NSW Crystal ball model - Sydney property price

Then I guess they will have to move further out. That's how it's always been. Look what happened in Byron Bay where poorer folk were displaced by sharers and the more wealthy set.

And you say people can't afford 30% more in rent. How have people afforded a 30% increase in property prices?

That said, a 30% increase in rents is too high to fathom right this moment, so I'll call it, I say 10-15% within the next 12 months.

 

The vast majority of people (who can WFH 5 days a week) won't necessarily move to the regions because its cheaper. Cities are still a draw for a lot of people. And its arguable whether the attractive regional areas like the Sunshine Coast, Byron etc or better parts of the other cities are cheaper.

As an example, I'd rather live in a crappier house in Sydney than a better one in Perth. Not everyone thinks like me but the disparity in rents has been evident for a very long time. And if the majority voted with their feet, the movement to less expensive cities would've been more apparent even before COVID.

If they are, then that gap will close. And those seeking value for money will have to search further afield in less sought after Redneck Central. That I think is not gonna happen.

 

are you looking at the demographics trends..this is not going away with retirees.

The WFH trend is only one aspect. Have a look at how much regions have gone up. I am talking cities like Wollongong, Newcastle, Gold Coast, Geelong, Ballarat, Sunshine Coast.

 

Are you forecasting a -22.59% in Sydney's median value??

 

Based on the model, yes.

@Sackie please pick apart my assumptions in the model.

I've played with it for a while now, the model is simple enough to understand and capture what I believe is the main macro drivers. Maybe it won't be -22.59% exactly in Sydney median value by 2023.... but if all the fundamentals hold true then -20% is a likely outcome

 

Curious what the model suggests for end of 2023 with:
- 20% increase in rents from 2022 levels (~35% from 2021)
- 1.5% cash rate
- wage growth at 4% for both years

 

14.79% decrease if the rent increase is 35% (20% was still around -22% decrease).

You'll see that 1.50% increase in rates has increase net cash interest payment by +$24K p.a.

It actually helps to keep the property value up / incentivise to borrow more if rent also increased.

As an increase in rent by 35% means this professional couple (the median Sydney property purchaser) is going to pay more to live/rent anyway, why not keep borrowing and service at a higher interest rate.

 

If the macro value comes off that much....then we all better...

 

Will be interesting to see how reality plays out compared to thorough analysis with reasonable assumptions. Will check back in 2023/4 I suppose.

 

An only 15% macro drop will be 30% approx drop in property values. I dont see it.

 

The biggest X factor is the government and the agencies response.

 

I know..... I'm someone who invested in property over last 15 years. If anything, I've being lucky and only ever experienced a generous rate environment.

Never have anyone in recent memory, experienced 1.00% or 2.00% increase in rates with 12-24 months period.... let alone in Sydney where dare I say the average loan is $1 million

 

Yeah ?

I was paying just under 18%, I cannot recall the business loan rate.

I can assure you, it was nowhere near that & I wish only 1 or 2 %

 

You sir, must be a silver haired old timer!

Serious question. How much was your loan when 18% was the interest rate. Better yet, what was your DTI (debt to income ratio).

Market currently expect 1.50% increase in the next 12 months. Given the debt size, this would be like going from 18% to 25% in those times I reckon.

 

When I first started investing I remember my interest rate was about 7.5% (mid to late 90s). And when it came down to 7%, I thought I better fix it. Then it kept going down.

 

The model looks quite interesting. Short term i think forecasting the market, even with a decent model (and first impression is this one isnt bad), is hard and probably less about fundamentals/more about sentiment and things like bank lending standards. But we can only try.

Can i ask, has this been backtested at all? I am quite used to working with these kinds of forecasting models, and there is a degree of calibration required (eg HH income) to get them to a point where they are somewhat reliable.

As mentioned, i think this one is alright. First impression i was a little skeptical that some of the factors were really that relevant, but on further look it seems ok - as good as can be done for a fundamental driven model attempting to forecast short term movements.

For a longer term forecast, you may want to check out the "Long term house price growth potential" thread if you havent already. (caution: shameless plug for my own model).

FWIW, assuming a 1.5% cash rate for that model gives a price decline of a bit over 20% to return to
'fair value' nationwide, although that is based on the conclusion that current prices are 10% overvalued (so fair value falls a bit more than 10%), which you may or may not agree with.

Backtested, that model has been off by about 0.23% p.a. over 42 years, although that number has varied from year to year.

 

I have hair, which is amazing, but any loss etc is not from financial worry, but from the other sex or more to the point, my boss

To give some an idea of what can transpire.

I went from being able to buy what I want, when I want, , to working from 9 till 11 or 1am, half day off Sunday which often ended up being all day, to break even. I had had enough and did not renew my leases at the time. It was crippling & I was not as bad o ff as many, heaps of people and businesses went under quickly.

Property markets were shot, especially the high end o f town. You did not want to be in a forced sale.


I also recall very clearly a discussion with manager at one of the majors, I had 5k left on one loan secured by a 250k house, and in no uncertain terms, I was told, if I miss 1 payment, they would foreclose, and, I can assure you, he was serious, he was in a bad way and under a lot of stress as was a business branch.

And in those days, it was often sold to someone they knew at a big loss, I never missed a payment It came before anything and anyone else.

 

What the modelling doesn't reflect is psyche, Govt interventions, dynamic economic conditions, potential sellers who may be stressed, buyers in the wilderness who missed out during the boom who will now pounce when prices drop etc etc.

So many factors that are changeable at play - that's why in essence, models are worth no more than Joe Blow's punt on what the market will do.

 

This is the type of feedback and thinking that I think is useful.

Agree with what you say. The model is a bit of a compass, its not a GPS.

No one knows how government will intervene or if after a 2% increase, RBA finally sees the economic down turn and go all out QE and decrease back to 0% again.

But I would like to poke around in the Crystal model and ask if you can quantify what you believe the key assumption on govt intervention, buyer eagerness, economic condition could be in a number. I have made that assumption that of all the above variables, the interest rate at a macro level capture it all. Peaking at 1.50% in 18 months (from 0.10% today). Keeping it simple, this could translate to a 15%-20% decrease as a base scenario.

 

No way the banks will do that now. During COVID, banks allowed people to freeze payments, unthinkable in those older days. Crazy to me personally, nowadays the risk is not one's own responsibility but on banks / government.

But I do think the biggest value will be in high income / blue chip suburbs. 2008 during GFC, East & Lower north shore had property pull back 50%. Simply because its the high leverage mid-upper management that for squeezed without work.