Why is Melbourne’s property market in the slow lane and will it accelerate in 2024?

We often tell clients that bigger metropolitan centres record stronger growth, and this means the best places for Australians to invest are in Sydney and Melbourne.

But looking through CoreLogic’s recent data, the annual performance numbers tell a different story.

Perth has had a runaway year leading the pack, followed by Brisbane and Adelaide.

Melbourne, on the other hand, looks like it’s dawdling.

It’s not a great annual performance number and what it doesn’t show us is that for the March quarter, Melbourne property prices actually fell 0.2 per cent.

This marks quite a break from the decade 2010-2019 when Melbourne duelled with Sydney as the top performing market, often coming out on top.

Why the low capital growth this year?

It’s actually quite difficult to put your finger on why Melbourne’s growth has stalled over the last year.

Certainly, the escalation in interest rates is a factor that has hit the Sydney and Melbourne markets harder in the last six months or so, while more affordable markets, like Perth and Adelaide, have shrugged off the increase in borrowing costs.

There is also anecdotal evidence that the return of international investors with a change in their composition (more coming from New Zealand and India) is favouring the Sydney market.

State taxes and low-grade property

If there’s one factor that sets this market apart it is the increase in property taxes.

Victoria has increased land tax for homes that aren’t the owner’s principal place of residence (PPOR) and expanded the vacant residential land tax.

My team of advisers is seeing the result of the land tax change every weekend. While overall listings of properties for sale haven’t increased that much, auction numbers have.

A lot of this increase is being driven by older, asset rich yet cash constrained landlords. The tax increases are prompting them to pull out and put their assets on the market.

Unfortunately, a lot of these properties are B-grade and C-grade and their lower sale prices are a contributing factor to low price growth of the overall market.

But it’s hardly the end of investment in Melbourne property. Indeed, real estate investor numbers have surged to 35.2 per cent of buyers this year, a significant increase from last year where the investor share was 27 per cent.

I expect the investor share to continue increasing. In fact, looking forward I’m quite optimistic about Melbourne’s future as a property investment destination.

Victoria’s thriving and diverse economy

One of the reasons why we direct most investors towards bigger cities is because these centres have more diverse economies, which shield investors from one-sector downturns.

In Australia, there’s quite a variety of city economies with varying dependence on industry sectors.

South East Queensland is heavily influenced by tourism. Perth is driven by mining, while Sydney is Australia’s leader in the finance and tech industries.

Melbourne isn’t a leader in anything but it’s a close second in almost every sector.

That not only provides good insulation for the metropolitan area’s residents from a one-industry downturn, but it also means the stream of skilled workers and other new residents is more dependable.

That influx of professionals and younger residents from overseas not only provides demand for rental properties, it also adds to Melbourne’s cultural life.

And that cultural life in turn is a driver of visitor numbers and a drawcard for young Australians from regional areas to move to Melbourne.

Population growth and property

One of the reasons Melbourne performed so strongly in the decade leading up to Covid was population growth.

The metropolitan area was taking in an average of 1,500 new residents every week, mostly from overseas but also from interstate and regional Victoria.

Covid brought a sharp break in that pattern but it has now resumed in force, with Melbourne taking in 450 people per day in 2023.

Immigration brings impact on housing demand, both for purchases and rentals.

In practice, there’s typically a lag of around two and a half years between rising migrant numbers and a measurable impact on property prices.

Rental returns

In the 12 months to January 2024, Melbourne’s asking rents increased 17 per cent for houses and 12.6 per cent for units, according to SQM Research.

With a vacancy rate of 1.1 per cent, there is strong demand for well-located rental properties that is unlikely to be satisfied any time soon.

For investors, that paints quite an appealing picture of rising cash flows from a well bought Melbourne property.

Melbourne’s improving affordability

One of the major drawcards for overseas and interstate migrants to Melbourne is that the city offers the same economic and educational opportunities as Sydney but with a cost of living discount.

We can see that advantage clearly when we look at average unit rentals in Australia’s major cities.

But relative affordability also impacts the demand from property investors.

One of the reasons for Perth’s stellar performance this year is its attractiveness to interstate investors compared to the eastern seaboard.

Take a look at this chart, which shows the affordability of Australia’s metro regions and how many years of income it takes to buy the average dwelling.

As Australia’s second biggest city, Melbourne looks relatively cheap with plenty of scope for outperformance in the years ahead.

City	Dwelling Price	Household income	Price / Income
Sydney	$1,090,000	$215,000	5.1
Melbourne	$800,000	$210,000	3.8
Brisbane	$695,000	$205,000	3.4
Adelaide	$671,000	$195,000	3.4
Perth	$560,000	$225,000	2.5
Hobart	$655,000	$185,000	3.5
Canberra	$785,000	$215,000	3.7
Australia	$720,000	$200,000	3.6

Source: ABS

Taken together, the base case for investing in Melbourne property is as strong as it is for any other Australian centre.

In fact, I would argue Melbourne is best placed to be the leading property destination over the next five years.

Time will tell.