Melbourne Oversupply: Impact on House Rental Growth

Melbourne has more skyscrapers than Sydney, Brisbane, and Perth combined. Could the combination of so many apartments in Melbourne City and surrounding actually kill the rental growth for houses? Melbourne is already one of the lowest yielding cities in the country. Is it actually set to stay that way? In this episode, we help you understand if Melbourne's massive supply of apartments could take away the long-term rental growth.

As always, leaning on the data to help us find the answers. I'm Jo Ma, Senior Research Analyst at InvestorKit. Now let's get into it. Melbourne has built so many apartment buildings over the past decade, both in the city centre and in all these high-density suburbs. Many people, including me, are wondering if the oversupply in apartments are affecting the house market's rental growth.

Intuitively, I would say yes, but we can't just rely on intuition, so we have to check the data and let the data speak. To be able to tell that, I've prepared several charts to dive into. The first chart here contains four things. The vacancy rate of Melbourne City SA3, where most of the skyscrapers are, and the vacancy rate of the greater Melbourne region, overlapped with indexed rental growth trend lines of the Melbourne City SA3 and the greater Melbourne region. At first glance, over the past 10 years, it seems that the oversupply in apartments has affected the overall growth of Melbourne City's house rental price.

If we set the house rental price back in 2015 as 1, in 2025, the end of 2025, greater Melbourne's house rental price has increased in total 51%, while Melbourne City's house rental price only increased by 36%. But does that mean the oversupply in apartments actually made the difference in this total growth? Well, not really, if we really look into it and look at it by periods. From the year of 2015 to 2019, Melbourne City's house rental growth was steady, and from 2018 to 2019, it actually outperformed greater Melbourne's rental price growth. The real difference was made during the pandemic time.

From 2020 to 2022, Melbourne City's rental price declined, but at the same time, greater Melbourne's house rental price steady with a gradual upward trend. And then after 2022, in the three years from 2022 to 2025, the overall rental price growth of the two areas were actually very similar. Greater Melbourne, 26% growth, while Melbourne City, 24% growth. That difference is really insignificant. So now we see the major difference happened during the pandemic time.

But if we think about it, that price decline in Melbourne City area wasn't actually because of the oversupply of apartment. It was a sudden drop in rental demand. In Melbourne City area, we have a large portion of tenants being international migrants, especially international students and new migrants just arrived in Australia. And as the international border closed in 2020, a big chunk of the rental demand suddenly disappeared. And that loss of housing demand or rental demand actually caused the rental price decline.

And we can see once rental demand came back, even though the area is still oversupplied with apartments, rental price growth recovered to a similar level to the greater Melbourne region. So now we know that when rental demand stays the same, performance of an oversupplied area can be just similar to non-oversupplied area or the average level of the whole region. So there's no difference caused by oversupply, this one factor. And then the next question is, is the oversupply issue affecting the whole region's rental growth? In other words, if we didn't have all these apartment buildings built, would greater Melbourne's rental growth in house market have been better?

To find out that, we actually want to compare Melbourne with other cities with a high apartment supply, such as Sydney and Brisbane. This chart tool here shows three lines overlapped. The vacancy rate of Sydney Inner City SA3, it's overlapped with Sydney Inner City's house rental growth trend line over the past 10 years, and Greater Sydney Region's house rental growth over the past 10 years. Again, growth rates were similar before and after the pandemic period. The major difference happened during the pandemic period.

We see something interesting here. As vacancy rate started to increase in 2016 in Sydney Inner City, as all these apartment buildings were built, Greater Sydney's house rental growth slowed, similarly to how Sydney Inner City's house rental growth slowed. And then the next chart is for Brisbane. We have overlapped in Brisbane Inner, Brisbane Inner SA3's vacancy rate trend and its house rental growth trend line versus Greater Brisbane's house rental price trend line. So in these three charts from Melbourne, Sydney, and Brisbane, something very similar happened.

One thing similar is that the major difference in house rental price growth between the Greater Capital City area and the Inner City area happened during the COVID period. And before and after that, rental growth were actually similar. And the second similarity is actually there's no significant difference before COVID when apartments were oversupplied in the Inner City area. Melbourne first. When vacancy rate started to surge, it started to surge in both the Melbourne City SA3 and the Greater Melbourne region.

And that vacancy rate surge has caused a slowdown in rental growth in both Melbourne City and Greater Melbourne. And then if we look at Sydney, vacancy rate started to go up in 2017, and that slowdown led to the overall house rental price growth slowdown in both the Inner City area and the whole Greater Sydney region. The same in Brisbane Inner. Vacancy rate was high in 2015 to 2018. House price growth flatlined during that time, both in Greater Brisbane and the Brisbane Inner City area.

So the hard truth is that very likely the oversupply in apartments is contributing to the slow growth in not just Greater Melbourne's house rental market and also in Sydney, Brisbane, and other cities where apartments are being oversupplied. Melbourne's rental growth was more suppressed because one, its apartment supply was much higher than Sydney's or Brisbane's, so the oversupply issue was more severe. And two, Melbourne's land supply and house supply are also more abundant compared to Sydney and Brisbane. So this rental growth slowdown were not just caused by apartments oversupply, it was actually partially caused by the high level of house supply as well. It's actually understandable because rental demand doesn't necessarily only stay in one sector.

Apartments have their attractiveness. For example, they are newer, they are better serviced by facilities like pools, sauna, gym, etc. And they are more secure compared to a lot of houses. A lot of rental demand previously in the house market was easily shifted to the apartment market once all these apartments became available. And another thing is when oversupply has caused an area's rental growth to slow down and caused relative affordability in this area compared to its surrounding areas, it's natural that housing demand, rental demand would be attracted to this area and either boost its rental growth to go up or to slow down the previous area's rental growth.

Then over time, rental growth would be even out. The slowdown wouldn't be just staying in one area, to be specific, the oversupplied area. I still want to say that supply and demand dynamic is just one thing contributing to rental growth. Rental growth actually is related to many other factors such as economic growth, wage growth, inflation, and the relative affordability between sales market and rental market, as well as many other factors. So when we are talking about the oversupply of apartments or houses, that's just two of the factors that are contributing to rental growth.

So in one sentence, oversupply of apartments have contributed to the slower house rental growth in not just the greater Melbourne region, but many other cities also with a large amount of apartment supply. Because apartments is one part of the rental market, demand can easily shift between apartments and houses. One asset is oversupplied, the other asset inevitably would be affected. But that doesn't mean that rental growth in Melbourne is dead. Because besides the supply side influencer, we still need to look at all the demand side drivers as well.

For example, we're looking at the fastest population growth in many years, we're looking at Victoria's economy is doing well, and we're looking at wage growth going up fast. So all these demand side drivers would be continuing to contribute to Melbourne's rental growth. So if you have just bought a house in Melbourne or have been wanting to get into Melbourne's housing market, rest assured, the data is not pointing towards all of the Melbourne apartments killing rental growth on houses. While the yields aren't really high in Melbourne, there's still positive indicators suggesting that rental growth will be happening in the coming years. If you have any questions, check your comments below.

I'm Jo Ma, the Senior Research Analyst here at InvestorKit. I'll see you next time.