Louis Christopher, one of Australia’s most experienced property analysts and founder of SQM Research, is forecasting continued double-digit price gains for the Sydney and Melbourne property markets—increasing the likelihood of a 2018 bust.

Christopher’s annual property outlook report for 2017 goes a long way to explain why the Reserve Bank has shifted its opinion of the housing markets in Sydney and Melbourne from growing “moderately” to “briskly”. 

“What we have noticed in very recent weeks is an acceleration, particularly in the Sydney housing market,” said Christopher. “Our view is that this acceleration will continue…it will go well into 2017.”  

SQM Research is forecasting price growth over 2017 of between 11% and 16% in Sydney and between 10% and 15% in Melbourne. While next year’s double-digit growth is still lower than the peak of 19% reached in Sydney in mid-2015, Christopher said it will now occur in markets that are already considerably overvalued.

“We think Sydney is up to 40% overvalued, and Melbourne is recording a similar rate...in fact Melbourne is at its most overvalued point that we've ever recorded,” he warned. “To see price increases from this point will be a problem for the RBA in later 2017.”

SQM Research’s base case scenario is that RBA and APRA will not take any action to cool down these markets, though the latter has made an effort to reduce risky lending by tightening its lending criteria over the past 18 months.

Christopher warned that such inertia could lead to the much-dreaded 2018 bust. “What we suggest is that it's best to move sooner rather than later because, if there is no action, it could be a large issue in 2018 where potentially a hard landing could play out.”

While the other capitals aren’t forecasted to experience the same level of price growth next year (and aren’t as overvalued), Standard & Poor’s warned earlier this week that any large falls in Australia’s two biggest property markets would reverberate across the nation.
 

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