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Sydney property prices not in bubble territory

Record-low interest rates have fuelled rapid house price growth across Australia, however, Sydney is not in a property bubble new data shows.

According to the latest UBS Global Real Estate Bubble Index, Frankfurt, Toronto, and Hong Kong top the list of cities most at risk of entering a property bubble.

Under the index, which ranks 25 cities across the world, a city that scores above 1.5 points is considered at risk of property bubble market conditions.

Sydney ranked 11th with a 1.39 points, while Frankfurt topped the list with 2.16 points. Toronto came second with 2.02 points and Hong Kong was third with 1.90 points.

“After a short-lived but sharp price correction between 2018 and 2019, the housing market rebounded,” the bank said of Sydney.

“From mid-2020 to mid-2021 prices increased by almost 14 per cent in inflation-adjusted terms—the third-strongest rise among all analysed cities.”

The index rated Sydney as “overvalued” but said it was not in a property bubble or in risk territory.

“The correction period for Sydney’s housing market was brief,” the bank said.

“Easier lending standards and rate cuts by the Reserve Bank of Australia have reflated the market.

“Market valuations have increased significantly but are still not in bubble risk territory, sitting below the 2017 level.”

Without a turnaround in interest rates, the decade-long upward trend of house prices is likely to continue given ongoing population growth.

With housing vales growing at a record 6 per cent (inflation adjusted) across 25 of the world’s leading cities, UBS believes the risk of prices becoming overheated has increased. 

Frankfurt, Toronto, and Hong Kong top the UBS index, with the three cities warranting the most pronounced bubble risk assessments.

Of Frankfurt USB said: “Its score is in bubble risk territory, which is the result of extremely strong price growth”.

“Since 2016, real home prices have been rising by 10 per cent per year on average, the highest rate of all cities included in our report.

“Currently, its price growth is still at the unsustainable level of 6 per cent per year, though it has fallen below the national average.”

Source: UBS

Risk is also elevated in Munich and Zurich, while Vancouver and Stockholm have both re-entered the bubble risk zone.

Amsterdam and Paris complete the list of cities with the most bubble risk from around the world.

Claudio Saputelli, Head Real Estate at UBS Global Wealth Management’s Chief Investment Office, believes COVID-19 and lower interest rates have been a contributing factor to the upward trajectory in house prices.

“The coronavirus pandemic confined many people within their own four walls, amplifying the importance of living space, and leading to a higher willingness to pay for housing,” he said.

“At the same time, already favourable financing conditions have improved even more as lending standards for home buyers have been relaxed. Moreover, higher saving rates and booming equity markets have freed up additional housing equity.”

The UBS report also notes that the cost of owning property compared with renting at the moment, along with the expectation of ever-growing house prices, makes homeownership seemingly attractive for households, regardless of price levels and leverage.

This rationale may keep markets running for the time being.

But households have to borrow increasingly large amounts of money to keep up with higher property prices.

The report suggests many housing markets have become dependent on very low interest rates, so that tightening of lending standards could bring price appreciation to an abrupt halt in most markets.

Matthias Holzhey, Head of Swiss Real Estate at UBS Global Wealth Management’s Chief Investment Office, suggests the markets that are most overheated are likely to slow down in the future. 

“A long, lean spell for city housing markets looks more and more probable, even if interest rates remain low.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.