Why Sydney property prices won't fall
Tuesday, June 02, 2015
By John McGrath
So we’re well into the third year of substantial price growth in Sydney, with home values up almost 7% in 2015 (CoreLogic RP Data) and we’re not even at the half way mark yet.
The boom was not expected to continue this far into 2015. We saw a dampening of the market in November 2014 when a lot of stock came online and indications at the time were that we might be coming to the end of the rapid growth period.
But the market has kept going, in part due to two further interest rate cuts which have done a lot to keep buyers engaged. But as prices keep rising, so does the intensity of discussion around price bubbles and the apparent potential for collapse of property values in the Sydney market.
I believe that buyers and sellers need to ignore this commentary. Sydney has proven itself over and over again to be one of the most resilient property markets in the world. There are reasons for this and most of them relate to long-term fundamentals that form a bedrock of strength for the market.
A big fundamental is that Sydney is vastly undersupplied with natural borders that limit the amount of new homes that can be built, yet demand keeps on rising due to the city’s strong population growth and increasing engagement from overseas buyers.
I read with interest an opinion piece by one of Australia’s most respected business and investment journalists, Robert Gottliebsen in The Australian recently that laid out some great statistics on Sydney’s supply/demand equation at it stands right now.
The article underlines why prices aren’t going to come crashing down and in fact, why they’re likely to keep on rising for the next 15 years. Here’s a rundown of Gottliebsen’s article, which is based on data from Infrastructure Australia and the Housing Industry Association:
Sydney’s population is expected to reach 6.1 million in 2031, which means 80,000 new people will move here each year.
Based on the assumption of 1.5 people per dwelling (in recognition of the rise in apartment living), Sydney will need 53,000 new dwellings per year.
The HIA says 54,000 new dwellings will commence in NSW in 2015 – but that’s for the entire state. That’s also a record high figure, with annual new builds expected to decline to 47,000 per year over the next four years.
The disparity between supply and demand is pretty plain here. Sydney is going to remain undersupplied and supply/demand is pretty much the ballgame when it comes to price pressure.
Now of course, the boom is definitely going to end at some point. That doesn’t mean price growth will end, it will continue on but in a less spectacular fashion. What will bring us out of the boom? There are a few things.
The market will at some point reach a natural peak – prices will get too high and buyers will lose interest. This isn’t happening yet, partly because finance is so cheap.
Investor activity, which has been a major driver of Sydney’s boom, will taper off as yields become too low.
Interest rates will begin rising at some stage as the economy improves and this will put the brakes on activity – but this is a long way off.
The Sydney property market is being very heavily scrutinised at the moment because it’s had so much growth and yes, it’s a bit unusual to have such a long stretch of significant price rises. But it doesn’t mean a calamity awaits us. A big part of the growth we’re experiencing today is simply catch-up after several years of little growth.
Everyone needs to calm down and remember that this is a solid, high performing property market in a truly international business hub and in my opinion, it is going to stay that way for a long time to come.
http://www.switzer.com.au/the-experts/jo...rty-expert
"The market will at some point reach a natural peak – prices will get too high and buyers will lose interest. This isn’t happening yet, partly because finance is so cheap."
yeah... and as per the previous article noted... your school teachers will disappear or you have to pay them really high ie inflation. these are commentators akin to bloggers who have no idea the holistic ramification nor long term impact, armed with basic econs 101 and brainwashed with supply/demand equilibrium. If we waited for equilibrium to happen in GFC most of us here will be in early retirement.
Policies focusing on property prices or for that matter asset prices including stocks are akin to directors of companies approving to buy stakes in cash-burning dot coms now because the prices of these dot coms are going higher. On paper it is going to look good but take a step back and common sense will tell you it's a stack of cards. Property investors are not long term vested interests.
Stock prices and property prices or for that matter asset prices is a 2nd order outcome of economic strength and growth. Like we always say here in VB: focus on your business and your stock price will follow. Reversing the horse and the cart will have disastrous consequences and more so for policy makers. We can sell stocks and move on. But many citizen aren't mobile enough to just pack and go. Like Greece a whole generation will be destroyed if handled wrongly.
Australian real estate at risk of sharp falls: OECD
By finance reporter Elysse Morgan
Jun 3, 2015
Australia's property markets are at risk of a "sharp correction" according to the Organisation for Economic Cooperation and Development.
The international organisation is the latest to join the chorus warning of the risk of a big fall in house prices.
"The continuing property market momentum adds to the risk of a sharp correction," it wrote in its latest report on Australia.
The warning echoes concerns raised by the Australian Government's Treasury secretary John Fraser this week that Sydney is "unequivocally" in a bubble.
The OECD warns the RBA not to cut interest rates again, saying "monetary policy firepower" should be held in reserve given the uncertainties about the outlook and inflationary effects on house and other asset prices.
To encourage growth it says the Government needs to consider sound policy, tax reform, cuts to red tape and competition boosting measures.
Treasurer Joe Hockey this morning told ABC Radio National's Breakfast program that he has concerns about how his children will be able to afford a home.
However, he does not believe there is a bubble.
"When you look around the world, bubbles have burst in real estate when there has been too much supply and not enough demand, whether it be in China, the UK or Ireland or the United States, that's when bubbles burst, and I'd say we're a very long way from that in Australia," he said.
What defines a property bubble?
The Treasury secretary says Sydney and parts of Melbourne have one, but what defines a property bubble? Business reporter Michael Janda explains.
Mr Hockey dismissed calls for intervention to cool prices and talked up the Government's "stricter regime" for foreign investment in housing.
He said the best way to respond to higher prices is to continue to add to supply.
"What we've seen is a massive increase in the amount of housing construction in Australia in the last year, up 18 per cent, which is 30,000 more dwellings being constructed last year than the year before and that's the best way to respond to elevated prices."
http://www.abc.net.au/news/2015-06-04/au...cd/6521150
Three things that could trigger a house price crash: interest rates, unemployment, the dollar
June 4, 2015
Jennifer Duke
Bubble has replaced boom as the major descriptor for Australian house prices in the past week,
but those betting on a sudden pop may be disappointed.
On Wednesday, the Organisation for Economic Cooperation and Development joined the chorus of doomsayers, saying Australian property prices were at risk of a "sharp correction".
Earlier in the week Treasury Secretary John Fraser said Sydney and up-market areas of Melbourne were showing unequivocal signs of a bubble.
However, Domain Group senior economist Andrew Wilson is not convinced.
"We have nothing like the pre-conditions for a sharp fall in house prices," he said.
In the current housing market, he said there were only three scenarios that could feasibly trigger a dramatic price drop of 5 to 10 per cent in Sydney and Melbourne – and none of them were particularly likely.
Trigger 1................
http://news.domain.com.au/domain/real-es...hes4d.html
illogical comments by specuvetors, agree others?
(04-06-2015, 10:04 AM)specuvestor Wrote: [ -> ]"The market will at some point reach a natural peak – prices will get too high and buyers will lose interest. This isn’t happening yet, partly because finance is so cheap."
yeah... and as per the previous article noted... your school teachers will disappear or you have to pay them really high ie inflation. these are commentators akin to bloggers who have no idea the holistic ramification nor long term impact, armed with basic econs 101 and brainwashed with supply/demand equilibrium. If we waited for equilibrium to happen in GFC most of us here will be in early retirement.
Policies focusing on property prices or for that matter asset prices including stocks are akin to directors of companies approving to buy stakes in cash-burning dot coms now because the prices of these dot coms are going higher. On paper it is going to look good but take a step back and common sense will tell you it's a stack of cards. Property investors are not long term vested interests.
Stock prices and property prices or for that matter asset prices is a 2nd order outcome of economic strength and growth. Like we always say here in VB: focus on your business and your stock price will follow. Reversing the horse and the cart will have disastrous consequences and more so for policy makers. We can sell stocks and move on. But many citizen aren't mobile enough to just pack and go. Like Greece a whole generation will be destroyed if handled wrongly.
Which part is illogical? Care to point out tell us why illogical?
sent from my Galaxy Tab S
Housing demand driving price
Nick Lenaghan
518 words
3 Jun 2015
The Australian Financial Review
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Big property developers have shrugged off warnings of a property bubble in Sydney's housing market in particular, pointing out that much of the activity is the result of pent-up demand for dwellings.
Treasury secretary John Fraser said this week Sydney and parts of the Melbourne market were in bubble territory, likening the activity to a feeding frenzy.
Last month Lend Lease sold all 581 off-the-plan apartments at its new development in Sydney's Darling Harbour in just five hours.
Mirvac has had recent sell-outs at its Elizabeth Hills and Elizabeth Point projects and has more releases coming up.
"While the market is certainly buoyant and vibrant and we're seeing price growth and confidence for customers, both owner-occupiers and investors, to buy, we're certainly not running at a peak of activity nationally," Mirvac chief executive Susan Lloyd-Hurwitz said.
The Mirvac chief acknowledged Sydney was running at a higher level than the national average but also pointed to ABS statistics showing dwellings for 32,000 new households were required each year for the next five years.
Yet dwelling completions had averaged about 18,000 a year over the five years to 2014.
"And while prices have increased in Sydney more than some other markets of late, it's worth noting that over the longer term, say 10 years, other cities like Melbourne and Perth have outperformed Sydney," she said.
"Various measures of vacancy still point to a Sydney average vacancy of currently less than 2 per cent, indicating the market is still in very short supply and the uptick in construction will be needed for some time to come."
Stockland managing director Mark Steinert also noted the strong demand for new homes in the growth corridors of Sydney, Melbourne and south-east Queensland, created by a shortage of new homes.
"We expect that the double-digit price growth we've seen in the Sydney market over the last 12 months will moderate to a more sustainable 5 to 6 per cent over the next 12 months, with the new supply that is coming on stream helping to moderate price growth," he said.
Moelis analyst Simon Scott noted the gap between income growth and house price growth had increased in the past year but dismissed concerns of a bubble.
"Historically, when the gap expanded either house prices came back or they tended to flatten and income growth caught up - we believe the latter will happen this time."
Mr Scott said domestic developers were being prudent in their site acquisitions. "They won't have factored in big price escalations in recent purchases to make profit. It's about shifting volume and enhancing IRRs (internal rates of return)."
Listed developer AVJennings has an extensive greenfield pipeline as well as apartment projects.
Chief executive Peter Summers said it was simplistic to speak of one Sydney market.
"In the one we operate in we do not believe there are signs of a bubble.
"What's driving activity in our sector is the significant undersupply in the last 10 years."
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Affordability jumps as family incomes improve
Michael Bleby
415 words
4 Jun 2015
The Australian Financial Review
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Housing affordability has improved outside NSW and Victoria over the past year as family incomes have risen relative to average loan payments, an Adelaide Bank report says.
The proportion of income needed to meet loan repayments has risen in the two biggest states - up to 35 per cent in NSW in the March quarter from 34.6 per cent a year earlier, and up to 32.8 per cent in Victoria from 32.3 per cent - the figure fell in Queensland, WA, NT and ACT, the quarterly report says.
Affordability worsened in SA and Tasmania from a year earlier, but the measure remained below the national average, which also picked up to 30.8 per cent from 30.6 per cent.
"There is still comparatively good buying in what I call the 'lifestyle capitals' of Adelaide and in Hobart, Perth and Canberra," said Adelaide Bank general manager Damian Percy. "South-east Queensland is also still an affordable favourite with older Australians looking to escape the rat race."
The debate about housing affordability echoed through federal Parliament this week. Prime Minister Tony Abbott rejected warnings of a bubble and accused the Labor party of wanting to lower house prices. Soaring prices in Sydney underpin a recent surge in renovation work, as people who have given up on buying a new house choose to expand their existing one, builder Sven Johnsen said.
Affordability would improve if stamp duty on housing transactions and GST - which could add over 40 per cent to the cost of a new home - was done away with and housing supply increased, the Housing Industry Association said.
In the March quarter, loan affordability rose in Queensland to 28.1 per cent from 28.3 per cent a year earlier. In WA it rose to 25.7 per cent from 26.4 per cent. In NT it showed a marked improvement, going to 25.3 per cent from 26.5 per cent, and in ACT it improved marginally to 19.7 per cent from 19.8 per cent. SA bucked the trend with a drop to 28.4 per cent from 27.4 per cent. Tasmania also dropped to 25.4 per cent from 25.2 per cent.
Nationally, rental affordability improved. The average proportion of family income required to meet rent payments fell to 25.1 per cent from 25.7 per cent, the report showed. Rental affordability improved in everywhere bar Queensland and SA.
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Our housing price bubble will only get bigger
Christopher Joye
869 words
3 Jun 2015
The Australian Financial Review
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House prices Don't be fooled by the obligatory winter drop in prices - home values are bound to appreciate further in the second half of 2015.
So it would appear that the "official family" - aka Treasury secretary John Fraser - accepts that the house price bubble we've been warning about since 2013, has suddenly materialised. Yes, that would be the bubble that many harangued us for daring to discuss, and which the Reserve Bank of Australia has denied exists.
It's an inconvenient truth for media outlets spruiking property portals and home loan advertising and for central bankers trying to rationalise insanely cheap money - you can now get that 3.98 per cent variable rate we anticipated prior to the RBA's May cut.
Fraser's commentary about the "unequivocal" existence of a bubble is also ironic, given the predictable surge in house prices in Sydney and Melbourne since January 2013, is a direct result of the RBA's decision to cut borrowing rates to the lowest levels in "human history" (in Glenn Stevens' words).
The Treasury secretary has a permanent seat on the RBA's board and has presumably been complicit in its attempts to crush savers' cash returns and encourage them to leverage-up in an insane "search for yield" that will inevitably end in tears.
Macquarie Bank says its much vaunted "Cash Management Account", which has attracted tens of billions in retail deposits, offers a "healthy 1.90 per cent per annum variable interest rate". You're living in a bizarre world when a real return of minus 0.5 per cent after core inflation is characterised as "healthy".
All of this begs the question: do we really have a "bubble" today? Economists, pundits and commentators often make the mistake of confusing a bubble's "necessary" and "sufficient" conditions.
The only criterion for a bona fide bubble to exist is a very large disconnect between the market prices people are paying for an asset, and its intrinsic worth. At its most basic level, a bubble means asset prices have become far removed from fundamental values. This is the "necessary condition".
The biggest bubbles also tend to be accompanied by manic buying (tick that box), backed by high leverage (tick) and hyperbolic defences (tick) of the crazy prices (tick again). My next-door neighbours traded their Sydney property, which recent sales implied was worth no more than $4.4 million, for a million dollars more than that level last week after only 14 days on the market.
In 2015 the myth being propagated by bank economists - no conflicts there - and home buyers hysterically chasing prices higher, is that the RBA will ensure interest rates remain low for long. And this is really the threshold issue.
If borrowing costs do indeed stay at the cheapest levels in 100-plus years, you can, in fact, rationalise current valuations. The problem is if you believe, as I do, that rates will normalise back towards nominal GDP growth, you find that current prices are overvalued by 20 per cent to 25 per cent.
Similar memes were rolled out to justify the tech boom in the 1990s and the leveraged financial service bubble in the 2000s. They were that the internet would herald a "productivity miracle" and households don't default on loans, which insinuated that economic growth would be permanently above-trend and property prices would never plummet.
In 2013 and 2014 the RBA said Australia did not have a housing bubble because of its assessment that credit growth was "low". After Jacob Greber and I co-authored a divisive news story with the headline, "RBA risks house price bubble" in August 2013, the bank's financial stability guru, Dr Malcolm Edey, slapped us down with the widely publicised rejoinder that "we shouldn't be rushing to reach for the bubble terminology every time the rate in house price increases is higher than average.
"You're just going to be unrealistically alarmist by making that call every time that happens," Dr Edey said.
Yet on Monday he flipped 180 degrees, conceding "serious people" now think there is a bubble and that the market is "overheated".
Setting aside the fact that housing credit growth was running at multiples the rate of wages, and was not therefore the remotely "modest" pace described by the RBA, the more substantive point was that the level of household leverage was rapidly approaching the historic highs touched immediately before the global financial crisis. As we forecast, Australia's household debt-to-income ratio and its house price-to-income ratio have both breached their previous record marks, and are now sailing into dangerously unchartered territory.
And don't be fooled by the obligatory winter drop in prices, which is pure seasonality, or the half-hearted efforts by regulators to belatedly clamp down on lending. Care of the RBA robbing savers to pay borrowers.
Bankers and non-regulated financiers are also brighter than their public sector game-keepers, which means the new lending rules will likely be ineffectual. The music will only stop when borrowing costs get normalised, which is not going to happen any time soon.
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Bubble trouble
1112 words
6 Jun 2015
The Australian Financial Review
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Housing Are warnings from several quarters of a dangerously hot property market cause for alarm? Robert Harley considers the evidence.
The bubble babble, led this week by warnings from Treasury Secretary John Fraser and the Organisation for Economic Co-operation and Development, is a timely reminder that house prices will not rise for ever. And when the boom is over, prices will subside.
On consensus, Sydney housing is not yet in bubble territory. Price growth elsewhere in the country is moderate, though specific markets show bubble characteristics. In the resource towns of the Pilbara and central Queensland, the bubble has clearly burst. In Melbourne's CBD, the sheer volume of new supply looks like a bubble in the making.
Rapid house price growth in the country's two biggest cities is not just a problem for Sydneysiders or Melburnians. As shown in the table on the next page, there have been substantial prices gains over the past three years in Canberra, Brisbane, Adelaide and Perth.
The Reserve Bank of Australia has hinted that it is not so worried about a price correction causing pain for the banks and threatening financial stability. Its real concern is for the broader economy. Falling house prices would make Australians feel poorer and likely cause them to spend less on discretionary items. This would weigh on business and consumer confidence, add to slowing pressures on the entire economy - and affect house prices everywhere.
For those looking to buy or sell - particularly in Sydney - the traditional benchmark, the interest rate lever, is on full throttle.
For Sydney house prices to slow down, there would have to be a number of forces at play - perhaps the city becoming unaffordable, or because of a surge in new supply that was much stronger than in the boom of the early 2000s. Other triggers could be investment returns dropping, crimped investor buying thanks to the new macro-prudential controls or slackening demand from offshore. Or if the government suddenly turned against the market with a punitive tax response on negative gearing, land tax or stamp duty for foreign buyers.
ANZ senior economist David Cannington says investors should not look to the past for guidance because the market drivers are changing "pretty quickly". For Cannington, the current exuberance is a "rational" response to the step down in mortgage rates.
The "current mix is pretty unusual", says Westpac senior economist Matthew Hassan. "How those pieces of the puzzle fit together is hard to know. It's about trying to guess where the surprise will come from," he adds. "Interest rates are pretty accommodating, so you are trying to second-guess non-standard policy measures. It is very hard to gauge their effectiveness and the willingness of regulators to apply pressure."
Hassan says rising supply will start to have more effect in 2016.
"That could see a more abrupt slowdown. But to get substantive price declines, you need an aggressive rise in interest rates, a change in the availability of credit or a weakening in macroeconomic conditions."
For Macquarie Capital's head of real estate strategy, Rod Cornish, the key is affordability - measured as the proportion of household income needed to meet mortgage payments. Significantly, Sydney's affordability has hardly changed in the past year, with interest rate falls and rises in household income offsetting the jump in prices.
"Housing affordability is still not yet at a tipping point for a broad downturn, though it is closest in Sydney," Cornish says. "It does take interest rate increases to tip the balance for affordability.
"Affordability is the overriding factor ahead of turning points in the cycle. Lower rates will immediately improve affordability but we expect the tipping point level to be eventually reached in Sydney first, then Melbourne through higher house prices." Cornish does note that the demand-supply equation, which has long kept upward pressure on prices and rents, is starting to change. The rate of growth in population and net overseas migration is starting to moderate. "The population demand/housing supply balance will start to shift this year … and increased supply will have an impact on the equation over the next few years," he says. "The annual demand/supply balance is to remain positive in NSW this year but decline elsewhere."
Tim Lawless, national research director of house price analyst group CoreLogic, says affordability constraint and the challenges in obtaining credit will start to have an impact. He notes that, with average housing debt now more than 140 per cent of household income, it will not take much of a rise in mortgage rates to slow demand.
"Those investors buying around the peak, which will be pretty soon, may not see much capital gain for some time, even experience some falls, at a time when cash flows will be low to negative," he says, pointing out that Sydney took four years to recover its peak of the early 2000s.
So what does a price collapse look like? Over the past 45 years, Australia has had six house price corrections. Prices did correct after each boom but, according to numbers from Westpac, not very far.
The worst was in the mid-1970s when, after years of economic growth, high migration and a resources boom, Sydney land prices were rising at 5 per cent a month. The boom collapsed under the weight of rising interest rates, oversupply, global economic downturn and the turmoil of the Whitlam years, taking with it a plethora of property companies, financiers and ultimately the Bank of Adelaide.
Yet house prices in Sydney and Melbourne fell by only 15 per cent, in real (after-inflation) terms. This would have caused pain at the time but was forgotten within five years as prices surged into the 1980s.
Prices have fallen further in specific sectors. The supposedly gold-plated mansions lining Sydney harbour lost nearly half their value in the early 1990s as the corporate high flyers who had bid up their prices went broke. In the Pilbara, investors have lost half the value of their property investments, and generally all their equity.
But in half a century Australia has not had a housing bust like the US collapse that preceded the global financial crisis. Caused by massive oversupply (with 2 million homes vacant at the end of the boom) and a collapse in credit, US home values fell around 30 per cent and up to 60 per cent in cities like Las Vegas.
The key factor is interest rates. The challenge for the Reserve Bank in trying to rein in the boom, and for investors, is to predict its future in the new "lower for longer" mortgage rate environment.
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