Slower price growth and investor retreat reshape the city's housing landscape
Housing affordability across Australia has worsened significantly since the onset of the pandemic, with national home values climbing 46.8% over the past five years. The median dwelling price now stands at nearly eight times the median household income, up from 6.4 times five years ago. Rents have also surged, reaching a national median of $672 per week, marking a 43.8% increase during the same period.
Melbourne, however, presents a contrasting picture. Over the last five years, dwelling values in the city have risen by 17.5%, a much slower pace than the national average. The median house price in Melbourne remains below $1 million, at $953,000, while cities such as Canberra and Brisbane have surpassed this threshold and Sydney’s median house price has exceeded $1.5 million.
The city’s dwelling value to income ratio is now 6.9, down from a peak of 8.2 in 2017, and at its lowest since December 2014. Although rents in Melbourne have increased by 33.3% over five years, this remains the smallest rise among the capital cities and is well below the national figure.
This relative affordability appears to be influencing buyer behaviour. Data from the Australian Bureau of Statistics indicates that Victoria leads the nation in the proportion of new housing loans taken out by first-home buyers.
A key factor behind Melbourne’s subdued price growth is a more challenging environment for property investors. Recent tax changes in Victoria, introduced in the May 2023 state budget and effective from January 2024, have likely reduced investor demand. These reforms include a lower land tax threshold, a flat land tax increase, and a higher absentee owner surcharge.
For a tenanted property valued at $650,000, these measures amount to an estimated $1,300 increase in annual tax. When combined with higher interest rates, maintenance, and compliance costs, the appeal of holding investment properties has diminished. These taxes are in addition to existing levies such as higher stamp duty, vacant residential land tax, and a short stay levy.
While comprehensive data is limited, several indicators suggest a decline in investment property ownership. “New investment lending in Victoria has been rising since mid-2023, but at a slower pace than the national trend,” said Eliza Owen (pictured right), head of research at Cotality.
“Rental bond data implies a contraction in the overall investment stock (though this has also been occurring in other states), and experimental data from Cotality also points to relatively elevated investment listings in the city over time.”
Between March 2023 and March 2025, the number of residential bonds in Victoria fell by about 22,000, coinciding with the introduction of new property taxes. In the same period, approximately 74,000 first home buyer loans were secured in the state.
Victoria’s property market was already becoming less attractive to investors before the 2023 budget changes. New investor home loans in the state have lagged behind the national trend since September 2020, and implied investor listings overtook those in Sydney in 2021. Other factors, including weaker capital gains compared to other states, have also played a role.
Economic and demographic trends have further influenced Melbourne’s market. Victoria’s population declined by over 1.1% between March 2020 and September 2021, while the national population grew by 0.3%. The state experienced sharp drops in both interstate and overseas migration during this period. Although the population is recovering, it remains below what would have been expected if growth had continued at the historic average. Improved affordability may be attracting more interstate migrants, which could start to put upward pressure on prices.
The state’s economic performance has also faced challenges, including extended COVID-19 lockdowns and structural issues such as a shift towards lower productivity industries, declining per capita household income, and high government debt. “While there are definite signs of strength and recovery in the state, weak economic performance is ultimately not how housing affordability should be achieved, because lower home prices are simply symptomatic of less purchasing power,” Owen said.
Victoria has historically delivered more new homes than other states, with 885,000 dwellings completed over the past 15 years – 21.5% more than New South Wales. However, the pipeline of new housing is shrinking. Total property listings in Melbourne are currently 15% lower than a year ago, and new dwelling approvals in Victoria have averaged 4,600 per month over the past year, 12% below the decade average. Nationally, dwelling approvals are running 5.7% below the long-term average.
Melbourne’s experience offers both lessons and cautions for the broader Australian market. While reduced price growth and lower investor activity have improved affordability and supported first home buyer activity, these trends may also be limiting new housing supply. With tighter supply, rising interstate migration, and lower interest rates, Melbourne home values have increased by 3% so far this year, compared to 4.7% across the combined capitals. Whether the city can maintain its affordability advantage remains uncertain.
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