Price moderation predicted for Sydney and Melbourne

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A major investment bank has suggested Sydney and Melbourne are set to enter period of moderation”.

While some commentators have said recent developments have meant the two markets, especially Sydney, have seen the end of their booms,  economist Scott Haslem from investment bank UBS believes the two are seeing a “moderation in strength,” rather than a full-fledged “downturn.”

According to Fairfax outlets, Haslem made the claim in a research note released this week and pointed to factors such as consumer sentiment, construction levels and interest rates as being behind his reasoning.

“Despite a moderation in commencements next year, completions are still likely to surge further to a record high peak above 200,000 in 2016,” Haslem wrote.

“This suggests a positive spill-over to consumption on furnishings and household equipment, albeit the fall in total housing sales, with established housing sales dropping, implies the peak in momentum is already passed,” he said.

Haslem predicts investment in new dwellings will lift until mid-2016 before flattening out in the second half of the year.

Haslem also said the housing in the two markets is somewhat overvalued, though low interest rates have helped affordability to some extent.

“The valuation of the housing market is clearly stretched, with the dwelling price to average household income ratio lifting to a record high of 5.6 now.

“However, with record low interest rates, housing affordability – proxied by the mortgage repayment share of income – is still only a bit around its long-run average, albeit the worst since the first quarter of 2012.”

While prices will moderate, the depreciation of the Australian dollar will help as real estate becomes more attractive to foreign buyers, Haslem suggested.

"As we have highlighted previously, foreigners are increasingly a key driver of Australia's housing market, with approved investment more than doubling in 2013-14.”

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