If you’ve grown tired of hearing that Sydney has a housing bubble on its hands, look away now. Treasury Secretary John Fraser is the latest high profile figure to cast doubt over Sydney’s housing market. Fraser has joined the growing queue, stating that Sydney is ‘unequivocally’ in a housing bubble.
Considering that Sydney values have risen by 40% since May 2012, it’s hard to disagree. Data released by CoreLogic RP for April showed it was another good month for investors in Sydney.
Record high auction rates continued apace during the month. Last Saturday, the clearance rate was at a barely believable 86.5%. In total roughly 1,000 homes were sold over the weekend.
And listen to this…
A four bedroom house in Sydney’s inner west sold for $2.27 million on Saturday. It doesn’t even have parking, if you can believe it. It looks like any run of the mill house you find on most suburban corners. But that’s the kind of market we’re in right now.
So if evidence for a housing bubble in Sydney keeps growing, what could send prices trending lower? The truth is that there’s nothing on the horizon suggesting any imminent decline. I’ll explain why…
Why a decline to Sydney’s real estate isn’t coming anytime soon
Every property market goes through cycles. Sydney is now going through its high. It’s unclear when it will reach its peak, but it will eventually be overwhelmed under the pressure of its growth. Yet every prolonged decline requires certain conditions aligning to push prices lower. Presently, there is nothing to suggest this is on the cards for Sydney.
Take interest rates for one. Any rise in the interest rate would dampen demand for housing. Loans, and their repayments, would become more expensive for borrowers. Investors and first time buyers would be less inclined to jump into the market as a result.
That’s not likely to happen if you’ve been following the world’s zero-sum regarding interest rates. Economies spanning the globe have been caught with ‘low interest’ fever, pushing rates ever closer to zero to gain export competitiveness.
In Australia there’s even less chance of a rate hike. The RBA still retains plenty of scope to lower rates much further. And according to economists, they’ll do just that. That’s because, outside of the property market, the economy is barely growing.
Then there’s the issue of housing oversupply. Sydney added more apartments than any other city in the past year. That’s led some investors to worry about an oversupply in the market. At first sight, CoreLogic data suggests their concerns had some merit. Figures showed softening apartment price growth in April. But despite that blip, units still rose 8.8% in value in the past year. That’s not too bad for a supposed oversupply.
So what else could topple Sydney’s expanding property bubble?
It might take something extraordinary to bring it down. Some kind of external, non-housing event that could send global economies into a tailspin. If that’s what it will take to get investors spooked, there’s not much to worry about for the time being.
The housing bubble will get bigger before it bursts
Investors in Sydney know what kind of market they’re operating in. It’s a market with lots of upsides. But it comes with its own pressures too.
Would-be sellers realise that the market is at a frenzied stage. It may sound counterintuitive, but that makes it harder to judge.
On the one hand, you might look at rising house prices, and feel the temptation to cash in now. But you may also be hesitant because you realise prices could go higher before they reach their peak.
No investor wants to sell their property now, only to watch the market trend higher. Not least because it would make it more difficult to buy back into the market upon selling.
So there is a whole segment of would-be sellers who are waiting. Waiting to see where things go before making a decision one way or the other. But it’s this very indecision that maintains a manageable level of supply in the market. If everyone decided to sell at once, that could put downward pressure on house prices.
Overall, looking ahead the signs for Sydney property prices are largely positive. The housing bubble is only set to keep growing — just don’t expect it to pop anytime soon.
None of this is news to The Daily Reckoning’s Phillip J Anderson. When property prices were rocked after the GFC in 2008, many predicted the worst for Australian homeowners. But Phil didn’t share the market’s pessimism. Going against the trend, Phil predicted that house prices would start rising in the new decade. With property values doubling in Sydney since the start of the decade, you could say Phil got it spot on.
Phil’s 20 years of industry experience has given him a keen sense for where the property market is, and where it’s going. That’s led him to develop a cyclical model that forecasts the movements of Australia’s property market.
In his latest report ‘Why Australian Property is on the Verge of a Decade Long Boom’, Phil guides you through this coming decade using that very model. He’ll show you how his 18 year cycle can help you time your property purchases when they’re the cheapest. To find out how to download his free report, click here.
Contributor, The Daily Reckoning