How Melbourne home buyers could save $125,000 with one compromise

Property prices for smaller houses are rising faster than for larger houses in Melbourne, as cash-strapped buyers and cashed-up downsizers compete for modest homes.

The median price for a two-bedroom house in Melbourne rose 3.6 per cent over 2023, while the typical three-bedroom house added only 1.5 per cent. The median four-bedroom house fell, ending the year 0.6 per cent lower.

This sent the median price of a four-bedroom house to $930,000, a three-bedder to $805,000 and a two-bedder to about $761,000, according to Domain data.

A family home buyer could save $125,000 by purchasing the median three-bedroom house, rather than the median four-bedroom house.

Domain chief of research and economics Dr Nicola Powell said rising interest rates had started to bite buyers who found they didn’t have the same borrowing power as they did before rates started to rise.

This has forced some potential buyers to look at apartments instead of detached houses.

While two, three- and four-bedroom house prices were still below their 2021 peaks, three-bedroom apartment prices were now at a record high, Powell said.

The Reserve Bank kept interest rates on hold this week and would not rule out another hike, although most economists think rates have now likely peaked.

“I do think in cities there’s now a real attractiveness that unit values offer,” Powell said.

Melbourne’s overall median house price rose by 2 per cent last year to $1,047,273, surprising economists who expected a longer downturn.

Two, three and four-bedroom houses are still below their 2021 price peaks in Melbourne.Credit: Istock

The overall Melbourne median differs from the four-bedroom house median as it calculates the middle of the highest and lowest prices of houses no matter the number of bedrooms.

PRD Real Estate’s chief economist Dr Diaswati Mardiasmo said competition between cash-strapped buyers and cashed-up downsizers was pushing up demand and prices for smaller houses and apartments in Melbourne.

“People [facing affordability constraints] are thinking ‘I’m going to be priced out of a three-or-four-bed house, or I’m going to be at the lower end of the market for those types of houses, so I’m going to play in the two-bed house market’,” Mardiasmo said.

That was fuelling more competition at that level, as buyers and downsizers face higher living and mortgage costs.

Both factors had also likely contributed to the record high median for three-bedroom apartments, as had their more limited supply, she said.

“We are seeing some spillover of people who can’t make it in the house market … they then go to the three bed units,” Mardiasmo said.

Michaela Green has noticed the rise in price of two and three-bedroom homes in Melbourne’s east as she plans to downsize from her five-bedroom Ormond home.

She is waiting to see the sale price for her home to determine what she can offer for a smaller one, after being taken aback by some recent sale results.

Michaela Green is selling her Ormond home to downsize.Credit: Jason South

“I’ve been surprised at some of the houses and the price points they’ve got,” Green said. “But I think, in general, a good house will always get a good price.”

Green bought the home in a former lolly shop 18 months ago after driving past and seeing it was for sale.

She and her family are selling as Green was offered a job that requires her to travel. It will go to auction on February 24.

“We just don’t need something so big any more,” Green said. “We’re still looking for another home - we’re just awaiting the outcome of the auction.”

Her selling agent, Ray White Oakleigh’s Leigh Kelepouris said a lack of stock of smaller two and three-bedroom homes had caused prices to rise in the area.

“Buyers also want land, they want to be in the right location, so it doesn’t matter if it’s a two, three or four-bedroom house, they will buy the property to knock down the house and rebuild what they want,” Kelepouris said.

Jellis Craig Richmond director Elliot Gill said the jump in prices for smaller homes could also be linked to higher rents, and the return of buyers to smaller properties after a search for larger homes during lockdown.

“Coming out of COVID, the market for small houses was a bit depressed, so I think this is a snap back from that,” Gill said.

“Younger first home buyers who would normally be looking to rent are being pushed out of the market [by higher rents], and they’re now feeling interest rates are at the top, and they’re looking to buy.”