Strong housing price growth over the past three years in Sydney has been the hot topic of discussion amongst economists, property commentators and the media locally and offshore. In the year to Q2/2014, real price growth of 12.5% has been well above the five year annual average of 4.5%. September quarter data from RPData-Rismark indicated relatively solid dwelling price growth in Sydney over the quarter, in relation to the other capital cities. However, the consensus seems to be that housing price growth will start moderating in Sydney over 2015.
The household debt to disposable income ratio has been rising in Australia, especially in cities such as Sydney, with growing leverage as households jump into the property market, upgrade their property or buy an investment property or two. This is unlikely to continue if interest rates rise and wages growth does not keep pace.
The net shortage of supply in relation to demand, the low interest rate environment and a pickup in foreign buyer interest have been the most common reasons used to explain the dwelling price appreciation. What is surprising is that the recent strong home buyer activity occurred during a period of weak employment and wages growth, which could be partly explained by an investor led recovery. Housing finance commitments by investors in the state of New South Wales rose by 42% in the year to FY2014 to AUD $52 billion, while loans to owner-occupiers (excluding re-financing) increased by 20% during this period, to AUD $64 billion.
Interest rates were a more important factor driving the last two house price cycles rather than employment conditions, with the Federal Government’s doubling of the First Home Buyer grants also having an impact during the 2009 peak in housing price growth. Since 2008, it appears that house price fluctuations in Sydney have been a lead indicator of office demand and subsequent rental growth movements, rather than being a laggard.
Demand conditions in the major Sydney office markets are starting to improve in 2014 as the housing market moves into a contractionary phase. The two different property sectors may be at turning points of the demand cycle so one must keep watch.
About the author
Rupa Ganguli is focused on analyzing the Australian residential market for JLL, based in Sydney, Australia.