THE Sydney and Melbourne residential property markets are in a bubble and house prices growth will continue for another 6 to 12 months, as both cities reach the top of the cycle, according to the Australian Property Institute.
The Australian Property Institute’s 34th Property Directions Survey found more than half of valuers, fund managers, financiers and analysts believe that the Sydney (58%) and Melbourne (53%) residential property markets are either in or entering a bubble.
Conversely, 70% of respondents do not believe that the Brisbane residential market is in a bubble.
API NSW Division senior price president Ian Muir said the majority of respondents also believe residential property prices will continue to rise for 6 to 12 months.
“53% of respondents believe that Sydney residential property prices will continue to rise for either 6 or 12 months with 26% stating 18 months. Respondents are more certain in their predictions for Melbourne residential property with 76% seeing prices continuing to rise for 6 or 12 months,” he added.
The survey sentiments reaffirm the views of Treasury Secretary John Fraser, who recently said the Sydney housing market shows unequivocal signs of a housing bubble, along with some areas of Melbourne.
“When you look at the housing price bubble evidence, it`s unequivocally the case in Sydney. Unequivocally,” Fraser told a Senate committee. “Frankly, whatever the data says, just casual observation can tell you it`s the case. Certainly I think that`s the case in the higher priced areas of Melbourne, and I base that on my own observation as well as the data.”
Last week a report by HSBC chief economist Paul Bloxham said the Sydney market has “an exuberance that is worrisome”, adding that the city is showing the same traits of the IT bubble in the early 2000s, as soaring prices are interpreted as a strong growth story.
Bloxham said Sydney prices have jumped by 39% over the last three years whilst the rest of the country increased by 10%, and they continue to rise by 15% year-on-year.
“This is how `bubbles` can form. What looks like a strong growth story, based on fundamentals (think: the IT bubble of the early 2000s), sees rising investor interest and, at some point, prices rise ahead of fundamentals.
“The market gets exuberant, as investors begin to believe that prices can only go up.
“The main driver of the ramp up in housing prices continues to be investors, rather than first home buyers or repeat purchasers for owner occupation. This is more unexpected. Investor loan approvals have risen by 112% since their trough in 2011, while loans to repeat buyers are up 47% and first home buyer loan approvals have only risen by 13%,” Bloxham said.
Last month a report by API Victoria and Opteon Property Group said whilst talk of boom or bust should not be ignored, the fundamentals over the medium-to-longer-term for Melbourne’s property market remain sound.
API (Vic) spokesperson and Opteon director Matthew Baxter said the housing market remains strong due mainly to constrained supply, net migration increases, an upsurge in activity from investors and a low interest/relatively open supply of credit availability.
Baxter said a crash would normally be associated with a mostly unforeseen event, such as the global financial crisis, significantly affecting supply and demand.
“When we look back at 2008 and the GFC there was a dramatic reduction in demand and buyer activity in second half of 2008. However the Melbourne values only reduced relatively marginally. Why? Because sellers did not need to meet the market (holistically) as interest rates reduced in a short period of time and Federal Governments stimulus package (well placed or not) worked to pump up the economy.
“Now compare this to 1990 when the economy crashed, sellers could not take option of holding, interest rates had hit 17% coupled with housing values that increased 83% over five years, an average compounding increase of 13% per year,” Baxter pointed out.
According to the API Directions Survey, Sydney residential property is seen as reaching the top of the property cycle in 2016 and moving past the top in 2017. Similarly, respondents see Melbourne as having passed the top of the cycle in 2016 but remaining close to the top through to 2017.
Muir said both cities are seen as remaining near the top of the property cycle for some time. In comparison, Brisbane is seen to be just nearing the top of the cycle.
100% of respondents believe low interest rates are a very significant driver in Sydney and the second most significant driver was foreign investment with 95%.
In Melbourne, 87% said low interest rates and 94% believe it is foreign investment.
Respondents list a number of other factors they also believe play a role in increasing demand in Sydney, such as population growth, low supply over the past decade and the trend towards smaller households.
Meanwhile the majority of Property Directions Survey respondents do not view foreign investment as a significant or very significant factor in driving demand in Brisbane or Perth. Instead, they believe negative gearing plays a bigger role.
“A large majority of respondents see low interest rates as the main driver of demand and prices for Brisbane and Perth residential property, however this view is not as strong as it is for Sydney and Melbourne,” Muir said.
Looking ahead, most respondents believe both interest rates and inflation will remain similar for the next year, while moving higher in the next three years.
“It’s a different story with foreign investment, with a small majority of respondents believing levels will remain similar for the next six months. Respondents are less certain over the next 12 months, but most still see foreign investment at similar or higher levels.
“Respondents are even more uncertain about the outlook for 2018,”
“Some respondents listed current or emerging factors which they believe may have an impact on the Australian property market. Factors listed include a slowing Chinese economy, any increase in the unemployment rate and potential changes to foreign investment or immigration rules.” Muir said.
Australian Property Journal
