Sydney is one of the world’s most “overvalued” cities, according to a new global house-price index, but declining property prices mean that could be set to change.
In its annual global house-price index London-based news magazineThe Economist compared residential property prices in the world’s most popular cities against each city’s median household income.
According to The Economist, post-global-financial-crisis property price booms that occurred in many famous metropolises, including Sydney, are “unsustainable” when compared to household incomes.
The average price of a home in 22 of the world’s most famous cities rose by an average of 34 per cent in real (or inflation-adjusted) terms over the past five years, according to the data.
Sydney ranked seventh on the global cities index, with home prices currently “overvalued” by 50 per cent when compared with household incomes, according to The Economist.
International cities with overpriced housing compared to wages include Auckland, considered to be 75 per cent overvalued, Vancouver at 65 per cent, London at 59 per cent, Paris at 70 per cent, and Hong Kong at 94 per cent.
Sydney’s current median price is $998,270 for houses and $746,431 for apartments, according to CoreLogic.
Home prices in the Harbour City rose by 47.1 per cent in real terms over the 10 years to June 2018.
However, after years of skyrocketing prices, some cities including Sydney, London, and Auckland, have begun to see small declines in values, with further reductions forecast.
In Sydney, prices fell 6.5 per cent in real terms between June 2017 and June 2018, according to CoreLogic.
“It is clear that on a historic basis housing costs are expensive and values are falling indicating that the prices that people are seeking are not prices that potential buyers are willing to meet,” CoreLogic analyst Cameron Kusher said.
In June 2018 the dwelling price to income ratio for Sydney dwellings was recorded at 9.1 times, up from 7.0 times five years ago and 6.8 times a decade ago, Mr Kusher said.
However, CoreLogic predicts a more moderate adjustment to Sydney home values than that suggested by The Economist.
“Being overvalued by 50 per cent would suggest that the cost of housing should fall by 50 per cent, which seems extremely unlikely notwithstanding the fact that after values peaked in July 2017 they have since fallen by 5.4 per cent over the following 12 months,” Mr Kusher said.
Instead, CoreLogic anticipates moderate dwelling value declines to continue over the next 12 months.
“A more likely scenario is one in which values fall 10 per cent to 15 per cent and then show little change over the coming year,” Mr Kusher said.
Property analyst Pete Wargent was also sceptical of The Economist’s findings, and does not believe home values are set to crash in Sydney.
Sydney property is still likely to be a good medium to longterm investment, he said, so long as buyers ensure they’re able to service any mortgage they take on.
“If you’re looking for short-term gains you’re not going to get it, but if you’re taking a medium-term outlook as a home buyer the [current] buying conditions are actually much more attractive,” Mr Wargent said.
According to University of New South Wales Director of City Planning Hoon Han, soaring home prices in Sydney have largely been driven by a “large scale of committed infrastructure investment at the supply side, and underlying demand of increasing population at the demand side”.
Dr Han expects to see a “correction” in Sydney’s property cycle in coming years.