In September, Melbourne’s property market experienced its tenth month of decline, dropping by 0.7%. However, this marked the smallest decrease since March and was the least severe among major cities, excluding Hobart.
Ten-Month Slump Shows Signs of Slowing
After ten consecutive months of losses, Melbourne’s property values have fallen 7.5% from their March 2022 peak, reducing the median house price by approximately $64,000. While the rate of decline has slowed, it’s not a recovery. Melbourne’s 0.7% drop in September was the smallest among mainland capitals, apart from Hobart, where Brisbane and Sydney saw larger declines of 1.5% and 1.4%, respectively.
Current values are 7.2% below the November cyclical high and 7.5% below March 2022 levels. Melbourne’s market has experienced two downturns with a brief recovery in between, never reaching its previous benchmark. The city’s property values remain below a peak set four and a half years ago, a high point that was never regained.
The apartment market has outperformed houses, with unit values dropping 3.8% over the past year compared to a 7.3% fall in house values. This disparity is due to shrinking borrowing capacity, which has shifted demand towards more affordable apartments.
Melbourne’s Supply Glut Least Severe Among Declining Capitals
Melbourne’s property listings have increased by 10.8% year-on-year, a significantly smaller rise compared to Perth (60%), Brisbane (55%), and Adelaide (42%). Even Sydney’s increase of 11.5% is slightly higher. Among capitals undergoing substantial corrections, Melbourne has the smallest excess supply in the country.
This is partly because Melbourne entered the downturn earlier than other cities. Vendors have had ten months to observe the market‘s decline and choose not to list their properties. As a result, new listings nationally are 9.2% lower than last year, and Melbourne’s prolonged weakness has exacerbated this local withdrawal.
Sales activity has also declined less sharply in Melbourne, with transactions down 19.5% year-on-year, compared to 27% in Brisbane, 26.5% in Sydney, and 24.2% in Perth. While weak, Melbourne’s market hasn’t collapsed as severely as those that experienced the strongest booms.
These figures indicate that Melbourne is further along in its market correction than other cities, rather than having avoided it. Melbourne began its decline earlier, has experienced the longest downturn, and is now showing the earliest signs of a slowing decline rate.
The national rental market has shifted, with the vacancy rate rising to 2.1% in September, the highest since January 2025 and a significant increase from February’s record low of 1.5%. Although still below the pre-COVID average of 3.3%, the trend has reversed.
This shift is notable because it occurred during a period of declining investment activity, which typically tightens rental supply. The likely cause is a structural change in demand.
This consolidation involves larger share houses, multi-generational living, and smaller dwellings farther from city centers. Fewer separate tenancies result in more vacant properties, regardless of supply. Monthly rent growth slowed to 0.3% (seasonally adjusted), the smallest increase since May 2025, with annual growth now at 5.5%.
Nationally, gross yields have reached 3.85%, the highest since August 2019, and are expected to rise further as rents increase while property values fall. Melbourne has traditionally offered better yields among large capitals, benefiting local investors disproportionately. However, high interest rates, rising insurance costs, maintenance fees, and management expenses make neutral cash flow unattainable for most new investors.
Today’s borrowers are more sensitive to rate increases, meaning the same nominal rate has a greater impact than it did 15 years ago. The immediate effects are predictable: reduced borrowing capacity, tighter serviceability assessments, and larger repayments for existing mortgage holders.
These factors, combined with rising living costs and negative real income growth, limit both the number of people who can qualify for financing and the amount they can borrow. For first-time homebuyers, the apartment sector offers the best intersection of falling prices and preserved borrowing capacity.
The federal budget’s tax changes have added further pressure. Less favorable negative gearing and capital gains tax settings have reduced investor demand, particularly impacting Melbourne, which has one of the highest concentrations of investment properties in the country.
Investor Retreat Exacerbates Market Weakness
Despite softer rents, the gross yield advantage remains for landlords who can hold through the cycle. However, rising interest costs continue to strain cash flow for many portfolios. New investor loans have declined for eight consecutive months, with the sharpest drops in Melbourne and Sydney, further imbalance in the rental market as fewer properties become available.
Market Sentiment Remains Fragile Despite Slowing Declines
Improvements in purchasing power due to lower prices have been offset by higher borrowing costs, leaving affordability largely unchanged for most buyers. While the average mortgage size has decreased, repayments remain near record highs, limiting the number of qualified buyers and suppressing transaction volumes across all property types.
Consumer confidence surveys indicate that buyers expect prices to continue falling through early 2027, leading to delayed purchasing decisions. Even with apartment values down only 3.8% annually, hesitant first-time buyers cite uncertainty about future rate cuts and job security as primary barriers to entering the market.