It’s safe to say the most common question we’re asked at Blue Wealth is ‘Why aren’t you in Sydney?’ Back to that in a minute. Now, I know you’re all big fans of my occasional research articles; today, however, I come bearing some good news and some not so good news about Sydney that explains why we’re currently not in that property market. Understanding that no one likes the bearer of bad news, I will start with ‘not so good’ and hope I don’t lose all of my fans before the end of the article.
The not so good
- You should recall that we spoke of the rhythm of history in last week’s article. The Déjà vu felt by Sydneysiders throughout the most recent growth phase reflects the cyclical nature of the property market. Over the 6 year period between 1998 and 2004, the average house price in Sydney increased by 102 per cent. The most recent growth phase (2009 – 2016) saw the median price increase by 82 per cent. Growth like this results in a significant strain on affordability which limits medium term growth. It’s important to keep in mind that investment becomes risker the further into a growth cycle you invest. This happens for two key reasons: 1) value deteriorates 2) the probability of a market correction increases. In fact, after the 1998-2004 growth phase, the average Sydney house price declined by 13 per cent over the following five year period.
- The breach of the affordability ceiling in Sydney has been artificially delayed as a result of record low interest rates. Still, mortgage repayments on the average Sydney home as a proportion of household income have risen to 40%, close to record levels (fun fact; this is almost twice what you’d pay in Brisbane and 40% more than what you’d pay in Melbourne). Now, it’s true that affordability doesn’t necessarily result in price growth (the macroeconomic factors of our research model are more important here). What we can be more certain of, however, is that strained affordability limits growth. As the affordability ceiling is encroached; income growth becomes insufficient to drive price growth.
Let me get to the good news, I’d hate for you to leave this page in a bad mood. I know it seems small in comparison to the ‘not so good’ but I assure you it’s worth the wait.
The good news;
Cue drum roll/slow clap: the recent property upswing has resulted in the city’s inner suburbs having levels of equity of more than $500,000 with the majority of inner, middle and outer ring locations having equity levels greater than $400,000! High five, Sydneysiders!