Is There a Risk of a Housing Bubble in Sydney?

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Is There a Risk of a Housing Bubble in Sydney?

May 16, 2016

 According to the UBS Global Real Estate Bubble Index, Sydney is at a real risk of a housing bubble and is one of the riskiest property markets in the world. We investigate if this really is the case and whether you should take the opportunity to sell your property in Sydney, Australia and get out of the market soon, before it takes a turn for the worse.

 Most Australian real estate observers have been saying for quite a while that the home prices in Sydney are grossly overvalued, which makes it impossible for first time buyers to get a decent apartment in the city. The median home price in Sydney is among the highest in the world - $900,000. Some real estate observers have suggested that the figure is actually closer to $1,000,000.

Sydney ranks only next to London and Hong Kong as one of the most overvalued property markets in the world. The Australian government is deeply worried about the situation and has considered raising interest rates. But it is unlikely that the real estate rates would be raised by much above the current levels of 2%.

 Even if the interest rates are raised, it is unlikely to have a transformative effect on the housing market as most of the homes are already locked in long-term low interest mortgage rates. However, there is no doubt that it would arrest the rise in home prices.

Another factor to be taken into account is the rise in unemployment, which could lead to more loan defaults, and hence foreclosing of more properties, and a subsequent correction in home prices.

Indeed, economists at the National Australian Bank (NAB) forecast that Sydney house price growth would decline sharply to a meagre 0.6 per cent this year, compared with double-digit growth achieved over the last three years. The demand from foreign buyers has declined to 11.7 per cent in 2016, compared to 13.6 per cent in 2015.

NAB chief economist Alan Oster says, "It's still a very mature market, but coming off a little bit in Sydney and Melbourne, and they're starting to switch a little bit into Brisbane."

The NAB warns of a sharp correction in Sydney and while it says that it is still a remote possibility as yet, the risks have escalated over the last 6 months. The NAB report warns, "A sharp correction will likely require an external catalyst, triggering a sharp deterioration in the local labour market and/or a wave of Chinese selling. The other possible trigger - a large increase in interest rates - looks highly unlikely in the current environment."

There many who say that property prices in Sydney have already peaked. There are four reasons for this – Australia’s economic growth is clearly and visibly slowing. Australia’s GDP grew at 2% in 2015, and is expected to register a slower growth in 2016.

The population growth is on a decline as well. There are fewer migrants entering Australia today than at any time in the recent past. This has slowed down demand for new homes in Sydney by a bit.

 The regulatory agencies in Australia have sought to clamp down on liberal lending by banks. Banks have raised home loan rates for homebuyers.

The auction clearance rates have dropped from 80% of the auctioned homes sold to 60% of the auctioned homes sold in the span of a year.

 Finally, there has been a lot of new real estate development in Sydney over the last few years which has led to a glut of apartments for sale, thus bringing down prices for everyone. That’s why the future doesn’t appear all too good for Sydney’s real estate market and there is a real risk of a housing bubble in the making.