Sydney Housing – analyzing house prices over the last 40 years

2015121-1Sydney housing prices have exploded over the past 6 years, with the many suburbs routinely bringing in sales in the 7-figures.

A combination of factors were at play in the lead up to this boom. A long period of slow growth characterized many outer Sydney suburbs like Chester Hill, and they had been overdue for an increase to correct their prices. The advancement of the Chinese economy as well as an influx in buyers from other regions have increased demand. Extremely low interest rates have also been a factor, making it possible for homebuyers to borrow much more than they normally would be able to budget for in their monthly repayments.

“A parking space in Potts Point sold for $264,000”

On top of this, Australia’s ageing population is reaching its peak    wealth with a large proportion of the population with the means to purchase multiple investment properties. When these factors are combined with the surge in overseas investment and the demand for homes closer to the CBD, it created a perfect storm for property value to take off.

Prices have reached ridiculous levels in Sydney, highlighted when a parking space in Potts Point sold for $264,000 earlier this year. This has left many pundits wondering, will the oft-mentioned property bubble burst? Or will these prices continue to surge ahead?

2015121-2Let’s look at the median house price in Sydney decade by decade:

As we can see, the median price in Sydney was more than 28 times higher than 1970, and that was before the latest boom where some suburbs more than doubled again in that 5-year span between 2010 and 2015.

With all investments to put it quite simply there are three possible outcomes:

  1. Prices increase
  2. Prices stay the same
  3. Prices fall

2015121-3The question of whether you should invest in property will depend on where you think the market is headed. Based on past data, do you feel the trend will continue and prices will increase, will they level out, or will they fall?

While the recent increases have left many feeling like a deer in the headlights, the rate of increase is not particularly unusual when compared with previous decades. In 1980 the median price was over 4x higher than it was 10 years earlier. At that point in time, people would have been questioning whether the property bubble would burst – skip forward another 10 years and prices almost tripled again.

“The median price in Sydney in 2010 was more than 28 times higher than 1970”

Between 1990 and 2000, the median Sydney property price increased by only ~48% but it quickly bounced back, almost doubling again. In July 2015, the Sydney median house price was recorded at $1,000,616 – over 1 million dollars for the first time.

In the latter part of 2015 there have been reported trends in slowing sales, and while there may be reduced confidence in the market, causing cautious investors to take a wait and see approach, prices can and most likely will continue to exhibit solid growth in the years ahead. So if you are waiting for prices to drop before buying, you could be in for a rude shock.

“If you are waiting for prices to drop before buying, you could be in for a rude shock.”

Two possible causes for a possible drop in pricing in Sydney:

Rapid increase in housing supply – if markets are flooded with apartments in every suburb to cash in on the current demand for Sydney properties. This could cause a tipping point where there are more units available than people are willing to buy, causing sellers to lower prices to meet buyer expectations and in doing so, reduce the price across the board. This would also affect rental markets with higher vacancy rates making it a ‘renter’s market’ putting negotiating power into the hands of tenants.

Rapid increase in interest rates – with so many buyers taking on larger mortgages than usual, stretching themselves to barely cover the repayments in their current situation, there will be many home owners left out in the cold if rates were to skyrocket. If banks do mortgagee auctions on a large scale, with property owners unable to keep up with their monthly payments, this would create an influx of property being sold off cheap, increasing supply. At the same time, if interest rates are very high, demand will also be low as people will not afford to take out large loans.

Is this a realistic threat for property investors? According to most experts: no. At least not in the short term. Looking at what banks are offering for fixed term home loans is a good indicator for what the interest rate will do over time. Looking at home loan calculator websites reveals the following:

5 years fixed home loans are currently between 4.5% and 4.8% from most lenders. 10 year fixed home loans come in slightly higher than this, ranging from 6.7% to 7.8% depending on the bank you go with.

Generally, the longer the fixed term the worse rate the bank will offer, simply due to the uncertainty around the investment from the bank’s perspective. However, using this as a guide, it is wise to use it as a measuring stick for where a variable interest rate could be 10 years from now. When purchasing a home, whether it is for yourself or as an investment, always stress-test your budget.

Looking at a $1,000,000 property as an example with a 20% deposit and 80% loan amount ($800,000), at the current fixed rate of 4.32% you would need to make $3,968 in monthly repayments over a 30-year loan. On an interest only loan, you would be paying $2,880 per month.

On a 7.80% loan you would be paying $5,759, or $5,200 on an interest only loan. If the poop hits the fan and the interest rate does hit this level, you need to consider what your options would be in a worst case scenario. Do you have enough in cash as a safety net to cover several months’ worth of repayments? Do you earn enough to comfortably cover that extra amount?

Cooling measures can also be brought in if prices increase too rapidly.

2015121-4Cooling measures can also be brought in if prices increase too rapidly. For instance, banks have created separate home loan rates for first home buyers versus property investors.

The government can also take measures to reduce the impact of investors. In Singapore, the government have taken it a step further and managed to curtail prices dramatically over the past 5 years. After rapid increases in housing prices, the Singapore HDB remains has dropped in price in many areas, making it affordable for first home buyers, particularly with the added government incentives on top.

So what does it all mean?

For property investors that got in before the most recent increase, there was a great opportunity to make a killing in sales. There still is, with sale prices continuing very strong. For those that buy into the media hype, selling makes a lot of sense, but when looking at the long term growth it would not be shocking to see prices continue to trend upwards in the years ahead, as more and more people flock to the highly sought after inner city suburbs.

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