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How much growth is really left in Sydney?
There are many ways to slice this pie, but let’s look at two today.
First, a little history
Property is a mean-reversion asset, meaning that growth rates can move above or below the mean (or average) but always snap back to the mean. Analyzing past cycles brings a lot of clarity to where we are in the current cycle. Most of the major markets in Australia have done quite well this cycle, with Sydney coming in around the middle of the pack with 61% growth since the cycle low in Q1 2019.
Based on my modelling, the Sydney property market tends to have three distinct phases, which are visually identifiable.
- Early cycle rally (culminating in a mid-cycle consolidation)
- Final run up (culminating in a blow-off top)
- Correction.
We can see the three phases across four complete cycles, and the current one is no different. The distinctive double-peaked shape of the curve is largely driven by the two interest rate pivots during a full cycle.
Method one – comparing growth in past cycles
Historically, the average peak-to-trough growth in each cycle has averaged 97% over 13 years, with remarkable consistency.
Applying this growth to today’s numbers implies a cycle top price of $2 million, or about 22% higher than where they are today.
Method two – regression analysis
If we were to apply an exponential regression to the current prices, it would look like this:
Extending the regression line to the expected cycle peak in 2027 suggests Sydney house prices reach $2.4m, or a whopping 46% higher than current prices. The model fit is near perfect, explaining 97% of the variation in the dataset.
What’s more likely?
I have no idea, but averaging two approaches tends to drop the property forecast error rate by 50%. If we average the above techniques, we end up with a median house price of $2.2m or about 35% higher than the current median.
Where the smart money will go
While prices will almost certainly rise in all fairly priced properties, this type of high-level analysis cannot provide a breakdown of the fastest-growing submarket.
Here are some clues.
Zooming out, it is clear that affordability levels are on a structural decline. Houses have become financialised and are now being used as a hedge against monetary debasement rather than just a place to live.
As affordability levels continue to worsen, capital will likely continue to flow to the cheaper suburbs. The 25th percentile (the cheapest 25% of properties) has continued to outperform the most expensive properties, as predicted in early 2024. While this gap will close a little with the rate cuts, we may have hit an event horizon in the housing market, meaning that trend will likely continue.
The final leg has begun.
Regular readers of this blog would know that we’ve been following this cycle since 2021, and it has played out perfectly. This final leg of the property market is now underway, and with a rate cut more or less baked in for May, prices are only likely to accelerate from here.
That’s all from me today – I hope you all got into position and are simply waiting. If not, there are still plenty of opportunities, but we are now much closer to the end of the cycle than the beginning.
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