Capital City Sale

There’s a capital city sale on, you just need to know where to buy for the  best  opportunities.

A few weeks ago, I wrote about the importance of knowing the market and leveraging off differences in capital city price cycles. With the Sydney property market approaching its peak, the ‘Sydney premium’ over comparable capital cities is more significant now than it has been at almost any point over the last decade. Property in evolving cities such as Melbourne and Brisbane is significantly more affordable and represents much better value than that in Sydney. Here’s what you need to know:

1. The median price for a home in Sydney is 32 per cent higher than Melbourne and 65 per cent higher than Brisbane

2. In Sydney, price growth has outstripped wages growth by a factor of five. Wages in New South Wales, where 60 per cent of the population resides in Sydney, climbed 2.5 per cent in 2013 and 2.4 per cent in 2014, compared to gains of 12.4 per cent and 14.5 per cent respectively for homes according to Australian Bureau of Statistics and CoreLogic data.  Yes, declining interest rates have dampened affordability pressures but there’s only so long they’ll remain as low as they are now.

The figure above tracks the ‘Sydney premium’ over Brisbane and Melbourne between 2002 and 2015 (Source: ABS 6416.0 – Residential Property Price Indexes). What you can see is that the price premium of a house in Sydney over Brisbane is at its highest point since September 2003, at which time the harbour city was at its cycle peak. The price premium of a house in Sydney relative to Melbourne is at its highest point since June 2007. You can also see that when the premium exceeds its equilibrium point, a correction stabilises the market so that prices more reflect their fundamental levels. The premium of a Sydney house over say a house in Hobart or Adelaide is indeed higher than what you can see below. However, these cities do not benefit from the same longer term economic drivers required to stimulate their property markets.

Buying in Sydney now is no more rational than waiting for the end of a sale to make a purchase. The laggards have helped create the capital gains being enjoyed by the early adopters, and, as often occurs, their fear of missing out has pushed prices beyond equilibrium levels. Next stop for Sydney? Correction.

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