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The Home Prices of Sydney – Popping Bubble

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“A comfortable house is a great source of happiness. It ranks immediately after health and a good conscience”- Sydney Smith

Australian Housing Bubble issue has popped up again. It has left many Australians a question mark that is there really a housing bubble. The real estate survey of the world has declared Australia as the most unaffordable housing in the world. Before going into this deep and sensitive report let us see what actually is Housing Bubble!

According to Wikipedia the Australian property bubble refers to the hypothesis that real estate in Australia is overvalued. The hypothesis has been proposed since at least 2001, yet Australian house prices have continued to rise. According to one Treasury official, Australian property market is a significant bubble. Various industry professionals have suggested it is not a bubble and that house prices have the potential to keep rising in line with income growth. But the observers have accused state governments of restricting land supply, driving up the cost of land, lots, and thus homes.

Thus a real estate bubble is a type of economic bubble that occurs periodically in local or global real estate markets. It is normally characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels relative to incomes and rents, and then decline.

In Australia house prices were up in relative to incomes and rents during the late 1990s and early 2000s, however from 2003 to 2012 the price to income ratio and price to rent ratio have both remained steady. Since 2012 prices have once again risen strongly relative to incomes and rents.

The House Price in Sydney

According to RP Data, house prices have risen by more than 16 per cent in Sydney over the past year, and almost 11 per cent across all the capital cities combined. The current median house price in Sydney now sits at $700,000, $532,000 in Melbourne and $469,000 in Brisbane.

The double-digit price growth over the past decade in Australia’s capital cities has raised concerns from some economists. Figures released from the Australian Bureau of Statistics showed median monthly mortgage repayments increased by 38.5 per cent over the five years to 2011 to $1800, while in the same period, median weekly household income increased by only 20.2 per cent.

According to the ABS, three in every 10 households are now suffering mortgage stress — defined as when a borrower pays more than 30 per cent of their gross income into mortgage repayments.

Few month back Sydney and Melbourne outperformed the rest of the Australian property market. An impressive 79% of properties that went under auction over the weekend were sold.

It was the second highest auction clearance rate since September 2009. That was when the government’s First Home Buyers scheme was in full swing and new buyers were flooding in.

It builds on their strong performance this year, with Sydney’s house prices up by 6.4% and Melbourne up by 3.9%. Not that this growth is a good thing for housing affordability.

According to international real estate, Sydney and Melbourne are among the world’s top 10 worst cities for affordable housing. The same doesn’t apply for the rest of Australia, which remains stagnant. Even with cheaper credit, Brisbane has only seen a 0.1% rise in property prices. Adelaide (-0.2%) and Perth (-1.6%) have seen house prices actually decline. That makes for grim reading if you have investments in these cities. But it may also suggest that Sydney has a housing bubble.

Property analysts believe that Sydney is where most auctions are taking place. They agree that Sydney’s market is currently overvalued by 25%. They also think this number could reach 40% by the end of the year.
House prices in other parts of Australia are stagnant for a few reasons. The first is that some local economies are struggling more than others. Mining towns are seeing house prices remain flat as they struggle with lower commodity prices in iron ore and coal. The other factor is that many Australian cities just aren’t as attractive for buyers as Sydney and Melbourne. Sydney in particular is attracting a lot of investment from wealthy foreign investors.

And this explains why some analysts believe that Sydney’s housing market is overvalued. Foreign investors are pushing up prices because Sydney is an attractive place to own property. Both Sydney and Melbourne can count themselves among the select group of global cities that foreign buyers covet. China led the way by contributing AU$6 billion to the Aussie real estate market in 2013. You may also know that much of this foreign investment is going towards luxury properties. One Sydney based property agency believes it will sell AU$200m worth of luxury properties to Chinese investors in Sydney this year.

Sydney’s real estate market will grow in line with low interest rates. If Sydney does have a housing bubble, it is not to pop anytime soon. The federal government is expected to cut interest rates further. This could come as early as May 2016. That will give Sydney an immediate boost to house prices as demand grows.

Rising interest rates are one factor that could lead to a downturn in the property market. Yet, higher interest rates are not likely to be a factor in the next 18 months. You’re more likely to see interest rates drop to 1.5% by 2017, according to the Royal Bank of Canada. That’d be a lift for every property investor across Australia, but it’s a significant boost if you own real estate in Sydney or, to a lesser extent, Melbourne.

Declining prices in Australian commodities is another factor that could affect property prices. If the Chinese economy continues to show declining growth, that could depress the Australian housing market. And the effects of a slowing Chinese economy are already seeing house prices dip in Perth and Adelaide.

As for now it doesn’t seem to be having much effect on Sydney. House prices should continue to rise in Sydney this year. And if you happen to own property in Sydney it is a good news and if you are a first home buyer here then it may be a concern.

Added on 04 Oct 2015 - 09:17