On this day in 1990, a middle ring house in Sydney cost $155,000 and, while there were a lot less of them back then, a typical apartment cost $145,000. Yes, investing in that essential commodity known as ‘shelter’ has proven to pay big dividends over the longer term in Australia!
But it’s never a smooth ride. Across the 3-decades since then, Sydney’s property market has produced three property booms (1999-2004, 2010 and 2013-2017). It’s also been through four (4) downturns (2005-2006, 2008-2009, 2011-12 and the current downturn). Although, the late 1980’s produced Sydney’s largest downturn of 24 per cent.
While there’s a disparity between ABS and Core Logic with the exact dates and amounts, Sydney’s market peaked in mid-2017. According to the latest ABS data, the June 2017 median house price of $1,075,000 had declined by $175,000 to $900,000 by September 2018. Core Logic suggests there was a further fall of 3.9 per cent (or $35,000) over the quarter ending December 2018.
If the various analysts who are forecasting an additional 10 per cent drop during the 2019 calendar year are to be correct, Sydney’s median house price will be sitting at circa $780,000 by Christmas time. If the Sydney market was to bottom at that price, it equates to a $295,000 decline from its peak.
And, if the trajectory of Sydney’s future growth cycle is anything like what history has taught us, the probability is that someone who purchased a stock-standard Sydney property during 2017 may find their asset to still be worth less than what they paid for it ten years from now. Markets do have a habit of tracking sideways for several years after a boom period.
There are many learnings that money can’t buy. But anyone who cares to know anything about property can learn so much from research about Sydney’s property market history.
For me, one of the most frustrating learnings is that Australia’s most influential decision-makers are renowned for making significant national decisions on the back of an issue primarily related to Sydney. That’s particularly the case with property-related matters like housing affordability, tax policies, credit policies and migration policies.
While I totally understand the important role that Sydney plays within Australia, I won’t apologise for reminding anyone who cares to listen that Australia’s 25 million population is spread across no less than 183 individual cities and towns which each have a population of 10,000 or more. Sydney is ONE of those communities. Rant over!
This time 3 years ago, depending upon whether you were a property owner or a renter, Sydney residents were either overjoyed by the boom which some thought would never end or disgruntled by the impossibility of ever being able to afford your own digs. Today, those moods are reversing. Quickly!
Either way, reflect on those feelings (from 3 years ago and now) and use the research that you’re about to read as invaluable learnings. Much of what the ‘property gospel’ would have you believe is not quite right.
1. Population growth
Propertyology has been saying for years that, while it is ONE factor, the rate of population growth has never been the biggest influencer of property prices. Sydney has just produced two consecutive years of all-time record high population growth yet the Harbour City’s property prices are falling at a decent clip.
Maybe now a few more people will appreciate that there are several factors associated with ‘housing demand’, with the primary one being affordability. And, while big cities like Sydney are going through a downturn, plenty of non-capital city locations have buoyant property markets even though many have a much more modest population growth rate [refer here].
The formation of Sydney’s recent population growth tells an important story. Of the 101,745 total population increase during the year ending June 2017, 84,684 (or 83 per cent) was totally reliant on Australia’s overseas migration policy. In that same year, 18,000 existing Sydney residents relocated to another part of this country and I’m anticipating that number will increase over the next couple of years. In other words, more Aussies are falling out of than in love with Sydney!
2. Infrastructure investment
The 2 to 4 years leading up to Sydney’s 2000 Olympic Games is the only period that comes remotely close to the enormous investment in infrastructure that continues to unfold in Sydney at the moment. It’s worth noting though that property devaluations are occurring right across Sydney, including in the suburbs benefitting from new infrastructure. Yes, infrastructure investment can influence property prices however, a new hospital, university, train station or airport precinct is by no means a money train to Australia’s best-performed location without all of the other dots lining up. Clearly it was something other than infrastructure investment (explained here in my ‘House Of Cards’ article of February 2015) that triggered the commencement of Sydney’s last property boom in late-2012 because the below chart illustrates that projects didn’t ramp up until 2014-15.
3. Housing supply
The primary cause of Sydney’s current downturn is that the all-time record volume of new housing supply exceeds demand (and many buyers have run out of dosh). From 2013 onwards, record building approval volumes provided reliable leading indicators that this day of reckoning was on the cards. The proof of it arriving lies in the large increase in properties today listed for sale, rising vacancy rates, some awful auction clearance rates and, of course, falling property prices. Sydney rents have already fallen by 5 to 10 per cent over the last year. It may take 2 years or more to absorb the supply. If Australia’s biggest city can be over-supplied, absolutely any location can!
4. Growth cycles
There are plenty of people who did well out of Sydney’s last growth cycle. But today’s Sydney property prices are already back to late-2016 levels so the roughly 200,000 people who purchased in Sydney since then are now holding an asset that is worth less than what they paid for it. And no one knows where the bottom will be yet.
History has taught us that growth cycles often end abruptly and Sydney’s last cycle certainly continued that tradition. While there’s no rule that says a period of price decline must follow growth cycles, there often is a prolonged flat period. For example, Sydney’s 1999 to 2004 boom (partly triggered by the GST introduction) saw the median house price peak at $523,000 in March 2004, then fall, and didn’t get back to this value until 5.5 years later, in October 2009. The below chart illustrates a few other modern history examples (in Brisbane, Perth and Melbourne) of long flat patches immediately after booms.
Each individual town and city will start and stop its own growth cycle at different times. We all want growth straight away but that’s out of everyone’s control. The objective of Propertyology’s buyer’s agents is to invest prior to or just as a growth cycle is starting. If you follow the herd in to the back half of a cycle it can be a very long time between drinks!
In our years of experience investing in locations all over Australia, if anything it’s better to get in a year or two early, but that requires an in depth understanding of leading demand and supply indicators and where to find all of that information.
5. Big isn’t better
Arguably the biggest misconception about property markets is that the more people that live in a city the better potential it has for capital growth. News Flash: the word ‘capital’ in ‘capital city’ has nothing to do with capital growth! As explained earlier, population growth rates are far from the biggest driver of property prices. The $200,000 to $300,000 that will be wiped from Sydney’s median house price during its current downturn will hopefully put to bed any claims that capital cities are ‘safer’ investments than all regions (note: downturns are also being experienced in Melbourne, Perth and Darwin).
Sure, there are higher risks associated with investing in one-industry towns, but there are dozens of other (strong) regional cities which have very diverse economies, solid job growth, and a long history of controlled housing supply. With a median house price of $350,000 to $450,000 in most of these locations, the height is lower to fall from than Sydney, the capital outlay is much smaller, and annual cash flows are stronger.
“…Oh, but over the longer-term…” I hear you say. Well, dollar-for-dollar, if one had the opportunity to purchase an investment property 20 years ago and kept within New South Wales, they would have benefitted from higher average annual capital growth in regional locations such as Bega Valley (8.9 per cent), Newcastle (8.5 per cent), Lithgow (8.4 per cent), Maitland (8.2 per cent) and various others compared to the 7.9 per cent in high profile Sydney municipalities such as Parramatta and the Inner-West. Alternative locations are also gentler on the household budget. Of course, the future never unfolds exactly the same as the past, but the point of these statistics and the chart above is to dispel misconceptions and help you to remove the blinkers.
6. Cash is king
Let’s be honest, Australia’s biggest (and most expensive) city has status. But make no mistake, there’s a big price to pay for investing in properties primarily chosen for their ‘status’. High mortgages and low rental yields is a recipe for a cash flow drain. Basic middle-ring houses in Sydney cost circa $1 million and most basic apartments, which generally appreciate less in value due to their lack of differentiation, still cost more than classy houses in most other parts of Australia. Using a scenario of 10 per cent cash deposit and official property data, I’ve calculated the average annual (pre-tax) investor holding costs in various corners of Sydney and they’re not pretty.
In northern suburbs such as Frenchs Forest and Hornsby, the holding cost is circa $26,000 per annum. The same basic house in western suburbs like Parramatta ($31,000) and Ryde ($40,000) will drain your household budget even more. And, for those who foolishly think being near water or the inner-city makes properties grow more, a basic house in Bondi ($57,000 per year) or Balmain ($42,000) hits the pocket very hard. A standard apartment in those two suburbs still costs $16,000 and $21,000 per annum, respectively. On the other hand, a standard house in a middle-ring Brisbane suburb such as Nundah has a pre-tax cost, after rental income and all expenses, of $11,000 per annum. Meanwhile, the holding cost in middle-ring Hobart, Australia’s best-performed capital city for the last few years, is a mere $1,000.
It’s imperative that investors respect the importance of individual properties not costing a 5-figure sum each year. Circumstances can change (market performance or personal finances) and it’s the annual holding cost of a property which provides investors the freedom of determining whether to sell or hold.
7. Credit Supply
While demand is the culmination of the cost of housing, economic conditions, lifestyle, local sentiment and population, availability of credit is a non-negotiable for being able to act on that demand. Australia’s APRA-enforced credit restrictions commenced back in 2015 [refer ‘New Era’], but the extra measures that were introduced at the start of 2018 is likely the tightest conditions in Australian history.
I believe that Australian real estate would have increased by an extra 5 to 7 per cent in the 2018 calendar year if not for APRA’s last round of (overzealous) credit tightening. Credit, along with the RBA cash rate, is a national policy, however the biggest mortgages are always affected most so Sydney’s property market is in the gun. Sydney’s current downturn was caused by over-supply of housing and then accentuated by the lack of credit supply. In Propertyology’s 2018 Market Outlook Report, we referred to three scenarios wherein Sydney prices were forecast to decline by between 3 per cent and 10 per cent in 2019.
8. All of your eggs
An astute share investor wouldn’t place all of their capital in to one single stock, or even one industry, yet it’s always amazed me why property investors haven’t thought about the soundness of avoiding the concentration risk of having all of their property eggs in one basket. An overwhelming majority of those who have invested in Sydney also have their family home there. No one has a crystal ball, so Propertyology’s buyer’s agents like to help investors to minimise their risk of future underperformance and downturns while taking advantage of multiple great opportunities by breaking up that one piece of investment capital in to smaller pieces.
SUMMARY
Of course, property investors can make money in Sydney. There’s money to be made in (literally) every city and town in Australia. The point is, for those who are keen to give themselves the opportunity of the best possible outcome, there’s lots of to learn from the history of Sydney’s property market.
For starters, what’s transpired over the last couple of years should teach you that Sydney isn’t ‘safer’ and its bulging population is far from the goose that laid the golden egg.
As a full-time student of Australian property markets, I’ve learned that affordability is a very important part of the long-term capital growth equation – Sydney is entrenched in last place on the affordability ladder plus it’s a massive drain on an investor’s cash flow.
I have no doubt that Sydney will boom again at some time – as will (literally) every other capital city and non-capital city location (at different times).
It’s impossible to say when Sydney will experience its next growth cycle, but it’s as good as guaranteed that it won’t be any time soon and, with an appreciation for how market cycles work, it may well be as far down the road as a decade or more.
Perhaps the biggest learning of all for investors is, instead of throwing everything on black, spread your investment capital across multiple more affordable property assets in a variety of different towns and cities (you’ll be pleasantly surprised how their history compares to Sydney).
Now that you’ve reviewed the historical evidence and had time to reflect on the validity of what you use to consider ‘property gospel’, you’re possibly wondering what to look for when deciding where to invest. The answer is that there’s a large number of factors which influence property market performance and the role of a skilled analyst is to join those many dots in attempt to create a ‘picture’ for the foreseeable future. It’s not an exact science, but there certainly is a science to it.
I consider it important to always have an objective look at every market in Australia, not just capital cities. Propertyology’s multi-award-winning buyers agents use our market intelligence to select strategically-chosen locations all over Australia and to help everyday Aussie investors to find that right property, on the right street, and to negotiate the lowest price.
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Propertyology is Australia’s premier buyer’s agent for property investors. Every capital city, every non-capital city, we analyse fundamentals in every market, every day. Our multi-award-winning buyer’s agents use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here.
