Sydney approaching danger zone
The Sydney market may be entering dangerous ground as prices climb higher and more investors jump into the market, a major research firm has warned.
Founder of Residex John Edwards said strong results in the last 12 months indicated the market was reaching unsustainable levels.
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According to Residex figures, Sydney median house prices increased by 17.25 per cent over the last year, while units rose by 10.78 per cent.
“It is reasonable to suggest this market is approaching a boom mentality,” Mr Edwards said.
The current median price in Sydney is $821,500, meaning the median family would be required to pay around 52 per cent of their after-tax income to meet loan repayments.
“This leaves just $812 per week of available cash following home loan repayments, which certainly does not provide margins for emergencies and interest rate increases,” Mr Edwards said.
He warns unsustainable growth in Sydney may deter the Reserve Bank of Australia (RBA) from lowering interest rates, or even push the RBA towards a rate hike.
He believes this would impact hardest on investors in the middle and lower end of the market, which currently appears to be the most active sector.
“Unfortunately, this group will be those who are potentially the largest borrowers and will have lower capacity to absorb interest rate increases as they occur in a few months,” Mr Edwards said.
Moreover, he warns values may correct if more buyers are priced out of the market.
“Historically, once the affordability ratio breaches 50 per cent, the market usually adjusts,” he said.
Growing unemployment figures could also jeopardise price growth.
“All are expecting unemployment levels to increase and this situation, coupled with all of the above, could be a recipe for some significant adjustments later this year or, more likely, early next year,” he said.