Melbourne Property Market in 2025: Investment Opportunities Amid Challenges

Over the past four years, Melbourne's property market has underperformed, with stagnant or even declining house prices in some periods. In the last 12 months, housing prices have barely grown, while other capital cities have seen double-digit growth. Since the outbreak of the COVID-19 pandemic, Melbourne's property values have increased by 8.4%, but they are still 6.4% below the peak in March 2022, with a 0.7% drop in December.

However, as interest rates begin to decline and Melbourne's house prices rebounded in the last weeks of February, market sentiment has improved, reversing the previous months' weak trend. Below are the latest median house price data for Melbourne.

(Source: CoreLogic, 3rd March 2025)

In fact, Melbourne's property market has not performed as strongly as some other capital cities over the past year, but this has created a window of opportunity for strategic property investors, as Melbourne's property values have significant upside potential. Compared to Sydney, the average price of detached houses in Melbourne is at its lowest level in about two decades.

Sydney's prices have always been higher than Melbourne's, but recently this premium has reached a historic high. Currently, the average price of detached houses in Melbourne is at its lowest level in about two decades, with Sydney's average house price being 70% higher than Melbourne's, and Melbourne's median house price being about 41% cheaper than Sydney's. This gap means that by the end of 2024, the median house price difference will exceed $600,000.

This is the cheapest Melbourne house prices have been relative to Sydney in the past 20 years, significantly deviating from the average discount of 29% over the past decade.

This means there is substantial "intrinsic value" in the currently undervalued Melbourne property market, but not all Melbourne properties are equal—you need to know where to buy, what to buy, and which suburbs are suitable for investment. One thing is becoming clear: if you wait until interest rates drop, all you'll be doing is competing with owner-occupiers for the best properties on the market.

As economic conditions improve and interest rates eventually decline, buying properties below replacement cost in a market preparing for recovery could yield significant returns. Strategic investors will not only benefit from Melbourne's long-term growth but also gain new opportunities as Melbourne's property market catches up and returns to its average growth rate over the loan term.

I. Reasons for Poor Market Performance

1. Lack of Consumer Confidence and Weak State Economic Activity

The main issues in Melbourne's property market are the lack of consumer confidence and poor state economic activity. Although some commentators blame the strict lockdown measures during the peak of the pandemic for the population shift to regional areas, I believe this is a thing of the past and has limited impact today.

2. Lack of Confidence in the State Government

I believe the poor performance of Melbourne's market is closely related to the lack of confidence in the state government. Data from the Australian Bureau of Statistics shows that Victoria suffered a significant economic setback, with a net loss of 7,606 businesses in the 2022-23 financial year. This was mainly due to the consequences of large-scale lockdowns and increased business tax burdens.

3. Increased Business Tax Burden

The Victorian government introduced a payroll tax surcharge in the 2021-22 state budget and further increased payroll tax in the 2022-23 state budget. These measures have increased the burden on businesses, negatively impacting the economy and the property market.

II. Dampened Investor Confidence

1. Lower Expectations for Melbourne's Market

Property investors have increasingly lower expectations for Melbourne. There has been much discussion about the Victorian government increasing property taxes to offset the massive debt from ongoing infrastructure projects and the new expensive obligations landlords must bear to meet minimum rental standards.

2. Investors Exiting the Market

Due to increasingly strict residential rental regulations and higher land taxes, more and more investors are abandoning the Melbourne market. Recent rental law reforms have significantly favored tenants, making it more difficult for landlords to effectively manage their properties. Additionally, the Victorian government's decision to increase land taxes has further exacerbated the difficulties for property investors.

III. Market Opportunities

1. Property Prices Below Replacement Cost

Despite current challenges, Melbourne's property market still offers significant opportunities. Property prices are well below replacement cost, creating unique buying opportunities. This situation is similar to Brisbane and Perth three years ago, when both cities experienced underperformance, but those who bought during that period saw significant capital growth as the markets recovered.

2. Window of Opportunity for Interstate Investors

Although some short-term investors have exited the market, we are seeing more interstate investors viewing the current market as a window of opportunity. I have been in this field long enough to witness this pattern evolve. The best opportunities often come from underperforming assets, while the greatest risks usually lie in any overheated assets.

3. Strong Long-Term Fundamentals

In metropolitan Melbourne, we are seeing strategic investors and homebuyers actively seeking upgrades, attracting market attention. Clearly, Melbourne is constrained by some temporary factors, which will either improve under new government leadership or be factored into market expectations in the long term.

Meanwhile, Melbourne's long-term fundamentals remain strong, with robust population growth, a diversified economy, strong industrial development, numerous job opportunities, a growing knowledge-based economy, and significant new infrastructure under construction, making Melbourne one of the most livable cities in the world.

In summary, Melbourne's property market currently faces challenges but is also full of opportunities. For investors, the key is to seize the moment and make wise choices. While there is uncertainty in the market, opportunities often lie within change. Let's keep an eye on the future direction of Melbourne's property market and look for investment opportunities within it.

If you are interested in Melbourne's property market or have any questions, feel free to reach out to me anytime. I will be happy to assist you.