Property prices in Sydney and Melbourne are headed down

Credit: Diliff

Another property expert says house prices in Sydney and Melbourne are set for a correction – primarily because they have become too expensive.

Performance Property Advisory (PPA), a real estate investment firm says that when Sydney’s ‘affordability index’ reach near-record levels, property prices have dropped by up to 5%, according to the Australian Financial Review. The investment firm says Sydney property prices have now reached a peak.

The Affordability Index measures average mortgage payments against average income.

Melbourne’s property market has seen price increases of 7 times the growth in average income in just the past six years according to PPA. David McMillan, PPA director of acquisitions says that Melbourne is a clear sign that the market has moved past sound fundamentals.

While the Reserve Bank of Australia (RBA) has argued that demand from foreign buyers for Australian property will provide a level of support for the market, a number of reports (Domain, and ABC News), suggest Chinese buyers have deserted the property market en masse – particularly in Sydney, and Melbourne’s prestige property market.

One report suggests tighter Chinese foreign exchange controls meant buyers were finding it difficult to get money out of the country – a factor the RBA may have overlooked.

Local property investors are still feeling the heat from higher borrowing requirements initiated by the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) last year, and are exiting the market too.

According to NAB’s latest residential property survey taken in late 2015 showed that the percentage of existing properties sold to local investors dropped to a record low of 19.2% in the last quarter. The percentage share of foreign buyers has also dropped – from 15.7% to 14.4% for new property sales.

Foolish takeaway

We’ve long argued that residential property price growth in our two main capital cities was unsustainable and likely to end with property prices falling – as they have done twice since 2008.

Cue likely changes to negative gearing by both sides of federal government and heavily geared property investors could be in strife.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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