Is Melbourne an Undervalued Investment Opportunity?

Scott Kuru December 14, 2023 4 min read

KEY POINTS

Slower recent property price growth in Melbourne means the city is moving towards becoming a “buyers’ market”, representing value for owner-occupiers and investors
Some investors have recently pulled out of Melbourne because of Victoria’s higher tax regime
Leading real estate and property experts are bullish on Melbourne’s medium to long-term investment prospects because of strong population growth and a forecast shortfall in the housing supply

One of Australia’s leading property experts says Melbourne now presents good opportunities for owner-occupiers and investors.

John McGrath, head of National McGrath Estate Agents group, says the Victorian capital’s property market is rebounding, but at a slower pace than other East Coast capitals.

“This is giving buyers more time to take advantage of last year’s price correction”, he says.

Mr McGrath, says Melbourne home values are up 4 per cent in 2023, compared to Sydney and Brisbane - which are up by more than 10 per cent.

A buyer’s market

PropTrack recently forecasted growth of 1-4% in Melbourne over the next 12 months, while rival Domain group is predicting growth of 2-4% for houses and 3-4% for units.

One of the reasons price growth in Melbourne is slower than many of the other capitals is that more housing stock is coming onto the market.

SQM Research reported the total number of homes listed for sale rose by 1.9% in Melbourne in November, the biggest rise in listings across all the capital cities.

“It is slowly swinging towards a buyers’ market,” says SQM Research Managing Director Louis Christopher, with house hunters now having more choice.

CoreLogic’s latest Home Value Index shows dwelling values in Melbourne actually stopped rising and edged down 0.1% in November.

Mr Christopher says the easing price data showed vendors were willing to compromise on their asking prices to get sales over the line.

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With the overwhelming majority of properties in Melbourne sold at auction, analysts have pointed to the fall since mid-year in the city’s clearance rate, which was 58% in November, the lowest all year.

According to Domain, “clearance rates at 60 per cent or above usually mean prices are rising, while anything below indicates falls”.

Some investors are pulling out

PropTrack’s Economic Research Director Cameron Kusher says the situation is now more favourable for buyers in Melbourne, ironically because of more landlords selling off rental properties.

“There are quite a lot of investors looking to exit Melbourne and Victoria because there are quite a lot of taxes,” he says.

From the 1st of January next year, property owners will be hit with a temporary increase in land tax for investment properties and second homes, as the Victorian state government attempts to claw back some of the costs of its COVID-19-era spending.

When the new tax regime was announced in May this year, Nicola McDougall, Chair of the Property Investment Professionals of Australia (PIPA) group, described it as an “absurd policy” that “will no doubt lead to the exodus of investors in Victoria who are already struggling with significantly higher mortgage repayments.”

Victoria was also ranked the worst of all the states and territories when it came to being “welcoming to investors” in PIPA’s annual investor sentiment survey.

Melbourne_sky_line_dec_14_23

But were investors too quick to exit Melbourne?

John McGrath says investors shouldn’t ignore the southern city’s growth prospects.

“The rental market has been placed under immense pressure from the return of international students and professional workers,” he writes in his McGrath 2024 Report.

Pointing to extremely high net overseas migration, Mr McGrath says, “Traditional population patterns suggest Melbourne will be one of the favoured destinations amongst many new arrivals.”

“Melbourne is on track to have one-third of Australia’s entire population growth in the next decade, and overtake Greater Sydney for the title of Australia’s most populous city by 2031-32,” he says.

“This growth story is expected to boost demand for Melbourne property in the medium-to-long term, with population pressure likely to outweigh any rise in interest rates”.

Mr McGrath’s views are backed by international property advisory firm, Charter Keck Cramer.

Its latest report on the prospects for the apartment market in Melbourne is decidedly upbeat.

“The supply vs demand imbalance in Melbourne has become even more pronounced,”

the company says.

“The supply of BTS (Build to Sell) and BTR (Build to Rent) apartments remains at decade

lows, whilst demand for new housing remains at decade highs.”

“Melbourne needs to build between 15,000 to 18,000 BTS and BTR apartments every year to

accommodate the growing population.”

Charter Keck Cramer says it also believes the government is substantially underestimating population growth.

“This misalignment between supply and demand is anticipated to remain an ongoing

the issue, and depending on the responses by the Government, could potentially be exacerbated over the balance of the decade.”

The take-out

Despite current slower price growth than many of the other capital cities, many property analysts and experts who take a longer view are extremely upbeat about Melbourne.

“Everything that has long made Melbourne one of the most liveable cities in the world remains

proudly on display,” says Mr McGrath.

“As more and more new arrivals call the city home within the next decade, the Melbourne market’s best days may well lie ahead.”