After years as the second most expensive city to buy a home, Melbourne has fallen in the rankings.
Typical home prices are now cheaper in Melbourne than many smaller cities which is being driven by several factors.
According to PropTrack's latest Home Price Index, the national median home value rose to $800,000 for the first time.
Sydney remains the most expensive capital with a median dwelling value of $1.1 million, while Brisbane, Canberra and Adelaide rank second, third and fourth, respectively, in terms of typical home values.
Melbourne, which held second place for many years, is now the fifth most expensive capital to buy a home in. This is good news for first-home buyers and owner-occupiers in the city.
Given this market shift, understanding the drivers behind the change can provide some valuable insights.
During the past year, most cities have experienced home price growth. Perth, Adelaide and Brisbane led increases among the capitals, seeing 18.7%, 14.6% and 12.6% growth, respectively. Melbourne is the only capital where prices declined.
The stronger growth in smaller cities suggests demand there remains strong which has driven up home values at a faster pace than those in Melbourne.
From the start of 2024, the tax-free threshold for land tax in Victoria decreased from $300,000 to $50,000, increasing costs for investors across the state. The absentee owner surcharge rate was also doubled to 4% which has hit overseas investors.
More investors have sold their properties and loans to investors have fallen as a result, and the number of listings on market has increased.
The total number of homes for sale in Melbourne has increased 9.6% since November 2023.
This increase in supply and decrease in demand from investors have put downward pressure on Melbourne's home values and contributed to its relative affordability.
Greater supply has also come from higher rates of home construction in Melbourne. Victoria has built the most new homes of any state since late 2018, with a large volume of being built in metro areas.
Not only is Victoria building more homes, but compared to other larger states such as New South Wales, Queensland and Western Australia, the state is closer to accommodating population growth with new housing construction. This has played a crucial role in stabilising home values.
Overall, these factors have a combined influence on Melbourne market conditions and the shift in price trends.
If demand continues to be stronger in our smaller cities; listings rise further in Melbourne and the rate of new home construction persists or improves there, our second largest capital is likely to retain its relative affordability. This is a positive development for first-home buyers and owner-occupiers residing in Melbourne.
However, if the growth in housing stock slows or if demand shifts back to Melbourne, this relative affordability could be short-lived, potentially leading to an increase in home prices once again.
