The median house in Sydney surpassed the million dollar mark in July and is now valued at $1,017,500.
In the quarter ending July, the Sydney median house value grew an astonishing 7.58 per cent.
The average quarterly growth rate of all other capital city house markets was just 0.92 per cent.
Graph 1: Capital Growth Rates – Houses
The annual rate of growth for Melbourne houses was 9.07 per cent, bringing the median house value to $683,000. Growth for the month was significantly lower, at just 0.13 per cent.
Brisbane houses performed steadily in the year to July, however performance was down in the unit market due to an overhang of stock.
Commencement of the Queens Wharf development in the heart of the Brisbane CBD (a complex which will include 2,000 new apartments) is likely to place further downward pressure on the growth of Brisbane units.
The worst performing areas in the year to July were once again the resource states.
Perth houses contracted 4.34 per cent while Darwin unit values dropped 6.41 per cent.
Table 1 presents the market performance summary for July.
Table 1: July Statistics Summary
A Note on the Resource Markets
A number of commodity prices have tumbled in the last year.
The iron ore price averaged just AUD $69 per dry metric tonne over the month of July, which is a 13.88 per cent reduction from the previous month.
Australian Thermal Coal remained steady over the last month, averaging AUD $85.75 per pound.
However, this is a significant reduction from the peak price in 2008 when coal averaged over AUD $200.
World Bank data shows that resources boomed in the early 2000’s, following a long period of low valuation between the 1970’s and the 1990’s.
While it appears that commodities are in a correction period, values have not fallen so drastically that prices are below what they were a decade ago.
In response to the decline in commodity prices, many suppliers, including BHP Billiton and Rio Tinto, chose to increase efficiency and cost cutting as opposed to reducing supply.
This is likely due to larger producers taking advantage of the fall in commodity values to pressure smaller suppliers out of the market.
In line with cost cutting, thousands of mining positions have been terminated across South Australia, the Northern Territory and Western Australia.
This, coupled with the completion of mining construction projects, is exacerbating economic downturn in the resource states.
Deterioration may be slightly offset in the short term due to the devaluation of the Yuan, which will make Chinese steel exports more competitive and drive demand for Australian Iron Ore, an input in steel production.
Commodity prices have a strong lead lag effect on dwelling values in the resource state capitals.
As commodity prices stabilise at significantly lower levels, the Darwin and Perth dwelling markets are also stabilising.
To put the current growth cycle in perspective, I have provided the historical House Price Index (HPI)data for Darwin and Perth in Graphs 2 and 3.
Graph 2: Perth HPI
Graph 3: Darwin HPI
The graphs show that, like commodity values, dwellings in the resource capitals are no longer in a stage of rapid growth as they were between 2000 and 2008.
The Perth and Darwin markets are currently in a correction period, which is indicated by the downward movement of the HPI.
However, putting the dwelling positions into a larger historical context shows they have not drastically collapsed.
During the mining boom, the Perth market saw annualised growth rates as high as 40 per cent in 2006. However, these growth rates were met with corrections as large as 10 per cent in 2009. The end of the mining boom has restored growth cycles that are much more subdued than these levels.
The New Normal – Ownership and Lifestyle in the Age of Population Convergence
Growth in the Sydney and Melbourne markets have concerned lending institution regulators, and hopeful investors and homeowners.
As discussed in previous newsletters, there is little evidence attributing foreign investment and tax structures to the surge in property values.
I have not found sufficient data to argue rigorously that these forces are driving up prices.
There is another force that I believe may be attributed to house and unit value increases – particularly in Sydney: the concept of population convergence.
In 2005, American urban studies theorist Richard Florida built a case for population convergence.
Measuring economic production, levels of innovation and population, Florida found that population and economic activity were converging to a few large cities around the world.
Evidence suggests that Sydney could be one of these cities. This would account for the positive returns on Sydney property over the last three years, which according to Residex data has averaged a rapid 3.05 per cent per quarter.
At the time of Florida’s study in 2005, Sydney was one of just 60 cities around the world that had a population of approximately five million or more.
Using World Intellectual Property Organization and U.S. Patent and Trademark data, Florida also found that Sydney was one of just 20 cities around the world to be fostering significant levels of innovation.
Population density in Sydney has increased approximately 16 per cent between 2000 and 2012, according to data from Charting Transport.
Increased density and the presence of more investors in the property market has led to an increase in the supply of units over houses.
From September 2012, unit commencements have regularly outperformed housing builds, which can be seen in Graph 4. This further implies that most development is occurring in urban, densely populated areas.
Graph 4: Sydney Dwelling Commencements
Population convergence theory could explain the growth in the house and unit markets, and signal that such growth is likely to continue.
This is not unprecedented.
Values and rents have skyrocketed in cities around the world, including Singapore, New York, London and Tokyo over the last few decades.
High rates of property growth are not just reflected in a desire to be near amenities, culture and cosmopolitan environments.
Density also brings productivity advantages through economies of scale. It increases connectivity and knowledge sharing. In turn, these things create more jobs and attract a higher population, reinforcing population convergence.
In response to higher density living, many people have begun to adjust their standards of living in Sydney.
However, a level of development resistance could further increase prices, such as a court ruling earlier this year which will see the minimum approval unit size in Sydney increase by 30 per cent.
The methods inhibiting development are wide and diverse and therefore difficult to fully quantify; the prevention of new development can come from environmental regulation and community resistance.
These forces prohibit development of popular space and undermine innovations used to adapt to higher density, such as the micro-apartment movement.
Resistance to development can also preserve a higher standard of living in Sydney, which – for those who can afford it – is clearly in demand.
Assuming Florida was right in his theory of population convergence, Sydney could see strong house value increases over the next few quarters before stabilising at a level that even the most wealthy and mobile will find excessive.