Sydney and Melbourne housing markets are overvalued and represent poor affordability for investors, according to a new white paper published by buyer’s agency InvestorKit.
The agency, who specialise in creating data-first analysis for property investors, rated the Sydney market as 22.3% overvalued and Melbourne as 13.9%, meaning that the gap between housing affordability and the ratio of household income spent on housing was severely slanted against investors and homeowners.
“Overvalue is largely measured through mortgage serviceability, and the average dual income household is using a little more than 30% of their net income on repayments,” said Arjun Paliwal, CEO of InvestorKit.
“While interest rates are very low, in places like Sydney and Melbourne the prices have risen so much and at such phenomenal pace over this last decade that it is a little bit higher than what we feel it should be based on income levels.
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“We have to look from a local and global aspect. From a global perspective, these two cities are powerhouses, whether it be popularity, jobs, lifestyle and, of course, financially.
“As a result, they are on a pedestal with other global cities, and when you compare them to those others, it does feel like they should be line and be expensive.
“At the same time, when it comes to investors considering options, the first callout is to look at the value point and see other cities across the country like borderless investors.
“It’s not to say that Sydney and Melbourne don’t grow because they are overvalued, but it’s more saying that they can be questionable when making investment decisions regarding how much more legs they have in them for the next few years considering the stellar growth that they have seen in the last year and the last decade. They’re already enhanced when compared to incomes.
According to Paliwal, it was this housing affordability crisis in the Sydney and Melbourne property markets that was fuelling the rentvesting trend, where people who are priced out of major capital city homes buy investments as their first home.
“Rentvesting is just going to propel forwards based on the overvaluation in Sydney and Melbourne,” he said.
“When it comes to an investor and their considerations, you have cities that have the trifecta: Adelaide, for example, offers well-placed affordability ratios, higher market pressure and an extremely strong rental market.
“There are many cities across Australia that have that market, before considering the jobs and economic growth on offer in those cities as well. Rentvesting is already a trend and will continue on, and other cities have the best prospects for capital growth.
ACT was also cited as an at risk area. Though it was not currently overvalued, only a slight interest rate rise would be required for it to become overvalued quickly.
“Interest rates impact everywhere, so overvalued locations will become even more so, while undervalued locations might become fair or overvalued,” said Paliwal. “There are also substantially undervalued locations that remain undervalued even with a 1% rise in rates.”
“The analysis goes through the country with a greater lens and suggests that there are still going to be many undervalued locations, even with rises, but also markets that are more sensitive to interest rate rises.
“If already overvalued locations like Sydney and Melbourne take on a rise in rates, it doesn’t make it easy for the market and it could become a trend that sends rentvesting even higher, or could send people towards units because the gap between houses and units is so big.”
