Melbourne's apartment market will likely end the year with the lowest growth in completions since 2013, according to a study by Urban Property Australia (UPA)

Based on UPA's estimates, around 4,000 units are expected to be added to the inner-city Melbourne precinct this year. The region is composed of the central business district (CBD) and 13 other suburbs.

Also read: Investors fuel housing gains in Sydney, Melbourne

Of the expected supply of apartments slated to finish this year, 40% are located in Southbank, 17% in North Melbourne, and 15% in the CBD.

"Constrained by tighter lending conditions for both developers and potential purchasers, the development pipeline for inner-city apartments is projected to decrease in the coming years despite the vacancy level falling below 2% and rents growing to all-time highs," UPA said.

Tight supply ahead

UPA said the inner-city market might face limited supply in the years to come.

Currently, there are 12,600 apartments under construction scheduled for completion by 2022. More than half of the apartment developments are located in CBD.

While the supply levels in 2020 through to 2022 are expected to be above average, growth will likely get stalled starting 2023.

"With development lending from major banks constrained, a number of projects previously being actively marketed have been withdrawn," UPA said.

In fact, roughly 3,000 apartments have already been shelved, with major residential developments being withdrawn for other uses. Some examples are projects located at 555 Collins Street, 85 Spring Street, and 383 La Trobe Street.

Also read: Dwelling price gains predicted for 2020

Rent likely to rise

The population within the city is projected to increase by 181,325 by 2031. To accommodate the possible boost in housing demand the population growth could entail, the inner-city precinct should be able to deliver 40,400 more dwellings.

Low vacancy rates have already resulted in a 4% growth in weekly rents in the precinct, hitting an all-time high of $530. In the broader metropolitan area, weekly rents rose by 6% to $430.

The Victorian government's vacant residential property tax (VRPT) was put in place to put downward pressure on rental levels by increasing rental supply. However, UPA said the tax has yet to make an impact since it was introduced in 2018.

"Looking ahead, we expect rents to increase in the Inner-City precinct along with the broader metropolitan area supported by strong interstate and international migration and a declining pipeline of new apartments," UPA said.