After a surge in prices over the past five years, Sydney is facing a housing bubble, according to the UBS Global Real Estate Bubble Index 2016. The index is designed to track the risk of housing bubbles in global financial centres. Vancouver topped the index this year, followed by London, Stockholm, and Sydney.  

Sydney’s property market is one of the riskiest in the world, mainly because very low interest rates and a flood of capital from Chinese investors are pushing prices up into bubble territory.

“In the other financial centres, prices have only risen by less than 15 per cent,” the report said. “This gap is out of proportion to differences in local economic growth and inflation rates.”

UBS joins other financial institutions and think tanks that warn of the imminent collapse of the Australian housing market—predictions that have yet to eventuate.   

The UBS Global Real Estate Bubble Index is calculated based on a combination of price-to-income, price-to-rent, change in mortgage-to-GDP ratio, change in construction-to-GDP ratio, and relative price-city-to-country indicator.     

While the existence of bubbles cannot be proven conclusively unless they burst, reoccurring patterns of property market excesses are observable in the historical data. “Typical signs are a decoupling of prices from local incomes and rents, and distortions of the real economy, such as excessive lending and construction activity,” the UBS report said.

UBS warns that the six cities in its bubble risk zone are at an “elevated risk of a price correction.”

Sydney’s housing market has been overheating since the city became a major hotspot for Chinese investors several years ago. The city’s real housing prices peaked in the second half of 2015 after an increase of 45% since mid-2012. Since then, housing prices have corrected by a low single-digit. Analysts are worried that increasing supply and further tax measures to reduce foreign housing investments may terminate the price boom abruptly.
 

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