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Citi Research and Digital Finance Analytics found that some suburbs, such as Sydney’s Bankstown, have seen investors create “extreme, Hong Kong-level” house-price-to-income dynamics, reducing the pool of available buyers in these suburbs.
“Bankstown is a typical example of the unsustainability of local market residential property pricing compared to local demographics,” the report said.
The report highlighted that unemployment is running at 12 per cent in Bankstown, double the rate of Greater Sydney (6 per cent). The suburb also has a higher proportion of residents born overseas and a higher number of renters compared to Greater Sydney.
It also noted that Bankstown's median household income is ~$58,240 per annum, which is 36 per cent below the Greater Sydney average and 22 per cent below the national median of $74,776.
The report said: “Despite a significant difference in household income, the median house price in Bankstown is currently $1 million, just ~15 per cent below the Greater Sydney average of ~$1.2 million and a huge ~56 per cent above the national average of $640,000.
“Disturbingly, the current median house price places Bankstown's house-price-to-household-income ratio to ~17.2x, which is more on par with Hong Kong (18.1x) than Greater Sydney at 12.9x.”
Citi believes that the high level of rental properties in Bankstown means that the division between house prices and household income can be attributed to multi-property investors who reside outside the Bankstown local area.
“In Australia, the unrelenting rise of house prices, accompanied by higher and higher levels of household debt, is emerging as one of the most important economic and social issues of our time,” the report warned.
“Since 2003, Australian house prices have more than doubled, with Sydney growing just below the national average for the eight capital cities.
“Over the same period, household debt to household income [ratio] has risen from 140 per cent to 194 per cent."
Citi fears that the proliferation of interest-only lending, which is “unique” to Australia, coupled with forecasts for slower growth and rate increases over the coming years, suggests that investors won’t be able to “ride out” the cycle. Instead, they could be forced to sell off their properties.
Meanwhile, the report considered the high number of owner-occupiers on interest-only mortgages.
“The proliferation of multi-property investment households has also driven a rise in interest-only finance utilisation by owner-occupied borrowers,” it said.
“These borrowers reside in suburbs like Hornsby where they compete with investors and overseas borrowers. These borrowers are more susceptible to interest rate rises, given higher average borrowing levels and higher average loan-to-value ratios.”