Sydney real estate has been on an upward trend since the Reserve Bank of Australia (RBA) begun cutting interest rates in mid-2012. All busts eventually end, as does every boom. Picking the end of this boom has seen many people get it wrong.
Investment bank UBS recently came out and called the peak of the Australian property market. However, even the big banks don’t always get it right. The Bank of Scotland kicked off 2016 by telling people to ‘sell everything’, which has been disastrous advice for anyone that followed it.
Everyone has an opinion on the market, many of which simply contradict the other. Therefore, before deciding to act, it is best that you form a view on the market using pragmatic thinking, not sensational reporting.
The market has NOT peaked because…
Interest rates are at record lows and are unlikely to rise significantly. Whilst rates are low, buyers will have a go.
Employment in Sydney is strong. Jobs in combination with low-interest rates will continue to see property perform well. Nationally, employment is struggling, but Sydney’s employment is particularly strong. Have you tried to book a tradesman recently? If so, you will have an appreciation of the demand for services in the community.
Stock levels remain very low. The number of homes coming onto the market is insufficient to satisfy the demand, which has been evidenced by the number of bidders per property. When a market is falling or peaking, new listings coming onto the market begin to outpace the number of sales occurring. This is not the case at present.
Foreign buyers are absorbing brand new apartment stock – insulating Sydney from an oversupply risk. Even though the apartment sector is slightly underperforming house price growth, apartments are still selling well.
The rental market is stable. Vacancy rates are very low, offering investors consistent income – albeit on a low yield. For years now, bearish commentators have warned that oversupply will show up in the rental market first, and then spill over into dwelling prices as investors shy away. This has not happened and there are no signs that will happen anytime soon.
Population growth in Sydney is strong. Whether it’s Australians moving interstate to Sydney or foreign migration, Sydney’s population is still growing. Finance regulators have rightly clamped down on risky areas of the market such as interest only loans. There is someone ready to take that borrower’s place in the market though. Certain global cities benefit from an influx of foreign money that pushes prices up. London, Vancouver, Hong Kong, Auckland and Sydney are all cities that perform differently to other markets in their respective country – due to strong population growth and foreign buyers.
Canada clamped down on foreign buying in 2016 and the market experienced an immediate correction of 20%, highlighting the power of foreign money pouring into the country.
The market HAS peaked because…
Global interest rates have bottomed, while Australian retail banks are increasing rates to borrowers. Cheap money has been the primary cause of the property boom. While no one expects rate hikes, no one seriously expects further rate cuts either. The Sydney property market has risen 20% in the past 12 months, triggered by rate cuts in May and August 2016. Don’t expect any further stimulation from regulators – actually, expect the opposite – more regulation to slow the market.
Buyer fatigue at excessive house prices. In calling the top of the market, UBS economist Scott Haslem was quoted as saying, “While the historical trigger for a housing downturn (of RBA hikes) is missing, mortgage rates are rising, and sentiment of home buying collapsed to a record low”. As real estate agents, we certainly have not seen a collapse of sentiment among home buyers in the Inner West. What has been interesting to note recently, is the number of auctions that have been passed in. The auctions have had multiple bidders but the auction failed to meet the owner’s reserve price. During April, in a 10 day period, 7 homes in postcode 2041 failed to sell at auction. Such a trend suggests vendors are overplaying their hand or buyers are resisting further upward pressure on prices.
Regulation gets serious – The Australian Prudential Regulation Authority (APRA) has imposed tougher lending criteria on retail banks, again. To date, much of the regulation has focused on investor lending. They have now targeted interest only loans – to both investors and owner occupiers. This is a prudent move and will take the heat off the market as the speculative buyer is diminished.
Mortgage repayments never really increased during the boom, until now. Broadly speaking, as interest rates fell by 70% in the past 5 years, house prices rose by about 70%. This point highlights how artificial the growth has been and why rising mortgage rates matter.
Now that retail banks are increasing rates and the RBA won’t be cutting rates to offset the increase, mortgage holder’s repayments will increase. Buyers were so willing to pay higher prices to vendors because their monthly repayments didn’t increase given falling interest rates. This story looks to be over now. The obvious side effect of lower interest rates and higher house prices is the massive debt burden in the market. If you need any sense of what a ticking time bomb is, this could be it, just look at the bureaucrats, bankers, regulators and politicians passing blame on each other for the high house prices. If the housing market debt bomb blows up, watch the blame game take hold.
Markets will always overshoot. Property analyst Louis Christopher said that there is always room for an overheated market to go higher.
When asked the secret to his wealth Baron Rothschild replied, “I will tell you my secret if you wish. It is this: I never buy at the bottom and I always sell too soon.”