After a long period of underperformance, are Melbourne apartments making a comeback?

A quarter of a decade ago, units in our capital city broadly performed well. Investors enjoyed their capital growth, and the increased rental yield has always been a drawcard for unit owners. However, from 2010 onwards, the median growth of apartments has been lacklustre to say the least. Factors including oversupply, high strata costs and construction woes have diminished investor appetite. The ongoing underperformance when compared to houses has reinforced investor preferences to target freehold houses.

Melbourne’s property market has long been characterised by a significant price gap between houses and units. However, recent trends suggest that this disparity may be narrowing, presenting potential opportunities for investors and homebuyers alike.

The Current Landscape

As of early 2025, Melbourne’s median house price stood at approximately $895,000, while unit medians reflected $583,000, marking a 39% difference. This gap has widened from 24% over the past five years, influenced by factors such as increased demand for space during the COVID-19 pandemic and a preference for detached homes. (Source: The Australian)

Emerging Opportunities in the Unit Market

In recent months, however, competition for units has increased markedly and growth has reflected this increased level of buyer participation.

This increased buyer interest in units is attributed to several factors:

• Affordability: Units offer a more accessible entry point into the housing market, especially for first-home buyers and investors.
• Lifestyle Preferences: Urban living, proximity to amenities, and reduced maintenance appeal to a broad demographic. Since the COVID-19 lockdowns, our city has enjoyed a recent revival of sporting, cultural and dining opportunities.
• Aging population: Many boomers and retirees are opting for a easier-maintenance lifestyle, with hospitals, transport links and lifestyle amenity at their fingertips.
• Return to the office: As bosses are calling their workers back to the office (either hybrid or full time), employees are less willing to tolerate long commutes.
• Supply Constraints: Limited new unit developments due to high construction costs may lead to increased demand for existing stock.
• First home buyer incentives: Both the federal and state government have concessions and opportunities on offer for eligible first homebuyers. In our capital city, these budget caps are more aligned with units, as opposed to houses.
• Lower birth rates: Australia’s fertility rate is at an all time low. Many couples are opting not to have children and we are anecdotally seeing many of these couples opting for location over size.

Recent forecasts suggest a promising outlook for Melbourne’s unit market. KPMG predicts unit prices will rise by 4.6% in 2025 and 5.5% in 2026, driven by affordability concerns and a shift in buyer preferences. (Source: KPMG). Similarly, Oxford Economics anticipates a 20% increase in unit prices by mid-2027. (Source: Australian Property Update)

Strategic Considerations

While the unit market shows potential, it’s essential to approach investments strategically:

• Location Matters: High amenity, zoning, streetscape, and accessibility to arterials are all important facets of location-based decisions.
• Property Type: Not all units are created equal. Factors such as building quality, strata fees, floor plans, orientation, outlook and future development plans can impact long-term value.
• Market Timing: With interest rates expected to decrease, entering the market before heightened competition could be advantageous.

Two years I wrote about some early leading indicators, but our interest rate hikes dampened most segments of the Melbourne market during this time.

So it seems Melbourne apartments and units could be turning a corner in 2025?

Like any dwelling type though, not all apartments have been created equal.

Understanding the negative impact of a low Land to Asset Ratio, the risks associated with off-the-plan purchases, and the lender sensitivities is vital for unit buyers.

The wide price gap between houses and units in Melbourne presents a unique opportunity. As units become increasingly attractive due to affordability and lifestyle factors, they are tipped to perform more strongly in the coming years. Investors and homebuyers should consider this shift, focusing on strategic locations and lender-approved property types if targeting units.