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Sydney at risk of ‘housing bubble’ warns UBS

Brace yourself…the Sydney property market is housing bubble set to burst.

Well that’s what the media have been saying over the last week following the recently released UBS Global Real Estate Bubble Index which analyses the risk of housing bubbles in global financial centres and places Sydney as fifth riskiest.

Ubs GlobalSource: UBS

According to the report:

“(Sydney) “real” house prices shot up 12% in the last four quarters and are now 60% higher than in 2012. Sydneysuburbs 496037222

“The dip in prices in 2015–16 proved short-lived… Incomes increased by a meager 2% in inflation adjusted terms.

“Tax breaks and interest-only loans are whitewashing the worsening affordability for the time being.”

The report continues:

“Sydney’s housing market has been overheating since the city became a target for Chinese investors several years ago”

“Low interest rates, rising wealth and exuberant expectations also buoyed local demand. So valuations soared and pushed the market into bubble risk zone.”

These warning echo similar concerns made by UBS 12 months ago ( and the bubble didn’t burst.)

No doubt the Sydney market is not at a mature stage of its property cycle, but I can’t see the bubble bursting any time soon.

Just to make this clear… 
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UBS say that price bubbles are a regularly recurring phenomenon in property markets, and of course that’s true.

To UBS the term “bubble” refers to a “substantial and sustained mispricing of an asset”

But then they go on to clarify: “the existence of which cannot be proved unless it bursts.”

And they confirm their Index does not predict whether and when a correction will set in.

In other words… It looks like a bubble, it smells like a bubble, we think it’s a bubble, but we won’t really know for sure until it bursts and we don’t know if or when that will occur!!

So what could make the bubble burst?

Clearly the Sydney property boom of the last five years is over with price growth having slowed over the last quarter, as APRA is getting its way restricting investor lending.

And while home buyers are staying put rather than upgrading and auction clearance rates are falling, for a property market to crash you need desperate sellers willing to give away their properties at fire sale prices and no one willing to buy them.

And that’s not on the cards for Sydney at present. 

According to George Raptis, director of Metropole Property Strategists in Sydney, for the Sydney property market to crash – and that’s different to the normal cyclical correction – we need one or more of the following four things.

  1. A major depression (not just a recession). Nobody with any economic credibility is suggesting this will occur in Australia in the near future. property-bubble-market-burst-house-price-correction-future
  2. Massive unemployment and people not able to keep paying their mortgages. This is unlikely to occur with our relatively strong economy creating new jobs and Sydney punching above its weight in the percentage of jobs created.
  3. Exceedingly high interest rates so that homeowners won’t be able to keep up their mortgage payments. Again this isn’t on the horizon.
  4. An excessive oversupply of properties with no one wanting to buy them. While this may be the case in the Brisbane CBD, this is not occurring in Sydney.

Raptis explains:

“It’s true that Sydney property prices are high but that doesn’t mean they’re going to crash, which seems to be what many potential buyers who missed out over the past few years are secretly hoping for.” Urban Building

“Remember – Sydney is an international coastal city, that deserves a premium price for its lifestyle as well as its amenities.

“The Sydney property market has performed strongly over the past five years, but this has been underpinned by strong jobs growth with Sydney producing close to half our jobs over the last year, strong population growth and also a relative undersupply of properties.

“The economic fundamentals of Sydney are still strong with significant planned infrastructure spending, so the chances of a “bust” seem minimal at best and historically have actually never happened in any of our major capital cities.”

The bottom line…

I don’t believe that the Sydney “property bubble” will burst. Sydney property market

Of course, the strong property price growth of the last five years was unsustainable so now we are entering a period more moderate growth in the inner and middle ring more affluent suburbs where jobs and wages growth remains strong.

But the story is likely to be different in Sydney’s outer “mortgage belt suburbs” where property values are likely to fall, particularly next year as interest rates rise.

In these locations many young families have stretched themselves financially to get into the housing market, and after borrowing to the hilt to purchase their new home they’ve gone to one of the big retailers and put a furniture and television packages on a store cards with 1 to 3 years interest-free terms.

When these honeymoon periods come to an end it is likely many young families will find themselves in financial trouble, and unfortunately some will have to sell their homes at a time when there will be fewer buyers.

It’s interesting how history repeats itself.

DOES ALL THIS MEAN INVESTOR SHOULD AVOID THE SYDNEY PROPERTY MARKET?

Well, first of all there is not “one” Sydney property market – there are different markets based on geography, price points and type of property.

So rather than avoiding investing in Australia’s largest property market, I’d be carefully selecting “investment grade” properties in selected segments of the Sydney market. 

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I’d look for established properties with a “twist” and a level of scarcity in affluent, gentrifying, inner and middle ring suburbs where there is no looming oversupply and suburbs where the supply /demand ratio is still causing prices to increase.

Then I’d be holding these properties for the long term recognizing that Sydney’s population and economic growth will underpin properties prices.

But if history repeats itself, while smart investors and homebuyers will be out buying the right type of property, others will be more cautious and sit on the sidelines waiting to see how things pan out.

While this may seem safe to them, they are likely to miss out on some great opportunities.

It is easy to do nothing.

As Donald Trump says: “Nothing is easy… but who wants nothing.”



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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