Melbourne has plenty of capacity for residential and office construction, the city is well planned and construction is mainly following demand. In Sydney poor planning and a heavy government hand means all new developments are more about squeezing out whatever can be done through the limits of the red tape rather than a response to demand.
Sydney needs to fix its government, the state is being run pretty well under O'Farrell, but local governments including City of Sydney are development hostile. Most of the projects for Sydney listed above in the diagram, were approved by the state as a Part 3A overruling local governments.