As of March 31, Sydney households spent an average 35.1 per cent of their income on mortgage repayments, up from 32.8 per cent in 2014, Moody's said in a statement April 27. That compared with 27 per cent for the entire country, the credit ratings firm said. Sydney's market was most at risk of a further decline in housing affordability, it said.

Cheap money – official interest rates are at record lows and average floating mortgage rates at a five-decade low – are underpinning the price gains. They are also proving a headache for the central bank as it tries to balance stimulating economic growth post a mining boom with housing that is becoming increasingly unaffordable.

Reserve Bank of Australia governor Glenn Stevens said that while "rather exuberant" Sydney home prices shouldn't dominate monetary policy, they can't be completely ignored and a balance has to be found.

Wages in NSW grew 0.4 per cent in the December quarter from the previous three-month period, close to the lowest on record, while home prices climbed 2.3 per cent in that time.

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Auction rates

Auction clearing rates hit a record on April 18, with 88 per cent of the homes that went under the hammer purchased. The number dropped to 79 per cent on April 25, according to the data.

"There may well be some kind of moderation or even correction in house prices versus wages at some point in the future," said Saul Eslake, the Melbourne-based chief economist at Bank of America Merrill Lynch. "Although that probably won't begin to happen till interest rates start to move up."


Twenty-five out of 28 economists surveyed by Bloomberg expect the RBA to cut the rate by 25 basis points when its board meets May 5. The central bank held its overnight cash target at a record-low 2.25 per cent April 7 and said it could ease at future meetings. Traders see a 55 per cent chance of a rate cut next month, according to swaps data compiled by Bloomberg.

Home values in New York rose 1.7 per cent and wages increased 3.2 per cent in the two years to June 2014, according to data from RealtyTrac.

Home prices across eight Australian capital cities climbed 7.4 per cent in the year to March 31 and Sydney values soared at almost double the rate, according to CoreLogic. In comparison, prices rose 6.4 per cent in New York in the year to March 31, according to Zillow. They increased 12.9 per cent in London in the 12 months to February 28, according to Hometrack.

Investors are driving the demand in Sydney with half the mortgage approvals, excluding refinancing, flowing to rental properties in February, according to government data. Australia's banking regulator said it will determine this month whether to take additional supervisory action against lenders after urging them in December to limit investor mortgage growth to 10 per cent a year and maintain sound lending standards.

Landlords are ignoring a slide in rental yields. Gross rental yields fell close to a record low 3.6 per cent in March in Sydney compared with 3.8 per cent a year earlier, according to CoreLogic.

"When the Sydney housing market starts to lose momentum, there is some risk that recent investors could be left holding a very expensive but low-yielding asset," said Tim Lawless, head of research at CoreLogic.

Bloomberg