i'll be with my wife and an 11 month old child during the holiday in Sydney. I'd love to know what people would suggest us checking out during this time of year. Are there any special events, parades, craft markets, anything suggestions on not so touristy things would be great!
There's nothing particularly special that happens in Sydney at Christmas. However, if you're planning to be there for New Year's Eve, you'll see one of the world's great spectacles - the fireworks that centre on Sydney Harbour. There are ways and means of doing this - the cheapest is to stake out a vantage spot with appropriate picnic gear, but there's a range of events and other ways to do it. Here's a good link: http://www.sydneynewyearseve.com/plan-ahead/watching-the-fireworks/
Obviously the main event is at midnight, but with a young child in tow, there's plenty of action from early evening with a family-friendly fireworks display around 9-ish.
The other answers are correct - there are of course some large Christmas trees in places such as the Queen Victoria Building and Martin Pl. The David Jones store usually has some nice window displays. Some streets in the suburbs go all out decorating their houses, but you'll need a car to get out to the suburbs to see them.
Restaurants will obviously have special Christmas menus for Christmas Day.
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I totally agree with Michelle Dunner, there is nothing much you can do in Sydney at this time. If you are really interested in the New Year's Eve. You'd better to plan ahead, as usually you need to go there at least 12 hours to find a good spot.
Unfortunately it's true, Christmas in Sydney is a tad boring. Although they have carols by candlelight in the domain and lots of Christmas displays in and around the city. Your better off saving up for New Years and making that the bigger celebratory day. Or find a family in Sydney and join in their Christmas celebrations :)