Sydneysiders have heard before – a friend, family member, or colleague moves to Melbourne for significantly cheaper housing.
Whether they buy or rent, Melburnians are, on average, spending less on housing than Sydneysiders, enough to entice anyone struggling with Sydney’s seemingly impossible housing market.
And while vacancy rates in Melbourne are the country’s lowest – at 0.8% – its median rent, at $543, is still $180 cheaper than Sydney’s. Only Adelaide has cheaper median rent than Melbourne, which makes the Victorian capital a very tempting proposition for young people or low-income families.
But the difference in housing costs is not a new trend. Melbourne costs have increased a mere 1.6% since the onset of the pandemic, compared with double-digit increases across the country, including 16.5% gains in Sydney.
The difference in median house value is also stark. In May, Melbourne’s median house value was 29.6% below Sydney’s, a dollar equivalent of roughly $382,500. The percentage of household income spent on rent was also much higher in Sydney than in Melbourne, 31.7% compared with 26%. The dwelling value to household income ratio tells a similar story, with Sydney’s ratio coming in at 8.8 compared with Melbourne’s 7.1.
That means the typical Sydney household is spending 8.8 times their median household income to buy a median-priced dwelling, significantly higher than its southern counterpart.
Why is Melbourne housing so much cheaper?
The research director at CoreLogic, Tim Lawless, says the gap in spending on housing between Sydney and Melbourne was quite wide and had grown wider.
“So if you look at Melbourne, coming into the early phases of the pandemic, Melbourne households were spending about 25.9% of their income to pay rent. In Sydney, it was 29.3%.
“And then and that’s blown out to nearly 32% in Sydney now, 26% in Melbourne.
“Melbourne experienced a more substantial drop in value than other capitals through the early stages of Covid, it recorded a softer increase through the upswing and there’s been a significant decline in values through the rate-hiking cycle to date.”
The deputy director of migration and labour markets at the Grattan Institute, Trent Wiltshire, breaks the gap down into long- and short-term factors.
More immediate effects include the pandemic, with the growing number of people in each household almost directly linked to the lifestyle changes people sought during lockdowns.
Wiltshire also says prices and rents rebounded much faster in Sydney than in Melbourne.
“We saw bigger falls in rents and prices in Melbourne, in response to what happened in Melbourne during the pandemic. Harsher and longer lockdowns meant more people left.”
Long-term factors include the natural geography that borders and restricts Sydney, including national parks and mountains that prevent endless, easy expansion.
Another is the simple fact that Melbourne has been able to build more dwellings than Sydney.
According to a report by the New South Wales Productivity Commission, NSW has lagged significantly behind Victoria, and even Queensland, in annual dwelling completions.
Since 1992, NSW has, on average, built around six dwellings for every 1,000 people each year, compared with eight to nine dwellings for every 1,000 people in Victoria and Queensland.
The report also said that the costs of building new dwellings, particularly apartments, were significantly higher in Sydney, making it harder to increase supply and in turn decrease rent.
“So Melbourne’s been able to produce or committed to more development of apartments than Sydney, particularly in the inner city, making their apartment prices cheaper,” Wiltshire says.
“The restrictions on how high you can build, in particular, bind much tighter in Sydney.”
The NSW government announced changes to planning rules on Thursday, with developers able to build higher, wider and faster should they provide more affordable housing.
Will the situation change?
Even Melbourne’s growing population, which is expected to overtake Sydney’s and become Australia’s biggest by 2031-32, won’t put a dent in the housing affordability gap.
Prof Sam Tsiaplias from the macroeconomics research program at the University of Melbourne says there are deeper issues at play which reinforce that gap, not least the income gap between the cities.
“The median income between New South Wales and Victoria is pretty similar, but the distribution of those incomes is quite different. You’ve got a greater proportion of people in that high income bracket in New South Wales than you have in Victoria.
“And that would push up prices at the top end of the market which tends to spill over into other portions of the market as well.”
Tsiaplias says that the rate of population increase will only have a marginal effect on housing.
“I think the difference is a function of policies,” he continued “And I think the difference will remain in the medium term. Population increases are not going to dramatically change house prices and inflation.”
