Watch the backlash when property prices fall
Written on the 31 March 2017 by James Cagney
(A 5 minute read)
Governments and their appointed watchdogs like The Australian Prudential Regulation Authority (APRA) cannot ultimately control market forces in the medium to long term . They can only influence the market in the short term. Macro and micro economics will ultimately be the cause of people buying and selling property, shares bonds etc. However, the Australian Federal Government has abdicated their responsibility for the crackdown on borrowing over to APRA and the Banks. A short time ago the Government were investigating the banks for unfair practices now they are giving them free reign to hike interest rates. What hypocrisy!
The Government has also abdicated their responsibility for the control of economic future of Australia to the Reserve Bank of Australia (RBA). That way when the backlash from furious property owners who see their property values plummet and their wealth diminish can point the finger at APRA, the Banks and the RBA for the country's economic woes. Just like the snakes in the grass they are - and so well camouflaged - but what can you expect from our politicians who have been self-serving for so long. The worst part is we let them get away with it!
The Government also chose to ignore one of the major reasons why property prices are soaring because it does not make them popular with their cronies at State level. That is the excessive and exorbitant Stamp Duty which the States charge. The States are the first to complain about the lack of direction from the Federal Government about property prices whilst they turn a blind eye to the amount of stamp duty they all collect. We are headed for troubled economic times in Australia and no politician will accept the blame.
And then a voice in the wilderness. No, not John the Baptist, but Timo Henckel, a research associate at the Centre for Applied Macroeconomic Analysis, Australian National University and author of 'The Conversation'. Listen carefully for what he has to say:
"However, housing bubbles are in a league of their own. Historically, they have always led to severe recessions, and there is no reason to believe this should change. The next time is not different. The answers on how to deal with a bubble range from "nothing" to "whatever it takes". The problem is that no one (policy makers included) can reliably identify a bubble.
"So, is Australia in the midst of a housing bubble? I will go out on a limb and answer in the affirmative. There are plenty of arguments why current house prices are exactly where they should be, based on the fundamentals."
"But in my opinion these explanations do not pass the smell test: double digit increases in house prices, combined with unprecedentedly high household debt (more than 120 percent of GDP - the third highest in the world) and household debt servicing ratios (also the third highest in the world), make for a precarious situation. All it takes is a modest change in investor sentiment, a few interest rate hikes, or a noticeable increase in unemployment, and the whole scheme unravels. I hope I'm wrong, but history is on my side."
Michael Matusik reported in his latest newsletter: that Sydney's population grew last year by 82,797 and Melbourne exceeded that with 107,770 people. These two cities together added 125% more people than the six other State and Territory capitals in Australia. And the Federal Government thinks by giving APRA and the Banks free reign to increase interest rates to investors will solve the property Bubble problem? Ludicrous and short term thinkers that are trying their hardest to play politics and stay in power.
And, that is why the Governments and their cronies futile attempts to stop property price rises in Sydney and Melbourne will never work. Trying to stop population growth where people can find jobs and join family is like putting your finger in the dyke to stop the flood of a swollen river.
So where will property in Sydney be a good buy in the future?
The February property data from the Bureau of Statistics is out and the no surprise that Sydney is the winner followed by Melbourne. This reminds me of "A tale of two cities" the novel by Charles Dickens. Pure and simple it's population growth and there is very little APRA and the RBA can do about this to control market forces.
In my last Finance and Property Update I covered the reasons why Sydney property prices will inevitably fall. If you missed this you need to read that update before reading this update. Click >>> SYDNEY'S FALL.
As discussed you cannot look at Sydney as one property market place. The city has over 5 million people and consists of multiple markets with vastly different trends.
Traditionally the population in cities move outward in rings around a city. In the case of Sydney you can't go east (into the sea) so the rings go North, South, and West. As property prices rise people will move further out in order to be able to buy or rent something affordable.
To form any opinion of the state of the property market in Sydney we need to divide it up into specific areas (see diagram).
You can't go east into the sea as inland towns and cities are able to do. Its surrounded by National Parks so Sydney has expanded where it could. The coastal suburbs and towns are expensive so people looking for affordable homes to buy or rent have gone north, west and south.
People gravitate towards areas that have convenient shopping centres, hospitals and medical centres, schools, kindies, sports facilities, parks, public transport and proximity to motorways. The areas / towns on the diagram below have all these positive attributes and you can expect massive population growth in these area in the near future.
Progressive councils are competing for the attention of locals, interstate and international migrants. Parramatta is one of the councils putting their hand up to accommodate the population growth. The Parramatta Advertiser reported that they expect the population in Parramatta to dramatically rise by 150% in the next 20 years. What the article said was that "35,000 will call the CBD home by 2036, up from 14,198. North Parramatta is set to grow by 58.8per cent to 21,964 residents."
To accommodate such a huge influx of people Parramatta's landscape is destined for a huge change. High-rise apartments will spring up and the CBD and parts of North Parramatta will look like North Sydney and Chatswood. Parramatta is a well-established city in its own right and has many of the facilities and infrastructure to accommodate this growth. More will have to be built but this is good for the area. Sydney's Business Chambers' Western Sydney director, David Burger, said "I think these figures underpin the need to make transport, including the underground Metro and light rail,goes in and goes to the right places."
The newspaper goes on to say " Greater Sydney as a whole is set to grow by more than 1.5 million people from 5.07 million in 2017 to 6.62 million people in 2040." With this population growth comes opportunities for industry, commerce, small business, schools and kindies etc. Therefore other councils are going to have to step up if they are going to compete for their share of this growth.In the diagram alongside I have identified the areas within greater Sydney which I believe will be the CBD and hubs for Greater Sydney of the future. They are already moving in the right direction and their geographic locations are ideal.
In my previous Finance and Property Update I covered other important factors which create population growth and housing demand. This is a must read so click >>> OTHER FACTORS.
Campbelltown in the south-west has great potential as housing development expands west to Narellan, Camden and to the Burragong & Nattai ranges and south to the Bargo. The land in this area is abundant and Campbelltown already has commercial and industrial precincts which offer locals gainful employment. Easy access to Liverpool, and inner Sydney via the M31, M7 and M5 and Sydney train line offers residents ample opportunity for work with a suburban lifestyle.
I have covered how infrastructure can give areas exponential medium to long term growth. For more information on this click >>> INFRASTRUCTURE. Even the announcement of new infrastructure can light a fire under areas and suburbs for property price surges. This happened with the announcement of the Blacktown and The Hills railway line in 2009 to be completed in 2018-19. Smart buyers got into the market in 2009 and the property prices rose in the suburbs along the new line. Warning for 'would be investors' for these areas is that the price surge is already done. You are too late!
The proposed Western Sydney Airport will be of great benefit to all the western Sydney suburbs and particularly for the Parramatta, Penrith and Compbelltown triangle. However there is still a fair amount of sceptism that this will eventuate and investors have been reticent to commit themselves to suburbs in the immediate area.
The announcement of a second Sydney Harbour underground tunnel which extends to The Spit has already pushed up overinflated prices on the Northern Beaches. The new 'state of the art' hospital at Frenchs Forest now under construction has created price surges in the surrounding areas never seen before. The Northern Beaches will remain unaffordable for younger home owners. Children raised on the Northern Beaches want to live there and bring their children up in the area. I cover "Demographics" in greater depth below. This information will give young adults some hope to remain on the Northern Beaches.
No need to mention the other areas I have identified in the diagram because they speak for themselves. If you are interested in obtaining more information on housing developments in the area click >>> HERE.
The bulk of the population over 37 years of age is in the North-East and Middle-Eastern suburbs (Yellow to Red colour). These are typically families with two plus kids and they are in their peak "spending cycle". As many of you may know bringing up children in this day and age is an expensive exercise. This means that the area will enter a period of prosperity as businesses flourish and house prices grow as parents spend their hard earned money and rake up huge personal and credit card debts. Unfortunately this growth will only last about 10 years because these parents, aged from 52 + years of age will start to enter their peak "saving cycle" as they prepare for their retirement.
The "Baby Boomers" in these areas have been enjoying huge growth in property prices. The trend is that the children of these Baby Boomers in these areas often choose to live longer at home. The average age for children still at home is now 27 years of age. That "Average" means that some of these children are even older. What a scary thought! Many of these "Gen Y's" are living the good life frequenting restaurants, bars and nightclubs which are flourishing whilst parents are coping the costs of running the household.
Today most "Gen X" couples both work and when they have children they need to be fetched and carried to and from school, to after school activities. In many cases the grandparents (Baby Boomers) have now become the convenient, unpaid child carers. Councils are relaxing guidelines for second dwellings on properties so parents can either accommodate their adult children or these "Gen Xs' to look after aging parents (very convenient for looking after kids). Therefore the building and renovation business in these areas is flourishing.
The areas of medium to long term growth are in the South and Western Sydney of the above map where a large proportion of the population is between 30 and 37 years of age. These "Gen Ys" are starting families and will start to upgrade from units to townhouses to houses. There will be a large proportion of renters within this group and therefore will offer good potential rental occupancy and growth for property investors. As these "Gen Xs and GenYs" get older their spending habits will drastically change as they start to buy furniture, school uniforms, electronic and electrical equipment, toys, clothes, fast food and groceries.
As an investor it is essential you have a clear understanding how demographics trends will help you make or lose your money. I cover Demographic trends in greater detail in my article " How to take advantage of Demographic Trends throughout the Boom-Bubble-Bust Cycle". You can download this by clicking >>> DEMOGRAPHICS.
We are in for big changes as these suburbs mentioned above become large cities. Cities are like an organisms which keep on growing larger and larger as big companies, entrepreneurs and investors move into the area. New businesses offering goods and services spring up everywhere to cope with the growing population. Fast food shops, restaurants, bars and clubs, hairdressing salons, news agencies, gardening services - to name only a few. As their businesses grow they move into the area thus creating more demand for housing.
In the next Finance and Property Update I will cover regional New South Wales (NSW). There will be some big surprises and opportunities to make profit so look out for my email.
This is not financial advice. You should not act solely on the basis of the material contained in this article for your investment strategies. Changes in government and legislation occur frequently and without prior notice and financial markets are unpredictable.
This information was written and compiled by James Cagney. The opinions expressed herein do not necessarily represent the views and opinions of his associates including
Thank you to the resources of Terry Ryder, Property Observer, The ABS, BIS Shrapnel, Michael Matusik, Property Monitors, Colliers, On the House, Corelogic, RP Data, Residex, SQM, Herron Todd White, NAB Residential Property Survey, Australian Bureau of Statistics, Peter Wargent, Port Phillip Publishing, Economy & Markets, Harry S. Dent and the many others for the material discussed above.
Author: James Cagney