Residex: Sydney housing all but a “bubble”

By Leith van Onselen

Residex has released its house and unit price data for December, which once again revealed exceptionally strong growth in Sydney, but patchy growth elsewhere.

According to Residex, house prices nationally increased by 1.05% nationally in December, and by 6.73% over the year, whereas unit values rose by 1.62% and 6.30% nationally over the month/year (see below table).

ScreenHunter_5923 Feb. 06 07.22

As shown above, Sydney price growth has overwhelmingly been the driver nationally, with values rising by an exceptional 16.78% (houses) and 12.90% (units) respectively.

This rapid growth, which has been driven by unprecedented investor demand, has prompted a blunt warning from Residex founder, John Edwards, about risks accruing in the Sydney property market:

Sydney has crossed another major milestone. The median value of a house is now $900,500, making it all but impossible for the median income family in Sydney to purchase the median property. Affordability calculations indicate that it now takes about 56.9 per cent of the median family’s weekly income to meet their mortgage commitments and leaves them with a very small $734 per week to live on and pay for the necessities in life. The reality is simply that Sydney is no longer an affordable place to buy and own a home if you are just starting out.

The growth in the Sydney market in dollar terms is in boom conditions. The median value of a house is now $900,500 and in the last 12 months has provided an increase of $144,732.

Most would recognise the period ending December 1988 as a boom in house prices when the growth rate was 36.17 per cent. The dollar value increase was $51,500. Even in today’s dollars (making an allowance for inflation) that figure is $93,922.66.

There has not been a tendency to call the current growth period a boom simply because the rate of growth has been relatively low (16.78 per cent) when compared to prior periods of high growth. However, this lower growth is simply a function of the much higher cost of housing.

Given the above there can be no doubt that in the last 12 months we have in fact witnessed one of the largest boom periods in the history of Sydney’s housing market.

The boom conditions are usually caused by supply issues and greed. The latter comes about as a consequence of people believing there are low levels of risk and quality returns to be made by entering a market.

New South Wales, in economic terms, has been performing better than other states… So, on economic grounds there is a clear reason why people who are wanting to enter the housing market would choose New South Wales.

Interestingly, Edwards used the term “boom” five times above to describe Sydney’s housing conditions, namely:

  • A median house price of an insane $900,500, following a $144,732 increase in just one year: “one of the largest boom periods in the history of Sydney’s housing market”; and
  • Near record unaffordability, which has made “it all but impossible for the median income family in Sydney to purchase the median property” and made Sydney “no longer an affordable place to buy and own a home if you are just starting out”.

Make no mistake, what Edwards has described are bubble-like conditions, and he should label them as such.

Edwards also provides some “disturbing facts” about the broader housing market, namely:

•Commencements in new housing is increasing and is currently some 4,082 dwellings above the median commencement number of the last five years;
•New housing approvals, while having turned down slightly, is still running at some 2,591 dwellings above the five year median;
•Population growth as last reported by the ABS is slowing and currently is running at some 1,728 people below the five year median;
•Residex estimates that there is currently some 7,000 dwellings surplus to need; and finally
•Unemployment is increasing and is likely to increase a little more than was anticipated given the lower crude oil prices and a related reduction in the liquefied natural gas development and exploration area.

All of the above suggests we are heading into a significantly over supplied market which could lead to some significant corrections…

In a market where there is significant shortage of desired stock, dollar weekly rentals increase significantly. If you look at Table 1 (above), there is one aspect which stands out and that is the lack of growth in dollar weekly rentals…

Analysis we have done right across Australia indicates that potentially in all states there is a stock overhang and in many states it is significant…

I issue a warning to all: We have passed the top of a normal growth period and we are about to have the market stimulated and have further growth. That growth is taking us into uncharted waters where affordability will be potentially worse than we have previously seen. Even with interest rates for home loans at 4.5 per cent convertible monthly, the median family in Sydney would only have $789 after tax and mortgage repayments to meet normal living expenses…

If you are an investor wanting to get into the market, take care, and make sure you don’t pay a premium for any purchase you make. This is particularly the case where you are buying new units.

Sage advice, although Edwards should also have mentioned the stiff economic headwinds confronting Australia next year as the mining investment boom unwinds, the car industry closes, and housing construction likely passes its peak.

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