The Sydney property market hit a two-year low during the June...

The Sydney property market hit a two-year low during the June quarter when the median house price dropped below $500,000 for the first time since the 2003 September quarter.

In the three months to June, the median house price in Sydney fell by 3.13 per cent to $495,000 and the median unit price dropped 2.63 per cent to $370,000, figures from the Real Estate Institute of NSW show.

Prices fell in all parts of the city, but the middle ring, which includes council areas such as Concord and Hurstville, recorded the biggest drop, 8.95 per cent.

The smallest fall was recorded in inner Sydney council areas, where the median house price dropped 1.6 per cent to $754,000.

The institute's president, Rowen Kelly, said the figures showed the market had "a long way to go" to recovery.

"It is a soft marketplace, the market really is relying on first-home buyers and established home buyers, they are the major force in the market," he said. "Investors are taking a back seat."

Sydney house sales rose in the quarter to 6586, a 24.66 per cent increase on the March quarter when 5283 houses were sold. The number of sales in the state increased by 33.77 per cent.

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Mr Kelly said the rise in turnover was welcome, even though the figures were still down on the same period in previous years - the lowest in a June quarter for more than 10 years.

House prices and turnover figures were expected to rise in the next quarter thanks to the Premier's recent decision to axe the vendor duty, Mr Kelly said.

"We're looking forward to an improvement, especially with the abolition of the vendor tax and the reinstatement of the land tax threshold. Investors will start to return."

But the head of property research at Macquarie Bank, Rod Cornish, said investors would not flock back to the market.

"I don't see [the abolition of the vendor duty] changing things too quickly. Investors have been the worst hit and their confidence is still weak. It's going to take time, it's not going to be a sudden turnaround."