The question of whether Melbourne’s housing market is a “basket case” or a “beacon of hope” for Australia is nuanced, with the sources concluding that the city presents both lessons and warnings for the broader Australian housing market. While Melbourne’s relative affordability stands out as a positive model, the underlying causes, including weak economic performance and risks to future housing supply, serve as critical warnings.
The Beacon of Hope: Relative Affordability
Melbourne’s market performance has diverged significantly from the national trend, leading to increased affordability. Nationally, home values surged by 46.8% over the past five years, but in Melbourne, dwelling values increased by only 17.5%. The city’s median house value remains below the million-dollar threshold at $953,000, a milestone surpassed by Canberra and Brisbane, and significantly below Sydney’s median value of over $1.5 million.
Crucially, the dwelling value to income ratio in Melbourne currently sits at 6.9, its lowest level since December 2014, and notably down from a high of 8.2 in 2017. This is compared to the national ratio, which is almost 8 times median household income. Furthermore, although Melbourne rents have risen substantially (33.3% in the past five years), this is still among the lowest results of the capital cities and well below the national rent increase of 43.8%.
This relative affordability has had a tangible positive impact: Victoria leads the nation in the share of new housing loans secured by first home buyers (FHBs). The decline in investor interest, driven partly by tax changes, may be allowing renters to transition into home ownership, slowing housing value growth and ultimately improving home ownership rates.
The Basket Case Warning: Underperformance and Supply Risks
The subdued price growth in Melbourne stems from several structural and policy-related factors, which economists suggest are not the ideal way to achieve housing affordability.
Economic and Demographic Weakness: Melbourne’s challenges were significantly amplified by the COVID-19 pandemic, during which the city saw a world-record 262 days in lockdown. Between March 2020 and September 2021, Victoria’s population fell by over 1.1%, contrasting with a 0.3% national increase, due to sharp declines in both interstate and overseas migration. While there are signs of recovery, weaker home prices achieved through weak economic performance are simply symptomatic of less purchasing power.
Tougher Investment Environment: The market was cooled by a tougher investment environment, including recent Victorian tax reforms implemented in January 2024 (e.g., lowering the land tax threshold, introducing flat land tax increases, and raising the absentee owner surcharge). These new or higher taxes come on top of existing costs, like higher stamp duty rates. Even prior to the 2023 budget announcements, new investor home loans in Victoria underperformed the national trend, partly due to stronger capital gains outside the state.
Threat to Future Supply: Melbourne has historically delivered a high volume of new housing, completing 885,000 dwellings over the past 15 years, which is 21.5% higher than in New South Wales. However, the future pipeline of work is fading. The affordability advantage may incentivize supply restriction, either through developers struggling with feasibility or sellers delaying listings. Currently, new dwelling approvals in Victoria are running 12% below the decade average, contributing to a reduction in new housing supply. This reduced feasibility for construction, resulting from subdued price growth and less investor activity, poses a serious warning that could jeopardize Melbourne’s long-term affordability advantage.