Melbourne property prices now rising faster than Sydney

The bad news is that Sydney house prices are already falling and Melbourne is likely next

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published February 1, 2016 2:58 pm AEDT

Melbourne median property prices rose 2.5% in January, compared to just 0.5% in Sydney, according to the latest data from CoreLogic RP Data.

The results mean that Melbourne's year-on-year (YoY) growth came in at 11%, slightly ahead of Sydney on 10.5%.

But homeowners, before you get excited, the rise may just be a blip in a longer-term downward trend. And it's likely that Sydney home prices have peaked earlier than in Melbourne. Auction clearance rates clearly show that trend, with Sydney posting a sub-50% clearance (45.2%) rate last weekend, while Melbourne continues to enjoy higher clearance rates (71.3%).

That's a danger sign for property prices. Sub-50% clearance rates in Sydney usually indicate a falling housing market according to Macquarie analysts.

Over the last three months, Sydney house prices have fallen 2.1% to a median of $776,000, while Melbourne median house prices were down 0.1% to $595,000, making the harbour city much more expensive to buy in.

Sydney's annual property growth is now at a 20-month low and has been steadily falling since peaking at 18.4% in July 2015, according to CoreLogic RP Data head of research Tim Lawless.

There's another problem for property investors too. Gross rental yields in Sydney and Melbourne are nearly at all-time lows – 3.2% and 2.9% for houses respectively, and not much higher at around 4% for units in both cities.

Housing price growth particularly in Sydney appears over for now and combined with the low rental yields, investors may be thinking twice about buying a property. Property investors also face higher interest rates, lower loan-to-valuation-ratios (LVRs) as well as ceilings on the amount that the banks will lend to them.

They can thank the banking regulator, APRA, for that.

APRA imposed restrictions on the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) in particular, to limit investor loan growth to below 10% and it has worked so far.

Foolish takeaway

The fact Melbourne has overtaken Sydney in YoY property price growth means little really. It's more an indication that Sydney house prices have already started falling, and Melbourne may not be all that far behind.

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