Melbourne Housing: Why It’s Now More Affordable Than Sydney & Other Capitals

The Shifting Cost of Living in Melbourne: Australia’s ‘Most Affordable’ Major City

Melbourne, once Australia’s second most expensive city in 2016, is experiencing a notable shift in affordability. While still a major global hub, a combination of increased housing supply, tax policies impacting property investors, and population movements during the pandemic have altered the financial landscape for residents. The question of how much it costs to live in the ‘best city in the world’ – a title often bestowed upon Melbourne – now has a surprisingly different answer than it did just a few years ago.

A Pandemic-Era Reset and Population Trends

The COVID-19 pandemic and subsequent lockdowns played a significant role in Melbourne’s affordability. Lockdowns prompted some population outflows, softening the housing market. Property advisory firm Charter Keck Cramer research indicates Victoria’s population is projected to grow faster than other states and territories, adding approximately 1.3 million people over the next decade starting in 2021, but this recovery hasn’t fully translated into soaring property prices. “It’s pretty much been evolving that way since about 2021 … when we started to see a lot of the disruption that really caused Melbourne to have quite a soft housing market,” says property expert Lawless. Melbourne now ranks sixth among Australian capital cities in median housing values.

Housing Costs: A Buyer’s Market?

This shift benefits prospective homebuyers. Victoria currently leads the nation in first home buyer activity, with entry-level units now available at prices lower than those seen five years ago. Almost a third of owner-occupier lending in Victoria went to first home buyers in the year leading up to September, exceeding the 10-year average and surpassing the share in New South Wales. An entry-level house in Melbourne currently costs around $720,000, while the median price sits at $1,111,084 – still lower than Sydney’s entry house price of $1,150,000.

Rental Affordability: A Relative Bright Spot

Melbourne as well stands out for its relative rental affordability. While rents across all Australian capitals are at record highs, Melbourne boasts the lowest median weekly rent for houses at $580. This contrasts sharply with Sydney’s $800 and higher rents in Perth, Darwin, and Canberra. “Rents in Melbourne, while still painfully high historically speaking … are still significantly lower than the other states,” notes Ashleigh Chang, an associate at the Grattan Institute.

The Impact of Investor Taxes

A key factor contributing to Melbourne’s affordability is Victoria’s controversial tax regime for property investors. Since mid-2023, approximately 23,000 landlords have exited the market following the implementation of increased taxes announced in the May 2023 state budget. Analysts suggest this exodus has inadvertently created opportunities for homebuyers. Independent economist Saul Eslake argues that while these taxes were initially intended as a revenue-raising measure, they’ve discouraged property investment, which he views as a positive development. The Sydney Morning Herald reported on how these taxes have contributed to Melbourne’s affordability.

Supply and Strategic Planning

Victoria has also been a leader in housing construction, completing more dwellings than New South Wales despite having a smaller population. The state government’s focus on increasing housing supply, particularly through initiatives like the townhouse code allowing for increased density in many zones, is also seen as a crucial element. The government recently released drafts for 60 proposed activity centres, primarily around public transport hubs in inner and middle Melbourne suburbs. Chang highlights the importance of allowing more townhouse apartments in middle suburbs close to employment, universities, and transportation, as outlined in a Grattan Institute report.

Looking Ahead: What’s Next for Melbourne’s Cost of Living?

Melbourne’s current affordability is a complex result of pandemic-era shifts, strategic policy decisions, and increased housing supply. While the return of population growth may eventually put upward pressure on prices, the state’s commitment to increasing supply and the impact of investor taxes suggest that Melbourne will remain a relatively affordable option compared to other major Australian cities for the foreseeable future. The success of the new activity centres, recently released in draft form, will be a key indicator of future affordability. The Age provides details on these proposed developments.