Chief information officer for the Australian housing market, Domain Property Group’s Dr Andrew Wilson, appeared on Sunrise over the weekend to calm the nerves of Australians concerned that Sydney housing values are a bubble.
Here’s the key quotes from Wilson (full video above):
[Interviewer]: Do you agree that a crash is on the way?
[Wilson]: No I don’t agree. I think we can all relax and we can continue to have our secure outlook for our property prices going forward. What we have seen recently has been mostly a Sydney story. There’s been very strong prices growth in Sydney – median’s up by $300,000 over the last three years – and we will get a million dollar median in Sydney this year. But other capital cities, they’ve been modest to moderate at best since we’ve had that big cut in interest rates over the last couple of years. And it is that big cut in interest rates that driven house prices growth, particularly in Sydney…
[Interviewer]: How long can it go on?
[Wilson]: As long as interest rates keep falling it gives buyers the capacity to pay more with a given income stream. And we did see interest rates cut this month and we may get interest rates cut again this year. So that improves affordability, allows prices to keep rising, and in a market like Sydney, which is really effervescent in terms of enthusiasm and confidence, we’re going to continue to see price rises.
[Interviewer]: But in general, incomes are remaining stagnant or rising very slowly at best, so how can they keep pace with the price rises?
[Wilson]: It is lower interest rates that gives the capacity to pay more for property with your set income. And you’ve gotta remember that we have got the lowest interest rates since 1968. We’ve had mortgage rates fall from 8% down to under 5% now. And when you are borrowing 80% of a property’s value, that really does give you the opportunity to pay more. And when there’s a lot of demand and not a lot of supply, as there is in Sydney, that really does activate prices growth. But other capital cities, just so-so at the moment…
And the Sydney economy’s going okay as well. It’s the best performing economy in the Commonwealth, so… don’t worry about all the scary talk…
Of course the big problem is first home buyers. We’ve got record low first home buyers in Sydney, which is of course no surprise given how expensive property is. That’s the real issue… How do we get those first home buyers into the market.
Leaving aside the fact that Melbourne housing is also massively overvalued – a point ignored entirely by Wilson – let’s look at the facts about Sydney housing, that proves it’s a giant bubble.
First, home values have surged by an incredible 35% in less than two years (see next chart),
Driven by an unprecedented surge in housing investors, which now account for nearly 60% of all new mortgages by value (excluding refinancings):
Meanwhile, wages growth in New South Wales (dominated by Sydney) has been in the gutter for the past two years:
And unemployment has been rising over that period:
Sure, the bubble has further to run and, if anything, has re-asserted itself since the beginning of this year:
This makes the $1 million median “milestone” likely to be hit. But with each incremental increase in values, the risk of a severe property correction rises, which is certainly no cause for calm.
Even Wilson’s claim about record low mortgage rates justifying price rises needs to be taken with a large pinch of salt. When adjusted for inflation, real mortgage rates are nowhere near historical lows (see next chart), which makes paying off today’s mega mortgages all the more difficult.
The upcoming $1 million median means that Sydney housing is attached to a bomb.
