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Residential Markets - Dec 2016

Almost every week we see news articles about the continuing escalation of housing prices in Sydney, Melbourne and Brisbane and the impending distress to come. Many of these are of course, sensationalised by the media but there are truths in among the rhetoric.

So what is happening in residential markets ? The short answer is - lots, but it depends on where you are talking about. Here's my summary....

But first....

Step Back and Slow Down

Lets step back a bit.......The macro economic conditions across Australia remain sound with inflation under control (1.3%), unemployment relatively low (5.6%), but with GDP growth slowing (1.8%) but with prospects of an improving terms of trade. Again, I am no ecomonist or politician, but the numbers look better than the feeling and as many people say they unimpressed with politics and the nation continues to be hamstrung by indecision, public confidence is only marginally positive.

In this context interest rates should remain on hold, however the RBA has been under pressure to slow the investor driven debt binge in the housing market, particularly in Sydney. The RBA don't have much to use in their bag of tricks so they have leaned on APRA to force banks to restrict credit growth in an attempt to cool the market as opposed to increasing interest rates which could do more damage to the existing home owners and reduce business investment.

The graph above shows just how far investor finance grew from 2013 to 2015 with declines now evident in 2016. Whether the declines have gone far enough to allay the RBA's concerns remains to be seen and will only show up when house price growth in Sydney shows signs of abating.

I recently wrote about the latest Building Approvals data and it is worth noting that Sydney continues to see Developers seeking approval for new apartments whereas Brisbane and Melbourne have seen noticeable declines in applications.

Apartment Prices

Real estate markets are cyclical and invariably have periods of excessive growth and periods below average growth and in some cases actually decline. The graph below shows the average value of apartment prices in Sydney, Melbourne and Brisbane from 1980 to 2016.


Sydney has clearly had an exceptional period of price growth since 2014, driven in part by strong foreign investment, but also easy access to relatively cheap money. Supply of new apartments has been strong and the recent building approval numbers suggest that there is no shortage of projects able to be built, if funding conditions exist.

Sydney's price rise has been well above trend and my belief is that Sydney is over priced by 10% however i don't expect prices to drop across the board due to ongoing strong demand for Sydney real estate. Prices are more likely to stagnate over the next 2 years to meet the long term trend.

Does this mean, I should ignore investing in Sydney residential markets - by no means.

Sydney's economic position is strong and employment and growth conditions are likely to continue for several more years. Whereas in past cycles, Sydney would start to see negative interstate migration due