Melbourne might see a reversal in its sluggish run over recent years as it gains an “attractive affordability advantage” versus its main rival Sydney and other capital cities.

CoreLogic Australia research director Tim Lawless said looking at how Melbourne performed compared to other capital cities over the period spanning the onset of the pandemic in March 2020 to May 2023, it is apparent that it could potentially set itself as the more affordable option for many homebuyers.

“Melbourne house values have increased a mere 1.6% over the period, while every other capital city has seen double-digit growth, ranging from a 16.5% gain in Sydney to a 45.2% surge in Adelaide,” he said.

“Melbourne homeowners might be disappointed at the city’s substantially lower growth rate but for home buyers the sluggish conditions could give Melbourne an attractive affordability advantage.”

Melbourne versus other capital cities

The gap between the house values in Melbourne and Sydney had significantly increased from the onset of the COVID-19.

In March 2020, houses in Melbourne were 19.2% cheaper than in Sydney.

This price gap reached 30.3% in April 2022, the widest it has been since May 2006.

“The gap has closed a little since then however Melbourne’s median house value was 29.6% behind Sydney’s in May 2023, or the dollar equivalent of roughly $382,500.”

Over the period, other capital cities were able to close their gap to Melbourne.

For instance, house prices in Brisbane were 47% cheaper than in Melbourne at the onset of the pandemic. Based on current values, however, the gap has narrowed to just 15%.

There was also a significant change in the gap between Adelaide and Melbourne prices, from 85% at the start of the pandemic to 29% under current values.

Why Melbourne is lagging

Mr Lawless said the relative underperformance of Melbourne compared to other capital cities were due to a combination of factors.

“The city experienced a more substantial drop in value than other capitals through the early stages of COVID, it recorded a softer increase through the upswing and there’s been a significant decline in values through the rate hiking cycle to-date,” he said.

In fact, Melbourne house values declined 6.7% between March 2020 and October 2020. They, then, surged 20.6% through the growth cycle.

House values subsequently fell by 11.2%, finding a floor in February this year. Since February, Melbourne house values have risen by 1.7% to the end of May 2023.

The slowdown in Melbourne coincided with a sharp decline in demographic trends — both overseas and interstate migration rates fell, which negatively impacted housing demand.

According to data in September 2022, Victoria started to see a normalisation in interstate migration levels, almost returning to positive territory.

“It’s likely Victoria will be once again have reached a positive interstate migration position, putting an end to 10 consecutive quarters of decline,” Mr Lawless said.

“With Australia’s annual net overseas migration surging to new record highs and Victoria’s first possible rise in interstate migration since Q1 2020, housing demand across Melbourne has begun to strengthen substantially.”

Melbourne’s burgeoning advantage

Mr Lawless said as affordability remains stretched, the improvement in Melbourne’s value proposition places it in a more competitive position to attract a greater share of housing demand.

“The city’s advertised supply level is trending lower and is 13.4% below levels at the same time last year and 7.0% below the previous five-year average,” he said.

“Melbourne’s rental vacancy rate of 0.8% in May is also one of the lowest in the country and yet another potential factor supporting purchasing demand for those with the financial capacity to enter the market.”

However, it remains uncertain how the impact of interest rates would affect Melbourne’s trajectory.

While the demand from overseas migration is likely to remain a feature of the market for the next few years, the challenges in accessing credit as rates increase will continue to be a challenge.

“Additionally, it’s possible more homeowners choose, or need, to sell due to the substantial increase in mortgage repayments over the past 13 months alongside persistently high cost of living pressures,” Mr Lawless said.

“Any marked rise in new listings could add downwards pressure to housing prices.”


Photo by gettyimages on Canva.