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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Sunday, 28 June 2015

Sydney shooting for a million

Auction clearances rise again

Another week, another thumping preliminary auction clearance rate reported by CoreLogic-RP Data, with an 83.5 per cent clearance rate from 747 results.

It's almost as though we have become desensitised to such boom-time clearance rates.

After all, it was not so very long ago a clearance rate of above 70 per cent was cause for arousal, while at the most recent auction market nadir results in the 40s range were recorded.

The final reported clearance rate for the preceding weekend was confirmed as 82.4 per cent. from 862 results across the city.

Nationally a 78 per cent preliminary clearance rate was reported, up from 77.3 per cent in the preceding weekend and just 66.6 per cent a year ago.

Price growth - Sydney median closes in on million

The Real Estate Institute of Australia (REIA) released its Q1 2015 house prices indices which showed Sydney's median house price soaring by "nearly 20 per cent" over the year to $830,000.

Meanwhile CoreLogic-RP Data's own Daily Home Value Index for Sydney has moved through its seasonal lull to surge some 3.5 per cent or $32,000 higher in only the past 17 days, with the month of June alone looking set to record more than a 2.5 per cent price increase on this index when it is reported on Wednesday.

Residex median at $961,000

Also this week Residex released its timely monthly property market indices to the end of May 2015.

Solid enough capital growth for Melbourne and Brisbane was recorded for the year to May.

A bit of a growth spurt has also been seen in Hobart median house prices, as the lower dollar combined with record Chinese tourism spend has improved the outlook somewhat for the local economy.

In most other locations capital growth has been relatively weak given the very cheap cost of capital available in the market.

But as widely reported in the media, it has been Sydney which continues to shoot the lights out with 16.7 per cent growth for houses year-on-year to a median price of $961,000.

Sydney also saw 13.1 per cent price growth for units to a median price of $635,500.

It is surely now only a matter of time before we cross over to above a $1 million median house price for Sydney, probably well before the end of the 2015 calendar year at the current pace of growth.

Quarterly house price growth in Sydney remained extremely strong at 4.8 per cent, with units not too far behind at 3.6 per cent.

Source: Residex

Where the Sydney cycle ends?

The Residex figures show how the Sydney housing market clearly moves in cycles, and so in turn the next cyclical peak will surely be in the post at some point.

Some commentators have calculated that there is an oversupply of property in Sydney, but it hasn't really felt that way in many parts of town based upon my "on the ground" experience, for want of a less irritating phrase.

New developments clearly have been dripping online in the lower north shore region, which intuitively should lead to a temporary spike in vacancy rates there, but generally speaking my sense is that if anything stock in parts of the inner west has been tightening again.

Sydney's eastern suburbs have been tracked relatively consistently of late in a state of near-equilibrium, neither oversupplied nor undersupplied.

I do expect, however, that some isolated postcodes will see fairly sharp spikes in supply.

NSW 2020 and adjacent postcodes is one region which immediately springs to mind, with industrial rezonings in the airport district being the driver - there are some sizeable projects underway in this part of Sydney.

NSW 2067 is another postcode which is seeing the construction of high rise units galore, Chatswood being a suburb that is said to be extremely popular with Chinese investors.

In aggregate though, demand from Sydney's very rapid population growth is tracking fairly evenly with dwelling completions, even at this relatively advanced stage in the cycle.

This could change quite quickly if net interstate migration to Queensland ever begins to pick up.

Alternatively development approvals in Sydney could experience a second wind.

Construction approvals could theoretically be reinvigorated by prolonged price growth through this cycle, this boom phase being stretched out by rock bottom interest rates.

Rents rise in Sydney

The Residex figures show that house rents in Sydney ripped 9 per cent higher in the year to May, while median unit rents also increased by 5.8 per cent.

This is another indicator of no oversupply.

The detached housing market will likely continue to beat to its own drum, particularly in the inner suburbs, but for the unit market I expect it will be the obliteration of gross yields which eventually pulls up the cycle in its tracks.

With mortgage rates at near record low levels and it being possible to borrow money at around 4 per cent, it seems that the cycle has a little way to run yet, provided that credit remains so freely available. 

Based upon what I have seen taking place at auctions, I wouldn't be at all surprised to see gross yields bid down to 4 per cent - which on the Residex indices implies that median unit prices could race higher from $635,000 to $715,000 - a further increase of $80,000 or 13 per cent.

In fact, I have seen numerous instances at auction where implied gross yields have been pushed far lower still into the mid 3s range, even on small apartments,  while the above scenario does not factor in any further rent growth.

While I don't think it would be healthy for the market if we were to tweak the numbers even slightly then these indices may even point to potentially stronger growth and the cycle blowing out further still.

With markets and most commentators not seeing rate hikes as likely between now and 2017 at the earliest - and little sign of a material let-up in the relentlessly fierce auction bidding by investors - upside risks still remain in this cycle.


A raft of interesting data is due out this week, particularly from Tuesday onwards, with Private Sector Credit expected to record growth in the region of 0.5 per cent for the month of May. 

Following significant releases of note include Building Approvals (a modest softening expected), Engineering Construction Activity, Overseas Arrivals & Departures (again!), Retail Trade (0.5 per cent expected), and International Trade in Goods and Services, all for the month of May 2015.


You can follow the links above to find analysis of all previous releases.

The April International Trade figures for April revealed a 13th month of deficit, and a huge one at an enormous $3,888 million! 

Let's hope for a better result this month!