I used to be a die hard believer in the Sydney housing bubble theory. I am no longer.; A correction in Sydney house prices is unlikely. A correction in our living standards is certain.
Why a correction in Sydney house prices is unlikely, but a correction in our standards of living is a sure thing
House prices in Sydney is a highly charged topic. I used to be a die hard believer in the Sydney housing bubble theory. I am no longer. Those of us who have been living in Sydney for over 10 years however can see a significant deterioration in our standards of living. Not only skyrocketing house prices and increased cost of living, but significant demographic changes, and a disappearing sense of community and belonging.
The reasons why I think house prices will not correct (at least not in a significant way) are multifold:
First, according to a new survey from McCrindle Research, Sydney is adding 1400 people every six days (and that’s more than what the entire state of Tasmania adds in a year). Sydney’s population is almost five million now.
Second, due to population growth, the vacancy rate is very low (1.9%) despite the massive construction activities taking place.
Third, despite the already inflated prices, people continue to line up at 7am (after they have paid a $5K deposit just to be there) at off the plan property launches and willingly pay the asking price with no room for negotiation. Hundreds of off the plan apartments get sold within a space of 2-3 hours. As long as this continues and as long as the Sydney real estate market continues to defy traditional supply and demand and price discovery rules, the madness will continue.
Forth, Sydney continues to be popular choice for overseas buyers. According to Credit Suisse, Chinese are on course to take out 20 percent of new homes in Australia in 2020, up from 15 percent now.
Furthermore, properties have gone up so much in value over the past few years that property investors can withstand a significant shock and still be “in the money”. This means less likelihood that investors will rush to the exit door all at the same time. Add to that that a significant portion of the property investors are high net worth investors and therefore they have various options to deal with shocks.
It’s also clear that would be first home buyers understood the game being played and became property investors themselves while living with their parents (or renting).
Add to that the complete lack of data on who owns what (foreign vs local) which makes any enforcement of the rules very difficult. Furthermore, real estate transactions in Australia are not covered by the anti-money laundering rules (In the US and UK they are).
The impact of this on our standards of living is staggering. Not only skyrocketing housing prices, but significant demographic changes, massive traffic jams at rush hour, and very expensive fruits and vegetables.
Median house price now stands at around 13 times annual income. A new 50 sqm 1 bed apt within 20K from the city center fetches a price tag (starting) from $700K which is way out of reach for families in the middle-income range.
Poor and middle-income families are being driven out of the inner suburbs and into the city fringes (50 to 60km away) or in some cases out of the Sydney metro area altogether in what can be described as a form of “social cleansing”. Out with the poor and middle-income class and in with the rich and the mega-rich. This is diminishing the sense of community and belonging for a lot of people. Lots of areas are being re-zoned as high density. People are being forced to sell or put up with living next door to high density apartments and traffic.
Traffic on major roads is becoming a problem during rush hours. Basically, you don’t want to be on a major road around Sydney between the hours of 4:30pm and 6pm. Prices of fruits and vegetables are higher than those in London and NY. Hotel rooms are more expensive than those in NY.
One of the biggest surprises in the McCrindle survey was that most of those surveyed said they would consider moving out of Sydney. 23 per cent had “seriously considered it”, 21 per cent “somewhat considered it” and 22 per cent “slightly considered it”. Only 34 per cent said they had not. More than 80 per cent of Sydneysiders believed that public transport, roads, hospitals and infrastructure were not keeping up with population. About 47 per cent believed it was “nowhere near keeping up”.
The factors that keep coming up as potential triggers for a correction are: potential Australian interest rate hike, China hard landing, significant job losses in Australia, and a US triggered global correction due to rate hike there.
With regards to interest rates, it’s likely that Inflationary pressures due to the depreciating Australian dollar be counteracted by opposing forces due to constrained wage growth and spending. This means less likelihood of an interest rate rise in the foreseeable future.
With regards to China’s economy, people tend to forget that it’s a managed economy. You just have to look at their GDP figures to realize that. Therefore, the Chinese government will use every lever at its disposal to prevent a hard landing of its economy (which could lead to social unrest and political instability). This is not a guaranty that things will not implode but a stark difference from other free market economies. If deleveraging in China is handled in a balanced manner (by balancing the inflationary and the deflationary levers), a hard landing could be avoided.
With regards to job losses here, it’s true that we will see more job losses in mining and in whatever is left of the manufacturing sector, but that is unlikely to impact Sydney property investors, most of whom, as mentioned earlier, have already built a buffer due to the significant appreciation of property values over the past several years. Although private debt levels are very high and income growth is falling, asset prices continue to increase and credit is still available. Therefore, a deleveraging process does not seem to be on the horizon yet.
With regards to US interest rates, the Fed will not tighten if they feel that the economy/markets will not handle a rate hike. Given the current volatility in world markets (especially emerging markets) and the low inflation environment in the US, the Fed will probably err on the side of waiting. Even if they do increase rates, they will do so in baby steps in order not to spook the markets.
Finally, housing is currently a corner stone of the Australian economy. Policy makers will adopt a “whatever it takes” approach to prevent a collapse in housing and therefore defend the wealth of the rent seeking class (which by the way includes many of our policy makers). Even if such a collapse were to happen, if history is any guide, speculators, rent seekers, and the banks will be bailed out (one way or another) and savers and people who played by the rules will foot the bill while getting shafted at the same time. No reason to believe it’ll be any different this time.
The reasons why I think house prices will not correct population growth low vacancy rate people continue to line up at 7am at off the plan Sydney continues to be popular choice for overseas buyers. (WHATEVER :LOL) properties have gone up so much in value property investors can withstand a significant shock and still be “in the money”. blah blah Blah
Spoken like a true shill. It's different this time. They say that at the top of all bubbles
"Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works." John Stuart Mill
A well written piece IMO. And yes I think you have succinctly expressed the situation with the statement that property wont fall but your living standard will.
Kid's somewhere between euphoria, anxiety, and denial phase.
I like it
Just a thought: But if it was all as simple as some of the simpletons who aren't home owners sometimes seem determined to make out, then they'd presumably be home owners - Rather than whinging about the fact that they aren't.
But maybe it is pretty simple after all? : If you want to own a home and can afford one then buy it. And if you don't want to own a home or can't afford to then rent one - And be happy that there's plenty of them about to rent.
Ok, you took the time to at least think about what you were saying, check your spelling, and structure your thoughts with a proper narrative however hackneyed they are, so it's at least worth dignifying with a response:
Quote:
First, according to a new survey from McCrindle Research, Sydney is adding 1400 people every six days (and that’s more than what the entire state of Tasmania adds in a year). Sydney’s population is almost five million now.
Average property values in a city are a function of its average income, not its desirability as a place to live.
Sydney has high prices because it's paying high wages to people like me who work in the financial services sector, which itself is an artefact of the now fading mining boom juicing our terms of trade and igniting a residential property boom. Sure, more people are coming to the city because they hear about well paid jobs like mine, but you're messing up cause and effect if you think that's what's driving prices higher.
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Second, due to population growth, the vacancy rate is very low (1.9%) despite the massive construction activities taking place.
This is an extension of the first point, not one in itself.
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Third, despite the already inflated prices, people continue to line up at 7am (after they have paid a $5K deposit just to be there) at off the plan property launches and willingly pay the asking price with no room for negotiation. Hundreds of off the plan apartments get sold within a space of 2-3 hours. As long as this continues and as long as the Sydney real estate market continues to defy traditional supply and demand and price discovery rules, the madness will continue.
You've perfectly described the symptoms of a speculative bubble, for more historical examples of this please read Galbraith's The Great Crash, 1929
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Forth, Sydney continues to be popular choice for overseas buyers. According to Credit Suisse, Chinese are on course to take out 20 percent of new homes in Australia in 2020, up from 15 percent now.
Please read my recent comments here regarding China's crackdown on hot money flows.
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Furthermore, properties have gone up so much in value over the past few years that property investors can withstand a significant shock and still be “in the money”. This means less likelihood that investors will rush to the exit door all at the same time. Add to that that a significant portion of the property investors are high net worth investors and therefore they have various options to deal with shocks.
Not only is their cost of of living as consumers increasing, their highly leveraged positions now facing an onslaught from rising investor targeted interest rates, but their rents are now falling due to sluggish wage growth. Don't bank on a new Mum and Dad rentier class just yet
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It’s also clear that would be first home buyers understood the game being played and became property investors themselves while living with their parents (or renting).
You've perfectly described the symptoms of a speculative bubble, for more historical examples of this please read Galbraith's The Great Crash, 1929
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Huge whine about cost of living, urban planning issues, foreigners etc etc
It's called city living motherfucker - get used to it.
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness. "Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
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