Melbourne has replaced Sydney as the worst performing national capital for residential property with prices falling by about 5 per cent in the past three months, according to analysis by investment bank Morgan Stanley.

Housing sentiment and expectations about prospects for real estate are plunging to near-record lows with most people nominating bank deposits a preferred option, despite low, single digit savings rates, its research shows.

Melburnians, which until recently has remained buoyant despite falls in other capitals, are the most pessimistic about investment in property, it shows.

Melbourne has replaced Sydney as the worst performing national capital for residential property with prices falling by about 5 per cent in the past three months, according to analysis by investment bank Morgan Stanley. Paul Rovere

But the median cost of housing in Melbourne and Sydney remains up to twice property costs in New York and Seattle, which are affluent east and west coast US cities home to major technology and financial centres.

Despite the growing local gloom, there has been a spike in the number of investment properties, particularly home owners buying a single investment property, which is contributing to a spike in household debt, despite record low cash rates.