Sydney’s ‘most undervalued and overvalued houses’ revealed

New research has revealed the ‘most overvalued and undervalued homes’ in Sydney. Is yours on the list?

Homes in parts of Sydney’s far west have become “overvalued” after continuing to soar during the past year’s onslaught of interest rate hikes – and there is a higher risk prices will fall.

The danger for new and recent buyers is that their homes will be worth less than the prices they paid if forced to soon sell.

It’s the opposite in isolated pockets of the east and south, which have become “undervalued” with room for prices to grow, according to data provided exclusively to The Saturday Telegraph.

It comes as economists warn the latest rate hike announced last week could pour cold water on the current housing market recovery and weaken much of the property market.

Suburbs deemed the most “overvalued” included Blue Mountains suburbs Faulconbridge, Hazelbrook and Leura, along with Ropes Crossing and Cambridge Gardens in the Penrith region.

Agent Kate Smith said much of the market remained patchy and there were big differences across individual suburbs. Picture: John Appleyard

Other overvalued areas were Moorebank and Minto in the southwest, plus parts of the Hawkesbury region, according to the DSR Data study.

Some of the locations flagged as overvalued were popular with home buyers who were priced out of inner- and middle-ring suburbs last year due to rising interest rates.

This kept prices growing at a time when most of the rest of the market was falling.

These markets also had growth before the recent rate rises due to strong demand from tree-changers during the early onset of Covid.

The result of the sustained rises was that prices were often well above neighbouring suburbs where home seekers could pick up comparable homes with access to similar amenities.

DSR Data analyst Jeremy Sheppard said the higher prices had created volatility in these markets that could push down home values in the future, making them risky prospects for new buyers.

“Overvalued suburbs have a higher probability of underperforming compared to the rest of the country and there is a higher probability that prices could fall,” he said.

“If you look at property markets over a long period of time, the data refutes the idea that some suburbs will continue to outperform.

“The reason why is that they eventually become too expensive for buyers and they look for alternatives.”

Mr Sheppard said across some capitals there was a general pattern in the suburbs that were undervalued versus those that were overvalued.

Minto in southwest Sydney was among the areas where houses were deemed overvalued.

Some of the undervalued suburbs were up-market inner-ring areas where prices plummeted during the first round of interest rate hikes last year.

“These areas may be more expensive than the city as a whole but, critically, they are now much cheaper than surrounding areas. They would be appealing because they have become good value again.”

Markets deemed “undervalued” relative to neighbouring suburbs with comparable homes were inner west suburb Summer Hill and southern suburbs Mascot, Bangor, Bonnet Bay and Carlton.

The list of “undervalued” areas also included affluent eastern and northern suburbs Rose Bay, Queens Park, Neutral Bay and Lane Cove.

Suburbs were considered undervalued when growth in local property values had lagged those in surrounding areas for a prolonged time and prices were now well below those in comparable areas.

To be considered undervalued, markets also had to have a shortage of housing supply, relative to demand – conditions that typically support price growth.

Houses were further considered undervalued if they were priced similar to local apartments.

Conversely, units at considerably lower prices than comparable houses were a marker that houses in the area could be overvalued, as units offered new buyers much better bang for their buck while the houses would be less appealing.

“The big benefit of buying in an undervalued area is that it is less risky. You are specifically targeting something that already looks like it is too low. Even if the values don’t grow any time soon they are unlikely to go south. It’s almost a case of being too cheap to fail.

“If the suburb is genuinely cheaper than others in the same area then it’s a good hedge against the risk of prices falling in that market.

“If you were to buy in a market where prices have kept steeply going up and going up, can they keep going upwards? And the risk if you buy there is that the answer is no.”

Property sales have been getting mixed results, despite the high number of people looking for a new home. Picture: David Swift

Ray White agent Kate Smith said the market, particularly in the eastern suburbs, remained “patchy” and there were large price differences among similar suburbs.

“There have been some suburbs that have flown under the radar,” she said.

In Sydney’s north, Stone Real Estate’s Eddy Piddington said a strong indicator that some houses were good value was that there was a smaller gap between them and unit prices.

“During the peak of the market that gap was much bigger, which made it harder for upgraders to move from a unit to a house,” he said.

SQM Research director Louis Christopher said the latest interest rate hike announced earlier this month would likely put a brake on any substantial price increases in most suburbs.

“We wouldn’t expect a large correction because of strong migration and housing shortage, but the nature of borrowing at the moment is very restrictive and that will have an impact.”