We sat down with real estate journalist, Chris Tolhurst, to discuss the evolving Melbourne property market and and gain some insight as to the direction it is heading in.

Current market conditions strongly indicate that it’s a very good time to buy an investment property in Melbourne. That’s partly because prices for entry-level properties in the inner-city (such as period cottages below $1.4 million and apartments below $700,000) remain fairly flat.

The same is true of prices in many middle-ring suburbs in Melbourne’s north and east.

Data from CoreLogic and other property analyst groups show that residential property price growth across the Melbourne middle market has been largely static for the past year. Currently, prices are not inflating like they are in most other capital cities. These stable market conditions make it an optimal time for owner-occupiers to sell and then buy their next home, as well as for new investors who are keen to purchase property that will outperform the average.

In a flat market, it’s easier to buy real estate at realistic prices because there’s more supply than demand. There is also heightened market transparency, which assists buyers to spot value. In a boom market almost any price a vendor puts on a property results in a sale, so the chances you’ll pay an inflated price are much greater.

If you have been considering buying an investment property, you should be aware of the factors likely to influence future price growth, as well as the tax and wealth-creating advantages that flow from property investing. These include:

Negative gearing

By using negative gearing, you offset the losses from an investment property against a salary to generate a tax deduction.

The percentage able to be claimed back is based on investors’ marginal tax rate, so the higher a taxpayer’s income the more effective negative gearing will be. The biggest beneficiaries of negative gearing are Australians who earn $180,000 or more a year.

Strong rental growth

Nelson Alexander Head of Property Management, Martin Sizer, says in the past 12 months the company has experienced rapidly increasing rent values across its network.

“Rents have been going up,” he says. “So, if you are an investor who can hang tight, you are arguably getting better returns than ever. The rise in rent values offsets some of the increase in costs, such as interest rates and land tax.”

Depreciation

Investors often have the potential to write-off depreciation against taxable income but haven’t been given the necessary paperwork on depreciation allowances by the previous owner of a property. In other cases, building developers will provide less-than-accurate depreciation reports to potential buyers.

These reports can be incomplete and include “guesses” about values that may be wide of the mark. It’s well worth having them checked by an independent quantity surveyor.

Supply rises

In winter, the supply of new property listings usually slows significantly but this is less evident this year. Over the month of May, Melbourne listings were up 34.8 per cent, according to CoreLogic data, compared with this time last year. And listings are up 9.6 per cent above the five-year average.

One reason for this is the flat rate of property price growth across Melbourne. Prices have jumped up sharply in other cities over the last 12 months. In Western Australia, prices are up 20 per cent, and seasoned property market observers recognise that Melbourne market values will eventually bounce up as well.

Property taxes

Another dynamic producing high vendor activity in Melbourne, are changes to State Government property taxes, which are encouraging some investors to sell. Cost of living pressures combined with higher interest rates have also led investors to offload properties, while some older investors are simply selling to free up cash for retirement.

Conscious investors consider things like land tax as part of the regular costs of owning property, just like budgeting for maintenance or hiring a property manager.

Low vacancy rates

Across the Melbourne real estate industry, sales teams have been selling properties off their property management rent-rolls. In many cases, these properties are apartments, and they are often being purchased by first-homebuyers and other owner-occupiers rather than by investors.

This situation, coupled with strong population growth in Melbourne, is helping to sharply reduce rental vacancy rates—a major plus-factor for any investor.

“Nelson Alexander’s vacancy rate is hovering around 1 percent, or just below that, depending on the suburb. It’s important to note that low vacancy rates and high rents work to ‘de-risk’ an investment property.”

Population growth

Investors need to think of residential property as a medium- to long-term investment. Studies show that over the past 120 years, residential property prices in Melbourne have doubled, on average, every 10 years.

This powerful growth is likely to continue, given the positive outlook for a population boost in Melbourne.

Victoria’s population grew by 181,800 in the 2022/23 financial year—more than any other state in Australia.

Land availability

Leading demographer Bernard Salt believes the strong growth in Victoria’s population over the 2023 financial year was partly a ‘snap back’ from the loss of people during the pandemic. Victoria was hardest hit and it makes sense that it is rebounding strongly.

Mr Salt says, the availability of land on Melbourne’s outskirts is much greater than in most other capital cities, especially Sydney, where future growth will be constrained by geographic barriers.

He also says the enviable lifestyle Victoria provides is highly appealing. Also noted is migration as an important driver for population growth in Victoria; “Migration is an important driver for population growth in Victoria, there is a strong recovery in the overseas student market and then there is also strong growth from overseas (migration).”

Strategic property selection

Selecting the right property is crucial for maximising the performance of your investment. A poor choice, due to location, amenities, high ongoing costs, or other factors, can significantly hinder returns. The ideal property offers the potential for steady rental income and long-term capital growth. By investing in a well-located property with strong rental prospects, you’re laying the groundwork for a successful investment journey.

Should you like to discuss the market in more depth with one of our Melbourne property experts contact your local Nelson Alexander office for a confidential, obligation free discussion.