Sydney property all froth and bubble – we just don’t buy it.

If confirmation of mainstream media’s interest in turbo charging Sydney’s residential property market were needed, property buyers needed to look no further in the past six weeks than the most recent front pages of the Murdoch owned community newspapers.
Published on 16 September 2014 and in a tactic clearly revealing a central editorial theme, all of the following samples ranked between the first and fourth headlines:

• Southern Courier: “Malabar home sells for millions: A Malabar home has sold for an astounding price, well above the suburbs median house price of $1.275 million”…
• Manly Daily: “Huge buyer demand sets the Forest on fire: A three bedroom house in Frenchs Forest, on a large but mostly unusable block of land, sold for $1.3 million after seven parties competed for the property”…
• Inner West Courier: “Would you pay $2 m for this? The roof is caving in, the windows are smashed and there are holes in the floor but the harbour views apparently make this shack worth about $2 million…
• Hills Shire Times: “McMansions turns Castle Hill into millionaire’s row: An abundance of McMansions combined with new business and transport links mean property values in Sydney’s fastest-growing suburbs are going through the roof”…

Objective and useful market commentary justifying near daily worldwide commentary on the existence or otherwise of a Sydney wide property bubble?

Or just sensational headlines yet again designed to line the pockets of publishers and their selling agent sponsors?

In deciding, we invite you to contrast these notional headlines based upon evidence we have gathered from the coalface over the same period:

• ” Vendor cops $120,000 in the neck at North Bondi: 26 Hardy Street, North Bondi which was purchased on 16 February 2011 for $1.92 million sold on 16 August 2014 for $1.8 million”
  
• ” Glebe property fails to keep up with inflation in the past three years:Rare offering at 6/447 Glebe Point Road, Glebe sold on 5 September 2014 for $952,000 which added up to a less than 1% per annum capital gain on the $925,000 paid at auction for the comparable 3/447 Glebe Point Road, Glebe on 15 October 2011″
  
• “Still no sale in Queens Park: Withdrawn from its 6 September 2014 auction, 70 Rawson Avenue, Queens Park is still on the market with a $1.8 million price tag – even at that price, not much left after stamp duty on the $1.65 million paid half a decade ago nearly to the day”.

Central to the actual headlines has been a drum beat over the past six weeks about allegedly rampant auction clearance rates.

Just how rampant?

A comparison between the clearance rates published by the Fairfax’s Australian Property Monitors in the past six weeks and those published for the same six weeks last year reveals a picture more consistent with our notional rather than such actual headlines:

Reinforcing the obvious is the fact that the week which produced the largest differential (5%) coincided with the usually disruptive Federal election.

What is the truth?

There is no doubt that:

• no matter which metric is used, Sydney real estate is expensive per se and by world standards
• the weight of right minded analysis nevertheless and with good reason overwhelmingly favours the view that there is no property bubble
• there is a  growing number of suburbs where the median house price has exceeded $1 million (for what use as an economic indicator that might be)
• local demand is being fuelled not by owner occupiers but by investors; many of whom are refugees from the equities and bond markets seeking to take advantage of historically low interest rates quarantined by the Aussie dollar’s gravity defying exchange rate.

Conversely, there is also no doubt that:

• regardless of the hype, buyer confidence is generally fragile
• many would be buyers, deterred by that hype, are biding their time in the belief that the market is too hot and a correction inevitable
• Chinese demand for Australian coal and iron ore, historically the epicentre of local economic prosperity, is rapidly slowing and looks like staying that way
• commodity prices are falling
• a renewed economic crisis is looming in Europe and
• local housing affordability is at a tipping point with a generation of first home buyers being squeezed out of the more popular inner suburbs.

The NAB’s Australian Markets Weekly 15 September 2014 edition attempts to deal with some of these truths in the following passages (the parts most relevant to this article being emphasised in bold):

“Business and consumers are in different head spaces. Last week the NAB Survey showed that despite a small pull-back in August, business confidence remains towards the upper end of its past three year range. On the other side, last week’s Westpac/MI survey saw consumer sentiment fall towards the low end of the past five year range. 

Business and consumer confidence are normally closely correlated – the historic causality perhaps being that when consumers were confident and spending, business was also happy.

Currently we are seeing one of the largest deviations between the two measures in nearly two decades. What’s going on? There are many factors at play but a key one we expect is what’s happening to wages and household incomes – not much at all. 

From a business perspective first, a feature of recent NAB Survey’s has been that firms’ profitability has improved to above average levels yet their employment plans remain below average. Labour costs are also contained. It’s not quite a “jobless recovery” as jobs growth has improved over the past six months – although not as much as last week’s farcical labour force report would suggest. Nonetheless, it’s fair to conclude that businesses remain focused on efficiency and productivity. 

The theme of a “bottom line” led profitability drive is not peculiar to Australia. In recent years large United States companies have posted record profits again the backdrop of modest employment and very weak wages growth. The better recent news is that US growth looks to be transitioning – jobs growth, capital expenditures, and wages are all picking up.  

Back to Australia where wages grew 2.6% [year on year] to June 2014, the slowest rate of growth in the near two decades of the ABS wages series. The result of moderate growth in jobs and wages, and CPI inflation still being near 3%, is that there has been virtually no growth in real household disposable incomes over the past two years.

To find income growth as consistently weak as it is now you need to go back to the early 1990’s recession. 

Probably adding further to household fragility was the Federal Budget which spoke the harsh fiscal truths about the limited ability of Government to keep funding welfare/pensions/education etc. at current levels into the future. Shouldn’t the rise in house and share prices be boosting consumer confidence? Normally yes and it still might be. It might also be that for some rising house prices are becoming a new source of concern rather than joy. If you don’t own one (and even for parents who do own one their children may not) the dream of owning your own home is increasingly out of reach for some.

Whatever the causes, households are fragile. The Westpac/MI survey tells us people are especially worried about their longer term financial security…

Practically, for now consumption and retail sales is being held up by currently rapid population growth and the residential building surge. Many households are fragile though and the rational ones will respond by saving more and spending less”.    

On the question of Government induced fragility, we would add the ICAC hearings in the past three months so far claiming 12 conservative New South Wales scalps for corruption, a Royal Commission exposing Union corruption and a budget stymied Commonwealth whose funds starved CSIRO scientists sweep their floors and stack shelves whilst it prepares for another forlorn war in the middle east.

As to the European crisis which had a serious effect on local property sentiment before Mario Draghi’s now famous  “whatever it takes” remark (see: CurtiseCall December 2011), the 30 August 2014 edition of The Economist contains a very down beat assessment of the Euro’s prospects.

Describing the recent recovery as an “illusion”, the article continued:

“[w]hat started more than four years ago as a banking and sovereign-debt crisis has decayed into a growth crisis that is now enveloping the three biggest economies. Germany is teetering on the edge of recession. France is mired in stagnation. Italy’s GDP is barely above its level when the single currency came in 15 years ago…The euro crisis has not gone away; it is just waiting over the horizon”.

Explaining the current market

In our view, the apparent buoyancy in some sectors of the Sydney residential property market is largely a function of stock, especially of decent quality, being in short supply.

The following and refreshingly frank comment published on 10 September 2014 by a prominent selling agent on the lower north shore echoes a sentiment Curtis Associates, buyers’ agents, hears from many other selling agents throughout the greater Sydney metropolitan area:

“Dissecting our local market closely, there are some interesting facts worth considering. At the time of writing this newsletter there are 72 houses (not apartments) for sale in Mosman out of a total of 4746 houses in Mosman, (Source: Mosman Council) which as a percentage of availability is very low. This is mirrored across neighbouring suburbs Neutral Bay and Cremorne. From that you can remove another 20% of what is on the market as they are either overpriced or simply not saleable in the eyes of the buyers, highlighting further tight conditions.

Feedback from the buyers is they’re frustrated and finding it hard to get motivated especially with the low levels of quality property coming online”.

Those agents conclude by urging that help is on the way and we agree.

A correction is more likely than not

Early anecdotal indications are that a large volume of housing stock is starting and will continue to hit the market.

If that becomes a sustained trend throughout the forthcoming spring, we expect prices to come under downwards pressure.

This, together with the underlying fragility discussed above, inevitably means that Sydney’s property market is relatively vulnerable to a variety of shocks.

Whilst prices are very unlikely to crash, we will not be surprised to see conditions swing in favour of the buyer rather than seller over the next one to two quarters.

And as to SQM’s recently published prediction that Sydney is expected to continue the dream run with the report predicting growth of 15-20% for 2014 and 8-12% in 2015…

Sorry, Mr Christopher, we just don’t buy it (pun intended).

As property buyers move into spring:

Given that anecdotes such as those underlying our notional headlines above can and do exist even in a hyped market such as the present, it is also prudent to keep in mind these  remarks published in Property Review Australia on 9 September 2014 by Australian Property Institute (Vic) President Aldo Galante:

Cautioning generally that when analysing sales and rental evidence, it is erroneous to view a residential property market as being homogenous, Mr Galante became more specific:

“In reality, the market is comprised of literally thousands of sub-markets. That is not say, that at a high level and long term, trends cannot be distilled from the wider market, and statements such as ‘broadly speaking house prices went up/down’ are acceptable. However, with no two properties being exactly the same, any broad assumptions or analysis will increase buyer risk. Micro market characteristics and value drivers can be more easily masked or diluted in the case of property than when trading a common bond or share in a listed company.”