Why you should think about buying a house in Melbourne

There is one surprise Australian city that experts say you should buy a home in now if you want the best deal.

The RBA has left interest rates on hold in a surprise move, meaning any fresh explosion in house prices has been delayed.

This could be hopeful news for young people looking to buy a house. And there’s one market in Australia where people are starting to notice value: Melbourne.

The Melbourne discount is huge now. The following chart shows how much less you pay for a separate house in Melbourne compared to Sydney.

The Melbourne discount is even bigger now than 20 years ago. Picture: Supplied / ABS

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Melbourne apartment values follow a similar pattern, albeit at a smaller discount to Sydney.

Sydney house prices really are astonishingly high.

Higher interest rates make houses cheaper, in theory. The more it costs to borrow money from the bank, the less people borrow and the less they have to spend. Lower interest rates do the opposite – they make houses more expensive.

Melbourne could be the best city to buy. Picture: iStock

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If you can afford to pay back $1000 a week, the bank will lend you more when rates are at 3 per cent than if rates are at 4 per cent and you will therefore have more to spend on a house, bidding the price up.

So the RBA’s surprise choice this week to leave interest rates at 3.85 per cent (everyone thought they would cut to 3.6 per cent) means any borrowing and spending boom in the housing market will be delayed for a while yet

The dream of buying a home is still a priority for many young people. Picture: iStock

The RBA uses interest rates to control inflation, and as we all know inflation has been way too high. High interest rates are supposed to help inflation fall and they seem to have done that – inflation is back in the target range of 2 to 3 per cent.

So people thought it was time to bring interest rates down.

The monetary policy board saw it differently and said it “could wait for a little more information to confirm that inflation remains on track.”

Has housing gone crazy?

It depends where you live.

The RBA said in May: “housing price growth has remained relatively stable, suggesting that it is yet to respond materially to easier borrowing conditions.”

But that’s on average across the country.

Sydney remains one of the most expensive places to buy a house in Australia. Picture: iStock

There’s only one interest rate for the nation. We don’t’ have an RBA of Adelaide – an RBAA.

If we did they might not have cut interest rates at all because, yes, house prices in Adelaide have gone crazy. They’re up 7.8 per cent over the last year, while Melbourne prices have fallen.

The Melbourne discount, in fact is no longer only available vs Sydney. As the next chart shows the city is on special vs the whole country just about.

The Melbourne house discount is rising. Picture: Supplied / ABS

Why have Melbourne house prices fallen vs the rest? The RBA’s interest rate suppresses the whole market on average, so it can’t explain the differences between markets.

What is different between markets is supply and demand. As the next chart shows, Victoria now has more dwellings per person than it used to, thanks to building lots of apartments, and a population fall during covid.

In the last little while, dwellings per person are rising. The reverse is true in WA, where dwellings per person are near a record low, and falling.

The difference between the states. Picture: Supplied / ABS

I like to think about the supply and demand dynamics as the soil and the interest rate as the rain.

When rate cuts arrive, rain will fall on these markets, but not all of them will blossom equally. If, based on this chart alone, I was going to pick a single destination where housing might not boom after the next rate cut, it would be the ACT.

The Canberra discount could be the new version of the Melbourne discount and the ACT might be the best bet for home buyers in the next few years.

Jason Murphy is an economist | @jasemurphy.bsky.social. He is the author of the book Incentivology

Originally published as Why you should think about buying a house in Melbourne