Why Melbourne’s property comeback is falling flat

Despite predictions of a major rebound, Melbourne continues to underperform with house prices trailing Sydney by the widest margin in 25 years.

National house price growth is almost double what’s being achieved in Melbourne.

Melbourne, the city where property investors are betting on a major rebound, is still in the dumps.

Despite plenty of predictions that the city is set to outperform key rivals, the numbers show that is far from materialising.

The city’s latest 12-month house price growth rate to September 30 of 3.4 per cent is little compensation for its five million residents, and thousands of interstate investors. The tepid lift is well behind the national average growth of 6 per cent, according to PropTrack numbers.

Sydney posted a solid 5.1 per cent performance over the last 12 months, which further stretches the gap between the nation’s two biggest cities. Long-term investors always watch the gap between Melbourne and Sydney as an indicator of value. That gap is at its widest since late 1999.

Vacancy rates – another key signal for investors – are also heading in the wrong direction. Everyone wants higher vacancy rates, except of course, property owners who depend on demand from tenants. In Melbourne, the current vacancy rate of 1.8 per cent is higher than every other city, according to SQM Research.

That level of vacant residential property may well stay ‘looser’ than other cities, because Victoria happens to have the best levels of property supply in the national market. In fact, the relatively strong supply of new housing is consistently underestimated in keeping house prices relatively cheap in Victoria. It has the capacity to dampen price activity for months to come.

Economists have also latched onto the outstanding nugget of data that the state has finally notched up a positive net migration number – there are, at last, more people coming into the state than leaving.

Victoria has not seen positive migration numbers for more than four years. The last recorded positive move was back in 2019, but in the September quarter it rose by 3 per cent. However, a closer look at the number does not bolster confidence. It’s not really about arrivals in the city, it’s about departures – or to put that more accurately, the lack of departures.

Overall, there are more people staying put in the nation’s second-largest city, which improves the net migration picture.

“It’s really the decline in departures that’s turned the interstate migration trend,” ProSolution Private Clients director Stuart Wemyss says.

For decades, Melbourne saw a constant stream of homeowners leave the state for Queensland. This pattern was linked to lower prices on offer in most of Queensland, where Victorian workers or retirees could move to find cheaper accommodation, teamed with a warmer climate.

However, the extended escalation in Queensland prices – Brisbane managed another 10 per cent last year – means that Victorians are increasingly unable to pay the prices now being demanded in most of the Sunshine State’s most attractive coastal regions.

There is also the shock impact on sentiment, which the recent blitz of property taxes from the Victorian government has created. The state government unleashed a raft of new taxes aimed squarely at the property market. There are now more than 10, including a short-stay levy, a windfall gains tax and a vacant land tax. Some buyers are hit with a congestion levy, an economic entitlement duty, and a growth areas infrastructure contribution.

Many in the market however are looking at the figures more positively. Ray White chief economist Nerida Conisbee says Melbourne has now edged above its previous peak with prices sitting slightly higher than the highs reached during the 2021-2022 upswing.

“A symbolic milestone that confirms the city’s return to growth,” Conisbee says.

Which is all true as far as it goes. Melbourne has finally passed its Covid-era peak – whether the city will ever return to its long-term spot as the second most expensive metropolitan district in the land is open to question. Either way, if there is a rebound happening, the numbers suggest it is not showing up just yet.