Economists and money markets are currently pricing in a 90% probability that the Reserve Bank of Australia (RBA) will cut interest rates by 0.25 basis points at their next meeting on 18 February 2025.
After a prolonged period of higher interest rates, this long-awaited cut is expected to increase borrowing power, ease mortgage stress and boost market confidence.
Historically, property markets react quickly to interest rate reductions, with buyer activity increasing and prices typically following.
When the RBA moves to cut or raise rates, it often marks the beginning of a new cycle which means that there are multiple rate cuts, not just one.
A reduction in interest rates will spark life into some markets.
Investors are always on the lookout for well-priced markets to take advantage of.
In today’s blog, we delve into the data points that suggest that Melbourne could be one of those markets:
- Melbourne’s Market Lull Since 2020
- Melbourne Rental Yields Move Above Brisbane and Adelaide for the First Time in History
- Home Buyer Sentiment Soars in Melbourne, but Nosedives in Perth, Brisbane and Adelaide
- Median Values ‘Slip Sliding Away’ For Melbourne… but Will this Last?
- Income to Price Ratio Superior to Brisbane, Adelaide and Hobart
- Melbourne Population Closing in on Sydney
- Increased Borrowing Capacity for All, Plus Extra Incentives for First Home Buyers on the Table
- Will Interest Rates Falling be the Catalyst?
- When Will Melbourne Rebound?
(This includes some information from a previous blog pre-Christmas – Is Melbourne’s Property market on the Verge of a Rebound)
Melbourne’s Property Market Lull Since 2020
Melbourne’s property market has faced a modest decline, with values dropping 2.0% over the last quarter and 3.3% over the last 12 months.
This is even more striking when looking at the growth in values since the onset of COVID-19 of the big 5 capital cities and over the last 10 years since January 2015.
- Perth, Brisbane and Adelaide have seen the vast majority of their price appreciation occur from 2020 onwards.
- Adelaide and Brisbane have outperformed over the past decade.
- Sydney saw strong growth pre-2020 and has since experienced more moderate gains.
- Melbourne, in contrast, experienced most of its growth pre-2020, with very little price appreciation in recent years.
We discuss several key metrics and indicators that suggest Melbourne may be on the verge of a market rebound.
Melbourne Rental Yields Move Above Brisbane and Adelaide for the First Time in History
For the first time in the history of the CoreLogic ‘Gross Rental Yield’ series, Melbourne’s rental yields surpassed Brisbane and Adelaide
Melbourne began 1% below the average Brisbane yield and 0.70% below Adelaide two years ago and has surpassed them both.
An extra 1.0% yield on a property valued at $1,000,000 equates to $10,000 per annum extra rent for the investor which is a huge incentive.
“You now receive less rental income to cover your mortgage costs when buying in Brisbane and Adelaide, than in Melbourne on average.”
The table shows that Melbourne’s rental yields have been steadily rising since 2023, whereas Brisbane and Adelaide yields have declined in the last 2 years.
High yields are often a sign that prices are low due to the inverse relationship between prices and rental yields.
If the prices stay flat or fall (as they have in Melbourne), and rents increase and even remain flat, the rental yield increases.
This is precisely what is occurring in Melbourne! ⬆️
In contrast, Brisbane and Adelaide prices have risen so fast that rental yields have been falling. ⬇️
This shift is an important price signal to investors.
This is one market signal that Melbourne is close to the bottom of the market cycle.
Investors considering a move into the Melbourne market will recognise this.
Home Buyer Sentiment Soars in Melbourne, but Nosedives in Perth, Brisbane and Adelaide
Another key indicator is homebuyer sentiment, which has jumped recently in Victoria.
In stark contrast to Perth, Brisbane and Adelaide where it has fallen significantly.
The Westpac Melbourne Institute Consumer Sentiment Survey “time to buy a dwelling” index nationally reached 89.9 in January, its highest level in nearly three years.
Although dipping slightly to 87.8% in February.
Over the last 12 months, this index has recovered by 18.4%, as consumer pessimism lifts with rates staying level for over a year and now being on the cusp of a fall.
What is particularly noticeable on a state basis is that Victoria has led the recovery in late 2024 with a huge 31.5% surge, reaching a positive index reading of 101.3 in November.
“This indicates that most buyers in Melbourne believe now is a good time to purchase.”
This contrasts with relatively poor sentiment in three of our strongest performing markets.
In November 2024, home buyer sentiment had slumped to the 80-87 range in Queensland and South Australia.
In Western Australia it was even weaker at a reading of just 66.
There seems to be a general feeling that the property party is coming to an end in those three states and this is playing out in the monthly CoreLogic price changes.
On the other side of the coin, the House Price Expectations Index, which measures confidence in future property price growth, rose in February to 142.3 points.
Victoria led the way, recording the largest increase, with expectations jumping 11%.
This provides further evidence that while some markets may start to cool off, buyers in Melbourne are starting to sense an opportunity.
“Sentiment often serves as a leading indicator of market direction, signaling potential shifts before they materialise in pricing trends.”
Median Values ‘Slip Sliding Away’ For Melbourne Property … but Will this Last?
“At the start of the pandemic in March 2020, Melbourne’s median dwelling value commanded a significant 37% premium over Brisbane’s. Since then, Brisbane’s property values have grown at more than six times the rate of Melbourne’s.”
In May 2024, Brisbane’s median property values for houses and units surpassed those of Melbourne for the first time since 2008.
Meanwhile, Perth and Adelaide are steadily closing the gap on Melbourne’s median values.
For houses, Melbourne could drop from perennially being the second or third most expensive city in Australia, to the sixth.
This is unprecedented.
This is even more stunning when you consider that Melbourne will soon become the most populated city in the country surpassing Sydney.
In August 2024 PropTrack revealed that Melbourne homes are now 41% cheaper than Sydney’s. Current figures from CoreLogic and PropTrack as of January 2025 show the differential both at approximately 38%.
In dollar terms, this equates to a staggering $557,000 price gap according to CoreLogic for the average house.
The question we must ask ourselves, are Melbourne’s medians likely to stay at current levels or revert to historical norms and rise above Brisbane and Canberra, and close the gap on Sydney?
The latest median’s as reported by CoreLogic are as follows:
Income to Price Ratio for Melbourne Property Superior to Brisbane, Adelaide and Hobart
Median home values are just one piece of the housing affordability puzzle— another crucial factor is income.
Housing affordability improves when income growth outstrips the growth in home values.
Melbourne has seen higher-than-average income growth, bolstering accessibility to housing whilst property values have fallen.
“Between March 2022 (the last market peak) and June 2024, dwelling values in Melbourne fell by -4.2%, while incomes rose by an impressive 8.8% over the same period.”
As a result, Melbourne’s dwelling value-to-income ratio dropped to 7.1 in June 2024, marking its lowest level in nearly four years.
In contrast, Brisbane and Adelaide have seen their dwelling value-to-income ratios climb to record highs, reaching 8.0 and 8.6, respectively.
Notably, this means that the price to income ratio for Melbournians is superior than those living in Brisbane and Adelaide.
These demographic shifts cause people to look to move to a new capital city for better priced properties and higher paying jobs, making Melbourne more attractive to those living interstate.
Melbourne Population Closing in on Sydney
The Federal Government’s Centre for Population predicts Melbourne will lead the nation as the fastest-growing city over the next decade, thanks to overseas migration, resulting in an annual growth rate of 1.7% for Melbourne.
With a current population of approximately 5,207,100 as of June 2023 (according to the ABS) this translates to an additional 88,520 people needing housing in Melbourne each year. This sustained population growth is expected to place upward pressure on housing demand, further tightening supply in an already constrained market.
Here’s how other capital cities compare over the next 10 years:
Meanwhile, Sydney has been experiencing a net loss in interstate migration, with the latest annual figures for March 2024 from the ABS revealing that 31,183 more people left New South Wales than moved into the state.
According to the Centre for Population, this trend is projected to persist over the next decade.
“By 2032, projections indicate Melbourne’s population will surpass Sydney’s, positioning it as Australia’s largest city.”
This surge in population is likely to exert upward pressure on housing prices in the Melbourne property market, particularly if the pace of new housing supply lags behind growing demand.
Increased Borrowing Capacity for All, Plus Extra Incentives for First Home Buyers
A combination of falling interest rates, policy changes to HECS repayments, and proposed access to superannuation for homebuyers is set to significantly boost demand in the housing market, placing upward pressure on property prices.
As interest rates begin to decline, borrowing capacity will increase, allowing buyers to access larger loans and compete for higher-priced properties.
Additionally, Labor’s plans to ease HECS debt repayments—by recalibrating indexation to wage growth rather than inflation—will improve borrowing power for younger Australians, enabling many to enter the housing market sooner.
On the other hand, the Coalition’s proposal to allow first-home buyers to use their superannuation for a home deposit would further stimulate demand, particularly in the entry-level segment of the market.
With these policy changes on the horizon, the combination of greater affordability, increased financial flexibility and renewed buyer confidence is likely to accelerate property price growth throughout 2025 and beyond.
Will Interest Rates Falling be the Catalyst?
Since the Reserve Bank of Australia (RBA) last rate hike in November 2023 it has been holding rates at their highest levels since November 2011.
Market analysts are betting on the first rate cut as soon as the RBA’s next meeting on February 17-18, with expectations holding steady at 90%.
This is expected to be the first of three to four reductions meaning interest rates could fall by 0.75% to 1% from current levels.
Lower interest rates will spur both homebuyers and investors to act—particularly in a city like Melbourne, where the property market has been subdued for an extended period, especially in comparison to Perth, Adelaide and Brisbane.
The timing and scale of these anticipated interest rate cuts in 2025 could be the primary catalyst for a full-scale rebound in the Melbourne property market.
Source: ASX RBA Rate Tracker
When Will Melbourne Rebound?
The data is building up for Melbourne to be in a sweet spot from a price and rental yield perspective to purchase in 2025 setting up for a price rebound in the coming years.
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