Has Melbourne Reached the Bottom of the Property Cycle?

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Over the past several years, Melbourne has been the underperformer amongst Australia's major capital cities. Whilst Brisbane, Adelaide and Perth experienced extraordinary growth following the pandemic, Melbourne has faced a combination of higher interest rates, increased land taxes, investor uncertainty and softer buyer sentiment.

The question many investors are now asking is simple:

Has Melbourne reached the bottom of the property cycle?

The reality is that nobody can identify the exact bottom of a market until it has already passed. However, a growing number of economists and property analysts believe Melbourne may be closer to the bottom than the top.

The Case for Melbourne's Recovery

One of the strongest arguments in Melbourne's favour is that it has largely missed the significant price growth experienced by many other capital cities.

Recent forecasts from KPMG suggest Melbourne is expected to become one of Australia's stronger performing property markets over the next two years, forecasting house price growth of 6.8% in 2026 and 7.3% in 2027. KPMG attributes this outlook to strong population growth, ongoing housing shortages and improving market conditions.

Similarly, Oxford Economics has forecast future growth in Melbourne, noting that strong overseas migration and population growth are expected to continue supporting housing demand despite Victoria's higher taxation environment.

Melbourne remains Australia's fastest growing city and continues to attract substantial population growth. At the same time, housing construction remains constrained, creating a long-term imbalance between supply and demand that may place upward pressure on property values over time.

The Case for Caution

Not all economists agree that Melbourne has reached the bottom.

ANZ Research has previously highlighted ongoing affordability pressures, higher interest rates and weaker consumer confidence as factors that may continue to weigh on housing markets in the short term. Recent market indicators also suggest conditions remain challenging, with softer auction clearance rates and elevated stock levels providing buyers with greater choice and limiting price growth.

Victoria's taxation settings have also been widely discussed as a contributing factor to weaker investor participation, with increased land taxes and holding costs causing some investors to reconsider their position in the market.

However, it is important to remember that property markets do not always correct through sharp price declines. Sometimes they correct through time.

History provides several examples of this. Following Sydney's significant property boom between approximately 1998 and 2003, the market entered a prolonged period of stagnation. For much of the period between 2004 and 2012, property values experienced little meaningful growth as affordability constraints, rising interest rates and softer buyer demand weighed on the market. At the time, many investors and commentators questioned Sydney's future prospects, yet what followed was one of the strongest growth cycles in Australian property history.

Perth provides another compelling example. Following the mining boom, Perth experienced an extended period of underperformance between approximately 2008 and 2020. Population growth slowed, employment conditions softened and housing supply increased. Many investors abandoned the market, believing Perth's best years were behind it. Yet in more recent years Perth has become one of Australia's strongest performing property markets.

Whilst Melbourne, Sydney and Perth are all different markets facing different economic conditions, there is a common lesson. Periods of weak sentiment, flat growth and investor pessimism are not unusual. In many cases, they form part of the journey between one growth cycle and the next.

The Property Effect View

Whilst there are no guarantees that Melbourne has reached the absolute bottom of the cycle, there is a compelling argument that the city is significantly better positioned today than it was several years ago.

The market has already absorbed a prolonged period of higher interest rates, investor uncertainty and taxation changes. At the same time, Melbourne continues to benefit from strong population growth, a diverse economy, world-class infrastructure and long-term housing demand.

For investors with a long-term outlook, the more important question may not be whether Melbourne is exactly at the bottom of the cycle, but whether it is closer to the bottom than the top.

History suggests that some of the best opportunities often emerge when sentiment is weakest and confidence is at its lowest. Both Sydney and Perth demonstrate that markets can remain flat or underperform for many years before growth resumes. By the time the broader market recognises that recovery has begun, a significant portion of that growth has often already occurred.

Whilst nobody can accurately predict when Melbourne's next growth cycle will commence, the combination of improving affordability relative to other capitals, strong population growth, constrained housing supply and increasingly positive economic forecasts provides a compelling case for cautious optimism.

Based on the current economic forecasts, demographic trends and market fundamentals, there is increasing evidence to suggest that Melbourne may represent one of Australia's most compelling long-term property opportunities over the coming years.