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Melbourne property market forecast for 2022 - featured image
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Melbourne property market forecast for 2022

key takeaways

Key takeaways

While Melbourne's property market is experiencing a flat patch the long term fundamentals are strong.

This creates a window of opportunity to get into the property market before the Melbourne market picks up again.

Currently there are 5.1 million people in Melbourne. By mid century Melbourne will have 8 million people Victoria will have 10 million inhabitants.

In fact, Melbourne will most likely be Australia’s largest capital city in the next decade.

Melbourne has unique lifestyle and economic benefits that will attract overseas migrants as well as plentiful jobs for highly paid knowledge workers.

Rather than time trying to time your next property purchase based on where we are in the cycle, take a long to view and if your income is secure and the time is right for you, this may be an ideal time to get a foothold in the Melbourne property market while others are sitting on the sidelines.

Melbourne Property Market Forecast

During the recent property boom Melbourne's housing values did not grow as strongly as other capitals, but remember...we were locked down in a Covid  Cocoon for 260 days.

But then, in the second half of 2021 property values increased in almost every part of Melbourne - and that’s very unusual.

So far this year the Melbourne housing market has languished with little overall growth in the first four of the year, however, there are still plenty of transactions occurring.

It's a bit like having one hand in a bucket of hot water and the other in a bucket of cold water and saying "on average I'm feeling comfortable."

The number of properties newly listed for sale is slowing and currently, buyers are taking their time and contemplating their decisions.

FOMO (fear of missing out) is no more and buyers are not willing to take shortcuts or compromise like they were last year.

Moving forward, there will be a flight to quality and the various sectors of the Melbourne real estate market will be segmented, which is a more “normal” property market.

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.

While Melbourne’s preliminary auction clearance rates this time last year were around 80%, they are currently holding around the 60's, which is moving from more of a seller's market to a buyers' market.

This year property values in some locations will continue to rise firmly, some will increase in value moderately and some locations will languish, and a few areas will experience falling property values, based on local affordability as well as supply and demand.

However, by the end of 2022, it's likely "overall" home values will be 5% higher than at the beginning of the year and unit values will be 3-4% higher.

Moving forward, the various sectors of the Melbourne housing market will be segmented, which is a more “normal” property market.

Melbourne property values:

  • dropped -0.2% in the last week
  • dropped -1.2% over the last 28 days
  • up 2.9% over the last 12 months

Don't worry… there is still growth left in the Melbourne housing market.

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.

And with the recent opening of international borders, Melbourne will be a major recipient of new residents putting extra pressure on our property markets, particularly the rental markets.

Sure Melbourne's property price growth slowed down a little lately with more properties listed for sale over the last couple of months, but it's important to remember that buyers are sellers and sellers are buyers – meaning they will have to live somewhere and many will be looking to upgrade their accommodation in 2022.

1 Weekly Change

2 Monthly Change

 

3 12 Month Change

Is it the right time to get into the Melbourne property market?

Now I know some potential buyers are asking:

How long can this last? Will the Melbourne property market crash in 2022?

They must be listening to those perma bears who have been telling anyone who is prepared to listen that the property markets are going to crash, but they have said the same year after year and have been wrong in the past and will be wrong again this time.

The following chart from Shane Oliver chief economist of AMP Capital shows that over the last century residential real estate has returned 11% per annum, and that doesn't take into account the benefits of gearing and compounding.

Sure the property markets move up and down cyclically - while the short-term trends may be flat or downwards, the long-term trend has always been up.

And with Australia's population likely to grow to 40 million people by the middle of this century and with Melbourne's population likely to grow to 8,000,000 people, the long-term capital growth of Melbourne property is assured.

So rather than time trying to time your next property purchase based on where we are in the cycle, take a long to view and if your income is secure and the time is right for you, this may be an ideal time to get a foothold in the Melbourne property market while others are sitting on the sidelines.

Currently there are 5.1 million people in Melbourne. By mid century Melbourne will have 8 million people Victoria will have 10 million inhabitants.

In fact, Melbourne will most likely be Australia’s largest capital city in the next decade

compound growth

So when will this property cycle end?

I see Melbourne's property market continuing to grow slowly throughout 2022 until eventually, affordability stall the market.

Remember that the current strong upturn phase of the property cycle only commenced in October 2020.

Normally the upturn stage of the property cycle lasts a number of years and is followed by a shorter boom phase which is eventually cut short by the RBA raising interest rates or by APRA introducing macro-prudential controls to dampen the exuberance of property investors and home buyers.

Currently, we're at the beginning of the cycle of increasing interest rates, so I hope the regulators have learned from the results of previous interventions, otherwise if history repeats itself, there will be some unintended consequences. Scale

Watch this space.

Melbourne houses are outperforming

Currently, Melbourne's house price growth is stronger than unit growth, and while most sectors of the market have been enjoying strong demand, the more expensive properties are now outperforming Melbourne's less expensive properties.

Looking back the Melbourne property market has been one of the strongest and most consistent performers over the last four decades.

Over the last 40 years:

  • The median Melbourne house has increased by 7.9% per annum
  • The median Melbourne unit/apartment price has increased by 7.73%per annum

Obviously, this wasn't the same each and every year, as the Melbourne property market worked its way through the typical property cycles.

Weekly Asking Property Price 04 July

Over the last few decades, Melbourne won the mantle of the world’s “most liveable city” more times than any other city in the world.

Needless to say, the Covid-related lockdowns endured by Melbourne led to some challenging times, but now both buyers and sellers are back.

Prior to coronavirus Melbourne‘s population grew by around 120,000 people each year and migrants are going to come pouring back into Australia.

Melbourne has a unique lifestyle and economic benefits that will attract overseas migrants.

Sure many Australians see Melbourne as the poor cousin that caught coronavirus and was locked down for 260 days, but overseas people see Melbourne as the only World City of 5 million people that contained coronavirus.

So this creates a window of opportunity to get into the property market before Melbourne property takes off again.

Auction clearance rates give a great "in time" indication of the mood of Melbourne property buyers and sellers and as the chart below shows, some of the heat has gradually come out of the Melbourne auction market.

 

Melbourne Regional Auction Clearance. Jpg

While there is a shortage of quality housing in popular areas across Melbourne, the lower-than-expected population growth has led to an oversupply of housing in some outer suburban new estates.

A prime example of this is Melbourne's western suburbs where an additional 18,800 houses are expected to be built over the next 24 months.Buyers Agent

Villa units, townhouses, and family suitable apartments will be seen as affordable alternatives to houses in the highly sought-after inner eastern and south-eastern suburbs of Melbourne.

On the other hand, high-rise apartments in the many Melbourne CBD towers or close to universities are likely to underperform, remain vacant for a long time, and keep decreasing in value.

Houses in regional Victoria with easy access to the capital city are also in strong demand and should continue to increase in value.

Fast facts about Melbourne and its property market

Here's the list of some vital points you would want to consider:

The Victorian economy is holding up well

Victoria represents only 3 per cent of Australia's total landmass, yet accounts for 22 per cent of national GDP and competes with the largest economies in South East Asia.

For more than two decades, Victoria's economy has delivered strong and consistent growth supported by a diverse economy and a long history of prosperity across many industries.

Around  3.2 million people are employed in Victoria, which is 26 per cent of all employed workers in Australia and the state economy will continue to benefit from ongoing population growth.

The  Australian Bureau of Statistics forecasts Victoria's population to reach between 10 million and 12 million people by 2060. Melbourne is predicted to be Australia's largest city as early as 2030 with a population of 6.1 million.

Moving forward Melbourne‘s new rail loop which is estimated to cost $54 billion will arguably be the biggest infrastructure project in Australia and will enhance accessibility to many suburbs.

In many ways, this will be a game-changer as the loop railway line will open up access to employment hubs in Melbourne's middle-ring suburbs.

At the same time, Melbourne Airport is Australia's biggest curfew-free airport carrying a lot of freight and Melbourne has the biggest and busiest seaport in Australia.

But remember... Melbourne is not one property market...

There are multiple markets in this diverse sprawling city.

It is divided by geography price points and type of property into many submarkets - this means you can't just buy any property and count on the general Melbourne property market to do the heavy lifting for you over the next few years, so careful property selection will be critical. 

So to help you better understand what's going on in Australia’s second-largest property market here is a long thing you should know if you’re considering investing in Melbourne property:

Melbourne House Prices

Over the last 4 decades, Melbourne property values have risen at the fastest pace of all capital cities.

Melbourne house prices and market activity were adversely affected by its extended lockdowns during 202 -21, but now Melbourne property is on the move again.

Housing Cycles Melbourne May 2022

MELBOURNE DWELLING PRICE TRENDS - Source: Corelogic June 2022

Melb01

Melb02

At Metropole, we’re finding that on-the-ground sentiment has changed completely with strategic investors and homebuyers already starting to feel a little FOMO (fear of missing out).

However, while house prices have been resilient, Melbourne rental rates are experiencing weaker conditions due to a higher supply of rental properties, and less demand.

At the same time, more buyers are active in the market, and there is currently a shortage of good quality stock on the market.

Melbourne Property

Melbourne houses are outperforming apartments

Melbourne is seeing a record high in the difference between house and unit medians

Mlbrn PreviewMelbourne has also seen the weakest rental market performance since the onset of COVID-19, and as a large portion of rental stock are units, this has dampened demand across the segment.

This also likely explains some of the weaknesses in the Sydney unit market, where rental demand was similarly affected by a lack of overseas migration.

Unlike Sydney however, Melbourne has seen similar rates of disparity through the 2017 and 2018 calendar years, when the house price premium on units averaged 46.3%.

A prolonged period of high unit supply, and the development of high-density stock, kept unit values relatively low through this period.

This dynamic may shift through the remainder of 2021, as ABS data points to a fall in the construction of units, and a rise in the construction of new houses.

Furthermore, affordability constraints across the housing segment, which could be amplified by the end of HomeBuilder and temporary stamp duty discounts, may guide more first home buyers back to the unit segment of Melbourne.

Mlbrn Chart

So…is it the right time to get into Melbourne's property market?

Melbourne property prices have been climbing at a breathtaking pace in 2021 with more but much slower growth expected as demand from buyers continues to outpace the volume of A-grade homes and investment-grade properties coming onto the market.

But recently there have been mixed messages in the media about what’s ahead.

Of course, there are always the Negative Nellies wanting to tell anyone who is prepared to listen to them that the market is about to crash, but other more solid commentators are suggesting our property market is slowing down.

And I agree, I believe the pace of capital gains has peaked, but I’m not suggesting home values are about to dip, far from it.

Rather I believe we’ve moved from a peak rate of growth to a pace of capital gain that will be more sustainable and there's plenty of life left in the Melbourne real estate market with property values likely to keep increasing throughout 2022 and into 2023.

Australia's economy looked like it was going to experience a continued strong recovery and we are experiencing strong employment growth this financial security will underpin Melbourne's property market moving forward.

However, some sectors of the Melbourne housing market will continue to languish this year.

The sectors of the Melbourne real estate market likely to underperform most moving forward will be:

  • Apartments in high-rise towers – in fact, this is these properties are likely to be out of favour for quite some time.
  • Off-the-plan apartments and poor quality investments stock (as opposed to investment-grade) apartments, particularly those close to universities.
  • Established homes in the outer suburban new housing estates, where young families are likely to have overextended themselves financially and many people will be out of work for a while. Currently, many first home buyers are taking advantage of the various incentive packages including HomeBuilder to buy newly constructed homes, leaving established houses in these locations languishing.

Top 10 Melbourne school zones for house price growth

Education influences home buyers and property investors across a broad range of demographics and data show that it is now influencing property prices in greater Melbourne’s popular education catchments.School Melbourne

Education is a long-term consideration and, whether you are planning a family, have children already enrolled in school, or are an investor looking to attract long-term, quality tenants, it may be beneficial to consider school catchment zones when you are determining suburbs of interest.

A well-rated school can do wonders for property value, and recent data shows that school catchment zones can actually have a significant influence over how quickly property prices grow.

In fact, Domain Group’s latest 2021 School Zones Report shows that while Melbourne's property market has been going gangbusters this year, despite spending almost as much time in lockdown as not, house prices in some of Melbourne's school zones have outperformed and skyrocketed by close than 40 per cent over the past 12 months as fierce competition to get into preferred school catchment areas continues to drive property price growth.

The report confirmed how public school zones can influence property decisions and impact house price movement.

In Melbourne, secondary schools appear to have a slightly bigger impact.

This trend has reversed compared to last year, suggesting that at a time of escalating house prices, household budgets have become stretched.

Group Of Multiethnic High School Classmates Walkin 2

In Melbourne house prices have risen across most school zones analysed, up in 83% of primary and 89% of secondary schools, aligning with the rising property market.

While the top school catchment zones were spread across inner, middle, and outer suburbs and across a variety of different price points, a number that topped the list favoured the lifestyle location of Mornington Peninsula.

House price growth varied between neighbouring school zones.

Interestingly house prices in the Brighton Primary School zone increased 11% annually, while the neighbouring school zone of Elsternwick Primary School dropped 15%.

Annual house price growth in 48% of the primary and 52% of secondary school zones analysed surpassed the respective suburb price growth, with most seeing up to 10% more growth compared to the suburb they are located in.

Roughly one-in-ten school zones had 10-20% additional house price growth over the suburb's growth.

The list of top 10 Melbourne secondary schools catchment areas

school name median yoy
1 Diamond Valley College $990,000
+33.2%
View CatchmentsView
2 St Helena Secondary College $1,077,500
+25.5%
View CatchmentsView
3 Edgars Creek Secondary College $595,000
+25.3%
View CatchmentsView
4 Werribee Secondary College $587,000
+24.9%
View CatchmentsView
5 Mount Erin Secondary College $787,500
+23.0%
View CatchmentsView
6 Craigieburn Secondary College $615,000
+22.9%
View CatchmentsView
7 Cranbourne East Secondary College $600,000
+22.7%
View CatchmentsView
8 Beaumaris Secondary College $1,765,000
+21.7%
View CatchmentsView
9 Roxburgh College $614,500
+19.3%
View CatchmentsView
10 Epping Secondary College $595,000
+19.0%
View CatchmentsView
Source: Domain

The list of top 10 Melbourne primary school catchment areas

school name median yoy
1 Richmond Primary School $1,842,500
+39.6%
View CatchmentsView
2 Heidelberg Primary School $1,510,000
+36.7%
View CatchmentsView
3 Valkstone Primary School $1,726,000
+35.4%
View CatchmentsView
4 Glen Waverley Primary School $1,881,944
+33.0%
View CatchmentsView
5 Surrey Hills Primary School $2,040,000
+29.9%
View CatchmentsView
6 Pakenham Lakeside Primary School $626,500
+29.2%
View CatchmentsView
7 Clayton South Primary School $978,100
+26.9%
View CatchmentsView
8 Williamstown North Primary School $1,525,000
+26.8%
View CatchmentsView
9 Preston Primary School $1,100,000
+25.7%
View CatchmentsView
10 Cheltenham Primary School $1,196,000
+25.6%
View CatchmentsView
Source: Domain

Long-term Melbourne property market trends

Historically, the city’s property market has gone from strength to strength.

In 1966, the median house price in Melbourne was just $9,400.

Values have doubled more than six times since then, with the median crashing through the $100,000 barrier in 1988, and pushing through the half-million-dollar mark in 2010.

Today one in three Melbourne suburbs have a median house price of at least $1 million, with 90 per cent of suburbs within 10km of the CBD having a million-dollar median house price and almost 50 per cent of suburbs in the middle ring also in the million-dollar club.

And changing demographics are playing a big role in driving shifting market trends.

The big house on a big block is no longer a surefire strategy for success, as single-person homes and households without children are increasingly favouring living in medium-density inner-city and waterfront apartment properties.

Meanwhile, families are trending towards locations that offer effective transport infrastructure, with access to amenities and quality education.

Upgrades to major highways and new rail links may close the gap between suburbs that were previously closed off by poor infrastructure.

Currently, there are 5.1 million people living in Melbourne.

The Victorian government has a business plan to increase Melbourne's population by 2050 to 8 million people, and at that time Victoria will have a population of 10 million people.

But long before that Melbourne will become Australia's largest capital city, likely to overtake Sydney within the next decade.

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

Currently, the number of property sales in Melbourne is growing week by week, and asking prices are holding up well:

Weekly Asking Property Price 04 July

Melbourne’s Rental Market

Traditionally in Melbourne, vacancy rates have been tight; hovering well below the level of 2.5% vacancies, which traditionally represents a balanced rental market.

At Metropole Property Management our vacancy rate is less than half this rate, in part because our clients have chosen investment-grade properties, but we'd like to think it also has a bit to do with our proactive property management policies.

While over the long term rentals have grown in line with property values, more recently asking rents have fallen, in part due to the influx of rental properties that were previously let on short-term leases such as AirBnB and student accommodation.

Weekly Rent Listings 04 July

Melbourne Residential Vacancy Rates 04 July

The lower yield investors have been achieving is a reflection of higher capital growth and the value of Melbourne properties.

As a consequence, overall yields have declined over the past few years as can be seen from the following chart from SQM Research.

Melbourne Gross Rental Yield

Melbourne Apartment Market

There's currently a mismatch between Demand and Supply in Melbourne's apartment market.

Valuers Charter Keck Kramer explains...

Demand, via population growth, will return to Melbourne from 2023 and onwards.

Moreover, the rate of growth within different age segments of the population will vary.

With that growth will come the demand for additional and diverse forms of living.

At present, supply will not be able to respond as quickly to demand which suggests that vacancies will decrease, and rents and prices will increase.

This will initiate the next cycle of the Buy to Sell apartment market and first wave of Buy to Rent apartment projects.

Melbourne property market

Melbourne property market

6 reasons to choose Melbourne

1. Melbourne’s demographics

Melbourne had been ranked the world's most liveable city more times than any other city and is a major and relatively young city with a growing population of 4.9 million people.

Melbourne is projected to overtake Sydney as Australia's biggest city by 2030, although due to high international and interstate migration, birth rates, and life expectancy, this may occur as early as 2030.

The number of people living in Melbourne increased by over 450,000 in the five years to March 2016, the largest increase of any Australian city.

Melbourne is currently home to over 1.8 million households, estimated to grow to over 2.4 million households by 2036.

Melbourne has a relatively young population for a major city within a developed country.

The latest census in 2016 revealed Melbourne's population had a median age of 36, with 37 per cent of the population aged between 25-and 49 years.2

Melbourne demographics

 Age of Melbourne Residents

Social Profile

Melbourne is a well-educated and multicultural society, living in single-family households in houses.

More than 70% of Victorians live in Melbourne, making it a much more urban state than Sydney and Brisbane

27.5 per cent of the current labour force is degree qualified or higher and 73 per cent have a post-school qualification (which includes a bachelor's degree or higher, diploma, and certificate).

Melbourne has a culturally diverse population, where 58 per cent of the population have either both or one parent born overseas.

Approximately one-third of all households speak two or more languages, with the top languages (outside of English) being Greek, Italian, Mandarin, Vietnamese and Cantonese.

Melbourne is comprised of family households (83 per cent), single-person households ( 16 per cent), and group households (5 per cent).

The average number of people per household is 2.7, the average number of children per family is 1.8, and the average number of persons per bedroom is 1.2\

melbourne education

 Level of Education

2. Melbourne’s Layout

A well-planned city that is amply serviced by a range of public transport options, Melbourne is laid out under the Hoddle Grid’, so named after its designer Robert Hoddle, which runs roughly parallel to the Yarra River.

As with most large cities, greater Melbourne is divided into ‘east’ and ‘west’ neighbourhoods; those in the east are more established and generally considered more affluent, while those in the west are more affordable, newer suburbs with less established reputations.

3. Melbourne’s Infrastructure

Melbourne residents enjoy the use of some of Australia’s most advanced and well-connected systems of road, rail, and tram infrastructure, which give locals plentiful options when deciding how to get around the city and its surrounding suburbs.

Melbourne’s Infrastructure

The city received a perfect score of 100 for its world-class infrastructure in the 2013 EIU Liveability Report, where ongoing investment in Melbourne’s infrastructure was highlighted as being one of the factors that keep Melbourne at the top of the index.

And the State government is spending a lot on infrastructure recognising that good infrastructure is not an end in itself, but an enabler of better social, economic, and environmental outcomes.

Melbourne's new Suburban Rail Loop is a city-shaping project that will transform Victoria’s public transport system, revitalise Melbourne’s middle suburbs and create a long pipeline of jobs.

The 90-kilometer Suburban Rail Loop will link every major rail line from the Frankston line to the Werribee line, via the airport, better connecting Victorians to jobs, retail, education, health services, and each other.

The $54 billion costs of this project arguably make it Australia's largest infrastructure project and are likely to be a game-changer as it will open up Melbourne's employment hubs and middle ring suburbs with better transport – much like London's Tube provide to ring around that city.

Meanwhile, Melbourne Airport, which is Australia's largest curfew-free airport, handles more than 30 million passengers annually along with 350,000 tonnes of air freight, making it Australia’s largest air freight hub.

And Melbourne seaport - The Port of Melbourne- is the largest port for containerised and general cargo in Australia.

The city is also home to a number of world-renowned universities.

However as Melbourne suburbs sprawl further and further out from the CBD, the difference in the level of amenities between the inner suburbs and the poorly serviced outer suburbs is becoming more glaring, causing people to pay a premium to leave closer to the CBD and the better serviced inner suburbs.

4. Melbourne’s Economy

Melbourne market update June 2017

As a cosmopolitan, creative city that is served by a number of industries, Melbourne residents enjoy employment in diverse industries, from tourism, hospitality, and entertainment to commerce, industry, and trade.

Almost half the jobs created in Australia over the last decade have been created in Melbourne and Sydney.

Over the last 10 years, more than 500,000 new jobs were created in Melbourne as Victoria is transitioning from a manufacturing state to one driven by service industries, which is creating strong job growth and resultant overseas and interstate migration.

At the same time, the momentum of the Melbourne property market is creating a “wealth effect” for many of its residents have higher-paying jobs at a time that they are feeling wealthier as the value of their homes keeps increasing.

As you can see from the chart below, Melbourne's economy slumped in 2020 due to multiple coronavirus lockdowns, however, it's now growing strongly again in 2021

Westpac Vic Housing Pulse

Source: Westpac May 23rd 2022

5. Melbourne’s growth

Victoria remains the nation’s population growth powerhouse but growth obviously came to a halt through Covid.

Currently, Victoria represents around 26 per cent of Australia's population, and 3 out of 4 Victorians live in Melbourne making it Australia's least decentralised state.

Melbourne's population now stands at over 5 million people and Melbourne is still the fastest-growing city in the country, growing at around 2.4% per annum.

The estimated population increased by 2.2% over the 2018 calendar year taking it to 6,526,413 persons with an increase of 139,430 persons over the past year.

The 139,430-person population increase consisted of a natural increase of 40,256 persons, net overseas migration of 85,965 persons, and net interstate migration of 13,209 persons.

Although the population continues to increase rapidly, both net overseas and net interstate migration are lower than they were a year ago and the natural increase is higher than a year ago but lower than the previous quarter.

Of course, there will be little immigration to Melbourne over the next year or so, putting a temporary halt to its substantial population growth.

However there is still an element of natural population growth (more births and deaths) and it is likely that population growth will surge once our borders are opened again, the popularity of Melbourne together with the fact it is the economic hub of Australia,

The chart below shows Melbourne's population increase attributable to net overseas migration in the year to June 2019, alongside the four latest four-quarter average of the workforce employed in accommodation and food services and arts and recreation services.

Clearly, these areas of employment are likely to suffer more as we are cocooned by the coronavirus.

Melbourne demographics

The graphs above highlight that Victoria's change in population is trending lower due to quite large declines in natural increase and net interstate migration and a more moderate fall in net overseas migration.

However, Victoria still records the largest raw number increase in the population of all states and territories in Australia

As you can see from the graph below, more than three-quarters of net overseas migration has been into NSW and Victoria, most of this coming from China and India.

Most of these permanent migrants are coming for jobs and are of household formation age.

Many initially rent the homes, but many want to eventually buy a home as part of their "status" of being an Australian.

A large chunk of this population growth is happening in Melbourne's outer west, where the number of residents has increased by a figure equal to the population of Hobart over the last decade.

In fact, seven of the country's top 10 growth areas were outer suburbs of Greater Melbourne, with international migration a big driving force behind Melbourne’s population growth.

The ripple effect of house price growth caused significant house price growth in Melbourne’s outer suburbs over the last few years.

Similarly, some regional centres including Geelong have performed well, but moving forward it is likely that the more affluent middle-ring suburbs which are going through gentrification are likely to exhibit the best property price growth.

Melbourne’s growth

population

By the way…

Just because there is significant population growth in these areas doesn't mean there is strong capital growth in property values in these areas.

In fact, there isn’t!

That’s why I would avoid investing in these new outer suburbs as they lack the demographic and economic drivers to push up property values as opposed to the inner and middle-ring suburbs where there is more "old money."

Melbourne is set to overtake Sydney and become Australia’s largest city by the 2030s according to demographer Bernard Salt.

And that’s not really that far away, is it?

If these forecasts pan out, and they are likely to be correct, they will underpin the strength of the Melbourne property market and deliver surety to investors who own property in the right locations.

Why is Melbourne attracting more growth than Sydney? Melbourne-vs-Sydney

Melbourne offers what Sydney cannot or will not offer: access to affordable housing on the urban fringe.

Melbourne planned for growth from the Kennett years resulting in the formation of a plan for five million residents in 2030 and announced in 2002.

Either way, Sydney’s lead is now closer to 350,000 but is narrowing at a rate of 20,000 a year.

If the present rates were to continue Melbourne would replace Sydney as Australia’s largest city at some point in the 2030s.

6. Melbourne’s culture

The city of Melbourne is nothing if not multicultural, with dozens of different cultures and nationalities 140 to be exact living side-by-side.

The city’s Multicultural Hub was launched as a friendly, supportive environment for Melburnians of all cultures to get together and work, share and learn, while the city’s diverse and awarded restaurant scene is highly influenced by immigrants from diverse backgrounds including Chinese, Italian, Greek and Lebanese.

5 types of well-performing properties in Melbourne

1. Melbourne Houses

Decades ago, the Australian property market was dominated by demand for freestanding houses. urban-sprawl

The appetite for ‘the Australian dream’, complete with a comfortable home on a big block with a picket fence and a pet dog, was insatiable, and home buyers, as well as investors, flocked to houses as a preferred investment type.

Today, the concept that land goes up in value is still well recognised, but not all land is created equal.

What’s more, changing demographics and evolving family situations have shifted dynamics to the point where more Melbournians are trading backyards for courtyards and balconies meaning apartments, units, and townhouses can be just as highly sought as freestanding homes.

With median house values in Melbourne virtually doubling in the last decade, many people can’t afford freestanding homes, so they smartly start their home buying or investment journey with apartments instead.

2. Melbourne Town Houses

The term townhouse originally referred in British usage to the city residence of a member of the nobility, as opposed to their country estate.

Today the term refers to medium density (often multi-story) dwellings that maybe, but are not necessarily, terraced (row housing) or semi-detached.

In fact, the 2016 Census showed an 11% increase in the number of people living in townhouses - a popular style of Melbourne accommodation where people live in modern accommodations on compact blocks of land close to amenities in the middle ring suburbs.

Yes, Melburnians are trading their backyards for courtyards and balconies.

3. Melbourne UnitsMelbourne Units

Units (sometimes called villa units) are the name given to single-story, older-style dwellings, mainly built in the 1960s and 70s.

Today, developers rarely build in this style because it’s not as profitable as building ‘up’.

This style of property makes an attractive investment, as they are increasingly popular with small families and young tenants, who enjoy privacy with no one above or below and the small yard.

4. Melbourne Flats / Apartments

If an overseas visitor returns to Melbourne for the first time today after a decade, they wouldn't recognise the skyline which is now listed with mini high-rise apartment towers.

Many were built for investors, particularly overseas investors, but they have proven to be poor investments with no capital growth for many years, and more recently falling prices and high vacancy rates.

Demand for off-the-plan apartments is now very weak, and as the graphic below from Charter Keck Kramer shows there is poor demand for new apartments and few new developments in the pipeline.

On the other hand, family-friendly apartments in low-rise developments located in lifestyle suburbs are proving very popular with young families and downsize and make great investments.

Apartment Market Update Melbourne

5. Commercial, Retail and Industrial properties Commercial-Property

Commercial properties, (retail shops, factories, warehouses, and office spaces) are in a very different league from residential properties and out of the domain of the everyday investor.

Whilst there are many benefits of investing in commercial properties, they are more suitable for the sophisticated and experienced investor, particularly as they are more yield-driven than capital growth-driven.

Consider it this way: for most advanced investors, your job is to build your asset base.

Once your portfolio is big and robust enough, you begin transferring into a cash flow strategy, and at this point, a commercial property can be a good investment.

Overview of Melbourne's areas

1. Inner City

Melbourne’s inner city core has a population of around 29,450 people, a figure that is expected to double to 59,900 over the next 20 years.

As a result, there is much more property development activity in Melbourne CBD than anywhere else in the larger metropolitan area, with the majority of these developments comprising high-density high-rise apartment buildings.Inner City

The area of Southbank, just south of Melbourne’s CBD, currently boasts over 9,000 distinct dwellings, the majority of which are family households (45%).

The number of residential properties is set to rise to more than 26,000 over the next 20 years.

Currently, I’m worried about a large number of poorly built inner-city apartments on the market or planned for completion.

Many, in fact, of these are being bought by overseas investors, and these are likely to become the slums of the future.

Just to make things clear...I would avoid this segment of the Melbourne property market.

2. Bayside and South-Eastern Suburbs

Melbourne’s south-eastern suburbs boast distinct communities, neighbourhood attributes, and differing property growth cycles.

However while intricate, they're considered by many to be the best Melbourne property investment suburbs.

The inner south-eastern and bayside suburbs of Melbourne make great locations to invest in.

3. Eastern Suburbs location street phone

These include some of the most affluent areas of Melbourne - the residents of the eastern suburbs enjoy a median personal income of $1,164 per week, according to ABS figures.

Around 33% of properties are owned outright or mortgaged here, with 20% of housing comprised of townhouses or semi-detached homes, and only 33% of residential properties being high-rise apartments.

This is a dramatic difference from the inner city, where apartments are the dominant dwelling type.

The inner eastern suburbs of Melbourne also boast some great investment locations.

4. Western & Northern Suburbs

While the outskirts of Melbourne’s west and north are home to several of the city’s fastest-growing outer-suburban areas including Truganina, which increased by 18%, Tarneit (16%), Point Cook (12%), Melton South (11%), and Wyndham Vale (10%).

However, these more blue-collar areas have lower average wage growth and therefore lower ability to sustain capital growth.

While these areas are experiencing strong population growth and they have enjoyed strong capital growth over the last few years as the rising tide of the strong Melbourne property market lifted all ships, now that the cycle has reached its mature stage, many of these locations, especially the blue-collar suburbs will struggle.

In general, there are better investment opportunities in Melbourne’s inner eastern and south-eastern suburbs.

Melbourne has high standards melbourne city park happy peace victoria garden

Melbourne has been named the world’s most liveable city by the Economist Intelligence Unit’s liveability survey for 7 years in a row and for very good reason!

Boasting excellent healthcare services, premium education facilities (including world-class universities), a stable and diverse economy, a solid investment in infrastructure, and a thriving, creative culture, it’s easy to see why Melbourne received an overall score of 97.5 out of 100.

With such a high standard of living and ready access to good quality facilities and amenities, it comes as no surprise that people continue to choose to call Melbourne home.

In addition, with over 120 suburbs with a median house price of over $ 1 million, Melbourne has the second-highest median price in the country (behind Sydney).

Advice for aspiring Melbourne property investors

1. Avoid Melbourne’s poor-quality apartments

Just because Melbourne has a well-deserved reputation for quality, that doesn’t mean the city is flawless – far from it.

In fact, the Melbourne CBD (Central Business District) is riddled with poor quality apartments, with one report stating that an estimated 55 per cent of the city’s tallest apartment buildings are of “poor” quality, with common design flaws.


No one wants to live in a substandard apartment, regardless of how affordable it is, and there are only so many people who would find a hotel-sized apartment appropriate for full-time living.

The fact that an estimated 40 per cent of apartments in Melbourne are smaller than 50 square meters, according to the Melbourne City Council’s planning department, shows just how big this issue has become –, particularly when you consider that the minimum size of a single bedroom apartment can be in Sydney, London and Adelaide is 50m2 or above.

Not only are the apartments lacking in breathing room – literally – they’re also flawed in a number of other ways, with kitchens placed in hallways, a lack of ventilation and natural light, and poor storage.

All of these design faults make these types of developments less attractive to potential tenants, which reduces the desirability of these properties.

Investors would be well advised to steer clear of apartments that don’t tick all the boxes.

Shoebox-sized living spaces, alongside common design flaws in the building itself, should raise some serious red flags for buyers.

The problem is that many overseas buyers are purchasing these properties which will become the slums of the future.

2. Look for Melbourne’s best properties in the inner and middle-ring suburbslocation map house suburb area find

Studies – and time – have shown that properties close to the city’s CBD (but not in it) and in bayside suburbs close to the water will increase in value more quickly than other properties and suburbs.

The demand for property is higher in these regions, as there is no land available for release, but the areas remain close to employment or desired locations.

Not only are properties closer to the CBD closer have better access to amenities and more employment opportunities, but transport costs are often lower and, as a result, people are willing to pay a premium to live there.

The end result for property investors in Melbourne is that the inner and middle-ring suburbs will (generally) outperform the averages for suburbs located further from the city.

3. Be mindful of a Melbourne inner-city apartment oversupply

Melbourne’s property market has been typified by strong population growth and to keep up with surging housing demand, there have been a huge number of new developments – mostly in the form of high-rise apartment buildings, in and around the CBD – that have been approved.

While the population growth, Mainly from overseas migrants, was soaking up much of this new dwelling stock, the CBD is now over-supplied with too many new apartments.

With too many development projects either completed, begun, or approved in recent years, the risk for property investors in Melbourne is that there is currently an oversupply of properties in and around Melbourne’s CBD.

And until our international borders are open, and tourists and in particular students return, it is likely that this oversupply will be soaked up meaning there will be no capital growth and sluggish rental growth on your investment – so avoid Melbourne CBD and near CBD properties.

4. Make the most of Melbourne properties through negative gearing

While most investors understand the concept of negative gearing, just in case you're not up to speed, here’s a quick refresher:

Negative gearingA property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs, and depreciation – exceed the income it produces.

Since the costs of producing an income are generally deductible against the taxpayer’s other income, property investors can effectively offset some of the interest expense against their wages.

Why would anyone go into a business deal to make a loss?

Generally, it’s because property investors in Melbourne hope that their income losses will be more than offset by their capital gains when they eventually sell (or refinance) their property.

And in Australia capital gain is not taxed unless you sell your property, and then it is concessionally taxed; again evoking the argument that it favours wealthy landlords.

Of course, negative gearing is more favourable for taxpayers who earn high incomes, and just to make things clear...
Negative gearing is not an investment strategy - it's just the way a property is financed at a particular point in time.

A strategic approach to choosing an investment property in Melbourne

We believe that 80% of your property's performance is related to its location (one that outperforms the averages ) and 20% or so is related to buying the right property in that location.

Here are some of the factors to look for when selecting an investment-grade property:

1. Buy a property below its intrinsic value

I’m a big believer in buying property below its intrinsic value – that’s why I avoid new and off-the-plan properties, which generally attract a premium price tag.

I also look for properties with a high Land to Asset ratio - but remember apartments have an attributable land value underneath them

2. Buy a property in a location that outperforms the averages house property

In other words in an area that has a long, proven history of strong capital growth and one that is likely to continue to outperform the averages, this is largely because of the demographics in the area and the future economic prospects for the area.

These suburbs tend to be those where a large number of owner-occupiers desire to live in the area, because of the lifestyle choices they offer.

I look for suburbs where wages (and therefore disposable income) are increasing above average.

This translates to being an area where locals are able to and prepared to pay a premium price to live there, putting a financial floor under your investment property.

3. Buy a property with a twist

An investment must have something unique, special, different or scarce – some ‘X-factor’ that makes it stand out from its neighbours – in order to land on my shortlist.

4. Buy a property where you can manufacture capital growth

An ideal investment is one in which you can manufacture capital growth through refurbishment, renovations or redevelopment.

About Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au
301 comments

Zac - you need specific financial advice for SMSF's so I can't give you individual advice - what I can say is you can't get an investment grade property anywhere in Australia for $400,000

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Hi Michael, thanks for the info. I am looking to purchase an investment property through my super fund with a budget of $800k. Looking to split into 2 investments around Australia. I live in Sydney, know very little about Melbourne, but want to inves ...Read full version

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Sorry time I can't individual investment advice – it would be very wrong to do so in this forum without knowing all your circumstances. However the apartment is very small and is not something we would recommend to our clients. Unfortunately your bud ...Read full version

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