Australian property buyers are underestimating the cost of properties in coveted areas by up to $1.75 million, new data shows, even as prices drop in the current downturn.

Analysis comparing Domain search data to median prices across capital cities from August last year through to the end of July shows buyers are searching at lower price points than sellers are asking for their homes in the same area. The disconnect tended to be widest in inner suburbs, Domain’s Matching Demand Report, released on Thursday, showed.

Domain chief residential economist Dr Nicola Powell said she thought there was probably an element of aspiration in searches for sought-after areas, especially in a moment where prices were falling.

“You don’t know what you can afford in an area until you actually start doing that research and understanding the market dynamics,” she said.

She thought with house prices falling most in prestige areas in Sydney and Melbourne, upsizers were probably looking to see how far their money might go, and finding there was still a reasonable gap between expectations and reality.

“This is where you get that nudging effect and being brought back to reality,” she said. “[Buyers] start to look at other property types, and that’s where townhouses and units and apartments really do have a much greater balance between seller and buyer pricing.”

House buyers in Sydney’s Eastern Suburbs - North region had the biggest gap between their median search price ($3.5 million) and the actual suburb median of $5.25 million.

In Melbourne, house buyers in Bayside, Boroondara and Stonnington were all looking for homes about $1 million below what sellers were asking.

Buyers in Perth’s prestigious Cottesloe - Claremont region had a $1.6 million gap between their budgets and sellers’ hopes.

Median searches in Brisbane’s Inner Region were $1.2 million under the area’s $2.5 million median listing price.

Sydney buyer’s agent Michelle May said houses in prestigious regions – particularly in Sydney – having the largest gap in search and listing prices wasn’t surprising given many Australians browsed real estate listings with no plan to buy.

“Who doesn’t love a little bit of property porn, right?” she said.

But she thought it also reflected a common experience of dealing with first home buyers, many of whom underestimated the real price of a coveted area, noting the same could be true for sellers in the current market.

“I think a lot of vendors overestimate their own property’s value,” she said. “It’s always better than their neighbours’, right? It’s just a natural instinct.”

Melbourne buyer’s agent and managing director at Cohen Handler, Nicole Jacobs, said she would have expected people to be searching above the suburb median, rather than below, anticipating discounts on top-tier properties in a falling market.

“That shows me that people have decided to be conservative in their budgets and what they’re looking for,” she said, given cost-of-living pressures and potential future rate hikes. “[They’re] hoping that the market has pulled back enough for them to be able to find what they want in that lower bracket.”

Across the country, houses in inner ring areas within 10km of the CBD were more likely to see a gap between buyers’ expectations and the listed prices of the homes they were searching for, with Melbourne seeing the second-biggest gap – a $440,000 shortfall from the $1.54 million median listing – after the much tighter Canberra market.

Powell said that Melbourne has a large disparity between house prices in coveted inner-ring suburbs and its more approachable outer rings, which was reflected in the bigger gaps.

“When you compare it to a market like Sydney, where affordability pressure is really evident across the entire city… Melbourne really is the only [city] that has that strong disconnect,” she said.

She thought Melburnians might be waiting to see when and how far “the knife will fall” on houses in prestige areas that have already seen prices tumble up to 20 per cent in the past year.

The gap between buyers’ expectations and listed prices for townhouses and units is significantly less across the board, and in most cities there was a greater proportion of regions where searches were either on par with or above the median listing price.

PRD chief economist Dr Diaswati Mardiasmo said large gaps between searches and listing prices in the top end of the market reveal how buyers whittle down their preferences as they make the hard decision about what they can actually afford to buy.

“[It’s] what I call the sweet spot between want and affordability,” she said, which was driving the gap between buyer and seller prices.

More:

• Property prices
• Property market
• Sydney house prices
• Melbourne house prices
• Affordable housing
• Sales
• Housing slump