Sydney property prices are rising – but real estate values are cooling elsewhere
The ABS released its Residential Property Price Indexes data, and with the reporting suite having been updated in recent times, it’s an interesting release in terms of what it tells us about the Australian residential housing market.
Let’s take a look in four short parts.
Part 1 – Sydney booming, elsewhere cooling
Sydney dwelling prices recorded 2.7 percent price growth in the September quarter to be 14.6 percent higher over the year to Q3 2014.
However, no other city recorded growth of greater than 1.0 percent in Q3, suggesting that market momentum is contained and possibly fading outside the harbour city.
To contextualise this, Sydney has actually been the weakest market performer since the end of the city’s preceding boom which ended in late 2003, with capital cities such as Darwin going gangbusters over the past decade.
However, following on from what we have learned from London and elsewhere, it’s long been our contention that since household debt levels bumped against their effective ceiling in 2006, few housing markets would be able to increase in price materially ahead of household income growth.
And thus it has been. Only Sydney and, for a while at least Melbourne, have looked likely to achieve this since 2008, with price growth elsewhere more muted, and quite significantly negative in real terms in certain instances.
Sydney, on the other hand, continues to march to its own drum in notching 53 percent growth since December 2008.
Part 2 – Value of Dwelling Stock by State
A chart which illustrates the point beautifully, with the gross value of dwelling stock only moving significantly higher in the states which are home to the two largest capitals over the last three years, and any entrenched uptrend now looks to be fading outside Sydney.
Part 3 – Houses versus flats
We know that historically house prices have comfortably outperformed the price of attached dwellings. This is logical since there is high demand for houses as the dwelling of choice, and well-located land retains an inherent scarcity value.
However, there is also a strong argument that with the median house price rapidly approaching $1 million in Sydney, holding costs relating to houses as investments will increasingly see investors turning their attention towards attached dwelling stock.
Over the past year, Sydney houses prices rose by 15.4 percent and attached dwellings by 13.2 percent.
The slight disconnect is unsurprising since so many generic multi-unit developments lack scarcity value or indeed any desirability at all, but it is notable that the strongest returns for attached dwellings were in the $550,000 to $600,000 middle-market bracket.
In other words, after holding costs are factored in, mid-priced apartments, where the greatest market demand from investors lies, have performed as well as houses for investors in the past year from a total return perspective.
Part 4 – Supply response
Conventional housing market economics dictates that as prices rise cyclically, development becomes profitable and supply comes online in response.
The ABS has recorded an increase of 143,700 dwellings over the past year, which is a solid enough response, though hardly awe-inspiring given that the latest round of population growth figures records national population growth in the region of ~388,000 on an annualised basis.
Where is the Sydney supply response?
Moreover, there is another issue which we have flagged here on several occasions previously.
While commentators love to wax lyrical about the looming oversupply of apartments in Sydney, the bigger picture is that the oversupply will in the near term be confined to relatively few small inner-city pockets (I’ve listed these suburbs on this blog page before), and on a city-wide basis, supply at present is barely keeping pace with population growth, let alone closing any inherent shortfall.
To underscore the point, today’s ABS figures recorded a year-on-year increase of 31,800 dwellings for New South Wales and only 7,300 over the past quarter.
Now ABS quarterly figures can certainly be a crap-shoot at the moment (not necessarily through the bureau’s own fault, it must be said, due to repeated funding cuts), but perhaps one implication of today’s figures is that fewer multi-unit approvals are making it through to completion than expected.
It is also true that much of the building work remains in the approvals pipeline or at the construction stage, and as such there will always exist a significant lag effect between price gains and multi-unit dwelling completions.
But…recall that interstate migration from New South Wales has fallen to the lowest level ever recorded in Australia and the state’s population is exploding higher at an annual pace of 114,500 and rising.
In that context, 7,300 new dwellings for the state does not cut the mustard as a supply response.
Our calculations below show that New South Wales has constructed one new dwelling per increase in headcount of 3.7 persons over the past three years, which is not nearly enough given that the average household size in the state is ~2.6.
To date we haven’t seen this demographic shift discussed or even considered too widely at all in the media, where mostly the chatter prefers to continue discussing an oversupply.
In reality we will likely see a decent pick-up in dwelling completions over the next two years but then approvals data indicates that there will be a decline again thereafter.
What happens to state population growth, on the other hand, is less certain, but the current trend reads “boom”.