Optimism has certainly returned to the Sydney property market. However, is this a sustained recovery or a “dead-cat-bounce” as a recent SMH article suggests.
From the coal face, I can tell you that the improvement in sentiment and the increase in prices is real, and probably more substantial than recent data suggests.
However, to determine whether this is a sustainable improvement or just a pause on a further leg down, we need to dig a bit deeper.
What is the data saying?
Sydney has recorded positive property price growth for two months in a row after two years of continuous price falls. Sydney median house prices rose 0.2% in both June and July.
Of course, “medians” can be very misleading. Good properties in inner and middle ring suburbs are now selling well over reserve, with resurgent buyer demand chasing a far lower level of available stock.
Compared to this time last year, the number of new listings in Sydney is down by 30% (and last year was 20% lower than the year before).
The lack of volume is making it harder to put our finger on market trends. The only data point that gives me doubts about a sustained rise in property values, is that rents are still falling, suggesting excess supply.
Anecdotally, prices are moving higher more quickly than the data suggests.
Auction Clearance Rates are Higher
Higher auction clearance rates can be a leading indicator for higher prices in the future.
Auction clearance rates since the election have hovered around 75% and compare to about 55% a year ago. If clearance rates are the “canary in the coal mine” for price moves – we can see in the chart below a definite correlation, suggesting that the next move in prices is higher – much higher.
Will interest rate cuts make a difference?
I have heard people say that lower interest rates will not make a difference to higher house prices. “Diminishing marginal returns” they argue.
However, in real estate, lower interest rates always make a difference.
Some reasons why rate cuts help leveraged assets, is because they become easier to hold, and easier to repay.
However, from an investor perspective, think of the interest rate as the “hurdle rate”. It is the rate at which investments change from being cash flow positive to cash flow negative? So, every time rates are cut, you can buy a more expensive property without it affecting your cash flow. And it means investments that previously didn’t make sense, now make sense – ie they clear the “hurdle”. Lower interest rates almost always push property prices higher – this is by design.
Prices always go up and down, but I am convinced that prices for most Sydney properties bottomed in the first half of 2019.
Part of this has been due to investor optimism after the election. And another part is that policy makers are forcing prices higher via interest rate cuts.
The decline in property prices over the past two years, lead to all sorts of distortions that are yet to play out, including a significant decline in the number of new dwellings approved to be built.
And ultimately governments and banks need higher property prices for higher tax receipts and higher loan valuations respectively.
Real estate goes up or sideways 80% of the time. Which means you don’t need to over-think things to understand that well-chosen real estate is a relatively safe place to be right now.
If you need help finding that one in a million deals, please contact me at firstname.lastname@example.org
Data from Corelogic.