Sydney House Prices – Insane Bubble On Outskirts Of The City
Sydney House Prices Fundamentals
I’ve published previous articles on Sydney house prices and what I believe is a financial bubble driven by interest only lending and in general lax lending standards. How else can we explain insane house prices on the outskirts of Sydney in areas such as Marsden Park, Schofields, Riverstone and suburbs surrounding those areas. You’d think by moving further south one would see lower prices but even in Campbelltown areas such as Leppington and Prestons, prices are very similar to the previously mentioned areas.
Developers have strong pricing power and this is enabled by bank lending. At the moment, prices in Marsden Park are close to $1 million. Near Campbelltown, prices are also close to that price range, about 10-20% less. But given those areas aren’t even close to major employment hubs in Sydney and where economic activity is taking place, I do believe that prices in the above areas are 30-40% overvalued. Rents aren’t even close to cover mortgage repayments. When mortgage repayments are about $800 p/w with a 20% deposit (many people won’t be able to come up with 20%) buying makes no sense. On top of these repayments you have council fees, maintenance, insurance and other expenses. It’s obvious that buying is much more expensive than renting, so why are people buying? It’s partly driven by ever increasing prices especially when NSW Government announced the region as the North West Priority Growth Area. When this occurred land prices skyrocketed. Many people made bank and plus more. However, prices in the last few years have stayed flat.
Housing Prices On The Outskirts Don’t Make Sense
I looked at some prices for Marsden Park area. New land and house packages have insane pricing. Double storey brick house on 300 sqm of land is about $950k, this is on the fringes of the city! Developers and builders are making a killing in this market assisted by RBA, governments (Federal and State) and lax lending standards by the banks. Are the prices justified? Is there an oil boom in Marsden Park or some sort of gold boom? No, it’s plain and simply: it’s a lending bubble supported by low rates and lax lending at the moment. For a wealthy person with some money, they can come up with another $1m and buy somewhere in prestigious suburbs of Sydney, not some dump that is Marsden Park.
Housing Price Growth In Sydney and Melbourne Won’t Continue
The question is whether growth continues. Over the past few years prices haven’t grown but there are no signs of forced selling yet or lower prices. The boom continues with stable prices and constant demand. Covid stimulus provided further support to the market especially given government’s cash incentives and low deposit guarantee. Whether interest rates rise is also questionable. Any substantial rise will see RBA go nuts and they’ll interfere in the bond market to bring yields down. The bond purchase programme recently hit $100b. What if banks’ funding costs rise? Again, RBA will interfere heavily. Any signs of stress will also see the Federal Government come up with new stimulus to prevent prices from dropping. It’s essentially a market where RBA and the Federal Government have substantial control over banks’ funding costs.
We have seen recently, due to covid crisis, that governments, regulators and banks will do anything that’s convenient and beneficial to rich bankers/investors to prevent prices from experiencing a sharp correction. From cash incentives to first home buyer grants to low deposit guarantees and to RBA providing banks with essentially free funding, those that represent us in both parties will implement policies to drive land and house prices higher. The main question is how long will this go on for given residential values in Australia are more than 4x GDP, same as Japan’s and Ireland’s before their markets crashed. Only time will tell.
RBA Contributing To The Housing Bubble
RBA’s Committed Liquidity Facility of around $200b was also designed a few years ago to provide banks with cheap and reliable funding when required. Banks can essentially never run of cash. CLF facility of course requires high quality collateral otherwise RBA won’t accept it. So in the event of a substantial economic crisis in the future, it’ll be interesting to see whether regulators can mitigate adverse impact on the financial system if the quality of collateral deteriorates due significant mortgage defaults. So far this hasn’t occurred; again this is due to the market being propped up by stimulus aimed at the housing market and RBA funding to Australian banks. In the absence of these measures, covid would’ve meant Ireland 2.0 for Aussie banks. The only difference between Ireland and Australia is that Irish government was dumb to realise that the banking system was toast before they intervened. Banks also relied on short term international sources of funding. Here in Australia, guaranteed funding can be obtained from RBA, it’s a $200b facility (at the moment being reduced) but in theory there is no limit.
All these actions are concerning because they’ve resulted in substantial housing market disparities especially on the outskirts of the city. It’s hard for me to see how these price tags of $800k or $1m are justified for suburbs like Marsden Park and surrounding areas. Low mortgage rates have made a huge difference and they can even go lower despite the general consensus that they’re most likely to rise. RBA and regulators are hell bent on controlling prices in the housing market via direct and indirect financial stimulus. There are zero signs of concern from regulators about prices increases in the last 6 months. Housing debt is at record highs but real disposable incomes haven’t increased in the last 10 years. I doubt prices will increase in real terms in the next 10 years given gargantuan size of the household debt in relation to GDP especially given flat incomes. I think some areas will experience big corrections in the foreseeable future, especially on the outskirts of Sydney and probably Melbourne as well.