NSW Sydney - the facts

True.

The bigger difference is the reason why the Sydney market is less vulnberable to large swings up or down. And that difference is that Sydney (and Melbourne) have multiple and diverse economic drivers.

Perth has mining.

Whereas Sydney has retail, manufacturing, tech, media/creative, banking, real estate, tourism. Etc. you get my point.

 

Oliver Shane, though the post was old, does your comment still stand? Do you think that the risk of buying Sydney property is still to the downside due to supply overhangs and declining rents? And if so, how much downside is there left to go?

 

Yes I do... most of the forward looking indicators point to another year or two of declining prices.

Supply overhang has about another 6-9 months to go. While new development is an easy explanation for falling rents, interestingly rents are falling in established, large inner city houses too(10% down in last year)..

New development pretty much stopped on a dime 12 months ago..

One metric i like is the cost per brick... eg in 2016 at peak bricklayers were charging $1.80 per brick in Sydney. Nowadays it is closer to $1.10-$1.20 a brick

 

Nice! I like the brick indicator.

Otherwise, aren't these leading indicators of supply reductions and lagging indicators of price reduction?

The leading indicators I see (population growth, rapid decline in new dwelling approvals, credit expansion, auction clearance rates) suggest that prices will increase.

 

I’ll take these one by one for you.


Population growth - long term factor. Doesn’t matter in 3-5yrs horizon, actually immigration is coming down and would expect it to further decrease under Dutton

Credit - still declining hard down 30% YoY. No sign of expansion yet

Auction clearance rates - all the tomfoolery with reporting results by agents and the best they can do is mid 60’s%? Hardly cause for celebration.

New dwelling approvals - approvals matter less as no developer is going to actually start building again until prices stop falling in Sydney.

 

The credit decline is again lagging. Lower interest rates and a relaxation of the APRA regulations are all leading.

I am a (big) bull on real estate prices, and a bear on the AUD at this point.

 

AUD bearish for sure. Though it has remained surprisingly stable against USD in the face of recent developments.

 

^^^^^ this.

I'm am long-term bullish on most AU metro residential locations (commercial outside of medical and services is another story entirely...).

But on Forex to USD I am bearish. For this and many other reasons I see and have taken advantage of opportunities in the US residential markets. I think the short-medium term capital growth won't be substantial in both AU and US residential (generally; there will be exceptions of course!). But the major difference is the yield/cash-flow. They are almost incomparable and the way I see it is.. if you bank on there being next to zero capital growth in both countries for a while (and hey, if I'm wrong on that, then happy days, would love to be wrong and consider any upside capital as it comes!); then that really leaves yield on the table as the investment-return opportunity.

And unlike almost every metro and major regional AU city right now and into the foreseeable future whereby yields are meek at best and horrendous at worst, in some US metro markets (we are talking 1-million+ population with diversified workforce economies, favourable tax and landlord conditions for investors, low vacancy rates, and scope for economic and/or population growth); yields are truly excellent. And that's in lower-risk-profile cities as mentioned above.

These markets are not your touristy/stereotypical cities that people tend to think of when thinking of the US. But they have excellent fundamentals.

I'm not suggesting for a moment that it isn't without its risks nor am I condemning AU or NZ markets into perpetuity. I'm simply saying that in my humble opinion, the US offers far greater short term (sub 5 years) and medium term (sub 10 years) overall 'return' scope than most AU locations are likely to produce during the same time period.

If you know your money can work harder elsewhere, why wouldn't you entertain it?

 

Risk factor i guess. Consensus is that the FED will be cutting down rates because their economy is slowing down. Add to that , due to currency difference (low AUD) , ain't you already paying a premium on these assets ?

 

I suppose you can look at it both ways. The days of 1 AUD = 1 USD are well and truly long gone.

What I do know is this: if a deal stacks up at the current forex rate on the day you send those funds for the upfront purchase, then you are already in good stead. Forex is a risk but a minimal one given my intention for this asset class is not capital growth (though if I get some throughout the hold that would be great too! But I'm not doing these particular deals with any CG-intention nor exp3ctation). You lock in the buy-price and forex when you do the deal.

From there, forex is a risk yes for ongoing yield (I.e. your monthly rental income after expenses). But even with this you can mitigate risk and in fact control *when* you choose to bring the funds across to AU. In fact, instead of the funds being sent monthly on auto-pilot, you can have your property managing agent there collect rent monthly but withhold on sending to you until a time of your choosing.

IMHO; AUD I cannot seeing increasing much in the coming years ahead. Despite US economic decline; we here are also in decline. Rates will likely stay around 0.70 or perhaps dip lower which would only be a good thing for rental return collected in AUD.

 

@C-mac , great points , thanks for that.

 

2 years on since mid 2019 and what a difference it makes

I was a buyer in syd early-mid 2019
The potential dev site is up ~ 70% ... insane

Some syd props bought near GFC time 2009-10 are up over 300%
Bris props from 2014 - will also need to check...

Its always hard to fight the herd and be a contrarian especially when media hype machine is pumping away and all the indicators look one sided ..

I may be way off but IMO there may be another 10% left and 6 months .. its always hard to time impeccably and that last 10% is more a function of probability than anything (right buyer, agent etc) ...

Beneath the surface risks are brewing .. be careful out there

 

Steep after 3YR and getting steeper in the medium term

 

Winners and losers...... always

 

State breakdown ...
Lending is great.. what could go possibly wrong ?

 

Looking at this chart what do you see over the next 6 months ?

 

Something we don't discuss enough is magnitude of change

As prices are inversely proportional to interest rates, you would assume that if interest rates dropped by 10%, then mathematically, prices can rise up to 10% based on that change. Of course it is never as simple as a direct 1/x correlation, tho for the purpose of this topic, the simplicity is appreciated.

• When rates were dropping from 5% to 4.5%, that was a 10% drop. Subsequently, in theory this could allow for an uplift of approximately 10%

• Recently we had rates drop from approximately 3% for a home loan, to approximately 2-2.5% for a home loan. This is at least a 16% drop in interest rate, and can help assist with price uplift pressure of 16%

• Interestingly, if interest rates do rise in the next 4 years, going from 2.5% back to 3% is now a 20% increase in rates! This may cause significant downwards pressure on prices! Perhaps this pressure will be offset with the inevitable increase in rents (due to limited new housing developments).

• More worryingly, we recently witnessed rates dip from approx 6% to approx 2.5% over the last 7 or so years, this is a dip of 67%, or 3500 basis points
• On an upwards rates trend, this is equivalent to our 2.5% approx rate becoming 4.175%, thats only a 1617 basis point increase!
• Following on from that thought, a rise from a 2.5% base back to 6% is now a 140% increase, for the same initial 3500 basis points.
• In conclusion, with this little thought experiment, if interest rates climb up to approx 4.2% for a home loan, then this is a pressure of up to 30% dip in prices.. of course this will be offset by rents going up, and the general inelasticity of property meaning the majority of people won't sell unless they have to. In other words, there will be massive stagnation in prices, as we see up to a 30% dip from all time highs. However the all time highs might still be 6 months to a year away! The total time for this will probably be a 6-7 year period, if history is our best guide. Otherwise it is anyones guess, as Government policy is shaping markets faster and more aggressively than ever before.

I am curious to see what happens in the potential event of rates climbing back upwards. Any upwards momentum in interest rates might be shortlived..

The other thing we don't talk much about is that property owner ship costs, such as council rates, and land tax, are becoming a larger and larger slice of rent collected. So yields on properties will have a hard time without very very strong rental growth.

 

Good analysis.

 

Agree.. as per my views in other thread:

The interesting part is as soon as the RBA yield curve intervention is reduced / removed (July-end of this year) the mortgage rates may go up by 0.5% , without any hikes

so 3yr mortgage rates from 2.00% to 2.50% (25% hike in payments, and potentially equal reduction is serviceability / borrowing power

 

No certainties in universe, life or investing..

But looking at this chart, and various other data high probability of a syd top within 6months sometime.. Everyone is piling in at the same time during the rates goldilocks moment..

From Canada, US, UK, Sweden, Aus, NZ and countless others .. from cities to small towns ... From prop to shares to crypto to base metals to energy to soft commodities

Shows its a global phenomenon based on global catalysts (suppressed bonds yields, related rates and near record level spreads) and not unique to a country, region, industry etc