Australia’s housing affordability crisis has deepened sharply since the pandemic, but Melbourne stands out as a rare bright spot in an otherwise frenetic national market, offering great value for money, particularly for first-home buyers and investors.
However, a new piece of analysis by Cotality suggests the Victorian capital could be headed for a tighter housing market, due to reduced feasibility for new construction projects.
With the city’s population growth picking up again, this could signal a period of sharper home price growth and higher rents.
The details
Cotality data shows Australian values have surged 46.8% in the past five years, pushing the median dwelling value from 6.4 times to almost eight times the median household income.
The median rent has climbed to $672 a week, with rents up 43.8% over the same period.
Cotality’s Head of Research, Eliza Owen, says the figures confirm that “housing affordability has deteriorated badly since the pandemic.”
But in Melbourne, the story is different.
Dwelling values across the Victorian capital are up a comparatively modest 17.5% over the last five years, and the city’s median house value of $953,000 remains below the million-dollar threshold now breached in Canberra and Brisbane.
Sydney’s median house value, by comparison, has soared past $1.5 million.
“The dwelling value to income ratio in Melbourne is sitting at 6.9, down from a high of 8.2 in 2017 — the lowest level since December 2014,” Eliza Owen notes.
While Melbourne rents have risen by 33.3% in the past five years, that increase is still among the lowest of the capital cities and well below the national average.
“This relatively affordable housing is clearly having an impact,” Eliza Owen says, pointing to ABS Housing Finance data showing that Victoria now leads the nation in the share of new housing loans to first-home buyers.
Tougher investor climate
Eliza Owen suggests that Victoria’s tougher investment environment may be a key factor cooling the market and easing price pressures.
In its May 2023 state budget, the Victorian government introduced several tax reforms aimed at investors.
These included:
“For a tenanted property with a land value of $650,000, these changes equate to an estimated $1,300 annual increase in tax,” Eliza Owen explains.
When combined with rising interest rates, maintenance and compliance costs, she says, “The feasibility of holding investment properties may have declined.”
Those new taxes add to an already heavy load for investors.
Victoria has higher stamp duty rates than most states, as well as a vacant residential land tax and a new short-stay levy.
While comprehensive data is limited, Cotality’s analysis suggests investment property ownership has weakened.
“New investment lending in Victoria has been rising since mid-2023, but at a slower pace than the national trend,” Cotality’s Eliza Owen says.
“Rental bond data implies a contraction in the overall investment stock, and our experimental data also points to relatively elevated investment listings in the city over time.”
Between March 2023 and March 2025, Victoria recorded a decline of around 22,000 residential bonds amid the rollout of the new taxes.
Yet in the same period, around 74,000 first home buyer loans were secured across the state.
“If the sale of investment properties and decline in investor interest allows renters to become first-home buyers, this would ultimately be a good outcome in terms of home ownership rates,” Ms Owen says.
Slower market
Cotality research shows so-called “investor retreat” in Victoria began even before the 2023 tax changes, with new investor home loans underperforming the national trend since late 2020.
“Implied investor listings overtook Sydney in 2021,” Ms Owen says, noting that “clearly other factors have been at play.”
Historically, there has been a close correlation between the rate of capital gain and investor activity.
As capital gains in other states accelerated, Coatlity’s analysis suggests Melbourne became a less attractive market.
Victoria’s economic and demographic trends have also weighed on housing demand.
The state’s population fell by over 1.1% between March 2020 and September 2021, compared with a national increase of 0.3%, as Melbourne endured one of the world’s longest COVID lockdowns - 262 days in total.
“The Victorian population has not quite caught up to what it would look like if growth had been uninterrupted and ran at the historic 20-year average of 1.7%,” Coitality’s Eliza Owen says.
However, she notes the interstate migration trend is now looking more positive.
“Relative housing affordability may be attracting more interstate migrants back to Victoria and creating fewer departures.”
“But this, in turn, may be starting to put upward pressure on home values once again,” she says.
Affordability vs supply
Eliza Owen says that while Melbourne’s more subdued price growth has improved affordability and allowed more first-home buyers to enter the market, it has also created new challenges for supply.
“Victoria has historically seen more homes delivered than other states,” she notes.
ABS data shows 885,000 dwellings completed in Victoria over the past 15 years; 21.5% higher than in New South Wales, despite that state’s larger population.
That strong construction record helped keep price growth in check, but Cotality says Victoria’s future pipeline of housing is fading.
“New dwelling approvals in Victoria have averaged 4,600 a month through the year to August, 12% below the decade average,” Ms Owen says.
“At the national level, approvals are running 5.7% below average.”
Meanwhile, total listings in Melbourne are 15% lower than a year ago, suggesting sellers may be holding back in anticipation of higher prices.
“The Melbourne market currently has an ‘affordability advantage’, but like any market, lower prices create an incentive to restrict supply — whether it’s home sellers delaying listings, or developers struggling with feasibility.”
The take-out
For now, Melbourne’s balance between softer price growth, higher first-home buyer activity and relatively stable rents appears to be holding, but Eliza Owen warns that this may not last.
Between January and September 2025, Melbourne home values rose 3.0%, compared to 4.7% across the combined capitals.
However, major banks are forecasting a strong recovery in Melbourne.
In August 2025, ANZ upgraded its home price forecasts for Melbourne, predicting 6.6% growth (the highest of any Australian capital city) in 2026, easing slightly to 6.2% in 2027.
Westpac is even more bullish, predicting 10% dwelling price growth next year in the Victorian capital.
“Between tighter supply, rising interstate migration and lower interest rates, Melbourne home values have picked up,” Cotality’s Eliza Owen says.
“More subdued price growth and reduced investor activity has clearly increased affordability and made room for more first-home buyer activity.
“But this may also be contributing to a reduction in new housing supply due to reduced feasibility for new construction.”
That’s a situation which could see faster home price growth and higher rents, as rental vacancy rates tighten.
“Whether Melbourne can maintain its affordability advantage over the longer term is yet to be seen,” she says.