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While Melbourne has been Australia's strongest-performing capital city housing market over the last four decades, it has underperformed over the last couple of years.
In fact, over the last 12 months, dwelling prices have basically been stagnant, while many other capital cities have enjoyed double-digit capital growth.
Several factors contribute to Melbourne's residential property market's underperformance, but the root cause is Victoria's economic challenges.
Fact is…where the economy and jobs go, the property market follows.
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.
In stark contrast, Queensland saw a significant net increase in businesses, expanding by 11,031 in the same period.
This has not only been the aftermath of Victoria's COVID-related lockdowns but also due to increased state government tax burdens on businesses, including payroll tax.
At the same time, many existing property investors are 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.
In fact, many investors feel control is being taken away from them by government interference.
Additionally, the Victorian government's decision to hike land taxes has only compounded the woes of property investors.
Yet despite the current struggles, there is a significant opportunity in Melbourne's property market as property prices are generally considerably below replacement cost, creating a unique buying opportunity.
In fact, today, median house prices in Melbourne are approximately 41% cheaper than in Sydney.
This is the cheapest house Melbourne has been relative to Sydney in over a decade.
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 over the next couple of years, 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.
The best-performing properties in Melbourne in 2025
1. Family-friendly homes
Price growth of established houses in Melbourne's gentrifying family-friendly 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 four-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 Waverly, 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.
2. Townhouses
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 southeast, Reservoir and Preston in the north and Mount Waverley and Glen Waverley in the east.
3. Villa Units
In Melbourne's property market, established villa units in the inner suburbs represent an exceptional investment opportunity.
These low-density units in older, tightly-knit complexes, provide a sense of community and lifestyle appeal that's increasingly sought after by both young families and older couples or singles.
Unlike high-rise apartments, village units offer the advantage of space and often a private garden or courtyard, which is perfect for those looking for more than just an apartment but without the commitment of a standalone house.
This middle ground appeals to a broad demographic, making these units highly desirable and resilient in terms of rental demand and capital growth.
The convenience of inner suburbs with access to schools, shopping strips, cafes, and public transport is another significant draw for villa units.
Melbourne's young families value these conveniences as they prioritise neighbourhoods with a strong sense of community and proximity to parks, schools, and other family-friendly amenities.
Likewise, older couples and singles are drawn to the low-maintenance lifestyle these units offer, allowing them to stay close to their familiar neighbourhoods without the upkeep of a larger property.
With consistently high demand and limited supply, established village units in inner Melbourne are set to remain a solid and appealing investment for those seeking stable rental returns and long-term appreciation.
But is now the right time to invest in Melbourne?
The relatively subdued performance of Melbourne's housing market compared to other capital cities over the past year has created an opportunity for strategic investors.
Melbourne's property values now hold significant potential for growth, making it an attractive option for those looking to capitalise on an underpriced market.
Currently, the average price of a standalone house in Melbourne is at its most affordable relative to Sydney in nearly two decades.
Historically, Sydney has commanded a price premium over Melbourne, but this premium has reached unprecedented levels.
Recent data reveals that the median house price in Sydney is about 70% higher than that in Melbourne, or in other words, houses in Melbourne are approximately 41% less expensive than in Sydney.
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.
Waiting for interest rates to drop might only intensify competition with owner-occupiers for prime properties.
Securing properties in Melbourne below replacement cost in a market set for recovery could lead to significant returns as economic conditions stabilise and rates eventually fall as they most certainly will.
Strategic investors not only stand to gain from Melbourne's long-term growth potential but are also likely to benefit from a "free kick" boost as the market recovers to align with historical growth trends.
One thing is becoming clear: if you wait until interest rates fall, you'll be playing tug-of-war with owner-occupiers over the best properties.
Photo by Serina Bird on Unsplash
