NSW Crystal ball model - Sydney property price

Yes, that change where forced sales have rules is much better, the old way was really shonky many times.

And yes, if business gets slammed in a recession/depression, nothing will be safe from a big haircut

 

Agree all models should be taken with a pinch of salt. That said, when probed they can give good indications about what is and isnt realistic under different scenarios. In the end, if you knew all the inputs, there would be no value add as all would have perfect information.

On a separate note, worth noting perhaps that financial markets are currently pricing in the cash rate at 2.7% in a year, and 3.6% in 2yrs. This is always a shoot in the dark, but we'd probably be lucky (from a house price stability perspective) to see rates cap out at just 1.5%

 

Curious does model change if you assume 30% deposits?
We have record household savings levels associated with years of low interest rates and households prudently squirrelling cash away. Ie big buffers.

unsure how to model this but it is a factor that’ll feed into housing resilience (and demand).

 

What do those cash rates translate to in market rates?

 

Just take RBA cash rate +2% or 2.5% for approximate mortgage rates.

 

At the bottom, you'll see that I assumed the median purchaser in Sydney would have saved X2 years salary and have equity roughly 20% of total debt to cash out / family help. This is the general scenario where in Dec 2021 a household can afford $2m plus house.

I don't think a deposit will make massive difference. $100k extra here and there will help buffer fall by 2-3%

 

Agree, but it takes only investors and tenants in the account largely. Rate increase will also hurt owner occupiers who don't own any investment property.

 

One of the things I spend time thinking through was the impact of rent on owner occupier buyers. 30% increase in rent will also stir up buyers to borrow more and pay more interest even if rates increase. Its just a trade off between rent and interest, cost of having a roof over your head.

It will also put a floor on property price for investors.

 

It will take a while to convince investors to buy a property falling $100k a year cause rent jumped up $50 a week.

 

Precisely. This is where using a fundamental factor-based model to forecast short term market movements that are usually driven as much by non-fundamental factors like sentiment become a challenge.

All of that model makes sense in theory, but need to recognise its strengths and weaknesses and when it can and cant be used. Mr Burns' message was exactly my initial thought when seeing the model - does a rising rental market really make a difference when house prices are falling due to over-valuation and rapidly rising interest rates??

 

Given the new rate environment now, I've updated the crystal ball model

The main updates are:
- RBA rate increases: 1.35% by Dec 2022, 2.10% by Dec 2023, 2.60% by Dec 2024
- Rental increase 20% in 2022, then further 5% per year for 2023 and 2024.

The increase in rent has driven a fascinating outcome. It provides some incentive to owning a property even if interest expense is higher.

As a result, the fall in 2022 is only a small 2% but then will fall to 13% in 2023 and 17% in 2024 compared to current prices.



If rent costs only increase by 5% p.a, then property value will fall further.

-12% 2022 and by 2024, -25% from today's price.

 

Strong predictions and signals in the market is that RBA will have little choice but to raise rates to 1.75%-2.00% by end of year.

An update on the macro model show the property market is on track for 30% reduction from peak.

 

FYI net incomes for two income households parachute up in mid 2024 - the biggest ever tax cuts for most homebuyers in our lives.
It’s a $250k+ BC improvement too for households gaining nearly the full benefit.
The majority of Sydneysider median owner occupier purchasers will benefit a lot, and upper quartile nearly in full.

 

2024 could be the turnaround timing. 5-10% increase given the macro environment may have settled by then and as you said @Redom, tax cut for $250K+ households.

 

Between now and mid 2024,
As you mentioned, we have risk of RBA raising cash-rate to 1.5-2% by dec 2022/23
400bn fixed rate expiry in 2023/24
RBA looking for TFF recovery aka QT?
RBA stopped bond purchases in early 2022
RBA/APRA under increasing pressure for independent review for ignoring the inflation genie instead busy pumping the BC.

 

30% increase in rents in Sydney ain't going to happen across the board... it is not one market

Here is what I am seeing:

1. Low end Unit rents have indeed increased 20%...but they also are coming from $100 off so stuff renting for $300pw now $360pw...will see more of this move to $420-$450 essentially moving where they should be.

2. Houses under $600 pw are stable and increases are contained to 3-5%

43. High end houses/units are not moving up in price dramatically. Some are falling up 10% and some stable.

Dems how it is .....

As for wages....I can't see much above 2-3%. So in real terms people will be worse off. Businesses are struggling with other costs increases... a lot will go to the wall.

 

Indeed, my old red brick unit is renting for $340 still. It was $420-$450 pre-covid. The tenants has being no fuss and quite clean/responsible people from what neighbours are telling me, so I only increased $10. If I was Scrudge McDuck, i did be seeking $400.

 

Hmm unsure on this, seems devoid of data (like someone suggesting prices are rising across the board when they are not). 30% is a crazy figure though.

So far on a couple of ours:
- Old old house gone from 350 to 550. It perhaps was under-rented a bit though, but I suspect many properties with existing leases have this.
- 27 inspections on a 30 year old home (niceish) on first open, 8 applications, above market rent and on a forced short term lease.
- A client put a $650 ask, rented for $820!
- all family homes in south west.

Overall data suggests asking rents are shooting the lights out at the moment. The existing portfolio of rentals will adjust slower of course given anchoring rents of existing tenancies.

Simply, most agents I speak to out west are reporting the strongest demand that they’ve ever seen. Vacancies are now lowest or near lowest on record, asking rents are flying, days taken to rent out dwellings crunching, etc. I suspect next quarter CPI will capture this a bit more.

Graph 12 on RBA housing speech with asking rents showing a steep upward rise not seen in 15 years. This needs to slow soon otherwise there is a proper housing crisis on the governments hands if rental inflation hits double digits in major capitals.

Housing in the Endemic Phase | Speeches

 

You are speaking about one area in the SW.

There is only so much people will pay. Definitely seeing unit rents going up. But in some areas around Sutherland no one has the appetite to pay $1300.

Again like the discussion around house prices where a few of you said provide data and disagreed about a fall in Sydney data follows it is showing up now. Sydney has already fallen 5-10% with more to come.

I watch these things closely.... The affordability and less population growth .. plus the large number of homes built in the SW and Be corridors may being back balance. The other thing is people are definitely moving back into units.

So the rental imbalance is not enough houses by lots of units. Affordability and new supply will drive the rebalance.

So a 30% increase in Sydney is not likely in Sydney nor Brisbane. But very possible in Perth and less so in Melbourne...as it is ridiculously cheap compared to even Geelong.

By the way your article does not have the current data just an opinion.

 

I’m talking about Sydney asking rents, specifically for houses.

It’s RBA, unsure if you could possibly find a more accurate source. It’s not an opinion, it’s just tracking asking median rents across the city. Walking around a city or my personal observations are definitely anectodes, opinions, etc though.

Asking rents in Sydney are up nearly 6%+ this QoQ, 20+% YoY for detached housing.

Asking rents do not equate to actual rents in real time. This is because there are tenancies in place and anchors to rental inflation. I.e actual rents will lag asking rents by 6-12 months.

Given rents being the second largest input into CPI (with new dwelling cost prices at 1), CPI will continue to be elevated for a while yet - excluding the large impact of energy/oil uplifts.