RP Data, APM warn on Sydney house prices

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By Leith van Onselen

With Sydney house prices reaching for the stars:

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Driven by an epic boom in investor demand:

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Data providers – Australian Property Monitors (APM) and RP Data – have both issued warnings that Sydney housing values have overshot fundamentals and risk a slowdown:

”All the pointers are there showing that the Sydney investor market has overshot its fundamentals,” said the senior economist at Australian Property Monitors, Andrew Wilson…

”Yields in Sydney are plummeting, which is no surprise given house price rises, but flat-lining house rents aren’t helping the situation.”

RP Data senior research analyst Cameron Kusher agreed, and said investors thinking of getting into the market had missed the boat.

”Whether you are chasing capital growth or rental return, neither look particularly strong at the moment, certainly not as strong as 12 to 18 months ago,” he said. ”Given that, I do think that we will see a pull-back in investor activity this year”…

”If you can’t get a tenant you have no cash flow,” [Dr Wilson] said. Without cash flow ”those that have gone short or have highly geared investments will have the sell”.

Mr Kusher said a rise in unemployment also could start a sell-off. ”The forecast data shows that the unemployment rate should start to climb,” he said. ”If people lose their jobs and need some capital, the investment property will be the first thing to go.”

Even though Sydney’s rental yields have plummeted, they remain well above Melbourne’s, which are by far the lowest in the nation (see below table).

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What does this say about Melbourne’s fundamentals?

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27 Responses to “ “RP Data, APM warn on Sydney house prices”

  1. InconvenientTruth says:

    The only reason I can see APM and Doc. Wilson suddenly talking down property markets is to try and avert macro-prudential, interest rate rises, or anything to spoil the property-palooza.

    Just my opinion.

    • Ino says:

      Yep – precisely. It’s like a coke addict saying “see, I can stop myself in the middle of snorting this line; I’m not addicted – I can quit whenever I want”

      • Janet says:

        Similar reporting in NZ as the RE lobby becomes more nervous about the results of it efforts!
        “More bad news for Auckland housing…housing is increasingly out of Aucklanders’ reach as incomes drop and house prices rocket. The study’s found prices are up almost $55,000 annually, while median household incomes are falling by almost $5000 each year. Auckland’s median house price is $561,700 dollars, the median household income is $70,500.”

      • rich42 says:

        @Ino……..Hey mister coke dealer. Can we ask your advice about how much it should cost?…..How does our idiot society take the word of a banker as a guide to where the economy and house prices are going? How is this legal?

        This whole industry is a disgrace. I put an offer in on Friday for a coastal regional house. $342k……The agent knew my offer was pending….The offer never made it to the owner because another agent from the same agency had already submitted an offer earlier that day that was accepted…..

        HOW IS THIS IN THE INTEREST OF THE OWNER? The agent is supposed to be working for the owner, when in fact they are working for themselves with zero regard for the owner. There should be a royal commission into this grubby industry. Every day, since I’ve been looking (4 months), I’ve found some BS grubby vested interest that is not in the interest of the owner but the agent. I’m going to start documenting it and write to the ombudsman.

        I’m angry with what’s going on out there, not just in RE but with our whole society. No ones interested in where this country’s headed and therefore there’s no stopping it.

      • gonderb says:

        @Rich42 – was the other offer higher than yours???

        And regardless, you are saying the first offer was made *first* and accepted before you formally submitted yours? What should the agent have done? Not submitted the other offer? I don’t think that would have been fair to the seller… How long should the agent/seller have to wait for some other “pending” offer to actually appear? 1 day? 1 week? 1 month???

        Maybe the seller was happy with that first offer and decided to take the “bird in the hand”, rather than wait for another offer that may or may not have actually materialised? Maybe the first offer required acceptance within a certain time period or it would have been withdrawn? Etc etc.

        I don’t think you can blame the agent or the seller for accepting the first reasonable hard/definite offer that they recieved?

      • netti says:

        @rich42
        You are on the right track. Vested interests, MSM & govt leaders have no interest in playing fair. Give the Ombudsman something to do. Good.

      • rich42 says:

        @gonderb….Two DIFFERENT agents working for the same agency. Like I said he knew my offer was pending, but the other agent submitted “her clients” offer first. Probably telling the owner there was no other interest in the property.

        I wouldn’t know if my offer was bigger or smaller because apparently it’s the law, they aren’t allowed to tell me what the other offer is (probably more lies). On the other hand at an auction everyone knows what’s going on. Who’s offering what.

        If I were selling a place I’d want the agents from the same agency to coordinate a sale. Not the grubby little agent grab the sale for themselves perhaps missing a higher offer ON THE SAME DAY. It’s a disgrace and I cannot see how you can defend it.

        @netti…Yep. My NY’s resolution is to start reporting things I find disgraceful…..The older I get the more I understand how dumb my fellow citizens are and how sneeky and grubby the people running the place are.

    • speculator says:

      no, everything is fine with house prices. Let prices go up 15% next year.

      • RobW says:

        Yep, same with share prices. There is a change of government and low interest rates, all will be good. People shouldn’t worry about fundamental problems like too much private debt, an inexperienced government or lack of robust earnings growth, just buy shares and property with your ears pinned back.

  2. TheRedEconomist says:

    Now watch the lobbying for the return of First Home Vendor Grants.

    .

  3. thomickers says:

    Melbourne rents are lower for a very good reason

  4. Powermonger says:

    Does anyone take Andrew Wilson seriously? He’s been cheering on rising house prices the whole time, now to come out and say the market is overshot the fundamentals is hypocritical. Why has he suddenly gained a conscious?

    • Ortega says:

      Wilson must have watched the footage of Lee Harvey Oswald being ushered away for questioning (after a good hammering by the Texas police) where he turns and yells “I’m just a patsy!!”.

      Maybe WIlson had nightmares….

  5. Kliff_Fiscal says:

    His fear of MP is now greater than his greed.

  6. aj. says:

    Pfffth. Interest rates at epic lows, and cash about worthless and devaluing fast. Shares perceived as a major risk and completely unreliable (shareholder equity gamed and abused by management). Bonds poorly understood and perceived as a blowout yield risk if there is a taper. Commodities already sky-high.

    There is only one place money is going, and it joins the flooding river of loose liquidity.

    • Hector says:

      Aj,
      Why would Bonds be affected by a taper? That’s a genuine question.

      • gonderb says:

        Because taper = rising long term interest rates, = reduction in the value of bonds priced on todays/yesterdays interest rate curve.

        Simplistic example – you buy a bond today for $100k paying 3% for 10 years – interest rates rise forcing new issue bonds to pay say 4%, suddenly your 3%/$100k coupon bond is only worth $75k in the current market – ie you’ve lost 25% of it’s face value.

      • Gonderb, interesting that the bond calculus you outline above has made long-dated debt unholdable, yet applies equally to the debt investors have gone exponential on. Sure, some are interest only and short term and stuff, but they will eventually require refinancing at higher prevailing rates sometime in the future and pin borrowers out to fry in the midday sun.

        The traditional Australian BBQ has been ruined by insufferable ‘Gearer hubris about unrealized gains. Some expect to exit cleanly and neatly to ‘greater fools’ just after the market turns and bank ten-baggers. The rest plan to hold forever. I foresee plenty of raw prawns on the barbie. They won’t be from the sea.

      • Hector says:

        Gonderb
        Many thanks. I understand exactly what you mean and your example was excellent.
        Again, thanks so much,

        And thanks Aj for putting the question in my head!

      • Natural Sceptic says:

        Not to be pedantic…ok, to be pedantic, but while correct in a sense in that you’re left holding an asset with a return that is below market return and therefore worth less than it was, gonderb’s response is not a correct reflection of yields and prices; a change in market rates to 4% while you are left holding a fixed 3% bond does not lose 25% of its face value, closer to 8%.

        When the market rate is 3%, you will be receiving a total of $130k (repayment of principal plus 3% coupons), or, assuming compounding (i.e. reinvestment of the coupons at 3%), around $134k. Discounting that to present value at a rate of 3% – i.e. assuming the time value of money is consistent with the market rate (essentially this being a risk free bond), gives you (not surprisingly) the market value of $100k – notionally anyway.

        Change the market rate assumption to 4%, and the 3% coupons reinvested (at 4%)plus principal will get you around $136k instead. Discount this using the 4% rate; and the PV is just under 92k – the market value will be around this, which is an 8% fall, not 25%.

        Still somewhat simplified of course, but closer.

      • AB says:

        And the US may require a rise in interest rates to get mortgage credit flowing again.

        http://blogs.reuters.com/felix-salmon/2014/01/15/why-banks-arent-lending-to-homebuyers/

        To put it another way, would you lend money fixed for the next 30 years at a rate of less than 5%? Mortgage rates might still be well above the rates on mortgage bonds, but on an absolute basis, they’re still incredibly low. If you hold the loan to maturity, you’re never going to make very much money, and if you mark it to market, you run the risk of substantial losses if interest rates move back up to more historically-normal levels.

      • gonderb says:

        @Natural Sceptic – yes, you are (more) correct. I was trying to illustrate the devaluation of the bond value as interest rates rise in the most simplistic way, without getting into PV based calcs, cumulative cash-flows etc. But perhaps my example was a bit misleading in terms of the size of the loss as a result! Your example is closer to the mark, yes.

  7. Evetsllub says:

    I’d like to know how they have applied valuations for the gross rental yields. 4.41% & 4.86% for Sydney Houses / Units seem to be ambitious. From what I have seen the numbers are more likely well under 4%. Once you include Rates, Strata, agent fees & maintentance you’re looking at net yield of under 3%.

    • gonderb says:

      It depends on the area and type of property. More expensive areas & houses have lower gross yields than middle/cheaper areas. Units in general have higher gross yields.

  8. The Patrician says:

    charade

  9. churlish says:

    Fundamentals have no bearing on a bubble. That is why house prices will continue to rise strongly for the time being. Once inflated the bubble must run its course no matter what the “fundamentals” say.