Sydney real estate might be overvalued, but it’s not at risk of entering a property bubble, according to a new index.
UBS Global Real Estate Bubble Index assessed the housing market in Sydney as ‘overvalued’ following its volatile nature in recent years when it had moved in and out of bubble-risk territory.
UBS said aggressive rate hikes by the Reserve Bank of Australia (RBA) triggered a sharp price correction, bringing inflation-adjusted prices back to 2018 levels.
However, the chances of further downside are limited, as foreign demand has improved.
Overall, Sydney was ranked number 16 out of the top 25 cities in the world for bubble risk and was only just considered to be overvalued at current prices.
Currently, only Zurich and Tokyo remain in the housing bubble risk category, according to the index.
While Miami, Munich, Frankfurt and Hong Kong are all considered overvalued but not in a bubble just yet.
Formerly in the bubble risk zone, Toronto, Frankfurt, Munich, Hong Kong, Vancouver, Amsterdam, and Tel Aviv, are now all in the overvalued category.
Unchanged from the previous year, housing markets in Miami, Geneva, Los Angeles, London, Stockholm, Paris, and Sydney continue to be overvalued.
UBS said more downside in prices was likely across the 25 major cities from around the world, with interest rates rising globally.
At the same time, real house prices have already fallen 5 per cent, on average, from mid-2022 to mid-2023.
House price growth has suffered due to rising financing costs as average mortgage rates have roughly tripled since 2021 in most markets, UBS said.
Overall, annual nominal price growth in the 25 cities analysed came to a standstill after a buoyant 10 per cent rise a year ago.
Head of Real Estate at UBS Global Wealth Management’s Chief Investment Office, Claudio Saputelli said in real dollar terms, price gains have evaporated in many areas.
“In inflation-adjusted terms, prices are actually 5 per cent lower now than in mid-2022,” Mr Saputelli said.
“On average, the cities lost most of the real price gains made during the pandemic and are now close to mid-2020 levels again.“
He said for Frankfurt and Toronto – the two cities with the highest risk scores last year – real prices tumbled 15 per cent in the past four quarters.
“A combination of high market valuations and relatively short mortgage terms also put prices under strong pressure in Stockholm and to a lesser degree in Sydney, London, and Vancouver,” he said.
“In contrast, in Madrid, New York, and São Paulo – cities with moderate risk valuations so far – real home prices have continued to rise at a moderate pace.”
Despite declining values, in some cities, the seeds for the next property price boom have already been sowed.
Lead author of the study at UBS Global Wealth Management, Matthias Holzhey said demand for housing remained high in many areas, with fewer new homes being built.
“Housing demand continues to accumulate and prices may rebound as soon as financial conditions for households improve,” Mr Holzhey said.