Interest rate rise to bust Australian property bubble: HSBC

Lower interest rates will continue to inflate the Australian property bubble with prices up between 7 to 8 percent in 2015, however the bubble will bust when interest rates rise again, according to a report by the HSBC bank released on Wednesday.

The HSBC said in a statement that the Sydney market was the most volatile and could suffer a major correction.

"We see Sydney prices rising by 9 to 10 percent in 2015 and expect that, when rates do eventually rise, there is now a high risk that Sydney will see price falls," the economists said.

"Although we do not see a national housing bubble, we believe that growth in Sydney housing prices is currently running at an unsustainable pace and that any further growth is likely to be met by housing price declines in future years, when interest rates do begin to rise."

The high level of investor demand for the Sydney market is a concern, HSBC said.

"The high involvement of investors suggests that there is a speculative dynamic in the Sydney market that may be worrisome," HSBC said.

"Investors are typically seeking capital gains, rather than rental yield, as Australia's tax system favors capital gains."

"Investors themselves tend to be lower-risk borrowers, as they typically have equity in another owner-occupied property and have lower loan-to-valuation ratios than first home buyers. In this way, it is not clear that investor involvement is leading to increased financial system risk."

"However, it does seem likely that increased investor activity is driving housing prices to rise faster than fundamental factors suggest they should in the Sydney market."

Housing prices have risen by 23 percent over the past 2.5 years and are currently growing at 8 percent year on year. In Sydney, they have risen 33 percent and are up 13 percent year on year. Endi