The boom in housing prices in Sydney has been widely publicised since the market experienced rapid growth in 2015. This rapid growth was driven by low interest rates, an increase in foreign investment, and increased market speculation.
Since this period of rapid growth, many have speculated whether the Sydney property market was in a bubble which could have concerning consequences for Australia’s economy. A recent report released by UBS could bring much-needed relief to those concerned about the state of Sydney’s property market.
The Global Real Estate Bubble Index released by UBS in late-September identified that Sydney’s property market is now “highly overvalued” rather than a “bubble risk.” The report noted that the bubble risk in Sydney peaked in 2017. With this market correcting by 5% since its highest risk period, prices have stabilised. The Sydney market is behind Hong Kong, Munich, Toronto, Vancouver and London on the list of markets that are at risk of being in a pricing bubble.
The Sydney housing market was determined to be “highly overvalued” in UBS’ report due to the ratio of inflation-adjusted values to rent and income growth. Inflation-adjusted home values in Sydney are 50% more than in 2013, while rent and income growth has increased in just single digits.
“Rising interest rates and tighter lending conditions can abruptly end a real estate boom if property becomes too pricey, as the current example of Sydney shows,” the report stated.
In the past, investors have tracked interest rate rises as an indicator of potential market corrections. The current low-interest rate environment in Australia, however, has meant that regulators have been using other measures to mitigate market risks. One of the key measures includes tightened lending criteria for investors and owner-occupiers.
Other important criteria that can be a leading indicator of a market correction includes price-to-income ratios, price-to-rent ratios, changes in mortgage-to-GDP ratios, changes in construction-to-GDP ratios, and the price-city-to-country indicator.
In the report, UBS also noted that the Sydney property market is a model for what can happen in markets where home values have the potential to burst. While the Sydney property market may not be back to regular value levels, the recent market correction indicates that the risk of a pricing bubble has decreased.