Sydney Home Prices Surging at 5 Times Wages Fuel Bubble Woes

Don’t count on a wage increase putting that Sydney home within reach.

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 60 percent of the population resides in Sydney, climbed 2.5 percent in 2013 and 2.4 percent in 2014, compared to gains of 12.4 percent and 14.5 percent respectively for homes in the nation’s most populous city and financial hub, according to government and CoreLogic Inc. data compiled by Bloomberg.

Sydney house and apartment prices have soared 40 percent 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 Investors Service 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 35.1 percent of their income on mortgage repayments, up from 32.8 percent in 2014, Moody’s said in a statement April 27. That compared with 27 percent 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.

‘Rather Exuberant’

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 and a balance has to be found.

Wages in NSW grew 0.4 percent in the December quarter from the previous three-month period, close to the lowest on record, while home prices climbed 2.3 percent 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 Group AG’s Sydney-based analysts led by Jonathan Mott said in an investor note dated April 27.

“There is increasing evidence that house price inflation is being fueled by speculative activity,” the analysts said.

Auction Rates

Auction clearing rates hit a record on April 18, with 88 percent of the homes that went under the hammer -- the dominant method of selling property in Sydney -- purchased. The number dropped to 79 percent on April 25, according to the data.

“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, the Melbourne-based chief Australia economist at Bank of America Merrill Lynch. “Although that probably won’t begin to happen till interest rates start to move up.”

Twenty-five out of 28 economists surveyed by Bloomberg expect the RBA to cut the rate by 25 basis points when its board meets May 5. The central bank held its overnight cash target at a record-low 2.25 percent April 7 and said it could ease at future meetings. Traders see a 55 percent chance of a rate cut next month, according to swaps data compiled by Bloomberg.

Home values in New York rose 1.7 percent and wages increased 3.2 percent in the two years to June 2014, according to data from RealtyTrac.

Investor Demand

Home prices across eight Australian capital cities climbed 7.4 percent in the year to March 31 and Sydney values soared at almost double the rate, according to CoreLogic. In comparison, prices rose 6.4 percent in New York in the year to March 31, according to Zillow Inc. They increased 12.9 percent in London in the 12 months to Feb. 28, according to Hometrack Ltd.

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 10 percent a year and maintain sound lending standards.

Landlords are ignoring a slide in rental yields. Gross rental yields fell close to a record low 3.6 percent in March in Sydney compared with 3.8 percent a year earlier, according to CoreLogic.

“When the Sydney housing market starts to lose momentum, there is some risk that recent investors could be left holding a very expensive but low-yielding asset,” said Tim Lawless, head of research at CoreLogic.

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