New data shows parts of Australia’s property market have become “overvalued” and some suburbs are now facing dangerous price declines as buyer demand weakens and supply becomes more plentiful.
Many of these overvalued suburbs were established areas of Melbourne, Adelaide, Brisbane and Sydney that had grown strongly in previous years.
But it’s not all doom and gloom: the same analysis shows that there are still regions where houses are “undervalued.”
In these undervalued markets, prices are likely below where they should be, offering buyers and investors a rare chance to get in before prices rise.
The results from analytics group SuburbData draw a clear line between suburbs where prices are rising too much, too quickly, and those where value still holds.
Auction sales figures have hit dramatic lows in Sydney and Melbourne in recent weeks. Photo: Lyndon Mechielsen
The study found that an overvalued suburb is not just a suburb with a sky-high median price.
Instead, the suburb finds itself in overvalued territory as years of aggressive capital growth push prices beyond what local supply and demand can support.
SuburbData analyst Jeremy Sheppard said the danger for recent buyers is that the value of whatever they buy could soon fall, increasing the risk of negative equity, especially for those with small deposits.
“The risk is that if you buy a property in this market, your home could sit there for a while without getting any return on your investment, or the value could fall and you end up with negative equity,” he said.
“This may not be an issue if you plan to stay there for 10 years, as prices in those areas will rise again over time, but you also never know when your circumstances will change, when you may have to sell due to a job change or relocation.”
Statements from Treasurer Jim Chalmers and RBA Governor Michelle Bullock have played a role in the current downturn.
Telltale signs of “inflated” prices were runaway price hikes that outstripped surrounding areas and a huge price gap compared to nearby similar suburbs.
They also experienced a decline in buyer demand coupled with an increase in inventory and home prices well above comparable prices.
“If you were ever forced to sell and there wasn’t enough equity growth or even negative equity, you could find yourself in a position where you still owe (creditors) money after the sale and have to tip extra,” Mr Sheppard said.
“I would also be cautious as an investor in these areas. And I would even be cautious as a first home buyer unless you have a very large deposit, which few people do.”
Undervalued suburbs have shown the opposite conditions, and buyers in these markets could benefit from catch-up value growth.
MELBOURNE
Melbourne’s most underrated and overrated suburbs revealed
SuburbData analyst Jeremy Sheppard said Melbourne may have more undervalued markets than Australia’s other major capital cities, after years of weaker growth than Brisbane, Perth and Sydney.
SuburbData analyst Jeremy Sheppard.
Among the undervalued areas, SuburbData valued East St Kilda $253,000 below comparable neighboring markets, the largest estimated gap in Melbourne, while neighboring Caulfield was valued $222,000 above them.
At the other end of the scale, Parkville and Deepdene were each priced $250,000 above comparable nearby markets, suggesting current prices may be inflated.
BRISBANE
Brisbane’s most underrated and overrated suburbs
The research has identified clear buying opportunities in the next wave of growth corridors, where buyer demand continues to outpace supply but home values remain well below surrounding postcodes.
The leader of the underrated city ranger was Rockley. A typical home in the southern suburbs costs $827,000, $204,000 less than nearby areas.
A similar price gap was found in the inner north. The typical price for a home in Windsor was $1.6 million, a significant discount of $160,000 compared to neighboring homes.
SYDNEY
Sydney’s most overrated and underrated suburbs revealed
Most areas of Sydney that were considered “overvalued”, with prices well above sustainable local rates, were upscale suburbs in the east, north coast and northern beaches.
Other suburbs flagged as overvalued were in the west, including St John’s Park, Wakeley and Old Guildford in the Fairfield area and Ashcroft near Liverpool.
Many of Sydney’s eastern suburbs were deemed “overvalued”, while parts of the inner west and Blacktown region were “undervalued”.
“It’s about what the market is willing to pay… in many parts of Sydney prices are not just high, they are higher than the rest of the market.
“The suburbs don’t always outperform the competition. They reach a point where buyers are no longer willing to pay prices because there are cheaper, comparable options nearby.”