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Melbourne Is The Next Property Hotspot For Investors? · The Follio Property Podcast

• 0:05
  Welcome to I Call Bullshit Property Podcast, where we separate real estate fact from fiction. I'm Rhys Bettle, and in every episode, we uncover the truth behind the property market's biggest claims and trends. Joining me is our resident expert, Lachlan Delahunty. He's seen it all and isn't afraid to call out the bullshit when he sees it. Lachy, let's jump into today's topic. Melbourne is the next property hotspot for investors. It's been talked about a lot, hasn't it? We've seen a lot on the socials. 100%. And I think-
• 0:32
  In the last six, nine months, I've seen all the negatives, all the positives, and it just feels like there's a lot of commentary behind this particular topic. So we're pretty excited. There's extremes, right? People are either real pro-Melbourne or completely against it. Spitting out land tax issues, net interstate migration numbers. So let's get into it. Beautiful, mate. Okay, so...
• 0:53
  What are, I guess, from a Melbourne perspective, I mean, it's been pretty obvious that the turmoil Melbourne's experienced post-COVID when you're looking at, I mean, you can probably touch on some of the data points, you know, off the top of your head, which I'm assuming you do, in terms of what happened to the market sort of post-COVID. But I guess, what are the signs that the Melbourne property market is turning around in 2025? So, obviously, we mentioned there's a lot of negative consequences.
• 1:18
  back into last year and the last few years, but it definitely feels like there is now starting to get some positive sentiment in the market. So what's some of the key signs that you're seeing that Melbourne's starting to turn?
• 1:27
  Yeah, so answer that first part of what's happened with Melbourne, because all of a sudden, it's probably experienced negative growth for the first time in 20, 25 years, right? So it's a huge surprise. Melbourne's now the biggest city in Australia. So obviously, they included Melton in the figures, and it's now half a million dollars, half a million, half a million larger on a population basis than Sydney.
• 1:52
  So how's our largest capital city in Australia going through, arguably, the first correction that it has in 25 years? So when we look at Melbourne and look back the last 10 years, it sort of peaked in 2017. And prior to that, Melbourne went on almost like a faultless run of growth.
• 2:13
  So the previous stagnation up until recently was back in the early 90s. So really... So is that the most successful market then? Most consistent. Most consistent. Certainly the most consistent. If you look at Sydney, people, you know,
• 2:29
  I can't really realise when Sydney was affordable, but it was around COVID time, right? Perth and Sydney median house prices were almost identical. And Melbourne at that point was slightly below Perth. And then obviously Sydney went on an absolute rampage and Melbourne's been really, really consistent.
• 2:44
  It went on a run at 8% compounding growth since 1995 to 2017. Almost, if you look at the graph you had in front of you, it's almost like a perfect incline with no stagnation. So you see other markets like Perth, you see typically a big upswing followed by a correction or a stagnation, big upswing, same with Brisbane. Adelaide's quite similar but just doesn't have the long-term compounding growth rate as Melbourne. And Sydney's gone through extremities of growth, flatness for two or three years, serious growth.
• 3:13
  So it's a really consistent market. But it peaked in 2017. And then the market started to falter. I don't know if you remember the time, but they changed the interest-only model. So it was a very difficult interest-only loan. So the investor market come out. And so it was the first dip in the market. How long was that for, the interest-only? Was that a period of time? Yeah, it's about a 12-month period. So that was when...
• 3:35
  Royal Commission snapped in and there was a lot of changing because they were really trying to put the handbrake on the Sydney and Melbourne market but typically Sydney because it was getting out of control and one of the levers they could pull was to stop the investment activity so pretty much eradicated investment loans and that dipped the market
• 3:52
  And then, obviously, there was a COVID hit and there was nationally a spike in house prices. Melbourne was the lowest performer. So we saw Adelaide, Brisbane, and Perth sort of hit 30%, 35% growth periods. Regionals do 40%, 45% periods. Melbourne only did 18% growth. And that was really primarily driven over a really low cash rate. It was the most locked down city in the world. Yeah, it was. I mean, I was living over in London at the time and we...
• 4:20
  we got hit first, I guess, in terms of the lockdowns and we thought it was bad, but we got off lightly compared to Melbourne. It just felt like Melbourne was in a lockdown for 12 months. Yep, yep, exactly. And the way the state government handled that COVID period is, I'm not going to talk about it in detail here, we're not politicians, but...
• 4:37
  was handed poorly and and the sentiment in melbourne meant that a lot of people moved away right so people think of lockdowns there was a mass interstate migration out of victoria particularly melbourne and that's why we're seeing you know brisbane really benefit on queensland benefit off off post-covers massively i think people have a realization we just want to get out of here not only that the government essentially ran out of money huge debt
• 5:00
  had to give up the Commonwealth Games and a lot of the big major projects that attracts a lot of employment were put on hold or deferred. So it was a weak economy followed by a lifestyle that people wanted to get away from. So we've seen a huge exit and that's why Adelaide and Brisbane really benefited off Melbourne going through such a tough time and Perth potentially benefiting off that as well. And then since then we've seen a negative decline in house prices.
• 5:30
  So what does that mean? So in summary, if you take out the 18% bump in COVID, which was purely on a cash rate, really low cash rate, the Melbourne market has been on a steady decline since 2017. And if you look at the data, units you're buying at the same price you could have in 2017, houses are marginally above where they were in 2017. So for the first time in over 25 years, Melbourne is in an eight-year stagnation. It's the first time.
• 5:57
  in 20, 25 years. So that starts to get quite interesting, because okay, Melbourne for the first time is really affordable. And if you look at in comparison to the other capital cities, just the median house prices alone. You've got Sydney there at 1.2 million. You've got Brisbane now at 910,000. Adelaide at 825, Perth at almost 810,000. And you've got Melbourne at 786,000.
• 6:23
  So for the first time since I've been in the game, well over 15 years, Melbourne, on the hierarchy of unaffordability, is now the fifth most affordable market in Australia. Which is crazy. So I think that's a great understanding on how Melbourne got in that situation and what the current state of play was.
• 6:45
  probably either now, I guess you might correct me, or maybe up until last year, but going back to those, you know, the key turning points, what do you think it's starting to... Like, how's it starting to show signs of recovery? Some of the stats I've seen is, you know, we've seen some month-on-month growth in Melbourne for the first time in 10 months, according to the core logic data, but what other things are you starting to notice that's showing that the tide's turning? Yeah.
• 7:07
  Yeah, so the migration data's back. So the problem was interstate migration was significantly negative, so losing 40,000, 50,000 people to other states, which is a huge problem when you have no overseas migration. There's two years there where no one was coming into the state and you're losing interstate migration.
• 7:25
  So that exodus was a huge downturn for the market. Fast track to 2025, that obviously overseas migration's back and they've arguably overdone it. And when you look at historically, Melbourne gets more overseas migrations than anywhere else in the country. It always has and certainly more than Sydney.
• 7:44
  So it's now got more than its fair share of overseas migration. But that interstate migration is now in a positive surplus for the first time in five years. So we're starting to get all those people arguably that have left away, moved away for various reasons, either returning or coming back to Melbourne or visiting Melbourne for the first time because of the affordability play. They're getting priced out of Brisbane.
• 8:06
  priced out of Adelaide and going to certainly priced out of Sydney and moving to Melbourne because it's now affordable and it's still a key jobs market, arguably the biggest jobs market in Australia. So your incomes are going to be high and comparable to that of Sydney but to buy all of a sudden for the first time ever is now affordable.
• 8:25
  So, yeah, to summarise that, you're seeing huge mass population growth into Victoria and particularly Melbourne into what is arguably a very undersupplied market. What about investors? Like, obviously, the data's there supporting strong migration, people returning. What about... The reason we were keen to talk about this is we hear a lot about this from people coming to us wanting to invest in Melbourne. We see a lot of other, you know...
• 8:54
  other people across social media talking about this as well. What's kind of changed from an investment standpoint and are they returning to the market or is the growth purely driven by home buyer activity?
• 9:08
  Yeah. So the point there is Melbourne historically is a very difficult market to invest in because the yields have been so low. To give you context, historically you could buy in Brisbane on Adelaide on a 3.5% to 4% yields. Perth is more of a 4% to 4.5%.
• 9:28
  When you looked at Melbourne historically, it was 2.5% to 3% because the rental returns in comparison to what it cost to buy a property was so much lower. And lots of reasons for that. Oversupply, the fact of, we won't have too much detail, the fact that it is so much more expensive to buy there historically also plays a role.
• 9:49
  But what we've seen is a vacancy rate decline significantly. In 2019, it was up four or five percent vacancy rate. We've seen that being crunched down to one percent. And we've seen rents rise significantly. So over the last five years, we've seen rents rise almost 60 percent. So for the first time since really I can remember, it's become, the yields have come to the point where it becomes really attractive for investors.
• 10:15
  What does attractive look like for investors? Typically, you need, at a minimum, yields to be above 3.5%. And it does vary based on the cash rate, what becomes attractive or what doesn't. But now, at 3.5%, there's opportunities in the market at 4, 4.5%. So that cash burn is far less than it was historically.
• 10:33
  So, that's why Melbourne has been neglected, I think previously as an investment market, just because the cash burn on an established property at 2.5%, 3% might cost you $80,000 a year to hold that property. That becomes very difficult, puts a lot of pressure on the asset. Where now that cash burn might be as little as $20,000 or $15,000 a year, which is far more palatable than it has been historically.
• 10:57
  You mentioned there on the rental side of things, I think it was a 60% increase in rents over the last 10 years? No, no, last six years. Last six years, I should say. 10% in the last 12 months. 10% last 12 months. That's where my brain's going with that one. The vacancy rate's interesting, though. So you said it's down to 1%. What's a healthy vacancy rate? Is that below what a...
• 11:19
  Significantly, yeah. A balanced market sits about 2.5% to 3.5% vacancy. A strong market is sub 2.5%. So it's a supply and demand equation. Anything sub 2% is what we consider a very strong market. And you look at the decline, it's almost like a cliff when 2021, like I said, it got up to 5.5%. We've seen that fall sharply to almost a flat 1%, 1.1% currently.
• 11:46
  And that's on the back of a number of reasons, right? That population play that I said, huge migration into Melbourne, overlaid with the post-COVID issue of being able to bring on supply. 50% increase in construction costs, inability to get labour to complete builds,
• 12:04
  and a market that hasn't been built up with a lot of pent-up demand. So it means they just haven't built enough bedrooms. And that lag is going to be significant because at 1.1%, it's clearly a problem. It's clearly not enough problems in Victoria. The government tries to do something about this, and obviously the Labor government talking about all these promises about housing.
• 12:23
  we're two three years away so i think in the short term i say short term the next two years we're going to see a sharp rise in rents um a further contraction of vacancy rates potentially which that is going to lead into you know arguably more investment activity because those yields are going to rise and rise aggressively
• 12:42
  Yeah, it's fascinating. And I think if we were looking at, so someone is ready to invest in Melbourne, what's the first step they should take? So you mentioned there, obviously, a lot of people, I'm assuming, haven't invested in Melbourne over the last six years or maybe even longer.
• 13:02
  The signs on migration, from what you're saying, are super positive. The rents and the lack of supply, and also the rental vacancy. I mean, it's sounding like these are some really key factors to push you into the market from an investor standpoint. Yeah, what's the first step? If someone wants to get into the Melbourne market, what's the first step they should be doing right now?
• 13:22
  They need to understand the dynamics of the Victorian market and Melbourne market in terms of how it operates. It's very different to that of Adelaide and Perth as well as it's completely different to that of even Sydney and Brisbane. So it's not a market where you can tread lightly and just go in there or a regional market where you can buy sight unseen and it's going to be no issues. It's very much a high auction market. There's different sort of...
• 13:48
  nuances on how melbourne operates right public transport's a really really important factor where that may be not as imperative in adelaide perth or regional um you know it's a small new york in the sense that traffic's getting worse it's the largest population city in australia now so having access to transport is a huge priority and you may see a 10 uplift by just being close to to key infrastructure nodes
• 14:14
  So you really need to educate yourself with the market and the local dynamics because it's very different to other markets in Australia. Contracts are very different. And the extremities are huge in Melbourne where you go from a really quality pocket of a suburb to somewhere you certainly don't want to be investing can change in the manner of a few hundred metres where typically in most suburbs across Australia there's lots of consistency. So you've just got to be, I think, mindful of,
• 14:41
  what you're doing when it comes to Melbourne and make sure you familiarise yourself and educate yourself. And in terms of say a property cycle where do you see Melbourne at the moment obviously you've mentioned some of the key facts there but are we now in that sort of buying phase of the cycle, where do you see Melbourne right now
• 15:01
  Look, you're never going to pick the absolute bottom of the cycle. And there's lots of conversations that it's too early for Melbourne, too early for Melbourne. My opinion is we're past the bottom of the cycle. I think the bottom of the cycle was late 2024. I think the bottom of the Melbourne cycle was, if you're going to pinpoint it on a dartboard, was December 2024.
• 15:22
  and the bottom of the cycle has passed and we're now into that next phase and that's where the Melbourne market sits currently. And I think the data sets that are coming through overlaid with a falling cash rate is gonna show signs of growth. And the sentiment feels like it's
• 15:40
  It's positive now. Very much so. You mentioned bottom of the cycle was probably December last year. I'd agree with that. And I think from the sentiment we're hearing, not necessarily the data that's now come out since to show a growth, whether that's looking at the auction clearance rates as well there.
• 15:57
  is a higher conversion than what it was last year. I don't know if you've got that. Yeah, absolutely. With recent, so this quarter's up to 70%, which December, we're talking 50% auction clearance rates. So it's a big difference. And that is a really good indicator for Victoria and particularly Melbourne. And that's the difference in that market. Auction clearance rates...
• 16:19
  super relevant in Melbourne and Sydney, as well as partially in Brisbane. And just to explain that for the audience that maybe isn't familiar with auctions, what do we mean when we say auction clearance rates? So how many auctions, if there's a thousand auctions on the weekend and 800 properties are to sold under the hammer, then 80% clearance rate. So that's, it gives you a really good, I suppose, overview. And if you're looking to track the, I guess, the intensity of the market,
• 16:45
  If you did one thing and one thing only, it'd be following the week-to-week auction clearance rates. And yes, there's some nuances that don't come through, so sometimes it doesn't factor in the things that sell after auction or may sell off-market pre-auction, but it's really good if you just did a baseline weekly check on that. That will give you a bit of a pulse check to see where the Melbourne market's at.
• 17:08
  Yeah. And what kind of properties are probably presenting the best opportunities at the moment? Are we looking established with a bit of land component? I know we talk about this on each episode from an investment strategy that forms a big part of where we buy and why we buy.
• 17:24
  Or what about apartments as well? You know that, hear the classic stories, we've probably spoken about this on previous podcasts as well, where these off the plan apartment purchases in Melbourne have gone horribly wrong, gone backwards. And then also maybe the, you know, the ones I need a bit of love, renovators. Like what do you see out of those sort of asset types, properties presenting the best opportunity or all of them I guess?
• 17:44
  That's good. It's looking, speaking with clients that aren't familiar with the Melbourne market, the first thing is Melbourne's cheap. I'm hearing Melbourne's cheap. I've just, I've seen an Instagram reel and that's super affordable. Melbourne is affordable, but it's not cheap. And the premium suburbs are still far more expensive pretty much than anywhere else in Australia with the exception of Eastern Sydney.
• 18:06
  And people sort of can't comprehend that, but $10 million in Melbourne actually doesn't buy you a lot in those premium suburbs of Toorak, Hawthorne, Brighton, where that pretty much buys you a lot in areas such as Adelaide, Brisbane and Perth. So it's affordable in sort of out of fringe areas. It's certainly affordable in higher density space because you're right, Melbourne has been prone to oversupply at various periods.
• 18:31
  A lot of that investment off the plan, apartment stock, has created horror stories for investors, certainly not our investors, but across the board you've heard that quite a bit. But for the first time in a long time, that actually, that unit market, probably the more unit, villa market, medium density, represents really good value for two reasons. The yields are certainly much higher,
• 18:56
  understand that your Melbourne yield now is going to be comparable to that of probably Adelaide and Brisbane. You're certainly not far north of that. It's going to be less than Perth and certainly higher than that of Sydney. But on units and villas, you can achieve that 4.5%, 4 to 4.5%, which becomes really, really attractive for investors because the cash burn's not as significant.
• 19:20
  But because of the undersupply and the fact that there isn't a lot of apartment building or building taking place in general because the market hasn't been there and the constraints with that, I think that unit market's going to see a serious run. Typically in a market, this is broadly speaking, you normally see houses going on a run, as we've seen. Perth's a great example.
• 19:41
  You know, houses did 50% growth before units really started to make a move. And then we're seeing units tail that by probably a couple of years and really start to move. I think Melbourne's going to be a little bit different where we might see established properties move at the same rate as units and villas because they're serious under supply. 100%. And you've only got to look at the infrastructure of a city like Melbourne compared to Perth. There are still...
• 20:04
  big blocks of land houses in, you know, close to any city in Perth that people can obtain. Whereas you go to Melbourne and they are, you know, it's a much smaller land size. You got there. It's density. It's density. And that's where the government's investing, like key areas. They've got identified 12 infrastructure nodes where they're, you know, they're iconic areas for Melbourne. And that's, you know, for those listening that are going to take a position, identifying those key nodes is going to be really, really important because that's where the government
• 20:32
  have tiered to where they're going to invest for infrastructure, for transport, for amenity. They've also created a high density plan and frameworks in those areas. So the benefits of that are going to be substantial. So understanding those areas and those localities are going to be really, really important. What are the types of risks that an investor, first time investing in Melbourne, should be aware of?
• 20:53
  Again, what we spoke about before, just understanding the nuances of the Melbourne market, very different to other markets around Australia. Contracts are very, very different. It's a high auction framework, so understanding, being familiar with that. But also, as I sort of briefly touched on, is the risks of not having local knowledge in Melbourne is probably more severe than I've seen in other markets because the difference between a quality pocket of a suburb.
• 21:18
  or even a suburb to suburb can vary dramatically within a matter of kilometres, if not, like I said, 200 or 300 metres. But also understanding infrastructure in particular suburbs. We spoke off air about numerous out-of-fringe suburbs that are becoming problematic because they don't have train routes and people living in these suburbs where they're building up and building buildings.
• 21:39
  lots of house and land packages, yet people can't get into the city if they don't have a car. You're hearing developers not having their office open until 11am so they can, when people come in to try to buy a plot, there's no traffic in there because the traffic's in there. There's one road in and out. Yeah, they don't have trains. So knowing that's huge because people in Melbourne, you know, the younger generations don't have cars.
• 21:57
  So being able to walk to a train station is a huge thing. It's not London, it's not New York, but it's the next tier behind that in the fact that most people don't have a car. So understanding that's going to become really important depending on the type of asset you're buying. So I just think the extremities are more severe in Melbourne than anywhere else in terms of quality assets and poor assets. I think public transport's, you know,
• 22:19
  Certainly, you can't overstate the importance of that. And understanding those key nodes of where the government's really investing is got to be sort of at the forefront of the investment strategy. One of the things you've kind of touched on at the beginning of the podcast, and I would say...
• 22:35
  sentiment from what I hear, this is a very topical and this is probably something that potentially could be a misconception, but is the whole land tax in Melbourne and what sort of negative impact that could have for investors. Do you see that as something that should deter investors from going to Melbourne or is it a mis... Do you call bullshit?
• 22:58
  Is it a misconception? Like looking at some of those, you know, the land tax you would be paying if you were to invest in Melbourne.
• 23:06
  It's been overstated. And it's, you know, the government had to try to do something, the state government, to show that it was trying to recruit some money. And the first thing they hit was the headline media was Melbourne's getting taxed, the land tax, and obviously tenants' rights, those sorts of things. But the tax was heavily targeted to those, you know, land-making and significant land-banks. We're talking not just an investor at $500,000, $700,000, $800,000. We're talking millions of dollars of land that they're just not doing anything with.
• 23:36
  So the fact that none of those entities are all in the same name, so obviously land tax is a state-based tax, but obviously it's the entity you purchase at him. On an individualised investment, it's not significant. I think you've got some data there in terms of what it costs. Who would have thought you're prepared? We've got some numbers here. Who would have thought we were prepared for this episode today? No, I had a look on the Victorian tax calculator for land, and as you mentioned, it probably is targeting more those higher...
• 24:04
  higher price points, but for a $600,000 land value, you're looking at just $2,250 per annum. Yeah, so it's not dissimilar to other markets, right? And that's the problem, it's targeting those that have got land, and typically, the worst that we're hit, that owns that own property in Melbourne, but they've got a beach house down in Srinow and Portsy, and they're getting taxed, like the threshold, it's compounding the effect, so, and they're all in the same entity, they might have $15 million worth of property,
• 24:30
  they're getting smashed and it's an easy headline story for the government because they're hurting those that can afford to get hurt, right? So it's, but the problem is that sentiment got dragged through the media that it's not great to invest in Melbourne because you're going to get smashed with land tax. Those individual investors, even if you're buying multiple properties under the threshold, you can be quite strategic with that. You're not going to see the impact.
• 24:50
  Yeah, and you've only got to compare, say, Perth as a market, obviously been the last kind of big bull run that they went on. You look at the management fees for property managers higher in Perth than what it is in- Significantly, yeah. Significantly. So you can almost kind of- Average fees be like eight and a half compared to Melbourne, five and a half. Yeah, so you can almost kind of balance those things off.
• 25:09
  And insurance is arguably lower in Victoria and Melbourne. So, you know, we will look at the net. So when we've run the numbers and you see the actual net holding costs factoring in those additional things such as land tax, rates, utilities, property management fees, very comparable to other capital cities such as Sydney, Brisbane, Adelaide and Perth.
• 25:29
  Certainly not something to be scared of. It's been overstated. And so has the tenancy laws. Everyone's like, well, I don't want to buy a property there because I don't have any rights as a landlord. That has been a little bit overstated as well. Certainly, tenants' rights have increased, but not to the point where it's going to discourage investors.
• 25:50
  and little things like you can't discourage pets and if you don't exit a tenant you have to have pretty valid reasons to do so there's caps on rental increases of 10 per cent per year so they're things that's not really any different to other markets around Australia it's just been overstated significantly so yeah it wouldn't be too cautious or sorry too concerned when when looking at those two elements be that tenancy issues or landlord rights as well as the land tax problem
• 26:18
  beautiful so Lachlan what's the verdict then Melbourne is the next property hotspot for investors I think I know where this is going Fact or Fiction is
• 26:26
  Do I call bullshit? No, I can't. I think it is a good opportunity. I think it's, you know, like I said, there's a lot of noise in the market at the moment. It's either really, really positive or it's really, really negative. You know, headlines are boring if they're not on either side of the fence. So I think it's a market that's probably seen the worst and we're seeing those green shoots in 2025. And if we had to pick the bottom of the cycle, I think it was late last year. Make sure to join us next episode. Stay informed, stay curious and keep going on the bullshit.