Risky NSW suburbs to buy homes in right now

An array of Sydney suburbs have become overvalued relative to neighbouring suburbs and could be risky markets to own property in, new research shows.

Houses in many outer suburbs and other once affordable pockets have become “overvalued”, while much of Sydney’s middle-ring is “undervalued” and could see more price rises, new data has revealed.

The Exclusive SuburbData research showed values in some outer areas were peaking after years of runaway growth in home prices.

Growth was so extreme that current prices were now well above those in neighbouring areas offering similar housing.

A recent drop in buyer demand in these areas, coupled with higher property supply, had raised the prospect that current prices couldn’t be sustained and could soon drop, according to the analysis.

Many of these outer areas, including Penrith, Ropes Crossing, Camden and Willmot, had been popular in the two years since the Reserve Bank began hiking rates – partly due to better affordability.

Bullaburra, in the Blue Mountains, was deemed overvalued.

That appeal has since deteriorated after the prolonged price rises, with Suburb Data indicating new buyers in these areas faced increased risk of properties losing value after purchase.

There was a similar trend in Blue Mountains suburbs Bullaburra, Hazelbrook, Wentworth Falls and Glenbrook, along with southwest suburbs Miller, Cartwright and Busby, which were also deemed overvalued.

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Suburb Data analyst Jeremy Sheppard said those considering buying in these suburbs would be vulnerable if they needed to sell.

“If you buy in an overvalued market there is a very high chance the prices are peaking and you can expect little to no growth in home values after purchase,” he said.

“In extreme cases, you could fall into negative equity as the prices adjust because overvalued markets can retract over time. This would be devastating if you had to sell.”

Aerial shot of houses in the outer suburbs of Melbourne.

Mr Sheppard, the developer of the DSR Score, a tool for measuring supply and demand across markets, said markets that were “undervalued” were the opposite: prices had room to grow.

Markets reported to be “undervalued” – where the better bang for buck on offer compared to neighbouring areas was attracting more buyer demand – were typically about 15-30km from the CBD.

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Most of these suburbs were in Sydney’s north, south and northwest, including North Balgowlah, Kareela, Willoughby, Lane Cove, Normanhurst, Oyster Bay and Illawong, plus plenty more.

Mr Sheppard said these areas, while sometimes more expensive than the Greater Sydney median, offered prices well below those in nearby areas with similar housing and amenities.

Recent growth in these areas had also lagged neighbouring areas, with many of the suburbs due for “catch up growth”, while buyer demand had recently shown signs of picking up.

The gap between houses and unit prices in these areas were also lower than the historical norm, meaning the houses were offering better value than in years past.

Houses in the Sutherland Shire suburb of Kareela were marked as particularly undervalued, with the $1.6m house median an average of $112,000 below neighbouring suburbs with comparable houses.

Buyer demand had also recently shot up after being subdued for some time.

North Balgowlah was also reported as heavily undervalued, despite typical house prices of $2.1m. This was because it was about $485,000 cheaper than neighbours with similar houses and there had been little growth in recent years.

Mr Sheppard said the key to understanding undervalued and overvalued areas was that each market moved in different cycles.

“Growth goes in cycles. You have to look at growth over time and how it compares to neighbouring areas,” he said.

“That’s how you can have areas that may be more expensive than the rest of Sydney actually being undervalued.”

Belle Property’s Tim Holgate said Lane Cove was showing strong signs of being undervalued – not just because of the cheaper prices relative to nearby areas – but because of improvements in amenities.

“(It’s) has gone through a lot of change over the last six or so years. We’ve had the whole Lane Cove village really have a massive facelift,” he said. “Now it’s got a plethora of opportunities and wine bars and cafes, everything’s here now.”

My Housing Market economist Andrew Wilson said suburbs offering cheaper prices than neighbouring areas, often termed bridesmaid suburbs, are getting harder to come by in Sydney.

“We’re running out of bridesmaids, they are all brides,” he said.

“Some areas on the fringes have become too unaffordable and buyers cannot borrow more to come up with difference.

“It eventually reaches a point where buyers cannot just keep paying more and more. They will adapt. That often means buyers shifting from one property type to another or moving in with their parents. The prices cannot go up all the time.”

Originally published as Risky NSW suburbs to buy homes in right now