UBS on Thursday released this year’s Global Real Estate Bubble Index showing that Sydney’s home market is now deemed “highly overvalued” rather than a “bubble risk,” as reported by Business Insider Australia.
In 2015, the housing market of New South Wales’ capital hit the “bubble risk” territory, which implied a risk of damaging price rise. This was driven by high foreign demand, low-interest rates, and overwhelming expectations.
This year, though, Sydney’s ranking in terms of bubble risk declined to 11th place. The report noted that the risk peaked last year but has since corrected by 5% in real terms, thanks to stricter mortgage lending.
Nevertheless, UBS underscored that Sydney prices are still “highly overvalued”. The reason? Inflation-adjusted values are still 50% higher than in 2013. Rents and incomes, meanwhile, have increased only at a single-digit rate.
Looking at things from a broader perspective, UBS saw Sydney as a model for home markets whose values have the potential to burst.
“Rising interest rates and tighter lending conditions can abruptly end a real estate boom if property becomes too pricey, as the current example of Sydney shows,” the report stated.
More importantly, it was pointed out that investors’ behaviour impacts the market price trend.
“Historically, investors have had to be alert to rising interest rates, which have served as the main trigger of corrections… [with] most such downdrafts in the past 40 years preceded by an increase in rates.”
The index score is a weighted average of the following five standardized city sub-indices: price-to-income and price-to-rent, change in mortgage-to-GDP ratio and change in construction-to-GDP ratio and the relative price-city-to-country indicator.
Sydney is currently behind Hong Kong, Munich, Toronto, Vancouver and London on the bubble risk list.
