Is there even a bubble to burst?

It is well known that we have emerged from a global pandemic and a property boom.

But are we in a property bubble and will it burst?

Recent research has shown that property prices in Sydney are certainly overpriced. Prices surged over 30% in 2021 and into 2022 before the Reserve Bank of Australia intervened to raise interest rates that they had previously averred would not change until around 2024. This has sent shock waves through current and prospective mortgage holders, resulting in diminished affordability and greater trepidation.

With two property booms in five years and relatively minor corrections, household debt has risen significantly faster than the long-term average. Historically low interest rates that were maintained for a sustained period, along with the RBA’s assurance that rates would remain stable for another couple of years, instilled confidence in the housing market to take on levels of debt that outpaced incomes and rental returns.

Inflation and lower borrowing capacity has placed downward pressure on property prices. However the researchers have fallen short of declaring that Sydney is at risk of being categorised as being in a property bubble. The term has been somewhat overused when it comes to commentating on Sydney property values. Sydney property has punched above its weight, so to speak, for many years. Typical methods of valuing property, like comparing the ratio of average property prices to average rents, are left wanting when it comes to Sydney and invariably exceed expectation.

That being said, just because property values overdeliver and are perceived as disproportionately overvalued, it doesn’t mean they necessarily have to come crashing down. For Sydney property prices to be restored to fair value, they would have to drop in the order of 30% and that is unlikely to happen.

Sydney’s property market behaved exceptionally during the COVID-19 lockdowns. A scarcity of stock, combined with record low interest rates and newly imposed working conditions, sent prices unexpectedly soaring. We have seen the market pull back in the order of around 9% since the peak. However, and any potential financial loss will only be incurred by those who bought at the peak and now have to sell for whatever reason.

---

Published October 21, 2022

By Belinda Cassano