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Sydney property prices are “highly overvalued” despite their recent falls, a report from global investment bank UBS has found.
The harbour city escaped being classified as property bubble territory in the latest annual UBS Global Real Estate Bubble Index, but was still considered well above fair value.
Sydney property prices are overvalued, a new report warns.Credit:Peter Rae
The report warned the global housing boom is coming to an end.
House price growth across the 25 cities analysed reached its highest pace this year since 2007 and household debt rose significantly faster than the long-term average, the report said.
It said home prices had drifted apart from incomes and rents during the past decade because of years of ultra-low interest rates.
But mortgage rates have almost doubled on average across the cities studied since mid-last year, which, combined with high prices, means the amount of living space affordable to a highly skilled service worker is one-third less than it was pre-pandemic. Strong jobs markets are also at risk of faltering.
“Inflation and asset losses due to current turmoil in the financial markets are reducing household purchasing power, which curbs demand for additional living space,” Zurich-based Claudio Saputelli, head of real estate at UBS Global Wealth Management’s chief investment office, said in the report.
“Housing is thus also becoming less attractive as an investment, as borrowing costs in many cities increasingly exceed the yields of buy-to-let investments.”
Sydney property prices surged by more than 30 per cent in 2020 and 2021 before “aggressive” interest rate rises and tighter lending standards sharply reduced affordability and started to push prices lower, the report said.
Sydney scored 1.19 on the index. A score of 0.5 to 1.5 is considered overvalued, while anything less is fair value, and anything more is bubble risk.
Cities with the highest bubble risk include Toronto (2.24), Frankfurt (2.21), Zurich (1.81), Munich (1.8), Hong Kong (1.71) and Vancouver (1.7).
AMP Capital chief economist Shane Oliver said Sydney property prices were in the ballpark of 20 to 30 per cent overvalued.
“It’s been an ongoing issue for property in Australia, but particularly Sydney, and Melbourne to a lesser degree, that normal ways of valuing them – like comparing where interest rates are or, if you like, that ratio of average property prices to average rents – puts them as well overvalued,” he said.
“Just because something’s overvalued doesn’t mean it’s going to crash … The term ‘bubble’ has been thrown around a lot in Australia but the problem with the term ‘bubble’ is it implies that something is so high that it’s inevitable that it will crash, and that hasn’t proven to be the case.”
Property prices soared after years of low interest rates.Credit:Peter Rae
He expects a peak-to-trough price fall of 15 to 20 per cent as rising interest rates reduce the amount of money potential buyers can borrow and spend at auction.
This would still leave property with an affordability problem, although prices would be edging closer to fair value. To see fair value restored could require 30 per cent price falls, a scenario he emphasises he does not expect, and one that would most likely come with rising unemployment.
“The best possible scenario is one where prices come down 15 to 20 per cent and spend five years being range bound,” he said, while wages rise and housing construction is ramped up.
“That would be a far better outcome.”
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