Low interest rates yes, but several factors working against continued Sydney surge

No-one predicted Sydney's residential price growth would be as strong as it is has been to the halfway point of the year. 

Sydney prices are up around 9 percent so far this year which puts median house prices at around $890,000 and apartments at around $680,000.

All the 2016 forecasts of the Sydney property market had the brakes going on after three years of strong double digit annual growth.

Even the Reserve Bank of Australia Governor Glenn Stevens didn't see it happening when he gave his predictions for the Sydney property market in his appearance before the House of Representatives Standing Committee on Economics in February. 

Glenn Stevens suggested home prices would “take a bit of a breather for a while” with the slowdown in Sydney prices “quite welcome.”

He'd previously noted the panicked buying that had been fuelling the boom in Sydney had eased following tougher lending rules imposed by the Australian Prudential Regulatory Authority. 

"I think what we've seen is that things have calmed down a bit."

The current growth cycle has been running for four years since early 2012. Sydney ranks as the capital city with the largest gains over the cycle with dwelling values some 57 percent higher.

Private treaty home are selling in quick time, in just 31 days according to CoreLogic. Auction clearance rates are sitting at above 70 percent. Values are up around 12 percent annually.

This latest price re-acceleration, after a periodic dip or two, has almost become the trend rate given the current low interest rate backdrop, albeit without the incessant boom headlines in the media.

Most of the prices being paid are solid, rather than panicked, but they are still too expensive for many.

We can't keep going at this pace, especially with our low inflation wage environment.

Buyers are taking on more debt than they could ever repay if interest rates rose significantly, the big dark cloud that doesn't appear to be closing in quite yet.

The latest forecast on house price growth suggests things might slacken off and soon.

Indeed price growth is set to halve over forthcoming months, according to the HSBC chief economist Paul Bloxham who said the house price growth was "somewhat surprising."

Bloxham points to three factors in his forecast.

He suggests the escalation of the taxation of foreign buyers to weigh on the market, along with ever tighter lending standards, and also an oversupply of apartments.

He forecasts national growth to slow from the national 9 percent in 2015 to around 4 percent to 5 percent later this year.

The 2017 house price growth will be even slower - between 0 percent and 5 percent, he tips.

Bloxham points to solid demand from foreign buyers as one of the main causes for the continued impressive growth in Sydney. 

Given the recent fall of the Australian dollar against the yuan, Australian housing was just as cheap now for a Chinese buyer as it was four years ago, he said.

But he expects recent increased stamp duty and land taxes for foreign buyers and changes to local bank lending practices as likely to weaken this demand over coming quarters.

Bloxham anticipates further tightening of lending standards for Australian borrowers should there be a strong pick-up in investor borrowing.

The mooted oversupply of apartments will be the third factor prompting house price growth to halve by year's end, though Bloxham concedes the oversupply won't happen for a while yet, if at all in Sydney.

This article was first published in the Saturday Daily Telegraph.