Sydney’s housing market has shown robust growth since the early 1980s, with the median house price doubling approximately every decade during this period.
In fact, several suburbs have delivered above-average growth.
Melbourne has experienced comparable growth rates over the last 40 years.
However, in contrast to Sydney, property in Melbourne tends to be more affordable, especially investment-grade assets.
I’m interested in exploring the reasons behind this disparity and whether Melbourne’s property market will continue to be relatively more affordable in the future.
This analysis could help investors decide where to allocate their capital.
This analysis is undertaken from an investment perspective only.
There’s no point debating which city is better, as Melbourne is always the clear winner.
Sydney is expensive relative to Melbourne
The chart below illustrates Melbourne’s median house price compared to Sydney’s since 1980.
Presently, Sydney’s median house price stands at 1.64 times that of Melbourne.
Over the past four decades, the average price difference has been 1.36 times.
In relative terms, this macro-level data implies that either property in Sydney might be overvalued, or Melbourne might be undervalued, or perhaps a combination of both factors contributes to this discrepancy.
The red trendlines indicate shifts in Sydney’s property prices over time.
Between the mid-1980s and the mid-2000s, Sydney’s property prices escalated in relative terms.
However, from the mid-2000s to the early 2010s, the relative value of property in Sydney notably declined, reaching a low of 1.09 times.
Since 2011, there has been a reversal, with Sydney’s property becoming more expensive than Melbourne’s.
I would like to consider what factors contribute to this price differential.
Relative population could explain some of the difference
The population of a city significantly influences property price growth.
A growing population enhances job opportunities, fuels economic expansion, and boosts housing demand.
Major capital cities offer a lot more high-paying jobs.
For instance, 72 out of the top 100 ASX-listed companies have their headquarters in Melbourne (31) and Sydney (41).
Individuals with higher incomes possess greater financial capacity, often leading to an upward push on property prices.
Using census data and ABS forecasts, the chart below illustrates the estimated populations of Melbourne and Sydney.
In 2001, Sydney’s population exceeded Melbourne’s by 18%. By 2021, this gap had narrowed to just 6%.
Projections indicate that Melbourne’s population is expected to match Sydney’s by 2036.
This relative population differential might explain why property in Sydney is more expensive than in Melbourne.
Noting that the population gap has shrunk significantly over the past two decades and that this trend is forecast to continue, it might suggest that the property price gap might also shrink.
Many Sydney properties offer more scarcity value
Sydney boasts two distinctive geographical features.
Firstly, its encirclement by national parks and mountains poses a challenge in accommodating a growing population.
This limited supply almost certainly contributes to the appreciation of land values.
Secondly, Sydney’s property market is significantly influenced by its proximity to water, particularly waterfront properties.
The city’s extensive harbour waterway, stretching from Watsons Bay to Melrose Park, along with suburbs along the northern and southern coasts, offer either water views or easy access to renowned beaches like Manly and Bondi.
According to Knight Frank, waterfront homes in Sydney command a premium of 118%.
These unique factors specific to Sydney likely contribute to its relative affordability compared to Melbourne.
Congestion and travel times
Sydney residents often attribute much of the city’s traffic congestion to the necessity of using the Harbour Tunnel or a limited number of bridges to travel from one side to the other, due to the city being separated by water.
However, Melbourne has also experienced worsening traffic conditions in recent years.
While I don’t drive a lot (thankfully), it seems reasonable to conclude that both capital cities face similar levels of congestion.
As such, worsening travel congestion is unlikely to have a material impact on relative property values between Melbourne and Sydney.
State taxes and debt
It is worth considering what influences state property taxes and government debt on the property market.
Take, for instance, Victoria’s recent introduction of a “temporary” Covid debt land tax surcharge.
This will result in increased land tax payments for landlords.
Landlords in Victoria are already exiting the market in droves, and this could exacerbate this further, especially as investors will begin receiving land tax bills in early 2024.
Victoria’s projected rise in government debt to around $165 billion over the next three years will undoubtedly strain the state’s budget.
Given that nearly half of Victoria’s overall tax revenue stems from the property market (via land tax and stamp duty), there might be a temptation for the government to implement further tax increases.
That said, if the underlying state economy remains robust, I believe that state tax structures and debt levels might not significantly affect property markets.
Over the past four decades, both Victoria and NSW have frequently adjusted property taxes without observable permanent impacts on these markets.
What can investors in Melbourne learn from this analysis?
This analysis highlights the substantial impact that scarcity has on investment returns.
Opting to invest in a property with unique features, like captivating water views, can significantly boost long-term capital growth over many decades.
In Melbourne, property points of difference can include many things, such as:
- Views: Properties offering panoramic views of notable parks such as the Royal Botanic Gardens, Albert Park Lake, Fitzroy Gardens, the cityscape along the Yarra River, and views of Port Philip Bay.
- Architectural styles: Architectural styles like Victorian-era or Art Deco buildings attract premiums in certain locations.
- Vibrant lifestyle hubs: Properties near bustling areas with a rich café culture, vibrant dining precincts, entertainment hubs, and cultural venues like theatres or galleries tend to experience high demand due to their lively surroundings.
- Premium streets in blue-chip suburbs: Every blue-chip suburb has a handful of highly desirable streets. These are the most sought-after streets and give a property a distinct point of difference.
- Schools: Proximity to prestigious private schools and certain public school zones significantly influences property capital growth rates across Melbourne, attracting families and impacting property values.
Unique characteristics serve as a point of difference and contribute to a property’s desirability and investment potential.
Will this price gap persist?
I believe Sydney’s geographical characteristics will likely maintain its price gap with Melbourne.
Melbourne’s more expansive urban layout allows for better accommodation of increased housing demand.
However, considering Melbourne’s projected population growth and the associated rise in employment opportunities, I anticipate that this housing price gap will narrow over time.
Given this, and Melbourne’s relative underperformance over the past 10 years, as illustrated by the chart below, perhaps Melbourne is an attractive investment market relative to Sydney.
