UNDERPERFORMING property markets, sharemarket instability, rising rents and falling interest rates are set to push Melbourne and Sydney into the lead of the property charge in 2009.

According to the Real Estate Institute of Australia, the Melbourne and Sydney property markets have been the worst performers in Australia over the past five years.

The median price of property in Melbourne had an average annual growth rate just over 4.5 per cent between 2003 and 2008. This compares with an annual growth rate of about 9.5 per cent between 1980 and 2003.

Sydney's long-term growth rate stands at 9.12 per cent, but in the past five years its median has not been able to manage an annual growth rate above 1 per cent.

The Melbourne and Sydney property markets have under-performed their long-term average by a long way. In contrast, the Perth market has been the stand-out over the past five years due to the mining boom. The median value of property in Perth has grown by more than double the long-term average, with growth rates of about 16 per cent each year.

With the exception of Melbourne and Sydney, every capital city in Australia has grown at rates equal to or above their long-term average since 2003. This trend started in 2003 when many Melbourne and Sydney-based property investors deserted the market in favour of a resources-driven sharemarket boom.

As 2008 draws to a close, however, these investors will begin to search for the next emerging market. Property in the traditional mining cities and towns will lose its investment appeal in 2009 as global demand for natural resources continues to soften. Many of the large mining companies will be keen to reduce costs and they will firstly cut jobs. Rio Tinto has recently announced it will lay off 14,000 workers, cutting the annual wages bill by over $1 billion. Falling wages and softening demand for homes will put downward pressure on property prices in these areas.

History tells us that when the sharemarket loses momentum, the Melbourne and Sydney property markets surge. In the two years following the 1987 crash, the median property price in Melbourne grew from $100,000 to $140,000. Sydney's median climbed from $130,000 to $185,000. Both cities had growth of about 20 per cent each year, more than double their long-term average.

A similar trend emerged after the "Tech Wreck" and September 11 savaged the sharemarket in 2000 and 2001. The Melbourne and Sydney property markets again felt the effects of returning investors looking to protect their investments from sharemarket volatility. Melbourne and Sydney property markets grew by almost 20 per cent each year.

Once investors shake of the effects of the 2008 sharemarket crash, falling interest rates and climbing rental returns will entice them back to property.

It took six years for interest rates to rise 3 per cent but only three months to fall 3 per cent and they still have further to fall in the early part of 2009. At the same time, rental returns have been steadily growing and with vacancy rates of about 1 per cent they will continue to rise. Property investment is rapidly returning to levels of affordability not seen for almost 10 years.

As investors head back to property, they will look for the markets with the greatest upside and in Australia there is no doubt these are Melbourne and Sydney.

In 2009, investors will begin to swing away from the sharemarket and property in the mining states. They will look for the traditional property safe havens of the eastern states.

Mark Armstrong is a director of Property Planning Australia, propertyplanning.com.au, and The Property School, thepropertyschool. com.au