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Houses in some areas in Melbourne already increased by hundreds of thousands of dollars, pricing many investors out of the market. But where some see a problem, the smarter investors look deeper to try and find the opportunity. Are townhouses in Melbourne the next opportunity for strong growth in 2026? In this episode, I'm scaling back the hype, the sales pitch, the anecdotes, presenting the raw data about townhouses in Melbourne to give you a clear understanding if they are the next opportunity or if you need to stay away as an investor. I'm Junge Ma, the senior research analyst at InvestorKit.
Now let's get into it. While Melbourne is relatively affordable compared to the other major capital cities in Australia, as a greater capital city, inside of Melbourne, we still see really high house prices, especially in the inner ring and middle ring areas or LGAs. In these areas, it's hard for many investors to buy an investment property because of one, the high prices and two, the low yields, making it really not sustainable to hold investment properties there. So townhouses have become an attractive option for many investors. It is understandable because they are more affordable, they have higher rental yield, and they are actually easier to rent out.
And in this episode, we'll be verifying if these advantages are true and use a Brisbane case study to try to understand townhouses' real long-term performance compared to house markets. In the end, we also want to discuss what types of townhouses are okay to consider and what traits we really want to avoid if we were going to invest in townhouses. And now first, why townhouses are now more attractive than houses. First, they're more affordable. In the same suburb, townhouses are usually a few hundreds of thousands of dollars cheaper than houses.
I'll give you two examples in Melbourne. First, Reservoir, a suburb 12 kilometers north of Melbourne CBD, and it's in the LGA of Darabin. House median price there is $940,000 now, and townhouse median price is just $680,000, $260,000 cheaper than the houses. The second example is Pascoe Vale, 9 kilometers north of CBD, in the LGA of Meribach. House median price there is $1.
2 million, and townhouse median price is now just $700,000, and that is $500,000 difference. So when people want to buy in these middle-range areas, including investors and owner-occupiers, chasing lifestyle and connectivity to Melbourne CBD, above $1 million prices can be really out of reach. If it's $600,000, $700,000, that is much more affordable as a starting point. So that is one of the most important reasons why townhouses are becoming very much sought after in these middle-range suburbs. Second reason is more for owner-occupiers.
Townhouses, from a price point perspective, many of them actually fall under the state and federal first-home buyer grant price cap. For Melbourne, there are three major first-home buyer assistance schemes. First-home buyer grant of $10,000. Price cap for that is $750,000. If you're a first-home buyer and would like to live in a suburb relatively close to the CBD where you work, and at the same time you would really love some help from the government, a townhouse of under $750,000 would be a great choice, both in terms of availability and in terms of lifestyle.
The second scheme would be around stamp duty. If you're buying a newly built property as your first home, you may be eligible for either stamp duty exemption or stamp duty concession. For exemption, the price cap would be $600,000, and concession would be $750,000. Again, for houses, that is really hard, especially if you're looking to buy somewhere closer to the CBD, not tens of kilometers away. So townhouses in this case would be also attracting more interest from first-home buyers.
And then the third scheme would be the 5% deposit scheme. For Melbourne, price cap is now $950,000. Again, many houses are actually higher than that price point when it comes to more established, closer to CBD areas. And if you're aiming for townhouses, there are actually plenty of options. That is why the price points for townhouses are actually making them much more attractive for first-home buyers.
Third reason, higher rental yield. In the same suburb, townhouses' rental yields are, in most cases, higher than house rental yields. I'll give you some examples. First, at a suburb level, if we look at Pascoe Vale, the suburb we were just looking at, house average yield is now 3. 1%.
For higher-priced houses, this yield can be just 2. something. And townhouse rental average rental yield is 4. 1%. That is 1% higher than houses.
And then in Reservoir, house rental yield on average, 3. 3%. While townhouses' rental yield on average is 4. 3%. That's at the suburb level when we look at average yields.
Here I've got some property examples to show even more dramatic difference. I've sourced some three-bedroom houses and townhouses in the suburb of Reservoir. There is one townhouse valued at $740,000 on Clingden Street. It is being leased for $650 per week. And that makes its gross rental yield a 4.
6%. In the same suburb, we have two houses, both valued at around $1. 2 million, one on White Street and one in Clinic Street. They are also being rented at $650 per week, making their rental yields just around 2. 8%.
So that is 1. 6% difference. So between the two properties, while you are receiving the same amount of rental income on the townhouse, you'll be paying $35,500 of interest to the bank. At the same time, if you were owning the house, you would be paying the bank $57,600 of interest. Another pair of properties we can actually compare is one townhouse valued at $795,000 versus a house valued at $800,000.
So value-wise, they are similar. But for the townhouse, you're receiving a $670 per week rent. And for the house, you're receiving only a $550 per week rent. So for the same amount of interest repayment, you're receiving very different rental income. And then the fourth reason why townhouses are getting more attention, especially for investors, is that townhouses are actually more rentable, more sought after on the rental market than houses.
Across many suburbs, we are seeing shorter rental time on market in the townhouse market compared to house market. To think about the reasons, there are several potential explanations. First one is townhouses could be newer than houses in the same area. They might have a newer aircon system. They have a secondary bedroom that the houses may not normally have.
And the overall property condition could be better in the townhouses than the houses. So in that perspective, townhouses could be more appealing. And the second reason could be that for townhouses with the smaller pieces of land, the running costs for tenants can be lower than houses in terms of the need of maintenance and the costs on utilities. For example, townhouses may not have a big piece of lawn to maintain. So you're saving on electricity, mowing, or any landscape maintenance.
Another reason possibly is the location of townhouses. Most townhouses were developed in locations closer to public transport, shopping centers, or convenient facilities. That's for many tenants or renters can be more attractive. So in summary, townhouses are actually hitting the sweet spot between lifestyle, value, and rentability. And second, how is townhouses' long-term performance?
When it comes to house investment, the one thing we really emphasize is the strong long-term performance of the house market compared to unit market. How about townhouses' long-term performance? Is it closer to house markets or closer to apartment markets? About this, we actually recently did a research, a case study on Brisbane's townhouse market. And we find that as long as the location is right, the traits of the townhouses are right, townhouses' long-term performance can be as good as the house markets in the same area.
One example here is Woodridge in Logan City. Median house price there is $630,000, while townhouses' median price is $440,000, close to $200,000 more affordable than houses. In the past year, they have both achieved very impressive growth. Houses achieved 22% annual growth, and townhouses achieved 18% growth. And if we extend the period to last three years, townhouse actually outperformed the house market.
In the past three years, as interest rates started to go high and stayed high, annual growth of the house market was 15% per year. At the same time, annual growth of the townhouse market was a high 24% per year. That's the power of affordability. Then, short-term performance, no problem. It's possibly because of affordability and maybe a bit of luck.
How about long-term growth? In the past 10 years, house value has in total increased by 142%, and townhouses' value in the same time has increased by 134%. Not as high as how the house market has performed, but it's not underperforming dramatically. It's actually very acceptable as an alternative asset option. And in terms of rental yield, townhouses are performing slightly better than the house market.
Average yield of houses is now 4. 5%, quite healthy because of the affordable prices. And at the same time, townhouses' average rental yield is 5. 2%, even healthier than the same suburb's house market. So Woodridge is just one example in Brisbane where townhouse performance in the long term can be very close to house market's performance.
But that doesn't mean that townhouse performance everywhere can be the same or close to the house market. In other words, townhouse is not automatically a good idea or a good alternative to houses.
