Property investors who owned assets before Budget night will continue to benefit from negative gearing. Therefore, most will be reluctant to sell, because if they subsequently reinvest in an established property, they will lose immediate access to those tax benefits.
However, given the Melbourne property market’s significant underperformance over the past decade, investors are naturally asking whether they should continue holding assets that have delivered little, if any, real capital growth.
These conversations prompted me to dig deeper into the factors that have contributed to Melbourne’s relative underperformance.
Melbourne property has tested investors’ patience
According to Real Estate Institute of Australia data, Melbourne’s median house price has appreciated by only 1.8% p.a. over the 9.5 years since the beginning of 2017. Inflation has averaged approximately 3% p.a. over the same period. Therefore, in real terms, Melbourne’s median house price is cheaper today than it was almost a decade ago.
It is not uncommon to meet investors who purchased a Melbourne property 10 years ago that is worth broadly the same amount today in nominal dollar terms.
The commonly cited reasons are probably wrong
When commentators attempt to explain Melbourne’s relative underperformance, they tend to cite several recurring factors.
The first is Victoria’s land tax regime and tenancy reforms. It is true that Victoria introduced a temporary land tax levy and reduced the land tax-free threshold to only $50,000. As a result, many investors have been required to pay land tax for the first time.
Victoria is undoubtedly a higher-taxing state. However, land tax is only one of several costs that influence a property’s cash flow. Therefore, comparing the holding costs of a Melbourne property with, say, a Brisbane property is not always straightforward. In my experience, for example, council rates can be very expensive in Brisbane.
We recently completed an analysis for a client who already owned an investment property in Brisbane. We found that buying another Brisbane property, rather than investing in Melbourne, would actually result in a higher land tax liability because the additional purchase would push them into a higher tax bracket.
Therefore, I do not think it is accurate to suggest that Victoria’s land tax changes will always adversely affect individual investment decisions.
Another frequently cited factor is Victoria’s burgeoning debt. It is true that Victoria carries significantly more debt than most other states, equivalent to approximately 25% of gross state product. However, despite all the negative commentary surrounding this debt, it is not dramatically higher than the federal government’s debt, which is approximately 20% of GDP.
I suspect the main source of frustration is that many taxpayers rightly believe Victoria’s debt has ballooned because of poor financial management, corruption and waste. However, I am less convinced that this provides a compelling explanation for Melbourne’s property market performance.
One argument is that higher debt will eventually create pressure to increase taxes, which I acknowledge. However, the link between the state’s debt position and Melbourne property prices still seems relatively weak to me.
As I have written previously, there is still plenty of good news in Victoria. The problem is that every positive story tends to be buried beneath 10 negative ones.
Victoria’s unemployment rate is only moderately higher than the national rate, at approximately 5.1% compared with 4.4%. Victoria is also recording the highest population growth in absolute terms and the second-highest growth rate in percentage terms, behind Western Australia.
Therefore, Victoria’s broader macroeconomic settings remain relatively healthy.
Melbourne’s great 20-year growth cycle
I acknowledge that sentiment towards Victoria has become increasingly negative, and that inevitably influences investment decisions. However, I believe the most important contributor to Melbourne’s decade-long period of underperformance is the strong growth that preceded it.
Between March 1997 and December 2016, Melbourne house prices grew almost without interruption for almost 20 years. I have analysed 45 years of Real Estate Institute of Australia data across every Australian capital city, and no other city has come close to a growth cycle of this length. The next longest, Brisbane’s 1980 to 1990 cycle, ran for 10.8 years, little more than half as long. Across the other cycles we identified, the typical length was somewhere between 8 and 11 years.
This observation is incredibly important because it points to a different explanation for Melbourne’s recent underperformance than the ones most commonly offered. Negative sentiment, state government debt, and higher land tax rates are frequently cited as reasons why Melbourne property has lagged over the past decade. I do not dismiss these factors. However, I believe the length of the preceding growth cycle has probably been the single largest contributor to the flat conditions Melbourne has experienced since 2016.
A market that grows for 20 years without a genuine reset accumulates a larger gap between price and the income, borrowing capacity, and construction cost fundamentals that ultimately support it, and therefore requires a longer period to work that gap off. The length of the correction, in other words, is proportionate to the length of the boom that preceded it.
Therefore, when investors lament a decade of virtually no capital growth, they should not be too quick to blame the state government. In many cases, the more important explanation is that they bought near the end of an unusually strong growth cycle.
Reading the trend line: A short explanation of our method
Property prices may grow by a similar percentage each year. However, because that growth compounds, the dollar increase becomes larger as the value of the property rises. That is why long-term price charts naturally curve upwards, often quite steeply, making the underlying trend difficult to identify.
For this analysis, we establish a repeatable long-term growth benchmark. It is informed by what each market has delivered over the past 45 years and adjusted for my expectations, as discussed below.
We can then compare actual prices with that benchmark to determine whether they are above or below the long-term trend. A reading above zero means prices are running ahead of trend, shown in blue on the chart. A reading below zero means they are lagging the trend, shown in red.
In simple terms, sustained periods above trend indicate a stronger market cycle, while sustained periods below trend indicate a weaker cycle or correction.
This allows us to separate short-term market cycles from the property market’s underlying long-term growth rate.
Why we have lowered our long run growth assumption
To assess whether property prices are growing above or below expectations, we first need to establish a realistic long-term growth benchmark.
Over the past 45 years, property prices have grown by approximately 7% p.a. However, there is evidence that this rate is gradually declining. Therefore, for this analysis, I have assumed that the long-term benchmark has fallen on a straight-line basis from 7% p.a. in the early 1980s to approximately 6% p.a. today.
I have made this adjustment for three reasons.
First, the 1980s and 1990s included once in a generation structural shifts, in particular financial deregulation and a substantial, sustained expansion in household borrowing capacity, that will not repeat at the same scale. These forces were largely responsible for the unusually high growth rates recorded in the earliest part of the dataset and extrapolating them forward without adjustment would overstate what is realistically achievable from here.
Second, percentage growth rates must moderate over time for a straightforward mathematical reason. In the early 1980s, property was coming off a low base, and affordability relative to household incomes was considerably more favourable than it is today. Now that property values are high in absolute terms, the same percentage growth rate represents a far larger dollar increase, and therefore a larger claim on household incomes and borrowing capacity, than it once did.
Third, we regard this one percentage point reduction as a defensive, conservative assumption. We tested a considerably steeper reduction, drawn directly from the historical data rather than assumed, and it implied an even lower long run growth rate than the one we have adopted. We have preferred the more conservative figure throughout this analysis.
The data across the five largest capital cities
The table below compares current median house prices in Sydney, Melbourne, Brisbane, Adelaide and Perth with the prices implied by their long-term growth benchmarks, adjusted down over time as discussed above (using log-linear regression).
The figures are current to June 2026. I have used the Cotality Daily Home Value Index to update the most recent quarters that are not yet covered by the Real Estate Institute of Australia’s published data.
Let me use Melbourne houses as an example. If house prices had followed their long-term growth path, rather than booming for 2 decades and then correcting, the median price would now be approximately 21% higher.
This does not mean Melbourne property is necessarily undervalued by 21%. It simply shows how far current prices have fallen behind their long-term growth path.
| City | Houses | Apartments |
| Sydney | +5.1% | -22.9% |
| Melbourne | -21.3% | -29.2% |
| Brisbane | +23.4% | +12.7% |
| Adelaide | +18.6% | +19.1% |
| Perth | +16.0% | +7.9% |
Melbourne is the clear outlier among the five largest capital cities. Brisbane, Adelaide, and Perth are all running well ahead of their own long run trend, and even Sydney houses remain marginally above trend, notwithstanding a recent softening. Melbourne is the only city sitting materially below trend on both measures, and by a wide margin.
I have set out this analysis against a declining long-term benchmark in the charts below for Melbourne houses and apartments. When shown graphically, Melbourne’s 20-year boom cycle becomes very clear.
What this means for Melbourne
This analysis suggests that Melbourne house prices are currently running approximately 21% below where they would sit had they continued to grow in line with their own long run, albeit gradually declining, trend. Melbourne apartments are running approximately 29% below that same mark.
History offers some guidance on what has followed comparable corrections elsewhere, although we present this as a range rather than a forecast. When a correction of this depth has fully unwound in other Australian capital cities, cumulative growth over the subsequent cycle has typically landed somewhere between 90% and 180% for houses, equivalent to average annual growth of approximately 8.7% over ten years at the midpoint of that range, and between 110% and 230% for apartments, equivalent to average annual growth of approximately 10% over ten years at the midpoint. These growth cycles have historically run for somewhere between 5 and 10 years.
I realise that this is a wide range, and we would caution against reading it as a prediction of timing or magnitude. I do note, however, that it has remained directionally consistent across every method I have tested it against, and I regard that consistency as meaningful, even where the precise figures are not.
Evidence that Melbourne property is intrinsically undervalued
Statistical comparisons can be useful, but I also look for practical, on-the-ground evidence.
This analysis suggests that Melbourne’s recent flat cycle is largely the consequence of the unusually long growth cycle that preceded it. If that is correct, Melbourne property may now be intrinsically undervalued.
There is some practical evidence to support this conclusion. For example, the replacement cost of many existing apartments is likely to exceed their current market value. Developers report that apartment construction costs have risen by 30% to 50% in recent years. In many cases, they simply cannot buy the land and construct new apartments for the prices at which existing apartments are selling.
We have also seen investors sell entire apartment blocks to developers. In some cases, the value attributed to each apartment has been substantially higher than what the owner could have achieved by selling to an ordinary buyer, sometimes close to twice as much.
Comparisons with other capital cities point to a similar conclusion. Either Melbourne property is relatively undervalued, property in other states is overvalued, or both are true. The gap between Melbourne’s median house and apartment prices has also never been wider.
Therefore, the statistical findings appear to be consistent with what we are seeing in the market.
Whether to hold or sell?
For investors who have held a Melbourne property for the past 10 years and are now questioning whether to retain it, the first step is to avoid sunk-cost thinking. What they paid for the property and how much it has cost to hold are historical costs. They should not influence an investment decision made today.
Similarly, retaining negative gearing benefits does not, in and of itself, justify continuing to hold the property. Negative gearing merely reduces holding costs. That benefit is of little value if the property does not deliver sufficient capital growth.
The only relevant question is: what return is the property likely to deliver over the next decade? Investors should assess that as objectively as possible, then decide whether the expected return justifies retaining the asset or whether their cash flow and financial resources would be better directed elsewhere.
If the trend analysis above is broadly correct, it is reasonable to believe there is a relatively high likelihood that Melbourne property prices could double over the next 10 years. For a good-quality asset, that level of growth would probably be sufficient to justify continuing to hold it.
It is always difficult to identify what will trigger a market to enter a new cycle. Usually, it is not one event, but the cumulative weight of several factors.
In Victoria, those factors could include improving rental yields, constrained housing supply, stronger owner-occupier demand, continued population growth and a recovery in sentiment towards Melbourne, particularly if there is a change of government in November.
And for new investors?
A few weeks ago, I concluded that if gross rental yields rose to approximately 5.3% to 5.4%, an investor could potentially achieve an after-tax internal rate of return comparable to what was previously available when yields were lower but negative gearing benefits were immediate.
If higher rental yields are combined with stronger capital growth, it is possible that established Melbourne property could once again produce an attractive after-tax return, even under the new tax settings.
