Let’s call a spade a spade… Property in inner-city Melbourne has been a terrible investment over the last eight years.
Every other week, there’s an example of a house purchased in Prahran, South Yarra, or Malvern in 2016 or 2017 selling for the same price today.
There was a two-bedroom Victorian single front that sold in Prahran last week for $1,400,000.
It was purchased for $1,402,500 in 2017.
Zero growth in eight years. This is very common.
2017 was the peak (and end) of a five-year bull run from 2012, so most properties purchased then have had little or no capital growth. Some have gone backwards.
This doesn’t quite align with the old adage that Melbourne property doubles every 10 years.
Sure, if you average out growth over a 50-year period, it’s reasonably accurate – but it’s far from linear.
There have been periods when property prices doubled in just three years, and times like recent years when they’ve stagnated or even dipped over a five-to-ten year period.
Let’s run the numbers
Back to our example. Once you factor in the costs of buying, holding, and selling – stamp duty, maintenance, insurance, rates, advertising, agents’ fees – you’re down another ~$150,000.
And then there’s the big-ticket item: interest on your mortgage.
If you borrowed $1,120,000 (80% of the purchase price) at the average interest rate of 4% from 2017 to 2025, the interest alone – front-loaded on a 30-year loan – would total around $331,000.
That’s very similar to what it would have cost to rent a similar home at $800 per week for eight years – $332,800.
But as a tenant, you wouldn’t have copped the additional $150,000 in transaction and holding costs.
Now imagine instead you’d invested that $1,400,000 into Commonwealth Bank shares in July 2017 and reinvested all the dividends.
Today, those shares would be worth $3,447,000.
A $2 million capital gain versus a $500,000 net loss is a pretty compelling case for stocks v property, wouldn’t you say?
Yes, I know this is a single, simplistic example and doesn’t factor in tax (or inflation of 31% since 2017).
And as with investing in shares, it’s all about timing. If you bought in 2014 you might have seen 30-50% growth (all from the first three years of owning).
But it helps explain why investors have been fleeing the Melbourne market in recent years.
When rents don’t even cover the interest, and capital growth is non-existent, the numbers just haven’t stacked up.
Not to mention the growing compliance burden on rental properties – and land tax.
So why am I bullish?
And yet, I am very bullish on Melbourne property right now – for owner-occupiers and investors alike. Why?
Firstly, if you’re buying a place to live, you probably shouldn’t be looking at it solely as an investment.
Even with zero capital growth, there are many benefits to home ownership – pride, security, stability, building equity, the ability to improve or renovate, and so on.
And for investors, we are long overdue for some decent capital growth – and things are looking up.
I wouldn’t be surprised if prices rise 20–30 percent in the next couple of years.
By my reckoning, prices in Stonnington have already jumped quite a bit in the last six months.
When you sell well over 100 period homes a year in Stonnington, you get a good sense of price movements over time.
I’m seeing similar homes sell for 5–10% more this year compared to last year.
A two-bed single front that was selling for $1,200,000 last year now seems to fetch $1,300,000.
A four-bed double front that was selling for $3,000,000 now seems to be getting $3,200,000.
When the market turns, it turns quickly.
The difference between strong competition (two or more serious bidders) and limited competition (one or none) can shift a result by 5–10% on the day.
We recently had a pre-auction offer of $2,400,000 on a home.
When a second buyer surfaced, we ran a boardroom auction and it sold for over $2,600,000.
Without that extra bidder, it would’ve gone for over $200,000 less.
Momentum drives urgency
In a rising market, more competition per property ratchets prices up.
Scorned, motivated buyers who miss out at auction are more likely to increase their limit and bid more aggressively on the next one, not shy away.
Put a couple of these determined buyers head-to-head, and that’s when you start seeing some unbelievable prices.
A buyers’ advocate I often work with has a saying that sums up a rising market:
“They didn’t pay too much – they paid the right amount too early.”
If prices rise 12% in 12 months – like they have in Brisbane – a strong result in July 2024 quickly looks like a good buy in July 2025.
Time is not your friend in a rising market.
Twelve months could cost you several hundred thousand dollars for the “average” house in Armadale or Malvern.
It’s no wonder we’re finally seeing some urgency from buyers.
It’s no wonder Carla and I have done 16 off-market deals since February.
It’s no wonder I’m getting more calls from buyers and buyers’ advocates than I have in years.
The market is on the rise and stock remains tight.
David Sciola 