The 15-year-old boy, who cannot be named for legal reasons, was arrested by police at the scene and taken to hospital, where he remained under police guard with serious injuries on Tuesday.
A neighbour, who did not wish to be named, said a couple lived at the home with an elderly grandmother and children.
He said he and his wife had spent a lot of time with the family who lived at the house.
The man said he had often helped the family, including transporting the mother to hospital for the birth of one of her children.
“We were there at the birth, it was nice,” he said.
“They were really nice people, I couldn’t say a bad word against them.”
Another neighbour, Madison, who came to lay tributes at the home, said she had read reports of the incident and “put two and two together”. She said the elderly woman walked the small girl in a stroller past her home each day.
“We just left some flowers and a teddy for the little girl,” she said.
Chief Commissioner Shane Patton said the victims were part of the same family.
“It’s an absolutely tragic incident out there,” he told radio station 3AW.
Neighbour Karl Kunze was at home working in his garden when the incident occurred.
He saw a woman crying hysterically on the phone in the front garden.
“I came around the front to get the green garden waste bin and I saw an ambulance out the front blocking [my] driveway, a couple of police cars and the young lady, was sitting on the lawn just over there crying on the phone,” he said.
“She was screaming.
“I just asked her if she was all right but then I saw a policeman at the door and I heard one of them say on the radio, ‘one ambulance, you better make it two’,” Mr Kunze said.
He also saw a man yelling in the street. “Some guy came running over and said, ‘my baby’s inside’.”
Mr Kunze said he was shocked that something so horrific had happened in the normally quiet home.
“You hear about it all the time, but you know, you don’t expect it next door,” he said. “I was gutted because I didn’t hear any screams or nothing and the radio wasn’t blaring.”
He said the family had lived in the home for a number of years and were friendly.
“I used to see the old lady out here picking weeds from the grass,” he said.
Mr Kunze said at least three ambulances and eight police cars were at the scene on Monday, and that police remained at the property until about 3am on Tuesday.
A police spokesman said investigators are not looking for anyone else in relation to the incident.
Neighbours and members of the public began laying flowers outside the Narre Warren home late on Tuesday morning.
Steph, who lives nearby and saw the scene on Monday, wanted to return and pay her respects today with another woman, Anne Holden.
“We just wanted to leave something for the family and pass on our well wishes,” said Steph, who did not wish to give her last name.
“Nobody’s really to blame, you think you know, you want to blame someone but everyone’s got a situation,” said Ms Holden through tears.
“I want to send love to all of them.”
Ash, who lives around the corner, did not know the family but left a bouquet of yellow flowers.
He said his family were shocked when they heard a 15-year-old was in custody.
“It’s just sad,” he said.
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Rachael Dexter is a breaking news reporter at The Age.
Ashleigh McMillan is a breaking news reporter at The Age. Got a story? Email me at firstname.lastname@example.org