Victorian taxes have deterred many investors over the past two years, but they have started to return to Melbourne – and they would be wise to do so, experts say.
Property investment in Melbourne is currently presenting a paradox. On the other hand, high taxes are a turn off, but low prices and less competition are attractive.
And here is an exciting opportunity, experts say.
In recent years, Victoria has hammered investors to increase accessibility and wipe out the Covid debt – doubling the absentee owner penalty to 4% (the highest in the country), reducing land tax thresholds to attract more taxpayers, and charging some of Australia’s highest stamp duties.
It is also mandated for rental improvements when it comes to energy efficiency, insulation and heating/cooling, which can add $10k-$30k per building to compliance costs, further depressing investor yields.
“All property owners in Victoria, whether they are owners or investors, pay higher taxes than any other state, and investors pay higher taxes than owners,” realestate.com.au senior economist Anne Flaherty said. “There’s a lot of disincentives to buy in Victoria.”
Melbourne’s property market has underperformed every other major city over the past five years, but investors are starting to see an opportunity. Image: Getty
The impact on Victoria’s property market has been huge. Melbourne has underperformed all other major cities over the past five years and dropped in the rankings from the second most expensive property market to sixth – ahead of only Hobart and Darwin. Regional Victoria also operated under other states.
“Over the past five years, there has been very little capital growth in Melbourne, where property prices have risen by around 12.7%. Most other capitals have almost doubled in value over that period.”
Property investment expert and OpenCorp Director Cam McLellan said Melbourne’s property market still suffers from a lack of confidence, with many investors reeling from tax issues.
“Investors in Melbourne are still a bit shy; sentiment has been dampened by the media frenzy about the tax.
“But in reality, you can pay an extra $2,000 a year in Victoria compared to other states, but that’s very little next to the growth opportunities that come to Melbourne.”
Investors returning to Melbourne
Home prices in Melbourne are skyrocketing again, having risen 3.4% in the year to February, to a median of $854,000, according to the PropTrack Home Price Index.
This compares to an average of $1.26m in Sydney (up 6.1%), $1.05m in Brisbane (up 15.9%), $987,000 in Perth (up 19.5%), $929,000 in Adelaide (up 14.8%), $874,000 (up 9.2%), $598,000 in Hobart (up 9.2%). in Darwin (up 16.2%)
And investors are coming back. From 2024 to 2025, new investor loans in Victoria jumped by 21%.
“In fact, we have seen a return of demand from residential investors,” said Ms. Flaherty. “Melbourne is now the cheapest capital city after Hobart and Darwin. So many investors are thinking, ‘Yes, the tax barriers are real, but Melbourne has never been cheaper than Adelaide or Perth or Brisbane. This is strange’.”
There are other good indicators for investors. Victorian building approvals and housing starts have fallen sharply, as developers have also been hit by taxes.
This is creating a worsening housing shortage in Australia’s second largest economy – which also has the highest population growth forecasts in the country.
Government data projects Melbourne’s population will increase by 1.5% each year over the next decade, beating Brisbane (1.4%), Sydney (1.3%), Darwin (1.3%), Adelaide (0.8%) and Hobart (0.5%). Only Perth ends up with 1.6%.
“Since development has been stopped because of the tax, that will create a housing shortage in the long term,” said Ms. Flaherty.
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REA Group senior economist Anne Flaherty.
“So while investors may see Melbourne as an underperforming market in recent years, these strong fundamentals point to a strong opportunity for growth over the next decade.”
Mr McLellan said the supply shortage would significantly increase house prices.
“When purchases dry up, buyers pay more and rents start to increase, and when those things happen, investors come back full.”
Melbourne buyer agent Jarrod McCabe from Wakelin Property Advisory said he saw an increase in local investor activity by 2025.
He said new investors come with their eyes open about taxes – they are not the same as those who fled when the tax laws changed.
“They look at costs and choose smart properties. It’s definitely a good time. Long term, investors will see the benefits of taking action where many others don’t.”
Investor lending has increased in Victoria over the past 12 months. Image: Getty
While Ms Flaherty said she did not expect a price correction to happen immediately, Mr McLellan, who recently bought an investment property in Melbourne, expects this to happen within the next three years.
“We’re getting a lot of investors from Sydney and other big cities. I see Melbourne as one of the best opportunities.”
Active investors across the country
Investor loan growth has accelerated across Australia from 2024 to 2025, with Victoria outpacing most states and territories – only the NT and Tasmania saw a higher increase in investor loans.
NSW increased by 14%, Queensland by 8% and South Australia by 7%. Investor activity held steady in WA at 0%, while the ACT was the only area where the number of new investor loans fell, by 16%.
Darwin has emerged as an investor destination over the past 12 months. Image: Getty
Ms Flaherty said Darwin had emerged as a popular destination for investors over the past year.
“Investment costs have risen significantly across the country, and the entry price of investment in Darwin is much lower than other capital cities, with a very low vacancy rate of 1.8% and strong rental growth so the yield is attractive.”
Hobart shows Darwin’s appeal, he added.
“Hobart has the lowest vacancy rate of any capital city at 0.7% so the potential for rental growth is very high, which means high yields for investors.
“Adelaide and Brisbane have been strong performers as well – strong price growth, low vacancies, and rising rents are driving interest. Perth has been a hot investor market for a long time, and we’re seeing investor activity stabilize there.”
Mr McLellan admitted Perth and Brisbane “still have legs in their growth cycle”, although he warned Hobart, Adelaide and Darwin – and regional cities – often lacked the necessary population growth forecasts and supply constraints to raise prices.
Ms Flaherty said interest in the regions had waned significantly over the past five years.
“Big cities are considered lower risk than regional areas and generate higher capital growth, although some regional markets still stand out as the most popular locations for investors – Townsville comes to mind – because they have cheaper entry prices and strong rental demand.
“Any regional area with a strong and diverse local economy is the type of place investors would consider buying.”
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Mr McLellan advised investors to stick to the four major cities of Sydney, Melbourne, Perth and Brisbane, which he described as “safe bets”.
“But for those looking for big growth rates over the longer term of three to five years, Melbourne is the way to go.”
