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    Are cracks starting to appear in Sydney’s housing market foundations?

    A recent Domain Group State of the Market report saw Sydney’s eastern suburbs emerge as the weakest market in the city, with house prices falling six percent in the three months to September.

    Sydney overall, in fact, is doing it tough, with all but two regions recording price falls over the month of September, with the south-west the next worst performer (- 4 percent), followed by the once-red hot inner-west, which fell by an almost equal 3.9 percent, according to the latest numbers from Domain.

    In terms of Sydney’s most downturn-proof markets, the northern beaches came out on top, a result that surprised few.

    Some of course argue that this is all part and parcel of our ongoing ‘housing bubble’, with AMP Capital's chief economist Shane Oliver claiming this ‘bubble’ has been inflated by tax breaks, low-interest rates, and ‘liar loans’ that are causing major mortgage stress.

    At the same time, Oliver says the conditions indicating a housing price crash are not yet in place.

    But this real estate ‘Sword of Damocles’ has been an issue for some time now. Way back in 2004, Oliver noted that the Organisation for Economic Co-operation and Development (OECD) estimated that the Australian housing was overvalued by almost 52 percent.

    "I'm more worried than I have been before ... every taxi driver I ever spoke to about this said things has been saying for 25 years,” UNSW economist Richard Holden told the Australian Financial Review (AFR).

    "Sydney has the second highest price-to-income ratios in the world and you've seen them go up a lot over the last, say, 10 years, you know, that's a marker,” he says.

    "The one that got me really worried was when I saw one of the chief executives of one of the four major banks say on television with a completely straight face, 'Well, see, the good thing about property is that these are all individual mortgages and these are all uncorrelated risks,” Holden was quoted by the AFR.

    In another, separate commentary to the AFR, Pimco managing director Robert Mead said much like the past 20 years, Australia is still dependent on the mining and housing industries, making it lose out on new growth that would help it to keep up with the growing technology and innovation industries.

    "Over this same 20-year period, Household debt to GDP has increased from around 60 percent to 80 percent in the US, whilst Australian household debt relative to GDP has risen from around the same starting point to more than 130 percent," says Mead.

    However, in a more optimistic assessment, Mortgage Choice CEO John Flavell says the housing market is self-correcting.

    Also quoted by the AFR, Flavell says Australia's real estate market has a “habit of correcting itself before a downturn occurs, so slowing building approvals were a prevention not a reaction.”

    “Higher prices were also not a sign of an overvalued market waiting to tip over, rather it was the "new normal" occurring on the back of growing demand and falling cost of credit, says Flavell.

    These add to the high level of controls keeping the market intact, he says.

    At the same time, Holden and fellow economist Jonathan Tepper are on record syaing that, “Overvalued homes, an extreme house price-to-income ratio and complacent bank bosses are signs there are cracks in the housing market.”

    As with most things, it seems whatever the truth is, only time will tell.

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