If property gets $ for $ with central New York, its time to sell..
If you are talking NYC/Manhattan, we would have to get to $2k-$4k/square foot, which would make a 100m2 unit in a good location in Sydney cost something like $2M-$4M, and heaven knows how much a well located 150m2 house would be - in the order of $3M-$5M++. I don't think we are anywhere near those sort of prices just yet.
For Aussie property bears, "denial", is not just a long river in North Africa.....
If you are talking NYC/Manhattan, we would have to get to $2k-$4k/square foot, which would make a 100m2 unit in a good location in Sydney cost something like $2M-$4M, and heaven knows how much a well located 150m2 house would be - in the order of $3M-$5M++. I don't think we are anywhere near those sort of prices just yet.
kind of my point... its not even worth comparing ...
sydney is best compared to a good tier european capital or second / third tier US city .. its just not in the same league as the major financial capitals ...
As to Sydney being compared to NYC/London, it's a fair comparison. In the local context, Sydney *is* to Australia what NYC is to the USA. In the global context, Sydney is an "Alpha+ Global City", sitting only one tier below the "Alpha++" cities like NYC (See http://en.wikipedia.org/wiki/Global_city).
A rather bizarre designation considering on the same page Sydney ranks * (not on list) in the Global Economic Power Index, * 15 on the Global Power City Index (presumably it scores high on "Livability", "Environment" but low to non-existent on "Research & Development", "Cultural Interaction", and "Accessibility") * In The Wealth Report Sydney ranks 17 for economic power, 12 for political power (I think that is a mistake), 7 for Knowledge and Influence (definitely a mistake given Tokyo is ranked 13), and 3 for Quality of Life which pulls it up the table. * 15 on the Global Competitiveness Index.
Basically Sydney is an Alpha+ city because it has beaches and parks.
According to the definition, an Alpha+ city "complements London and New York by filling advanced service niches for the global economy." I don't know what "advanced service niches" Sydney fills, perhaps you could enlighten? Rotterdam, which runs one of the world's largest container ports is a Gamma city, so I am genuinely curious about these "advanced service niches" going on without anyone noticing. Is it because our FX market opens first (well NZ doesn't count)?
Quote:
Sydney bashers love to deride the status of the city, but the economic facts around this are undeniable, including the real estate market aspects. Eg, why do you think so many rich Chinese (nationals and ex-pats) want to park their money in real estate here?
The economic facts, from the very page you linked to, are indeed undeniable. Economically, Sydney is a 3rd or 4th tier city. There are reasons why rich Chinese want to park their money here, and they have nothing to do with the size of the economy.
------------------------------ " ... which is that all-too-familiar dynamic in Irish life where people tell lies, cover them up and create all sorts of collateral damage, sometimes spread out over decades, and never take responsibility." - Alan Glynn
It was a financial hub, but not a major one. Still, the potential was there, all we needed to do was (a) install a decent telecommunications network (still arguing about this even now, i.e. NBN) (b) improve the banking system (some progress was made but quickly fell behind HK and Sing) and (c) upgrade Sydney's mass transit system (complete and utter failure).
A rank of 15 versus 3 is irrelevant. As long as the commodities boom continues, there will always be financial activity in play, but bulk commodity trade will never compete with manufacturing trade, and we still have a lot more capital controls and regulations than places like Singapore and Hong Kong, and very little infrastructure to show for the money generated by the boom. Australia is now seen as a mine and somewhere to store your family in case of political trouble in North Asia.
Yeah. I guess a lot of this depends on what you call "major" doesn't it? The 15 vs 7 vs Tokyo is probably less important than the 674 vs 693 rating. Really it just shows that Sydney is just outside the major global hubs and is in the very thick pack of transnational hubs.
Couldn't agree with you more about the telecommunications. Sydney is a decade or more behind each of the 4 cities above it in the list. Not just because of lack of speed and poor RTT to the rest of the world, but the huge relative cost of telecoms because of the protected duopoly where Optus is allowed to operate by Telstra as long as they take no more than 7% market share and are no more than 7% cheaper and as long as they don't compete in the last mile. If you are a Westpac or Rio you can build yourself a decent network at a high cost which is possibly not going to kill you, but what about if you are a SME in North Ryde? You can get a 10Mbps symmetric service out of your small Data Centre for $8k/month. In North Asia you can have that for a couple of hundred bucks a month. Wanna limit yourself to a paltry 20GB? Comes down to a "mere" $1.7k/month. Shit even in backward Beijing I can get an equivalent *mobile* service for $300/month. It's no wonder most SMEs sits behind a shitty ADSL connection.
But Turnbull has a plan that will get us to 5 years behind where the competition is now by 2019, so it's all good.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
I agree there is a risk of a bubble building, and if a bubble does build then it will burst (all bubbles burst).
The reason why there has been no burst in Australia is because there has been no bubble yet.
Note that a Sydney median house price of approx. $1M by end of 2015 is NOT a bubble.
Approx $1M by end 2015 would just take the Sydney price/income ratio back up to 2003 levels.
However if the price/income ratio grows significantly beyond that level, then we may enter bubble territory.
The indicators to watch are the house price to income ratio, mortgage repayment to income ratio, and rental vacancy rates.
Sydney stalled in 2003 and then fell back 10% in nominal terms because mortgage repayments reached an all time high relative to incomes, and the rental vacancy rate was almost 5%, indicating oversupply.
Today, rental vacancy rates in Sydney are below 2%, and mortage repayments are about 40% lower relative to incomes than they were in 2003.
So this boom has a long way to run before Sydney gets back to 2003 levels in terms of unaffordability and supply/demand imbalance.
When people talk of $1m homes as if its normal, you know you are in the mother of all bubbles
According to the definition, an Alpha+ city "complements London and New York by filling advanced service niches for the global economy." I don't know what "advanced service niches" Sydney fills, perhaps you could enlighten? Rotterdam, which runs one of the world's largest container ports is a Gamma city, so I am genuinely curious about these "advanced service niches" going on without anyone noticing. Is it because our FX market opens first (well NZ doesn't count)?
The economic facts, from the very page you linked to, are indeed undeniable. Economically, Sydney is a 3rd or 4th tier city. There are reasons why rich Chinese want to park their money here, and they have nothing to do with the size of the economy.
I don't think the size of the container port is all that relevant to its status as an international financial hub. Shanghai is the world's busiest container port, but it would rate well below Sydney as an international financial hub. Port Klang is nearly twice the size of container port as New York, but it's outer bumfuck as far as anything else is concerned.
On most measures such as market depth, liquidity and volume, Sydney rates as second tier behind the big four.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
When the crash comes it will be the crash we had to have back in 2007.
Instead we got a bumper First Home Owners Grant, SMSFs being allowed to borrow to buy property, and relaxed foreign ownership.
Now we're getting near-zero interest rates.
All demand-side policies that create house price inflation and make large amounts of debt seemingly more achievable.
When it comes, the Government, the RBA and the major banks will blame 'extraneous circumstances' and a '1 in 1,000 year event' but they've stoked the fires at every opportunity and they continue to deny that housing affordability is a serious economic and social issue that will take generations to repair.
You would expect it from the Govt and the Banks, but for the RBA to come out and say bubble-talk is 'unrealistically alarmist' shows that they'd rather win the popularity contest than do the right thing for the long-term benefit of the country.
Well Bill Evans of Westpac reckons there's nothing to worry about, so you can all just chill.....
Quote:
The Reserve Bank has released its Semi annual Financial Stability Review for September.
This report is of more than usual interest as it provides the Bank with its most appropriate vehicle for highlighting any concerns around potential property market and household balance sheets stemming from the current low interest rates. (Note that despite the overnight cash rate being 2.5%, below the previous cyclical low of 3.0% in 2008/9 the headline (before discounts) variable mortgage rate is 5.95% compared to 5.75% in 2008/9).
Our reading of the Review indicates that there is no high degree of concern from the bank around property market or household balance sheet excesses.
There are some “responsible” warnings, “Of particular importance is that banks maintain prudent risk appetite and lending practices, especially in the low interest rate environment”.
The Bank notes “the risk profile of new household borrowing remains reasonably sound and indicators of household financial stress are reasonably low” there is “a continued rate of excess repayments on home loans”.
The centre of strongest housing activity is concentrated in NSW it is “important that those purchasing property do so with realistic expectations of future dwelling price growth”. It is suggested that over the medium term that should be around the growth rate in nominal incomes.
The Bank is particularly focussed on the strong buffer which existing borrowers have built up due to the jump in the savings to around 11% and the consistent falling interest rates. It notes that “around half of households have not reduced repayments as rates have fallen” and “mortgage buffers remain near highs since (first measured) in 2008”.
These buffers which are commonly known as mortgage offset or redraw facilities average 14% of loan balances indicating borrowers could cover 21 months of interest payments in the event of losing current cash flow through,say, unemployment.
The Bank accepts that some of the results particularly from the “wisest savings” questions in the Westpac Melbourne Institute Consumer Sentiment Survey point to “a slight shift in household preferences towards riskier assets”. We discuss these issues extensively in Westpac’s September Red Book. Fall in proportions of respondents preferring bank deposits (down around 10 ppt’s over the last year to 29%) and pay back debt (down around 7 ppt’s to 14 %) were partly offset by increases in real estate (up 8 ppt’s to 28%) and equities (up 3 ppt’s to 9% ) – described by the Bank as still “quite low”.
However the Bank seemed quite relaxed, “increased financial risk taking is an expected outcome of lower interest rates”.
It did correctly note that the centre of the strong housing activity has been in NSW, pointing out that 40% of new lending approvals in NSW have been to investors, who are responding to the recent pick up in Sydney house prices – the highest proportion since 2004, although this was qualified because it partly reflected the marked decline in First Home Buyers.
Indicators of household stress provided no grounds for concern. The non performing share of banks’ housing loans was steady at 0.7%; data on securitised housing loans suggests arrears rates have fallen since peaking in mid 2011.
Lending standards are assessed as having been broadly maintained since late 2011. The distribution of high LVR share of loan approvals has shifted down since 2009. The share of low doc loan approvals has remained steady at 1% in 2013.
The share of fixed rate loans being approved has jumped from 9% a year ago to 19%.
Self Managed Superannuation funds (SMSF) come in for scrutiny. They are assessed as now representing 33% of the total pool of super savings which has now reached $1.6 tr. That is up from 9% in 1995.
These SMSF’s hold around 15% of total assets in property assets, although 77% of those assets are commercial property, with small business able to move business property assets into their SMSF’s.
My point would be that these investors should be put into perspective. Residential real estate assets represent around 3.5% of the SMSF’s investments – around $ 20bn in assets. That represents around 1.5% of total housing credit outstanding and around 5% of investor credit. With such a low share of the stock it seems highly unlikely that the SMSF sector could significantly influence prices through its flow.
The Bank notes that a new source of demand might exacerbate property price cycles. However the actual size of this sector to date indicates that the “rise” of the SMSF is unlikely to drive a housing bubble in Australia of its own volition.
We expect that the more appropriate reason for the Bank’s attention to this sector is around financial stability issues with the Bank noting an ASIC report highlighting “pockets of poor advice” given to individual SMSF investors around geared residential property investment.
Conclusion
There has been considerable media attention around potential property bubbles in Australia which might constrain the Bank from cutting rates further.
An appropriate opportunity to highlight that case was available in the September Financial Stability Review.
There is no convincing evidence from this Review that the Bank is concerned about such prospects.
If you are worried about all this talk about a housing 'bubble' and have delayed buying a property or put off other decisions as a result, then you have fallen into a well laid trap, or perhaps you are following a path that the RBA (Reserve Bank of Australia) and others are trying to steer you down.
Don't believe me? Here's why
This country's monetary policy in recent decades has been set and controlled solely by the RBA (this wasn't always the case). Fiscal policy is set down by the government of the day with the assistance of Treasury and the competing interests of other departments and that government's policy agenda (meaning it can get messy & complicated).
As the name suggests, monetary policy relates to the supply and cost of money.
Interest rates are the price (cost) of money and, whilst they can also have an effect on supply, the RBA's legislative ability to regulate supply and cost has largely evaporated over the past 40 years or so with deregulation as they moved away from or eased legislated controls such as LGS and SRD ratios, abolition of interest rate ceilings, exchange controls and the like to a liability management model. You can read all about it here in a research paper written by Ric Battelino and others of the RBA.
So, with the removal of that legislative ability to impose controls the RBA has come, through necessity, to rely more on setting interest rates but even then their ability to impose those changes in getting the banks to follow suit has been found wanting as we have seen in recent years with banks often choosing their own path. Even when banks do agree to change their lending rate on mortgages, especially when the change relates to a reduction, their internal policies often leave the client's monthly payments unchanged.
The big problem for the RBA in this deregulated globalised environment now that we have a floating dollar is the effect of interest rate changes on the rate of exchange for that dollar. Make no mistake - the RBA is poised on a knife's edge in balancing it's interest rate policy lever. Here's why.
The effect of the GFC
It's very nearly six years now since our markets started to head south. It was five years ago last month that Lehman Brothers collapsed and we were engulfed by the GFC, the biggest financial mal event since the great depression. No other financial event has received such widespread media coverage at a time when media reaches us at all times of the day and in every place we visit - like it or not.
Furthermore, financial news has never been so prominent and widespread.
Here in Australia we escaped the worst of the GFC yet it scared the pants off most investors, home owners, business people and those who need to be employed. As a result countless plans have been delayed, decisions put off, retirements avoided, expansion plans placed on the back burner etc, etc. All this has led to massive pent up demand, especially for housing as our population continues to rapidly increase.
With Australia's economy in good shape compared to most other western economies these past few years and the strength of investment in the mining boom our currency has been very strong which has hurt many sectors of the economy, (even mining), to the point where a lot are at, or near, breaking point. With mining entering a new phase it has now become very important and urgent to assist and stimulate those sectors through creating the conditions for a lower aussie dollar. For the RBA that means low interest rates.
To their frustration the low rates to date have not translated to people spending money. Retail prices are still low; profits patchy and minimal. The dent in confidence was deep. Conservative consumer habits developed during the GFC are proving hard to shake. Three years of a hung parliament with all the negativity it brought did not help, just exacerbated things. Yet all this time our population continued to grow. Pent up housing demand was growing, yet confidence and job security was still weak.
Change isn't just coming - it's here!
That's right and there is more to come. Confidence is returning and we've got a new government. People are back out looking to buy houses and it has got the RBA scared. They are scared because we not only have a major under supply of housing but also labour and resources required to build more.
The laws of supply and demand then dictate that this puts upward pressure on existing housing stock which does nothing to stimulate the economy and is counter productive to what the RBA wants. Pent up demand is so great that if left unchecked it may lead to a bubble. Then again it may not. But wasn't that a bubble in US housing prices that caused the GFC? Maybe - in very simplistic terms. It's a good scary story though.
So in this deregulated environment what does the RBA do? Increase interest rates (and by so doing the aussie dollar) to pour ice on the housing market at the expense of every other sector such as manufacturing, retail, farm, tourism etc, etc? It's a dilemma.
RBA's new power tool
A few years back, having lost most of their statutory controls the RBA discovered another powerful tool to harness. It's called publicity and use of the media. They noticed how the media hang on every nuance of the RBA Governor's utterance.
They need to keep interest rates down and they also need badly to stimulate the economy at large to fill a sizeable hole left by falling mining investment. Any uncontrolled surge in prices of existing houses is just not productive except for assisting a few real estate agents.
So what better idea than to flag in the media the possibility and then call it "likelihood" of a housing bubble? Try and scare the punters away before it ever happens. They've even enlisted the likes of APRA and other spokespeople to join in the cause.
This story has been getting a good feed and continues to do so. Insurance and fund management industry spokespeople even blamed self funded retiree's with their SMSF's as the main 'housing bubble' protagonists locking the poor (still scared) first home buyers out in the cold.
Of course they have a major axe to grind as they have witnessed the SMSF sector take charge of their own money management instead of entrusting it to them, depleting the pie that the fund managers controlled for many years by many billions of dollars, with more than $500 million dollars going into SMSF's each and every week according to the Institute of Public Accountants.
Fund managers don't like it and you can bet that they will be lobbying the new government for some changes - just what I am unsure. For their part the government will also be eyeing that SMSF pie too because there's a huge stash of cash there. Oh how to make use of it?
So what about the bubble? Evidence please
Truth is there is no bubble. Sydney prices have been buoyant and auction clearances above 80%. According to RP Data Sydney prices were up 8.4% last 12 months whereas the previous 12 it was only 1.2% and the year before that they were down 2.4%. Prices elsewhere in the country have told a similar story in a general sense over the same period, though not as buoyantly as Sydney - yet.
Sydney always leads and we all follow.
Brisbane according to RP Data has only risen 1.8% these past 12 months after some decreases and a flat market following the extensive flooding experienced all over Queensland these past two ears. So follow we will, but is it a bubble? The answer is an emphatic no. Have another look at those graphs that I featured in my blog, "Where to after the election", it's all there in black and white and easy to see. We are simply now in the early stages of upswing in the investment cycle. Remember how back in April and May we studied the property cycle in quite some detail? You can go back and read it again here if you missed it.
The fact is that the RBA does not want to increase rates or have plans to do so anytime soon. They do want to encourage broad activity however across most sectors of our economy, even new home building, but price inflation of existing housing stock is not a preferred outcome so they are attempting to scare people a little to slow things down avoiding use of their interest rate lever.
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