Melbourne’s property market has been a hot topic among investors, analysts and homeowners alike. If you’ve been keeping an eye on it, you may be wondering if now is the right time to invest or if patience is the better approach.
One term that’s come up frequently is mean reversion – but what does it really mean for Melbourne’s property market?
In today’s blog we cover:
- What is Mean Reversion in Property?
- Undervalued Suburbs: Where Melbourne’s Next Boom Could Happen
- The Risks of Relying on Mean Reversion
- Melbourne’s Growth Gap: Opportunity or Risk?
- 5 Key Strategies for Property Investors
What is Mean Reversion in Property? The Trend Investors Shouldn’t Ignore
Simply put, mean reversion is the idea that property prices tend to return to their long-term average over time. So, if a market (like Melbourne) has underperformed for a few years, the theory suggests it will eventually catch up.
But, as with all things in property and investing, it’s not always that straightforward.
Property prices are influenced by a range of factors, including supply and demand, economic conditions, government policies, and local infrastructure developments. While history shows that many markets do eventually correct themselves, the timing and extent of these corrections vary significantly.
Undervalued Suburbs: Where Melbourne’s Next Boom Could Happen
Over the past few years, Melbourne’s property market has lagged other capital cities.
However, recent research from MCG Quantity Surveyors suggests that several Melbourne suburbs are currently undervalued, showing a significant “growth gap” between where property values sit currently and where historical trends suggest they should be.
SA3 Regions and Suburbs with Potential for Growth:
Stonnington West (SA3) – With a 28% growth gap, the sought-after inner-city suburb of Prahran could be due for a rise. It boasts strong amenities, public transport access and rental demand.
Stonnington West:
Source: MCG Quantity Surveyors
Stonnington East (SA3) – Currently sitting 24% below its projected value, Malvern East and Hawthorn East’s excellent schools, transport links and lifestyle appeal make it a strong contender.
Stonnington East:
Source: MCG Quantity Surveyors
Yarra (SA3) – With a 30% growth gap, Collingwood, a vibrant, inner-city location may present an opportunity for long-term investors.
Yarra:
Source: MCG Quantity Surveyors
Darebin South (SA3) – With a 17% growth gap, Thornbury has character homes and a growing appeal among buyers and renters.
Darebin South:
Source: MCG Quantity Surveyors
Sunbury (SA3) & Wyndham (SA3) – The outer-ring suburbs of Sunbury and Hopper’s Crossing show the biggest potential, with gaps as high as 43%. However, selecting the right pockets is crucial.
Sunbury:
Source: MCG Quantity Surveyors
Wyndham:
Source: MCG Quantity Surveyors
The Risks of Relying on Mean Reversion in Property
While the concept of mean reversion in property suggests prices should return to historical trends, property markets don’t operate in isolation.
Factors like population growth, employment rates, government policies and infrastructure developments all play a role.
For example, Sydney’s market saw minimal growth from 2004-2012 before rebounding strongly, while Perth’s market stagnated for over a decade before showing signs of recovery.
The key questions will Melbourne catch up to its historical growth rate?
If it does, how long will it take?
Source: CoreLogic, Domain
Melbourne’s Growth Gap & Mean Reversion: Opportunity or Risk?
Some areas may present solid investment opportunities if mean reversion holds true. However, not every suburb that has underperformed is a guaranteed success.
For example:
- Werribee and Hoppers Crossing have seen strong investor activity, but picking the right areas is crucial as there are risks due to high levels of available land, the homogenous nature of certain areas, pockets of social challenges and low land-to-asset ratios.
- Sunbury is set to benefit from transport infrastructure upgrades, which could positively impact demand.
- Inner-city suburbs like Prahran and Collingwood have strong fundamentals but require careful selection within the suburb to maximize potential returns.
5 Key Strategies for Property Investors
If you’re considering investing in Melbourne, here are some practical strategies:
- Look beyond past performance – Just because a suburb has underperformed doesn’t guarantee a mean reversion turnaround. Assess fundamentals like rental demand and employment growth.
- Leverage local expertise – Work with professionals who understand the nuances of each suburb, as even individual streets can vary significantly.
- Think long-term – Property investment requires patience. Markets don’t shift overnight, and mean reversion can take years to play out.
- Stay informed about government policies – Land tax changes and rental regulations can impact investment returns, so keeping up with state policies is essential.
- Monitor investor sentiment – Perception can drive the market. If more investors start seeing potential in Melbourne, prices could move sooner than expected.
Want to Learn More?
Listen to episode #302 of the Property Trio Podcast: Can You Predict Property Market Recoveries? Property Cycles & Mean Reversion – Is Melbourne A Hidden Opportunity or a Risky Bet?
Listen to the Property Trio podcast
- #39 Why Sydney and Melbourne outperform
- #52 Dissecting 10 years of Core Logic data – capital cities & regional areas
- #213 Exploring How Government Policy Shapes Investor Behaviour – Decoding the Queensland Land Tax Ripple Effects
- #251 Rental Revolution Revealed – Unit Rents Gain Ground on Houses, a Temporary Surge or Lasting Trend?
- #286 Is Investing in Property Still Worth It? Navigating the Shifting Property Landscape
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