- UBS has released its Global Real Estate Bubble Index for 2018, and once again Sydney has made the list.
- It’s global ranking fell to 11th from 5th in 2017, meaning prices in the city are now deemed to be “highly overvalued” rather than a “bubble risk”
- The report says most price corrections over the past 40 years were preceded by an increase in rates.
Sydney’s housing market is no longer regarded as being a “bubble risk”, according to the latest UBS Global Real Estate Bubble Index, meaning that while prices in the city are still seen to be overvalued, the perceived risk of a damaging price “pop” has reduced.
“Sydney’s housing market reached bubble-risk territory in 2015 thanks to buoyant foreign demand, low interest rates and exuberant expectations,” the UBS report said. “It peaked last year and has since corrected by 5% in real terms in light of tighter mortgage lending.”
As seen in the chart below from the report, after ranking fifth in 2017 in terms of bubble risk, Sydney has plummeted over the past year to 11th spot, sitting behind the likes of Hong Kong, Munich, Toronto, Vancouver and London on the list.
However, despite falling from bubble risk territory, UBS says Sydney prices still remain “highly overvalued”.
“Overall, inflation-adjusted prices remain 50% higher than five years ago, while rents and incomes have grown only at a single-digit rate,” the report said.
So how does UBS come up with that conclusion, and the subsequent bubble risk rankings?
It says the index looks at the fundamental valuation of housing markets using a variety of metrics, compiling them into a single score to assess their perceived risk.
“The index score is a weighted average of the following five standardized city sub-indices: price-to-income and price-to-rent, change in mortgage-to-GDP ratio and change in construction-to-GDP ratio and the relative price-city-to-country indicator,” it says.
“It does not predict whether and when a correction will set in.”
So it doesn’t aim to predict when a bubble will pop, just the markets most at risk.
Like Sydney, UBS says the first cracks in the boom’s foundation have begun appearing, noting that house prices declined in half of the cities deemed to be bubble risks in 2017.
“How appealing the returns of owner-occupied homes will be in the next few years is questionable,” the report said.
“Last year the house price boom in key cities was already losing intensity and scope.”
And with interest rates around the world now starting to lift from emergency levels, it says Sydney may provide an example of what may lie ahead for other bubble-like housing markets.
“Rising interest rates and tighter lending conditions can abruptly end a real estate boom if property becomes too pricey, as the current example of Sydney shows,” it says.
“Historically, investors have had to be alert to rising interest rates, which have served as the main trigger of corrections… [with] most such downdrafts in the past 40 years preceded by an increase in rates.”
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