Victoria has seen the emergence of a two-speed housing market. The pandemic has encouraged homebuyers and renters alike to seek more space while eschewing share-houses and the high-density and high-rise tower blocks of Melbourne’s Central Business District.

While houses in some desirable Melbourne suburbs and especially regional locations recorded exceptional price growth over the past year, at the same time, some sectors of the unit market are struggling and have experienced falling prices and rents.

Oversupply has been an issue for some time in Melbourne’s inner-city unit market, which has been reflected in the weakness in price performance.

Strength in detached houses

House price growth has been spectacularly strong in regional housing markets over the past year, such as on the Mornington Peninsula and in Geelong. Some of Melbourne’s regions have also recorded strong price growth for detached houses, But have not performed as strongly as top-performing suburbs.

SA4 Region	Property Type	12m price change
Mornington Peninsula	House	27%
Geelong	House	18%
Melbourne – Outer East	House	13%
Melbourne – South-East	House	12%
Melbourne – North-East	House	11%

Victoria’s top-performing suburbs are dominated by detached house price growth across the Mornington region.

SA4 Region	Suburb	Postcode	Property type	12m price change
Mornington	Somers	3927	House	46%
Mornington	Blairgowrie	3942	House	44%
Mornington	Crib Point	3919	House	43%
Mornington	Sorrento	3943	House	42%
Mornington	Rye	3941	House	40%
Mornington	Portsea	3944	House	40%
Geelong	Jan Juc	3228	House	38%
Mornington	Tootgarook	3941	House	38%
Mornington	Mount Eliza	3930	House	35%
Mornington	Baxter	3911	House	34%

Weakness in inner-city units

On the other side of the coin, the inner-city unit market in Melbourne is a different story entirely, with new unit supply continuing to hit an already flooded market. Consequently, the rental market in Melbourne has been weaker than in other parts of the country, and not only in the Central Business District and its immediate surroundings.

As measured by the uplift to the existing apartment stock, some of the most impacted locations include Footscray, Box Hill, South Melbourne, and Coburg.

SA4 Area	SA2 Area	New properties in the pipeline next 24m	Uplift to existing stock
Melbourne – Inner East	Box Hill	1,833	26%
Melbourne – Inner	Melbourne	1,759	5%
Melbourne – West	Footscray	1,531	28%
Melbourne – Inner	North Melbourne	1,374	14%
Melbourne – Inner	South Melbourne	1,056	21%
Melbourne – Inner	Coburg	970	27%
Melbourne – North-East	Preston East	940	22%
Melbourne – Inner	Docklands	933	8%
Melbourne – Inner	Brunswick	882	12%
Melbourne – Inner	Richmond	770	7%

Unit asking rents dropped very sharply for units in the Melbourne CBD and on the city fringe, in some cases falling approximately 50 per cent before finally stabilising. Notably, rental prices have also declined significantly across a range of suburbs in the inner east of Melbourne.

SA4 region	Suburb	Postcode	Median suburb rent	12m Change
Melbourne – Inner	Fitzroy	3065	$495/week	-11%
Melbourne – Inner-East	Balwyn North	3104	$500/week	-10%
Melbourne – Inner	Fitzroy North	3068	$450/week	-9%
Melbourne – Inner	Cremorne	3121	$510/week	-7%
Melbourne – Inner-East	Burwood East	3151	$430/week	-6%

There are signs that the worst has passed for the city’s rental market. Still, even now, elevated vacancy rates persist in parts of inner Melbourne, suggesting that weakness in the rental market will continue into 2022.

SA4 Region	Vacancy rate
Melbourne Inner	6.6%
Melbourne Inner-East	6%
Melbourne Inner-South	5%

The outlook for 2022

The dichotomy seems likely to continue for the remainder of 2021, as the Victorian economy suffers ongoing travel and lockdown restrictions while the vaccine rollout continues.

The international border is expected to reopen in the first half of 2022. The return of international students, tourists, and permanent migrants to Australia is likely to tighten rental vacancy rates in the inner city.

Counter-cyclical investors may be tempted to look at buying units in Melbourne. Still, they would be well advised to seek out the more boutique unit blocks with a higher land value-to-asset ratio, reasonable strata fees, and, where possible, a point of scarcity (such as a third bedroom, or protected views, for example).

Prospective buyers would also be well-advised to heed the unit oversupply warnings for certain parts of the city of Melbourne.

Overall, while the detached housing market across Victoria has been a strong performer this year, investors in units in Melbourne should also be prepared for the weakness in the rental market to persist into 2022.