Melbourne Property Investment 2026: Why Experts Say Australia's Most Undervalued Market is Set to Surge

For investors watching Australia's property markets, Melbourne presents a curious paradox. While Perth and Adelaide doubled in value and Brisbane surged past $900,000 medians, Melbourne's growth has been notably restrained — just 15.5% over five years according to CoreLogic data. But experienced investors recognise that lagging markets often become leading markets. The question isn't whether Melbourne is undervalued — the data confirms it is — but how long this window of opportunity will remain open.

The 13% Undervaluation Gap: What ANZ Economists Found

ANZ economists Madeline Dunk and Catherine Birch have conducted detailed analysis comparing Melbourne's current pricing to its historical relationship with Sydney. Their conclusion is striking: Melbourne property is currently about 13% undervalued.

To understand this, consider the historical context. Over the long term, Melbourne's median home price has typically been equivalent to about 78% of Sydney's median price. This relationship has held relatively stable through multiple property cycles, reflecting the fundamental economic relationship between Australia's two largest cities.

However, Melbourne's lacklustre price growth in recent years has seen that ratio blow out dramatically. The Victorian capital now sits at just 65% of Sydney's median — a significant deviation from historical norms.

In dollar terms, the gap is even more pronounced. CoreLogic data shows Sydney's median house price at $1,466,475 while Melbourne sits at $981,165 — a difference of $517,596 or approximately 54.5%. This is the largest price differential between the two cities in more than two decades.

For investors, this undervaluation represents opportunity. Markets tend to revert to historical relationships over time. If Melbourne simply returned to its normal 78% ratio with Sydney, prices would need to increase by approximately $145,000 from current levels — and that's before accounting for any growth in Sydney itself.

Why Melbourne Lagged While Other Cities Surged

Understanding why Melbourne underperformed helps investors assess whether these factors are temporary or permanent. Several forces combined to hold Melbourne back:

The COVID Exodus: Melbourne sustained the biggest population losses during the pandemic. In 2021 alone, approximately 32,000 people left the city for regional areas or interstate. Extended lockdowns — the longest of any Australian city — drove a flight to lifestyle locations and less-restricted states.

Investor Deterrence: Victoria's land tax regime has become one of the most aggressive in Australia. For investors holding multiple properties or land with high site values, land tax often represents the single largest expense eating into net yields. This has deterred investment activity compared to other states.

Higher Listing Volumes: Unlike Perth and Adelaide where supply constraints drove prices higher, Melbourne saw its highest number of total listings since November 2018 in mid-2024, with stock 24% above the five-year average. More choice for buyers meant less urgency and more negotiating power.

Interest Rate Sensitivity: Melbourne buyers have historically been more sensitive to interest rate movements than other capitals. The rapid rate rises from 2022-2023 hit Melbourne sentiment harder, with buyers pulling back more significantly than in other markets.

The crucial point for investors: these factors are largely temporary or already reversing. Population is returning. The Metro Tunnel has opened. Vacancy rates have tightened to 1.4%. The fundamentals are aligning for recovery.

The Recovery Signals Emerging Now

Multiple indicators suggest Melbourne's recovery is not just possible but already underway:

Population Growth Returning: Melbourne is once again Australia's fastest-growing capital by absolute numbers, adding approximately 73,000 residents annually. International migration has resumed strongly, with Melbourne historically attracting the largest share of overseas arrivals. The Centre for Population projects Melbourne will overtake Sydney as Australia's largest city by the early 2030s.

Vacancy Rates Tightening: At 1.4%, Melbourne's vacancy rate sits well below the 3% threshold considered a balanced market. This means approximately 9 days of vacancy per year if properties are priced competitively. Rental demand is strong and strengthening.

Infrastructure Transformation: The $15.8 billion Metro Tunnel fully opened on February 1, 2026, creating a new cross-city metro line and dramatically improving accessibility. This represents the most significant transport upgrade in Melbourne's modern history.

Buyer Sentiment Improving: January 2026 saw prices rebound 0.2% in Melbourne after a soft December. Auction clearance rates have stabilised. Buyer enquiry is increasing. The market has found its floor.

The consensus among Australia's leading property forecasters is clear: Melbourne is set to outperform in 2026. But the range of predictions varies, and understanding the reasoning behind each forecast helps investors calibrate their expectations.

Bank and Research House Forecasts

KPMG emerges as the most bullish on Melbourne, forecasting house price growth of 6.6% and unit growth of 7.1% — making Melbourne the "standout performer" among Australian capitals. Their Residential Property Outlook specifically identifies Melbourne as benefiting from its "comparatively lower price base compared to other capital cities," which "is likely to provide room for further growth and help sustain momentum."

ANZ economists forecast 6.2% growth for Melbourne, citing an "affordability-related demand boost" as the key driver. Their analysis suggests that as price-to-income ratios in Brisbane, Perth, and Adelaide continue stretching beyond Melbourne's levels, buyer rotation back to the Victorian capital becomes increasingly likely.

Domain expects Melbourne house prices to reach approximately $1.17 million by year-end — roughly $87,000 higher than current levels, implying growth of around 6%. Domain's chief of research, Dr Nicola Powell, states Melbourne will be "fully recovered in house and unit prices" by the end of 2026, reaching new record highs.

PropTrack forecasts Melbourne to add between 5% and 7% to property values, recovering from its recent underperformance.

The more conservative forecasters include NAB at 3.9% and Westpac at 3.5%. These lower estimates reflect greater caution around interest rate uncertainty and the potential for further RBA action.

The Two Halves of 2026

Domain's forecast includes an important nuance: 2026 will likely be "a year of two halves."

First Half: Pent-up demand flows through the market as buyers who delayed purchases during rate uncertainty finally act. Competition increases. Prices accelerate.

Second Half: Affordability constraints may begin to bite as prices rise and any rate relief fails to materialise. Growth moderates but remains positive.

For investors, this suggests that earlier action in 2026 may secure better entry points than waiting until the second half when competition has intensified and prices have moved higher.

On February 4, 2026, the RBA raised the cash rate to 3.85% — a 0.25% increase that marked the first hike since November 2023. The decision made Australia the first major central bank to end their cutting cycle in favour of tightening following the COVID pandemic.

For Melbourne property investors, this development requires careful analysis. The headline news sounds negative, but the implications are more nuanced.

What the Rate Rise Means for Borrowers

The practical impact on household budgets is significant but manageable:

• On an average new mortgage of approximately $700,000, the rate rise adds around $110 per month to repayments
• Borrowing capacity reduces by approximately $18,000 for a median-income household
• All four major banks have passed on the full 0.25% increase

These numbers matter for purchasers operating at the edge of their borrowing capacity. However, for investors with comfortable serviceability buffers, the impact is relatively contained.

Why This May Actually Benefit Melbourne Investors

Counterintuitively, the rate rise creates several advantages for strategic investors:

Reduced Competition: The rate rise reinforces caution among marginal buyers. FOMO (fear of missing out) subsides. Auction crowds thin. This means less competition for quality properties and more room to negotiate.

Fundamentals Unchanged: The rate rise doesn't alter Melbourne's underlying supply-demand dynamics. Vacancy rates remain at 1.4%. Population continues growing by 73,000 annually. The housing shortage persists. These structural factors support prices regardless of short-term rate movements.

"One and Done" Expectations: Most economists expect the RBA to hold at 3.85% for the remainder of 2026. Commonwealth Bank, Westpac, and ANZ all forecast no further increases. This provides relative certainty compared to the uncertainty of 2022-2024.

Entry Point Preserved: If Melbourne were to grow 6% this year without the rate rise dampening sentiment, prices would accelerate faster. The rate rise keeps the market more accessible for longer, allowing strategic investors time to position.

The $15.8 billion Metro Tunnel represents the most significant infrastructure investment in Melbourne's modern history. After years of construction, the tunnel fully opened on February 1, 2026, creating a new cross-city metro line connecting Sunbury in the northwest with Cranbourne and Pakenham in the southeast.

For property investors, understanding which suburbs benefit most from this transformation is critical for strategic positioning.

The Five New Stations and Their Property Impact

The Metro Tunnel introduced five new underground stations, each creating distinct investment opportunities:

Arden Station: Located in North Melbourne, Arden anchors a major urban renewal precinct earmarked for thousands of new homes, offices, and community facilities over the next two decades. Property analysts expect Arden to become one of Melbourne's most dynamic growth precincts, similar to Docklands' early development phase.

Parkville Station: This station dramatically improves accessibility to Melbourne's medical and university precinct. Properties in surrounding areas benefit from strong rental demand from students, medical professionals, and hospital workers. Higher-density housing development is expected to accelerate.

State Library Station: Enhancing CBD accessibility, this station primarily benefits the commercial and apartment markets in the central city and immediate fringe areas.

Town Hall Station: Another CBD station improving the retail and commercial precinct accessibility. Most relevant for apartment investors targeting the inner city market.

Anzac Station: Located on St Kilda Road, this station is forecast to boost apartment and mixed-use development in surrounding suburbs including South Melbourne, Albert Park, and Middle Park. These already-premium areas gain additional transport convenience.

Growth Corridor Connections

Beyond the five new stations, the Metro Tunnel's greatest impact comes from connecting two of Melbourne's biggest housing growth corridors:

Northwest Connection (Sunbury/Diggers Rest): Properties along this corridor now enjoy dramatically improved access to the CBD and employment hubs. Suburbs like Sunshine — already undergoing significant transformation — benefit from being positioned as the western gateway to the new metro network.

Southeast Connection (Cranbourne/Pakenham): These high-growth suburbs have long offered affordability but suffered from lengthy commute times. The Metro Tunnel slashes travel times to the CBD, making these areas significantly more attractive to buyers and renters seeking value without sacrificing accessibility.

Selecting the right suburb is arguably the most critical decision for Melbourne property investors. The city's diverse market offers opportunities across every price point and investment strategy. Here's a comprehensive breakdown by category.

Premium Growth Suburbs (Capital Appreciation Focus)

These suburbs have demonstrated exceptional recent growth and continue attracting strong owner-occupier and investor demand. Entry prices are higher, but growth potential remains substantial.

Blairgowrie on the Mornington Peninsula recorded a median house price of $1,400,250 with 16.8% annual growth and an impressive 53.9% increase over five years. The lifestyle appeal of this coastal suburb continues attracting affluent buyers seeking weekend retreats and permanent tree-change relocations.

Strathmore in Melbourne's northwest attracts professional families with its premium homes, top schools, and excellent transport links. The suburb recorded 17.8% annual house price growth with a median of $1,645,000. Five-year growth of 25.6% reflects sustained demand from high-income households.

Pascoe Vale in the inner north has emerged as a gentrification success story, recording 15.2% annual growth with 31.7% appreciation over five years. The suburb offers better value than neighbouring Brunswick and Coburg while benefiting from the same inner-north appeal.

Middle-Ring Family Suburbs (Balanced Returns)

For investors seeking the balance of solid capital growth with reasonable rental yields, Melbourne's middle-ring suburbs offer compelling opportunities.

Preston continues its transformation from working-class suburb to trendy inner-north destination. Strong gentrification, excellent train connectivity, and a thriving café and restaurant scene support both capital growth and rental demand. Median prices around $1 million offer better value than neighbouring Northcote and Thornbury.

Coburg stands out for its exceptionally tight rental market, with vacancy rates of just 0.8%. Strong rental demand from young professionals, students, and families ensures consistent income, while gentrification continues pushing values higher.

Clayton offers unique exposure to the education sector through proximity to Monash University. Strong rental demand from students and academic staff provides reliable income, while the suburb's broader transformation supports capital appreciation.

Affordable Growth Corridors (Under $750k)

These suburbs offer genuine entry-level opportunities with strong fundamentals supporting future growth.

Mernda has transformed from a sleepy semi-rural area into one of Melbourne's most vibrant rail-connected growth suburbs. The South Morang train line extension dramatically improved accessibility, and median prices around $600,000 offer genuine affordability. Low vacancy and strong population growth support both rental income and capital appreciation.

Craigieburn in Melbourne's northern growth corridor offers houses around $580,000 with yields approaching 4%. Ongoing infrastructure investment, including road upgrades and shopping centre expansions, continues improving liveability.

Cranbourne benefits directly from the Metro Tunnel, with the suburb now a terminus on the new cross-city line. Median prices around $600,000 and strong rental demand make this southeast hub attractive for investors seeking infrastructure-driven growth.

Budget Entry Points (Under $500k)

For investors with limited deposits or seeking maximum yield, these suburbs offer genuine detached housing under the $500,000 threshold.

Melton remains Melbourne's most affordable house market with a median of approximately $473,000. Located in the western growth corridor, Melton offers yields around 5% and benefits from ongoing infrastructure investment including the future Outer Metropolitan Ring road.

Werribee offers slightly higher prices around $550,000 but greater established infrastructure and amenity. The western growth corridor benefits from employment growth and continued infrastructure investment.

Understanding potential long-term returns helps investors set realistic expectations and compare property against alternative investments. Let's model scenarios based on different growth assumptions.

10-Year Projection Scenario (2026-2036)

Starting Property: $800,000 middle-ring Melbourne house
Deposit: $160,000 (20%)
Loan: $640,000 at 6.5% interest

At the moderate growth rate, your property nearly doubles in value over 10 years, consistent with the historical pattern of Australian property values doubling every 7-10 years. Your initial $160,000 investment has grown to $792,000 in equity — nearly 5x your original capital.

Not every investor suits the same strategy. Melbourne's diverse market offers opportunities across different profiles, risk tolerances, and financial situations. Here's how five common investor profiles should approach the Melbourne market in 2026.

This question dominates every property discussion. The honest answer: it depends on your specific circumstances. Here's a framework for making the decision.

Arguments for Buying Now

• The Undervaluation Window: Melbourne's 13% undervaluation compared to historical Sydney ratios represents a measurable opportunity. Markets tend to revert to historical relationships.
• Metro Tunnel Catalyst: The infrastructure boost is just beginning. Properties near new stations haven't yet fully priced in the accessibility improvement.
• Competition Currently Lower: The February rate rise has reinforced buyer caution. Auction crowds are thinner. Negotiating power is stronger.
• 6-7% Growth Forecast: If forecasters are correct, waiting costs approximately $48,000 on an $800,000 property.

Arguments for Waiting

• Further Rate Rises Possible: NAB predicts another 0.25% increase in May. If rates continue rising, prices may soften.
• More Negotiation Power: A softer market means better buying conditions — lower prices, longer due diligence periods.
• Better Rate Environment Possible: If inflation moderates and rates eventually fall, borrowing capacity improves.
• Spring 2026 May Offer More Choice: Listing volumes typically peak in spring. More options mean better chances of finding the ideal property.

Decision Framework Checklist

Every investment carries risk. Understanding Melbourne property's specific risk factors allows you to make informed decisions and implement appropriate mitigation strategies.

Interest Rate Risk

The RBA has demonstrated willingness to raise rates despite market expectations. NAB predicts a further 0.25% increase in May 2026, potentially taking the cash rate to 4.10%.

Mitigation: Stress-test your budget at current rates plus 1-1.5%. Maintain cash buffers covering 6+ months of repayments. Consider fixing a portion of your loan.

Victoria Land Tax

Victoria's land tax regime has become one of the most aggressive in Australia, with rates and surcharges that significantly impact investment returns.

Mitigation: Model land tax impact before purchasing. Consider interstate diversification. Focus on properties where land value is lower relative to total value.

Economic Factors

Melbourne's economy, while diversified, remains exposed to broader economic conditions including employment, immigration policy, and consumer confidence.

Mitigation: Maintain employment diversity. Focus on areas with diverse employment base. Invest for long-term hold periods that can ride out cycles.

If you've decided Melbourne property aligns with your investment goals, here's a practical action plan for moving forward.

Step 1: Get Finance Pre-Approval

Before inspecting properties, understand exactly what you can borrow. Speak with 2-3 lenders or a mortgage broker. Ensure your pre-approval reflects current rates and accounts for potential further increases.

Step 2: Define Your Investment Criteria

Clarity on what you're seeking streamlines the search process: budget range, preferred locations, property type, growth vs yield priority, and deal-breakers.

Step 3: Research Your Target Suburbs

Deep-dive into 3-5 suburbs meeting your criteria: recent sales data, rental yields, vacancy rates, infrastructure plans, and local amenities.

Step 4: Build Your Team

Property investment succeeds through expert support: buyers agent for market knowledge and negotiation, mortgage broker for loan structuring, property manager for rental income, and accountant for tax planning.

Step 5: Start Property Inspections

With preparation complete, begin active searching. Inspect at least 10-15 properties before making offers. This builds market knowledge and helps calibrate value expectations.

Melbourne's property market in 2026 represents a rare convergence of factors: significant undervaluation relative to historical norms, strong growth forecasts from major institutions, transformative infrastructure now operational, and population fundamentals returning to pre-pandemic strength.

The 13% undervaluation calculated by ANZ economists isn't just a statistic — it represents measurable opportunity for investors willing to act while others hesitate. The $517,596 price gap between Melbourne and Sydney, the widest in over two decades, won't persist indefinitely.

Yes, the RBA's February rate rise to 3.85% adds complexity. But for strategic investors with adequate buffers and long-term horizons, this environment creates opportunity rather than obstacle. Reduced competition, stronger negotiating position, and more time to position before sentiment fully recovers.

This isn't about timing the market perfectly — no one achieves that consistently. It's about recognising value when it exists and having the conviction to act. Melbourne may not remain 13% undervalued for long. The Metro Tunnel is operational. Population is returning. Vacancy rates are tightening. The fundamentals supporting recovery are already in place.

Whether you're a first-time investor exploring rentvesting in affordable growth corridors, an established portfolio holder seeking interstate diversification, or a Sydney investor tired of stretched prices and compressed yields, Melbourne offers a compelling proposition in 2026.

The best time to invest was yesterday. The second best time is when you're ready, informed, and have done your homework. Use this guide to inform your decision — then take action.

Market Data & Forecasts

• CoreLogic/Cotality Home Value Index January 2026
• KPMG Residential Property Outlook 2026
• Domain 2026 Property Forecast
• SQM Research Vacancy Rates
• PropTrack Property Forecasts

Interest Rates & Economic

• Reserve Bank of Australia Cash Rate
• Canstar RBA Forecast 2026
• Broker Daily - RBA Rate Hike Impact Analysis

Melbourne Analysis

• Oliver Hume 2026 Melbourne Outlook
• Australian Property Update - Melbourne Recovery
• Property Update Melbourne Outlook
• OpenAgent Melbourne Market Data

Infrastructure

• Victoria Big Build - Metro Tunnel Project
• City of Melbourne - Metro Tunnel Project