The recent slowdown in unit prices can be largely attributed to two main factors: affordability constraints and a reduction in net overseas migration. Together, these have dampened demand in the market, signaling a shift in dynamics.

Affordability is the Primary Constraint on Growth

Affordability is now the key factor restraining both price and rent growth. For many households, particularly those on single incomes living in townhomes or apartments, housing costs have become a significant burden. The benchmark for housing stress, defined as spending more than 30% of income on rent or mortgage payments, has become a widespread reality. This growing financial strain is making it harder for potential buyers and renters to absorb price hikes, effectively putting the brakes on market expansion.

Lower Net Overseas Migration is Leading to a Slower Flow of New Demand

In addition to affordability concerns, a slowdown in net overseas migration has further reduced demand-side pressures. A marked decline in foreign student arrivals has been a key contributor to this shift. With fewer newcomers entering the rental and apartment markets, demand has softened, providing some stability to prices. While this might offer a degree of relief for prospective tenants and buyers, it has also created a more subdued market environment.

Supply Constraint

However, the easing of demand is being offset by entrenched supply constraints. Despite a slowdown in demand, the market is facing ongoing challenges on the supply side. Low approval rates for new developments are already having a negative impact on start and completion rates. Even when projects receive formal approval, they often face significant obstacles in securing financial viability. Many developments fail to meet pre-sale or funding thresholds, further exacerbating the supply shortage. As a result, the market finds itself in a delicate balance. While demand stabilises, the constrained supply ensures that rents and unit prices are unlikely to experience significant drops in the short to medium term.

Government Initiatives are Positive but Inadequate for Off-the-Plan Projects

State government efforts to streamline approvals and address construction financing bottlenecks are important steps in the right direction. However, there are still major obstacles to overcome, especially for off-the-plan developments.

Consider this: at a conservative estimate of $12,000 per square metre, a 70sqm off-the-plan apartment would cost approximately $840,000 – 34% higher than the Melbourne median unit price of $628,000. This price gap continues to present challenges in the feasibility of new apartment projects, particularly for developers aiming to maintain financial viability.

This article references findings from our January 2025 Melbourne Apartments & Townhomes Market Report. Read the full report here.