Is it the right time to invest in Melbourne?

Investing in the right property markets at the right time all comes down to understanding the data. And the data on the Melbourne property market tells a very interesting story. 

Since 2020, all the Australian capital cities have enjoyed significant property price growth – except Melbourne. Melbourne’s dwelling prices have risen only 8.4% since the onset of COVID-19 and remain 6.4% below their peak in March 2022. Compare that to property market growth of 27% in Sydney, 67% in Brisbane, 73% in Adelaide and 77% in Perth, and Melbourne is a clear outlier. 

The average price of a Melbourne home is the lowest it has been against its Sydney equivalent in around twenty years, with a median house price approximately 57% cheaper than in Sydney. The long-term average is 29%. 
There are several factors which have led to Melbourne’s underperformance, but it appears that the market is undervalued and set to rebound.

So, what’s going on? 

• Economic factors: Victoria has experienced economic setbacks, including a net reduction of 7,606 businesses during the financial year 2022-23, according to the Australian Bureau of Statistics.

• Investor sentiment: Property investors have previously been disillusioned with Melbourne due to stricter residential tenancy legislation and higher land taxes.

• Replacement costs: Property prices are considerably below replacement cost (i.e. the cost to develop a similar property), creating a unique buying opportunity similar to Brisbane and Perth three years ago.

• Population growth: Victoria’s population is growing at near-record levels, increasing by over 183,000 people in the 12 months to March 2024, driven by overseas migration and interstate movement for those seeking housing affordability. This is the largest rise in any state across the country. 

• Rental market: Melbourne’s rental market remains exceptionally tight, with vacancy rates at 2.3%, well below the 5% peak in 2021.

• Supply constraints: Housing completions in Victoria are at a decade long low and continue to decline. Approved dwellings in Victoria are 14% below the 10-year average. Currently there are 11% less homes under construction than a year ago. This will naturally tighten supply.
  
  

The Melbourne opportunity 

The data suggests a perfect storm for investors – an undervalued Melbourne housing market, with increasing demand thanks to strong population growth and tighter supply. Sydney dwelling prices now hold a 57% premium over Melbourne, the largest recorded since 2003. The growing disparity between the two cities, illustrates the value proposition of Melbourne right now. 

After several years of negative net interstate migration, Victoria recorded a positive net interstate migration of 537 people in 2023-24. This suggests that people are once again seeing Melbourne as an attractive place to live. Secondly, overseas migration to Victoria is also strong, with a net overseas migration of 151,740 people in 2023-24. This is contributing toward Victoria having the strong population growth in the country and increasing demand for housing.

At the same time, rental supply in Melbourne is decreasing. This is due to several factors, including unfavorable government policies that have discouraged property investors. As a result, vacancy rates in Melbourne have fallen to 2.3%, well below the 5% peak in 2021. This tight rental market is putting upward pressure on rents, making property investment more attractive.

Lower dwelling completions and approvals suggest that supply will tighten substantially in the coming years. That will put further upward pressure on housing prices.

A look back at Brisbane

In many ways, the trends we’re seeing in Melbourne mirror Brisbane just a few years ago, giving us a preview of what may be ahead. 

In 2019, Brisbane had been relatively stagnant for several years, with prices increasing by only 30% in 10 years compared to Sydney’s 93% growth. There was an oversupply of apartments, and confidence in the market was low. Vacancy rates were high, peaking in 2017 and 2018. However, several factors were at play that would soon change Brisbane’s trajectory.

Firstly, the disparity between Sydney and Brisbane’s housing affordability was becoming increasingly apparent. This encouraged interstate migration to Brisbane, as people sought more affordable living options. Secondly, overseas migration was increasing, with 80% of migrants settling on the east coast of Australia. These factors combined to create a surge in demand for housing in Brisbane, while supply remained constrained.

As a result, Brisbane experienced a period of substantial growth, with prices increasing by over 60% since the onset of COVID-19.

The fundamentals which drove price growth in Brisbane in this period are largely the same for Melbourne now – strong population growth driven by both international migration and interstate migration of Australians seeking out more affordable housing. 

Where to invest in in Melbourne

For investors interested in Melbourne, family-friendly homes, townhouses, and well-located apartments in premium locations are expected to perform well in the coming years.

While there was only modest average property price growth in Melbourne of 1.33% in 2024, suburbs like Toorak, South Yarra, Canterbury, Balwyn, and Surrey Hills have well outperformed the average. 

When considering investing in Melbourne, it’s important to adopt an “owner-occupier” mindset. This means looking for properties that would appeal to owner-occupiers, such as those with good size, layout, and natural light. These properties are more likely to hold their value over the long-term and attract quality tenants.

It’s also crucial to avoid “investor-grade” properties, which are often smaller and less appealing to owner-occupier type properties. These properties may be cheaper to purchase, but they can be harder to rent and may not experience the same capital growth as owner-occupier properties.

Key takeaways 

While the Melbourne property market has faced challenges in recent years, there are several signs that it may be on the cusp of a new growth cycle – which is great news for investors. Increasing migration, decreasing rental supply, and less homes being built are all contributing to a more positive outlook for the market.

In addition to the above, recent government policy changes can also be an advantage to investors. The Victorian government recently announced a 12 month stamp duty concession for all off the plan purchases providing investors with significant savings. 

Interested in investing in Melbourne? Reach out to us today to get started.