Sydney is on the latest UBS housing bubble list. They say real housing prices peaked in the second half of 2015 after an increase of 45% since mid-2012. Since then, prices have corrected by a low single-digit. Sydney sits alongside London, Stockholm, Munich and Hong Kong. The UBS Global Real Estate Bubble Index is designed to track the risk of housing bubbles in global financial centers.
The Australian residential market is influenced by a rapidly growing foreign demand (in particular, Chinese), which has tripled in value over the last three years. Increasing supply and further tax measures to reduce foreign housing investments may end the price boom rather abruptly.
Vancouver tops the index in 2016. Bubble risk also seems eminent in London, Stockholm, Sydney, Munich and Hong Kong. Deviations from the long-term norm point to overvalued housing markets in San Francisco and Amsterdam. Valuations are also stretched, but to a lesser degree, in Zurich, Paris, Geneva, Tokyo and Frankfurt. In contrast, Singapore, Boston, New York and Milan are fairly valued, while Chicago’s housing market remains undervalued relative to its own history.
Out of touch with fundamentals House prices of the cities within the bubble risk zone have increased by almost 50% on average since 2011. In the other financial centers, prices have only risen by less than 15%. This gap is out of proportion to differences in local economic growth and inflation rates.
Elevated risk of a price correction
The discrepancies have emerged out of a mix of optimistic expectations, capital inflows from abroad and loose monetary policy. The weak economic foundations of the latest price boom make the housing markets in those cities vulnerable.
A change in macroeconomic momentum, a shift in investor sentiment or a major supply increase could trigger a rapid decline in house prices. Investors in overvalued markets should not expect real price appreciation in the medium to long run.
Sydney‘s housing market has been overheating since the city became a target for Chinese investors several years ago. While Sydney showed the lowest index score of all our covered APAC cities in 2012, the market now ranks in the bubble risk category and tops all other cities in the region.
