Here's how Sydney's property market is making it hard for the RBA to properly help the rest of Australia

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If you haven’t heard, Sydney’s red-hot property market has dominated water-cooler discussion in recent days.

Some think it’s a bubble while others think it is affordable, as long as you get a good job that pays a good wage.

HSBC’s chief economist for Australia and New Zealand, Paul Bloxham, today weighed into the debate by suggesting that lower interest rates are starting to drive potential asset bubbles in some parts of the Australian economy.

Bloxham notes that the RBA faces a tricky balancing act at present. Lower interest rates are required to support rebalancing in the Australian economy as the mining infrastructure boom winds down. Although, as a consequence of the reduction in interest rates, it may be starting to drive potential asset bubbles in some parts of the economy.

He also notes, quite rightfully, that the RBA cash rate “is, and always has been, a blunt instrument”.

Here’s his view on the state of Australia’s property market, the formation of potential bubbles and, tying the two together, the current state of Sydney’s property market.

Housing prices are also rising unevenly across the country. Sydney prices are up 39% in the past three years, while prices are 22% higher in Melbourne and only 10% higher elsewhere. More even housing price growth would be preferred. Although the trends in Sydney and Melbourne are what should be expected, given that these cities have the least exposure to the mining sector, at the same time, this is how ‘bubbles’ can form. What looks like a strong growth story, based on fundamentals (think: the IT bubble of the early 2000s), sees rising investor interest and, at some point, prices rise ahead of fundamentals. The market gets exuberant, as investors begin to believe that prices can only go up.

The Sydney housing market is showing some of these more worrisome traits and has been for some time now. Investors continue to dominate the Sydney market, prices are rising at 15% y-o-y and auction clearance rates are around record highs.

These two charts, supplied by Bloxham, show that Sydney property prices are not only accelerating at a faster pace than those seen in other Australian capital cities, but are also expensive on a historic price-to-household income basis.

Not only are the recent developments in Sydney’s property market worrisome, according to Bloxham, they might also be preventing the RBA from lowering interest rates further “despite below-trend growth and the central bank’s desire to see the AUD fall further”.

Just think about that. Sydney’s property market may be preventing monetary policy from being set at the appropriate level for the remainder of Australia’s economy.

If that is truly the case, not only is it worrying, it needs some leadership from others who can control it.

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