According to the UBS Global Real Estate Bubble Index for 2016, increasing supply and further tax measures to reduce foreign housing investments “may end the price boom rather abruptly” in Sydney.
The UBS Index, which is designed to track the risk of housing bubbles in global financial centres, found that Vancouver topped the index this year, and “bubble risk also seems eminent in London, Stockholm, Sydney, Munich and Hong Kong”.
Last year’s report, which listed Sydney as the third most at risk global city (behind London and Hong Kong) after identifying real estate prices as “overvalued”, said that prices in many global cities have “doubled” since 1998 in real terms.
“On average, they are higher than they were before the 2007-08 financial crisis,” it said, “A mix of optimistic expectations, favourable economic fundamentals and capital inflows from abroad has caused valuations to soar in certain cities in recent years.
“Loose monetary policy has prevented a normalisation of housing markets and encouraged local bubble risks to grow."
This year’s report explained that in Sydney, real housing prices “peaked” in the second half of 2015 after an increase of 45 per cent since mid-2012, and since then prices have corrected by “a low single-digit”.
“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,” the report said.
Overall, the report explained that house prices of the cities within the bubble risk zone have increased by almost 50 per cent on average since 2011, whereas prices have only risen by less than 15 per cent in other financial centres.
“This gap is out of proportion to differences in local economic growth and inflation rates,” the report said.
“The weak economic foundations of the latest price boom make the housing markets in those cities vulnerable,” it said.
“A change in macroeconomic momentum, a shift in investor sentiment or a major supply increase could trigger a rapid decline in house prices,” the report concluded.