Housing bubble looms, says HSBC

HSBC economists say growth in Sydney housing prices is currently running at an unsustainable pace and could be met by housing price declines in future.

Record low mortgage rates have sparked concerns over a potential housing bubble, caution economists.

In a recent report, HSBC's Paul Bloxham and Daniel Smith warn that the Reserve Bank's rate cut will increase the risk of a housing bubble, particularly in Sydney.

It’s expected record low mortgage rates will lift house prices even further in 2015, after strong growth in the past two years.

"We expect national housing prices to rise by 7-8% in 2015, once again well ahead of household incomes," they said in a report.

“We see Sydney prices rising by 9-10% in 2015 and expect that, when rates do eventually rise, there is now a high risk that Sydney will see price falls,” the economists said.

“Although we do not see a national housing bubble, we believe that growth in Sydney housing prices is currently running at an unsustainable pace and that any further growth is likely to be met by housing price declines in future years, when interest rates do begin to rise,” they said.

Sydney prices have soared 33% since mid-2012 and are rising at 13% year-on-year, while national prices have risen 23% in two-and-a-half years and are growing at an annual rate of 8%.

Those rises have come from a low base, however, after prices dropped during the mining boom's peak in 2011 and 2012, the report said.

According to HSBC, a signal of the growing risk of over-inflation in the Sydney market is the high level of investor demand, as housing loan approvals for investors currently account for a “worrisome” record-high share of new loan approvals in New South Wales.

Despite investors posing a lower risk, HSBC says it’s likely that the increased investor activity is driving housing prices to rise faster than fundamental factors suggest they should in the Sydney market. The RBA last week cut the cash rate to a new record low of 2.25%, which has been passed on by most lenders, and another reduction is expected in the coming months.

That and strong foreign demand has boosted housing construction activity, which will help to address an under-supply. And Mr Bloxham and Mr Smith expect that activity to pick up strongly in 2015.

"Building activity is also booming, with national residential approvals reaching record highs of over 200,000 dwellings over the past year," they said on Tuesday.