Sydney property market cooling ahead of Melbourne's

According to data from CoreLogic RP Data, Melbourne median property prices increased by 2.5% in January, compared to 0.5% in Sydney. This sees Melbourne's YoY growth reach 11%, higher than Sydney's 10.5%. However, Sydney posted a sub-50% clearance (45.2%) rate last weekend, which Macquarie analysts suggest usually indicates a falling property market. In addition to this, gross rental yields for Sydney (3,2%) and Melbourne (2.9) were close to all-time lows. 

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources , and more. Learn More

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.