NSW Sydney - the facts

There seems to be a lot of "debate" about the Sydney property market and its direction. So thought I will also provide my input ...

Cons
- APRA rules have had the desired effect in slowing the market (probably faster than expected).
- Imposing restrictions on foreign capital has slowed down the capital from China. Double whammy
- Investor demand, confidence and expectations are coming down.
- Low yields already.
- Low auction rates, from high 80s at start of year. Many homes are now private treaty rather than auctions - signalling the froth is definitely gone.
- Prices starting to come down in a number of areas (have been for a few months), patchy market. Time on market is increasing.

Pros:
- Pop growth yoy is still very high (>85k). Including short term arrivals (students etc) its phenomenal.
- Sydney is near full employment ( < 4.6%) and is still producing a lot more (and highly paid) jobs.
- Global markets, especially tech are booming: see NASDAQ, top five companies etc. Sydney is most linked to tech sector in Aus. This tech upswing will continue at least for number of years until we have another tech crash. Tech, Fin and Fintech giants will continue to base in Syd this driving high paid jobs.
- Commercial markets, especially office and retail are fetching record prices, with record low vacancy - again signalling very strong economy.
- RBA will not raise for a while (late next yr?) based on the current data: AUS unemployment rate, core CPI, etc. This will provide some stability. Though I expect job inflation esp in Syd to rise quite fast next yr (and Melb? later), which may prompt higher RBA rates later next yr...
- NSW surplus budget, high infra spend and projects already underway (not just stuck in planning).
- Inner-Mid Houses: although population has increased, number of houses has decreased by >10%
- First home owners buying is still strong.

This is unlike the downturn that started in 2004. Some notable differences:
- Global resources upswing had started. Oil and base commodity prices rose sharply due to high demand and rise of China (infra spending etc).
- This created global inflation and a supply response (once in multi generation mining boom).
- RBA hiked rates aggressively in 2004 (0.5% in one go) citing house price inflation.
- AUD was in a uptrend, impacting education, mfg etc exports (Syd , Melb affected).
- In syd vacancy rates in 2004 when downturn started were already > 4%.
- 2004 - 2008: Jobs and wage growth was mainly outside of Syd (and also Melb).
- Low pop growth in Syd (and Melb) to resources intensive areas (QLD, WA).
- Overall 2 speed economy with Syd, Melb losing out... Melb was 4th city, by median price, by 2007 (5th if you also include GC) ! At the moment we have the reverse ... and it will continue for a while..
My Verdict
The market will remain patchy and likely slide some more till early next year (~5%) and then find a floor. After that its likely to recover and have single digit growth... Its a correction and pause not a crash...

There will be a substantial downturn in Syd - this just isn't it...

 

Cheers for that mate. Very informative. Can you do one for Melbourne?

 

Great writeup @trendsta !

Care to give your forecast on price change over the next 1, 2 & 3 year periods?

 

Technically speaking, Auction clearance rate is not a fact, it is an estimation based on non reliable reported data.

I already posted an illustrative example but I'll post it again:

Let's compare 29/04/2017 results with 21/10/2017 results

663 vs 653 listed properties
70% vs 71% clearance rate

... but 295 sold properties vs 399 in April.

So in Apr there're 33% more sold properties than in Oct for the same number of listed and same clearance rate. Assuming correlation "low growth - low number of reported to number of listed raio", the real clearance rate is much lower than reported.

 

Two missing important facts:
- price to income ratio is extremely high (record)
- debt to income ratio is extremely high (record)

Those two are the main contraints for the future long-term growth.

 

What you mean to say is - it won't look like the last one which occured 3 years before GFC.

History repeats, but History never replicates.

 

Agree on some fronts....but here some trends which are relevant:

1. The population of people leaving Sydney is increasing due to affordability and lifestyle reasons. The number of Baby Boomers leaving is unknown and I suspect will be quite large at some point.

2. As for Fintech and Tech....the cost is huge....and increasingly a lot of this being offshored or automated. New jobs will come in ...but there will be a period of adjustment.

3. Whilst FHB are strong...eventually the borrowing limitation will put a cap on this. This is already happening.

4. The market is always cyclical....there may not be a crash...but drops of 20% are possible...in certain sectors. When Sydney does flatline it does for 7 years plus.

 

Folks, if the property values in Syd sees a 10% drop, will the councils reduce land value by a similar percentage ? In other words if I am paying land tax on my IPs, which have a combined land value of say $1m, shouldn't I be paying 10% less if the values of these IPs drop in the next 12 months?

 

No....
Land value is set by govt authority. property value is determined by supply / demand of the consumer. They are not directly correlated.

 

Hi mate, sorry don't have the pulse on the Melb market so I'm not in position to comment in detail.

At a high level, it seems Melb is 6-9 months behind Syd. The market has also started becoming patchy - some areas stagnating (e.g. some inner), other still going up (outer west), time on market trending up, auctions trending down. Seems we have a pause for a while overall, with some areas dropping (<5%) but outer areas still going up for a while longer due to: record pop growth, FHOG grants etc.

Overall the Melb economy is also quite strong: has transitioned well from mfg base and has continued pop growth.

 

Hmm.. for Sydney?
I think overall (if one were to look at overall city-wide median) we will see a plateau with median bouncing between -5 and +5 range, and rents will start rising as pop growth is maintained, approvals drop and construction peaks..

Selective buy opportunities to still make good money. There will be one-off sales where seller must sell etc which will provide good buying opps.

For nearly the last decade the rates have been in a downtrend in developing countries as globally economy recovered from GFC, euro issues, china slowdown, commodities collapse etc... As resource multi-generation boom crashed, another boom started and is well underway - tech boom...

The rates trend changed about a year ago.. global economy has been picking up speed for a while, esp tech, and overall is doing very well (see dow, NASDAQ, FTSE etc), unemployment has fallen from GFC highs (e.g US from >8 to <4.5). With the economy continuing to do well, low unemployment, some inflation is likely with rates likely to continue to trend up...

Cities that benefit from this continued global tech boom e.g. San Fran will feel no effect from interest rate rises. Whereas cities that are not exposed to the current boom, and on top are burdened with higher rates will feel double whammy (unless they have other very good offerings). I think Syd is somewhere in the middle globally, but most exposed of the aust cities to the global tech boom (like Perth was for mining boom)...

 

Hi Alex,
The fact is Syd auction clearance rates are trending down - I believe we both agree on that as a fact..

Whether auction rates are even lower than reported, I'll let you be the judge of that. Yes there is a divergence of reported vs actual compared to boom times and it always happens at this time - not unique to Syd or this cycle..

Agree about the negatives
- price to income ratio is extremely high (record)
- debt to income ratio is extremely high (record)

But they are offset by some of the positives I stated above.. Hence, overall don't see a meltdown that many are calling (hoping?) for... At the same time I don't expect boom times either... plateau with initial downturn (which we are in middle of), followed by stabilisation and some upwards growth and rent increases...

 

A blanket of -5% fall for Sydney is way too general, it will be totally dependent on which market/suburb, product etc. and oversupply. Some may be hit harder and recovery could take longer.

We just don't know as it will be dependent on how much stock comes to market in a particular suburb and blue chip is not immune to falling markets.

I guess perhaps apartments will be far more vulnerable and outer burbs where there is more land?? Time will tell

 

Hi Sash,
1. Yes that is true.. That's why the pop growth is ~85-90k rather than ~ 120k. The way I see it is: US, UK had the highest "number" of immigrants. With Canada, Aust, NZ well behind in numbers but higher in percentage terms.

With trump presidency, anti-migration views, constant shootings and violence in US , combined with changes in UK (Brexit etc), many more migrants have been favouring Canada, Aus and NZ.. The A cities in all three countries are experiencing similar population and economic conditions and challenges.. Don't see this changing for a while - infact over the years migration has become much more stricter to curtail migration into Aus.

The pop growth helps Aus too as the predominantly young tax paying workers can provide some taxes for the ageing population, without putting burden of additional taxes on the current working population, or increasing working age drastically.

2. Yup the r&d and dev side is being offshored.. However the tech giants are, and will continue to choose base out of Sydney (or Melb) for Aust operations - sales, account mgmt, marketing, hr, admin, some onsite and support and tech service.

3. Agreed... FHOG market will taper off and decline.. after a while rents will rise and then balance out again. Be very selective...

4. Definitely agree about cycles. However, I think factors are much more balanced atm than the syd downturn of 2004. At that time mining boom was underway and taking jobs, population and wages away from syd, higher than national unemployment for many years... Syd was close to recession for many years with NSW budget deficits, little infra spending etc, at the same time yields were very low, rents were still low, and rates were rising.. it was a perfect storm - similar to perth 2013 onwards...

What are your views?

 

Hi MTR,
Yup I was being general on purpose and referring to the Sydney overall city wide median.. Agreed some will drop more, some will be flat, other may even rise..

For an investor, buy / sell / hold decision should not be based on the generic city-wide median. That should be near the start point of analysis not the end point. The end point would be property / deal specific... e.g. one may find an absolute bargain due to owner needing a quick sale...

 

Great write up. Anymore insight into that part?

 

Just for the record
It looks like nobody actually moved to Canada after Trump's election win

Many US cities very desirable to live and the economy is now roaring.... I seriously doubt we will see a mass exit to Australia. I love Australia, but we are not the centre of the universe....

Look who is buying in US and how much??? volume???

China's real estate investors are now on a $200B global spending spree

 

If you're pulling econmics into the forecast, put $$ values against things like tech. how much have they actually added to the NSW economy, and more importantly, how much is that likely to go up by? The sectors may double in size, but what does that mean in the context of the NSW economy? Then look at what sectors have given it legs in the last 5 years. the big underlying one is construction, which has added multi-multi-billions. So with that falling 30%, what ever industry takes over will need to add billions just for the state to break even.

Historic and current population alone is also a very unreliable statistic to base a forecast on. Literally every single economic forecaster will be out on this. BIS Oxford are renowned for being magnitudes off, which has significant implications for their "overbuild/underbuild" articles. WA went from 76,000 people to 16,000 people in 3 years. Unemployment went from 2.32% in 2008 to 5.65% a year later. It dropped to 3.56% in 2012 and hit 6.8% in 2016.

Understood its different to NSW, but Even if it went from 110,000 ppn increase to only 70,000, that would still result in a massive overbuild given they are looking at 70,000 annual dwelling completions from now to the next year or 2.

IMO the fact that Sydney's indicators are so strong right now is its biggest risk. If it can't maintain these stats, it has a long way to fall. With construction winding back and international debt now costing more, its going to be a lot harder for the government to keep bankrolling infrastructure projects and feed its $500bn debt pile. Like you I'm not sold that there will be an all-out crash, but the thought of a stall and pickup in a few years just seems highly unlikely. There is nothing in Australia's economic pipeline that could possibly deliver the level of foreign investment stimulus and government spending acceleration that we have seen in the past 5 years. I tip a price dip and prolonged stagnation that will see a lot of investors who disregarded the fundamentals of rental yield get caught out. once the capital gains stop flowing and interest only loans can't be refinanced, there will be victims that will cause an enduring shake-out.

 

When you consider Syd/Melb perhaps currently around 2-3% yields, it makes little sense for investors to buy, that is if investors can source the finance.

Investors are out of the game now in Syd and Melb, once more supply comes to market FHB will not be able to absorb this...

 

This probably warrants a thread by itself and OT but AFAIK councils should get the land valuation from the Valuer General and the land is valued on the recent sales of property in the area and accounts for their land size in some way. You can dispute the valuations though if you can see that properties in your area are not moving as per the valuer general's value.

Council rates are usually not entirely based on your property or land value either.