Australia's property market has become a tale of two cities based on their relations with foreigners.

Sydney prices slid by 0.5 per cent in October but the story was very different in Melbourne where real estate values actually went up by half a per cent.

It wasn't just a monthly once-off, either, with data from CoreLogic showing Sydney property prices dropping by 0.6 per cent during the quarter as Melbourne prices surged ahead by 1.9 per cent.

Sydney property prices slid by half a per cent in October as banks become stricter on investors (Palm Beach in the city's north pictured) 

Sydney property prices slid by half a per cent in October as banks become stricter on investors (Palm Beach in the city's north pictured) 

Sydney property prices slid by half a per cent in October as banks become stricter on investors (Palm Beach in the city's north pictured) 

CoreLogic's head of research Tim Lawless said Victoria’s record breaking migration rate was creating unprecedented housing demand in Melbourne.

'Additionally, strong jobs growth and a healthier level of housing affordability relative to Sydney are also supporting continued growth in housing values in Melbourne,' he said.

Victoria's population growth is well above the national average, surging by 2.4 per cent in the year to March, compared with 1.6 per cent in New South Wales – a level in line with the national growth average.

Median house prices in Melbourne of $710,420 are also still more affordable than Sydney's $905,917. 

Tighter lending rules appear to be turning off investors in Sydney, many of who come from China.

Victoria's high migration rate is driving demand for housing in Melbourne (Flinders Street Station in the city centre pictured)

Victoria's high migration rate is driving demand for housing in Melbourne (Flinders Street Station in the city centre pictured)

Victoria's high migration rate is driving demand for housing in Melbourne (Flinders Street Station in the city centre pictured)

'Lenders have tightened their servicing tests and reduced their appetite for riskier loans,' Mr Lawless said.

Economists at Swiss financial services giant Credit Suisse are also convinced that a slowdown in Chinese demand for Australian real estate is hitting the Sydney market.

'Over the past year, Chinese capital flows have fallen considerably, in part reflecting the impact of stricter capital controls,' they said in a research paper.

Melbourne house prices surged by 1.9 per cent during the quarter (upmarket Toorak pictured)

Melbourne house prices surged by 1.9 per cent during the quarter (upmarket Toorak pictured)

Melbourne house prices surged by 1.9 per cent during the quarter (upmarket Toorak pictured)

Australia's house prices are a tale of two cities, with Sydney going down and Melbourne rising

Australia's house prices are a tale of two cities, with Sydney going down and Melbourne rising

Australia's house prices are a tale of two cities, with Sydney going down and Melbourne rising

'This fall foreshadows weakness in New South Wales housing demand in the year ahead.'

A drop in Sydney auction clearance rates to below 60 per cent is seen as another ominous sign of flagging demand from Chinese investors.

'The failure of local variables to explain the housing cycle suggests that there must be a strong foreign component to demand,' Credit Suisse said. 

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