Interstate buyers are purchasing property in Melbourne

Over the past year, we have had an increased number of interstate buyers purchasing property in Melbourne. This trend hasn’t only been observed by our business. Anecdotally, other buyer’s agents and selling agents have reported a similar observation.

Both investors and owner occupiers from interstate have decided to circle Melbourne as a city to purchase in. Today I decided to delve into some of the data behind this, and some of the reasons driving this decision.

Starting with investors, (and I’ve written about this previously), Melbourne’s underperformance has widened the ratio between the median house prices when compared to other capital cities. While capital city performance varies and league ladders interchange frequently, one common ratio that analysts have kept an eye on is that of Melbourne vs Sydney. Over the past decade, the relationship between Melbourne and Sydney’s house prices has sat at -29%.

“The latest data shows the typical house in Sydney currently fetches a 70% premium relative to the typical house in Melbourne, or put differently median house prices in Melbourne are approximately 41% cheaper than in Sydney. This gap represents a more than $600,000 difference in median house prices in August 2024.” (Prop Track)

This is the largest price gap in over twenty years.

Many analysis (and investors) are noting the wide gap and subscribing to the theory of mean reversion. Put simply, it’s the theory that asset prices eventually revert to their long-term average. There are limitations to this theory however, including localised market conditions, economic shocks and government incentives, policies and taxes.

However, there is plenty of consensus currently around the idea that Melbourne will ‘bounce back’ in the near term. Interstate investors have broadly confirmed that mean reversion is a consideration, and this has been a common theme among the interstate investors that have made enquiries to us.

Another driver that isn’t to be overlooked is Melbourne’s growing rental yield. Traditionally, our city was not a high rental yielding city. As values have remained static in recent years while rents have increased sharply, our average rental yield now sits above that of both Sydney and Brisbane’s, and in line with Adelaide’s.

The direct impact of a higher rental yield translates to an investor’s cashflow. Sydney based investors can not only secure a superior property for relatively less, but they can also look forward to higher rents than compared to their own local market.

Just this week we secured a house on 528sqm in Melbourne’s west for $552,000. The rental appraisal at mid fours places the gross rental yield of this dwelling at a whopping 4.2%.

Despite land tax challenges, interstate investors are focused on the long-term outlook and the growing rental yield is certainly softening the tax burden.

Others are simply noting the value proposition. The same amount of money can secure a better dwelling, a more premium location, or larger land within a comparative distance to CBD.  This isn’t just attracting investors.

As stated by Prop Track’s Eleanor Creagh over a year ago, “At some point, Melbourne may be seen as undervalued, given its current price levels relative to Sydney.”

And this is exactly what is happening.

Over the past year, we have had a disproportionate number of clients engage our services to help them move to Melbourne. Most have been Sydney based, and all have cited housing affordability, the cost of living, and the opportunities Melbourne presents.

The table below shows a net internal migration increase across only three of our states, Victoria included. While the figure is only 500, Victoria’s total population increase is attributed to our enormous intake of overseas migrants.

Finder delved into the cost of living and benchmarked our capital cities. Interestingly, housing holds the lion’s share when it comes to the discrepancies between the cost of living in the two cities. Food is relatively similar, with cars and transport being slightly more affordable in Melbourne. This chart below shows the differential between the capitals for rent, and it is particularly notable for a few dwelling types.

Our internal migrating clients have all cited work opportunity in Melbourne too, and this recent chart from ABS affirms the opportunity in Victoria for work.

And unlike other capital cities that have experienced overwhelming investor attention, Melbourne’s market conditions have given first home buyers stronger opportunity.

Is internal migration something that we believe we will continue to see increasing into our city? Yes, indeed.

Melbourne’s cooler climate may not be everyone’s cup of tea, but plenty of people do enjoy the colder, more temperate environment. Weather aside, the housing value proposition, combined with job opportunity are a drawcard. And our vibrant café scene, great sporting venues and impressive civil infrastructure will continue to lure buyers to this beautiful city.