Mirror mirror on the wall, tell me which capital city is the best value of them all? Obviously, I don’t have a crystal ball but I predict Sydney prices are looking to stay flat (and some parts will even fall), for the next three to five years. In the meantime, the Brisbane housing market (excluding units) will increase strongly!
You may ask the question, why could Sydney price growth slow? Sydney is by far the most unaffordable and most highly leveraged property market in Australia. There has been a long period of irrational enthusiasm where people have been buying at any cost, led by their fear of missing out. This has resulted in record low rental yields, record high prices, and record high levels of investor and owner occupier debt, making Sydney extremely susceptible to a price correction if there are interest rate hikes. So, as you can see, you can’t blame me for thinking the Sydney market is on the brink of a long period of flat growth or even negative growth!
Let’s explore what could happen to Brisbane once the Sydney market takes the punch:
Investors leave Sydney to Invest in Brisbane – As buyers see stagnating or falling prices in Sydney, confidence will be vacuumed out of the market. Increasing prices was a vital ingredient propping up the Sydney market, as yields are so poor, growth is all this market had to keep investors happy. To find better cash-flow, investor demand will flow into other markets where buyers seek yields and yes – lower prices! Brisbane should take up a high percentage of this investor demand due to its affordability and good yields still available today.
Historic Trends show Brisbane Peaks after a Sydney Boom – Sydney’s last peak finished in 2003, Brisbane’s last peak finished in 2008-10. Graph 1 shows Sydney’s average house prices have only been worth more than 1.8 times the value of the average Brisbane property three times since the 1970’s. After each peak, Brisbane prices have caught up to Sydney’s by more than 20% each occasion within just two years (1980, 1989, 2003 and we predict 2018/19). This next Brisbane growth catch-up on Sydney could be one of the biggest yet, since the average Sydney house is now worth nearly 2.2 times the value of Brisbane’s average house price!
Sydney Investors Cashing Out – There is no secret that anyone who bought anything in Sydney a few years ago has made a huge profit. Once price growth stops, many investors and some owner occupiers, will see this is the time to cash out and collect their profits. Once they have sold out (creating more supply in the Sydney market), these sellers will look for other places to make their money. Once cashed out, they will inevitably look to reinvest in new markets due to their recent positive experience in Sydney. There is no secret that the media is raving on about Brisbane, which is predicted to be the next hot-spot for investors (excluding the CBD unit market off course). So, there is the potential to make even more money with the right moves outside Sydney.
Mortgage Stress will be Higher in Sydney Compared to Brisbane – Even on a state level, data from research house Digital Finance Analytics, shows that a 0.75% interest rate rise will be far more than severe in terms of mortgage stress in NSW compared to QLD – 4.6 times worse to be exact! This shows QLD will not be affected to the same degree as NSW if rates go up. A less exposed QLD market means more security from potential falls in price (refer to Graph 2).
Property Buyer’s want more Affordable Properties – As lending conditions have tightened, getting a loan – especially a large one – has become exponentially harder. This will FORCE many home buyers out of the most expensive markets and into more affordable markets like Brisbane. I believe investors will prefer to still invest in capital cities which again will help Brisbane remain one of the go to destinations for new home purchasing in the next few years. At 12.2 times the average income to buy a house in Sydney, Brisbane is looking like a bargain at only 6.2 times the average income.
So, let’s see if history repeats itself, and Brisbane becomes the next investor haven!! Are you ready for it?
Director – Rethink Investing
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