Despite recent declines, a global investment survey by global bank UBS determined that Sydney’s real estate prices remain “very expensive.”
The current annual UBS Global Real Estate Bubble Index did not classify the port city’s real estate market as a bubble. Still, it was nevertheless priced substantially over its fair value.
The analysis cautioned that the global housing bubble would soon pop.
The analysis found that property price rises in the 25 cities analyzed reached their most significant level since 2007 and household debt increased much faster than the long-term average.
It was stated that housing prices had diverged from salaries and rentals over the last decade due to years of ultra-low loan rates.
Since the middle of last year, mortgage rates have nearly quadrupled on average in the locations analyzed. Combined with high prices, the living space available to a highly qualified service worker is one-third less than before the epidemic. Strong employment markets are likewise in danger of collapsing.
In the research, Claudio Saputelli, head of real estate at UBS Global Wealth Management’s main investment office, stated, “Inflation and asset losses owing to the present instability in the financial markets are diminishing household spending power, hence limiting demand for more living space.”
“As a result, housing is becoming less appealing as an investment, as borrowing rates in many areas continue to surpass buy-to-let returns.”
In 2020 and 2021, Sydney real estate prices increased by more than 30 percent, according to the forecast, before “aggressive” interest rate hikes and tighter lending rules drastically impacted affordability and began to push prices lower.
1.19 was Sydney’s score on the index. A number between 0.5 and 1.5 is considered overpriced, a score of less than 0.5 indicates fair value, and a score of greater than 1.5 indicates bubble danger.
Toronto (2.24), Frankfurt (2.21), Zurich (1.81), Munich (1.8), Hong Kong (1.71), and Vancouver have the highest bubble risk (1.7).
Shane Oliver, the chief economist of AMP Capital, estimated that Sydney real estate prices were 20 to 30 percent overpriced.
“It’s been an ongoing problem for Australian real estate, particularly in Sydney and to a lesser extent in Melbourne, that standard methods of valuing them – such as comparing where interest rates are or, if you like, that ratio of average property prices to average rents – place them as well overvalued,” he said.
“Just because something is overpriced does not imply that it will fall… The phrase “bubble” has been used frequently in Australia. However, the problem with the term is that it suggests that something is so high that a fall is inevitable, which has not been the case.
He anticipates a 15 to 20% price decline from peak to trough as rising interest rates restrict the amount of money potential bidders can borrow and spend at auction.
This would still create an affordability issue for real estate, but prices would increase closer to market value. Restoring fair value might need 30 percent price declines, a situation he emphasizes he does not anticipate and would likely be accompanied by increased unemployment.
“The best-case scenario is one in which prices fall by 15 to 20 percent over five years while incomes grow and house building is accelerated,” he added. That would be a far superior consequence.
