The media extensively covered a ‘stalling housing market’ over the weekend, as monthly results from CoreLogic came out indicating a 0.1 per cent drop in the Sydney median house price from August to September. As seasonal factors typically influence how much property is sold and for what price over the course of a calendar year, monthly changes are rarely a good measure in the property market.
A more enlightening statistic is the annual growth rate, which for Sydney was 8.5 per cent in September. Generally speaking, that means a property worth $1 million in September 2016 increased in value by $85,000 by September 2017.
Is this growth sustainable? Obviously not.
The slowing price growth rates in Sydney suggest the recent boom-train is finally (and justifiably) approaching the terminus, with some even suggesting Sydney has reached a point of being terribly overpriced and will therefore face a bubble-burst scenario. Are they right?
Some of the factors that have made Sydney the unaffordable city it is can shed light on what could happen in the future.
For starters, the Global Financial Centres Index ranks Sydney as the number eight greatest financial centre on earth. Most other financial centres on this list are also facing housing affordability issues due to a high level of demand from a high calibre demographic.
Second, Sydney is a geographically constrained city. This means homes within a one-hour radius of the central business district are increasingly difficult to buy as the population increases with professionally employed migrants. Unless we want to destroy the national parks, there aren’t that many more places to build new homes unless we build upward.
Third, interest rates haven’t been this low since the inception of the Reserve Bank of Australia. Also, Australian housing debt is estimated to be around $1.7 trillion, a quarter of the Australian Bureau of Statistics’ $6.7 trillion estimate of the value of all dwellings in the country. Australians aren’t suffering unprecedented housing unaffordability like we are continually told.
Unless these factors (and many others) change significantly, the recipe for a crash simply doesn’t exist.