Is Sydney’s property market in bubble territory? Lessons from September 2007 and the unimportance of interest rates

October 8th, 2010

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Driven by sustained auction clearance rates in September 2013 over 80%, property chatter this month has largely and again been about the existence or otherwise of a bubble forming in Sydney’s property market.

We thought we would approach the topic from a different angle by comparing and contrasting, from the perspective of a buyers agency, the conditions buyers created in September 2013 with those in September 2007; being a month occurring during a period that last and most closely resembled bubble like conditions just before the dark clouds of the GFC appeared on the horizon.

In an effort to achieve a like for like comparison and in recognition of the likelihood of there being many more investors in 2013 buying in the sub $1.5 million brackets than there werein 2007, we have confined the analysis to the bracket above $1.5 million.

As it was in 2007, so it is in 2013 that this bracket is one dominated not by investors but by buyers of second hand stock who are trading up in the world.

There are some interesting trends but none consistent with a bubble about to burst in this bracket.

The view from the coalface at and above $1.5 million

This anecdotal evidence is easiest understood in table form with the critical points of difference in bold

Market Factor September 2007 September 2013
Availability of quality housing stock Extremely tight throughout the entire Sydney property market No different; perhaps even worse than September 2007
Availability of credit Profligate with loan to value ratios exceeding 90% common Easier than reported in the mainstream press especially to those buyers with more than 20% equity. Loan to value ratios above 80% uncommon
The movers and shakers Investment bankers with mega bonuses Entrepreneurs and mixed professionals
Buyers’ appetite for debt Equal to lenders’ profligacy Aversion with savings ratios increasing and most owner occupiers consistently having finance pre approvals for loans far higher than the amounts they are prepared to borrow
Prevailing animal spirits ‘The only way is up baby!’ ‘It’s been over five years since the GFC, but are we really out of the woods?’
Mood in the auction rooms Intensely competitive and often ‘win at all costs’. Likened to a bushfire, buyers in search of quality stock often razed everything in their path Competitive but seldom exceeding carefully considered pre determined limits. Likened to a bushfire, buyers in search of quality stock are in a controlled burn which only occasionally leaps across the highway
Appetite for lifestyle or second homes Strong Anaemic – see statistics below for the northern beaches
Price Rises Often high leading to capital losses being incurred by the last quarter 2007 buyers seeking to sell in the current market Modest
Reserve Bank Cash Rate 6.5% 2.5%
Impact of interest rates Apparently negligible with the Reserve Bank Cash Rate at its highest level since 6 November 1996 and the interest rate cycle tightening after four successive 0.25% increases since 3 May 2006 Apparently negligible with the Reserve Bank Cash Rate at its lowest level ever and the interest rate cycle easing after seven successive 0.25% decreases since 1 November 2011 and a 0.5% decrease on 1 May 2012

How does the anecdotal evidence compare to the statistics?

As the next table in relation to purchases over $1.5 million shows, with the exception of the inner west, there is a strong and consistent correlation between the two types of evidence.

Region Number of September 2007 purchases Number of September 2013 purchases Total value purchased in September 2007 $million (rounded) Total value purchased in September 2013 $million (rounded)
City and Eastern Suburbs 98 41 309 100
Inner West 21 21 40 40
Lower North Shore 90 30 260 65
Upper North Shore 58 30 130 54
South 23 15 54 39
Northern Beaches 40 16 118 33

Source: Australia Property Monitors

Lessons about Sydney property buyers above $1.5 million in all main regions except it seems, the inner west

  • such buyers seem generally unfazed by the prevailing level of interest rates whether these rates are at historically high levels as they were in September 2007 or low levels as they were in September 2013
  • of greater significance  are the confidence sapping animal spirits especially those which cause buyers to be debt averse
  • future price rises in this bracket are likely to stay contained until the prevailing animal spirits mentioned in the table above change and memories of the GFC fade, at which time, given the cyclical nature of things, often after 10 years in the property market (CurtiseCall September 2011), the bushfire will inevitably again leap across the highway.