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Why Sydney property prices won't fall

John McGrath
2 June 2015

By John McGrath 

So we’re well into the third year of substantial price growth in Sydney, with home values up almost 7% in 2015 (CoreLogic RP Data) and we’re not even at the half way mark yet. 

The boom was not expected to continue this far into 2015. We saw a dampening of the market in November 2014 when a lot of stock came online and indications at the time were that we might be coming to the end of the rapid growth period. 

But the market has kept going, in part due to two further interest rate cuts which have done a lot to keep buyers engaged. But as prices keep rising, so does the intensity of discussion around price bubbles and the apparent potential for collapse of property values in the Sydney market. 

I believe that buyers and sellers need to ignore this commentary. Sydney has proven itself over and over again to be one of the most resilient property markets in the world. There are reasons for this and most of them relate to long-term fundamentals that form a bedrock of strength for the market. 

A big fundamental is that Sydney is vastly undersupplied with natural borders that limit the amount of new homes that can be built, yet demand keeps on rising due to the city’s strong population growth and increasing engagement from overseas buyers. 

I read with interest an opinion piece by one of Australia’s most respected business and investment journalists, Robert Gottliebsen in The Australian recently that laid out some great statistics on Sydney’s supply/demand equation at it stands right now.

The article underlines why prices aren’t going to come crashing down and in fact, why they’re likely to keep on rising for the next 15 years. Here’s a rundown of Gottliebsen’s article, which is based on data from Infrastructure Australia and the Housing Industry Association:

  • Sydney’s population is expected to reach 6.1 million in 2031, which means 80,000 new people will move here each year.
  • Based on the assumption of 1.5 people per dwelling (in recognition of the rise in apartment living), Sydney will need 53,000 new dwellings per year.
  • The HIA says 54,000 new dwellings will commence in NSW in 2015 – but that’s for the entire state. That’s also a record high figure, with annual new builds expected to decline to 47,000 per year over the next four years

The disparity between supply and demand is pretty plain here. Sydney is going to remain undersupplied and supply/demand is pretty much the ballgame when it comes to price pressure. 

Now of course, the boom is definitely going to end at some point. That doesn’t mean price growth will end, it will continue on but in a less spectacular fashion. What will bring us out of the boom? There are a few things.

  • The market will at some point reach a natural peak – prices will get too high and buyers will lose interest. This isn’t happening yet, partly because finance is so cheap.
  • Investor activity, which has been a major driver of Sydney’s boom, will taper off as yields become too low.
  • Interest rates will begin rising at some stage as the economy improves and this will put the brakes on activity – but this is a long way off. 

The Sydney property market is being very heavily scrutinised at the moment because it’s had so much growth and yes, it’s a bit unusual to have such a long stretch of significant price rises. But it doesn’t mean a calamity awaits us. A big part of the growth we’re experiencing today is simply catch-up after several years of little growth. 

Everyone needs to calm down and remember that this is a solid, high performing property market in a truly international business hub and in my opinion, it is going to stay that way for a long time to come. 

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