By Mike Bentley
UPDATE Q4, 2024
As Australia’s property markets fluctuate in response to economic forces, one city stands out with significant potential for a comeback: Melbourne. Despite recent challenges, Melbourne could be poised for strong growth in 2025 and beyond, offering a unique opportunity for investors willing to think long term.
While high interest rates and property taxes are causing concern among investors, the fundamentals of Melbourne’s market suggest that it may be on the verge of a countercyclical upswing.
Here’s why Melbourne may outperform other Australian property markets going forward.
Melbourne’s Strong History of Price Growth
Melbourne has a long track record of strong property price growth, which provides a solid foundation for future performance. Historically, Melbourne’s property values have shown resilience, bouncing back from market slowdowns and external shocks.
Over the past few decades, it has been one of the fastest-growing property markets in Australia, driven by a diverse economy, high levels of immigration, and its appeal as a cultural hub.
While Sydney has always been the most expensive city, Melbourne has always held second place, until 2024.
Even through the challenges of the COVID-19 pandemic, Melbourne maintained relative stability in comparison to global cities facing similar pressures. It’s worth noting that prior to the pandemic, Melbourne experienced substantial property price growth, fueled by a combination of population growth, infrastructure investment, and urban development.
The strength of its long-term performance makes it a market worth watching closely, especially as the current period of underperformance may be creating an attractive entry point for investors.
Current Market Conditions
The Melbourne property market is currently facing several challenges, leading to a slowdown in price growth. Rising interest rates, increased property taxes, and ongoing concerns around housing affordability have dampened investor confidence, creating financial uncertainty and impacting buyer decisions. Tens of thousands of potential buyers are sitting on the sidelines, waiting for clearer economic conditions.
And in recent months, I have personally spoken to 3 real agents in Brisbane asking about making an investment in a Melbourne apartment themselves, as they can barely believe some second hand units in Melbourne are selling at around half the price currently of new Brisbane units, and getting a significantly higher rental return
At the same time, property values in Melbourne have experienced a decline of around 5-10% from their 2022 peaks. This downturn has been exacerbated by the tightening of monetary policy by the Reserve Bank of Australia, with higher interest rates reducing borrowing capacity and cooling buyer demand. Additionally, the introduction of increased property taxes has made investment more expensive, leading some investors to pause their purchasing plans.
While these current market conditions may appear discouraging, they are part of a normal property cycle. Markets go through periods of correction before they stabilise and begin their upward climb again. For seasoned investors, moments like these present potential opportunities to buy quality properties at lower prices before the next phase of growth begins.
After booming through 2020 and 2021 with prices rising by 15.8%, Melbourne housing values fell -5.1% from their peak in March 2022 through to September 2024.And since Covid Melbourne house prices have only risen by 9.9% compared to:
Perth up 74.6%
Adelaide up 69.0%
Brisbane up 66.4%
Sydney up 29.2%
Melbourne 9.9%!
These figures ALONE should be enough reason for you to understand WHY in my view, Melbourne represents right now a superb opportunity.
BUT of course, make sure you buy the correct property.
Currently, there are around 5.8 million people in Melbourne which by some estimates means it has now overtaken Sydney as Australia's largest capital city.
This new property cycle creates a window of opportunity for home buyers and investors to get into the property market as the Melbourne market picks up again.
Melbourne could be one of the most lucrative markets for property investors looking to capitalise on the impending price rebound when interest rates are cut in 2025.
It would be very wise to position yourself before this happens, while there is a choice, while it is a buyer market, while you have time before the forthcoming rush, even if it not right at the bottom of the market, as from my experience, no-one ever times that perfectly.
Why Melbourne Is Currently Under Performing
Several factors help to top explain why Melbourne is under performing at the moment, but these are largely temporary challenges that are expected to resolve over time. Melbourne’s housing market has faced a series of unique pressures that have caused it to struggle more than other Australian cities, such as Sydney and Brisbane.
FIRSTLY, Melbourne was hit harder by the extended COVID-19 lockdowns, which not only affected the local economy but also slowed population growth. While interstate and international migration were key drivers of demand pre-pandemic, border closures significantly reduced the number of new residents coming into Melbourne. This had a direct impact on housing demand, especially for apartments and inner-city dwellings.
SECONDLY, the cost of living pressures, including rising interest rates and property taxes, have been more pronounced in Melbourne. The Victorian state government introduced additional taxes, particularly aimed at higher-end properties and foreign investors, as part of their budget recovery efforts. This has made investing in Melbourne property slightly less attractive in the short term for both local and international buyers.
LASTLY, sentiment around Melbourne’s property market has been somewhat negative due to these factors. Many investors have become cautious, waiting for signs of recovery before making significant investments. However, history shows that periods of under performance can present the best opportunities for future gains.
Indicators of the Next Upturn
Despite these challenges, there are several signs that Melbourne’s property market could be on the cusp of a significant upturn. Investors who are willing to look beyond the short-term uncertainty and focus on the long-term fundamentals will likely benefit from Melbourne’s next growth phase. And for the first time in over a decade, we can confidently says it is NOT just houses, but apartments too that will (finally) rebound.
Population Growth Will Continue:
Population growth drives demand. Its that simple. If supply doesn't match demand, prices must move up. After the borders reopened and migration levels again increased, Melbourne is expected to regain its position as one of Australia’s fastest-growing cities. Immigration, particularly from overseas, has historically driven demand for housing in Melbourne, and the city’s population is forecasted to increase significantly over the coming years. The return of international students and skilled migrants will add further pressure to the housing market, driving up both rental demand and property prices.
Melbourne’s population is forecast to rise by roughly 500,000 over the five years to 2026-27, after increasing by an astounding 1.7 million people (52%) so far this century.
That's the equivalent of two Hobarts’ worth of population growth in only five years. And yet look at Hobart's price above, Melbourne is just 16% more expensive currently.
In fact Melbourne’s population is expected to grow by one million people over the next ten years. Where will they all live?
Infrastructure Investment:
Melbourne continues to see large-scale infrastructure projects, such as new transport links, airport expansions, and urban renewal developments. These projects not only create jobs but also make the city more attractive to residents and businesses. Areas close to new infrastructure developments are expected to see higher demand for housing, leading to price increases.
TIP: Buy a second-hand apartment, at a bargain price, with a current rent return of 6% rent return, near the new Anzac station before it opens in 2025.
Limited Supply:
Melbourne’s property market is facing a tightening supply of new housing, particularly in high-demand areas. With construction costs rising and developers holding off on new projects due to economic uncertainty, the supply of new homes has slowed. And not just houses. New apartment supply is at a new low, and there is no recovery in sight. This imbalance between supply and demand is expected to drive up property prices as demand begins to recover.
Affordability Compared to Sydney:
While Sydney’s property market has always been more expensive, the gap between Sydney and Melbourne prices has widened greatly in recent years. Melbourne remains a more affordable alternative to Sydney for both investors and homebuyers. As affordability becomes a bigger issue for buyers, Melbourne’s relative value is likely to attract more interest, boosting demand.
And not just Sydney! Incredibly, as at September 2024, Melbourne has slipped from being Australia's second most expensive city for the past 100 years, to being behind Brisbane, Perth and even Adelaide and Canberra!
(CoreLogic)
Economic Resilience:
Melbourne’s economy is diverse, with strong sectors including education, health, finance, and technology. The city’s economic strength underpins its property market, providing resilience in the face of broader national and global economic challenges. As the economy continues to recover and expand, property demand is expected to follow.
This is creating a window of opportunity for home buyers and property investors with a long-term perspective.
And when interest rates start to reverse and buyers will come back into the market with a vengeance. The time to position yourself is before that happens.
And it's not just for houses…
Six of the eight capitals have seen unit values rise by more than house values , or in the case of
Melbourne, recorded a decline, over the past month to September 2024, over the previous 3 months, AND over the past 12 months:
If you are an investor looking for a bargain unit, with a high rent return, and prospects of strong growth over the next 3 to 5 years, this is good news. And represent a once in two decades situation.
There will be a clear flight to quality properties in Melbourne, with A-grade homes and "investment grade" units, townhouses and properties still in short supply for the prevailing demand. Currently B Grade properties are taking longer to sell and informed buyers are avoiding C Grade properties, such as new houses in the west, and many high rise apartments in the CBD and Southbank. APARTMENTS, either new in prime locations, with outstanding facilities and amenities to make them super attractive to future home occupiers not investors, OR second hand if you hold an Australian passport or citizenship, near transport links, shops and facilities, such as near the new Anzac station, will be excellent investments. Employ a buyers agent to do the running around and find you that elusive below value unit in the right building!
Between Now And Early 2026 Will Be a Great Countercyclical Time to Invest
For investors willing to take a long-term view, the next 6-9 months could be an ideal time to invest in Melbourne property. While the market may be struggling in the short term, these down cycles are often the best times to enter the market and secure properties at more affordable prices.
Countercyclical investing can lead to significant gains when the market eventually rebounds. By purchasing when others are hesitant, investors can capitalise on lower prices and ride the wave of growth when conditions improve.
Melbourne’s property market is expected to follow this pattern, with the current downturn likely to be followed by a period of strong growth.
Moving forward strong immigration and a lack of supply of properties will help push Melbourne property prices up.
The market is not easily navigated. Feel free to schedule a no obligation call for 30 minutes where we can go through in detail the market.
I provide advisory services to buyers and sellers, and am always happy to discuss the market with anyone and while my service doesn't suit most people, I rely on referrals from people just like you who I have helped without any obligation or commitment.
APARTMENT SUPPLY AND HEAT MAP 2016-2028:
CBRE estimates Melbourne's apartment delivery will average 10,000 pa over 2024-28, nearly 40% below Sydney.
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Apart from Location – Location – Location - is there ANOTHER Golden Rule of Property Investing in Australia?
YES there is. It is the QUALITY of your property that is of major importance to it’s financial success going forward 2025 to 2028.
KEY POINTS
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The quality of the property determines long-term investment returns.
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Average-quality property yields average returns; above-average quality leads to above-average returns.
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Combined with strategic locations near the water, city hubs, parks, shops, schools and supermarkets, helps ensure investment success. Wherever possible, focus in inner and middle ring properties ONLY.
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Focused Investment Energy:
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Direct energy towards asset quality working with your professional property buyers agent.
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Outsource all other matters (tax, borrowing, property management, building inspections etc.) to advisors.
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Attributes of Quality Property:
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Sustained buyer demand exceeding supply.
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Appreciating value/prices in the long run.
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High-quality property is scarce.
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Factors Impacting Supply and Demand:
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In prime investment locations, supply is fixed or diminishing.
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Supply includes land supply and dwelling type/style.
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Land Supply Dynamics:
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Well-established, blue-chip suburbs have fixed and finite land supply.
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Outer suburbs may have abundant land supply due to releases within a 20km radius.
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Property Type and Style Effect on Supply:
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High-land-value locations see stable house supply; apartments can change more readily.
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Example: Victorian style houses have finite supply, potentially diminishing.
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Buyer Demand Exceeding Supply:
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Buyer demand refers to potential buyers desiring property in a certain location.
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Demand substantially exceeding supply leads to rising property prices.
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Imbalance in Supply and Demand:
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Invest where buyer demand substantially exceeds supply.
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Notionally, 10 buyers for every seller ensures price stability despite changes in supply or demand.
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Long-Term Price Support:
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Despite changes, the number of buyers exceeds sellers, supporting prices.
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Prices remain resilient even during supply increases or demand reductions.
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Tip: Location Matters
Look for properties in inner and middle-ring suburbs. Avoid properties in the west, as they are unlikely to appreciate to the same level.
REMEMBER: MELBOURNE IS THE BEST "BUYER'S MARKET" RIGHT NOW IN AUSTRALIA, AND SHOULD CONTINUE TO BE SO - UNTIL INTEREST RATES DROP BY A FULL 1%, OR IF BRISBANE AND PERTH PRICES EACH RISE BY ANOTHER 5% TO 7% FROM CURRENT LEVELS - THEN DEMAND WILL OUTSTRIP SUPPLY AND IT COULD QUICKLY TURN INTO A "SELLERS MARKET".
IF EITHER OF THESE EVENTS OCCUR EXPECT BUYERS TO FLOOD BACK TO MELBOURNE, PUSHING PRICES UP VERY QUICKLY. IF BOTH EVENTS HAPPEN, WHICH IS LIKELY IF INTEREST RATES DROP FIRST, THEN IT TRULY WILL BE AN ENORMOUS BOOM FOR A FEW YEARS IN MELBOURNE.
