In the latest episode of Selling House Australia, which is one of the more educational documentary programs on television, the team of renovators tarted up a little fibro shack in St Mary’s, a Sydney suburb on the M4, half way between Rooty Hill and Penrith – 47km from the CBD.
When host Andrew Winter asked the local real estate agent about the St Marys market, he said it was booming and, astoundingly, added that it was 90 per cent investors. Ninety per cent!
Goodness. There was some talk that this might be due to nearby Badgerys Creek, where they’re going to build Sydney’s second airport, but does anyone seriously think that turkey will get cooked? And anyway, aren’t airports bad for real estate values?
Sure enough, when the agent sold the lipsticked pig in St Marys via tender – that is, each buyer had to write their best offer on a piece of paper and put it in an envelope – there were 28 offers! No one could believe it. The winning price was $485,000, way over what anyone expected.
For me, the episode gave life to the statistics showing that the Sydney property market is running very hot indeed.
According to CoreLogic RP Data, the Sydney median rose 1.4 per cent in February, compared with 0.3 per cent for the combined Australian capitals, and that includes Sydney.
Since this cycle began in June 2012, Australian dwelling prices have risen 22.6 per cent and in Sydney by 34.8 per cent.
Assuming a rental yield of 4 per cent, that’s a compound annual rate of return on 14.7 per cent in Sydney.
That compares with 19.2 per cent compound from the sharemarket over the same period, but the difference is that many investors don’t trust that, and here’s why (it’s a graph I have prepared for tonight’s ABC news):
It shows the national median house price and the All Ordinaries index both rebased to 100 in 1990.
This explains clearly why investment in residential housing has become so popular, both in and out of super -- it’s the GFC.
Yes, shares often rise more quickly than property but the crash of 2008 is still fresh in investors’ memories -- it turned conservative SMSF investors off the sharemarket and it also meant that over 25 years the sharemarket’s performance has been worse than real estate.
As a result, the national median home price has gone back up to 4.8 times average annual income per household, as shown by the following chart:
Note that Barclays’ economist Kieran Davies calls this “extraordinarily stretched”.
In New South Wales the same ratio is 5.7 times, in Victoria it’s 5.3, Queensland is 3.9, WA 4.1, SA 3.8 and Tasmania 3.3. Despite the dispersion, Davies concludes that: “house prices are expensive relative to incomes in almost every state”.
The price to income ratio has just returned to what it was in 2003 and 2010, but the difference is that in those years, interest rates were rising -- this time they are declining.
The Reserve Bank might even cut rates again today, and if not today, then next month, or the month after.
Says Kieran Davies: “This suggests to us that house prices are likely to enter uncharted territory on the back of lower interest rates.”
That’s especially true of Sydney: after a long period of underperformance, the ratio of Sydney prices to the rest of the country is not yet out of line, as this graph shows:
That suggests Sydney prices have further to rise relative to the rest of the country, and that’s certainly borne out by the heat of the Sydney market at the moment.
Meanwhile, in December the Australian Prudential Regulation Authority supposedly “cracked down” on property investment lending, by warning that loan growth of more than 10 per cent might result in pursed lips, or some such.
In fact that only affected five smaller banks, and none of the big four.
If the authorities are serious about curbing the Sydney property boom, then they will have to do more than that.
Certainly the RBA will not be putting up interest rates to curb it -- it won’t even stop cutting. The bank has made it clear that while it’s concerned about the real estate price boom, it’s more concerned about the weakening economy.
That means house prices, especially in Sydney, are going to go up more before they come down, which means, of course, that they will come down harder when they do.