A surge in property prices across Brisbane, Adelaide and Perth could see Melbourne lose its place as Australia’s No.2 market, a leading expert says, as higher interest rates spark a sharp growth divide between suburbs.

My Housing Market chief economist Dr Andrew Wilson predicts more price records will be broken in smaller capitals this year as buyers look to more affordable areas.

It could lift Brisbane – where 85 per cent of suburbs are posting record-high prices – towards median valuations in excess of $1 million, he said, which would top Melbourne prices.

Perth and Adelaide are also experiencing sharp price increases despite higher interest rates, while Melbourne and Sydney have experienced more subdued conditions since hikes began.

“Perth, Adelaide and Brisbane are headed for double-figure growth this year,” Wilson said.

“There are still affordability advantages in those three markets, and income levels are similar to Melbourne and Sydney.”

‘Significant diversity’

CoreLogic research director Tim Lawless said on Wednesday that a divide has opened up in national housing markets since the Reserve Bank began hiking rates in April 2022.

Over the course of more than four percentage points in cash rate increases since then, property prices rose to record highs in 49 per cent of suburbs and fallen in 37 per cent.

Nationally, the market has risen only 2.8 per cent since hikes started, much lower than the meteoric 31.7 per cent gain in values in the two prior years.

”The perception might be that property values are continually increasing, but we can’t forget the short and very sharp downturn that occurred in the immediate aftermath of the first rate increases,” Lawless said.

“Since the market bottomed there has been 15 consecutive monthly increases in values nationally, but that performance is not indicative of the entire market.

“Underneath the headline figure there’s significant diversity in the housing market’s performance.”

Housing divide amid rate hikes

The housing market divide splits broadly across Brisbane, Perth and Adelaide – which are experiencing strong growth – and then Melbourne, the ACT and Hobart at the other end, which are struggling.

Wilson said smaller capitals have been experiencing somewhat of a “catch up” effect in which cheaper housing and strong migration have driven strong demand despite rates.

Melbourne, where prices have fallen since April 2022, has meanwhile been plagued by hangovers from Covid-19, which left it vulnerable to the impact of rates.

CoreLogic said on Wednesday that 87 per cent of suburbs in Melbourne have posted smaller values since rate hikes began in 2022, which is second worst only to Hobart at 98 per cent.

“Melbourne is still a little constrained with confidence,” Wilson said.

“The markets dragging the chain are the higher prices markets in the eastern suburbs.”

In contrast, only one suburb has fallen in value between Adelaide and Perth since 2022, while house values across Brisbane are up an astonishing 50.9 per cent in that time.

“Even in the face of higher mortgage rates and reduced borrowing capacity, buyers – including investors – have turned to Perth and Adelaide for their relative affordability, strong rental conditions and higher gross rental yields,” Lawless said.

“The demand has outweighed supply, which has contributed to pushing values significantly higher over the past year.”

Slowdown looms

The heat is coming out of the market in Brisbane though, with slower rates of growth evident in early 2024, which Wilson said makes sense as the affordability gap shrinks.

There has also been a surge in sellers hitting the market in 2024, with auction clearance rates sitting around record highs as home owners chase higher yields that have come from rising prices.

All else equal that means more choice for buyers and weaker price growth, Wilson said.

“We have to start looking at affordability issues. Prices can’t continue to rise as steeply in those markets [Brisbane, Perth and Adelaide].”

Perth has shown few signs of slowing just yet, with Lawless saying that prices are approaching the highs seen during the pandemic when rates were at rock bottom.