A decade ago Melbourne was considered to be the decaying heart of the rustbucket state.

Not any more. A new report predicts the resurgent Victorian capital, with a population now of 3.9 million, will overtake Sydney as Australia's biggest city within the next 30 years.

The report by economic forecaster BIS Shrapnel for the Urban Taskforce also warns that unless the New South Wales Government undertakes urgent reforms, Sydney, with a population now of 4.5 million, will become the nation's retiree capital, avoided by migrants and sliding further into economic malaise.

The report, Going Nowhere, follows other figures this month from the Bureau of Statistics showing that Melbourne's growth is outstripping that of Sydney.

Last year Melbourne's population grew by 93,500, or almost 1800 new arrivals a week. In contrast, Sydney attracted about 1600 a week.

"The gap between Sydney and Melbourne is already closing rapidly," Urban Taskforce chief executive Aaron Gadiel said. "Sydney's lead has been reduced by 20 per cent in the space of just eight years.

"Over the past decade, Melbourne has proved far more capable of accommodating extra people than Sydney."

The report said that with Melbourne's population projected to reach 5.7 million by 2036, Victoria was building new homes at twice the rate of Sydney. While last year was Victoria's best for building new homes, it was the worst for NSW since housing statistics began.

The report said that without reform, by 2020 NSW could be in a downward spiral as Australia began in earnest to face the challenges of a greying population - poor housing affordability, lower immigration, fewer workers, a shrinking tax base and a greater likelihood of an alarming decline in economic growth.

It said that Sydney's decline was fuelled by a housing shortage that pushed housing prices up dramatically, hitting the state's share of overseas migration.

Until the late 1990s and the housing price boom the state's share of national net overseas migration had remained at a steady 42 per cent. In the past decade that share had fallen to about 30 per cent.

To win back its earlier share of migrants, Sydney would have to build 31,000 new homes a year - two-and-a-half times the number built last year.

"If we see a business-as-usual approach by the State Government, Sydney will fail to meet its metropolitan strategy housing targets," Gadiel said.

"New housing construction will limp along at the average of the 2000s."

This meant Sydney's annual rate of population growth would fall from a projected 1.1 per cent to just over 0.9 per cent a year.

Melbourne, with a long-term population growth of 1.3 per cent a year, would displace Sydney as Australia's largest city in 2037.

"This should alarm every Sydneysider," Gadiel said.