Bubble bubble, toil and trouble??

Every time Sydney house prices increase the property bubble crew hit the media with negative headlines predicting a crash.

These doomsayers may very well be right., however, we feel that there are five key trends that destroy their current predictions:

1. The median Sydney residential dwelling price has increased at an average rate of just over 2.5% per annum over the last 10 years. Hardly a boom. Especially when you consider this growth rate is almost exactly the same as the average annual inflation rate over the same period. In other words, when taking into account the impact of inflation, median Sydney dwelling prices have not increased (in real terms) at all over the last decade.

2. The number of properties selling in NSW is on the rise (see chart below) but these numbers are definitely not in boom territory. In fact, July’s property sales numbers are only the 3rd highest over the last 10 years and approximately 20% below the boom numbers that we saw between 1998 and 2003.

3. The last time Sydney saw a property boom the median residential rental yield dropped down to below 2.50%. As you can see below, Sydney’s yield has dropped by 1.80% for houses and 1% for units. These negligible declines are certainly not what you would expect to see in a boom. More importantly, yields of 4.61% for houses and 5.08% for units are relatively high when looking over a 20 year history.

4. Another typical characteristic of a property asset bubble would be an over supply of residential dwellings. However, as you can see below, new dwelling constructions have been on a steady decline for 10 years. The boom between 1998 and 2003 saw approximately 40% more new constructions than we have seen over the last 7 years.

5. Finally, whilst new dwelling construction has been declining since 2002, the population of NSW has increased by 720,327 people!!. Sydney accounts for 506,982 of that growth. This is a classic case of demand starting to outstrip supply. If prices were rising in a market where supply was outstripping demand then we would also be making the case for an asset bubble risk. Clearly this is not the case in our current market.

As you can see, the case against Sydney being in a property asset bubble is quite powerful. And this argument has been made without getting into other macro aspects driving growth such as the SMSF sector moving into residential property and the massive build up of cash deposits (looking for better yields) in the Australian economy.

Please do not hesitate to get in touch if you would like to discuss your property goals. We would love to help.

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