Sydney - the coming correction 2018-2022

Discussion in 'Property Market Economics' started by sash, 3rd Dec, 2017.

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  1. sash

    sash Well-Known Member

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    All

    I have been asked what I think the Sydney market will do over the next few years. I strongly believe as part a normal cycle Sydney will correct over 2018-2022. This is normal correction...where some areas may come off 20-30% and others will only drop 5-10%. Obviously in some quarters like OTP apartments/houses you can see a correction as high 30-40% if people seriously overpaid. This will be shallower correction...but it will probably stabilize and not go up for another 3-5 years in most areas. So end to end we are talking about 8-10 years of no hurry to buy in Sydney.

    I stress that this is normal as part of any cycle and does not reflect the impact on the overall median. The impact of median is more likely to be 5-10%.

    What do I see as causes which will cause the correction...a couple of reasons:

    1. Cycle has topped out ... people and banks won't buy or finance properties at crazy prices any more
    2. Due to restrictions put in place by the Chinese govt... Chinese buyer are thin on the ground. They also see better value in places outside of Sydney now
    3. FHB buyers have picked up the slack but they are capped in terms of deposits and borrowing capacity.
    4. In some suburbs it is cheaper to rent than buy....as supply increases rents will start dropping in the suburbs where the supply is increasing
    5. The I/O cliff will start hitting from 2019...with the new rules coming in around living costs people will not be able refinance. A certain percentage people will have to sell...Sydney will be most affected as the mortgage repayments will not be covered by rent in most instances. The increase from a 5 I/O only period is about 25% increase in repayments...after 10 years it is 40%......
    6. The areas which have the largest corrections will be where there are the most investors and where there is a lot of OTP stuff.

    So that was the doom...what is the upside?

    1. People will be able to buy in at less cost if they are prepared to wait a 1-3 year
    2. Mortgagee sales will increase...this will present opportunities
    3. Rent in well serviced areas close to the city again will be in demand as people look rent. This will be at the expense of areas which do not meet this critieria.
    4. Supply will increase significantly
    5. Based on the past the optimum buying time is expected to be sometime in 2019 to 2021

    Happy to discuss this...but lets keep emotions outside of this. I realize everyone has different opinions happy to take this input but lets keep it to the topic on peoples thought on Sydney market and its performance over the next few years.

    Cheers
    Sash
     
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  2. Marg4000

    Marg4000 Well-Known Member

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    I think it more likely that the market will level out and then basically stagnate for a few years. How many years is anyone's guess, could be up to 8-10 years. Or far less.

    Most owners will simply batten down and ride it out. Only those forced to do so will sell, and will have to reduce their prices.

    And some will take the opportunity to upgrade if the opportunity arises, as the higher priced properties can be harder hit.
    Marg
     
  3. sash

    sash Well-Known Member

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    Marg

    I have been attending auctions and talking to agents trying to selling OTP apartments people can't settle one.

    A couple of observations:

    1. Lot of the properties being asked have one of the these in common
    - Asking too much
    - Properties in secondary locations
    - Lots of work to be done
    Some have been sitting on the market for weeks. The agents have said in some instances the owners have bought elsewhere and are paying huge amounts in bridging finance...so
    something will give.

    2. Investors being thin on the ground and FHB more pronounced in Sydney if the property needs a lot of work it might have issues selling. If the location is not ideal it is getting bypassed

    3. OTP is about to become a bloodbath...I can see some developers who sold to too many overseas investors going under if their clients can't settle.

    I looks like 2003....with a twist.....this time employment prospects and rates are ok so will provide a floor.
     
  4. jins13

    jins13 Well-Known Member

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    I am hoping for this scenario! I would like to upgrade my PPOR to something that's going to be almost a forever home at a reasonable price.

    I think some investors do need to play it defensively in order to hold on to their current portfolio whether it is to sell low prospect IPs, may down debt or find strategies to bring their balance to either neutral or positive levels.

    Not sure what next year may bring, but waiting on an equity release and have it there as a back up to weather the storm. My ace card up my sleeve is the partner's income hasn't been factored into my current holdings, so my serviceability should be more than adequate. I do know some other people will struggle if they are doing this solo.

    In my humble opinion, I reckon some prices will come down but to see 30 to 40% is far-fetched and fanciful unless we are talking about OTP stocks. I do feel for the people commencing their journey now because it's going to be alittle bit more difficult.

    I am also happy to see any data of whether NSW suffers from an exodus of skilled workers to other states and territories.
     
  5. sash

    sash Well-Known Member

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    So I give context....I am not negative about Sydney..I did say early on that Sydney would boom....it is just a normal part of cycles...

    The Mother of All Booms is Coming??

    However I also said that eventually Sydney would correct....it is now well and truly happening...

    Panic Setting in Sydney

    @jins13 ...yes the 30-40% drop would be mostly people who over paid for OTP (they never did due diligence) or forced sales ...
     
  6. MTR

    MTR Material Girl Premium Member

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    +1 This

    FHB will not be able to soak up supply, equates to fall in end values.

    Investors our out of the markets, same happening in Melb. APRA has worked.

    I don't really know how far prices will fall back, no one will know, some suburbs/product will be far more vulnerable and at the end of the day it will come back to how much supply comes to market and where?

    There will be investors that will have to sell simply because they need to reduce debt, happens all the time when cycles change.

    The upside..... no need to rush and buy because we may see a 7 year cycle of no growth, just review previous cycles, down turns are much longer time frames than boom cycles.

    BTW if sometime tells me Sydney is land locked I will eat my hat:p

    MTR:)
     
  7. sash

    sash Well-Known Member

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    Yep...agree.....Sydney maybe land locked...but it is now building up with units....that means density increases.....it has has to..so going the direction of London and Paris....Vienna...Chicago...New York....Munich...Berlin..Frankfurt.

     
  8. MTR

    MTR Material Girl Premium Member

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    But by land locked, no land to build... yet we are seeing land and house packages in outer burbs in Syd, you don't see this in Hong Kong for example.

    MTR:)
     
  9. sash

    sash Well-Known Member

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    Ahaa....you are absolutely correct...the issue is red tape not shortage of land in the burbs...a govt ploy to go up as that will require less infrastructure.

    Unlike Melbourne where developers build a lot of the infrastructure ....in NSW they get a charge paid by the end-user but they never build it....
     
  10. Konn

    Konn Well-Known Member

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    We have all of Australia to build in, its just currently unnecessary. Humans have built on hills before.
     
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  11. L3ha7

    L3ha7 Well-Known Member

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    Happy to wait definately 2 or 3 years because the strategy I am using does require me to wait if I wanna buy in any good areas of Sydney.
     
  12. Silverson

    Silverson Well-Known Member

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    @sash care to share you views/start discussion in another thread for Melbourne?
     
  13. sash

    sash Well-Known Member

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    Will do once I have better view...still researching.....Melbourne is 12 months behind Sydney and harder to predict as the immigration is astounding...the inner suburbs have hit their straps.

    I thought the outer areas will slow...but still moving particularly suburbs under 500k.....
     
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  14. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    Doom and Gloom:
    • Interest rates:
      • APRA Regulations driven by BASEL are unlikely to ease even if properties tank.
      • IOs will continue to be under pressure. Changeover to PI will exacerbate the pain inflicted due to negative equity and push more distressed stock onto the market.
      • Royal Commission will not help as far as interest rates are concerned. Banks might have to cop some of the following:
        • Increased cost of funding
        • Additional regulations, oversight.
    • Foreign buyers:
      • Will have to be creative as both the source and destination countries are reducing availability of credit. Canada is a good example of the impact the withdrawal of foreign money has on property prices.
      • Loosing deposits will be common. While 10% loss is easy for cashed up foreigners to absorb when weighing up against future losses, it creates a ripple of price reduction in similarly settled properties and local investors with similar stock are looking at 15% (inclusive of 5% registration and exclusive of 2%) negative equity. Not easy to hold a typical property with less that 2% yield with a 15% negative equity on a 90% LVR when looking at stagnant to negative growth in future.
    • Foreign Developers:
    • Local investors might be facing pressures on multiple fronts: LVR, LIR, IO to PI, Growing Negative Equity, changed taxation regimes, higher interest rates, stagnant wage growths.
    • FHBs will simply wait for better deals adding more pressure on the market devoid of investors.
    • Political Hazards: 2019 might bring Bill Shorten and some variation of following, (mostly) bad news for property :
      • Removal/reduction/streaming of NG (hopefully grandfathered)
      • Reduction of CGT exemption.
      • Tax on trust distributions.
    Not so gloom and doom:
    • If some talk of personal tax rate cut and allowing FHBs assessing the Super materializes, some relief may be available
    • Improved Yields will eventually provide some floor.
     
    Last edited: 3rd Dec, 2017
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  15. MTR

    MTR Material Girl Premium Member

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    Why do you think that yields will improve?

    Yields are very much dependent on supply vs demand, I have seen yields go pear shaped when markets tank because investors have gone gangbusters and way too much stock in the market.
     
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  16. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    I qualified my statement :D..eventually...but I see and agree with your point...it will be a fair while...
     
  17. MTR

    MTR Material Girl Premium Member

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    Who knows? Syd had a good run.

    I think Melb boom was in 2008 for 2 years then recent boom of 2013 and still going. Some downturn cycles are shorter, time will tell.

    I expect Melb will have a better run than Syd due to the immigration
     
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  18. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    True..

    And as @sash has mentioned it is also better management of infrastructure and not constrained for land (watch that hat)...which leads to chicken and egg...more affordable properties for immigrants and FHBs with faster access to CBD...
     
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  19. MTR

    MTR Material Girl Premium Member

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    Yes, but on the flip side when markets turn its the outer burbs that will feel the pain, too much of the same cookie cutter product, too much land and developers start to offload.

    Investors may disagree with me but I have been through a number of cycles and it seems to repeat itself.
    I love land and house packages in rising markets, but you certainly don't want to be building when the market turns.
     
  20. sash

    sash Well-Known Member

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    MTR this cycle...it has been largely people wanting to live there.

    But it will turn....in any case..I am pulling my money to buy my mansion in Sydney. ;)
     
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