With the Australian property market facing headwinds, it is easy to focus on negativity. However, in the past forty years, there have only been three distinct downturns lasting more than a year. This historical data tells us that when the inevitable market recovery comes, Melbourne's relative affordability advantages and emerging demographic trends could see it poised for stronger performance than other Australian cities. To understand the bigger picture, we dive into the five macroeconomic indicators that are driving the current property cycle.
Interest rates
While there were already signs of slowing demand in late 2025 due to broad affordability pressures, demand has slowed further since the Reserve Bank of Australia (RBA) started to lift rates once again. By its May meeting, the RBA had fully reversed the cuts it had implemented in 2025, and the hiking cycle may not be finished yet. Two trends are key to understanding this decision to increase interest rates: inflation and unemployment.
RBA cash rate target and pre-COVID averages
Inflation and unemployment
Although headline inflation has been highly volatile over the past 18 months, with automotive fuels, electricity prices and housing costs all contributing to significant price movements, the RBA's preferred measure of underlying inflation has remained stubbornly above its target (of 2-3%). Meanwhile, unemployment has remained relatively low and stable, tracking broadly sideways at around 4.3% since April 2024. With persistent labour shortages across a range of sectors in the economy, such tightness in the labour market is seen as adding inflationary pressure, with the RBA targeting an unemployment rate above 4.5%.
Annual change in headline inflation
Melbourne's relative affordability advantages and emerging demographic trends could see it poised for stronger performance than other Australian cities.
Global uncertainty
A decline in demand has caused the national market to shift from robust growth in the latter part of 2025 to a noticeable cooling in recent months. Adding to this sense of uncertainty are changes to tax policy in this year's Federal Budget that look likely to lower overall investor demand, while households are also facing higher energy prices as a result of the Middle East conflict. When global uncertainty spikes, consumer confidence becomes the first casualty, forcing everyday consumers to reconsider major life milestones such as buying, selling, or investing.
Borrowing costs and capacity
There's little doubt that the RBA's recent rate hikes have had an impact on property demand across the country. Higher interest rates increase the monthly repayments of borrowers, while at the same time reducing the borrowing capacity of new borrowers. For a Melbourne household earning the median income, the three rate rises have reduced their ability to borrow by around 7%, equivalent to over $58,500. Similarly, based on a typical 30-year mortgage with a 20% deposit, the mortgage repayment on the median Melbourne dwelling has risen by $320 a month.
Dwelling value to income ratio
As of December 2025, the median dwelling value in Melbourne was 7.1 times the median income, compared with over 10 times in Sydney, over 9 times in Adelaide and Brisbane and 8 times in Perth.
Melbourne's affordability advantages and demographic changes
While this represents an added burden for households, it is worth remembering that Melbourne has a sizeable affordability advantage over most other mainland capital cities, given the modest increase in home values over the past five years (a period where home values in Perth, Brisbane and Adelaide have rapidly increased).
As of December 2025, the median dwelling value in Melbourne was 7.1 times the median income, compared with over 10 times in Sydney, over 9 times in Adelaide and Brisbane and 8 times in Perth.
Similarly, mortgage serviceability in Melbourne is better positioned than in most other cities. Based on median dwelling values, a household earning the median income would contribute less than 39% of its income to servicing a new mortgage in Melbourne, compared with almost 55% in Sydney, almost 52% in Adelaide and 50% in Brisbane.
This affordability advantage may be slowly showing up in demographic trends. For the past three quarters, Victoria has recorded positive net interstate migration numbers, while the number of Australians moving to WA and QLD has been slowing. We have seen for some time affordability pressures lead to demand being deflected into lower value segments of the housing market. It is possible that Melbourne's affordability advantage, particularly given the pressure of rising interest rates, could see more residents from other states considering migration to Victoria.