The bubble is a Sydney/Melbourne affair

Core Logic’s Cameron Kusher has posted a nice blog examining dwelling value growth since the GFC, which has been largely confined to the two bubble markets of Sydney and Melbourne:

ScreenHunter_14102 Jul. 19 12.04

What is immediately noticeable is that the increases have been all about Sydney (87.9%) and Melbourne (71.8%). In fact, most other capital cities have recorded growth which is around or below the rate of inflation…

The relative strength of the Sydney and Melbourne economies and the much greater employment growth has clearly assisted drive housing values higher in these cities.

Until the economic performance improves outside of Sydney and Melbourne it seems unlikely that sustainable growth will return in these areas despite the extremely low interest rates which are set to potentially move even lower over the coming months. For Sydney and Melbourne although affordability is increasingly becoming stretched home owners have experienced a substantial increase in equity. With historically weak rental markets and record low yields it will be interesting to see if investors and upgraders in the two largest capital cities continue to show a thirst for housing in these cities given the growth phase has now been running for more than four years.

For those of you that may have missed it, last month we published a detailed subscriber report entitled Sydney vs Melbourne: battle of the bubbles, which assessed a variety of metrics to determine which market has the bigger bubble.

While it was a very tight race, we determined that Melbourne’s bubble is in fact slightly bigger than Sydney’s; although that assessment is admittedly somewhat subjective.

Unconventional Economist

Comments

  1. Terror Australis

    But wouldn’t a falling Sydney/Melbourne market also mean falls in the other capital cities?

    • casewithscience

      A 5% fall in the Brisbane market is bearable. A 50% fall on a Sydney mortgage would be soul crushing.

      Gen X are truly screwed.

      I just hope Gen Y forewent purchasing property in those States!

      • BrentonMEMBER

        Gen Y reporting, I am indeed holding out from diving into the market.

        Unfortunately, my wife and I are the only couple in our group of friends that hasn’t dived in. In fact, one of the couples, a part time policewomen/stay at home mum and a CASUAL earthmover, have taken an additonal $130k out on their mortgage to partake in some renno’s!

    • https://list.juwai.com/news/2016/06/juwai-top-10-chinese-buyers-picks-q1-2016

      Australia

      “According to the Foreign Investment Review Board (FIRB), Chinese invested A$24 billion (US$17.6 billion) in Australian property last year.

      And now, with a new 10-year visitor visa for Chinese combined with another new visa for foreign students set to go into effect from 1 July 2016 onwards, Chinese buyer interest in Australia should be getting off on the right foot.

      Already, Australia is the second favourite property investment destination for wealthy Chinese, and this trend should continue, with the ever-popular cities of Melbourne, Sydney, and Brisbane being the top three cities.

      Interestingly, Adelaide and Canberra experienced a jump in Chinese popularity in Q1 quarter, while Airlie Beach was the sole newcomer to the list”

      • The 2nd tier of the top 10 includes Thailand, Japan, and Spain. They’ll definitely get more bang for their buck compared to Australia, NZ, or Canada. However, what do these stats from Juawei actually mean? Because they U.S. has the highest # of views and enquiries, how does that translate into sales? Does it mean that Australia have the 2nd largest property investment from China in terms of sales?

      • Both. That chart is based off page views, but it lines up with official dollar values, yes Australia is number 2 about half the level of US. US is a much deeper market of course about 12 times the size, so better able to absorb foreign investment. Even so starting to see localized bubbles in places popular with Chinese like San Fran, Portland, Seattle.

      • Thin data for shallow analysis. Looks to be straight from the playbook of a Malcolm Turnbull ministry cabinet meeting……full of hope but lacking in any depth or meaning. Australia still a dead duck waiting.

      • Gaps in data = opportunities for investors. My advice:- try to draw the most realistic picture you can with the data you have. Not the one that suits your current positioning, political leanings or other bias.

      • Any detail on these new temporary visas propery purchasing rules? Are they limited to purchasing new builds only?

      • @Dan “gaps in data = opportunities for investors”…gee that is a first I have to give it you Dan how much does someone have to pay for that advice….zip, nil, nothing in this case. I must say I have never heard of that investment strategy. If you had of said a ‘gap in knowledge’ I might have understood.

      • Addressing Data Gaps gents – from the OECD G20 Draft Report on Investment Strategies:

        “Insufficient data availability or quality has been cited as one of the key factors contributing to infrastructure financing gaps. The problems that have been identified include a lack of performance data for infrastructure assets, lack of standardized documents and methodologies, and inadequate transparency and accountability. Various measures have been introduced to address these shortcomings in data availability, including the creation of dedicated websites and other efforts to broaden the availability of infrastructure data…..

        *reducing information barriers to accelerate investment.. and then we get to the wammy:

        The lack of standardization is another issue jurisdictions have sought to address”

      • Remember two years ago when it wasn’t happening and you’d get torn to shreds on Q&A for being a racist pig just asking if it was a good idea? And now the pitch is we want it?

        Yeah! Bluey was right to go that b#tch, this is what mind control looks like people.

    • casewithscience

      The Chinese buyers cannot account for the total increase in market activity leading to the bubble. A fair portion of this has to land on stupid Australians thinking that investing in property was a worthwhile alternative to investing in productive industries.

      • Who is on the margin and therefore setting prices?
        Chinese property buying is ‘inelastic’ what that means is that they buy regardless of price. As they are the marginal buyers (bidding the price up) they set the price. Market prices are not solely a function of volume.

        yes there are lots of dumb Aussies but they are not the ones driving the prices higher.

  2. There currently 33,000 high rise apartments in Melbourne under construction at the moment. Fuel to the fire?

    • There are 1,357,000,000 people in China. Those new apartments would disappear in an instant if just 0.002% of Chinese wanted one. Relatively tiny swings in foreign demand (e.g. as caused by a feature in a popular real estate site) are capable of overwhelming our housing markets.

      • @Dan so Dan please enlighten the readers of your unanimous ‘reason’ for continued price support in Australia real estate – are you saying it is the China foreign investor syndrome?

        Please support your claim with real facts and not drivel and fictitious data from ‘domain and juwai’ – quite honestly this stuff is hardly worth reading let alone commenting on.

      • @Dan I do note that Pfh007 has performed some ‘real’ data analysis on house price sales and data and has clearly discovered gaping holes in the content provided by RP Data and such…

      • Can I refer you to the official FIRB data on approved Chinese investment, then maybe you could look at the recent industry surveys we’ve been discussing for days, and the international comparisons, and feel free to re-read all my posts in case there’s anything helpful. I don’t have time to compile a full dossier for you or even dig up the links.

        Draw you own conclusions and discount any data that doesn’t happen to fit as you wish.

      • @Dan industry survey’s? These have designed to ‘fit’ the Real Estate industry view have they not. Please explain..

      • @Dan industry survey’s? These have designed to ‘fit’ the Real Estate industry view have they not. Please explain..

        In fact all Australian real estate industry data is questionable and rubbery, time after time this has been shown to be the case by a number of independent analysts over the years on this particular blog and others.

      • Dan’s argument seems reasonable. Even the data from UE points to an external demand element being the primary driver of house prices in Australia. We can see the impact in data we trust (house prices) with no explanation in other data we trust (domestic financing) and so Dan offers an alternative explanation using data of more dubious provenance. His conclusions are still reasonable because the mechanisms assumed (massive influx of foreign money) is consistent with our other observations (high AUD).

        What is the alternative explanation you offer @tea merchant?

      • @Matthew “His conclusions are still reasonable because the mechanisms assumed (massive influx of foreign money) is consistent with our other observations (high AUD).”

        High AUD is a direct result of foreign hedge funds and domestic financials – super funds and banks, seeking bond yields. The Australian 2yr and 10 yr bond yield is still a good 0.75 – 1.00% greater than most other ‘safe’ western economies at present (note carefully not all), however this yield carries risk – Australia has the highest domestic private debt carry in the world and the carry trade USD/AUD of the last two decades is being unwound.

        As for the supposed massive influx of foreign money into Australia now – this is a myth. This phenomenon occured during the mining infrastructure investment boom that is now over.

        I say Matthew carefully look at what you a juxtaposing and the real estate industry will be and is the principle cause and effect of the catastrophe that Australia has become. It is an unregulated industry full of cheap unqualified, uneducated sprukers who give investment advice and agency support to millions of Australians who place their trust in these bedfellows. The consumer ultimately has to take responsibility of their own financial undoings and poor decisions.

        A royal commission into the Australian Real Estate Industry and politico complex perhaps……………

      • Thanks for the considered reply @tea merchant.

        “A royal commission into the Australian Real Estate Industry and politico complex perhaps…”

        Ah! It’s too much to even dream about!

  3. OZ export iron ore/education to China and import house bubble…ok….anyone give the balance of trade here…

    • At least we have FIRB restrictions and now taxes and holding costs specifically for international buyers. Not perfect by a long stretch but better than NZ’s open market.

  4. i don’t think FIRB is so much a restriction as a rubber stamp. MB could ask FIRB how many approvals for real estate they’ve given in the last year and how many refusals and what the fee for assessment is… and watch the story go viral on MSM three days later. Last I heard it was 34 000 approvals in some forgotten timeframe.