Sydney’s property market is a house of cards

GUEST OBSERVATION

The performance of Sydney’s property market over the past 12-18 months is as concerning as it is spectacular.

Double-digit price growth isn’t consistent with Sydney’s property market fundamentals. While I’ll stop short of predicting that a downturn is on the horizon, the drivers of Sydney’s market are as fragile as a house of cards. With over 9.3 million properties to choose from in this country, one begs the question, “Why Sydney?”

First, The Fundamentals

Contrary to tabloid rhetoric, Australia is not having a property boom. Outside of Sydney, property markets are experiencing a predictable post-GFC recovery phase with normal rates of growth (0 to 6%) over the past 12 months.

The state of New South Wales is home to 7.4 million people (a third of Australia’s total population) and 4.3 million (18.7%) of these are in Sydney

Greater Sydney can be broken in to ‘Metropolitan’ and ‘Western Sydney’. With a population of 2.06 million people (8.9% of Australia), Western Sydney on its own is bigger than the combined populations of South Australia, Tasmania, ACT, and Northern Territory.

With a median house price of $802,000 Sydney is the least affordable location in Australia (miles above the capital city average of $580,000).

For the same price that you can buy a Sydney apartment (median value $576,000) you can buy a house in every other location in Australia with the exception of Melbourne.

Sydney’s population growth rate has been below the national average over the past 10 years, and only ahead of economic minnows South Australia and Hobart. Rate of growth is completely different to size.

New South Wales has a long history of people immigrating away from Sydney to alternative locations

Sydney has been Australia's worst performing capital city market since the 2000 Olympic Games (it’s not a typo).

Through 2000 to 2010, the NSW unemployment rate was regularly above the national average. After finding its way back to parity it improved further to fall below the national average this January and currently sits 0.5% below. It is no coincidence that Sydney’s property market has improved with its employment record.

Metropolitan Sydney is Australia’s white-collar capital and unemployment rates are currently up to 50% better than the national average. It’s just a shame that few people can afford to buy a metropolitan home.

Large parts of Western Sydney, on the other hand, have significantly fewer job opportunities. Manufacturing accounts for 16% of jobs (not ideal with a high Australian dollar) while a fifth of all businesses are in the construction industry. Australia’s highest crime rates are in western Sydney

To overcome a reported 182,000 job shortfall, tens of thousands of people have to commute from the more affordable western suburbs to work in metro Sydney each day.

Transport infrastructure has not kept pace with population growth. The rail network has not been significantly expanded since the 1930s, yet the region’s population is now five times greater. The heavy reliance on passenger cars results in horrendous traffic congestion, loss of productivity, and high fuel costs. Remember that earlier Interstate Immigration graph?

15 years of babble about Sydney having run out of land and therefore having an under-supplied property market is not totally correct. Metro Sydney’s land shortage has been compensated by higher density construction while sprawl has occurred to the west. Overall, dwelling construction was greater than required until the GFC handbrake was applied. The tightening of supply is another reason for the more recent pressure on Sydney property prices.

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The Foreign Investor Phenomena

Structural changes resulting from the revolution known as the ‘Asian Century’ has directly resulted in unprecedented volumes of properties being purchased in Australia by Asian investors.

With Sydney and Melbourne having Australia’s biggest profiles internationally, they have been the centre of attention for the construction industry’s marketing teams.

In a majority of cases, Asian investors are buying brand new properties – only Australian residents are permitted to buy established properties.

According to the latest report from Australia’s Foreign Investment Review Board (FIRB), there were 12,647 applications approved in the 2012-13 financial year. A total of 12,025 of these approvals were for Australian real estate transactions (289 were for mining).

The number of FIRB approvals for Australian (residential) real estate has grown from 3,723 in 1999-10 to 11,668 in 2012-13. I’d be staggered if the numbers aren’t even bigger this year. The tsunami is coming! Victoria (38%) and NSW (30%) account for the lion share.

The House Of Cards Concern

While I think that Sydney’s employment will follow current trends, its property market will ease (refer lack of affordability and a significant supply of new dwelling stock in the pipeline).

An unhealthily high ratio of investor-owned properties is already occurring with recent ABS data confirming that 53% of NSW home loan approvals (refer Sydney) were for investors. Melbourne is concerning high at 45%, 30% is about normal. Yields will reduce!

In light of the fundamentals outlined, the only thing that can sustain Sydney’s market strength is continued high rates of Asian investment. This is where there are two jokers in the pack which I feel make Sydney’s house-of-cards very fragile.

With the boom being isolated to Sydney and pressure still on the Australian dollar, the Reserve Bank is unlikely to pull the trigger on a few interest rate rises as they would normally do. But, what if the FIRB passed legislation to restrict Asian investment in Australian real estate? Joker number one!

The other possibility lies in China. There are recent reports of China’s residential market declining by 15% over the last 12 months. Chinese banking executives and economists say that a severe housing downturn could cause a considerable increase in non-performing loans at the country’s banks. We know that when times get tough investment properties are often one of the first assets disposed of in order to bring the household budget back in to order. Further instability in China’s market could result in high levels of resale stock in Sydney. Joker number two!

In so far as a medium term outlook, my money is on Sydney performing similar to the last 15 years – below the Australian average.

Simon Pressley is managing director of Propertyology, a full-time property market analyst, accredited property investment adviser, and REIA / REIQ Buyer’s Agent of the Year (2012, 2013, 2014).

Photo courtesy of Peter Roberts/Flickr/Creative Commons.