The area was settled by European settlers in the 1830s, around the time of the establishment of Melbourne. The first sale of land by the Crown in Prahran area took place on 10 June 1840 when land bounded by Kooyong Road, Gardiners Creek (Yarra River). Gardiners Creek Road (now Toorak Road) and Glenferrie Road was sold. The purchasers included Jane Hill (the widow of pastoralist David Hill), the Langhorne Bros. (the nephews of Captain William Lonsdale), Capt. John Browne and James Jackson.[3]During the 1840s, it became popular with wealthy citizens of Melbourne as a suburban retreat from the town. Several large houses were built and, together with neighbouring Toorak, it maintained its upper-class reputation into the post-World War II period. South Yarra Post Office was open briefly in 1854, then reopened on 21 June 1858.[4]

 

Toorak Road looking west from the railway station in 1906

 

Regent Theatre on Toorak Road in 1927

During the 1920s and 1930s, many of the large gardens of the older mansions were subdivided and blocks of flats became a feature of the area.[5] From the 1930s, the area around Park Street, where large numbers of flats had been built, became a popular neighbourhood for middle-class homosexuals; at that time an illegal subculture in the state of Victoria.

The building of apartment buildings, particularly around South Yarra railway station, continued into the 1960s and 1970s and today South Yarra is one of the most densely populated suburbs in Melbourne.

On 12 October 1988, police officers Steven Tynan and Damian Eyre were murdered in Walsh Street, South Yarra.

On 8 July 2002, the Salt nightclub in Daly Street was the site of a dispute which resulted in the murder of three men. On 19 September 2005, seven men were found guilty of murder, in the Supreme Court of Victoria. The nightclub was particularly notorious for criminal activity and was finally shut down.