Is Melbourne our next capital city hotspot? - July 2024

By Rich Harvey, CEO & Founder, propertybuyer.com.au

Greater Melbourne real estate has been copping it a bit recently. While Perth, Adelaide and Brisbane have been riding a euphoric wave of capital gains, Melbourne has been languishing. Perhaps more painfully for those next to the Yarra, traditional rival Sydney is winning in their head-to-head real estate footrace too.

It appears a lot of investors are Melbourne-shy right now, but does that mean it’s a lousy choice for investors?

I had a chat with Propertybuyer’s Melbourne principal, Amanda Jones, about prospects in her hometown, and she tells a very different story from others you may have heard.

Melbourne’s state of play

The current slowdown in Melbourne relative to other big cities is real. Analysis shows the price gap between Melbourne and Sydney has widened. In addition, Melbourne’s median house price is now on par with Brisbane’s – a rare event indeed.

But Amanda suggests we look beyond the statistics. As she points out, the high-end market in Melbourne is flourishing. For those homebuyers with $5 million-plus to spend, competition for quality real estate is fierce. There’s been strong auction clearance rates and increasing stock numbers along with robust demand particularly from “new money” in the tech and crypto sectors. Brighton has had a ridiculous number of properties transact above $5 million in the first quarter of this year. In addition, Toorak had 48 homes sell last year for over $5 million, which is a staggering volume.

In contrast, however, investor-level stock hasn’t been quite so crazy. Properties priced between $600,000 and $1.5 million are where investors get active. Tax changes and tenancy legislation viewed as unfriendly to investors have made Victoria less appealing to landlords. In today’s borderless-investing world, many simply choose to buy in one of the smaller capitals instead.

However, it’s these very market conditions that are prime for smart investors, according to Amanda.

Like many other places, Melbourne is dealing with a rental crisis. There is a severe lack of available rentals, with the vacancy rate hovering at an extraordinarily tight one per cent. Rents continue to rise too, with many yields tracking well above inflation.

Melbourne is offering the best value in years as measured against Sydney. This wider-than-usual disparity should be a marker that the market here has bottomed.

And things will eventually turn around as they have done time and time again.

Investors need to take advantage of the downswing and diversify their property portfolios because price cycles always wax and wane. History shows that those other markets – like Sydney and Brisbane – will lull, and Melbourne will flourish. It’s hard to tell when that will happen although Amanda wouldn’t be surprised if it was from the end of 2024 into early 2025.

Investing in Melbourne

Drawing on the fundamentals will stand you in good stead in Melbourne. Suburbs with excellent infrastructure always appeal. Think great connections to the CBD for commuters. Also, seek excellent school zones along with comprehensive amenities such as retail, restaurants and cafés. Lifestyle appeal is also important. Being close to water and/or having easy access to parks and reserves helps drive buyer demand too.

An advantage for investors here is that Melbourne has room to expand. There isn’t the huge price disparity you see in Sydney between blue chip suburbs in different areas. With Melbourne’s population expected to surpass Sydney by 2036, you can see demand will only increase.

The perfect investor type for Melbourne right now is someone with long-term vision. They’re ready to ride out the bumps and reap rewards – especially when interest rates begin dropping. They also have ready access to funding so they can make quick decisions and be competitive in the buying space. In addition, these investors will employ financial buffers to avoid making rash short-term decisions about selling.

As for price points worthy of attention, seeking property in the $500,000 to $1 million bracket looks good, but make sure it’s a quality asset. For example, don’t go purchasing in a 300-apartment unit block. Instead, seek boutique developments with 15 to 30 units… or even less if you can. And keep common facilities to a minimum. Pools and gyms make high body corporate fees unappealing.

Amanda said a location like Brunswick is a fine example. Recently, a two-bed, one-bath, one-garage unit sold there for $420,000, and it was achieving $520 per week rent. That’s an impressive gross yield of 6.4 per cent.

If you’re in the market for a detached home, then look at suburbs from Edithvale to Frankston South. Here you’ll find homes on decent 700 square metre sites for $1.2 million. Langwarrin is another great address where a four-bed home is within reach at $900,000. These are areas that are flourishing as people escape the busy inner-city and look for a less-dense suburban lifestyle. The thing is, in 10 to 15 years as the city’s population grows, these very same locations will be considered “inner addresses”, and that means impressive capital gains over time.

So, if you’re an investor with a keen eye on the years to come, Melbourne is an attractive option. Just make certain you don’t proceed without an independent, local advisor in your corner. Someone like Amanda with a comprehensive network of agent contacts can help you secure a great asset that will outperform the market for many years to come.

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