Does Australia Have a Housing Bubble? No, but Sydney Might

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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.

Mat Spasic
Contributor, The Daily Reckoning

The Daily Reckoning
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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6 Comments on "Does Australia Have a Housing Bubble? No, but Sydney Might"

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Graeme
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nonsense by any metric you care to name housing in Australia is seriously overinflated.

david
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The main reason for high and rising house prices is the fact that huge amounts of money are created through mortgage lending by our banks. House prices are driven by the ability of banks to create money out of thin air ( when someone takes out a loan/ goes into debt). Not in the public interest.

Elias
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Just hope your not holding the bag when the bubble pops

John
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The stupidity of the average Chinese investor must be something to marvel at – why invest in Sydney and signup for years of negative cashflow when properties are clearly at or near their peak value? When properties are overdue for a price correction? I thought smart investors looked for undervalued assets, not assets in bubbles. Just look at how they are buying apartments in China’s new ghost cities, which they must know can never be tenanted. Sydney has a major bubble that will go the way of the US and Ireland – all asset bubbles burst without exception It will… Read more »
James
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The federal government has nothing to do with interest rates – this is determined by the RBA

tony
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i like cheese but cheese don’t grow on trees

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