After a challenging 2024, where prices slipped more often than they rose, Melbourne is showing signs of strength again. The city has now clocked four straight months of price growth in 2025 - a clear signal that momentum is building.

For investors, this isn’t just a rebound. It’s the early signs of a new property cycle taking shape. The big question is: what’s driving this shift, and what should you consider if Melbourne is on your radar?

A Market Finding Its Feet

Melbourne prices are moving upward, but they’re still sitting about 4.5% below their March 2022 peak. Compared to Sydney, the gap is even more striking as homes are now priced about 70% higher than Melbourne's, creating a difference of more than $600,000 and the widest it's been in two decades. .

For investors, this gap matters. Melbourne is undervalued, both against its own history and compared with other capitals creating a rare “inbuilt equity” opportunity. Even without a boom, prices have room to rise simply by closing that gap.

And gaps like this don’t last. Historically, Melbourne has trailed Sydney by a much smaller margin. Today’s discount signals upside potential, and in plain terms: Melbourne has space to grow, and securing property now could mean locking in value before the market catches up.

Why Confidence is Returning

Several factors are shifting the mood in Melbourne property: 

1. Interest Rate Relief Ahead

Economists expect the RBA to begin cutting rates later in 2025. Bank of Queensland research shows that once cuts begin, national prices typically climb 10 to 15% within two years.

That matters for investors because the market tends to move before the first cut lands. Buyer activity especially from owner-occupiers often ramps up in anticipation. Waiting for cheaper finance may mean competing with more cashed-up buyers when the best-quality homes hit the market.

2. Population Growth at Record Pace

Melbourne is once again Australia’s fastest-growing city. In the year to March 2024, Victoria’s population jumped by 183,000 people, thanks to migration and interstate arrivals.

This isn’t just a headline number. More people mean more demand for both rental properties and homes to buy. For investors, it underpins confidence that rental yields and capital growth will remain supported over the long term, regardless of short-term cycles.

3. Severe Undersupply

While population surges, supply remains constrained. Building approvals in Victoria are sitting 14% below the 10-year average, and vacancy rates are at just 1% well below the 2–2.5% threshold that indicates a balanced rental market.

This imbalance is already pushing rents higher, with flow-on effects expected for property prices. Long term, Melbourne is projected to need 1.6 million new homes by 2050. With approvals trending lower, that challenge is only intensifying.

Where the Growth Is Happening

Not all Melbourne suburbs and property types are moving in sync. 

Early signs in 2025 show clear winners:

• Family-friendly homes in inner and middle-ring suburbs are leading the way. Demand in places like Glen Waverley, Essendon, and Bentleigh is being driven by proximity to schools, transport, and lifestyle infrastructure. In 2024, 25 Melbourne suburbs saw median price growth of $100k+, with Deepdene jumping $602k (20%) in just one year. For investors, these homes provide consistent rental demand and capital growth, driven by strong demand from families wanting schools, transport and lifestyle access.

• Townhouses and villa units are also proving popular, striking the balance between affordability and space. Young families and down sizers are driving this trend in middle-ring suburbs like Reservoir, Preston, and McKinnon. For investors, this segment combines relative affordability with steady tenant demand.

• Boutique, low-rise apartments in premium suburbs are holding their own. Unlike high-rise towers, which suffer from oversupply and lack of scarcity, smaller, well-located apartment blocks with character and lifestyle appeal are seeing renewed interest. These are the types of assets that can deliver consistent returns without the volatility of the broader apartment market.

On the flip side, not everything in Melbourne is primed to outperform. High-rise, off-the-plan apartments continue to face challenges from oversupply and weak tenant demand. Likewise, outer-fringe estates may look affordable but often lack the infrastructure and amenity base needed to drive sustained long-term growth.

For investors, the message is clear: focus on quality, scarcity, and locations where demand is underpinned by fundamentals, not just low entry prices.

Long-Term Fundamentals Remain Strong

Despite policy challenges like higher taxes and stricter tenancy laws, Melbourne’s fundamentals remain intact. The city is projected to reach a population of 9 million by 2050, overtaking Sydney. Billions are being poured into new transport links, hospitals, and education precincts, while Melbourne’s economy remains diverse and resilient across sectors like finance, health, and technology.

For investors, this means demand is structural, not temporary. The city’s long-term growth is powered by demographics and infrastructure, not speculation. Those who take a strategic view and invest in quality assets can expect Melbourne to continue rewarding patient investors over multiple cycles.

The Takeaway

Melbourne’s 2025 housing market is being defined by one clear theme: confidence returning in a market constrained by supply.

• Prices are edging upward after a soft patch, but they remain undervalued compared to Sydney and historic peaks.

• Interest rates are expected to fall, boosting activity, while migration and undersupply are tightening both the rental and sales markets.

• Family-friendly homes, townhouses, and boutique apartments in gentrifying suburbs are the strongest performers, while high-rise towers and outer fringe developments remain risky bets.

For investors, the story is less about timing the perfect bottom and more about recognising Melbourne’s long-term resilience. With affordability advantages, record population growth, and infrastructure investment all working in its favour, the city is quietly setting the stage for its next cycle of growth. Melbourne may have stumbled in recent years, but for those looking ahead, its next chapter looks full of opportunity.