Peter Carey, Oscar and Lucinda (1988) — A Victorian-era novel about a glass church transported across the Australian wilderness to the far north. Carey grew up in Australia and his understanding of the country's colonial anxieties and landscape is deep. Not set in Sydney specifically, but essential for understanding what the colonial project meant to those involved.
Thomas Keneally, The Chant of Jimmie Blacksmith (1972) — Based on the true story of a half-Aboriginal man who goes on a killing spree in New South Wales in 1900. Brutal, precise, and important — one of the best Australian novels for understanding the violence at the foundation of white Australian society.
Delia Falconer, Sydney (2010) — Part history, part memoir, part meditation on the city and harbour, Falconer's book captures the particular light and moods of Sydney with more precision than most travel writing manages. Read it before or during a stay and the city will look different.
Robert Hughes, The Fatal Shore (1986) — Hughes was Sydney-born and this is the definitive account of the convict transportation system that founded the city. Dense and brilliant: it explains why Australians have the attitude they do toward authority, and why The Rocks looks the way it does.