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Executive Summary

Luke Kelly

National Managing Director Built Form

luke@rpmgrp.com.au

Investor lending hit a Q1 record, but first home buyers now hold their smallest market share since 2017.

Monetary policy, federal budget reform, and construction cost pressures are hitting Victoria’s residential property market at the same time, producing a level of uncertainty that is reshaping both buyer behaviour and development activity particularly in the apartment and townhome segment.

Home loan activity held firm in Q1 2026, with 34,680 new loans written. Investor lending was the standout at 12,660 loans, up 29% on Q1 2025 and the highest Q1 figure on record, likely reflecting buyers moving ahead of the budget changes, though that effect is now largely spent. FHBs edged marginally higher but now represent just 24% of the market, the lowest share since 2017. New loan commencements are expected to fall materially from here.

The 2026-27 Federal Budget introduces structural changes that work in favour of new dwelling construction. Limiting negative gearing and CGT concessions to new builds gives investor capital a clear reason to move toward apartments and townhomes, though developers should monitor the risk that softening established dwelling prices exert indirect pressure on new unit pricing over the medium term.

Construction costs remain the most pressure near term challenge. Rising fuel prices and input cost increases across plastics, metals, and bitumen are already being felt across the industry, with housing construction costs escalating around 7-8% between March and May. PPI data for Q2 2026 is expected to reflect the full extent of these pressures, and even a resolution to the Middle East conflict would take months to flow through given supply chain lag.

Melbourne is better placed to absorb these pressures than Sydney or Brisbane. Greater contractor availability has introduced genuine tender competition locally, with builders absorbing a share of cost increases as a result.

For the apartment and townhome sector, the combination of tax changes and a more competitive construction environment represents a more navigable position than the headline conditions might suggest.

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Buyer Activity

Victorian Home Purchasers

First home buyers now hold their smallest share of the lending market since 2017.

Home loan activity held firm in Q1 2026, with just over 34,680 new loans written across all buyer types. While this is a pullback from Q4 2025, when activity peaked at a near-decade high, the result is still the strongest Q1 since 2022.

The standout was investor activity. With 12,660 new investor loans written in Q1 2026, a 29% increase on Q1 2025, this is the highest Q1 investor lending figure on record. The result likely reflects investors moving ahead of the federal budget changes and is particularly notable given the tightening rate environment.

Subsequent owner occupier lending also grew, with 13,540 new loans written in Q1 2026, up 7% on Q1 2025. While still below the HomeBuilder-supported peaks of Q1 2021 and Q1 2023, which saw about 17,000 new loans taken out in each quarter, activity in the upgrader segment remains solid.

First home buyer lending edged marginally higher year on year, with 8,480 new loans written in Q1 2026, above the Q1 decade average of 8,100. Government support through the 5% Deposit Scheme continues to underpin FHB demand despite tightening affordability and rate rises. With FHB activity the only segment to have remained essentially flat year on year, their share of the total lending market has fallen to just 24%, the lowest since 2017.

Looking ahead, new loan commencements are expected to fall materially. The Q1 investor record largely reflects buyers moving ahead of the budget changes rather than a fundamental shift in market confidence, and that effect is now largely spent.

Investor activity is likely to pull back as rate rises flow through and new tax settings lock in, with the removal of negative gearing and the CGT concessions on established dwellings reducing the viability of shorter term investment strategies.

Home Purchaser Loan Size

Home loan sizes have retreated down to an average of $650,000 in Q1 2026.

As of Q1 2026, two consecutive rate rises and a sharp deterioration in consumer sentiment pushed the average new loan size in Victoria down to $649,619, a 0.9% contraction from the Q4 2025 peak of $655,619.

The sharpest pullback was among investor buyers, who tend to be the most sensitive to borrowing rate movements. The average investor loan size fell 1.8% in Q1 2026 to $606,178, sitting below the $609,040 recorded in Q1 2025. Investors are the only buyer cohort to have seen average loan sizes fall on an annual basis. This trend is expected to continue, as lenders begin to reassess investor borrowing capacity to exclude negative gearing.

Average loan sizes also decreased for subsequent owner occupier buyers, down 1.0% to $745,062. While this figure remains materially higher than Q1 2025 (up 6.2% YoY), the recent downward trend reflects growing unease in the upgrader market, compounded by rate rises in February and March.

Average FHB loan sizes held largely steady at $562,198 in Q1 2026, up just 0.2% on Q4 2025. This reflects loans continuing to be written at pace under the 5% Deposit Scheme through January, before pulling back sharply following the first rate rise in February. On an annual basis, however, FHB average loan sizes have grown 8.7%, the largest increase in any buyer cohort and a clear measure of the Scheme’s effect on borrowing behaviour.

Preliminary data to May 2026 shows dwelling values falling, raising the prospect of FHBs who purchased under the 5% Deposit Scheme entering negative equity. The risk is most pronounced for borrowers who bought at or near the Scheme’s price cap. Provided loans can be serviced, negative equity at an individual level does not present real risk.

Average Loan Size by Buyer Type

FHB Investors Subsequent OO

Budget Changes and Impact

The Budget favours new construction, with negative gearing and CGT concessions limited to dwellings that add supply.

The 2026-27 Federal Budget introduces two structural changes to property tax that will reshape the investment landscape.

From 1 July 2027:

• Negative gearing will be limited to new builds

• The 50% CGT discount will be replaced with indexation plus a minimum 30% tax

Buyers purchasing newly built dwellings that add to supply will retain access to negative gearing and may choose between the optional 50% CGT discount or the new indexation method. Knock down rebuilds are excluded from this exemption.

The new 30% minimum tax is not punitive by design; investors earning above $45,000 are already at or above this floor on their marginal rate. The rate is primarily aimed at income-splitting CGT strategies rather than mainstream property investors. The practical difference in capital gains tax between purchasing an established versus a new dwelling is relatively modest, and diminishes the longer an established dwelling is held. The more consequential change for investor behaviour is the loss of negative gearing on established stock.

The shift in tax setting effectively redirects investor demand away from established dwellings, which are likely to become a predominantly owner occupier asset class, and toward new builds. Independent of the budget’s impacts on property prices, these changes are expected to significantly drive activity towards new builds and boost new infill developments.

One caveat is that lenders have already begun factoring out negative gearing in new investor loan application as tax changes mean that at most, an existing dwelling purchased after 12 May 2026 can only be negatively geared for one year.

The new build exemption also extends to owner occupiers who subsequently convert their dwelling to an investment property, provided the property has only been owned by the original builder and has not been occupied for more than 12 months. The ability to retain negative gearing concessions represents a significant level of flexibility for buyers of new units in infill areas.

Further announcements in the budget also includes a $6 billion commitment to enabling infrastructure, as well as a $2 billion Local Infrastructure Fund to be delivered over four years. For developers with land holdings in outer metropolitan and growth corridor locations, this directly addresses one of the more persistent early stage development hurdles.

Finally, the budget introduces no new build-to-rent (BTR) measures. BTR developers should treat existing policy as the operating baseline.

Budget Changes and Impact

Investor capital is being redirected toward new builds, with established dwellings losing access to negative gearing.

Development Type Impacted Impact

Off the plan (OTP) apartments and townhomes

Knock-down rebuilds

Investor demand strengthened. New builds retain access to negative gearing and CGT concessions, placing them at an advantage over existing stock.

Dwellings that replace a single residence with multiple new dwellings (e.g. four townhomes on a large block) qualify for the same new concessions. Rebuilds of old residence (ie replacement of residence that does not add to net dwelling supply) unable to quality for NG and CGT concessions.

Vacant land subdivisions

New builds on vacant land qualify for new build concessions. Benefits further with the $2b Local Infrastructure Fund.

Build To Rent

Existing policy settings unchanged. The foreign buyer ban exemption has been extended to 30 June 2029.

Established Dwellings

Investor demand expected to weaken. Resales into the investor market lose access to negative gearing, and the reduced tax incentive is likely to diminish the appeal of renovations.

Greater Melbourne Pricing, Rents, and Vacancies

Melbourne Unit Market

Laurence Rao

Research Manager

Market Intelligence

laurence@rpmgrp.com.au

Melbourne’s unit market continued to edge upward in Q1 2026, with the median reaching $659,500, a 1.1% increase on the prior quarter. Growth has slowed noticeably compared to the end of 2025, and the pattern of price appreciation has shifted across rings.

Value growth in Q1 2026 was concentrated in the inner ring, up 1.4%, while the middle and outer rings saw comparatively modest gains of 0.4% and 1.1% respectively. With inner ring units now priced meaningfully below both middle and outer ring products, demand is being funnelled toward lower priced stock. This dynamic is particularly evident among FHBs accessing the 5% Deposit Scheme, who are primarily constrained by price points.

With established units set to lose negative gearing, new infill products are well positioned to capture investor demand.

Melbourne’s unit-to-house price relativity has reached 50% for the first time, with median house prices now 50.3% more expensive than units. This appears to unwind some of the relative strength the unit market showed toward the end of 2025.

Median Unit Prices by Location - Q1 2026

The new tax settings are likely to produce a two speed unit market. Existing stock, much of which has already saturated the market, will lose access to negative gearing and CGT concessions, placing downward pressure on established unit prices. New stock retains access to both negative gearing and the existing 50% CGT discount, giving new infill products a pricing and investment advantage. However, falling established unit prices carry a risk of dragging broader median figures down and exerting indirect pressure on new unit pricing. How the market absorbs the tax changes over the coming months will be critical. Source: REIV and RPM Market Intelligence Note: Units include all dwellings that are not detached houses.

Median Unit Prices - March 2026

Vacancy Rates and Rental Stock

Rental supply dynamics will shift as investors pivot toward new builds.

Melbourne’s rental vacancy rate eased slightly to 2.5% at the end of Q1 2026, bringing it back in line with levels from around 12 months ago. The market remains tightly held.

Inner and middle ring vacancy rates held largely steady at 2.6% and 2.8% respectively. While both figures represent marginal upward movement, neither signals any meaningful easing in rental conditions, with both remaining well below medium and long term averages.

The outer ring tells a more interesting story. After an unexpected spike in the latter half of 2025, which saw vacancy rates peak at 2.5%, the outer ring has tightened sharply back to 1.8% as of Q1 2026, returning to early 2025 levels.

Vacancy Rates

Vacancy Rates and Rental Stock

Potential impacts of the budget on vacancy rates are only likely to materialise in the longer-term.

Melbourne’s rental market is expected to remain tight despite the likely investor pivot toward new builds driven by the tax changes.

Near term impacts on weekly rents are expected to be mild. Over the medium to long term, some disruption is possible as investors move away from older residential stock, but the dynamic is more nuanced than a simple reduction in rental supply.

Established dwellings vacated by departing investors are likely to be absorbed by owner occupiers, evening out the overall supply impact. The pressure, however, shifts away from prospective buyers and toward renters.

Source: REIV, RPM Market Intelligence

Metro Melbourne Vacancy Rates

Unit and Apartment Rents – Melbourne by Region

Unit rental growth has stalled as affordability pressures weigh on what the market can absorb.

Unit and Apartment Rents – Melbourne by Region

Median Rental by Product Type and Region

Greater Melbourne Dwelling Supply

Building Approvals – Greater Melbourne

Townhome approvals have hit their second lowest quarterly figure since Q4 2014.

Townhome approvals across Greater Melbourne fell below 2,000 for the first time in two years in Q1 2026, with 1,987 approvals recorded for the quarter. This is the second lowest quarterly figure since Q4 2014. On a rolling 12 month basis, approvals have continued to trend downward, with 9,062 townhome dwellings approved in the year to Q1 2026.

Apartment approvals are also contracting. While individual quarterly figures can be skewed by a single large scale development, rolling annual approvals have fallen 6% to 10,372 dwellings in the year to Q1 2026, suggesting the current apartment development cycle has reached a new low point.

Prior signs of optimism in unit supply are unlikely to materialise in the near term. New tax settings have introduced considerable uncertainty, even as new off the plan (OTP) dwellings retain meaningful concessions relative to established stock. Interest rate increases have pushed developers back to

reassessing feasibilities, with the cash rate target at 4.35% as of May 2026 returning monetary policy to the restrictive settings last seen in 2024. Planning changes, including the new mid rise code, will take time to deliver supply benefits.

The greatest risk to unit dwelling supply is the construction cost escalation. The Middle East conflict has driven building costs sharply higher. Diesel prices have risen approximately $3.00/L before settling in the mid-$2.00 range, while costs across plastics, metals, and asphalt have increased by double digit percentages. The scale of escalation means that achieving feasible $/sqm rates will be challenging and, in some cases, may not be achievable. Uncertainty over the course of the global conflict has given way to near certain expectations that cost escalation will exceed baseline projections set at the end of 2025. These figures will translate into materially lower building approval figures as developers and the market adjust to new settings.

and Townhome Approvals - Q1 2026 and Rolling Annual to Q1 2026

Apartments Q1 2026

3,310 dwellings

q/q and -17% y/y

Townhomes Q1 2026

1,987 dwellings

Apartments - Rolling Annual 10,372 dwellings

Townhomes - Rolling Annual

9,062 dwellings

Source: REIV and RPM Market Intelligence

Note: Units include all dwellings that are not detached houses.

Apartment

Building Approvals – Greater Melbourne

Apartment and townhome approvals continue to decline amid uncertainty.

Approvals

Greater Melbourne Quarterly Rolling Annual Approvals

Approvals

Greater Melbourne Quarterly Rolling Annual Approvals

Medium and Higher Density Construction Outlook

Construction Costs - March 2026

Construction Pricing

Housing Construction cost figures are expected to grow as latest figures have yet to reflect changes in the latter half of the quarter.

Construction cost escalation in Australia had shown meaningful signs of stabilisation in late 2025 and early 2026, with both material inputs and building outputs tracking modest, stable increases compared to the preceding three years.

With the Iran conflict and the closing of the Strait of Hormuz cutting around 20% of global oil and gas flows, downstream effects were almost immediately visible across the Australian construction industry.

The most direct impact was a spike in diesel prices to $3.00/L, which has since settled to around $2.50/L following the lifting of the fuel excise and the securing of alternative supply. Australia’s construction industry is deeply transport and diesel dependent, with fuel costs running through virtually every element of a project, including plant and operation, materials haulage, site logistics, earthworks, and the production of energy intensive inputs.

The latest ABS Producer Price Index figures for Q1 2026 show material input costs escalating by just 0.2% in Melbourne, well below the 0.6% recorded nationally. This unusually low reading largely reflects timing, given the conflict had only recently commenced at the point of measurement.

Building outputs for residential construction tell a different story, with a 1.5% increase recorded in Q1 2026, the highest quarterly movement since late 2023, driven by the immediate flow through of rising fuel costs.

Inputs and Outputs to Housing Construction

Melb Construction Inputs Vic Other Residential Outputs Source: ABS Producer

Construction Pricing

The construction industry is facing a cost crisis rather than a supply crisis.

Significantly, more volatile movement is expected in the Q2 2026 PPI data release. Input and output costs are likely to reach an annualised 6-8%, well above the 4.5% forecast that had been projected for the next 12 months absent the Iran conflict. Cost escalation will be most concentrated in plastics such as PCE, PE, and PP metals, and bitumen, and asphalt – all of which have seen immediate price increases. Beyond raw costs, lead times and contractor risk pricing are also expected to shift materially.

That said, Australia comprises multiple sub markets operating at different speeds. There is a broad consensus that civil engineering construction will be more severely affected than residential construction.

Melbourne’s outlook is comparably more stable, supported by a more competitive contractor market and lower levels of ongoing construction activity than Brisbane or Sydney. Some supply and labour cost increases are being absorbed by contractors in Melbourne given the relative availability and competitiveness of the local market.

It is worth noting that the federal government’s actions in securing fuel supply, effectively trading domestic gas for imported fuel, have left Australia’s present fuel stockpile above pre-conflict levels. Materials continue to flow into the country, albeit at higher prices with some delays. The current challenge facing the construction industry is therefore primarily one of cost rather than supply.

Input Cost Escalation by Material - Melbourne

vs Last Quarter vs 12mo vs 24mo

Key Material Price Movements

Construction cost movements of this scale will need to be passed to consumers.

The most significant price movements are concentrated in energy and petrochemicals supply chains, where energy costs drive up both transport and energy-intensive material costs.

Container shipping costs increased around 15% in March alone, and some quotes for new fixed price contracts now include fuel surcharges that have doubled as diesel prices rose 50-75%.

The table summarises observed price movements as of May 2026. These figures represent conditions to date, and developers should not assume a resolution to the Iran conflict will quickly reverse them. Even if the conflict were to cease immediately, building prices are unlikely to fall given the backlog of demand and the many months required for supply chains to normalise.

Overall housing construction costs escalated around 7-8% between March and early May 2026. Key material increases include plastics, up 30-40%, and bitumen and asphalt, up 30-50%. These movements are particularly consequential for subdivision works and will need to be passed through to consumers, with direct implications for project feasibilities across the board.

Material/Input

Source: Rawlinsons Cost Data; Rider Levett Bucknall; Australian Constructors Association.

Economic Outlook

Michael Staedler

General Manager

Market Intelligence

m.staedler@rpmgrp.com.au

The developers best placed are those treating current conditions as a planning and execution challenge, rather than a reason to stand still.

The first half of 2026 has been genuinely difficult for the industry, and the second half will require careful navigation. Rate rises have shifted sentiment, tax changes are still working through purchasing decisions, and escalating input costs are forcing feasibility reassessments across the board.

Investor lending reached a Q1 record, but the timing says more than the number. Buyers pulled forward decisions ahead of the Budget changes rather than signalling a fundamental shift in market confidence. The effect is now largely spent. First home buyer lending has plateaued despite ongoing government support, with average loan sizes broadly flat quarter on quarter. As a result, unit price is slowing.

Melbourne’s rental market remains tight at the mid2% mark, driven by population growth rather than investor behaviour. The fundamental tension in the rental market is not going away regardless of how tax settings shift purchasing patterns.

Input cost escalation tied to Middle East supply disruptions has placed real pressure on feasibilities prepared earlier in the year. Borrowing rates have returned to 2024 highs, and cost conditions are deteriorating at a pace that invites comparison to the post Covid escalation period – without the buyer activity and price growth that helped developers absorb those increases. This is a cost and margin challenge, not a demand or supply crisis, and that distinction matters for how risk is framed in feasibility assessments.

The policy environment has shifted meaningfully for new dwelling construction. Limiting negative gearing and CGT concessions to new builds redirects investor capital away from established stock. Apartments, townhomes, and dual occupancy products are well placed to capture that flow, with pre-sale absorption expected to benefit as investor purchasing patterns realign. The $2 billion Local Infrastructure Fund represents a meaningful commitment to trunk infrastructure gaps, with growth corridor projects among the primary beneficiaries. Unchanged BTR policy settings provide a degree of stability for that sector and position it well for future investment.

Melbourne’s construction market is better positioned than Sydney or Brisbane, both of which have been running near capacity for an extended period. Greater contractor availability has introduced genuine tender competition locally, with builders absorbing a share of increases rather than flowing them through entirely.

The fundamentals underpinning new residential development in Melbourne remain intact. Structurally tight rental conditions, redirected investor demand, and a more competitive construction market combine to create real opportunity for well structured projects.

For more information, please visit: www.rpmgrp.com.au

Our Research Consultancy Services create bespoke reports crafted to your specifications, translating rich data into in-depth analysis. For a bespoke report, email the team at: contactus@rpmgrp.com.au