Melbourne property has missed its tram but another may be around the corner

As property prices on the bigger mainland Australian cities notch up record prices Melbourne’s property market continues to lag, but why?

The city has strong immigration, is constantly rated highly on global liveability rankings and sales figures are up on last year.

Despite some key metrics remaining positive, Melbourne’s property market continues to falter.

The median dwelling value in Melbourne increased just 1.6 per cent over the past year, according to CoreLogic, but recorded a reduction of 0.6 per cent over the most recent quarter.

Much has been made of Victoria’s increasingly hostile environment for landlords but other states with similarly restrictive measures are performing strongly, such as Western Australia, so that is only part of the story.

In July last year, the South Australian government announced its ban on ‘no grounds’ evictions, along with other rent reforms that took effect from the start of this month. Since these reforms were announced in July last year, new investment property finance has only trended higher, and is up around 37 per cent as of May 2024, according to CoreLogic.

“Ending ‘no grounds’ evictions will support greater security of tenure for tenants and while this will come at the cost of flexibility and potential rental income gains for landlords, reducing the power imbalance for tenants is unlikely to have a substantial impact on investor activity or rent values,” Eliza Owen, Head of Research, CoreLogic Australia, said.

“Prices in the rental market will continue to be dominated by demand factors such as population growth, household size and income, while the supply of investment properties will be largely influenced by market conditions, such as capital growth prospects, availability of credit and interest rates.”

Melbourne’s time may still come

It is not all property price pessimism.

Units in inner Melbourne have sprung to life in the past past quarter.

Areas like Carlton, Parkdale and Ripplonlea have in the past quarter notched up growth above 5 per cent. Houses have had a similar trajectory in a range of different areas, with the past quarter accounting for around three quarters of all growth of the previous year.

Steve Janes, a property consultant with aussieproperty.com, said Melbourne’s affordability had never been better.

“Anyone who regards Melbourne as home will never have a better opportunity of setting themselves up.

“It’s the cheapest I’ve ever seen Melbourne property, and it’s well overdue for another significant escalation of prices after five subdued years, and strong migration and population projections for the coming years,” he said.

Mr Janes said expatriates in particular could benefit from the additional bonus of a low Australian dollar.

PIPA Chair Nicola McDougall said over the past year, double-digit dwelling price growth has been recorded in Perth, Brisbane and Adelaide, while signs have emerged of a resurgence in Sydney and New South Wales more generally.

She said Melbourne’s woes could soon turn around.

“Melbourne continues to be the talk of the property town – but not in a good way,” Ms McDougall said.

“The anti-market sentiment about Melbourne has resulted in the city not only becoming a buyers’ market but one where investors are either selling up or giving it a very wide berth,” she said.

“This is predominantly due to its plethora of anti-investor rental reforms as well its new land tax regime that is set to cost investors billions of dollars over the years ahead.

“However, while the negative market narrative is prevailing at present, it is highly unlikely that our most populous city does not continue to offer sound property investment potential.

“Indeed, now is the perfect time to invest in Melbourne if can look past the current market negativity.”

The contrast between Melbourne and the likes of Perth could not be starker.

Perth, Brisbane and Adelaide continue their strong run, all exceeding 13 per cent price growth over the past 12 months. Perth remains red hot, recording an increase of 25.6 per cent over the past 12 months, with no signs of slowing at this point.

In direct contrast, Melbourne only outperforms Hobart among the capitals. Hobart is now recording house price declines over the past 12 months, while Melbourne is increasing only marginally at 1.8 per cent. A similar trend is being observed in the unit market for all these cities.

What is holding Melbourne real estate back?

Nerida Conisbee, Chief Economist, Ray White Group, said there are likely a number of drivers for the Melbourne decline.

“Victoria is possibly in recession and additional taxes on property owners to pay back state debt has made investing in property less attractive.

“We are now seeing an increase in properties coming to market but days on market has also increased dramatically.

“Melbourne’s days on market is now at its highest level since December 2020 (at 42, according to REIV) whereas, by comparison, Perth is currently the lowest at nine days,” Ms Conisbee said.

An oversupply of stock continues to weigh heavily on Melbourne.

The city is awash in new listings, far in excess of the other capital cities.

Victorian housing completions have run at high levels relative to other states in recent years and the outflow of interstate migration during the pandemic deepened the oversupply.

Diana Mousina, Deputy Chief Economist, AMP, compared this to Queensland, where Brisbane has overtaken Melbourne as the country’s second most expensive property market.

“Queensland’s housing undersupply started accumulating during the mining boom from 2005, until the peak in the mining boom in in 2012, when population growth was high.

“Low construction in recent years has made the undersupply problem worse.

“Queensland has experienced high interstate migration since 2018 due to affordability challenges in neighbouring NSW, with the pandemic further increasing interstate migration into the state.”

It’s not a great time to be a seller in Melbourne.

Suburbtrends assessed a range of factors in compiling a list of 120 suburbs across Australia where market conditions have significantly improved for sellers. Only one, Deer Park, was in Victoria.

Still, there may be some greenshoots emerging.

Achieved the strongest house price gain in 2.5 years, rising by $18,000 (1.7 per cent) over the June quarter, According to Domain.

Tim Keith, Managing Director of Capspace, said continued evidence of high construction costs and limited construction activity will mean the apartment and housing markets remain in an undersupplied position, especially in Australia’s two biggest cities, Sydney and, eventually, Melbourne.

“Building approvals are simply not keeping up with population increases.

“The probability of valuation increases in the residential unit sector in Melbourne, Sydney and Brisbane are high over the next 24 months,” he said.

Antony Bucello, Director, National Property Buyers, said that despite Melbourne’s price growth being moderate in the last year, the market had demonstrated resilience in a challenging real estate landscape and is now poised for an upswing.

“While the growth is subdued compared to some of the other capital cities, the long-term fundamentals of Melbourne remain in place and the current market conditions make it a good time to buy for the opportunistic investor.

“However, there is no point denying that there are challenges in the marketplace that particularly affect investors.

“At a national level, interest rates and the cost-of-living crisis are impacting everyone, however, closer to home at a state level increased taxes and tightened rental regulations have made it more expensive to hold a property.

“Yet with a vacancy rate of only 1.3 per cent and weekly rents rising nearly 10 per cent in the last 12 months, the rental market is tight, and properties are in high demand, providing investment owners with increasing rental yields and cash flow.

“Key drivers include strong population growth, low unemployment, and substantial infrastructure spending in the metropolitan area, dubbed the ‘Big Build’ with major works already under way for roads and the rail network,” Mr Bucello said.