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Melbourne has the highest chance of a real estate market correction over the next five years, research by JP Morgan shows.
Melbourne’s chance of suffering a fall of at least 15% in real estate prices stands at 19%, while that of Sydney is 18%, notes an economic modelling by the bank.
Researcher Henry St John, JP Morgan’s local interest rate strategist, came up with the figures by looking into both absolute price growth and price-to-income and price-to-rent ratios to determine how the Australian market has deviated from historical averages.
"In Sydney, the core drivers of this estimate relate to the significant acceleration in real price and PTI (price-to-income) growth over the last five years," said St John in his research note.
While Melbourne did not experience a bull market as exaggerated as Sydney did in 2001-2004, it did not have as deep a retreat either, "so its long trend leaves ratios well above average, implying a high chance of market correction", he said.
The research puts Brisbane’s and Adelaide’s risk of experiencing price dives over the next five years at 8%, and Perth’s at 7%.
In its calculation of PTI ratios for Australia's capital cities, the research shows that Sydney has made the biggest increase of 39% over the past five years with a ratio of 9.5 times income.
At 8.7 times income, Melbourne's PTI has increased by 30%. Other capital cities have mostly maintained stable PTIs.
"If house prices deviate persistently above residents' ability to pay for them, it suggests a speculative rationale for buying a property," said St John.
A number of economists predicted a moderation in house price growth to single digits in 2018, citing increased supply, tighter lending regulations, and a crackdown on foreign buyers as reasons. At the same time, they generally do not expect a sharp decline in house prices.
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