Sydney’s Property Market May Have Hit a Brick Wall

In the recent property data for the quarter October to December 2015, it seems the Sydney Property Market had decreased by 3.1%, the first drop in property price since June 2012. That is a wow factor. The biggest drop happens in Cantebury and Bankstown, which recorded 5.3%, while the south recorded a decrease of 4.3%. Areas in Double Bay, or in the East had also experienced a large decrease in property price.

It was a surprise to see that the property price for houses in Adelaide had risen by 1.8%.  From the table below, we can that houses in Adelaide is still the most affordable in the mainland in Australia, however, it is catching up with houses in in Brisbane, as at December 2015, the difference between the median house price in Brisbane and Adelaide is a mere difference of 17,077.

Hobart, the capital city in Tasmania had enjoyed the largest price increase in the October to December Quarter on 7.9%. In addition, the median house price is the most affordable in the whole of Australia at $359,837 as at December 2015.

Median Housing Prices and Changes

Since 2013, the property market in Sydney had risen by an average of 52.6%. It increased exponentially in 2015. According to an article by the Domain Group, it is expected that by middle of 2016, most of the properties in the Sydney market will fall-off from the multi-million dollar benchmark.

Sydney House Price

Hence, it is important to analyze what are the contributors which affect the house price. We had came up with this framework as illustrates in an equation which will hopefully helps you to understand the variables which might affect the house price now and the future.

P = Function (X, Y, Z, W)
P = Average Price of a property
X = Interest rate, or so called opportunity cost to hold the property
Y = House Supply in the Area
Z = Expected demand of houses in the area
W = Expected return of the property in the area

It is a common understanding that If the expected demand of the houses exceeds the expected supply of the houses in the area, then the property price for the area would be likely to increase. In addition, it is important to measure the interest rate, which is termed as the cost of fund for holding the property, and also the expected return of the property in the area.

The expected return is made up of two components: one is gross rental yield or the current actual return on investment, and the other is the future expected return, which is measured as the expected growth of the property. If the expected return exceeds the cost of fund to hold the property, in theory, the property price will increase. If the reverse happens, then the property might drop. Saying that, it is important to point out that the average rental yield in Sydney is around 1.5% to 3.5%, while in Adelaide, the average rental yield is around 4.1%.

Gross rental yeidl all AustraliaAll of these would factor into the auction clearance rate, and it is important to measure this yardstick closely. Auction clearance rate is a very good yardstick to see how the market is performing at a particular point in time. If the auction clearance rate is higher, this means the demand is exceeding the supply, which indirectly means that the expected future return is exceeding the cost of fund or cost of owning the property, and the expected future price will then be likely to increase. If the auction clearance rate is low, or is on a sliding scale, then it means the property price is likely to fall in the short to medium time frame, as people are losing confidence in the property market. Hence it is paramount to monitor the auction clearance rate on a monthly if not weekly basis to see the movement in order to gauge any sudden movement in the market place.

In an article written by the Domain Group (February, 2016), the auction clearance rate last Saturday has increased to 72.5%, which is much better than the 43% recorded in the previous weekend. However, it is still lower than the same period last year which is 82.5%.

Hence it is important to review your existing investment properties, to see whether the actual rental yield is within your acceptable range, and also to talk to your accountant or tax agent to see not only the gross rental yield of the property, but the tax effect rental yield ratio, which will incorporate the tax position of an individual into the equation to formulate whether the investment property is actually giving any positive effect to the rental property. We welcome you to give us a call on 0403-418-758, or email us on hello@endurego.com.

Images corteousy of Domain.com.au

3 thoughts on “Sydney’s Property Market May Have Hit a Brick Wall

  1. Julia

    In Sydney’s case, two potential systemic risks merit scrutiny. The first is the very rapid growth in credit being used for property investment; that is, the expansion of leverage. The second is increasing foreign investment that is reportedly flowing into the Sydney property market, purportedly from China.

    Reply
    1. Alex

      / I was curious if you ever thought of changing the stuutcrre of your website? Its very well written; I love what youve got to say. But maybe you could a little more in the way of content so people could connect with it better. Youve got an awful lot of text for only having one or 2 images. Maybe you could space it out better?

      Reply

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