Why Sydney property prices won’t fall

In his recent column in Switzer, John McGrath discusses Sydney property prices and why he believes they won’t be dropping anytime soon.

Here’s what he had to say:

So we’re well into the third year of substantial price growth in Sydney, with home values up almost 7% in 2015 (CoreLogic RP Data) and we’re not even at the half way mark yet.

John Mcgrath

The boom was not expected to continue this far into 2015.

We saw a dampening of the market in November 2014 when a lot of stock came online and indications at the time were that we might be coming to the end of the rapid growth period.

But the market has kept going, in part due to two further interest rate cuts which have done a lot to keep buyers engaged.

But as prices keep rising, so does the intensity of discussion around price bubbles and the apparent potential for collapse of property values in the Sydney market.

I believe that buyers and sellers need to ignore this commentary.

Sydney has proven itself over and over again to be one of the most resilient property markets in the world.

There are reasons for this and most of them relate to long-term fundamentals that form a bedrock of strength for the market.

A big fundamental is that Sydney is vastly undersupplied with natural borders that limit the amount of new homes that can be built, yet demand keeps on rising due to the city’s strong population growth and increasing engagement from overseas buyers.

I read with interest an opinion piece by one of Australia’s most respected business and investment journalists, Robert Gottliebsen in The Australian recently that laid out some great statistics on Sydney’s supply/demand equation at it stands right now.

The article underlines why prices aren’t going to come crashing down and in fact, why they’re likely to keep on rising for the next 15 years.

Here’s a rundown of Gottliebsen’s article, which is based on data from Infrastructure Australia and the Housing Industry Association:sydney-harbour

  • Sydney’s population is expected to reach 6.1 million in 2031, which means 80,000 new people will move here each year.
  • Based on the assumption of 1.5 people per dwelling (in recognition of the rise in apartment living), Sydney will need 53,000 new dwellings per year.
  • The HIA says 54,000 new dwellings will commence in NSW in 2015 – but that’s for the entire state.
    That’s also a record high figure, with annual new builds expected to decline to 47,000 per year over the next four years

The disparity between supply and demand is pretty plain here. Sydney is going to remain under supplied and supply/demand is pretty much the ballgame when it comes to price pressure.

Now of course, the boom is definitely going to end at some point.

That doesn’t mean price growth will end, it will continue on but in a less spectacular fashion

What will bring us out of the boom?

There are a few things.

  • The market will at some point reach a natural peak – prices will get too high and buyers will lose interest.This isn’t happening yet, partly because finance is so cheap.
  • Investor activity, which has been a major driver of Sydney’s boom, will taper off as yields become too low.
  • Interest rates will begin rising at some stage as the economy improves and this will put the brakes on activity – but this is a long way off.

The Sydney property market is being very heavily scrutinised at the moment because it’s had so much growth and yes, it’s a bit unusual to have such a long stretch of significant price rises.

But it doesn’t mean a calamity awaits us.

A big part of the growth we’re experiencing today is simply catch-up after several years of little growth.

Everyone needs to calm down and remember that this is a solid, high performing property market in a truly international business hub and in my opinion, it is going to stay that way for a long time to come.

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'Why Sydney property prices won’t fall' have 4 comments

  1. June 6, 2015 @ 1:07 pm George

    What a lot of real estate saleman balony! John McGrath you are so full of it!
    The integrety of this entire article is based on one simple assumption…….
    “Based on the assumption of 1.5 people per dwelling (in recognition of the rise in apartment living), Sydney will need 53,000 new dwellings per year.”
    Well I’m sorry to tell you that statistics show that young people are staying at home much longer and furthermore I have observed that people are sharing accomodation more to keep their rental costs down.
    Hence if that 1.5 people assumption is changed to say 2 people then we have a significant property oversupply instead.
    It just shows you how anyone can manipulate numbers to reach a desired conclusion.
    FACT: Dwelling approvals are currently near an all-time (boom) high
    FACT: Apartment approvals are at hughly elevanted all time highs, escpecially in relation to houses.
    FACT: We are quickly heading into a housing oversupply in the next 2 years as many commentators have pointed out.
    FACT: The proportion of investors (and investment loans) in the market has never been higher
    FACT: Property prices have well outstripped rises in incomes in the last few years. The only driver of rising prices and improved affordability then is low interest rates. Worse still, rents which usually underpin property prices have been either flat or declining over the last 2 years!!!! So when interest rates level out so wil property prices. And when interest rates start rising there will be nothing there to stop prices from falling back to realistic and sustainable values again….welcome home again.
    FACT: There has been no fundamental property investment analysis nor returns/yield analyis conducted by investors in the last 18 months. Only assumptions that property prices will keep rsing. Investors stopped asking the question of “How much rent can be achieved?” early last year as the greed and fear factor set in. This is not property investment! It is pure speculation in property prices and we are certainly living in dangerous times.
    FACT: The reserve bank acknowledges this danger and has acted to rein in invstment loans by tightening loan criteria.
    FACT: Investors will sell out of the market as quickly as they bought in. And when they do watch prices come tumbling down in both Sydney and Melbourne


    • June 6, 2015 @ 11:33 pm Michael Yardney

      While you make some valid points you spoil your argument my claiming some of your opinions are FACTs. For example the last one. That is pure conjecture


  2. June 7, 2015 @ 1:36 pm Dean Livanos

    I work in construction as a tower crane operator im not an economist but I am noticing that a large proportion of newly completed construction àre being left vacant by investors rather than being leased out. So this whole thing of housing shortage I dont believe is accurate. Also in Vaucluse I notice a lot of nice big houses being purchased by Chinese and being left vacant. Like the first poster George pointed out rental returns no longer matter as buyers are going for capital gains.


    • June 7, 2015 @ 6:28 pm Michael Yardney

      You’re correct – overseas invetsors are buying with very, very different criteria to locals


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