It’s been yet another week in which Sydney and Melbourne have outperformed the rest of the Australian property market. An impressive 79% of properties that went under auction over the weekend were sold.
It may surprise you to learn that it’s 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.
But if you think that makes the market overvalued — think again. That’s because most of the properties auctioned off were in Sydney and Melbourne. 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.
Demographia, which analyses international real estate, says 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.
Is Sydney’s property market overvalued if demand remains strong?
Property analysts agree that Sydney is where most auctions are taking place. They believe Sydney’s market is currently overvalued by 25%. They also think this number could reach 40% by the end of the year. The reasons for this are the same ones that explain why other cities are flat.
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. The Daily Reckoning’s feature editor Callum Newman last year wrote about why the Chinese are so interested in Australian property, which you can read here.
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 falling interest rates
If Sydney does have a housing bubble, it isn’t likely to pop anytime soon. The federal government is expected to cut interest rates further. This could come as early as May. 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.
For now it doesn’t seem to be having much effect on Sydney. House prices should continue to rise in Sydney this year. And that’s good news if you happen to own property there.
Contributor, The Daily Reckoning