JOHN MCGRATH: Sydney property is 40% overvalued


*UPDATE: Since this article was published John McGrath has clarified his comments about Sydney’s “overvalued” property market, saying: “The Sydney market is most of the way through its sales cycle and very near the top of its cycle. My view is there is no bubble, and no chance of a 40% correction.” Read more on that here.

There’s no shortage of people who think Sydney house prices are extremely overvalued, and John McGrath, executive director of McGrath Estate Agents, is among them.

According to a report on the Mortgage Business website today, McGrath told an audience at the AussieThink conference on the Gold Coast earlier this week that Sydney’s real estate market is overvalued by 40% and approaching the end, if it’s not already there, of the current price cycle.

“I don’t see any material capital growth in the next few years,” he told the conference, adding that “we [McGrath] think the Sydney market is 40% overvalued.”

However, while McGrath is of the view that Sydney’s property market is both overvalued and nearing the end of the current price uplift, he’s not expecting that there’ll be a cataclysmic collapse in house prices as some more bearish commentators currently suggest.

“We say internally what a good thing it is the market is settling down in Sydney, and we think that over the next few years there will be a short, small correction in small single digits — 3, 4, 5% — but we see nothing worse than that,” he said.

That mirrors his view on Melbourne’s housing market, currently the hottest of all capital cities in terms of annual price growth, according to recent data from CoreLogic.

“We have population growth, a strong economy, overseas investment, a number of things that have driven [the price increases] and I believe that it will continue to drive strong markets especially in these cities,” he said. “Couple that with relatively low interest rates as well, so that’s helpful.”

While McGrath sees a period of consolidation in Sydney and Melbourne’s housing markets, he said that there likely brighter times ahead for Australia’s smaller capitals, especially when it comes to Brisbane and southeast Queensland.

“If you look at the traditional gap in value between Sydney and Brisbane, it’s certainly greater now than I’ve ever seen in the 35 years of real estate history,” he said.

“So, do I think Sydney is overvalued? Yes. Do I think Brisbane is undervalued? Yes. I think Brisbane and SE QLD are undervalued.”

Source: CoreLogic

According to data from CoreLogic, the median house price in Sydney and Melbourne rose to $856,000 and $655,000 respectively in July, leaving the gains in both cities since the start of 2009 at over 100%.

Over the same period, the median price in Brisbane grew by just 16.2% to $490,000.

Despite the disparity in price growth between Australia’s three largest cities over that period, recent indicators point to a likely slowdown in the Sydney and Melbourne property markets after giddying price gains in recent years.

Auction clearance rates in both cities have fallen from the levels seen earlier in the year, coinciding with out-of-cycle mortgage rate increases and tighter macroprudential measures from Australia’s banking regulator, APRA, to cool the level of investor activity in these markets.

Upcoming house price data from CoreLogic for August, released on Friday, is also likely to reveal a steep deceleration in price growth in the Sydney and Melbourne markets over the past three months.

You can read more here.