Sydney Real Estate - Where to from here?

[itchyfeet]

I just read this article

https://www.domain.com.au/news/the-aftermath-of-the-boom-how-five-years-of-soaring-prices-has-changed-sydney-20170622-gwm06d/

What struck me is the changed mindset. Adults in there 20s and 30s choosing to stay living with their parents to buy a property at all costs, or alternatively buying a rental property at any price, just to get a foothold in the market at any cost.

On that face of it, it is irrational. They are bound to lose money..... or are they...

Maybe Sydney property is now an asset class like gold, traded purely on speculation and scarcity, with no underlying basis of return on investment.

It's quite fascinating. Is it possible that the rules of the game have changed? That as an asset class, property in major cities should be looked at more akin to precise metals than stocks?

I really don't know what the future holds when prices are so high and people have so much debt? Logic says that small shifts in interest rates could be dramatic. But I am not so sure. I think the obsession with real estate in Sydney now transcends logic and value.

People will continue to seek ways to buy into the market regardless of price. For now people are staying living with their parents. Next up will be millenials taking large baby boomer inheritances to prop up the market.

If I view my property in Sydney as an investment, I am extremely exposed. Or maybe, I am the holder of a large pot of gold that's valuation can not be assessed based of historic norms of ROI.

What do you reckon?

[alsoknownasDean]

I think the fact that we use the terms 'getting into the property market' or 'getting a foot on the ladder' instead of 'buying a home' shows what people think of housing here in Aus (it's not much different here in Melbs either). Then there's the FOMO effect, people worrying about being priced out by continually-increasing prices. Also it seems as though interest rates (and changes in such) are heavily politicised.

The way I see it is, that can only continue until there's a squeeze on the availability/price of credit, or other macroeconomic factors (the whole '25 years without a recession' thing, that can't go on forever). Obviously any government policies intended to lower housing prices are unlikely (as state governments in particular are getting a large windfall from stamp duty revenue).

What would happen if interest rates go up 3%? What about if unemployment goes up 2%? If China's economy crashes and they stop buying Australian goods and services? It'll take a recession to 'normalise' the housing market here, and when that happens, many people will end up with their financial pants down.

[itchyfeet]

I agree that the terminology is far, far away to what you would use in making an investment.

The language of "climbing the ladder" implies growth, but if interest rates rise quickly the ladder could quickly become a deep pit of despair.

I am pretty certain that a 2-3% interest rate rise will take all confidence out of the market, and result in major price drops. Maybe we won't see significantly higher interest rates again in our life time though. Who knows??

I am certainly glad I bought into the market many years ago. I'd hate to be debating with my DW whether to buy a first home now or not. It is hard enough debating whether to sell.

[alsoknownasDean]

I agree that the terminology is far, far away to what you would use in making an investment.

The language of "climbing the ladder" implies growth, but if interest rates rise quickly the ladder could quickly become a deep pit of despair.

I am pretty certain that a 2-3% interest rate rise will take all confidence out of the market, and result in major price drops. Maybe we won't see significantly higher interest rates again in our life time though. Who knows??

I am certainly glad I bought into the market many years ago. I'd hate to be debating with my DW whether to buy a first home now or not. It is hard enough debating whether to sell.

I'd probably say that anyone who is earning under $80K or so a year in Sydney and doesn't already own a home, should probably consider leaving Sydney if they want to own a home eventually. It'd be interesting to see if there's a 'youth drain' to other cities as a result of high housing prices?

I suspect we'll see higher interest rates at some point in the future. It might not be any time soon, but eventually.

[marty998]

I agree that the terminology is far, far away to what you would use in making an investment.

The language of "climbing the ladder" implies growth, but if interest rates rise quickly the ladder could quickly become a deep pit of despair.

I am pretty certain that a 2-3% interest rate rise will take all confidence out of the market, and result in major price drops. Maybe we won't see significantly higher interest rates again in our life time though. Who knows??

I am certainly glad I bought into the market many years ago. I'd hate to be debating with my DW whether to buy a first home now or not. It is hard enough debating whether to sell.

I'd probably say that anyone who is earning under $80K or so a year in Sydney and doesn't already own a home, should probably consider leaving Sydney if they want to own a home eventually. It'd be interesting to see if there's a 'youth drain' to other cities as a result of high housing prices?

I suspect we'll see higher interest rates at some point in the future. It might not be any time soon, but eventually.

There's a unit in my block up for auction next Saturday and I'm quite keen to see how it goes.

Rationality has been thrown out the window... when you've got "young couples" paying $2.5m for an old shitbox, pardon me, "home with character" in Randwick, or people spending 1.5-2m on tiny terraces in areas within 10k of the CBD that are in need of $700k of renovations... I just fail to see how there is any sense in the market.

Auctions are unusual in my area - I'd expect the unit to sell for about $625k. I purchased my one for $385k back in 2010.

[itchyfeet]

I agree that the terminology is far, far away to what you would use in making an investment.

The language of "climbing the ladder" implies growth, but if interest rates rise quickly the ladder could quickly become a deep pit of despair.

I am pretty certain that a 2-3% interest rate rise will take all confidence out of the market, and result in major price drops. Maybe we won't see significantly higher interest rates again in our life time though. Who knows??

I am certainly glad I bought into the market many years ago. I'd hate to be debating with my DW whether to buy a first home now or not. It is hard enough debating whether to sell.

I'd probably say that anyone who is earning under $80K or so a year in Sydney and doesn't already own a home, should probably consider leaving Sydney if they want to own a home eventually. It'd be interesting to see if there's a 'youth drain' to other cities as a result of high housing prices?

I suspect we'll see higher interest rates at some point in the future. It might not be any time soon, but eventually.

Why limit your quote to those living under $80K. I think the question is valid to everyone.

The biggest issue I've always had to leaving Sydney is that on any week of the year there are dozens and dozens of good, well paid jobs in my field in Sydney that I would have a fair shot of getting if I ever lost my job or felt like a change of scene. Other than Melbourne this is not the case anywhere else in Australia. So, I always weighed the higher cost of housing against a slightly higher salary in Sydney. (probably) and far higher job/career security and then stayed in Sydney (until I took a job OS for now).

I also really like Sydney. It's my favourite city anywhere!.

Post FIRE I will need to leave Sydney as it makes no sense having so much money locked in a small inner city home, but even this is a hard decision. I weigh 5 years of extra work to stay in Sydney permanently in our old home versus freedom and living outside Sydney and freedom wins.....just. Lots of pros and cons.

[LonerMatt]

I don't have any answer to the biggest question you've posed: what type of asset is property most similar to.

I guess it's something that's treated like gold - buy and hold, always has intrinsic value, a shelter, rather than a growth (though maybe not the last one). Though I wonder what this implies - gold goes up and down in value - so what can we draw about housing from likening it to gold?

Like Dean I also wonder about the fragility in the housing market. What if rates went up 3% like he said? How would that affect Australia? What if prices halved? How would that affect people? Would it be a beneficial thing, or would it trigger something bad and disastrous? It's hard to know with so many people very exposed (that's something I'm assuming, I don't actually know how exposed people are).

My girlfriend and I have been talking about buying, I guess we go through the standard cliches: rent goes nowhere, maybe an apartment we own would be better/cheaper/easier for the short, mid and long terms, maybe renting is better as it's more flexible, maybe the 'bubble' will burst, maybe it won't.

It's a minefield, I don't feel confident about proceeding at all, but due to my gf's ambitions we'll be in Melbourne, Canberra or Sydney for sure.

[marty998]

It's cost me $23,000 a year (pre-tax) if rates went up by 3%. Negative gearing will give me back 39% of that.

Not the end of the world, but not likely to make me very happy.

[alsoknownasDean]

I agree that the terminology is far, far away to what you would use in making an investment.

The language of "climbing the ladder" implies growth, but if interest rates rise quickly the ladder could quickly become a deep pit of despair.

I am pretty certain that a 2-3% interest rate rise will take all confidence out of the market, and result in major price drops. Maybe we won't see significantly higher interest rates again in our life time though. Who knows??

I am certainly glad I bought into the market many years ago. I'd hate to be debating with my DW whether to buy a first home now or not. It is hard enough debating whether to sell.

I'd probably say that anyone who is earning under $80K or so a year in Sydney and doesn't already own a home, should probably consider leaving Sydney if they want to own a home eventually. It'd be interesting to see if there's a 'youth drain' to other cities as a result of high housing prices?

I suspect we'll see higher interest rates at some point in the future. It might not be any time soon, but eventually.

There's a unit in my block up for auction next Saturday and I'm quite keen to see how it goes.

Rationality has been thrown out the window... when you've got "young couples" paying $2.5m for an old shitbox, pardon me, "home with character" in Randwick, or people spending 1.5-2m on tiny terraces in areas within 10k of the CBD that are in need of $700k of renovations... I just fail to see how there is any sense in the market.

Auctions are unusual in my area - I'd expect the unit to sell for about $625k. I purchased my one for $385k back in 2010.

Yeah, and how many people are really making enough to service a $1m+ mortgage? Even the cheaper housing in the outer suburbs there seems like it'd be a huge stretch to people on median salary or lower. After all, what kind of home would a couple on 50-60K each be able to buy in Sydney, let alone a single person on that amount?

Think about all of the jobs around that, while not high in salary, are critically important for a city to function. If people who do those jobs can't afford to live there...

Why limit your quote to those living under $80K. I think the question is valid to everyone.

The biggest issue I've always had to leaving Sydney is that on any week of the year there are dozens and dozens of good, well paid jobs in my field in Sydney that I would have a fair shot of getting if I ever lost my job or felt like a change of scene. Other than Melbourne this is not the case anywhere else in Australia. So, I always weighed the higher cost of housing against a slightly higher salary in Sydney. (probably) and far higher job/career security and then stayed in Sydney (until I took a job OS for now).

I also really like Sydney. It's my favourite city anywhere!.

Post FIRE I will need to leave Sydney as it makes no sense having so much money locked in a small inner city home, but even this is a hard decision. I weigh 5 years of extra work to stay in Sydney permanently in our old home versus freedom and living outside Sydney and freedom wins.....just. Lots of pros and cons.

Yeah I take the viewpoint that there's going to be little chance of upward mobility in my career outside the capital cities (and probably even just Melbourne/Sydney). Would moving to somewhere with cheaper housing really be worth it if I end up earning 20% less and having less jobs around for upward mobility?

There's also the situation where people save up a deposit over a few years, but prices have risen by $200K in the time it's taken to save the deposit, and the goalposts have shifted further away. How do we get around that? All the ideas that I can think of (allowing 100% loans or having the government pick up the LMI tab, etc) would end up causing issues like what happened in the US 10 years ago (not to mention further inflate housing). Allowing more and more building/development would create a huge infrastructure bill for governments.

The big problem here is the centralisation as mentioned above. If, in so many careers, opportunities outside a handful of cities are limited, how do we address that so that population growth is more evenly distributed?

[waltworks]

Well, we have loads of evidence (Tokyo in the 80s, whole USA in the 2000s are two great recent ones) about what happens with real estate - if it skyrockets, it eventually crashes. Every single time it happens people say "well this time it's different because <fill in your Japanese culture is better/they're not making more land/Inland CA is where everyone wants to live reason here>"

So far, in all of history, in the long term, it's never been "different this time." It's been pretty much the same this time, after a while.

That's not to say I have any idea when or how much Sydney housing will crash. But eventually, crash it will.

-W