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A significant price correction has a higher chance of occurring in some Australian capital cities over the next five years, particularly in Melbourne and Sydney, where prices have been sky-high, according to JP Morgan.
The investment bank expects that there is a one-in-five chance of real estate prices falling at least 15 per cent in the two cities. Henry St John, JP Morgan Australian and New Zealand interest rates strategist, expects the Melbourne market to have the highest possible market correction at 19 per cent, while Sydney may encounter an 18 per cent correction.
JP Morgan used the comparison of median household income to median home prices as a basis for its forecast. St John said that a huge gap in price-to-household income (PTI) often serves as a reason for speculations of a real estate bubble.
Buyers in Sydney have to earn 9.5 times more than their median income to afford a median-price house, according to the bank. This rose 39 per cent compared to the last five years. In Melbourne, the PTI gap increased 30 per cent to 8.7 times in the same period. The gap in other cities has remained stable so far.
The real estate market in Brisbane and Adelaide has a lower chance of a 15 per cent price drop at 8 per cent, while there is a 7 per cent chance of lower price in Perth, according to JP Morgan.
High prices normally encourage property owners to test buyers’ interest by listing a sale. However, some Australians choose to stay put and instead upgrade their houses, by adding new furniture, interior sliding barn doors and other improvements.
High property prices justify the concerns of a huge correction in the industry, due to the simple explanation that prices are bound to fall after reaching their peak.