Why being highly overvalued is better for Sydney’s home market

By Kay Rivera

Sydney saw the steepest price drop and moved out of bubble risk territory, although still “highly overvalued,” according to UBS’ Global Real Estate Bubble Index for 2018.

Sydney saw the steepest price drop and moved out of bubble risk territory, although still “highly overvalued,” according to UBS’ Global Real Estate Bubble Index for 2018.

Brought about by high foreign demand, low interest rates, and overwhelming expectations, Sydney’s home market entered the “bubble risk” territory in 2015. Things have changed over the past year as the city’s ranking on the bubble risk list declined to 11th place. In fact, it is currently behind Hong Kong, Munich, Toronto, Vancouver and London.

The report stated that the risk peaked last year but has since corrected by 5% in real terms, thanks to stricter mortgage lending.

Nevertheless, Sydney prices are still “highly overvalued.” This is because of inflation-adjusted values, which are still 50% higher than in 2013. Rents and incomes, meanwhile, have increased only at a single-digit rate.

Digging deeper, Business Insider Australia reported that UBS sees Sydney as a representation of home markets whose values have the potential to burst.

 “Rising interest rates and tighter lending conditions can abruptly end a real estate boom if property becomes too pricey, as the current example of Sydney shows,” the report stated.

 “Historically, investors have had to be alert to rising interest rates, which have served as the main trigger of corrections… [with] most such downdrafts in the past 40 years preceded by an increase in rates.”

The index score is a weighted average of the following five standardized city sub-indices: price-to-income and price-to-rent, change in mortgage-to-GDP ratio and change in construction-to-GDP ratio and the relative price-city-to-country indicator.

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