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!