House prices - where to from here (sydney)

Hi everyone

was going to hijack another thread from property economics section but thought it would be better to post a new thread..

id especially love to hear comments & thoughts from people who have been involved in more than 1 property cycle...

i can only imagine that in previous property cycles when the market was at its peak .. people would have been saying - "houses way to expensive.. no way it can get more unaffordable than it is now etc etc".. these are certainly the thoughts going through my head at the moment.

Now considering the median sydney house price is/was $1mill - and no way salaries (in Sydney) have increased at the same rate over the same short amount of time... and assume no rush to increase interest rates (wont be happening in this current climate)

- What sort of price correction as a % would you estimate from the peak of $1mill ( or in otherwords the median house price after the correction)

- and more importantly what would cause such a correction other than a fall in demand (either by investors or FHB).
i.e. assume supply rate of new dwellings stays the same

cheers

 

Plenty of steam left in the market.even if the market peaks it'll be over the $1m post correction.

 

Personaly I think the correction would be very minor, say 10%-15%. The new immigrants take up the supply pretty quickly. During the last boom 2003, the rents for a 2 beddr in my suburb went down pretty noticeably. But this time, the rents for the same 2 beddr just dropped a little. Lots and lots of new arrivals in Australia.

 

It won't be a uniform correction. Never is. I remember last boom thinking it had 'jumped the shark' when I read about somebody paying a crazy amount for a house at Kellyville. I'm sure it was $900K. That house would have dropped a lot when the froth got blown off the last boom. But there would have been some suburbs where there wasn't much of a drop and prices just marked time for a while - a long while. The same thing will happen this time.

 

Wild guess here - A 30+% correction in real terms before the start of next boom.

Also, it would be unwise to assume that the supply rate for new dwellings would stay the same in the short to medium term.

The smart people already made their money in Sydney - people who got in too late or paid too much or borrowed beyond their means are gonna have big problems. That's true everywhere but more so in Sydney at the moment.

 

Too much downside risk in a market dependent on foreign capital

 

People being priced out of the market. Prices can't keep going up if only a limited amount of the population can afford them. We're starting to see that with South West Sydney where the median is 650k but people who predominantly buy in the area (first home buyers) have now been priced out. Those suburbs were never that attractive to foreign investors and now with the APRA changes a lot of domestic investors are overlooking those suburbs because they're questioning the scope for capital growth.

On a macroeconomic scale it would be a recession and job losses, in particularly. This would mainly effect the mortgage belt suburbs imo.

 

I can't answer the first part but I have been wondering the same thing. I remember the last Sydney boom but I didn't follow the market between then and now. I also haven't been able to find a good graph to show house prices between then and now. I just remember looking at Perth, Sydney and Melbourne in 2007. Melbourne was cheapest, so I bought there. (I was on a budget). The last Sydney boom was a big one. It would be interesting to track prices to see what happened between then and now.

For the second part... some people say that property prices never really go down because people always need somewhere to live. Not true. Prices decrease when the property market corrects. The property market corrects because demand decreases. Some examples of this are: kids moving back with their parents or into shared accomodation or investors moving to other markets (such as Brisbane, Melbourne or Perth) because they have been priced out of the market. As demand decreases, so do prices.

 

I bought my first unit at the peak in 2005 in West Ryde. (255k). The property price went absolutely nowhere for at least the first 3 years. Didn't go up or down.

But all of a sudden it went up 100k over the next 2 years, and I sold Christmas/New year 2010-2011 for 365k. (I wanted to sell due to a horrible sewerage overflow flood... it went all over the carpets and the insurance would only clean the carpets not replace!!!) Urgh....

Tip.

Dont try to sell around Christmas.... oh, and that place would be high 5's nudging 6 if I had of held till now.

Anyway, a few months later I bought a better place with potential with that same money so it all worked out quite ok. This is before I discovered the forums and had an awesome mortgage broker. So with the knowledge I had, it was a decent move.
These days I'm sure I wouldn't have sold even with that kind of problem, done my hardest to get a carpet replacement from the insurance and would have done an equity pull instead.

 

I'm waiting to buy before Christmas once my first IP gets tenants. Patiently waiting.

 

The previous boom is a bit hazy to me but I somehow do remember that houses in houso Mt Druitt peaked at around 240 - 250K.

After the boom they were priced around 190-200K. They slowly creeped to about 230K. Prices then took off with the current boom.

I think prices in the Druitt could hit 600K before settling down out there. This would be phenomenal growth for such an area.

 

Everybody agrees that Ireland was in a bubble in 2008. The average house price in Dublin topped out at around €430,000, against a salary of about €43,000, or ten times earnings.

After that, prices fell by 56%. They're still down by 37%.



Sorry about the Dutch labels on the chart above. I stole it from Wikipedia.

No matter how you cut it (all dwellings or just houses, and mean or median income), Sydney is above that level. Houses in Melbourne are somewhere between nine and ten times the average income, so getting into the same sort of range as Dublin was.

If things turn, then my guess would be that both cities will suffer spectacular losses. Probably more than 50%, and possibly over 60%.

This will potentially wipe out the banks, as they're heavily leveraged in the mortgage market, probably trigger a nasty recession, and possibly lead to a sovereign financial crisis for Australia. It's not going to be the gentle realignment that the bears at Macrobusiness or the Australian Property Forum are expecting.

However, London provides a counterexample. Despite a double or even triple dip recession, stagnant wages, first time buyers being wiped out, riots, and being the epicentre of the financial crisis, prices are significantly up over the last six or seven years.

What happened is that London property became seen as a safe haven in an uncertain world, so a huge amount of capital arrived from rather dubious countries, and bought out the prime postcodes. The people who would have formerly purchased in Chelsea were displaced to Fulham; Fulhamites moved to Wandsworth; and so on.

At the same time property investors continued to buy up the bottom end of the market, which supported prices. A lack of decent returns, and a distrust of the pension (super) industry made it an attractive option.

The net result was that values rose by 50% or more during a period of economic weakness and instability.

If Chinese money continues to flow into Sydney and Melbourne then this could be an alternative scenario.

The thing is that we're not going to know how it all pans out for five to ten years. I personally think that there's a lot of downside risk and not a lot of upside in property. But I've been proven wrong enough to know I simply don't have a clue what will happen.

 

Its been my experience that dwellings in high demand areas, in good locations will generally hold their value in slump times. And if its bought well then it further insulates you from risk. One of the biggest issues of losing value is when someone pays way too much for a dwelling in the first place.

 

This is an interesting point. It would be interesting to see the data on the last Sydney peak to compare. I know prices were out of control. They had auctions on tv where prices just kept going and going to ridiculous levels. But I don't know how the prices compared to the average salary at the time. I also don't know what happened to prices after the peak but I am guessing they did not suffer spectacular losses in the order of 50% or more.

I'm with you. Risk. Uncertainty. I'm getting the hell out of Melbourne. I'm going to take the money and run!

 

Canada is more or less a mirror to Australia, but their situation evolved faster and their government acted quickly:
Canadian official interest rate = 0.5%
Canadian prime mortgage rate = 2.7%
Two Canadian cities: Toronto and Vancouver, similar to Sydney and Melbourne, attracted many foreign buyers.
“Toronto, Vancouver housing affordability deteriorates to 'risky' levels: RBC”
http://www.cbc.ca/news/business/tor...ty-deteriorates-to-risky-levels-rbc-1.3209786
http://www.cbc.ca/news/business/teranet-canadian-house-price-index-rises-5-4-in-august-1.3227283

This could be the worst case we can get, cutting rate to 0.5%? – Canada has shown the housing market status corresponding to a rate 0.5%....more or less the picture for future Syd and Mel markets?

 

Would you say mount Druitt is going to drop in price again, or continue to go up?

What would be your reasoning for your answer?

 

Just crunched some numbers for a Blacktown PPoR I am currently living, purchased new at end of 2003

A small townhouse complex of 8, all owner purchased new at similar times, mid - end 2003 ( this was the time every man and dog was talk property).

• one sold in 2007 for 9% less than initial purchase
  
• another sold in 2008 for 14% less than initial purchase
  
• another 2 sold 2009 for 10% less than initial purchase

checked out a few more Sydney west properties, it seemed to be a fall in a range 10-15% if bought at peak 2003/2004 and sold in the next 5 years after that peak.

 

@Graeme, this is a fantastic post!

I agree that the wider economy will be stuffed if/once housing goes under as mining would have died by then.
Although, I don't think that Australian banks are in the same position as the Irish ones. I would like to here more about similarities/differences if anyone knows about them?

 

Gut feeling.

 

I agree with a lot of posters on here that it really depends on the area- prices are quite ridiculous in some areas BUT if you compare prices of somewhere 30-50km out of the city vs <5km from the city, they are not vastly different. Those <5km to the city should continue to see growth, or at worst, remain steady, those further out may drop.

But even for those that may drop, Sydney is essentially landlocked, but an amazing international city- supply is somewhat limited but I'm not sure if demand will ever decrease- based on this I don't foresee a massive correction

(all of this is said on my best guests but in all honestly who knows what could happen !)