There is a lot of confusing property market commentary around at the moment…perhaps even more so than usual!
I read one article from a US pundit stating that “Australia’s property prices are rising faster than ever”.
That makes for an interesting headline, but none of the real data shows anything remotely close to that.
RP Data‘s figures instead demonstrate that, Sydney aside, Australian dwelling prices have essentially done absolutely diddly squat since their previous peak in 2010.
Price changes in real terms
Of course, the above figures are in actual or nominal terms.
In real terms, when adjusted for incomes dwelling prices have gone backwards everywhere except for Sydney over the past four years or so.[sam id=40 codes=’true’]
Pundits often state that “asset prices can’t outpace inflation”, but since wages can outpace inflation, so too can dwelling prices.
Given that incomes tend to increase over time, and given that the speed limit on asset valuations largely boil down to the availability of credit and borrowers’ ability to service that credit, you might expect that over time dwelling prices could mirror household income growth, while acknowledging that interest rates and the make-up of the average households will also shift.
It’s now around a decade since Sydney’s preceding property boom finished.
Here is what has happened to rents over the time since December 2003 as compared to average weekly earnings ordinary time earnings.
The earnings figures I’ve used here are the average weekly ordinary time earnings (AWOTE) from the Reserve Bank which increased by a little over 50% over the past decade, which is, of course, well ahead of the rate of inflation, as noted in previous posts.
The recently released inflation data from the Australian Bureau of Statistics showed that Sydney rents mirrored earnings growth remarkably closely in the harbour city over the past decade, also increasing by around 54%.
As for house prices, contrary to the incendiary commentary from our well-meaning but misguided US friends, Sydney has been one of the weakest performing property markets over the past decade, with house prices lagging incomes significantly since 2003:
The chart above explains why I’ve long suggested Sydney as being the best risk-adjusted bet for investors in Australia over the past 5 years, since I believe that over the medium term eventually prices would catch up again sending the market up to its next cyclical and irrational peak.
The chart also explains why SQM Research felt that Sydney could show 15-20% growth in 2014.
Recall also that the official cash rate in Australia in the boom years 2000 to 2003 hovered between 4.25% and 6.25%.
Today the cash rate is only 2.50% which is a nontrivial 275bps below where it was in December 2003, so it is not unfeasible that we even might yet see the red light overshoot the blue.
Since average earnings might grow, say conservatively, by say another 2.50% or so in 2014, this would mean Sydney dwelling prices would have to record exceptionally strong growth in the ABS house price index of around 20% to again hit their previous eye-wateringly high levels.
Historically the most expensive city
Sydney has historically been Australia’s most expensive city.
Louis Christopher of SQM Research said that “Sydney is like a high PE stock. It trades at high levels because people expect prices to continue performing in the future”.
Throw in record low interest rates, Sydney’s massive population growth, the new impact of self-managed super funds (SMSFs) being able to invest directly in residential property and the fact that the great stock market crashes around the world have seen a global shift from equities to prime location real estate, and I’d take a bet that some time in the coming decade the red line will again have crept closer to the blue.
We opined a long time ago that there has been a global shift towards storing wealth in real estate in prime locations, one which has been accelerated by the financial crisis, rock bottom interest rates and a trend towards capital flight from countries across eastern Europe and Asia.
Note that as foreign funds wind their way to these shores, rarely will they be invested in remote or rural areas.
On the contrary funds will flow to the inner suburbs of Sydney and Melbourne.
It’s no coincidence that I’ve been heavily invested in real estate in cities like Sydney and London, and nor is it any coincidence that we have offices in those two cities.
“As property prices cool in Hong Kong and Singapore, which have long been magnets for Chinese investment, more money is flowing to real estate markets such as New York, London and Sydney.
Chinese have overtaken Russians for the first time as the biggest buyers of apartments in Manhattan, according to real estate brokers.”
Juwai also reported this week that Chinese investors are unsurprisingly focusing on Sydney and are buying in suburbs such as Chatswood, Epping, Camperdown, Epping, Mosman and East Sydney.