Sydney and Melbourne property markets have rebounded over the past few months, but price gains have not been uniform.

Prices are rising in most segments of the two capitals and the turnaround has been faster than most expected, but some price points stand out.

Sydney houses in the $1 million to $1.5 million price range in the inner west, north-west and southern suburbs have seen the biggest jumps.

In contrast, less-expensive Sydney units have fallen in price, notably on the central coast.

In Melbourne, houses worth around the $1.1 million to $1.4 million mark have seen prices jump by about 10 per cent in the past six months, mainly in the inner city and inner bayside regions. For units, prices have increased most for mid-price units.

The upper-end of the Sydney and Melbourne property markets have historically led recoveries. This upswing looks to be broadly following this historical pattern, although the biggest price rebounds are occurring in mid to higher-priced areas rather than at the absolute top-end of the market.

This article takes an in-depth look at the rebound in the Sydney and Melbourne markets.

The typical house and unit has rebounded in Sydney and Melbourne

There has been a clear turnaround in the Sydney and Melbourne property markets over the past six months.

Domain’s latest property price data from the September quarter shows that stratified median house and unit prices in Australia’s two largest cities had their biggest quarterly jump since the 2016-17 boom period. The median price is the most closely watched price statistic as it tracks what is happening to the typical house or unit in a city.

In Sydney, the median house and unit price increased by 4.8 per cent and 2.6 per cent respectively over the September quarter. This followed the June quarter when prices stabilised, meaning Sydney property prices are higher than six months ago. House prices have regained almost one-third of the value lost during the downturn, but are still below their 2017 peak.

In Melbourne, median house and unit prices jumped by 4.1 per cent and 3.7 per cent in the September quarter. Over the past six months, house and unit prices are up by 5.3 and 7.1 per cent. Melbourne’s house prices have regained more than half of what was lost in the recent downturn, but are still 6 per cent below their late 2017 peak (the median unit price is at a record high).

The rebound in prices follows the biggest property price correction in Australia’s two major cities since the 1980s. But the turnaround is not evident across the country. While Hobart prices continue to rise, prices fell or were steady in most other capital cities. However, there are some early signs of a pick-up in these cities in the past couple of months.

Mid-priced and expensive homes have rebounded the most

The above analysis looked at median capital city house and unit prices. But the median price doesn’t tell the whole story.

More detailed analysis below looks at price movements across price segments and regions. This analysis shows that while prices are rising in most segments and regions of the Sydney and Melbourne markets, the rebound has been most significant in mid to higher-priced areas in Sydney and Melbourne. In contrast, prices on the outskirts of Sydney and Melbourne have generally been stagnant or risen only slightly, while unit prices in some parts of Sydney have kept falling.

First, Sydney and Melbourne house and units are broken into five different price segments. These “price quintiles” are obtained by ranking all property sales in order from cheapest to most expensive and then calculating the median price of each 20 per cent of sales (e.g. the fifth price quintile for Sydney houses is the median price of the most expensive 20 per cent of houses sold in Sydney each quarter).

In Sydney, house prices have jumped the most for houses in the third and fourth price quintiles (so houses around the $1 million to $1.5 million price range) (see table). In the past six months, houses in the fourth quintile have jumped 8.6 per cent and houses in the third quintile have increased by 6.8 per cent. In contrast, house prices for the top 20 per cent (the fifth quintile) were unchanged and prices have only increased 1.4 per cent for houses in the second quintile.

For Sydney units price changes overall have been smaller. Prices increased the most for units in the fourth price quintile, by 2.5 per cent. These are units priced around the $800,000 mark. Unit prices in the lowest quintile, which are in the $450,000 price range, fell by 2 per cent over the past six months.

House and unit prices in Sydney’s second-highest price quintile increased most over the past six months Median house and unit prices in each Sydney price quintile, September quarter 2019 House price House price, 6 month % change Unit price Unit price, 6 month % change 1st quintile $600,000 3.4% $450,000 -2.1% 2nd quintile $730,000 1.4% $605,000 0.8% 3rd quintile $1,020,000 6.8% $686,750 1.0% 4th quintile $1,455,000 8.6% $830,000 2.5% 5th quintile $2,110,000 0.0% $1,000,000 0.5% Notes: Price quintiles are obtained by ranking all property sales each quarter in order from cheapest to most expensive and then calculating the median price of each 20 per cent of sales. Source: Domain Group.

In Melbourne prices have jumped by more than in Sydney. House prices in the fourth price quintile increased the most, by just under 10 per cent over the past six months. These are houses worth around the $1.1 million mark. The most expensive quintile had the second-largest rise of 4.1 per cent. The bottom three price quintiles saw a rise of around 3 per cent. Unit prices rose across all price segments, but jumped the most in the second and the fourth price quintiles (which have a price point of around $500,000 and $550,000 respectively).

House prices in Melbourne’s second-highest price quintile have jumped most over the past six months Median house and unit prices in each Melbourne price quintile, September quarter 2019 House price House price, 6 month % change Unit price Unit price, 6 month % change 1st quintile $555,000 2.8% $392,000 4.5% 2nd quintile $660,000 3.1% $500,000 9.4% 3rd quintile $776,000 3.5% $530,000 3.9% 4th quintile $1,080,000 9.8% $547,000 7.8% 5th quintile $1,510,000 4.1% $626,500 2.1% Notes: Price quintiles are obtained by ranking all property sales each quarter in order from cheapest to most expensive and then calculating the median price of each 20 per cent of sales. Source: Domain Group.

This pattern identified in the price quintile analysis above is similar when looking at price growth across regions within Sydney and Melbourne.

In Sydney, house prices have jumped most significantly in the inner west, northwest and southern parts of Sydney (see table below). These regions have a median price of $1.1 to $1.5 million, which aligns with the third and fourth price quintiles identified above which increased in price most.

For units, the northern beaches was the standout region, with the median price jumping 10.6 per cent in the past six months. Again, this aligns with the strong growth in the fourth price quintile, which had a median price close to the median price for units in the northern beaches ($830,000 versus $885,000). Unit prices fell the most on the Central Coast, which is the most affordable part of Sydney to purchase a unit.

Property prices have increased most in mid to high-priced areas regions of Sydney Sydney regions, median house and unit prices and six-month price changes, September quarter 2019 Sydney region House price House price, 6 month % change Unit price Unit price, 6 month % change Lower North Shore $2,330,000 5.2% $920,000 -0.5% City and East $2,180,000 -3.9% $940,000 4.3% Northern Beaches $1,696,000 2.2% $885,000 10.6% Upper North Shore $1,620,000 2.9% $745,500 3.5% Inner West $1,550,000 10.7% $762,000 5.5% North West $1,250,000 8.7% $677,250 -0.4% South $1,125,000 8.7% $660,000 -1.5% Canterbury Bankstown $860,000 3.0% $510,000 -1.9% West $700,000 2.5% $544,000 -1.1% South West $695,000 3.7% $455,000 1.1% Blue Mountains $650,000 0.3% — — Central Coast $616,500 1.5% $426,500 -10.2% Notes: Minimum 50 observations for a (non-stratified) median price (insufficient observations for Blue Mountains units). Australian Property Monitor city regions. Ordered by September quarter 2019 median house price. Source: Domain Group.

Melbourne’s inner-city and inner-southern bayside regions saw the strongest price growth over the past six months of around 10 per cent. These areas have a median house price of $1.2 million. This aligns with the fourth quintile house price of $1.1 million, which jumped by 10 per cent over the past six months.

For units, the outer-east and the north-east were the standout regions, with the median unit prices jumping by 19.6 per cent and 14.1 per cent respectively over the past six months.

House and unit prices have increased most in mid to high-priced areas regions of Melbourne Melbourne regions, median house and unit prices and six-month price changes, September quarter 2019 Melbourne region House price House price, 6 month % change Unit price Unit price, 6 month % change Inner East $1,340,000 4.7% $604,250 -1.7% Inner South $1,234,567 9.2% $606,000 4.5% Inner $1,205,000 10.6% $540,000 8.0% Outer East $760,000 7.2% $565,000 14.1% North East $687,500 1.9% $524,999 19.6% Mornington Peninsula $685,000 2.2% $460,000 0.8% South East $635,000 1.6% $460,000 9.5% North West $611,500 1.9% $481,750 0.4% West $598,000 3.1% $406,000 1.4% Notes: Minimum 50 observations for a (non-stratified) median price. Australian Property Monitor city regions. Ordered by September quarter 2019 median house price. Source: Domain Group.

The top-end of the market tends to lead in Melbourne, and to a lesser extent in Sydney

Research has found that the top-end of the Melbourne market has led the overall market in previous cycles. Historically, this pattern is also apparent in Sydney, although it is not as well-defined as it is in Melbourne. This pattern is also apparent during downturns, with the premium areas of the Melbourne and Sydney markets leading the correction that began in 2017.

The graph below of six-month annualised price growth for Sydney and Melbourne price quintiles shows that more expensive properties typically rebound first, particularly in Melbourne. The red and green lines in the graph typically have turning points before the lower price segments. This graph also highlights that property price growth is typically more volatile at the more expensive end of the Melbourne and Sydney property markets.

The 2019 rebound aligns with recent cycles, although it is slightly different as the turnaround has, in general, been led by properties in the fourth quintile. So while it’s not the absolute premium end of the market rebounding the fastest, it is still the more expensive properties and regions that are the epicentre of the recovery.

Other indicators also point to a turnaround

Domain’s price data aligns with CoreLogic’s price data, which showed a 3.5 per cent increase in dwelling values in the September quarter. Prices paid at auctions have also increased significantly over the past few months. According to Domain’s auction data, the average price paid at auction increased by 6 per cent in Sydney and 10 per cent in Melbourne in the six months from April to October.

Numerous non-price indicators also show the Sydney and Melbourne markets have rebounded significantly over the past few months.

Auction clearance rates are around 70 per cent in Sydney and Melbourne, their highest point in over two years. Clearance rates around this rate historically aligns with annual property price growth of around 10 per cent.

Property market confidence has rebounded and is now above average, according to the NAB Residential Property Survey. Expectations of house price growth have also jumped.

There’s also more buyer interest. There have been more views of properties on Domain’s website and apps compared and the average number of people attending open for inspections has increased compared to early winter. Home buying intentions are approaching record highs. The significant rise in property sales over recent months is also a sign of a market rebound.

Conclusion: the market has bounced back, which is not good for affordability

It’s clear that the Sydney and Melbourne markets have rebounded over the past three to six months, with the turnaround most significant among mid to higher-priced areas and properties. The turnaround has been rapid, but Sydney and Melbourne house prices still remain below their 2017 peak.

Based on analysis of previous cycles, it is not unusual for prices for less-expensive properties in Sydney and Melbourne to be stagnant or still falling in price at the beginning of an upturn. If things proceed as they have historically, the bottom end of the market may see price growth in 2020, although as prices in less expensive areas tend to be less volatile, prices may not rebound as much as more exclusive areas. Other capital cities, most likely Brisbane, Perth and Canberra, may also follow Sydney and Melbourne.

But there are a few reasons why history may not repeat itself, and prices in more affordable areas may not rise much. Household debt is at historically high levels, wages growth remains weak, house prices are already very high in Sydney and Melbourne, and the banking regulator may intervene in the lending market if the market overheats, as it did over the 2014-17 period.

While rising property prices should give the economy a boost, a return to boom-time conditions in Sydney and Melbourne would not be a good development. It would make housing even more unaffordable and increase already high debt levels. Ideally the rebound would only be modest, but there are growing signs that price growth could potentially be in the double digits in 2020.