Key takeaways
The Melbourne housing market has not performed as strongly as other capitals over the last few years, but Melbourne’s property values are expected to play catch up over the next year or two.
Melbourne has been constrained by several factors that are transitory in nature, but the long-term fundamentals of Melbourne remain strong, with a robust economy, strong population growth tipped to overtake that of Sydney and significant new infrastructure in the pipeline, making it one of the most liveable cities in the world.
We are seeing some early signs of a boost in confidence in both buyers and sellers and auction clearance rates have remained strong showing a significant depth of buyers in the market.
There is significant "inbuilt equity" in the undervalued Melbourne housing market at present, but not all Melbourne property is created equal - you need to know where to buy, what to buy and what suburb is ripe for investment.
One thing is becoming clear, if you wait around until interest rates eventually fall, all you’re going to be doing is playing tug-of-war with owner occupiers over the best properties.
With vacancy rates at historic lows, rentals are skyrocketing in Melbourne
Recently the Victorian government has stepped up to encourage more housing supply with two key policies designed to give developers a push to build:
1. A12-month reduction in stamp duty for off-the-plan units, townhouses, and apartments—regardless of the price tag.
2. 50 new activity centres where they will be streamlining the planning process for multi-storey residential developments.
Are you wondering what will happen to the Melbourne property market in 2025?
Over the last four decades Melbourne has been Australia’s strongest performing housing market; however, over the last couple of years it has underperformed.
In fact, over the last 12 months dwelling prices have been basically stagnant, while many other capital cities enjoyed double digit capital growth.
Melbourne's property values have risen 10.6% since the onset of COVID-19 in March 2020, but they are still -4.4% below their previous peak in March 2022.
Here is the latest data on the median property prices for Melbourne.
| Property | Median price | Δ MoM | Δ QoQ | Δ Annual |
|---|---|---|---|---|
| All dwellings | $776,949 | -0.4% | -1.0% | -2.3% |
| Capital city houses | $923,422 | -0.5% | -1.2% | -2.3% |
| Capital city units | $610,622 | -0.1% | -0.7% | -2.3% |
| Regional dwellings | $565,853 | -0.1% | -0.9% | -2.8% |
Source: CoreLogic, 2nd December 2024
The fact that the Melbourne housing market has not performed as strongly as some other capitals over the last year creates a window of opportunity for strategic property investors as Melbourne property values significant upside potential.The average price of a Melbourne standalone house is the lowest it has been against its Sydney equivalent in around twenty years.
Sydney has always commanded a premium versus Melbourne, but recently that premium has hit historic extremes.
The latest data show the typical house in Sydney currently fetches a 70% premium relative to the typical house in Melbourne, or put differently median house prices in Melbourne are approximately 41% cheaper than in Sydney.
This gap represents a more than $600,000 difference in median house prices at the end 2024.
This is the cheapest houses in Melbourne have been relative to Sydney at any point in the last 20 years, and a significant deviation from the average discount over the past decade (29%).
This means there is significant "inbuilt equity" in the undervalued Melbourne housing market at present, but not all Melbourne property is created equal - you need to know where to buy, what to buy and what suburb is ripe for investment.
One thing is becoming clear, if you wait around until interest rates fall, all you’ll be doing is playing tug-of-war with owner occupiers over the best properties for sale.
Buying properties below replacement cost in a market poised for recovery could yield substantial returns as the economic conditions improve and interest rates eventually fall.
Not only will strategic investors benefit from Melbourne’s long-term growth, but they will also get a “free kick” as the Melbourne property market catches up and reverts to its loan term mean growth rates.
Why the underperformance of the Melbourne market?
The underperformance of Melbourne's residential property market can be attributed to several factors, but the root cause boils down to economic challenges.
Some commentators still blame the harsh COVID lockdowns imposed at the height of the pandemic which influenced some people to move to the regions, but in my mind that was a long time ago and not really relevant today.
I believe Melbourne's under performance is related to lack of confidence in the state government.
Victoria has experienced significant economic setbacks, particularly evident in the net reduction of 7,606 businesses during the financial year 2022-23, according to the Australian Bureau of Statistics.
One of the main reasons for the decline in business numbers in Victoria is the aftermath of the state's extensive lockdowns.
Another critical factor is the increased tax burden on businesses.
The Victorian government introduced a payroll tax surcharge in the 2021-22 State Budget as part of a “mental health and wellbeing levy”, targeting businesses with a payroll of $10 million or more.
This was followed by a further increase in payroll taxes in the 2022-23 State Budget as part of a 10-year COVID debt levy to repay the government’s substantial borrowing during the pandemic.
The economic struggles of Victoria have had a direct impact on the property market. Where the economy and jobs go, the property market follows.
At the same time…
Property investors are getting disillusioned with Melbourne
Investors are increasingly abandoning the Melbourne market, driven away by stricter residential tenancy legislation and higher land taxes.
Recent reforms in tenancy laws have tipped the balance heavily in favour of tenants, making it more challenging for landlords to manage their properties effectively.
Additionally, the Victorian government's decision to hike land taxes has further compounded the woes of property investors.
Despite the current struggles, there is a significant opportunity in Melbourne's property market.
Property prices are considerably below replacement costs, creating a unique buying opportunity.
This situation is similar to where Brisbane and Perth were three years ago.
Back then, both cities were experiencing a period of underperformance, but those who bought during that time have since seen significant capital growth as the markets recovered.
At Metropole Melbourne we’re finding that strategic investors and homebuyers are back actively looking to upgrade, picking the eyes out of the market.
It is clear that Melbourne has been constrained by several factors that are transitory in nature, and over the longer term, that will either improve under a new government or be integrated into market expectations.
At the same time, the long-term fundamentals of Melbourne remain sound with strong population growth, a diverse economy with robust industries and employment opportunities, an increasing knowledge based economy and significant new infrastructure in the pipeline, making Melbourne one of the most liveable cities in the world.
Cheaper properties are recording stronger price growth
Melbourne dwelling prices remain below their 2022 peak, and more affordable properties (in the bottom quartile) have outperformed.
There’s been a shift towards outer suburban areas, where additional supply is greater and prices are lower.
In fact activity at the top end of the Melbourne property market has stalled with high properties selling over the last couple of years, and this obviously affects the median prices being reported for Melbourne.
This shows how Melbourne’s most expensive homes recorded sharp price falls.
This situation in Melbourne today is similar to where Brisbane and Perth were three years ago.
Back then, both cities had experienced a period of underperformance, but those who bought then have since seen significant capital growth as these markets recovered.
This means that once interest rates fall, and when Melbourne gets his Mojo back, the Melbourne housing market will likely outperform other capital cities, driven by strong population growth, economic recovery, and relative affordability.
Confidence will return as interest rates fall over the next year or two, and buyers will return to the Melbourne property market.
However, affordability will still be an issue for many potential buyers, and buyers will only be able to pay up to the limit of what they can afford, so I would only invest in locations where wages are increasing faster than average and residents have multiple streams of income, not just wages.
This means investing in the more affluent inner-ring suburbs and the gentrifying middle-ring suburbs of Melbourne which will outperform the cheaper suburbs, where residents will still find it difficult to afford to buy a home.
What is the Victorian government going to do about the situation?
Recently the Victorian government has stepped up to encourage more housing supply with two key policies designed to give developers a push to build.
Firstly, from October 21, 2024, there will be a 12-month reduction in stamp duty for off-the-plan units, townhouses, and apartments—regardless of the price tag.
This should hopefully make these properties more attractive to both developers and buyers.
Secondly, to boost density around public transport, the government has identified 50 new activity centres where they’ll be streamlining the planning process for multi-storey residential developments.
The goal is to fast-track much-needed housing in these areas.
Now, when we look at the numbers from the ABS, things are a bit concerning.
At the moment, there are around 63,700 dwellings under construction across Victoria—that’s 11% fewer than what we saw a year ago, and most of that drop is due to the slowdown in high-density apartment projects.
While detached houses under construction are still above the 10-year average, they've fallen by 19% over the past year.
If you look at the bigger picture, 2024 is likely to see the lowest level of new housing completions in Victoria in the last decade, and new housing starts are continuing to decline.
The approval pipeline isn’t looking great either—approved dwellings in Victoria are sitting 14% below the 10-year average. This all points to a further tightening supply in the near future.
On the flip side, demand is booming.
Victoria’s population is growing at near-record levels, increasing by over 183,000 people in the 12 months to March 2024, which is the biggest jump of any state in Australia.
A big driver of this has been overseas migration, and for the first time since 2020, Victoria has also managed to attract people moving from other states.
In terms of housing finance, things are also picking up.
Total housing finance commitments in Victoria have been steadily climbing and are now sitting 13% above the 10-year average as of August 2024, with a whopping $86.2 billion financed.
Over the past year, monthly finance commitments have risen across the board.
- Non-first home buyers have seen a 4% increase in owner-occupier finance compared to last year, and first home buyers have also been quite active, with their commitments up 13%.
- Investors, in particular, are making their presence felt, now accounting for 32% of total housing finance in Victoria, up from 27% just three years ago. With rental growth continuing strong and the housing shortage becoming more acute, I expect investors to take an even larger share of housing loans moving forward, as affordability challenges push owner-occupiers out of the market.
It’s an interesting dynamic—demand is as strong as ever, but the supply side is struggling to keep pace. This imbalance will continue to put upward pressure on prices and rents in the months ahead.
The best performing properties in Melbourne in 2025
Family-Friendly Homes
Price growth of established houses in Melbourne’s gentrifying suburbs will be underpinned by the ongoing trend of families seeking spacious homes with proximity to amenities, schools, parks, and transport links that continue to fuel demand for houses.
With Melbourne’s population growth back on the rise due to both domestic and international migration, family-oriented homes in established suburbs will maintain strong demand.
3-4 bedroom houses with larger land components, ideally with some potential for renovation or minor upgrades, will attract families and grow in value.
Middle ring eastern suburbs such as Mount Waverley, Glen Waverley, Mitcham, Blackburn, and Ringwood are enjoying gentrification and infrastructure upgrades, and remain more affordable than inner suburbs, and therefore experiencing strong owner occupier demand to push up prices as well as rental demand.
In the west, Essendon and Moonee Ponds are popular suburbs among families and professionals alike and provide easy access to the CBD, reputable schools, and ample lifestyle amenities.
Townhouses and Villa Units
Townhouses are an increasingly popular form of accommodation for young families, offering a compromise between apartments and houses.
With affordability pressures still high, many buyers and renters prefer townhouses as a more cost-effective option compared to standalone houses.
The trend toward higher-density living in inner and middle-ring suburbs will continue to make townhouses an appealing choice for investors.
Melbourne’s gentrifying, middle ring suburbs are great locations in which to buy townhouses, including Bentleigh and McKinnon in the south east, Reservoir and Preston in the north and Mount Waverley and Glen Waverley in the east.
Similarly villa units in Melbourne in a suburban suburbs in suburbs make great investments as they are popular amongst young families and older couples
Established apartments in Premium Locations
Well-located "family friendly" two-bedroom apartments are seeing renewed interest.
This is particularly true in areas with strong rental demand, especially from young professionals, students, and downsizers.
Look for properties in low-rise, boutique developments with unique features and modern finishes, spacious layouts, and access to amenities such as cafes, restaurants, public transport, and green spaces.
What's happening in the Melbourne Property Market?
Source: SQM Research
On the other hand, the Melbourne auction market started the year strongly showing a significant depth of buyers in the market and has continued to deliver steady auction clearance results.
While the data is insightful, as we know, Melbourne’s market is not a one-size-fits-all property market and A-grade homes and investment-grade properties remain in strong demand and are likely to outperform, many holding their values well.
There is a clear flight to quality with A-grade homes and investment-grade properties still in short supply for the prevailing strong demand, but B-grade properties are taking longer to sell and informed buyers are avoiding C-grade properties.
This is creating a window of opportunity for homebuyers and property investors with a long-term perspective.
Sure, many discretionary buyers and sellers have left the market at present, but life will go on in the Victorian capital – people will get married, people will get divorced, families will have babies and many Melbournians are going to need to move house.
When they realise interest rate rises have stopped (and we're possibly there already) and that inflation is under control (and we're past the peak already) they will come back into the market with a vengeance.
Melbourne’s rental markets remain exceptionally tight
Vacancy rates in Melbourne’s rental market are usually very tight, often sitting below the national baseline.
And thanks to soaring demand and a severe undersupply across Victoria, and the rest of the country, the national vacancy rate is exceptionally low today by historical standards.
SQM Research reports Melbourne’s vacancy rate at 1.5%.
By comparison, the vacancy rate which represents a balanced market, is around 2-2.5%.
Source: SQM Research
Of course, this isn’t news.
As we know, Melbourne’s rental market, like most places across the country, has plunged into crisis.
Near-record-low vacancy rates, high rent prices, strong demand, and a rising population have combined to push the city’s market into a high-pressure cooker environment.
The data for vacancy rates and also weekly rent listings highlights that the distressing state of Melbourne’s rental market leads to a bleak outlook for renters.
Source: SQM Research
Melbourne's decline in vacancy rates and number of rental listings can be attributed to two factors:
- One major factor is the city's strong economy and job market. Melbourne is home to a number of major industries, including finance, technology, and healthcare, which are driving the demand for housing.
- Another factor is the city's growing population. Melbourne's population has been growing steadily in recent years, with more people moving to the city to take advantage of its job opportunities and quality of life.
This increased demand for housing has led to competition among renters, driving down vacancy rates.
Overall, the decline in vacancy rates in Melbourne is a sign of the city's strong economy and growing population.
While it may be more difficult for renters to find a property, the city remains an attractive place to live and work.
Key trends for Melbourne’s housing market 2025
The Melbourne property market has been one of the strongest and most consistent performers over the last four decades.
After booming through 2020 and 2021 with prices rising by 15.8%, Melbourne housing values fell -7.9% from their peak in March 2022 through to the recent trough in January 2023.
While the Melbourne housing market turned the corner in early 2023, property price growth has been slower than in most other capital cities.
Any way that you look at it, Melbourne has now clearly passed the bottom of the downturn, and while Melbourne has not seen as sharp a recovery in prices this year as other capitals have, it also did not see as large a decline in 2022.
And there are firm indications that Melbourne property values and rents will start to pick up in 2025.
The level of new dwellings completed in Victoria in 2024 is likely to be the lowest level in 10 years with the current level of approved dwellings in Victoria 15% lower than the 10-year average;
Conditions are notably softer outside the capital, with property prices in most regional centres in Victoria falling or at best only stabilising.
And it’s worth remembering that even though Melbourne’s property market underperformed in the last few years, it has been one of the strongest and most consistent performers over the last four decades.
Supply will not keep up with demand from all the new immigrants coming to Melbourne, and boosted by below-average vacancy rates, Melbourne residential rental rates grew by more than 9% for both houses and units over the past 12 months.
Melbourne's population growth vs. housing market
Note: Projected population growth will continue to support Melbourne’s recovery, but will also pose problems.
Currently, there are 5.8 million people living in Melbourne, and 6.8 million in Victoria.
Victoria experienced the biggest population increase over the year to June 2023.
This can mostly be accounted for by a steady inflow of interstate and international arrivals and a subdued number of Victorians leaving the state (compared to other states which have had higher arrivals but also higher departures).
Annual population change
| State | Current Population | Change over previous year | Change over previous year (%) |
|---|---|---|---|
| New South Wales | 8.3393m | 172.6k | 2.10% |
| Victoria | 6.8125m | 181.8k | 2.70% |
| Queensland | 5.4594m | 138.5k | 2.60% |
| South Australia | 1.8517m | 30.5k | 1.70% |
| Western Australia | 2.8786m | 86.8k | 3.10% |
| Tasmania | 572.8k | 1.7k | 0.30% |
| Northern Territory | 252.5k | 2.2k | 0.90% |
| Australian Capital Territory | 466.8k | 9.9k | 2.20% |
| Australia | 26.6385m | 624.1k | 2.40% |
Source: ABS data
And the population growth is expected to continue growing too.
The Victorian government has a business plan to increase Melbourne's population by 2050 to 8 million people, which will put Victoria’s population at around 10 million people.
This means that over the next 30 years, Melbourne is likely to require 1.5 million more dwellings which will be made up of 530,000 detached houses, 480,000 apartments, and 560,000 townhouses.
While this increased demand is likely to translate to continued strong property price growth and a more robust economy, which is great news for investors, its infrastructure will struggle to keep up.
However Melbourne's public transport system, in particular, is struggling to keep up with the increased demand, leading to overcrowding, delays, and other issues.
The city's roads are also becoming increasingly congested, making it difficult for people to get around.
To address these challenges, the Victorian government has committed to investing heavily in public transport infrastructure.
The Metro Tunnel project, for example, will create a new underground rail line through the CBD, while the Suburban Rail Loop project will create a new orbital rail line connecting Melbourne's suburbs.
These projects will help to relieve congestion on Melbourne's roads and public transport system, providing much-needed relief to commuters.
The local government also has plans to invest in the city’s sustainable infrastructure and practices and is looking to develop new areas in surrounding suburbs to help facilitate the impending population boom.
Despite the Victorian Government’s Housing Statement ambition to build 800,000 dwellings in Victoria over the next decade, the number of dwellings under construction across Victoria has fallen over the past 12 months.
According to the ABS, there are currently 68,100 dwellings under construction across Victoria, 6% lower than the activity recorded 12 months ago, largely impacted by the slowdown of high-density apartment development.
The level of new dwellings completed in Victoria in 2024, is likely to be the lowest level in 10 years.
With construction costs having risen by up to 40% since Covid and higher financing costs, the level of new supply is likely to continue to decrease in coming years with commencements falling to their lowest levels since 2014.
Top 10 Melbourne suburbs where property has earned more than the average worker
Overall Melbourne property prices grew by a relatively modest 1.33% over the year.
But in the exclusive inner-Melbourne suburbs of Toorak and South Yarra, houses still gained more than the average wage at $237,486 and $136,311 respectively.
Meanwhile, suburbs east of the city in Canterbury, Balwyn and Surrey Hills also saw house values jump by $160,638, $156,400 and $125,312 respectively.
Further east the data was also impressive.
House prices in Wheelers Hill, Park Orchards, Lysterfield and Doncaster East increased $115,706, $103,194, $101,332 and $99,385 respectively over the year, all more than the average Australian wage.
Top 10 earners in Victoria
| Suburb | Region | AVM 12 months ago | Current AVM | Change ($) |
|---|---|---|---|---|
| Toorak | Melbourne - Inner | $4,148,336 | $4,385,822 | $237,486 |
| Canterbury | Melbourne - Inner East | $3,121,281 | $3,281,919 | $160,638 |
| Balwyn | Melbourne - Inner East | $2,702,699 | $2,859,099 | $156,400 |
| South Yarra | Melbourne - Inner | $1,891,053 | $2,027,363 | $136,311 |
| Surrey Hills | Melbourne - Inner East | $2,163,709 | $2,289,021 | $125,312 |
| Mont Albert | Melbourne - Inner East | $2,077,778 | $2,200,017 | $122,239 |
| Wheelers Hill | Melbourne - South East | $1,301,619 | $1,417,325 | $115,706 |
| Balwyn North | Melbourne - Inner East | $2,102,890 | $2,214,560 | $111,670 |
| Middle Park | Melbourne - Inner | $2,682,799 | $2,790,123 | $107,325 |
| Park Orchards | Melbourne - Outer East | $1,900,536 | $2,003,730 | $103,194 |
Source: PropTrack/realestate.com.au
Melbourne’s housing market - the forecast for 2025
Digging deeper into the stats, some Melbourne properties - bearing in mind there are multiple markets within markets - have far outperformed others.
- Also read:Latest property price forecasts for 2025 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:Sydney property market forecast for 2025
- Also read:Brisbane’s property market forecast for 2025
- Also read:This week’s Australian Property Market Update – Latest Data, State by State December 10th 2024
- Also read:Everything you need to know about the state of Australia’s property markets in 20 charts – December 2024
It really is a tale of two cities - while some properties over-perform, others underperform.
But the expert consensus is that strong population growth and tight supply will continue to push property prices upwards as we move through this next stage of the property cycle.
While Melbourne’s property market has lagged behind Sydney and Brisbane, there are clear indicators that it will continue on its upward trajectory.
Here is the most recent forecasts from Dr. Andrew Wilson, chief economist of My Housing Market:
Oxford Economics recently made the following forecasts of where house prices will be in 3 years time.
As you can see, they expect very strong property price growth for both houses and units in Melbourne over the next three years as Melbourne reverts back to mean long-term growth rates.
3-year property price forecast (by June 2027)
| City | Median price | Total price growth | ||
|---|---|---|---|---|
| Houses | Units | Houses | Units | |
| Sydney | $1.93M | $1.09M | 18% | 22% |
| Melbourne | $1.28M | $0.78M | 21% | 20% |
| Brisbane | $1.21M | $0.71M | 19% | 23% |
| Adelaide | $0.95M | $0.69M | 16% | 18% |
| Perth | $1.05M | $0.64M | 30% | 30% |
| Canberra | $1.17M | $0.75M | 19% | 20% |
| Hobart | $0.86M | $0.71M | 13% | 16% |
| Darwin | $0.7M | $0.46M | 24% | 26% |
Source: Oxford Economics, PriceFinder
