Sydney Bottoming out

I did a bit of analysis using Corelogic daily index and it does seem like Sydney is finally bottoming out.

See the chart below:



Basically I have plotted day to day movement and then added a polynomial trendline to expose the movements. Since I was looking at declines hence positive values indicate falling prices and it seems quite evident from the data that daily falls are becoming quite small and once the trendline hits zero, market should be at the bottom (which doesn't seem that far away). Interesting to note that worst erosion happened between Oct-18 and Jan-19.

Note: I am not taking a position nor advocating a certain market direction. This is just for discussion/education purposes.

 

Whats the success rate of your predictions?

 

When I said in Feb that Sydney was starting to recover, I was ridiculed. This above graph now shows that Sydney recovery did start from Feb.

When I called Sydney peak in early 2018, not many people agreed.

Having said that, I didn't predict in the past nor I am predicting now. I am merely using publicly available data and combining it with direct market feedback through friends etc.. We are all deeply entrenched in our positions and deeply invested in market direction one way or another hence it's easy to ignore early signs and understandably this happens a lot here.

 

Does it factor in any big changes after the election.
A Liberal party win is probably going to produce a different outcome to a big ALP win.
Which may put the market back in a downward spiral.
That outcome will not be known untill after the country votes.
The election can produce many different scenarios, especially if minority parties and independants play a big role.Or they may play a very small role.

 

I would think some of the uncertainty is already priced in the current state of the market since Corelogic daily index works like stock market index (theoretically).

Labor's (likely) win would be interesting. Abolishing negative gearing + franking credits would provide a massive incentive for many people to move their wealth into real estate before January deadline and this could create another mini bubble.

A liberal win could also result in prices going up since a lot of buyers are waiting on the sidelines due to political/policy uncertainty and they will jump in quickly once policy fears are out of the way.

 

It will be mid 2020 before the lions share of IO loans from the pre APRA era have rolled off their 5 year IO periods ( some will have 10 years, but most will be 5 ) ....
That's something that I would suggest needs to be in the rearviewmirror before getting too excited one way or the other ....

A reduction in the assessment rate - suddenly getting bits n pieces of media coverage - would probably bring that 12-18 month waiting period forward to about now/nowish though

 

Yields will also have a big say on the bottom and when the next cycle starts. Sub-par yields and rising rental vacancies will put a downward pressure on price in the short to medium term. Gone are the days where one can take on a 1 million mortgage with 2ish% yield with the hope the CG with make up for it.

 

@petewargent this thread will interest you ... thoughts?

Great analysis @standtall!

 

Ok an essay here but i think it raises some talking points for those willing to read..

I think the bigger picture issue that isn't getting discussed is the supply/demand equation. Not just finance availability, but actual on the ground people needing a place to live. Supply is rising, and population growth is slowing.

Number of new people per new property; 2 people is roughly stable. any more is an underbuild, any less tips to overbuild. NSW has dipped below 1.8 for the first time since 2005 (with a minor dip in 2010), and on current approvals data, it could easily be well into 2020 before that turns into a positive indicator again,and that's assuming the crazy jobs and population growth continues.

For some perspective:

• In the year to September 2012 there were just 27,681 new dwellings in NSW
• By December 2015 with the boom well underway, this number was 47,092
• In December 2018 (latest data), there were 73,860 and that number is still trending up

Pipeline for new dwellings
In Oct 2018, 74,231 annualised approvals for new dwellings. between Oct and Feb that has fallen to 62,312 and stabilised somewhat

Employment
The main driver of population growth. In early 2015 NSW unemployment rate was over 6%. last month it was 4.32%. that is a huge amount of new jobs that would underpin highly uncharacteristic population growth (but then again building 25,000, or 50%, extra new dwellings a year will do that..). I highly doubt NSW will be making a further 1.7% improvement any time soon. the absolute best they can hope for is to sustain current levels of jobs growth, and that will be hard with the construction industry having shed 5 figures of approvals in a the last few months.

Population growth
This has fallen from its 135k people peak (Mar2017) to 119k (sept18) with further to go. To give context, NSW has never (since ABS records start in 1981) experienced the rate of population growth that it has in the last 5 years. Since January 2014, there has not been a single month where annualised growth has fallen below 1.4%. It has only ever been above this level twice; 1986 to 1989, and 2008-2009. Between these periods, not a single month ever saw annualised population growth above 1.4%, and yes it is still lingering above this number now so it hasn't even begun to feel the effects of "normal", let alone a downturn in growth.

Yes, i get that this is highly reflective on historical data and the past doesnt always predict the future blah blah. What i am trying to point out is that the current boom was fuelled by a once in a life time population growth burst, and we are now building as if that is a normal amount of people. There is heavy evidence to suggest that number of people will cool, and the current build rate will continue to impact the market for coming years. A lot can be learned from WA's market over the last 10 years, and the blind mentality everyone had there up to 2008.

 

Is the index asking prices, selling prices or something else?

 

It’s hard to explain but selling prices are a key contributor to the index price. Theoretically it captures real time movements in house prices.

 

I dont see why a Labour win would result in a mini-boom, unless your prepared to pay P&I , with really good yields and want to actually pay off the property.
Whats the point of going interest only on a loan if capital growth is going to be seriously slowed down, and when you want to sell you are limited to owner occupiers.
Many investors are just sitting tight waiting for the results of the federal election.
In a worst case scenario for many investors ,a big Labour win would see many of the speculators within the industry heading for the exits.

 

nice chart.... the only problem that market movements are not polynomial (biased view). If you choose another math function it may show opposite results.

the right conclusion that can be made from CL data is that fall rate is decelerating... it doesn't mean it is "Bottoming out". There are many possibilities when fall rate may be stabilised or increased - it happened in the past and it can happen again. time will tell.

 

Thanks mate.

I used polynomial because in the context of Microsoft Excel, it picks up peaks and valleys in a trend line and generally used to identify sub-movements in trends. A linear graph over 365 days will just show you straight declining line on the other hand.

Even if we ignore the trend line, just a plain look on the pattern of the bars shows that falls are decelerating as you described.

Whether it's bottoming out is a contextual conclusion depending upon time frame we use. There are cycles within cycles. Sydney is no way close to a bottom if we look at full 14 years cycle length. I think we are just 2 years into roughly 7 rough years for Sydney. We had a 15% decline from the peak and now we will see recovery back to peak prices which could take 2-3 years and then prices will flatline for another 2-3 years before picking up again at the start of next cycle.

 

Any of this helping anyone to make profitable investment decisions?

 

Correct me if I'm wrong, but some investors seem to be able to re-finance to a different provider and continue their IO loans?

 

Sure - looking to buy a PPOR in Sydney within 3 years, better do it now or wait atleast 3-4 years if you are buying an IP when yields start picking up.

 

It could be 2019 when APRA will change the serviceability benchmark of 7.25 who knows?

 

If your goal is to smooth a trend then you're better off using moving averages than an Excel trend line. Any polynomial will try and pick a recursive pattern which is not the case with property data. If you want to get fancy drop a Henderson weighting into it like ABS do for their trend data..

I just did this for NSW CoreLogic index, I can't post an image but suggest you give it a try. Tried with a 7, 14, and 31 day rolling average and all showed similar trend. Although it has improved from the disaster that was December last year, its still firmly in the negative. For over a month the index it has stabilised losses of around 0.03 index points per day. A marginal improvement on the 0.04 it was losing daily throughout 2018. Losing $3 a day is better than losing $4 a day, but you're still losing.

 

Sure... but there is ALWAYS, ALWAYS ,ALWAYS a lag. Not everyone would be borrowing money the day after the calcs get better .. just as it took time for the 2015 changes to be felt by 2017