Sydney price surge sparks bubble fears
Published 30/04/2015 | 02:30
Home prices in Australia's biggest city have surged more than five times faster than wages in each of the past two years, adding to fears of a housing bubble.
Wages in New South Wales state, where 60pc of the population resides in Sydney, climbed 2.5pc in 2013 and 2.4pc in 2014, compared to gains of 12.4pc and 14.5pc respectively for homes in the nation's most populous city and financial hub, according to government and CoreLogic data.
Sydney house and apartment prices have soared 40pc from their May 2012 trough to a record, forcing regulators to call on banks to strengthen lending standards and warn of the potential for values to drop. That comes as wages growth slows to the lowest on record, rental yields approach an all-time low in Sydney and Moody's saying housing affordability in the city has deteriorated.
"When you compare home-price surges between early 2000s and now, this time income is static or lower in real terms," said Martin North, a Sydney-based principal at researcher Digital Finance Analytics. "With interest rates at rock bottom, the affordability is not extreme, but it can easily go very bad if rates normalize and add to that static or declining rents."
As of March 31, Sydney households spent an average 35.1pc of their income on mortgage repayments, up from 32.8pc in 2014, Moody's said. That compared with 27pc for the entire country, the credit ratings firm said. Sydney's market was most at risk of a further decline in housing affordability, it said.
Cheap money - official interest rates are at record lows and average floating-mortgage rates at a five decade low - are underpinning the price gains. They are also proving a headache for the central bank as it tries to balance stimulating economic growth post a mining boom with housing that is becoming increasingly unaffordable.
Reserve Bank of Australia Governor Glenn Stevens has said that while "rather exuberant" Sydney home prices shouldn't dominate monetary policy, they can't be completely ignored.
Wages in NSW grew 0.4pc in the December quarter from the previous three-month period, close to the lowest on record, while home prices climbed 2.3pc in that time.
The median dwelling price in Sydney is at a record 10.3 times the median disposable household income, placing the city among a handful of the most expensive housing markets in the world, UBS's Sydney-based analysts led by Jonathan Mott said.
"There is increasing evidence that house price inflation is being fueled by speculative activity," the analysts said.
Auction clearing rates hit a record on April 18, with 88pc of the homes that went under the hammer - the dominant method of selling property in Sydney -- purchased. The number dropped to 79pc on April 25.
"There may well be some kind of moderation or even correction in house prices versus wages at some point in the future," said Saul Eslake, chief Australia economist at Bank of America Merrill Lynch. "Although that probably won't begin to happen till interest rates start to move up."
Home prices across eight Australian capital cities climbed 7.4pc in the year to March 31 and Sydney values soared at almost double the rate, according to CoreLogic. In comparison, prices rose 6.4pc in New York in the year to March 31. They increased 12.9pc in London in the 12 months to February 28.
Investors are driving the demand in Sydney with half the mortgage approvals excluding refinancing flowing to rental properties in February, according to government data.
Australia's banking regulator said it will determine this month whether to take additional supervisory action against lenders after urging them in December to limit investor mortgage growth to 10pc a year and maintain sound lending standards.
Landlords are ignoring a slide in rental yields. Gross rental yields fell close to a record low 3.6pc in March in Sydney compared with 3.8pc a year earlier, according to CoreLogic.
"When the Sydney housing market starts to lose momentum, there is risk recent investors could be left holding an expensive, low-yielding asset," said Corelogic research head Tim Lawless. (Bloomberg)