While Victoria is anticipated to witness price gains over the next few months, the level of residential supply seems to pose a challenge, according to the latest ANZ/Property Council Survey.

Despite the steady and positive confidence in Victoria's housing market, the study found that the state's low level of housing supply remains a concern, given its likely impact on affordability and prices.

The state government's decision to write down land tax revenue from $3.6bn to $3.5bn could further constrain new housing supply, said Cressida Wall, executive director for Victoria at the Property Council of Australia.

"The return of buyers to the market and improving house prices, without new supply, means house prices will continue to rise and compromise affordability further," she said.

According to a report released by the Urban Development Institute of Australia (UDIA) last year, Victoria is headed towards a housing supply deficit.

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New dwelling approvals declined to 59,719 in the 12 months to June 2019, down from 75,613 from the previous year. UDIA said this could result in a decline in completed dwellings from 58,978 to 48,581. Based on UDIA's estimates, this would push the demand-supply gap into a deficit of 6,846 homes, a massive difference from the previous year's surplus of 4,565.

Suburbs close to Melbourne CBD would likely feel the impact of the shortage. Apartment approvals in the city's inner ring, which is composed of the central Melbourne, Maribyrnong, Yarra, Stonnington, and Port Phillip council areas, declined by over 50% from 12,074 to 5,078. Townhouse approvals also fell sharply from 900 to 524.

Melbourne recorded the most significant decrease amongst the council areas, with approvals going down from 7,350 to 1,924.

However, a possible supply shortage is not the only challenge confronting the state. The ANZ/Property Council Survey also found that the confidence in the state government has swung into negative territory for the first time in 12 months. Expectations of strong economic growth also moderated.

"If we are to seriously address affordability in Victoria, government needs to support industry in delivering supply required by the market. This requires accelerating the land release process and supporting the delivery of denser housing projects, especially build-to-Rent," Wall said.