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Sydney still at risk of property bubble

AAP logoAAP 28/09/2016 Garry Shilson-Josling, Economist

Most home sales are yielding a gain on their purchase price but a new report puts Sydney in the "bubble risk zone".

Fewer than one in 10 homes sold in the June quarter fetched less than their purchase price, according to CoreLogic's latest Pain and Gain report.

Capital city houses were the least likely to deliver a loss, with only 5.9 per cent going for less than they cost to buy

But 9.5 per cent of capital city units caused their owners some pain when they were sold.

Outside the capitals, the chances of a loss-making sale were higher, at 12.2 per cent of houses and 19.9 per cent of units, the report said.

The lowest proportion of loss-making sales was in Sydney and Melbourne, both under three per cent of sales.

The total value of losses realised in the quarter was $459 million, while the gains were 34 times that at $15.7 billion.

But as CoreLogic issued a reminder of the huge profits being raked in, UBS issued its own warning that it could all go pear-shaped.

The global banking and financial services firm's Global Real Estate Bubble Index put the Sydney market at fourth in its ranking of "bubble risk" in major financial centres, and one of only six cities in the bubble risk zone.

"A change in macroeconomic momentum, a shift in investor sentiment or a major supply increase could trigger a rapid decline in house prices," UBS said of cities in the bubble risk zone.

"Investors in overvalued markets should not expect real price appreciation in the medium to long run."

The index used by UBS is based on a comparison of indicators to their historical levels.

The indicators are the ratios of prices to both rents and incomes, the ratio of city and country prices, and the growth rates of both construction and mortgage debt relative to gross domestic product.

Mechanistic measures like these can be misleading if there has been significant structural change in the economy, or a change in the way the economy works.

And there's no doubt the home loan market has changed markedly in the past 30 years or so, and the economy has moved from persistently high inflation to reliably low inflation.

Even so, it does suggest investors in Sydney should not be overly confident that the proportion of loss-making sales will stay as low as the one in 42 recorded in the June quarter in Sydney, or even the one in 23 seen in Melbourne.

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