A fascinating article from Savings.com.au recently compared the evolving median house prices in our major cities from 1970 to current. Whilst Sydney always maintains the price lead, Melbourne’s performance is most remarkable, constantly changing its ranking. At certain times its home prices are second only to Sydney, at other times it lags Canberra, Perth or even Darwin.
Whilst time in the market is more important than timing the market, buying at a good time reduces risk and increases return.
In this blog we consider whether now is a good time to buy in Melbourne.
The graph illustrates how Australian property prices in the major capitals have rebounded from their recent low in January 2023. The average is 14.4% annual price growth, with Sydney reaching the limits of affordability in many suburbs and the other capitals just booming…. all except Melbourne.
Property prices in Melbourne have not only clearly lagged the pack, but have increasingly lagged over the past 15 months. Note how the blue line above increasingly diverges from the rest.
Hear more from Julian on Melbourne’s underperformance here:
https://vimeo.com/963832351/c3fbd5d51f?share=copy
As a result, Melbourne houses are below the average price for a capital city, below the average house price for Brisbane and below that of Canberra.
The truth is no one really knows the exact reasons why, but the best assessment we can make is in this article and it presents an opportunity for the savvy investor to leverage.
Head winds:
No doubt there are other ‘unknowns’ but these seem to be the most common explanations. Low sentiment being the overarching head wind.
There are also many positives.
The rapid return of overseas migration post covid, saw two years of elevated arrivals increasing by 2.6%. This was followed by a smaller net migration for 2024 and into 2025. However, the long-term pattern of net overseas migration is expected to resume and the population of metropolitan Melbourne is projected to increase from 5.1 million in 2023 to 8 million in 2051.
People still want to live in Melbourne, which remains the 2nd largest city and economy in Australia. And this is proven by rents. See the table below courtesy of SQM:
Last week, Melbourne was one of the few places where rents were still rising. And if you do the maths, Melbourne average house rent at $744/ week divided by average house price of $921,000 produces a gross rental yield of 4.2%! Not in all locations – but on average.
Melbourne property is relatively affordable too. In Sydney servicing the mortgage consumes 56% of household disposable income, compared to 45% for Melbourne, a figure roughly on-par with most other capitals.
All this tells us that Melbourne is desirable and more affordable to live than many other cities in Australia. Fear and negative sentiment seem to be driving down home prices. But affordability can’t be underestimated, it eventually drives values.
Finance professionals will tell you that the price of all assets, be they shares or properties, will trade on prices determined by both fundamental value and a sentiment premium or discount. It would appear Melbourne homes now have a deep sentiment discount embedded in their price. And this may well present an enticing investment opportunity. Surely the rental yield will attract investors, whilst relative affordability will encourage migration by young families.
This is why a rebound is on the cards for Melbourne.
Melbourne is forecast to become Australia’s largest city by 2034. Property supply is tight with not much happening to turn this around in the short term, simple macroeconomics, i.e., supply and demand, would suggest there is only one direction for values to go.
In a recent forecast, Oxford Economics Australia says the median Melbourne house price will grow 21% over the next three years, outpacing Sydney’s forecasted 18% expected growth.
There is the issue of land tax, a $750,000 investment property will attract annual land tax of approximately $3,150, or $60 per week. To offset this, most landlords have had the ability to increase the rental income on their investment property in the past twelve months anywhere from $50 - $100 per week, or $2,600 per year as a minimum, with scope to move higher in the future given the supply issues.
Historically rental yields have been low, discouraging out-of-state investment, whilst the Melbourne population has been sprawling into bountiful available land. Sprawl is now contained by the outer limits of road and other urban infrastructure. More-over we note pockets of opportunity have emerged much closer to the city centre, where in some cases a house 8-10km from the CBD costs the same as one built at a 40km distance.
It's easy to chase capital growth to feel good about buying where others are, but don’t ride off Melbourne as it’s the market with the most upside in the medium term.
Interested in reading the full Savings.com.au article. Read the full article here. https://www.savings.com.au/home-loans/australian-house-prices-over-the-last-50-years-a-retrospective
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