Sydney in the midst of a property bubble
Although there remains vastly divided opinion surrounding the health of Sydney&rsquo;s property market, one analyst has claimed that the city&rsquo;s market has been in "bubble territory" since December 2014 and shows no signs of leaving in the near future. The study examined Australia&rsquo;s house price growth rate compared to the growth of rent and Glenn Otto claims that Sydney was the only city experiencing such results; although recent reports state that Melbourne is currently seeing a &lsquo;two-tiered&rsquo; housing market, where prices of new housing are much greater than prices in the resale market due to foreign investment.
Professor Otto said prices generally "wander along in a reasonably random fashion, but there are episodes where you have a really high, really rapid explosive growth in house prices".

"This definition picks up a house price bubble based on the rate of the growth of house prices in relation to rent."

He said by measuring how fast the asset price grows, the modelling detects any "short-term, explosive behaviour" on the part of buyers.

"The rapid growth suggests they are expecting return over and above the normal rate of return, which compensates for the uncertainty that the bubble will burst. It also suggests buyers don't do due diligence on what the place might be worth.

A new economic modelling from UNSW Business School shows the Sydney residential property market has been in the bubble territory since December 2014. AFR

"Another advantage of the technique is it potentially gives you an early warning signal and you can see the beginning of a bubble, so if you're the central bank and this is something you're concerned about, at least you know you're in the bubble territory."

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Two-tier property market

The latest data from CBRE also suggests foreign investment may be creating a "two-tiered" residential market in Melbourne, where the price in the new residential property market is significantly above the price in the resale market due to foreign investment.

CBRE data shows the price for a new Melbourne residential property is more than 6 per cent higher than the price for a Melbourne property in the resale market.

The two-tier property market phenomenon is expected to get worse as the lower Australian dollar brings more foreign investment into Sydney and Melbourne housing markets.

CBRE data shows the price for a new Melbourne residential property is more than 6 per cent higher than the price for a Melbourne property in the resale market.

CBRE head of research Stephen McNabb said: "There is more demand in the market from foreign investors than we've seen in other markets."

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He said the price differential is also reflective of the supply coming onto the Melbourne market in the past five to six years.

"It suggests that you're moving towards a peak in the pricing cycle," he said.

The price differential was also reflecting foreign buyers' expectation of lower return in the property market, he said.

"Across the real estate market we have seen foreign investors having lower return expectations because they're coming from a market of lower interest or lower return, or in the case of China, markets with higher risks," he said.

The data shows that approved foreign investment makes up more than 18 per cent of residential property purchase in Victoria, and over 10 per cent in NSW.

Valuer Herron Todd White's latest red-flag report last week warned that some apartment buyers in Sydney and Melbourne were paying too much for properties in competition with foreign buyers, leaving owners and lenders exposed if the market suddenly turned.