Sydney predicted to avoid house price correction

House prices in Sydney are likely to “plateau and remain expensive” rather than experience a significant correction, according to Citi Research.

The company says the “exceptional price growth” seen in Sydney’s housing sector in recent years is due to low exposure to the declining mining and manufacturing sectors combined with a low interest rate cycle, low unemployment and an excess demand for property, rather than evening out with growth in other states.

“There is also an argument that during the previous decade, prices for these other capital cities were improving while Sydney’s median price was only sideways, hence the current period is Sydney’s catch-up. This argument, while somewhat appealing, is incomplete,” the company said.

Citi Research said a significant correction in the housing market would likely require a “large sustained increase in unemployment”, which would be most likely triggered by an interest rate tightening cycle.

“However, households on average have substantial positive equity in their residential properties and mortgage repayment buffers that would take some time to unwind before forced selling occurred.

“The most likely scenario is that Sydney prices plateau and remain expensive unless there are some large, external, negative shocks to the economy.”

The forecast came as former CBA chief executive and Financial System Inquiry chair David Murray warned that the Australian property market is in an investor-driven bubble.

In an interview on Sky News earlier this month, Mr Murray said the Australian economy is vulnerable because “there is a bubble in the housing market”, which he likened to “tulip mania”.

“All the signs of a bubble are there. Many of the signs are the same as the Dutch tulips – people’s behaviours, people’s defensiveness about any correction in the market. If the economy tracks okay, it might turn out that this thing sorts itself out. But when those risks are there, something needs to be done about it in a regulatory sense. The RBA and APRA need to stay on it,” he said.

“We have more investors in the market than we have had historically. Those investors, even the ones on lower incomes, own multiple properties that are often cross-collateralised and they are the people who become forced sellers. That’s the risk to the system.”

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