Monday, August 22, 2005

Sydney house prices fall - Business - Business - smh.com.aua

Sydney house prices fall - Business - Business - smh.com.au: "The median house price in Sydney fell by 3.13 per cent to $495,000 in the June quarter, Real Estate Institute of NSW figures show.

The slump was worst in middle Sydney, including areas such as Concord, Hurstville and Kogarah, which recorded the biggest drop of 8.95 per cent.

Unit prices in Sydney also dropped in the three months to June, falling 2.63 per cent from $380,000 to $370,000.

NSW as a whole suffered from a 2.83 per cent drop in house prices and a 0.78 per cent drop in unit prices in the same period.

In contrast, land prices rose by 15.56 per cent in NSW and 7.95 per cent in Sydney."


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This has been a prediction of mine for about 2-3 years now. Ever since the bubble in Sydney house prices peaked I started calling a short on the Sydney housing market.

I believe the median price for a sydney house was 550,000 AUD at the peak of the market.
This means the median house prices have fallen about 10% from the peak. The peak of the market as far as I am concerned was early 2003, before interest rates start going up again.

Average wage in Sydney is now 55,000 AUD. that makes an average home 9X average wage. About 40% of a sydney families earnings a week currently go into paying of the mortgage.
Melbourne, Australia's second largest city has an average home priced at about 6-7X average wage and I believe the average wage in Victoria (state Melbourne lies in) is less than Sydney.

So is sydney over priced and what is going to happen to the market going forward?
This is a complicated question. But thinking about it in very simple terms...Yes Sydney housing prices are over priced.
How much over priced? If you consider that the median home in Melbourne is $357,000 AUD and let me say that Sydney gets a 15% premium over Melbourne for being a better city for various reasons (which is highly debatable, in fact I think Melbourne is going to become Australians best City in the near future but thats another story!). They the average Sydney house price should be 357*1.15*10^5= 410*10^5.
This means that Sydney house prices are (1-(410/495))*100=17% (rounded to two dp) over priced.

So when will they fall? They are falling and have been for a good one and half years.
Did the bubble pop? No, not the same way that the equities market did. But these markets are entirely different. So the answer to this questions depends on what % price fall constitutes a pop! I dont know the answer to this. I just know that if the prices to fall another 17% and interest rates go up, a lot of people are going to be in alot of pain. Meaning the people who have borrowed the most that they could or people who are close to 90-100% negatively geared.

So when is this 17% drop going to occur. I think it will happen gradually. The australian economy is doing ok on the back of the resource boom from south east Asia and China. The economy will continue doing ok untill about 2008 I think, about the time the construction for the Chinese Olympics finishes. After that it all depends on what will drive the resources market. If the market drops, the aussie dollar will drop which will drive up inflation. Oil prices are not coming down for a long time yet! If inflation goes up, interest rates follow shortly after.
So over the next 3 year expect a price correction of about 10% and then in 2008 or 9 expect a sharp correction of approx 7% if things dont go well for the resource market (and on the assumption Australia does not find some gold mine in the mean time).

Ok so this is a very simplistic view of the housing market. There are many variables which could change my predictions above. I will endeavor to make adjustments to the above in future posts as things change in the coming years.

Also remember that the housing market is all about location, location, location. Some areas may go up over the next few years, some will stay the same and some will fall.
I am talking about median prices in Sydney. I am not talking about the multimillion dollar properties which a few select (which I hope one day I am a part of!) can afford. That end of the market hardly moves either way unless there is a massive recession of massive growth in the economy and every one becomes rich. Can't see that happening in the next 4 years.

Leave me comments....

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