Sydney house price is predicted to skyrocket by $216,000 this year alone.?? Is it possible?

Sydney took the
5 city lead

 

The contributions here are great. I echo the comments about this being driven by low interest rates, but I would substitute this language instead for "irresponsible monetary policy".

However, like everything, there is never one answer.

The other driver of higher price growth is that markets are correcting price suppression from 2017-2019 due to APRA regulations. At the time, it was sort of like a beach ball being held under the water.

In this way, it is simply simply "reversion to the mean".

For the last 50 years, median house prices in Sydney have gone up on average by approx 7% per year.

However since 2017, house prices moved up on average of only 1% per year for 4 years. So to achieve a reversion to the mean and achieve an average of 7% per year, the Sydney market needs to outperform 7% for a number of years. If it does approx 16% this year and again next year, it will be caught up.

In terms of potential intervention:- I think there is too much debt to start raising interest rates. So this leaves APRA - but will they make the same mistakes as last time?

Ultimately, we don't have free market price discovery any more. Central banks are too involved in price setting, and they leave regulators to clean up the mess. I would rather honest pricing of interest rates rather than rolling asset bubbles created by clueless bureaucrats.

 

Why would you say this is not honest pricing of interest rates? RBA has made it clear that asset prices are not their domain they have to focus on job creation and economic activity. If that requires low interest rates then be it and asset prices as a result of that is market pricing really.

 

According to the Austrian school of economics at least, all asset bubbles and subsequent recessions/depressions have their root in the manipulation of interest rates by the monetary authority.

We get harmony when markets set prices: harmony between savers and borrowers, harmony between consumers and producers etc etc etc. If we had free markets and no central banks, we wouldn't have these booms and busts. There are centuries of academic scholarship that prove this out, and this real estate boom is just the latest example.

When central banks set prices, we get rolling booms and busts. Would we have had a 2008 crash if Greenspan hadn't responded to the tech wreck with lower interest rates? Would we have a real estate boom now if central banks hadn't responded to Covid with lower interest rates and force-fed consumption?

We could do this all the way back to 1913 when the Fed was created, and of course to earlier iterations of the central bank is all countries.

 

But interest rate manipulation doesn't just screw up asset prices: it screws up consumption decision making as well. Interest rates just reflect our time preference for consuming now or in the future.

Remember, at the end of the day, central banks are really just centralised inflation machines. That's all they really do.

And the way inflation destroys wealth is by people essentially selling capital in order to consume. Free markets prevent this miss-alocation of resources because you essentially run out of credit before you can really balls things up - but we don't really have this, at least not any more.

 

So will it all end in tears.
Interest rates rising, too much debt….. crash

I just know its not sustainable… its not if but when

 

We will just end up like Japanese FED.
They just keep printing and buying ETF as it is their own currencies.
Mind you Australia still have at least 20+ years before we will ever become like them.

 

All I know is if you cant service debt you will be royally screwed when interest rates rise. I can only look after my patch.

 

Don't fight the FED.
Australia is only at stage 1 of the cancer (QE)
It isn't terminal LOL

 

It's not a static situation - there are various moving parts.

Int rates are being assessed at 2.5% higher rate than current, so allowing for 10 int rate rises of 25 basis points each until 'new' borrowers cannot service, we are reasonably looking at (even if they start moving earlier say 2023) 2025/ 2026 or beyond for 10 rises. One would think average wages would have gone up circa 10-12% by then (2% per annum compounding 4 /5years).

And of the total mortgage holders, only a tiny proportion of them would have bought at top where they have no equity and cannot service the loan. There was a lot of talk of sky falling down earlier on in 2016 and then in 2017/18 with fixed rates going to variable but that didn't materialise either.

I suspect we will be ok!

 

Only referring to those who are highly leveraged and can not service debt when interest rates rise.

There will always be fire sales when things go pear shaped. Winners and losers

 

The very short and simple way to explain the magnitude of impact that rates changes may have:

• approx 7 years ago, assume rates were at approx 5.5%

• assume today the going rate average is approximately 2.5%

• This reduction of 300 basis points is approximately a 54% reduction in overall rate

• if rates rose by 54% from the current average, it would be 3.86%. This means that rates only need to go back up 136 basis points for the pricing headwind provided by interest rates to be equivalent to the pricing tailwind provided over the last 7 or so years.

 

Disclaimer: this is an indicative example only , as
market pricing for property is not purely dependent on interest rates.

 

Not sure I follow your logic in this specific scenario..

We are talking serviceability.

Since around 2017, all new loans have a serviceability-assessment at 250 basis points higher than prevailing rates. Therefore, it will take 10 rises (approx) to be at the level where new borrowers are unable to service their loan (assuming all things being equal).

Re your point on 7 years and 54% reduction in loan servicing costs, do note that during the last 7 years prop values are roughly up 50% (and still going strong) so significant new equity can act as neutralising buffer against any supposed-headwinds, in the worst case scenarios (selling down/ refinancing etc).

 

Lets not forget its a different world today…..we now have a change of policy…. IO loans revert to Interest and principal loans and its not a phone call to keep these loans on IO. So requires full doc, valuations etc.

tack 40% to the loan repayments

 

I don’t mean to imply that it will affect pricing to the same magnitude, as there are so many variables

 

Some ppl are suggesting RBA will get to 1.1% relatively quickly

 

Whats quickly? It took them 1.5 years to go from 1 to 0.1. The climb back to 1.1 would be a steadier one I'd imagine...but you never know

Speaking of market movements, I've seen south west sydney has certainly still crept upwards just in the last 6 weeks

 

SW Sydney which areas do you keep an eye on?

 

The East Hills, Picnic Point, Panania, Revesby, Padstow pocket