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Know Your Market: Sydney Hot, Others Not
  • Headlines concerning soaring property prices in Sydney are now almost a daily occurrence. However all this focus on Sydney and a potential ‘bubble’ is masking the lacklustre movement in other property markets around the country. Simply put, Sydney is not Australia and local economic factors are playing a more significant role than changes in interest rates. So what has been happening around the country?

 

Overvalued, Undervalued

  • The latest data from RPData indicates that the house price index rose slightly in all capital cities in March (1.4%), and over the quarter dwelling prices increased by 3%. After many months of apparent rampant growth, this constituted the lowest point since September 2013 which would suggest that the housing market is finally moderating.

 

 

  • However these numbers should be taken with a grain of salt as they are inevitably inflated by the Sydney market which has increased by 13.9% over the past year, well beyond even Melbourne (5.6%), while the rest of the country has either dipped into negative or is simply cruising on stable (Brisbane 2.7%, Adelaide 2.2%, Canberra 1.5%, Perth -0.1%, Hobart -0.3% and Darwin -0.8%).
  • Indeed, after such a flurry in the Sydney market the median price for a house has reached a whopping $781,600, while the median price in Hobart is less than half at $340,000. This is the result of successive increases in house values in Sydney for the last ten years, but especially in the last year when cheap credit, negative gearing and SMSF’s created a seemingly unquenchable demand for property in Sydney, but not in other markets.
  • SQM Research believes that the Sydney property market is now overvalued by 25% and predicts that by the end of the year it will be overvalued by 40%. This will be the second highest overvaluation SQM Research has ever recorded, with the highest in 2003 when the market was overvalued by 55%. As the graph below clearly shows, this overvaluation eventually led to a (negative) re-adjustment.

 

 

Where is the Action?

  • Transaction volumes across the country were recorded at slightly higher levels than they were a year ago (0.5%). This increase is attributed to the sale of houses (3%) and has been brought down by unit numbers (-5.3%). Again, these changes were differentiated across the states. Interestingly, NSW suffered a slight decline (-1.5%), while SA (5.0%), VIC (4.8%), NT (3.7%), QLD (3.6%) and TAS (0.1%) experienced increases. WA (-10.6%) and ACT (-5.4%) suffered from quite considerable declines but an explanation for this requires little thought beyond iron ore prices and public sector ‘consolidation’, respectively.

 

 

  • Auction volumes have soared since the RBA’s decision to cut interest rates. With credit now at such a cheap rate, auction clearance rates have also witnessed sharp increases. In fact they are at their highest level since 2009. However Sydney and Melbourne are the main contributors to this increase with other markets not faring nearly as well. For example last weekend, Brisbane reached 54% while Sydney sat comfortably high at 87%.

 

 

It all depends on timing

  • Across the country new and total property listings are trending lower, and are lower than they were a year ago. As the table below shows, most new listings are coming from NSW, followed by VIC, and QLD. However overall, new listings are down by -10.4%. Interestingly, for the capital cities this decline is even more significant: Sydney saw a decline in new listings by -20.9%, Melbourne by -16.5% and Hobart by -13%, with Perth (17.3%), Canberra (22.7%) and Darwin (33.1%) witnessing significant increases. This stark differentiation between cities is evidently related to local economic factors vs interest rates which are the same in all regions.

 

 

Context matters

  • National dwelling approvals remain at unprecedentedly high levels, despite a slight decline in March. RPData predicts that if building approvals continue to remain high and population growth continues to moderate, we may see a better relationship develop between supply and demand over the coming years. However this is not necessarily guaranteed as the location of construction is obviously important. For example, it is probably not the best idea to start building in Perth or Canberra, but new housing in the Sydney region would help to ease some pressure in the lower end of the market.

 

 

Conclusion

  • The Australian property market is differentiated geographically. This is a simple though important fact. While Sydney remains hot on the back of the RBAs interest rate cut and is expected, at least in the short term, to hold this growth; other markets like Perth and Canberra continue to be affected by varying local economic factors which have hampered dwelling values, transaction levels and inflated listings. As the RBA continues to ponder another interest rate cut, our advice is simple: before anything else, know your market.

This update does not constitute financial advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek professional advice before acting or relying on any of the content.

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