Are Sydney Real Estate Prices Really Out Of Control?

Over 2021, Sydney’s Eastern Suburbs experienced a record property boom but should we really be worried about runaway prices?

By any measure, 2021 has a stand out year for Sydney property prices. In the 10 months to the end of October 2021, the median Sydney dwelling price lifted 23.8%, according to CoreLogic. The median Sydney house price rising 27.8% and the median unit price rising 14.5%.

But where does current price growth sit compared to the longer-term average? And are prices really as out of control as many in the media would have us believe?

Comparing to the long term average

This year’s growth has been nothing short of incredible, and the Eastern Suburbs has performed even more strongly than the general Sydney market. Data showed that, in the year to September 2021, the eastern suburbs was one of the best performing regions in the entire country, with the median dwelling price rising 25.8% to $1,728,832. That also, incidentally, was the highest median dwelling value of any region in the country.

The same figures showed that property prices in Sydney’s Eastern Suburbs have risen by a rate of 8.1% over the past 10 years. However, over the past five years, that rate of growth has slowed to 6.2%.

In other words, despite the current booming market, prices have actually risen at a slower rate over the past five years than they have over the longer term.

That’s largely because these price gains come on the back of a few sluggish - or even relatively poor - years for the Sydney property market. Here is how the past four years break down for the Sydney market more generally.

In fact, you need to go as far back as 2016 to find the last year that Sydney property price growth exceeded the long term Eastern Suburbs average. In those 12 months, the median Sydney dwelling price lifted 19.2%.

Price growth not linear

What this firstly shows is that real estate values don’t grow in a linear fashion. Property prices tend to grow sustainably most of the time and then have periods of rapid price gains, like the one we’ve been going through this year. As the figures show, this hasn’t happened for the past five years.

Interestingly, CoreLogic data also shows that Sydney property prices grew 11.5% over 2015, 12.4% over 2014 and 14.5% over 2013. When taken together, that was a much longer and more sustained period of growth than this one. Although, that came on the back of another period of falling prices.

Perhaps, then, this means the Sydney market has only been playing catch up over 2021 and that, once it has done so, prices will stabilise again? After all, while there are still many buyers in the market, over the past month or so we’ve been noticing less frantic activity, more stock and a more generally relaxed feeling.

This is reflected in the Sydney-wide auction clearance rate, which fell from a peak of over 90% early 2021 to around 70% by late November.

That’s still a reasonable figure - and close to the average - so it’s the kind of clearance rate that reflects a market growing sustainably rather than one rocketing off the charts.

Part of a bigger trend

Another factor worth noting is that Sydney’s recent price growth hasn’t happened in isolation. It’s part of both a national and a global trend. As strong as the Sydney market has been this year, it’s actually the Hobart market that has performed best of all capital cities - growing at 25.4% over the year-to-date, according to CoreLogic.

There have been exceptionally strong gains in overseas property markets too. For instance, real estate values across the whole of New Zealand rose 31% in the year to June 2021. Prices in the United States grew 17.1% over the same period.

We believe these gains generally reflect the fact that people around the world are willing to invest more in their property post-pandemic than they were previously. That’s most likely the result of a number of factors, including being forced to spend more time at home, as well as decreased discretionary spending on things such as entertainment and travel.

The link between property prices and interest rates

That said, as we’ve argued many times before, outside of the prestige market, the single most important factor affecting property prices is interest rates. Over the pandemic, these have been at record lows.

This has given people the capacity to borrow more - and that’s exactly what they’re doing. Across NSW, the average new loan commitment has grown to a record high of $750,000, ABS data shows. In Sydney, it’s likely to be closer to $1million.

If a $1 million mortgage sounds a lot, it pays to consider that, at the current average new interest rate of 2.32% it equates to $3,853 a month on a 30-year principal and interest loan. If interest rates were at their long term average of around 7%, monthly payments on the same $1 million would be $6,653 a month. To have repayments a similar size as today’s million-dollar loan when interest rates are &%, a borrower could only take out a mortgage for around $570,000.

So, when expressed as a percentage of monthly expenses, property values probably haven’t really changed that much at all.

In short…

While 2021 has been a year of groundbreaking growth in the Sydney property market, it always pays to put that growth into perspective. That means looking at the wider economic data and the global patterns and most importantly, taking a long-term view.

Want more?

If you’re thinking about buying or selling in Sydney’s Eastern Suburbs contact my team today.

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