Sydney and Melbourne Values Up as Gap Widens

August 8th, 2014
Property prices in Sydney and Melbourne are on the rise, with values in both capitals continuing to outpace the rest of the Australian market. Home prices were up 1.6 percent nationally in J uly according to figures from RP Data-Rismark, with a detailed review showing a disparity between state capitals. While few economists are predicting a housing bubble, the value gap between Sydney and Melbourne and other capitals is evidence of a growing two-speed market.

Melbourne house prices rose 3.7 percent in July to a median price of $540,000, finishing 1.8 percent stronger for the quarter. ; Sydney prices were up 1.5 percent for the month to $650,000, ending the quarter 2 percent stronger. ; While monthly growth in Darwin was also strong at 2.8 percent, prices rose just 0.8 percent over the quarter to reach $515,000. ; Canberra was the only other capital to record positive monthly growth at 1.5 percent, with all other cities showing a decline.

House prices were down 0.1 percent in Brisbane and Adelaide, with Perth falling 0.5 percent and Hobart down 0.6 percent. ; Even though prices continue to rise on a national basis, recent results highlight a two-speed market with a gap that continues to widen. ; Over the last year, house prices in Sydney have grown 14.8 percent, more than double any other state capital except Melbourne. ; While prices in Melbourne have grown 11 percent over 12 months, the next highest increase was Brisbane at 6.9 percent.

The surging nature of the Sydney market is evident in recent auction results, with clearance rates up and a number of homes attracting prices well above their reserve. ; In the first weekend of August, the auction clearance rate in Sydney was well above average at 77.6 percent. ; According to RP Data housing market specialist Robert Larocca, “Both Sydney and Melbourne, which account for the majority of the auction market in Australia, had strong results with clearance rates above trend.”

With Sydney and Melbourne continuing to outgrow the rest of Australia, the two capitals are most at risk of developing a housing bubble. ; According to HSBC chief economist Paul Bloxham, “merely the expectation of rising housing prices may be starting to drive housing price gains”. ; However, while most economists believe Australian house prices are overvalued, few are predicting a typical bubble and crash scenario. ; According to BT Financial economist Chris Caton in a recent Fairfax Media survey, "While high house prices presented affordability issues for some buyers, it was not a major macro-problem... ; There is no bubble waiting to burst.’’

In fact, a number of analysts are expecting the value gap to reduce as growth rates dampen to more sustainable levels in Sydney and Melbourne. ; According to RP Data’s chief economist Tim Lawless, “What is likely though is that the rate of capital gain will continue to reduce, particularly in those cities where affordability constraints are the most significant and rental yields are the lowest... ; The most affordable suburbs across the capital cities are generally showing the lowest capital gain over the past year suggesting buyer demand may be held back by price barriers.”