There’s a seemingly endless amount of commentary on the property market right now.
That’s not surprising given the extraordinary rates of growth the market has experienced over the past few years.
That said, I want to make a few points about the market that you may not have heard.
I want to look at the concept of riding an irrational market, the disparity of returns within a market, and some factors you can’t afford to overlook in 2016 and 2017 if you’re looking to enter the property market.
This is essential reading if you’re still thinking of investing in the property market. And I challenge you to find a more honest assessment of the market than what I’m about to serve up here.
Fear of missing out
I was chatting recently with a well-known Australian investor. I asked him what he made of all the recent financial markets volatility.
He said he wasn’t surprised. He argued that there was an enormous amount of cash and debt sloshing around the system, and, combined with uncertainty – about a whole range of things – it’s created a nasty recipe for market participants.
He went out of his way, however, to warn against being too nervous about the market and where it’s going.
He said, how would you feel now if you ‘bought the Australian share market’ in 2009 at the bottom of the market? The answer is pretty good, right?
The ASX200 bottomed out at 3,100 or so and is now trading at 4,980. Despite extraordinary volatility, many stocks have done quite well.
Yes you could have argued until you were blue in the face that the stimulus efforts of central banks around the world, and their money printing efforts, had left the market vulnerable to a huge crash or correction, but you would have missed out on large capital gains and one-in-a-generation boom in dividends.
The same applies to the property markets in Sydney and Melbourne. Both markets experienced double digit growth (12 per cent and 11 per cent respectively) in 2015 when talk of a “property bubble” was all over the media.
Indeed over a 10 year period the growth rates are around 5 – 6 per cent. What’s the saying? With risk comes reward.Well in this case it’s very true.
The majority of voices were saying the market’s over bought (including me), but when there’s momentum for money to be made, well, investors dive in. Now that’s not to say investing in property in 2015 was a wise investment. It wasn’t. It was, however, a lucrative one.
I’m fairly conservative when it comes to investing and it was obvious then (and still is now) that the Sydney and Melbourne property markets are around 20 per cent overvalued… but that doesn’t mean the market will crash.
The bottom line here is that you can hold a view that the market is due to crash for as long as you like, and you might be well-reasoned, but it doesn’t mean you’ll make money from your view.
Often holding the ‘investment moral high ground’ viewpoint leaves you with little other than some peace of mind, while others are riding an irrational market.
East versus west
I love hearing news about the “Sydney” and “Melbourne” property markets.
These markets – traditionally speaking – don’t actually exist.
Yes you can work out the “median” house price of both cities, and some other statistics, but the reality is that they’re not markets in of themselves. In fact Sydney and Melbourne are made up of several different markets.
SQM is a property research firm. It’s been crunching the numbers and has found something very interesting about Sydney’s housing market.
It seems that the wealthier parts of town, like the eastern suburbs, are doing much better than the less wealthy suburbs, like the south west.
Its data show Total Property Listings have risen significantly in Sydney’s south west since October, 2014. Conversely, listings in Sydney’s east, particularly in the last few months, have dropped off significantly.
“What this means is that Sydney's downturn seems to be most acute out in the South West right now,” SQM Research managing director Louis Christopher said.
He also notes that listings in Sydney’s south west are now as high as the “panic of 2008”.
So here’s the lowdown: despite the headlines, a property investment in Sydney’s south west doesn’t look like a good idea right now.
On the flip-side, Sydney’s wealthier suburbs, despite the already inflated prices, continue to look price-resilient.
It’s worth considering though whether what we’re seeing in Sydney’s west will ultimately translate to the eastern suburbs.
It’s possible that borrowers in the western suburbs are a little more sensitive to increased lending standards and slightly higher interest rates from the commercial banks.
So that begs the question: are we likely to get an official interest rate increase by the Reserve Bank of Australia any time soon? Because that will throw a spanner into the works for all markets: Sydney, Brisbane, Melbourne and everywhere else.
For my mind this is THE central theme in the property market debate. The property market has been hot largely because it’s cheap to borrow money. A continual stream of investors taking advantage of low rates helped to drive the market to new highs.
If the Reserve Bank were to start a tightening cycle, I suspect the property market would unwind very quickly. That’s simply not going to happen though. The economy just couldn’t take it.
So does that mean the market will just continue to rise? Not necessarily.
SQM Research have also found a huge glut of apartments in some capital cities (Brisbane happens to be one of the worst). Sydney has a glut of 40,000 apartments. That will put downward pressure on rents and I imagine it will flow through to investor sentiment as well.
So yes interest rates are still at record lows, and will likely stay that way for the remainder of this year, but tighter regulations and growth caps on credit for investors are slowing the market down.
Market correction in 2017?
It’s rare to be able to say this but I can report that every single economist, market analyst, real estate agent and investor I have spoken to over the past few months agree that Sydney’s property market will grow between 3 and 4 per cent in 2016.
The market drove up too hard and too fast in 2015 but there’s nothing to suggest there will be a significant downturn in prices.
The two main reasons given are that the unemployment rate is expected to remain low, and there’s little to no chance of an increase in borrowing costs (especially led by the Reserve Bank).
For the record
For the record, I wouldn’t be surprised if there was another major financial shock this year.
At the very least, there will likely be some sort of backlash to extremely low wages growth and the increased cost of living.
The imbalances in the ‘system’ are unusually strong at present (reflected in the huge gap between rich and poor). If this affects the prosperity of the Australian economy, the property market will likely be the first to go down the toilet.
However I just can’t see either the jobless rate increasing or interest rates rising (both would cripple real estate prices) independently of some of sort economic event.
In the meantime, property investment will likely return as much as cash in the short term, but with A LOT more effort from the investor!
David Taylor is a journalist with the ABC. Before taking up a position with the ABC, David was a financial markets analyst and economics commentator. You can follow him on Twitter: @DavidTaylorABC.