We’ve all heard the news about the new boom in Sydney.
But how real is it? I’m on the record as saying a lot of it’s hype (Property Rule #1: don’t trust the media. Ever.) But it’s clear that something’s going on.
So what do we actually have? Let’s take a deep breath and break it down a little.
A lot of the excitement comes from what’s happening to auction clearance rates. Auctions have been doing exceptionally well, with about 80% to 90% of auctions going to sale each weekend. That’s a very impressive clearance rate.
We normally only see clearance rates like that during the boom years, so it’s certainly suggesting we’re heading back that way.
And there is solid evidence to suggest that all this heat is translating into price increases.
According to RP Data, house prices in Sydney rose 5.2 percent in the September quarter. That’s strong. If Sydney keeps that pace up, and the auction data suggests we will, then we’re looking at annualised growth of over 22% a year!
People laughed at me when I was tipping 15% 6 months ago.
“Oh Jon,” they said. “You’re hilarious. We should have you round to dinner more often.”
Now it’s easily within reach. In fact, it’s pretty much become the baseline scenario as far as Sydney is concerned. SQM Research, one of the largest property research houses in the country is now looking for 15-20% in 2014.
Just like I am.
“How do you like them apples? And I was being generous when I complimented you on the lamb. I thought the your choice of spices didn’t fully draw out the natural flavours.”
But skiteing aside, the writing was on the wall for a while. Record low interest rates, money flooding in from overseas, 6 years of soft conditions. Something had to give sometime.
Now that it has, the flood gates are open. We’re only seeing the first of it now.
And to get a feel for what’s in store. There’s a couple of interesting graphs from SQM Research. They publish an asking price series. Have a look at this one here, taking asking prices for the inner-west – trendy places like Surry Hills and Newtown.
The top lines are for 2 and 3 bedroom houses. The bottom two are for units.
What we can see is the prices of 3 bedroom houses in the inner-west were just under $900,000 at the beginning of the year. Now, average asking prices are just shy of the million dollar mark.
That’s an 11% increase in just 9 months! That’s going toward 14% year on year.
Pretty nice going, huh?
What about this one? This is for the Western Suburbs. More or less Parramatta onwards. Median asking prices were around the $540,000 mark at the beginning of the year. Now they’re just shy of $600,000.
Again, that’s 11%, or 14% year on year. But think about it. If you bought there at the beginning of the year, you’ve had an equity gain of close to $60,000, in just 9 months.
Not a bad little earner, hey?
So Sydney is going gang-busters. The question that should be on your mind now though is, ‘is it sustainable?”
It’s an interesting question. As I’ve argued more than once, there are some serious long run dynamics getting behind the Australian property market. This is not flash-in-the-pan type stuff.
But even at the local level there’s some signs that this boom has legs.
Take a look at this chart here. This is stock on market data for Sydney. The blue bars are houses, the purple units.
What it shows is that the number of properties for sale in Sydney has fallen to the lowest level since late 2009. It’s a level that’s consistent with booming conditions.
But what it also tells us is that Sydney is churning through the sales quickly. And if there was any hang-over from the GFC, it’s way behind us now.
All the activity we’ve seen is not distressed sellers looking to off-load. Sydney is quickly clearing stock, and very rapidly approaching a shortage.
Unless more properties come to the market soon (and if I had a property in Sydney I certainly wouldn’t be cashing in now), then the stock on market is going to run down even further.
As that happens, prices will rise even more quickly. But we’re already steaming ahead at a 14% clip. Where are we going? 20%? 25%?
It starts to boggle the mind.
But the next question then is are properties in Sydney becoming over-valued?
There are as many ways to try and answer this question as there are rat-bags with a blog. But I like this approach here from SQM Research.
They compare Sydney prices with nominal GDP. What we’re trying to get at here is if house prices are getting too far ahead of national income. If they are, then it suggests that they could be over valued.
But this chart here cuts it up. House prices are the blue line, GDP is the green. The bars represent the ratio. Note, this graph includes SQM’s forecast of prices going to 15% in 2014.
What it shows is that even with a 15% forecast factored in, the house price to GDP ratio is anchored around 20 year averages – and certainly well down on the boom levels of the early 2000s.
And from this SQM draw the same conclusion I do. Sydney prices are not looking over-valued. Not by a long way yet. It’s going to take at least 3 years to get to the over-valued stage – if past experience is anything to go by.
So even if you’ve missed out on the 11% gains we’ve seen so far this year, it’s not saying that you’ve missed your window. Just on this metric alone, you’d have to think that the boom’s got another 3 or 4 years to run.
But then, as I said, there are a whole lot of long-term drivers at play too.
Seems to me that this boom’s got legs.
Go son, go!
Steve says
Dead cat bounce, next year I expect at least a 65% crash
anita banney says
What data are you basing your 65% minimum crash on house prices, or is it instinct?
sam mantrao says
Great article.
Marc montano says
Steve obviously isn’t in the market. Those few friends of mine that choose not to get into the property market love talking about the big crash that’s coming…. I think it’s take their mind of the tens of thousands of dollars their missing out on every few months at the moment – as a direct cause of their own stupidity.
Ken. says
Well said Mark. Only a few months ago, I made a bet with a bloke on Jon’s blog that we would see a 15% rise in house prices by 2015. This bloke bragged that he was a school teacher, well educated, an ex real estate pro, and cash invested all over the world. I don’t expect to ever hear from him again. Some people are just too stupid to come in out of the rain. I’ll bet Steve is into shares or got cash in a bank @ 3% int. For Steve’s benefit, I’ll repeat what I’ve always said. If times ever do get bad again, you can always live in a house, but you can’t eat shares. If you don’t know the past, you’ll never know the future. Also if you can’t make a $10 decision, you’ll never make a $1,000,000 one. Cheers, Ken.
Marat says
What all of you will say to Steve if he will be right? Bet you will keep it shut, picking the remains of your properties hah?
Marc montano says
I’m sorry to hear that you’ve missed the boat too Marat, try Brisbane it’s set to go? Otherwise better luck next time – which will be about 10 years from now… I wonder much dead rent you’ll pay in the interim about $250,000 + ??
Pat Sanders says
Steve must be off his head he must have a dim view of life too
I knew it would go up last year too 15 to 20% as history repeats over and over but. Steve did you know you could buy a house in the western Suburbs of Sydney for less than 20k in the early 70’s they never went down again did they? NO I don’t think they did.! Now they are 500k plus
Steve says
Gold an silver is what I buy did you know in 1970 ounce of gold just $35 today 1340 but it will go to 10k
A video you might like.
Mike Maloney hidden secrets of money eposode 4 it’s on you tube
Kevin says
Steve is definitely awake….he sees the writing on the wall……the greatest wealth transfer is coming ! Those holding gold and silver will be able to buy more real estate for pennies on the dollar once this delusionally monetary system were are on collaspes !!!
KiwiPunter says
Hi Steve, Kevin,
I’m in Auckland, across the ditch. Auckland property is already booming, since the middle of last year. And it looks set to continue here too, I believe mainly driven by arriving immigrants with loads of money, and not enough houses to accommodate them. (A bit different from Sydney?) However, like you guys, I’m also very worried that there’s another crash coming, the bubble might be about to burst. Getting nervous, we actually sold one of our properties too soon, at the beginning of the year, and could probably have made another $100K if we’d held it another 9 months. But I was worried, and still am, about the American economy and their Money Printing Madness (aka QE…). By rights, the US economy should crash and burn, and I still think it will. The question is when, and what then? Last time, a couple of US bank collapses brought down the whole world – but only because the media talked us all into it, and now can’t talk us out again – or doesn’t want to.
But as for Gold & Silver – dunno about that either. The Gold Price is being manipulated downwards. Obviously, someone has an agenda there, but I’m not too sure what it is. Some points for thought.
1. Gold in particular has little intrinsic value, apart from being rare (= precious). But like Ken says, you can’t eat it, and it isn’t even being used in Electronics manufacturing like it used to be. It’s not really a very useful metal, apart from for decoration. Silver is more useful.
2. A huge proportion of the worlds population still buys into the “Gold has Value” idea, in spite of the “inexplicable” recent major falls in the price of gold. If gold is such a sure bet, the price should be booming. But these people, who have been busy buying it up as fast as the price falls, may turn out to be the biggest suckers. This may be part of the coming big wealth transfer that Ken has mentioned.
3. Can’t see how gold can have more value and security than land. You can even grow food on your land…
So I dunno what to do. Any suggestions, anyone?
KiwiPunter says
Sorry:
…that Kevin has mentioned…
KiwiPunter says
P.S. The world’s population is still growing, and that can’t continue too much longer, at least, not without massive changes…
But there is one scenario in which the value of land would fall. And I think this one is coming too, but again, who knows when? Nothing to do with gold though.
Kevin says
KiwiPunter have a look at Hidden secrets of money all 4 episodes by Mike Maloney. If you understand how our monetary system works and realize that we have been lied to for the last 100 years, you’ll see why it’s important to have gold & silver in your own possession
KiwiPunter says
Hi Kevin,
Will take a look. However, I think people have been lying to other people since Adam was a boy. Of course, the sole purpose of lying is to seek to gain some advantage over the other – always – so this is to be expected. Anyway, I’ll go take a look.
Cheers!
Ken. says
I think that the only advantage on gold and such, is that you can take it with you if you have to. This means a lot less secure if you get burgled. Interesting to see that a house in the western suburbs of Sydney cost $20,000 in the early 70’s. A house in Woodridge in Brisbane at that time cost $8,350. My father bought the house I was born in for $800 in 1948, which is now the average price of present homes in it’s category. If this doesn’t convince anyone, I rest my case. Cheers, Ken.
Ken. says
The present day cost of that 1948 home is now $259,000. Ken.
Ken. says
Maybe we all should have played monopoly as kids. Those that remained objective will never learn anything. Cheers Ken.
Sean says
Reminds me of another Steve, Steve Keen, a famous property bear economist, if I remember rightly.
Sure I remember him betting somebody back around 06-07 that prices were about to crash 40% & if he was wrong he would walk backwards from Sydney to Canberra. Don’t know if he ever made the journey but I do remember him trying to justify how a 5-10% drop in property prices equated to 40% in ‘real’ terms. I’m guessing that he is a frustrated tenant secretly kicking himself that he didn’t get into property years ago.
On the value of gold as an investment, its price crash of the last 18 months or so makes property look even better. As I have often said they don’t build enough bridges for us all to live under so houses are always going to popular.
cjo says
Spare us from amateur statisticians. The bottom graph compares house prices with (collective) GDP. It should be GDP per capita (since it is house price per capita not the value of ttoal hiosuing stock). That would show a growing gap since roughly 1997.
GDP is in any case not the best measure of collective income. Why not use average household income and tell us what you find??