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When Sydney property prices will fall

Written on the 16 March 2017 by James Cagney

(A five minute read)

We do need to look back at Sydney's over the last 40 years. Sydney has grown phenomenally over this time mostly due to immigration. Towns like Parramatta, Liverpool, Blacktown, Penrith and Campbelltown were swallowed up by the ever increasing boundaries of greater Sydney. 

The once cheaper suburbs on these outer rim suburbs of Sydney have had incredible growth over the last 10 years as buyers scramble to achieve the great Australian dream of owning their own home.

Many experts have been predicting that Australian property market is in a bubble and about to burst. They state that Sydney is due for a correction. Yet the CEO of Westpac, Brian Hartzer, announced this week there is no property bubble in Australia. Surely the CEO of one of Australia's major banks who has economist and experts working for him should know what he is talking about.

Who is right and who is wrong? Well they are all right and they are all wrong! We do realize the Sydney & Melbourne have a huge impact on the statistics they study. Have you ever heard the saying that "There are statistics and there are lies". How true!

Sydney is not one market! It is hundreds of markets which each have their own property cycles. Greater Sydney estimated population of 7.65 million and Melbourne 5.94 million and together have a greater population than the combined population of Western Australia (WA), South Australia (SA), Australian Capital Territory (ACT) and Tasmania (TAS). The entire population of Queensland (QLD) is 4.78 million, less than the population of either Sydney or Melbourne.

Once you understand the bias that the property prices of Sydney and Melbourne have had on the Australian property value statistics you know why the experts get it wrong.  Regional towns and areas in Australia are definitely not in a bubble. In fact many are in suffering in a decline in house prices and rent particularly in mining areas.  So instead of aiding development and population growth in these regional areas the government (through the Australian Prudential Regulation Authority [APRA]) it has been decided to punish these property owners and investors with the same stringent lending rules as Sydney and Melbourne. How on earth can these owners and investors ever hope to make money on their properties? 

This policy shows a lack of government understanding of the true market economic position. What the Coalition Government should be concerned about is how this affects peoples' emotions and can they ever win the next election with over 10 million people living in regional towns and areas.  Pack your bags Turnbull you're gone!

Yes the experts are wrong about the Sydney market but they are also right - Sydney is entering the correction phase in the property cycle. People do have short memories Sydney has not had continuous growth in property values for the last 18 years. Sydney went into correction from:

  • March 2004 to Dec 2006 values dropped from $557K to $529K (5%)
  • March 2008 to March 2009 values dropped from $561K to $540K (4%)
  • From April 2009 to Dec 2016 Sydney has enjoyed an unprecedented growth from $540K to $1.12 million which is a staggering 107%. However in 2016, Sydney experienced, for the first time in 8 years two quarters of negative growth.

Figures released by Domain show how diverse the Sydney market is:

Houses Median Price Quarterly growth Year on year growth
Canterbury Bankstown $859,000 -1.3% 6.7%
City and East $2,025,000 7.4% 12.5%
Inner West $1,420,000 -3.1% 4.7%
Lower North $2,300,000 12.2% 13.9%
Northern Beaches $1,600,000 1.9% 14.1%
South $1,096,500 -0.3% 8.6%
South West $657,000 0.0% 7.7%
Upper North/North West $1,290,750 -4.4% 4.1%
West $675,000 -2.2% 8.7%

Source: Domain Group, March 2016 data

This was one of the two quarters when the average house prices in Sydney declined in 2016 and clearly shows how diverse the Sydney market is. Bearing in mind that each region has suburbs which have had better and worse results, so beware jumping into the market because you think the suburb or even the street is a good buy based on the above information.

Another alarming trend which was highlighted by Michael Matusik in his newsletter is the decreasing lack of affordability of mortgage payments.  Michael Matusik said that traditional housing has become increasingly expensive particularly in capital cities. In a study he conducted measuring "House prices and the ratio to household income he shows that house prices are 11.3 times the annual salary of the average household in Sydney.  He commented that "Accepted affordable housing benchmark is 3 to 4 times the average household income. Nationwide, it now exceeds 6 times." His research shows that Melbourne is 7.8 and Hobart 5.2.

Banks get very edgy about lending money to home owners and investors when these ratios are as high as they are in Sydney. Plus rental returns in Sydney are declining and are only around 3% and investors are now looking for diversification to provide a better yield on their money.

Economic uncertainty and increasingly large mortgages are making many Australians worry about job security, according to a new survey commissioned by ALI Group.
The survey of 1,000 Australian mortgage holders showed that job security to maintain mortgage payments is a major concern:

  • 36% were worried about their job security.
  • 41% among families with dependent children.
  • 43% of singles with kids said job security was their top worry.
  • 42% of part-time workers listing job security as the top concern, compared with 35%of full-time workers

Roy Morgan estimates that, as at December 2016, 4.6 million Australians had a mortgage. At the same time, 1,186,000 Australians were unemployed.
These figures are alarming because interest rates are at a 54 year low. At present mortgage payments should not be more than 35% of household income. What will happen when interest rates rise again?  Home owners will have to sell which will result in a glut of properties for sale and prices will fall dramatically.

Here is why I believe that Sydney is going into correction:

  • A Federal, state and local council divide that complicates land release and planning and direct and indirect taxation on land
  • APRA's increasing restrictive lending policy
  • Crackdown on foreign investment purchases through increased and discriminatory taxes on investors.
  • Banks' reluctance to lend to foreign investors.
  • Discriminatory interest rate increase introduced only for investors.
  • Lack of real full time job growth.
  • Low income growth rate.
  • Lack of ecoonmic & business confidence.
  • State governments are reluctant to reduce exorbitant stamp duty charges
  • Statewide land use planning which heavily restricts subdivision and greenfield development is driving land prices to extreme heights
  • Ongoing debate by the opposition government about the removal of income tax relief through negative gearing
  • Very restricted land supply and extremely onerous planning approval processes
  • The growing harsh affordability factor for first home buyers
  • Threat of Australia losing its AAA credit rating because of the reluctance of parliament to reduce government spending
  • The growing debt of home owners and the inability to pay their mortgages when interest rates rise again.
  • Exit of investors who are looking for rental yield to support their property portfolio or retirement. 

All these factors should be sounding alarm bells for Sydney property owners and investors. However, in my next Finance & Property Update I will concentrate on the areas within the greater Sydney area that are going to have reasonable growth in the next few years - despite the coming correction in house prices in Sydney.  Remember that property is a long term investment and we need be conscious of factors like economic growth, manufacturing growth, infrastructure plans, property cycles and demographic trends.  Please read the section in this  Finance & property Update which covers all of these areas before you commit yourself to buying a home or an investment property in the future. Click >>> FACTORS .

If you would like to discuss your property in Sydney or like to discuss an investment you are considering please give James Cagney a call on +61 416 137 645 or click >>> HERE.


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.
Please note that the information herein is of a general nature only and is not intended as specific advice for any particular person or entity.

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
Asset Finance Pty Ltd.


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
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