The gap between median home prices in Sydney and Melbourne have recorded significant escalation recently and as a result the pricing differential between these and other capital cities is at its largest level in many years.
According to the RP Data-Rismark Home Value Index results for June 2014, combined capital city home values increased by 10.1% over the 2013/14 financial year.
Sydney and Melbourne have been the primary drivers of that value growth and selling prices have also pushed much higher.
As a result, the difference in prices between Sydney and Melbourne compared to other capital cities has widened.
While median prices aren’t great for understanding value shifts over time, they are a good indicator for understanding the relativity of pricing of housing stock between markets.
Looking at the differential in median selling prices of houses and units over the 2nd quarter 2014 we can see there are some significant differentials between house and unit prices.
Based on our analysis of median prices for the June quarter, at the combined capital city level, houses are $98,000 more expensive than units. To put this another way, the median selling price of a unit is -17% lower than the median selling price of a house.
Across both measures, the gap is the largest on record (going back to 1990). It will be interesting to see whether or not the large difference in prices starts to drive buyers to the unit market.
Property developers seem to think so; over the 12 months to May 2014, more than half (51.7%) of all new dwelling approvals have been for multi unit dwellings rather than houses.
Units have only consistently accounted for more than half of all new capital city dwelling approvals since July 2013.
Looking across individual capital city markets, the median selling price of a house is currently highest in Sydney at $800,000.
Across the other capital cities, median selling prices are recorded at $620,000 in Melbourne, $480,000 in Brisbane, $420,000 in Adelaide, $532,000 in Perth, $343,000 in Hobart, $570,000 in Darwin and $561,000 in Canberra.
The pricing differential between Sydney and Melbourne houses compared to other cities house prices has widened substantially as a result of the recent stronger value growth in these cities.
To put this differential into perspective Brisbane prices are -40% lower than Sydney’s Adelaide’s are -48% lower than Sydney’s, Perth’s are -34% lower, Hobart -57%, Darwin -29% and Canberra -30%.
In Brisbane, Adelaide and Hobart the gap hasn’t been this wide since 2004, in Perth the gap was last this wide in late 2005, in Darwin the gap was last this wide in mid-2007 and the gap in pricing for Sydney to Canberra was last this wide in early 2003.
Comparing selling prices of houses between Melbourne and other cities sees similar results.
Brisbane house prices are -23% lower than Melbourne’s (largest gap since Dec-02), Adelaide prices are -32% lower (largest gap since Dec-02), Perth prices are -14% lower (largest gap since Jun-05), Hobart prices are -45% lower (largest gap since Aug-03), Darwin prices are -8% lower (largest gap since Aug-11) and Canberra prices are -10% lower (largest gap since Jul-99).
It is a slightly different story across the capital city unit market. Median selling prices across the capitals are recorded at: $586,000 in Sydney, $468,000 in Melbourne, $385,000 in Brisbane, $345,000 in Adelaide, $440,000 in Perth, $267,000 in Hobart, $445,000 in Darwin and $419,925 in Canberra.
The gap in pricing is certainly widening in comparison to Sydney but not so much compared to Melbourne.
The pricing differential between Sydney and other cities is at its largest in many years. Melbourne prices are -20% lower than Sydney’s (largest gap since Dec-06), Brisbane prices are -34% lower (largest gap since Jun-04) and Adelaide prices are -41% lower (largest gap since Dec-06).
In Perth, unit prices are -25% lower than Sydney’s (largest difference since Dec-05), in Hobart prices are -54% lower (greatest gap since Dec-03), in Darwin prices are -24% lower (biggest gap since Jan-08) and in Canberra the gap is -28% its largest since Jun-03.
Why the gap has increased by so much in recent years is likely due to a range of reasons. Sydney and Melbourne have much higher populations than other capital cities and are headquarters to many more major businesses than other capitals.
Overseas migration has been strong over recent years, particularly to Sydney and Melbourne while the outflow of citizens from NSW and Vic to other states has been lower (in fact Victoria is now attracting a net inflow of interstate migrants).
Sydney and Melbourne have captured the attention of overseas buyers who seemingly have a preference for these two cities as opposed to other capitals.
Nevertheless, as the gap in pricing between Sydney and Melbourne relative to other cities widens, buyers may start to look to other cities to purchase.
Think of it this way: at a median price of $800,000 for a house in Sydney a mortgage is going to be a lot lower and more manageable elsewhere.
Alternatively if you have an $800,000 budget you can purchase a house in Sydney or two units in Brisbane and still have $30,000 left over.