Melbourne House Prices

property investment when prices fall

How to Buy an Investment Property When Prices Fall

How to Buy an Investment Property When Prices Fall 2560 1808 andrew stone

We know from experience that you can buy a good investment property when prices fall and markets soften. Be smart – know your values, negotiate well, and add value proactively.

The price boom we’ve experienced over the last couple years started running out of steam a few months ago. The Reserve Bank of Australia have lifted rates, and they’re indicating that rates will likely rise further.

House prices are down from their peak and tipped to fall.. Would you purchase an investment property in this market?

Remember when house prices fell significantly in 2018-2019? That was the sharpest market correction in living memory – the below graph shows that really clearly.

Investment property when prices fall

The market started to soften in late 2017, and prices began falling early the following year. Around that time, a builder that we had come to know asked us to keep an eye out for a development site.

Russ is a really sharp guy. He recognised that the market had shifted and that prices would potentially fall (though few people predicted them to fall by 10%!).

But, if we could buy him a good investment property, under market value, and with value-add opportunity, then he could succeed even if prices fell.

Russ said “If you’re standing still then you’re going backwards”. We totally agree, but put it a slightly different way…

  • If you’re able to accurately assess market values, then you’re able to recognise bargain prices.
  • If you understand leverage and motivations, then you can negotiate purchases on exceptionally favourable terms.
  • If you know how to add value to properties proactively through planning and design, then you can make serious money.

There are a lot more off-market properties in a softening market.

In late June, an agent we know came to us with a large block in Ringwood East. Without going into personal issues, the vendors were very motivated to sell. They needed a settlement of exactly 6 months, and were aiming for a price between $1.0 to $1.05m.


Recent nearby sales pointed to good value at under $1.1m. The existing dwelling was in pretty good condition and would rent well. We ran a feasibility and a development of 3 good sized 4bed houses would deliver strong profits. Was Russ interested? Absolutely.

The market was clearly softening, and who’s to say that the property would be worth the same in 6 months?

The vendors didn’t want to advertise, they needed to get a signed contract quickly. After some serious haggling, we secured the property for just under $0.98m.

Russ cracked on immediately with the planning and design process. After settlement, he got a good renter in. Eventually, after a typically hard slog with Maroondah Council, he attained a planning permit for 3 houses. Once working drawings and engineering were in place, he costed the job up.

The problem was that Russ was bloody busy building for clients. He struggled to fit the build into his program of work. The market started to pick up considerably through 2020-2021…

Why not sell the property as-is with the plans and permits?

I recommended a good local selling agent for Russ to talk to. They decided to take the property to auction in October 2021, and it sold under intense competition for over $1.4m.

Russ trusted our advice and made really good money through a smart property investing strategy when prices were falling.

  • We demonstrated that the property was worth more than what the vendors were asking – both by looking at comparable nearby sales and by conducting a comprehensive feasibility study.
  • We understood the vendor’s motivations and applied leverage through negotiations to secure it for well below market value.
  • Russ secured really good plans and permits, designed to appeal to the increasingly affluent demographic of young families in the area.

The market ran extremely hot from 2020-2021. A lot of buyers overpaid for properties (not our clients!).

We’re entering into a challenging market. Even though strong employment and savings levels mean that widespread forced sales due to interest rate rises are unlikely, most analysts are predicting price falls.

There will be really good property purchase opportunities in coming months.

Particularly off-market with favourable settlement terms. Be smart about values, negotiation tactics, and planning permits, and you could make a couple hundred thousand dollars profit like Russ did.

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Interest Rates and Melbourne House Prices

Interest Rates and Melbourne House Prices 3685 2562 andrew stone

Rising interest rates will affect Melbourne house prices – price growth will go down because borrowing costs increase and buyers can’t spend as much. Before April 2022, the last time the Reserve Bank raised the Target Cash Rate was November 2010. It’s been a long time since the property market has dealt with a rate rise, so what should we expect?

Firstly, it’s worth noting that Melbourne house prices have increased in the past when interest rates were high.

Look at the period from 1998 to 2004 in the below graph – the RBA Target Cash Rate was +/- 5% and house prices boomed. As interest rates steadily increased from 2004, price growth dropped significantly, but the market remained in positive territory.


History suggests that the direction of interest rates is more important to house prices than the actual level of interest rates. The Melbourne property market tends to respond quickly to changes upwards or downwards – look what happened to house prices during interest rate rises in 2000, 2005, and 2011, and look what happened to prices when interest rates fell in 2001, 2010, 2013, and 2020.

Interest rates will continue to rise given inflation levels and overseas experience. Melbourne house price growth will likely cease in response.

Melbourne house price growth had flattened in recent months prior to the rate rise in April. Talk to most selling agents, and they’ll tell you the market is very different in 2022 than it was in 2021. Hot competition between 5-6 bidders quickly turned into private sales with 1-2 genuine buyers who refuse to overpay.

The market is patchy though. Quality houses in good locations on conventional blocks are still achieving great results under the hammer. But most other vendors are being brought down to earth. The market was already coming off the boil – now with interest rates set to rise, what should we expect?

Widespread drops in Melbourne house prices are likely but not necessary inevitable in coming months as interest rates rise.

Household savings are higher than ever, population growth is returning, unemployment is at record lows (and predicted to fall further), and massive construction cost escalations will lead to less new housing stock. All that said, the market was already slowing and if interest rates rise dramatically in a short space of time, we could be in for a correction.

The below graph shows how Melbourne house prices responded to a near 3% increase in the RBA Target Cash Rate over just 6 months from July 1994. In affordable areas, average areas, and expensive areas alike, the affect was similar – price drops of 6 to 10% over a year or two.


Supply and Demand will likely buffer us against serious shocks in the short-term though. New listings were already slowing due to the federal election; winter is always quieter; and a lot of vendors will likely sit on their hands to see how the wind blows. Less Supply should act to prop up prices before the busy Spring season from September onwards.

The main risk that we see in the Melbourne property market relates to property investors.

Rising interest rates will affect Melbourne house prices. As borrowing costs increase, the number of property investors will shrink. And those looking to invest will be more cost conscious than they have been in recent years.

I’m already seeing this in the market anecdotally. From late 2020 to late 2021 speculation in the market was rampant. So many people were overpaying for investment properties and development sites. The mindset was clear – why not pay a bit extra, I’ll make it back in the next few months as the market continues to rise. I went to countless auctions for small-to-medium townhouse development sites where I walked away knowing beyond a doubt that the purchaser would lose money on any project they tackled.

Every dickhead was a property developer in 2021!

Said anyone who buys or sells for a living

Now, most properties that have a few warts (older kitchens/bathrooms, warn carpets, outdated lighting, minor cracks, etc) are struggling. Trees, slope, easements, challenging overlays – too hard.

We’re in a more balanced property market than we’ve been in for years. The rollercoaster of unsustainable price growth, rare price drops, and pandemic hysteria has seen sentiment shift sharply. A sellers market turned into to a buyers market into a sellers market into a buyers market into a sellers market. Crazy.

In coming months, we’re going to focus on off-market opportunities. We’re already dealing with more vendors who have realist price expectations and are open to long settlement periods. Prospects for price growth over the next year or two are pretty slim, so smart operators will manufacture wealth through property development instead of hoping for more favourable market conditions.

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