Sydney housing ripples

Sydney is different. Since 2003 rents have risen faster than prices. I imagine the rest of the country would find that hard to believe, given their experience. But this is just one piece of evidence to show that the property cycles in Australian cities are non-synchronous.

The past 25 years data shows that the Sydney residential property market is the least volatile, and is always first to boom. In fact, you can chase the price growth ripples from Sydney and Melbourne across the country – to Adelaide, Brisbane, Perth then Darwin. This might be one reason that such divergent opinions exist in the media, academic and professional circles about residential property market conditions.

The above graph shows the two biggest markets, and arguably most attractive cities, have had the least growth since 2000. That seems particularly counterintuitive. But if we look long term the explanation is clear – Sydney and Melbourne began their major boom years before the other capitals in the mid 1990s.

Each of the charts that follow this post compare the timing of booms in capital cities against Sydney’s booms. This exercise reveals a number of things.

  • Sydney and Melbourne booms in the 80s and 90s started and finished within a year of each other. In fact, their cycles are the most in synch of all markets.
  • Brisbane lagged Sydney’s late 1990s boom by 4 years – making it an early 2000’s boom. This appears connected to the fact that Brisbane’s 1980’s boom lasted about 4 years longer than Sydney’s.
  • Adelaide followed Sydney’s lead more closely than Brisbane in the 1990s, and lagged Sydney more closely in the late 1980s.
  • Perth’s 2000s cycle was similar to Brisbane, although in the 1980s it had sharper and shorter price rises.
  • Darwin is a world of its own – booming when other capitals had prices tracking below trend.
  • Brisbane, Melbourne and Perth prices have been ‘catching up’ to Sydney over this 25 year period. This could be because the quality of homes is catching up to those in Sydney, and also due to a convergence of income levels between the cities.
  • For some reason Adelaide is falling behind other major cities (lowest long term growth trend)
  • Sydney never falls as far below its trend as any other city. My eyeballing suggests that price volatility is lowest in Sydney.

This might have lessons for property investors outside of Sydney. If you are in Brisbane, Perth or Adelaide and follow the Sydney trend a couple of years behind, you will do well. If prices are flat in the major capitals, take your money to Darwin.

What about from 2011 on? Sydney appears below its long term trend, and it rarely drops far below this trend. The other capitals are above their trend and do fall quite far below trend during economic downturns. My personal view is that Sydney stability will continue.

The other question to ponder is whether the trends over this past period can validly be applied from now on. Deleveraging is the most important new consideration, and we have seen the dramatic affects this can have on asset values if we look to the US and some European property markets.

My expectation is that prices will fall until such time as yields are high enough to be attractive to investors who aren’t expecting capital gains in the near future. To me, this might mean yields might get higher, relative to interest rates, than we have seen for 30 years. And for that to happen, prices will fall. Of course, if the RBA drops rates significantly, this will dampen falls, but I doubt lead to growth (not even matching inflation) for a few years yet.

Under this condition I expect price contraction to operate in the reverse pattern, starting at regional capitals and finishing in Melbourne and Sydney.  The beginnings of this trend are already evident in the data, with Perth and Brisbane leading the declines.

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  1. Thanks for the insight,

    We have recently moved to Toowoomba from Brisbane. Prices are lower but so are wages. I have not been able to uncover any data or opinion other than MSM sprook. Can anyone point me in the right direction?

    There is talk of price rises in the area due to the mining investment. Do you think this region could buck the trend?

  2. Sydney obviously has similar conditions to cities like London, New York, Los Angeles, and Vancouver, that always seem to sustain what look like impossible property prices relative to local incomes. Might this be because there is NON-LOCAL wealth that is still an “input” into the “local” property market? This makes it tough for young locals.

    • I moved to London in 2000 and at that point buying was substantially cheaper than renting – then it boomed and only stopped in 2007 (and has stabilised), but if you value prices in terms of rental returns it still remains a better deal than Sydney.

      However, I agree the international ‘input’ is a factor, and this with the low pound has been given as one of the reasons why London has not had the price falls of other UK regions.

      But Sydney is way overpriced – it’s cheap to rent here – and after all, despite Sydneysiders vanity, it’s not London or New York . . .

      • “Cheap to rent here” I am presently having to move rentals for the first time in 13 years – and cheap is not the word that comes to mind!

        Admittedly I am looking at the lower end of the market, which is where the demand is highest, and quite frankly what you get for your money is very ordinary. For some of the cheaper properties in places like Blacktown, buying looks like not too bad an option. For more expensive (to buy) properties, renting is relatively much better value. I figure that’s because most people who can afford to spend $500pw or more on rent tend to go and buy something anyway, so there’s not much demand.

        • Hamish, please tell us more.
          My research indicates that over the last few decades rentals in Sydney have become much more expensive. An ordinary house that used to rent for 1/3 an ordinary income now rents for 1/2 an ordinary income.
          Yet shortage-deniers have produced a graph that shows rent as a flat line. A pity that graph cuts no ice with my landlord.
          Can you tell us what % of a typical income is needed to rent in your area?

          • Await the crash. Over 4 years, Dublin PRICES may be down 50% but its RENTS are down 30%.’

            They had a higher population/dwellings ratio than Sydney (an actualshortage?).

          • I might be too much of an optimist, but I believe there might just be a way to provide decent housing for all people without suffering a terrible economic crash and mass exodus of people.
            Perhaps building enough good housing and good transportation whilst limiting immigration to a manageable level might do it.
            (ps the average person to house ratio is a woeful way of measuring shortage.)

          • Well I’m looking at spending around 40% of my takehome pay ($950pw) to rent an acceptable unit in my area. Any sort of reasonable house starts at around $500pw+. This is for Hurstville to Oatley in Sydney, which is a pretty decent area.

            My rent started at $170pw 13 years ago, and should be about $340pw judging by other units in the area if it had kept up with market rate, so a 100% increase or around 5.5% growth a year. The steepest increases have been in the past 5 or 6 years. Mine only went up to $260pw which was very reasonable, and a very good deal now compared to asking rents. Leith’s 30% real increase sounds about right. Note. this is not a great property we are talking about here, it still has the original, and very tired, 70s kitchen & bathroom, not to mention all the other fittings are tired as well. To get something nice, I’m looking at $400 pw or more for a unit.

            I also suspect the comparitively low rents for higher end properties is making the rental picture look a bit better than it is, as when I look at rentals out west, they aren’t much lower than where I am now. The rent increases aren’t nearly as bad as price increases, but they are still bad, and squeezing the least able to pay the most.

          • Thanks for that information Hamish. I am always suspicious of the use of averages. With your head in the oven and feet in ice you should be quite comfortable on average.
            Similarly by averaging those with too much and those with too little “we” all have enough.
            My theory is that choked supply coupled with high immigration has been hurting the poorer segment of the population the most. I want to see less immigration and more building until prices and rents fall.

          • Well migration has dropped off quite a bit over the past 12-18 months, and the changes in the skills shortages list is seeing international student numbers fall, especially in the vocational area, so that desire of yours I guess is being met. Though I think we can accommodate a high immigration rate if we chose.

            Aside from that I’d like to see a supply side response as I think it might help, and if nothing else give builders some work.

    • By ‘cheap’ I mean relatively. I pay $400 a week for a flat that if I bought would cost me at least $700 in repayments/costs. Whereas in London I rented a flat at $200 a week, that would have only cost me $250 in repayments/costs.

      I also agree that the bottom end of the market is much more competitive than the top, if you can pay in excess of $500 you will get a lot more for your money in renting.

  3. Thanks for that, plenty of lessons there.

    One thing though…

    > Sydney appears below its long term trend, and it rarely drops far below this trend.

    Does a chart for 25 years of data qualify as long term?

    That 25 year stretch is when credit creation by the banks went in to overdrive. It’s not a normal period, from a longer term perspective.

      • I don’t think there is any reasonable data prior to that time. Even in the Stapledon paper there is only Sydney or capital city prices. It would take a lot of work to search the archives and develop longer term time series of prices in each capital city.

        At the broadest level, the capital city price index used by Stapledon followed a similar long term trend since the 1960s (flat prices in the first half of the century, an uptick after the war, and then the trend began to take hold).

  4. Adelaide is tracking below the long-term average because it is at the heart of Australia’s rust-belt. I lived there for six years in the nineties and I couldn’t believe how much industry has vanished when I was there earlier this year. Despite the SA Govt trying to up-sell the place there are long term endemic problems with jobs that will continue to put downward pressure on house values.

    Added to that is the fact that they have high costs of living with poor public transport, expensive electricity and water, really bad traffic problems (for a city that size) and you can fully understand why young people move to the Eastern seaboard. The only industry that appears to be booming is the tertiary education sector and even that’s looking sick with the high dollar.

  5. In case of both Sydney and Melbourne banking and financial services are important components of local job markets. It will be interesting to see what happens if banks shed thousands of jobs. Westpac, Macquarie, JBWere have started the trend. Prices change at the margin and if a few thousand people are forced to sell their properties it may impact the housing market quite significantly.

    • +1

      Even for those people who have/will keep their jobs, bonus and salary expectations are/will be severely muted.

    • Hi JPK, how do yuo know banks in Melbourne is going to suck staffs? If that happen, I believe Government will re-open the door to immigations. then evrything will be back to as beofore.

    • +1
      In the UK the banks (for example) realised long ago that it was cheaper and better for staff retention if they regionalised their major development projects and even their HQs. That hasn’t happened here as far as I can see, so there is greater demand for housing in Sydney & Melbourne

    • Theres a finanicial recruiting agency on my floor. Banks already on hiring freeze. (NAB & ANZ).

      Read into this what you want.

      • Yes, all banks are currently doing a ‘structural review’ including the second tier Aussie banks. Pain to come in 2012.

  6. Asking prices are still very resistant to reduction.

    Sales are dropping off but the vendors expectations were encouraged by RE agents over competing to get listings. Some buyers will pay anything to get a property, particularly if they think someone else is interested.

    At long last I’ve seen an agent principal manning the cash register in a servo. Maybe things are about to change.

    • re: asking prices: they have actually been dropping (on a trimmed weighted average, as I calculate it at BurbWatch).

      eg.!qld/vstc5=qld-price-charts (and similarly, chart 5, in the Price Charts section, of any of the state sections).

      Yes, there is a bit of bouncing around as the profile of listed properties changes, but this, lately, is due to more expensive properties coming onto the market, rather than the number of cheaper properties declining.

      This will be illustrated in the next release of BurbWatch, which I hope to release in the next week.



    Funny you know, the other markets that collapsed had plenty of migrants…. UK, US, Ireland. Japan had no migrants but plenty of long livers which is an equivalent plus 160 mil on the area hardly the size of Victoria and still their houses are a shadow of the prices of ours……As inspector detective Colombo would say; “something bothers me mam”

    • I donot know the situation in UK and Ireland. But in Japan, since 1980s, the nation population starts shrink. In USA, the growth of the number of migrants is at very low due to the 9.11 event.

      As to Australia, Canada and New Zealand is a compare. From 1998 to 2001 (only three years), New Zealand house price halved as New Zealand’s population experienced shrank at that 3-years period. From 2001- 2005 (about fours years),new Zealand’s biggest city – Auckland’s property price almost tripped due to very loosen immgration policy to Asia people and overseas students. This year, the biggest city of Canada — Vcouver (?), house price was uped from median $800k to 1 million. This mainly is becuase Australia “closed” door to Chinese since last year so they turned to Canada.

      • Not sure about the US observation. Cities like Phoenix, Las Vegas and Miami were running 3.5%+ rates of growth at the same time as falling off a cliff property wise.

        Immigration is all well and good whilst the economy is stable, but once property bubbles, the wider population is enslaved to large debt repayments and the economy turns south. Immigration becomes a political hot potato for obvious reasons. Australia is in this phase now.

        Harry Dent nailed this phenomena perfectly in his book ‘The Great Depression Ahead’.

      • Maybe I’m too late here, but KW – you need to provide some data to justify that statement that 9/11 led to lower immigration to the US.

        I believe it is absolute bunkum.

        Indeed during the RE bubble leading up to 2006, spruikers always talked of high immigration and a so-called “shortage” as a reason for rising prices. Whilst the shortage was a myth in many cases, it was undeniable that the immigration rate was very solid.

    • Ireland had massive immigration which was part of the reason for the large price rises. When things changed many of these immigrants went back home.
      I have no doubt that if a million immigrants suddenly left Sydney this would result in house price falls. Can you assure me that this is going to happen?

        • Well, there were lots of expats going home plus quite a few Eastern Europeans coming in for a look.

          And every one of them was offered cheap and easy credit…

          This all sounds so familiar.

      • The other factor was demographics, you had 20 years of decent economic growth, record low emigration and the people that formerly would have emigrated to the US and Liverpool and Australia weren’t. They are now though.

        • Ha! Yes, they watched the bubble burst and ran.
          Ex-expats became expats again and the Eastern Europeans forgot how to speak English.

      • Not that many immigrants would leave Sydney compared to Ireland. The reason for this is that in Ireland the immigrants mostly came from Europe and so had reasonably good countries to return to. However in Sydney the bulk of the immigrants come from Chindia and I can’t see anyone rushing back there, although any European immigrants may leave provided Europe hasn’t completely fallen apart by then.

    • Canberra has almost identical timing to Melbourne – later start to the boom in the 1990s, but the same cycles in the 2000s.

    • Canberrra’s large public sector employment distorts as well, the rest of the economy could be falling off a cliff and canberra does well. Best time to purchase in Canberra is the first couple of years of a Liberal Government ( as a rule ) they tend to prune a bit off the public sector.

  8. This data is all from the leverage property bull market. Early 80’s – Mid 00’s.

    Will be very interesting seeing how it all performs in an environment of less leverage, an equities secular bear market and rising inflation/interest rates.

    • True. I think that even with a market prices in reverse due to this new financial environment, similar time inconsistencies will be felt across the capitals.

  9. Rents will fall as well as house prices falling.

    This will make getting a good yield on investment properties even harder.

    Therefore this analysis is slightly flawed…as it doesnt take account of the likelihood of falling in rents.

    Otherwise great stuff

      • Household consolidation. When the going gets tough people move in together to save housing costs, thus reducing demand for rental homes.

        Remember, Australia has been building the world’s biggest homes for a few years now.

        This consolidation may drive a small wave of renovation – granny flats and the like.

        • “Remember, Australia has been building the world’s biggest homes for a few years now.” Be careful with this stat Cam. Australia’s home sizes include attached garages in the data. American home data does not.

          • I’ve got a feeling at least part of that increase in size could also be because the market for new homes has been skewed to higher income earners, who tend to build big houses, as fewer ordinary earners could afford to buy the smaller 3-4 bed single story entry level homes.

            There’s a lot of elitist sneering in the commentary about Mcmansions etc. The criticism that houses are unjustifiably large maybe valid, but the delivery of it has been poor and counterproductive.

      • Also competition, people who cant sell their homes but still have a mortgage, take the property of the market and rent it or try and sell it with a tenant as an IP. I am seeing a bit of this in my local area.

        • Seeing lots of that where I am as well. Properties that were selling for $350k in 2007 are now lucky to get $250k. Noted one recently that went for $229k. So on the rental market they go…sadly there is nobody to rent. RE types claim there is a rental shortage but I call shenanigans
          Carnage in property world here. Absolute carnage.

        • Look I hope you are all correct. I do beleive that prices are coming down, i subscribe to the loans-drive-prices thesis. Problem is, although there are heaps of empty houses around, how many of these are seriously owned by people who are likely to have to sell? At the margin some yes, but i don’t see a flood of rental supply in my future. Household consolidation, sure – this has been and will continue to happen. But my feeling is that there will be more pressure on house prices (people can’t borrow as much, more forced sales) than there will be on rents (people gotta live somewhere)

          • Prices are set at the margin, so it doesn’t take a huge change in volumes to move the whole market.

    • Very good point. Local issues are far bigger factors in regional centres (mining industry impacts in Gladstone, Bowen etc).

      Although it is included to partly show that the more regional you are, the more out-of-synch you can be.

  10. I found this study of prices to be rather worthless. I think more could be gained by studying the water level of the compartments in the Titanic on its final journey.

      • That is nonsense. UE – The Unconventional Economist has figured out the housing situation very well.
        What exactly are these theories of mine which have been obliterated by all these studies?

  11. Not sure if anyone else saw the story in the SMH on Saturday talking of the 500 auctions scheduled in Sydney for the weekend.

    According to the auction results there were 361 auctions, 242 sales. Anyone know what happened at the rest of the auctions?

  12. Well, one way or the other, the total return must be justified else who would want to buy a dwelling? The author said the yield have to rise higher in order to attract investor. And through this conclusion itself, it was inferred the price has to drop, may I know is that a biased view. In order to rise the gross rental yield, my conclusion would be either the price has to drop or the rent has to rise. which one would it be? Your guess is as good as mine. Also, total return in australia does not only includes rental yield, it includes tax policy of federal, states and local governments.