Understanding Australia’s market polarity

In September 2021, progress in the housing market would have felt the most difficult. If you owned a home in the lower end of the market worth around $494,000, you would have felt furthest away from the top of the market, which was worth $1.12 million at the time, more than 2.3 times your starting point.

Market polarisation is the gap between the high and low ends of the market. High polarisation makes upgrading your home incredibly difficult. You're either stuck with basic housing or need to make an enormous financial leap to get something better. First-time buyers might find entry-level options, but moving up the property ladder becomes nearly impossible.

Since then, Australia's housing market has converged significantly to a gap of just 1.9 times. Between September 2021 and now, the high end of Australia's housing market grew by just 15 per cent to $1.29 million, while the lower end surged 35 per cent to $667K.

The "new normal" has definitely favoured the lower end of the market far more than the higher end.

What's driving this reversal? From 2019 to 2022, prices across all segments showed incredible growth fuelled by low interest rates and quantitative easing. This environment disproportionately benefited wealthier buyers who could quickly leverage cheap credit into real estate investments. However, when conditions tightened and interest rates jumped to 4.4 per cent, these buyers pulled back first and the fastest.

The reason lies in the fundamental difference between market segments. The higher end includes investment properties, speculation, and discretionary upgrades - purchases that can be delayed or abandoned when conditions turn unfavourable. In contrast, the lower end represents essential housing that people need regardless of market conditions.

This creates two distinct demand patterns. Luxury demand is almost binary with wealthy buyers having the ability to wait for better conditions or invest elsewhere. But essential housing demand never disappears; it relocates. When buyers are priced out of inner suburbs, they move to outer areas. When priced out of Sydney and Melbourne, they shift to Brisbane, Perth, or Adelaide.

This spillover effect explains why the lower end has outperformed. As prices have grown consistently over the last decade, essential housing demand has cascaded into previously affordable areas, driving up their values.

But these national trends play out very differently across Australia's cities, largely because the luxury housing market is heavily concentrated in just two locations.

Sydney has extensive high-end options from harbourfront mansions and penthouse apartments to prestigious suburbs that can reach astronomical prices. While Sydney's affordable homes are already the most expensive among major cities, its luxury properties cost more than double the high-end offerings in any other Australian city. This creates a price gap of 2.1 times between Sydney's high and low ends.

Melbourne offers a unique contrast. The city holds large volumes of entry-level housing alongside ultra-premium properties. Melbourne's high-end market ranks second nationally for price, while its low-end segment ranks as the third most accessible. This creates a 1.9 times gap between high and low ends.

Brisbane, Perth, Adelaide, and Canberra cluster together with much more balanced markets with only 1.5-1.6 times gaps. This raises an important question: If most cities have relatively balanced markets, why does the national price gap still sit at 1.9 times? The answer lies not in what's happening within cities, but between them. When we say the national price gap is narrowing, it's not just about luxury retreating within cities, it's about most Australian cities becoming more similar to each other, even as Sydney remains in a league of its own.

Among the most polarised suburbs, the gap between high and low ends ranges from 2.0 to 2.6 times.

Interestingly, despite being the most polarised city, Sydney only appears twice on this list, suggesting its polarisation occurs between suburbs (east vs west) rather than within suburbs. In contrast, Melbourne’s Victorian-era development appears to have created a larger variety in housing types within prestigious areas. Suburbs like South Yarra and Toorak contain everything from heritage terraces to grand mansions, creating significant internal price ranges.

Brisbane appears twice with Hamilton and Ascot, while Perth appears once with Mosman Park-Peppermint Grove. However, there is a pattern with every polarised suburb being a luxury area. The ‘low’ end of these suburbs all exceed $1 million, while the high ends mostly surpass $3 million.