Melbourne’s property market remains the great under-achiever of the nation but that may be about to change.

A number of key indicators suggest better performance by the Melbourne property market is imminent.

One pointer to better times is the latest Property Sentiment survey by API magazine, which recorded a major turnaround in investor attitudes towards the Victorian property market.

The survey asked: Which state or territory do you regard as having the best property investment prospects for the next 12 months?

Mid-year Melbourne and Victoria attracted only 8.6 per cent of respondents who felt it was the best state for property investment.

Three months later in the new survey there was a remarkable turnaround, with 25 per cent identifying Victoria as having the best property investment prospects for the next 12 months.

This ranked Victoria No.2 - above New South Wales and Western Australia, and close behind Queensland in the investment popularity stakes.

One of the attractions of Melbourne is its relative affordability, thanks for the absence of price growth in the past two years.

The latest Home Price Index from PropTrack shows that Melbourne is currently cheaper than Canberra and Brisbane, as well as being well behind Sydney. Melbourne’s median dwelling price is on a par with Adelaide and Perth now.

Sydney’s median dwelling price is $1.1 million, compared to $790,000 in Melbourne.

There is a growing perception that Melbourne is now affordable and poised for capital growth that would return it to its more familiar spot sitting a little ehind Sydney as the country’s priciest market.

Indeed, the latest PropTrack price report notes recent evidence of a turnaround for Melbourne. It says:

“Price falls have started to reverse in Melbourne, with buyers out in force for the peak of spring selling season. Prices rose 0.5% in October, the highest monthly growth rate among the capital cities.”

Other factors suggesting that Melbourne is due for a period of stronger property market performance include population growth (fuelled by overseas migrants and international students), a solid economy and a significant program of major infrastructure developments.

The latest edition of the State of the States report from CommSec ranked Victoria No.4 among the state and territory economies, ahead of NSW, the ACT, Tasmania and the Northern Territory. The report said the greatest strength of the Victoria economy is the level of construction work.

The latest population data from the ABS shows Victoria had the second highest growth rate among the states and territories in the year to March 2024, rising 2.7% compared to the national average of 2.3% - and bettered only by Western Australia.

In raw numbers, Victoria added more to its population than any other state, ahead of NSW and Queensland.

Jacob Caine, President of the REIV, says Victoria has always been an attractive destination for overseas and interstate migration.

Caine says: “Melbourne’s reputation as one of the most liveable cities is well deserved.

“We have a growing population and growing demand for rental properties with new residents more likely to rent before buying.

“The challenge in Victoria is a lack of housing supply, and the need for Government to build a stronger policy platform that will attract new property investors to meet the needs of the market.”

One positive policy from the State Government is the recent announcement that the stamp duty concession for off-the-plan properties in Victoria has been extended to investors - and the price cap removed for home buyers, albeit temporarily.

This has been largely welcomed by the sector, as offering a much-needed boost to development.

New data from off-the-plan property portal, urban.com.au, has shown a “massive spike in interest” for Victorian off-the-plan projects after the concession’s announcement, reporting an immediate 123 per cent increase in direct online enquiries, and a fivefold increase in online traffic volume.

Another factor in favour of investors is the reduction is the number of rental properties available, putting upward pressure on residential rents.

For the first time since records began in 1999, Victoria’s active rental bonds dropped significantly over the 12 months to June 2024, signalling a significant shift in the state’s rental market.

There are now 22,000 fewer rental properties in the market than a year ago.

Victoria’s high property taxes and stricter rental property standards have made owning investment properties less attractive. These factors, combined with sustained higher interest rates, have driven many landlords to sell off their properties.

Melbourne’s metro areas have experienced the largest declines, with more than 20,000 fewer rental properties, a 3.7% year-on-year decrease. Regional Victoria saw a smaller drop of around 1,000 properties.

Every Melbourne LGA saw rents rise in the past year, with some regions experiencing increases of nearly 20%. Overall, rents are (on average) 7.5% higher than a year ago, creating affordability challenges for tenants.

Another positive for the state is that Victoria currently leads the nation in first-home buyer activity, accounting for 32% of new loans.

Victoria’s population is projected to grow significantly over the next five years, further increasing demand for rental properties. The shrinking rental market, combined with rising construction costs and fewer new developments, could exacerbate housing affordability issues for both renters and buyers.

The Australian Financial Review reported earlier this month that “Melbourne’s housing market could outperform Sydney and other capital cities once it emerges from its current downturn, boosted by a marked improvement in affordability after years of weak growth”.

Nicola Powell, Domain’s chief of research and economics, says: “In the next cycle, we’re likely to see Melbourne overperform because it has underperformed significantly compared to other capital cities since March 2020.”

AMP capital’s chief economist Shane Oliver says he expects Melbourne prices to grow more than Sydney’s in the next upswing.

Oliver says: “Melbourne’s been lagging for some time, but this has made the property market relatively cheap compared to Sydney and the other cities. Because of its relative underperformance, it could bounce back a little bit quicker and sharper.”

At Hotspotting, our assessment is that many of the key parameters and indicators are lining up to boost the growth prospects for Melbourne and Regional Victoria in 2025. The city and the state generally are overdue for a period of price growth.