Kevin: Good day, Louis.
Louis: Hello there, Kevin.
Kevin: You’ve made some pretty good forecasts about growth in the future and how you see the market going. Do you think there’s a bit more steam left in it yet?
Louis: Yes, we do in a number of cities so yes we’re being pretty bullish once again on the Sydney housing market where we’re forecasting an 8-12% increase in dwelling prices over the next year.
You may recall this time last year we said 15-20% per city. A lot of people had criticism over that one, but I think we got it right.
Kevin: You did get it right.
Louis: We think there will be some moderation occurring in the market. We think sooner or later investors are going to start slowing down.
They’ve been really driving this recovery up, and sooner or later they may well exhaust themselves. But the momentum is still there, and there’s enough momentum now to continue well into 2015.
Let’s just be clear that what’s happening in Sydney isn’t happening everywhere else.
I can tell you now that in Darwin house prices are now falling. In Perth, the rental market is extremely weak.
We’ve already seen asking rents fall by over 8% over the course of this year.
In Adelaide things are very flat. Hobart looks like it’s just starting to pick up now, and we think that’s a good value play for Hobart.
But the point I’m making is that what is happening in Sydney is not happening all across the country. It would be wrong to conclude that we’re in a bubble just because of what’s been going on in Sydney.
Kevin: I want to ask you about the bubble in just a moment but you missed Queensland and Brisbane.
I’m a little bit concerned about the Brisbane market because of the amount of stock that I can see still coming onto the market. In fact, I think there may still even be more properties for sale in the Brisbane market than there are in Sydney.
Louis: Yes. In terms of total listings, yes, there’s actually more stock on the market in Brisbane right now. It used to be a lot worse.
Listings overall have come down. In inner-city areas, particularly for apartments, we’re quite concerned about the power of the Brisbane market. We think there’s an oversupply and it’s not really a good time right now to be a landlord right in the middle of town.
Obviously in time that stock will absorb. The Brisbane population is still growing and growing at a fairly strong rate. That stock will be absorbed, but at this point in time things are a bit weak for the rental market in town. That’s a specific part of Brisbane we’re quite worried about.
Kevin: Will you be worried about that for a considerable amount of time, or is it something short-term, as in the next 12 months?
Louis: We’re worried about it for 12-24 months, because like you, we are aware that there’s going to be even more new stock coming into the marketplace.
That will put additional pressure on rising vacancy rates, which will slow down the rental market. I wouldn’t say it’s overly critical.
I wouldn’t want to overplay the situation, but for example, the vacancy rate in the Brisbane CBD now is running at about 4%.
Over in Perth, just to give you an example, in the CBD it’s running close to 8%, and in Docklands in Melbourne, that’s running at about 8% as well, off memory.
Kevin: Louis, what makes a bubble? What is a bubble?
Louis: A bubble is basically where prices, whether it is property, shares or other goods and services run well ahead of their underlying intrinsic value, where buyers just keep bidding, even though they’re fully aware that the market is well about its value, but they’re doing it because they’re so fearful that prices will go up even further.
Normally bubbles are also fueled by easy money and easy credit. That tends to fuel things as well.
Just because prices rise, that doesn’t necessarily mean you’ve got a bubble immediately on your hands. That’s what I’m a little bit fearful about the current debate at this point in time.
I don’t know about you, Kevin, but the moment this recovery actually begun in the last days of 2012 you had so many commentators out there saying, “We’re in a bubble.”
Hang on. The market’s just started picking up and we’re just straight on to it. No, we weren’t in a bubble.
The other question I pose is, once again, “What is happening in Sydney?”. We do agree the market’s going into overvalued territory. It is not happening everywhere else.
Are we in a national bubble just because of what’s happening in the Sydney housing market? The answer is, “No.”
Kevin: We’ve seen that Sydney market peak and trough so many times over the last 10-20 years. I can recall only about a decade or so ago when that market actually did a big nose dive. No one was saying then that Australia is in a property bubble.
Louis: That’s precisely right. People forget that the Sydney housing market was effectively in the doldrums between 2004 through to about 2012, with some very minor periods in 2007 and 2009 when prices picked up a bit. But the rest of that time it was in the doldrums and it was underperforming.
If you actually look at the ten year annualized increase in dwelling prices in Sydney, even taking into account today’s gains, it’s only running at about 3% per annum for that whole ten-year period.
That’s how much of a downturn we’re in. So the Sydney market was definitely overdue for a pickup and a sharp recovery. Sure enough, we’ve had one.
When we’ve run our 30-year valuation metrics and just look at the average value placed on Sydney homes compared to incomes over that 30 year period, in Sydney we’re just now over above that long-term average.
We have been in a far more overvalued situation in Sydney in the past, particularly in 2003 and in 2009, than what we’ve got today.
Kevin: Louis, thanks for sharing with us. It’s always great talking to you, Louis Christopher from SQM Research. A lot of great reports there, too. If you like what Louis says and you want to find out more that’s the place to go: sqmresearch.com.au.
Thanks for your time, mate.
Louis: Thanks, Kevin.
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