I have been observing the Sydney market for a while now and it seems to me that the situation is much bleaker than that being reported (which is already fairly negative). As I have commented previously in these Columns, I wonder whether the "Experts" actually ever go out and talk to Agents or visit Auctions because if they did I think they would see that things are much worse than their computer generated statistics indicate.
Average price rises or falls in Sydney or Melbourne disguise the reality of different sectors of very different markets. Aside from the distinct house and apartment markets, there are of course sub-markets within them including the off the plan foreign investor market, the "A Class" market (i.e. where people really want to live due to good Schools or proximity to work), the "B Class" market (i.e. those where people really did not want to live but bought, often in desperation and frustration because of being priced out everywhere else) and C, D etc. Mixing them all together gives a distorted picture.
Unless a property is one that really ticks all the boxes: (1) Auctions are being very poorly attended (by genuine bidders) and there is often only one or two bidders (2) Foreign investor activity has dropped to a trickle (3) Prices in a lot of the A Class areas have come down a lot more than the reported 5% over the past year. Prices have fallen 10% or even more depending on the property and area compared to the days in 2016 and early 2017 when prices were pumped up an extra 5% just due to the craziness at the Auctions. If you do not believe me, then ask your local Agent or better still try to get a loan based on a value that is only 5% less than last year - in most cases you will not - you will be lucky to get a loan valuation even 20% less than last year in the areas that had increased the most.
This is probably only the start of the downturn because wages are going nowhere and interest rates trending slowly upwards. The downturn will likely accelerate in Spring and Summer as more properties come onto the market and interest rates start to rise independently of RBA decisions due to increased funding costs. In addition, the uncertainty as to whether there will be a Labor Government (with the accompanying restrictions on negative gearing) means that unless you really have to buy ........ you should not. Most industry players I speak to quietly expect prices to come back another 5% or more before the year end and for the downward slide to continue until at least end of next year. Prices will fall until reaching equilibrium with loan values and wages. Expect larger numbers of properties for sale and longer times to sell.
I don't say all this with pleasure as I think a lot of people are going to be in pain by year end and I am a property owner myself. The pain will not only be due to the falls in the property market, but also due to a whole lot of other factors including the struggling retail environment. The drop in activity in the property market alone will see a lot of people associated with the property industry out of a job (or on reduced remuneration). Just take a look at the share price of McGrath and you can bet that company will not be on a hiring spree!
As a retired banker I always like to admit (reluctantly!) that I have been wrong in the past and that I might be wrong this time as things often turn out differently to what I expect. Who knows, maybe Malcolm Turnbull will suddenly take the bull by the horns and give us sudden economic growth and wages growth. I personally think that is about as likely as Bill Shorten handing back his Union membership but crazier things have happened.
I worry for our young people and advise my own adult kids (who are about as interested in my advice as anyone reading this is likely to be) that unless you have a very secure job or substantial assets, this is no time to be buying property. The only reason property may appear cheap now is because of how far it has inflated on the back of historically low interest rates. If wages are not growing then banks will continue to restrict lending and prices are unlikely to rise. Now that the Banks are valuing more conservatively, it is inevitable prices will in fact continue to fall unless we import a whole lot of immigrants with suitcases full of cash! On the subject of immigration, I believe the anti-immigration voices will only grow louder and the Chinese in particular are currently feeling "unloved" by Australia right now - without any prospect of capital gains in the near future they will turn their attention elsewhere. We will also find less "students" coming here given the general anti-immigrant environment.
For those who talk about demand and supply or about the limited impact of historical downturns I don't buy it. When Banks reduce lending and interest rates start rising then property can only go one way. Unfortunately, we are finally going to pay for years of poor Government and RBA policy.
If wages were rising, the prospect would be different, but in most sectors the trend to part time work and outsourcing will restrict wage growth. The job cuts we have seen at Telstra are indicative in my view of the excess fat at many of our large lazy companies. Department stores and other retail chains seem to be rudderless and ill equipped to deal with the Amazons of this world and our big Banks will be next to retrench because they are bloated dinosaurs and face reduced profitability and new online competitors - every time I walk into a Bank branch I wonder how long it will survive as most people do all their banking online and technology will finally make the trip to the Bank redundant. So any recent good news you may have read about lower unemployment or higher GDP is in my view likely temporary at best.
If you are really desperate to buy, this purveyor of unwanted advice suggests you make sure you are buying in a good street in a good suburb where the downside risk will be limited. It is not a good time to be buying an average home in an average street and I would definitely stay away from one or two bedroom apartments unless they offer something very special. Many one and two bedroom apartments all over Sydney could well be on fire sale in 2019 and 2020 as foreign investors withdraw or fail to obtain finance. That may well be a once in a lifetime opportunity to buy a cheap apartment, but we are not there yet.
I think eventually you are right and the market will continue on its way upwards. The only question is how far it will fall. When sentiment is so negative there is less urgency to buy on the part of locals and new immigrants. Also, it is less easy to get money out of China and local banks are tightening so the effect of immigration on house prices over the next few years is questionable. Many will come and rent a small high rise apartment with their families until the market turns. Just go to an Auction anywhere in Sydney - new immigrants are nowhere to be seen. Without easy outflow of money from China and with the devaluation of the Yuan, I think you will find that with the exception of a few very wealthy who are not as sensitive to market fluctuations, most immigrants are not as cashed up as they may have been. Remember that even in Hong Kong (which had a huge excess of demand over supply at the time) the market nearly halved some years back. Of course it eventually came back stronger, but when sentiment changes in a bubble environment (as I believe this have became) no-one is spared. I could mention other factors too, such as the increasing number of young people and families leaving the big cities, the absentee landlords who live overseas and will likely sell and take their gains and the baby boomers who will sell to cash in and fund their retirement, but for the next 2 or 3 years prices are unlikely to move up and I still believe will drop significantly. As I said, I may be wrong :)
I have been observing the Sydney market for a while now and it seems to me that the situation is much bleaker than that being reported (which is already fairly negative). As I have commented previously in these Columns, I wonder whether the "Experts" actually ever go out and talk to Agents or visit Auctions because if they did I think they would see that things are much worse than their computer generated statistics indicate.
Average price rises or falls in Sydney or Melbourne disguise the reality of different sectors of very different markets. Aside from the distinct house and apartment markets, there are of course sub-markets within them including the off the plan foreign investor market, the "A Class" market (i.e. where people really want to live due to good Schools or proximity to work), the "B Class" market (i.e. those where people really did not want to live but bought, often in desperation and frustration because of being priced out everywhere else) and C, D etc. Mixing them all together gives a distorted picture.
Unless a property is one that really ticks all the boxes: (1) Auctions are being very poorly attended (by genuine bidders) and there is often only one or two bidders (2) Foreign investor activity has dropped to a trickle (3) Prices in a lot of the A Class areas have come down a lot more than the reported 5% over the past year. Prices have fallen 10% or even more depending on the property and area compared to the days in 2016 and early 2017 when prices were pumped up an extra 5% just due to the craziness at the Auctions. If you do not believe me, then ask your local Agent or better still try to get a loan based on a value that is only 5% less than last year - in most cases you will not - you will be lucky to get a loan valuation even 20% less than last year in the areas that had increased the most.
This is probably only the start of the downturn because wages are going nowhere and interest rates trending slowly upwards. The downturn will likely accelerate in Spring and Summer as more properties come onto the market and interest rates start to rise independently of RBA decisions due to increased funding costs. In addition, the uncertainty as to whether there will be a Labor Government (with the accompanying restrictions on negative gearing) means that unless you really have to buy ........ you should not. Most industry players I speak to quietly expect prices to come back another 5% or more before the year end and for the downward slide to continue until at least end of next year. Prices will fall until reaching equilibrium with loan values and wages. Expect larger numbers of properties for sale and longer times to sell.
I don't say all this with pleasure as I think a lot of people are going to be in pain by year end and I am a property owner myself. The pain will not only be due to the falls in the property market, but also due to a whole lot of other factors including the struggling retail environment. The drop in activity in the property market alone will see a lot of people associated with the property industry out of a job (or on reduced remuneration). Just take a look at the share price of McGrath and you can bet that company will not be on a hiring spree!
As a retired banker I always like to admit (reluctantly!) that I have been wrong in the past and that I might be wrong this time as things often turn out differently to what I expect. Who knows, maybe Malcolm Turnbull will suddenly take the bull by the horns and give us sudden economic growth and wages growth. I personally think that is about as likely as Bill Shorten handing back his Union membership but crazier things have happened.
I worry for our young people and advise my own adult kids (who are about as interested in my advice as anyone reading this is likely to be) that unless you have a very secure job or substantial assets, this is no time to be buying property. The only reason property may appear cheap now is because of how far it has inflated on the back of historically low interest rates. If wages are not growing then banks will continue to restrict lending and prices are unlikely to rise. Now that the Banks are valuing more conservatively, it is inevitable prices will in fact continue to fall unless we import a whole lot of immigrants with suitcases full of cash! On the subject of immigration, I believe the anti-immigration voices will only grow louder and the Chinese in particular are currently feeling "unloved" by Australia right now - without any prospect of capital gains in the near future they will turn their attention elsewhere. We will also find less "students" coming here given the general anti-immigrant environment.
For those who talk about demand and supply or about the limited impact of historical downturns I don't buy it. When Banks reduce lending and interest rates start rising then property can only go one way. Unfortunately, we are finally going to pay for years of poor Government and RBA policy.
If wages were rising, the prospect would be different, but in most sectors the trend to part time work and outsourcing will restrict wage growth. The job cuts we have seen at Telstra are indicative in my view of the excess fat at many of our large lazy companies. Department stores and other retail chains seem to be rudderless and ill equipped to deal with the Amazons of this world and our big Banks will be next to retrench because they are bloated dinosaurs and face reduced profitability and new online competitors - every time I walk into a Bank branch I wonder how long it will survive as most people do all their banking online and technology will finally make the trip to the Bank redundant. So any recent good news you may have read about lower unemployment or higher GDP is in my view likely temporary at best.
If you are really desperate to buy, this purveyor of unwanted advice suggests you make sure you are buying in a good street in a good suburb where the downside risk will be limited. It is not a good time to be buying an average home in an average street and I would definitely stay away from one or two bedroom apartments unless they offer something very special. Many one and two bedroom apartments all over Sydney could well be on fire sale in 2019 and 2020 as foreign investors withdraw or fail to obtain finance. That may well be a once in a lifetime opportunity to buy a cheap apartment, but we are not there yet.
Of course, as I said I might be wrong.