Will The Property Boom Last?
Sydney’s property market is in the midst of an extraordinary boom.
The median property price shot up 3.7% over March 2021 and 6.7% for the first quarter of the year, according to CoreLogic.
What’s more, many commentators believe this is just the beginning. ANZ Bank expects Sydney property prices to lift by as much as 17% this year, while CBA and Westpac are both forecasting rises of around 10%.
Here in the eastern suburbs, we’re right at the epicentre of Sydney’s hot property market.
According to the Wentworth Courier, our local auction clearance rate hit 93% in early March. We’ve never seen figures like this before.
Seventy per cent is usually considered a seller’s market and even in the previous boom market of 2017, we were only recording auction clearance rates of around 80-95%.
In other words, today’s property market is an outlier, even for booms.
The big question is whether current conditions can last. (Spoiler alert: they won’t, at least not forever). And, if not, how and when they will end.
Here are five factors we think could determine if and when the property boom finishes.
1. Lower immigration
Traditionally, one of the key factors in Sydney’s growing property prices has been a growing population. Twenty-one years ago, when we hosted the Olympics, Sydney was a city of 4.085 million; by 2016, it had grown to 5.029 million. Today, estimates have it as high as 5.32 million. Every one of those 1.3 million or so new residents has needed somewhere to live.
What’s interesting about the current property boom is that it’s taking place at a time when immigration has stalled. Again, that makes these conditions different to most others.
What we have noticed though, is an incredible number of expats returning from overseas and looking to secure property here in Sydney – potentially filling the void other new arrivals have left. We’ve also noticed that more people are looking to upgrade their home or get on the property ladder for the first time. These are the real groups driving today’s property market.
In the long term, however, as these buyers find somewhere to live, lower immigration should mean less pressure on house prices, which could eventually cause the market to lose momentum.
2. An economic shock
People tend to upgrade their home or get onto the property ladder for the first time when they’re optimistic about the economy. Right now, unemployment is low, GDP growth is strong and consumer confidence is high. But, as we all know, that can change rapidly.
What would happen, for instance, if there was another lockdown, or the vaccine rollout never took off, or the trade restrictions imposed against Australia started to bite?
3. An interest rate rise
The link between interest rates and property prices is well established: the lower the interest rate, the lower the loan repayments and the more someone can afford. And interest rates have never been lower than right now.
While the Reserve Bank has said that it won’t lift rates again until wages grow, a rapidly rising property market may force its hand. If that happens, the boom could be over.
4. Lending policy
It isn’t only interest rates that affect buyers, it’s also the amount lenders are willing to let them borrow. The 2017 boom came to an end when APRA decided banks’ lending practices – especially around interest-only loans – were posing a risk to financial stability. This forced the banks to introduce tougher lending requirements and a lot of people had their borrowing power curtailed. At the start of 2019, those restrictions were eased.
At the moment, APRA says that rising prices are no threat to financial stability and that it has no mandate to specifically target house prices. But if that changes, it could step in and force the banks to toughen their lending criteria once again
5. Housing supply
As we often say, the property market always comes down to supply and demand. And, while each of the factors above targets the demand side of the equation, there is always the chance that something could happen to supply. Where this is most likely is in the apartment market. After all, fewer people are arriving in Sydney, more people are looking to upsize into homes, and property developments continue.
We’ve already seen something of a decoupling of apartment and house prices, with the median Sydney house price rising 8.2% over the April quarter while apartments rose 3.2%, according to CoreLogic.
If the apartment market heads south, this could theoretically drag down all property.
The case for Sydney property continuing to rise
Property booms always end and one day this boom will end too. However, our view is that it still has a way to go yet. There is simply too much demand in the market right now compared to the amount of property coming up for sale.
We think a more likely scenario is for property prices to continue to grow over 2021. So people holding off, waiting for the heat to come out, may have to wait for some time – and may also find themselves in a worse position than if they’d bought today.
It’s also worth remembering that Sydney property has almost always been a solid long-term investment, especially in established suburbs such as here in the eastern suburbs. Even if prices do eventually start to come back a little, or flatten out, they’re likely to go up again.
If you’d like advice on buying or selling in today’s market, get in touch.