6 reasons the Sydney property market will soldier on

There have some unusual attempts to talk down the Sydney property market in the last few weeks…is it a seasonal lull or the start of a downturn?

Australian Property Monitors (APM) recorded a resurgent 78% preliminary auction clearance rate yesterday, suggesting that reports of the death of the property market were somewhat exaggerated. 

McGrath reported an 89% clearance rate for Sydney metro and 100% for properties in the $1.5m to $3m bracket.APARTAMENTS

There were some big results, too, including this art deco two bedroom apartment in Neutral Bay which sold for a thumping $777,000, among other examples, including in Pyrmont.

Considering these units were selling for mid $500,000s in early 2011, on the lower north shore Sydney prices have not been easing.

There had also been some misguided reports about prices ‘falling’ in May, which I explained here, were due to seasonality in the index in question, rather than prices actually falling.

And so it was, as the index has miraculously having recovered its mojo to hit new heights, with the index surging strongly through June, and now July too:

There have been some more sensible arguments about why the property market may be running out of gas, with low interest rates having “pulled forward” demand from investors, thus leaving a hole which cannot be filled.

It’s a sound theory, but I disagree in Sydney’s case.

Granted, the market is certainly less manic than it was in November and December 2013, but there is still an awful lot of demand out there, from investors in particular, as tomorrow’s ABS Lending Finance data will likely confirm.

And while plenty of new apartment supply is due to hit the market, we’re a long way from that supply meeting the pent up demand yet (not to mention that city-wide vacancy rates of 1.7% are a million miles away from the 4.3% vacancy rates we saw at the end of the preceding boom a decade ago).

And BIS Shrapnel agree apparently, forecasting Sydney’s median apartment price to rise by 15% in the next two years.

6 reasons why…

Firstly, although in truth not all that significantly, there is now new demand for well-located apartments from self-managed super funds, which has an impact on the real estate markets at the margin.

Secondly, investors have hardly run out of capital to invest.[sam id=40 codes=’true’]

In fact, with dwelling prices rising and ongoing low deposit requirements, investors have significantly more equity in aggregate than they did two years ago.

Thirdly, fixed interest investments in this country are paying poor returns.

While you might argue there isn’t much value in Sydney real estate, equally, as Roger Montgomery has been arguing for weeks, there is no value to be found in the Aussie share market now either.

Ultimately, capital needs to find a home, and increasingly, it’s home is becoming…well, homes.

Fourthly, interest rates are heading lower, probably through another cut from the Reserve Bank to a cash rate of 2.25%, the reasons for which I discussed here, and in any case because banks are slashing borrowing rates independently of the RBA, as detailed here.

Fifthly, rents are surging, which has kept gross apartment yields propped up at 4.7% in Sydney.

Yields are not as good as they were, but they have still not declined to the levels which will turn investors away completely while mortgage rates remain available at similar levels.

Homebuyers tend to stop buying property when renting becomes an equivalently far more attractive option.

However, Sydney’s apartment rents are surging, up by another 5.3% in the last year.

The cost of renting a house in the inner west has risen by 25% in the past five years, and median unit rentals are up by 19% in that region.

Over the past five years in the eastern suburbs unit rents have increased by 21.9%, to $585 per week.

In other words, renting is still not really that attractive an option for many punters when standard variable mortgage rates are available from only 4.65% and rents continue to surge higher.

And sixthly, as noted here, there is a great wall of foreign capital now hitting the Sydney and Melbourne property markets.

forein capital

Unsurprisingly, there has been a huge surge in demand for buying Sydney apartments from foreign buyers.

The next downturn

It’s actually this sixth point which makes me believe that inner Sydney is the best place to invest in property in Australia.

We’ve had a long, strong run in property prices in this country over the years, to the extent that prices in many locations are too high for comfort, despite record low interest rates.

One day, some time in the future, we’ll get a property market downturn proper, and when we do, in my opinion, interest rates will likely be slashed to close to zero as they have in many developed countries which experienced an equivalent run-up in household debt:

It was instructive to read Gordon Brown’s memoirs which noted how when the global financial crisis struck and the Q2 2008 mortgage data filtered through to him it “made his blood run cold”, because he knew that with mortgage demand dropping by a third, the UK was heading for a certain recession:

“Prime Minister Gordon Brown lamented that the Q2 2008 figures reported by the Council of Mortgage Lenders on July 18 of that year, which showed an annual decline in lending of 32%, ‘made his blood run cold’.

Brown knew exactly what a dramatically shrinking debt market could mean for the British economy, specifically recession, and perhaps even a depression if the deflation in borrowing could not be stemmed.

The response in Europe was swift, concerted and included a vast bank bailout, yet even with interest rates stuck at close to zero (ZIRP) prices fell dramatically in northern England, by more than a third in some cases.”

When a really significant downturn hits Australian shores, we will likely see similar policies implemented, and in particular, I believe, we could see another relaxation of foreign buyer restrictions in order to help prop up the flailing market.

The thing about housing markets is that policies are typically set at the national level, not the local, and policies do not affect sub-markets across the country equally.

Zero interest rates and foreign demand (and QE?) would in my view see Sydney and Melbourne’s inner ring benefit disproportionately, exactly as we have seen happen in central London over recent years, but many regional markets could experience a long, painful, slow decline.



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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