The Sydney Property Bubble


Is The Sydney Property Market About To Pop

Sydney seems to have been going through some crazy growth lately but is it sustainable, and what is driving it? Let us have a look and keep in mind these are my views only. : )

To begin with, yes, we do have a lot of people coming into Sydney and yes, there are many Chinese investors buying up property in Australia, specifically Sydney. This has been happening for years now but it does not fully explain the recent property boom, so let’s address this first as it’s often brought up as an issue.

If we look at Sydney’s property and forecast growth, we see that the number of dwellings is keeping up with the population growth, while the dwelling size is staying consistent. In fact Australia has the biggest or largest houses in the world on average, so to point to a lack of properties does not align with these facts.

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There are many different factors that drive prices and each factor plays a role in moving property prices, but the one with the single biggest impact is …debt!

Cheap & Accessible Debt Drives All Economies

Yes we said it. (Throwing rocks in a glass house right) Debt is the key factor that drives economies around the world, even though we can also look at immigration, negative gearing and the economy as indicators for property prices. The one notable factor to growth is the access to cheap debt, something Australia has had a lot of lately.

Why I Love History

The thing I love about history is how much it repeats itself; it’s only new characters that change. Sydney (and its surroundings) went through a property boom in the early 2000’s ending in 2004.

This was a time of huge growth, similar to the recent property boom, with experts stating it was only ever going up, Sydney would not have a crash and so on.- the same arguments being made now. One key point to note is the relation between income and house price ratios, and the willingness of banks to lend money and the cycles debt has in relation to house prices.There seems to be three points here not one.
When banks increase their willingness to lend money, the people spend it. It’s no more complicated than that, and there has been a direct correlation between banking regulations and the economy for centuries.

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We Are Running Out Of Fundamentals

When we look at the last 50 years of the real estate market in Australia, we can see an upwards trend that has experienced huge times of growth. Looking at this, many people believe it signals that the real estate market will always be safe, and rightly so. Real estate can be and has been a positive investment for many but we need to look deeper and understand why it has grown so much.

Females enter the work force

The introduction of the female population entering the work force meant, in general, more household income in the family home.

Pay Increases

Strong unions and equal pay regulations have led to an increase in wealth amongst the population

Going Off The Gold Standard

Abandoning the gold standard meant that Australia’s currency was no longer limited by the amount of gold we had as a country and enabled Australia to print as much money as we wanted.

Deregulation of the Banking Industry

Banks make money by lending out money and charging interest. Loosening regulations around the lending of money means banks are free to lend more money and money becomes more accessible to the population.

The Four Pillars Policy

The Big Four Banks may be viewed as a monopoly now but this was originally intended as a move to introduce competition in Australia and have four strong banks as the pillars of the banking industry and be competitive amongst each other.

Negative Gearing & Superannuation

The introduction of negative gearing as an investment strategy for wealth creation {and the reduction in government funded pensions meant that Australians needed to take more control over their retirement and investing in property became a common strategy to build wealth.

These are some (not all) key fundamental reasons why property prices have risen, especially in Sydney.
So,, what now? We’ll, I’m not sure. Currently the majority of Australian households have dual incomes, many people work overtime, and new statistics are showing more than 50% of new mortgages are interest only loans, Many Sydney property owners are at the limits of what they can borrow and afford.

The Cracks Are Starting To Show

Some key indicators are not necessarily what’s happening to the property prices but what’s happening to key players in the market. Genworth Mortgage Insurance Australia are the largest mortgage insurance company that specialises in LMI (Lenders Mortgage Insurance). Genworth insure the lender against borrowers defaulting on the mortgage and Genworth insurance has been reporting an increase in home owners falling behind in repayments, which is a common sign of trouble in the market. (They are a public company, you can look them up.)
Banks are increasing interest rates outside or beyond that of the RBA and tightening their lending criteria. This is a sign that banks view the current market as increasing in risk, so they are increasing rates to help cover any potential losses. Lenders are also becoming stricter in who they lend money to and under what circumstances (i.e. investment, duplexes, rural etc).

Interest only loans have been coming under recent scrutiny and many banks have been heavily restricting the use of interest only loans, with some pulling interest only loans completely from their offerings.

Who Will Feel The Pain?

We can only speculate what will happen (as I’m doing in this whole piece) but if we look back at what happened in the early 2000’s, we saw that properties on the outskirts of the city were the hardest hit . This is what occurred in the western suburbs of Sydney, the Central Coast and South Coast regions. These areas that are typically less desirable locations to live,) due to travel distance to the city but their prices become inflated when the Sydney market is hot.
Example: Chittaway Point, NSW, on the NSW Central Coast (where I grew up) What’s interesting about Chittaway Point is that in the 2000’s property boom it was one of the top growth areas in NSW, two years running.
So let’s go for a trip down memory lane, imagine a block of land in the height of 2003. Someone bought a vacant block of land for $600K as an investment. This investor holds on to the property and after 5yrs (and now in a different market) sells the property at a loss, for $450K. This new owner sees it as a good buy and wants to hold onto the property but, after 5years they come to a point where they need to sell the block.
Enter my brother: This vacant block is now on the market, my brother is looking for his soon to be first home and makes an offer of $310k. The owner, in what has been a long and stagnant market, accepts the offer.
This same block in 2017 has now been valued at $600k+…..See the pattern?

The typical scenario plays out like this, Sydney property market gets hot and as keen investors are eager to enter the market, the prime areas quickly become too expensive, so investors and buyers start to look elsewhere. The outer areas of the Sydney market start becoming a focus for buyers, which then starts to drive the outer suburbs’ prices up.
We have seen this pattern recently in Penrith, with up to 70% of properties being snapped up by investors and this also happens on the Central Coast, something that is widely known by Real Estate agents, who promise they know how to get the elusive “Sydney Investor” to get you a better price.

What’s interesting about these scenarios is these areas’ prices are driven up by groups (such as investors, first home buyers and downsizers?) outside of the local economy and whilst it may make sense for them to pay more for such a property, the local economy and average home owner might not. This means that the fundamentals to a property’s price get skewed because if the local economy cannot sustain the prices, then this means as soon as the investors dry up, the market will suffer. This is exactly what is happening at the moment with banks restricting interest only and investor loans, and this will affect the number of property investors in the market..

The Good News

The good news is if you’re in a good suburb close to water (the catnip for property) then you will not be affected as much if there is a down turn. The other key thing to remember is that if you are already a home owner (living in your house) and can afford your repayments, then yes you may be affected by property price fluctuations but, so will everyone else and if you need to sell, you will also be able to buy in a softer or falling or downward market. If you are in the market it’s much easier to ride out. Generally if you are a single home owner there is less to worry about. If you’re a heavily leveraged interest only investor, then you might need to review your position in the