UBS Wealth management released a new global property index overnight. It’s an index the bank says is “designed to track the risk of housing bubbles in global financial centers,” with a focus on the long term “norm point”.
Looking at global financial centres is an interesting way to judge like-for-like, in the way that the head of the RBA’s financial stability department Luci Ellis often discusses Australian property prices in comparison with similar cities all over the world.
So the results are worth taking seriously.
The study finds that Sydney takes out third place behind London and Hong Kong. Notably, that’s two spots above San Francisco, the other big bubble city everyone is talking about.
The report says that cities near the bubble risk zone face a higher risk of a large price correction if a change in “macroeconomic momentum, a shift in investor sentiment or a major supply increase” occurs.
UBS study shows that:
“Between 1985 and 2009, whenever the index exceeded 1.0, i.e it entered the upper half of overvaluation territory, a real price correction of on average 30% began within three years 95% of the time.”
Crucially the report added “investors in overvalued markets should not expect real price appreciation in the medium to long run”.
That’s important because Sydney’s current print is 1.39 and clearly in the “overvalued” territory on UBS metrics.
The bank said that in Sydney:
“Real housing prices have increased almost 30% since 2012, while rents and incomes have stagnated. The prices are also influenced by strong Asian demand. Gradually deteriorating economic conditions, a slowdown in China and tighter regulations increase the risk of a significant correction in the medium term.”
Both UBS warning on valuations over the long run and Sydney’s own experience in the aftermath of Reserve Bank action to slow the Sydney housing market back in 2003-2004 suggest Sydney housing may be in for rough weather ahead.