Unraveling the Differences: Melbourne vs Sydney Property Markets and What's Ahead for 2024

 Read the full blog here. 

Ever wondered why the Melbourne and Sydney housing markets are as different as chalk and cheese? Well, it's time to quench your curiosity! I'm your host, Stuart Wemyss, and in this fascinating episode, we'll be demystifying the disparities between these two major Australian cities. We'll dive deep into historical growth rates, scrutinise current property prices, and explore unique factors such as population demographics and geographical features that are making waves in these markets. We'll also confront the elephant in the room - the escalating issue of traffic congestion in both cities.

But that's not all! We are ringing in the festive season with our heartiest Christmas wishes to you, dear listeners. As we gear up for the New Year, we're thrilled to reveal a sneak peek into the marvellous content we're cooking up for our blog and website. With new team members joining us, we have more hands to curate and craft informative and engaging content to fill your 2024 with thought-provoking discussions. So buckle up and join us on this journey as we chart the course for an insightful year ahead!

ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8

If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)

Click here to subscribe to Stuart's weekly email.

SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.

Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.

IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.

Transcript

Speaker 1: 0:00

Hi, this is Stuart Weems and welcome to the Investopoly podcast. My goal is to give you simple, easy to understand strategies, insights and tips to help you master the game of building wealth, and in today's episode which is the last for the year, unfortunately I'd like to talk about Melbourne versus Sydney. You know, sydney's housing market has performed robustly since the early 1980s. The median value over very long periods of time is essentially doubled in value every decade, which is pretty significant, and in fact there's plenty of suburbs that have outperformed the median value. Melbourne has performed comparably to that very similar sort of growth rates over the last 40 years. However, in contrast to Sydney, melbourne's property tends to be more affordable, particularly for investment grade assets, and I'm interested in this episode in exploring the reasons why that disparity exists and also considering whether that growth gap or that price gap will eventually evaporate or contract.

Speaker 1: 1:10

Now, of course, this analysis is from an investment perspective only. There's no point debating which city is better, melbourne or Sydney. Obviously, melbourne is the clear winner. So the first thing I did is charted the property prices, so the median house price in Melbourne and Sydney, to determine its relative value. So that is, how much more expensive is Sydney compared to Melbourne on a median price basis, and at the moment it's 1.64 times more. In Sydney, the median house price is compared to Melbourne. The average differential is 1.36 times, so Melbourne is relatively cheap compared to Sydney at the moment by historical standards, and that could mean that either Sydney is overvalued or Melbourne is undervalued, or it could be a combination of those two factors, and I've drawn some trend lines on this chart. Of course you'll find the link in the show notes to the blog on the website, which contains these charts, as it always does. And I've drawn some trend lines. And really, between mid 80s and mid 2000s, sydney's property price escalated in relative terms, so Sydney got a lot more expensive. Now, between mid 2000s and early 2010s, the relative value of Sydney declined, so that obviously means that Melbourne made up for a bit of that loss growth and reached the low almost all time low of almost equal in terms of median value by early 2010s. But since 2011, there's been a kind of a reversal and in fact, sydney's price compared to Melbourne has increased quite substantially and again that could send us a sign of well. Maybe Melbourne is relatively good value compared to Sydney property prices, but this is the sort of fact that I'd like to consider is what is driving this disparity and how, as investors, can we interpret this information? So one explanation to this could be the differential in population.

Speaker 1: 3:25

A city's population can influence property price growth they were, in fact, it often does and a growing population obviously enhances job opportunities, fuels economic expansion and obviously boosts housing demand. You got more people. They need more houses to live in. Major capital cities offer a lot more higher paying jobs, and if you attract those individuals that are earning higher dollars, they tend to again fuel property price growth. So, for example, when you look at the top 100 ASX companies, these are listed companies 72 out of 100 are either in Melbourne or Sydney. So 31 in Melbourne, 41 in Sydney. So that obviously attracts much better employment opportunities. I certainly have experienced that in my client base and I reckon that's changed over time, although I can't really find the data. But if you go back 30 years, at the moment, as I said, 31. Companies headquarters in Melbourne, 41 in Sydney. So there's not that big a gap between Melbourne and Sydney.

Speaker 1: 4:31

I reckon if we were back 30 years, there'd be a much larger gap, and that is, you'd have a lot more headquarters in Sydney than Melbourne and when you look at census data, which I have charted again, you can find that chart on the blog, on the website. In 2001, for instance, Sydney's population was 18% more than what Melbourne's was. By 2021, that gap had closed to only 6% and, based on ABS projections, in terms of population projections, melbourne and Sydney expected to have the same population by 2036. So that's not that far down the track and Melbourne's population is projected to exceed Sydney's from there on in. So Melbourne will be the largest capital city from 2036 onwards, according to those forecasts. So Sydney's relatively higher population compared to Melbourne could go to explaining some of that price gap, although, as I said, that population differential is actually contracted over time, whereas certainly over the last decade or so Sydney's price has become relatively more expensive than Melbourne. So maybe the population growth isn't the biggest explainer here.

Speaker 1: 5:48

I actually think that there's two distinctive geographical features that Sydney has that Melbourne doesn't. Firstly, sydney's encircled by national parks and mountains, which possess that. They pose challenges to really accommodating that growing population because there's limited supply of available land, whereas Melbourne is much more spread out and can continue to spread out beyond the outlying suburbs. Secondly, sydney's market is significantly influenced by proximity to water, particularly waterfront properties that have water views. You know the city's extensive harbourway stretches from Watson Bay down in Melrose Park and along the suburbs of the northern and southern coast. They also offer a lot of water views and walking access to renowned beaches like Manly and Mondi and so forth. And according to research prepared by Knight Frank, waterfront homes in Sydney command a hundred and eighteen percent premium. So these unique factors are probably the biggest contributor to why property is more expensive in Sydney compared to Melbourne.

Speaker 1: 7:03

Now, sometimes Sydney residents, particularly over the last few decades, have continued to complain about traffic congestion. You know, driving anywhere, you know, creates a lot of problems and the problem is that you've got the water that kind of splits the city and you've only got the tunnel and a couple of bridges to go from one side of the city to the other side of the city, and that's been a point of contention or complaint really for Sydney residents. However, if anyone's driven in Melbourne lately with the government's inadvertent commas big build, they would have experienced worse in traffic conditions and I don't think there's going to be a disparity there between that. The impact on housing prices, you know, I think traffic in both cities is bad. It's probably not going to get any better. It's probably only going to get worse over time with greater congestion, and that will essentially mean that if we can't build good infrastructure to alleviate that congestion, that living closer to the city or closer where we're working and we're entertaining ourselves, which tends to be close to the CBD then living close to the city will command a greater premium than what it did maybe 20 years ago, when traffic congestion wasn't as bigger issue.

Speaker 1: 8:18

Now it's worth considering the States different financial situation as well, so both in terms of property taxation regimes and then the underlying health of the state government in each of these locations. Now, of course, victoria is just introduced a temporary in a vertical commas covert debt land tax surcharge. That essentially means a lot more people will pay land tax next year than what they have. Some have never paid land tax before and it will be their first time. It might be a bit of a shock and those bills will start being sent out in early 2024. So it'll be interesting to see how landlords react to that. Also, victoria's debt is projected to rise to around about $165 billion, which is more than most other states combined, and that will undoubtedly put a strain on the state's financial position. And, of course, there might be greater temptation to continue to increase taxes, particularly for property investors, given Victoria generates around about half of their total tax revenue from either stamp duty and land tax are really from the property market.

Speaker 1: 9:32

But having followed these property markets for at least the last couple of decades, you know New South Wales have done some strange things too. There was a period of time where they had a vendors tax, so that is, if you went to sell a property, you'd have to pay some whatever it was called stamp duty or tax at that stage. So not only the purchaser had to pay, but the vendor had to pay as well. That didn't really last. We've had some stamp duty reform in New South Wales as well.

Speaker 1: 10:01

Look, overall, I think it's hard to isolate the impact that state taxes have, and the state government has, on a particular property market, but I don't think it's going to be material and particularly over long run. Sometimes these taxes get introduced and then repealed or wound back by successive governments and so forth. So, and there's a bit of a moving feast as well. But generally speaking, because you know the big problem is well, if I go and invest in Melbourne, you know, is that state going to blow up because they've got so much debt? Are they going to keep knocking on the door of property investors to continue raise taxes? Of course these things could happen, but they tend to be very short term and there's a lot of other things happening behind the scenes or adding to property price growth in addition to these differentials. So, in summary, I don't think it's going to be a big deal in terms of Victoria's debt position or its impact on rolling out higher land tax, at least in the long run. It might do in the short term, but not in the long term. So, really, when it all washes down, it's really probably those geographical factors in that, firstly, sydney is surrounded by national parks and mountains and so it's very difficult for that city to spread out, and then, secondly, a lot of properties that the prices of properties are stimulated by their proximity to water or water views, and it's those two geographic elements that are probably driving Sydney's property values higher than what they are in Melbourne in terms of relative value, and I think it's good to say OK, that's great.

Speaker 1: 11:33

What can we learn? Because, as I said, the actual long term average percentage rate since 1980 isn't that, isn't that different between Sydney and Melbourne. It's just that there's a price gap and so, percentage wise, you're still achieving a good return even investing in either of these markets. So what can investors then learn from this? Well, firstly, we can learn that Melbourne is relatively cheap compared to Sydney. It's more affordable for investors and for looking for an investment grade property. We don't have to spend as much. Both markets will probably perform very similarly over the next 20 or 30 years. So it's not really saying one market is better, it's really just saying one market is more affordable.

Speaker 1: 12:19

But if we really dig down and have a look at what has driven Sydney property prices, I guess what it shows is that if a property has some scarcity is likely it's going to outperform other properties. So, for example, if it's got a unique feature like captivating water views, you know in Sydney you can assume that you're going to probably outperform the median. So it's really that scarcity element. So what can we have in Melbourne that adds to scarcity? Well, we don't have the Sydney Harbour right, and you know there's properties along the beaches, along Port Phillip Bay, which are very attractive, but you know it's a pretty flat area. So unless you're right on the beach line. You know you're not always going to get those views, but there are some properties that do offer panoramic views around Melbourne. So those properties around the Royal Botanic Gardens, elber Park Lake, fitzroy Gardens, even some older style apartments might have, you know, some of the cityscape or Yarra River views, port Phillip Bay, those sorts of things. So those views can be a unique factor. Architectural styles so architectural style and this is true really for most capital cities in Australia, but some locations really put a premium on some architectural styles, whether it's a Victorian Yarra style property or Art Deco, but it can add some uniqueness or scarcity to a particular property.

Speaker 1: 13:53

Vibrant lifestyle hubs are properties near sort of really cafe, culture, rich areas, you know, vibrant dining precincts, entertainment hubs, these sorts of things. So again, a good example in Melbourne might be Hawkesburn Village, which is just on Malvin Road. You know that area around there tends to have its own sort of vibe and is a very attractive area. Of course there's always going to be premium streets in blue chip suburbs. You know every suburb has four or five streets that are considered to be premium and that can add to the scarcity value. And then, lastly, schools are the proximity to in public school zones, for really well renowned public schools or proximity to prestigious private schools. That can really add to demand for property and add that sort of uniqueness. But if we're investing it's always good to consider what does our property have that most other properties doesn't? Because if you can have that scarcity element, you can have that uniqueness. That's, I think, what we can learn from the Sydney market.

Speaker 1: 15:00

So to wrap up, then, I think the price gap between Melbourne and Sydney will likely persist in the future, just because of those geographical reasons. However, I believe Melbourne is really well placed, given its population projections in terms of it being it's anticipated that Melbourne will be larger than Sydney by 2036 and beyond and the fact that Melbourne's performance over the last 10 years has been pretty poor compared to Sydney. So the median house price in Melbourne has appreciated by about 5% Over last 10 years, where Sydney is about eight, just over 8%, which is certainly close to its long term average. So Melbourne's underperformed. It's underperformed over 20 years by about 0.6% as well compared to Sydney. Particularly, over the last say, five years Sydney has performed at 6% where Melbourne's at 2%, and I think that's why, on relative terms, sydney looks so expensive. It's mainly because Melbourne has underperformed but, given those population projections, the fact that when you look at that very long term growth is not a big differential. So over 40 years, for example, sydney's 7.6% and Melbourne 7.3%. So there's a differential there, but that's probably because we've underperformed or Melbourne's underperformed for the last 10 years, but it does show over very long periods of time Melbourne and Sydney will perform relatively similarly. It's really just about what price point are you getting in? What stage of the market are you getting into that particular market?

Speaker 1: 16:40

Okay, check out the charts that I have on the blog, on the website. I hope you, I hope you have a fantastic Christmas. I'm looking forward to sharing lots of new and interesting content with you next year. I've got some more help to allow me to spend more time on developing this content and writing the content. Have a great Christmas and look forward to sharing that with you in 2024 and beyond. Cheers.