When Will the Sydney Property Bubble Pop?
Leon Jacques, Cohen Handler’s Buyer’s Agent and Property Strategist discusses the major factors currently affecting Sydney’s housing boom and whether the balloon is about to burst?
As a buyer’s agent and property strategist, the most common question I get from my clients is about when the property boom will end. It’s no surprise that there is a certain amount of anxiety, especially from investors and downsizers who want to know if they should make a move before the bubble bursts.
Last month, leading investment bank, UBS predicted that Sydney and Melbourne’s seemingly endless price growth has peaked and is about to reverse after a weekend of ‘lower-than-usual auction clearance rates’. This caused a flurry of disagreement from other property analysts, such as Louis Christopher of SQM Research, who said it was ‘really too early to call the end of Sydney and Melbourne’s housing boom’.
At the moment there seems to be a lot of media hype about Sydney’s growth having softened in the month of April, so I thought it would be a good opportunity to share my view. But before I share my thoughts on whether the ‘end is nigh’, let’s look at some of the major factors driving property prices:
- Interest rates – Interest rates are still at, or around, historical lows making borrowing cheaper than it has ever been. The banks have started raising rates independently of any Reserve Bank of Australia (RBA) increases, mainly due to pressure from the Australian Prudential Regulation Authority (APRA) and offshore borrowing costs. However, it is still possible to borrow at around the 4% level. Ask any baby boomer how good this rate is compared with the double digits they faced in the 1970s and 80s…
- Foreign investment – In 2016, the NSW government introduced a 4% stamp duty surcharge for foreign investors. This combined with new rules surrounding identification and banks reducing, and in some cases restricting, lending to investors with foreign incomes are likely to have an impact on this segment of the market.
- Population growth – According to World Population Review, Sydney’s population is currently at around 4,580,000 and grew by 1.7% last year or around a significant 75,000 people. That is the equivalent of the entire populations of Ulladulla, Lithgow, Bowral, Kiama, Griffith and Ballina all moving to Sydney this year and trying to find a place to live! Forecasts have Sydney passing the 5,000,000 mark by 2025. When you look at this rate of growth compared with the current level of supply, or should I say undersupply, this is still a strong driver for growth.
- Unemployment – NSW currently has an unemployment rate of around 5.1% and Sydney’s rate is below this at around 4.5% for the combined Sydney and greater Sydney regions. With the recent NSW government spending on infrastructure these numbers are likely to remain at low levels for the coming few years.
- Wages growth – According to the Australian Bureau of Statistics (ABS), wages growth is at a record low of 1.9% per annum.
So to answer the question about when the property boom will be over, the truth is nobody really knows. Naysayers have been talking about the Sydney bubble bursting for the past two years and it just hasn’t happened.
If you analyse the above factors, we still have more upward price drivers than downward, i.e. low interest rates, population growth, undersupply and strong employment verses foreign investment and wages growth.
So, on the balance of probability I believe the current rate of growth will slow soon, but a lower level of growth is likely to be around for the balance of this year.
To back this up with anecdotal evidence, two of the past three auctions I attended had more than 10 bidders registered. Every auction has only one winner, therefore there were 10 or more people that missed out on these auctions. What were they doing the following week? I would hazard a guess that they were straight back out there looking. So demand still appears to be strong and Australia’s appetite for property doesn’t seem to be wavering.
But remember not all property is created equally, so regardless of where we are in the property cycle, choosing the right location for rental yield and capital growth is the key to successful property investing.
Cohen Handler can help you get the right property at the right place. If you are interested in buying an investment or residential property in Sydney, contact us today to find out more about how we can assist you.