Is the Sydney Property Market in a Bubble That is Going to Burst?

Annual growth in the Melbourne market shot up to 8.18 per cent in the 12 months to May 2015, which is a dollar increase of about $55,000.

The latest statistics on capital growth, rental return and sales are presented below.

This is still a far cry from the Sydney median dollar growth of $160,000 in the same period.

However, it does represent a rapid increase in values

Table 1

Annual growth in the Melbourne market shot up to 8.18 per cent in the 12 months to May 2015, which is a dollar increase of about $55,000.

This is still a far cry from the Sydney median dollar growth of $160,000 in the same period.

However, it does represent a rapid increase in values.

The smoothed out growth trends, measured monthly in Sydney and Melbourne, are displayed in Graph 1.

As noted last month, Melbourne Growth seems to have peaked in the beginning of 2014, but growth is trending down from this peak very gradually.

In Sydney, it is unclear whether growth has peaked.

Graph 1

Does the Sydney Bubble Exist?

A bubble depends on so many factors. It really could be a yes or no answer. We don’t really know what defines a bubble, however what we DO know can be seen in the current housing market.

The reasons I think ‘yes’, we are in a bubble situation, include:

1. Bubbles are characterised by low interest rates

Australia currently has low interest rates and a historically low cash rate.


The Australian Prudential Regulation Authority (APRA) has had a slow, weak response to banks’ lending to investors.

Rather than the loan to value ratio cap employed in New Zealand, APRA has been encouraging ‘stress tests’. Under this policy, banks are given the responsibility of ensuring borrowers can cope with an interest rates of up to 7 per cent.

2. Bubbles are characterised by ‘speculative investment’

Speculative investment is when you invest in something because you think it is going to quickly deliver a high return.

The NAB Quarterly Australian Residential Property Survey for the first quarter of 2015 revealed that investors are making up a larger portion of those taking out home loans to purchase houses.

Investors are further incentivised to purchase properties through negative gearing and capital gains concessions.

In documents released by the RBA under the freedom of information act, the amount of investors receiving home loans was growing by an annual rate of over 10 per cent in 2014.

The ideal growth rate in investor home loans was specified at around 6 per cent.

3. Bubbles are characterised by rapid growth

According to, the median value house in Sydney has increased by approximately $160,000 in one year, between May 2014 and May 2015.

At the same time, I could also answer ‘no’, we are not in a bubble situation, because:

1. I’m afraid of commitment

2. Evidence from the past

The Sydney market has never really ‘popped’.

We can see this by looking at the ‘house price index’ for the median house is Sydney:

The ‘House Price Index’ (HPI) is a number that represents, at any point in time, how much house prices have increased since our first point of data collection in January 1979.

At April 2015, the HPI for the median house in Sydney was 20.70.Mortgage Calculator

This means that the median house value in Sydney has increased 20.70 times the house value in 1979.

In Graph 1, I have circled the big housing booms throughout the last 30 years (1987-88, 2003-04 and 2013-14).

The slope of the HPI represents the rate of growth in this indicator.

This data shows that Sydney houses are currently in their largest, longest housing boom.

But you can also see that the HPI rarely goes down, and when it does go down it doesn’t stay down for very long.

For example, in 2003, Sydney houses experienced a peak growth rate of 24 per cent.

The correction that followed between 2004 and 2007 saw a contraction of just 3 per cent.

A mere 3 per cent contraction of what houses were worth at the end of a housing boom does not seem like a drastic correction, although this contraction continued for several quarters.

Such growth patterns prompt me to view the Sydney market as an anomaly that could well stabilise at high prices.

Graph 2

The bubble could pop if the institutional conditions that affect demand are changed.

These could include a crack-down on foreign investment, reform to negative gearing and capital gains, an increase in interest rates and/or a serious reform to lending rules for banks.

It could also pop if people decide the money they are paying is not worth the quality of life they are getting in Sydney.

Sydney is becoming very dense, some of our transport options are at capacity, and what expansion is happening out west is further and further from employment opportunities and entertainment.

The Persistent Two Tiered Housing Market

In spite of high growth in Sydney and Melbourne, growth in Australia as a whole is significantly lower than other housing markets around the world – according to the latest Knight Frank Global House Price Index. data reveals that the median annual capital growth rate for Australia’s houses and units was just 5.7 per cent and 5.6 per cent respectively.

It is likely that nationally, houses and units are similar in their growth rate because there are more units in dense, high growth areas.

The two significant resource markets – Darwin and Perth – have showed poor performance over the last year.

Houses in Darwin fell -3.74 per cent in the last year, from $575,000 in May 2014 to $554,000 in May 2015.

The deepening downward trend for these markets can be seen in Graph 3.

Graph 3

The differing trends between Graph 1 and Graph 3 represent the persistent, two tiered housing market that makes growth across the board seem stable.

The Iron Ore price remains low at just US$60 per dry metric tonne, a commodity which averaged over US$100 per unit this time last year.

Little has been done to create sustainable employment following low resource prices, and the end of the construction phase in the mining boom.

It is therefore misleading to look at data in such aggregation.

The two tiered housing market makes it difficult for policy makers and Reserve Bank to influence housing growth.

With a boom on the south east coast that sets a higher deposit hurdle, and a bust in the resource states that has an unclear future, the state of the Australian housing market seems dismal.

However, sustainable house and unit growth are an indicator of the strength of the economy.

Though we present a summary of statistics by city metropolitan regions, there are suburbs with idiosyncrasies that make them a promising for investment.

These include diverse employment opportunities, planning regulation, quality properties and affordability.

Exploring such places outside of the major cities could present a more accessible growth or high yield strategy.

Want more of this type of information?

Eliza Owen


Eliza Owen is the Market Analyst for

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