Melbourne's return to price growth driven by demand in affordable suburbs

Melbourne’s property prices have returned to positive annual price growth for the first time since early 2022.

While its recovery has not been a dramatic as Sydney’s, and it lags the capital growth taking place in the smaller capitals such as Perth, Adelaide and Brisbane, Melbourne’s property market is rebounding.

It is often said that Melbourne’s property market belatedly mirrors that of Sydney and there are parallels emerging in the current market.

Within Sydney, inner city areas had the strongest rebound in prices compared to a year ago, reversing the pattern seen earlier in the downturn when affordable peripheral areas were holding up better.

The story is playing out in a similar fashion in Melbourne, however, prices in the inner Melbourne region have not performed as well as prices in the east, particularly the inner east.

PropTrack’s Home Price Index for September reveals home prices in Melbourne are now up 1.66 per cent from the low in January this year but are still 4.27 per cent lower than the peak in March 2022.

While overseas interest in Melbourne’s blue-chip suburbs has soared, it is the more affordable suburbs that are driving the overall market higher.

The most searched-for location in the past six months on realestate.com.au was Melbourne, eclipsing the next most popular Gold Coast, suburban Brisbane, Sydney CBD and inner Perth.

But while migrants and foreign investors have their sights set on Brunswick, Carlton, Hawthorn and Toorak, Melbourne’s outer east has been the best performing region in 2023, with growth of 3 per cent according to PropTrack.

Ringwood-based Brett Freeman, Director of realtors Noel Jones, told API Magazine that first home buyers in the east were active but the family home segment of the market was very strong.

“Homes that are presented well and in good locations near schools and infrastructure have been particularly sought after.”

Melbourne stands alone with Canberra and Hobart as having an above average number of homes on the market nationally.

While interstate investors were still quiet, deterred by changes to the tax and regulatory environment that have targeted investors, high listing volumes were being matched by buyer demand.

“We are seeing many more properties coming to the market, which is giving buyers more choice but we are still seeing strong results in our core areas,” Mr Freeman said.

In the south east of Melbourne, Director of Darras and Zervas Estate Agents in Clayton, Chris Zervas, said the broad middle of the market is now recording the highest growth rate after previously being led by the upper quartile.

“Demand is still high in the face of higher listings, with good renovated homes doing well in this market.”

He said interstate buyers were finding value but added that the state government needed to implement further incentives for interstate buyers to purchase much-needed investment properties in Victoria, to help ease the rental crisis.

The rental market remains extremely tight in Melbourne, slipping further over the past month to just 1.18 per cent, with 2 to 3 per cent regarded as a balanced market.

While it’s the highest vacancy rate among the mainland state capitals, it’s still exceedingly low and driving rents higher.

Those high rents are encouraging first home buyers to make the switch from rent to ownership.

Belinda Botzolis, Managing Director, Add Valuer, said Melbourne’s middle-tier property segment has shown notable growth, with first home buyers also having a flow-on effect for that market.

“The demand appears to be stronger for well-located properties, particularly in established suburbs with good amenities and accessibility to transport and employment hubs and this always goes back to the age old saying, that the most important factor in the growth of a property is ‘location, location, location’.

“Additionally, properties with the increased cost of construction and the risk of having both the budget and project completion date blowing out due to the trade shortage, we are seeing a strong demand for well-presented homes.

“And finally, entry-level homes are attracting the greatest number of people to open homes and therefore achieving the most sales success come auction day, so those properties in more affordable price ranges, appealing to first-time homebuyers, families and investors, have seen consistent demand.”

Government reforms putting off investors

The Victorian Government has unleashed its most radical overhaul of the housing sector in a generation, and last week unveiled further changes to land tax laws.

Amendments included expanding vacant residential land tax to all vacant residential land in Victoria from the 2025 tax year; expanding the definition of vacant residential land to include unimproved residential land that has been unimproved for five years or more in established areas of metropolitan Melbourne from the 2026 tax year; and prohibiting land tax apportionment between a vendor and purchaser under a contract of sale of land from January 2024.

In an attempt to tackle a crippling shortage of housing, the government’s Housing Statement – The Decade Ahead 2024-2034, detailed plans to build another 800,000 homes over the coming decade.

In Melbourne’s northern suburbs, Paul Dines, Director, Stockdale and Leggo Reservoir, said strong stock levels are being driven by investors looking to offload their investments in the light of spiralling costs, taxes, interest rates and government reforms.

“These things combined are together acting as a disincentive for property investors, with the result being investment properties forming a larger slice of the property pie being offered for sale.”

He said that even with annual rent increases of 10-20 per cent in most suburbs, it has not been enough to cover an owner’s commitments.

“This is particularly evident where interest rates have doubled and nearly tripled in some cases, not to mention land tax.”

He agreed first home buyers were most active despite interest rate increases.

“Spiralling rents combined with increased listings at the more affordable end have enticed them back to the market.

“The upper end of the market feels the pain of interest rate rises the most and as a result, upper quartile properties represent a less active segment of the market,” Mr Dines said.