5 reasons Sydney unit prices will rise 25pc

Sydney heading for undersupply

Sydney unit prices are now rising, and I believe will continue to do so for a number of reasons.

Firstly, interest rates are at or close to their peak now, with Australia's 3-year bond yield trading down towards 2.7 per cent, from around 3.7 per cent only a few weeks ago.

This largely reflects the emerging banking crises in the US and Europe - which are of course bad - but it is already reducing fixed mortgage rates in Australia, and of course now portends lower interest rates Down Under over the next few years. 

Secondly, although people like to talk about mortgage stress - which may be a factor for some existing leveraged borrowers - Sydney's economy is still firing along just fine.

The unemployment rate in New South Wales is actually now the lowest in the nation, at an unbelievably low level of around 3 per cent.

Thirdly, Australia's population growth is now running at a record high of almost 600,000 per annum, which will be almost impossible for the new unit supply to keep up with. 

Sydney will be the most obvious beneficiary of the resurgence in long-term and permanent migration, the return of international students, and regional COVID refugees being called back to their city offices (at least for 2 to 3 days per week).

Fourthly, construction costs for developing medium-density dwellings have increased by about 50 per cent from pre-COVID levels, partly accounting for the crunch in building approvals. 

Crucially, therefore, we won't get any meaningful increase in the unit supply until prices rise by at least 25 per cent from here, and probably more. 

And fifthly, for the time being at least, New South Wales has exempted first homebuyers from having to pay stamp duty up to the $1.5 million price point.

With rents spiking by up to 50 per cent in some cases for prime location apartments, buying a unit has often become a more attractive option than renting, although stock levels are exceptionally low for A-grade units. 

Rental crisis

In related news, CoreLogic reported today that Sydney unit rents are surging higher at an annual pace of around 17 per cent and rising (this remains some way lower than SQM Research's asking rents leading indicator, which is up by more than 25 per cent over the past year). 

Source: CoreLogic

Rental vacancy rates in the capital cities continue to fall to all-time lows of 0.8 per cent.

Source: CoreLogic

This has been driven lately by sharp declines in Sydney and Melbourne - where vacancy rates are also now extremely low - and before that Brisbane. 

Yes, I've heard and noted all the counter-arguments. 

Bookmarked.

Home values steady

Stock shortage

Very little news from the ABS this week, as the ructions continue in global markets and for banks in the US and Europe. 

In Australia bond yields have fallen markedly over recent weeks.

With a shortage of quality stock foe sale, housing prices have begin to rise in Sydney, as well as in Brisbane and Perth to a lesser degree.

Wages growth cools for a 2nd month

Wages slow

Via SEEK's advertised salaries index, advertised salaries grew up just 0.2 per cent in January, seasonally adjusted. 

It's the second consecutive monthly decline, reported SEEK's Newsroom:

Over the year advertised salaries growths slowed to 4.4 per cent (down from 4.6 per cent in December).

This suggests that we may seen the peak of wages growth for the cycle, according to SEEK's Chief Economist, Matt Cowgill.

This makes sense, with the peak tightness in the labour market having passed in mid-to-late 2022.

Supply issues steadily being resolved

Supply shocks solved

Charlie Bilello always provides sensational insights from the US on Twitter, and is well worth a follow.

From this weekend alone...freight costs are now - almost unbelievably - lower than they were at the start of the pandemic, having plummeted by an astonishing -87 per cent. 

On the rampant demand side, things have been gradually cooling a bit too.

The average price of a used Tesla has fallen by US$21,000 since July last year, as charted by Charlie:

Gas prices are now tracking -20 per cent lower than a year ago.

In Australia we aren't quite there yet, but given the significant drop in oil prices of late it shouldn't be too long before unleaded prices are down by a similar amount from a year earlier (diesel prices have remained strangely high, on the other hand). 

As for US interest rates? Well, they are now expected to fall now over the next two years, as markets price in rising concerns about major stress within the banking system.

Great analysis as always. 

Too much, too fast

Breaking bad

In many respects, we’ve lived through an unprecedented few years.

The enormous fiscal stimulus deployed around the world - combined with the brutal supply shocks - led to a burst of inflation as the world reopened.

Perhaps that was the inevitable cost of the shutdowns.

Too much, too fast

With the benefit of hindsight, many are saying that central banks should have started lifting interest rates sooner.

Maybe that’s so…with hindsight.

But it’s also questionable whether that would’ve made any meaningful difference to, say, timber shortages, or spiraling freight costs.

The monetary policy response to the spike in inflation has been rapid and brutal.

But now things are demonstrably breaking, with banks coming under severe pressure all over the place.

Wild swings

The volatility in bond markets over recent days has been almost beyond belief, which is not typically a sign of good news.

The US 2-year Treasury yield finished another wild trade at around 3.84 per cent overnight - it was above 5 per cent only a matter of days ago.

Australia’s yield curve is also now pointing to lower interest rates over the next few years.

More volatility is to be expected ahead, but the narrative around the need for lifting interest rates has been broken. 

Fixed rates to fall

Fixed rates to fall

A snippet from yesterday's population release.

Net overseas migration hit a record high of +106,200 for the September 2022 quarter, the largest 3-month increase in modern history.

Westpac now sees the Reserve Bank holding interest rates in April to take stock of the situation to date.

Looking further out, with the sharp declines in the 3-year bond yield, lenders are already starting to cut their 3- and 4-year fixed rate mortgage offerings. 

There's so much competition between lenders for new business that it's imperative borrowers shop around for the best possible deal. 

Population growth approaching record pace

Population count accelerates

Australia's population increased by +128,670 in the September 2022 quarter, implying an annual pace of around +500,000 per annum. 

Source: ABS

The population is growing faster than previously projected, and the population clock as of today was ratcheted higher to 26,385,000.

Indeed, this now implies population growth of faster than one person per minute, which is actually more like an annual population growth of +573,000 per annum.

I guess it will slow down a bit at some point.

The peak of the rush to south-east Queensland passed in the September quarter.

More and more employers are requiring workers back at their desks in Sydney and Melbourne, and with each passing week this trend will continue. 

Queensland topped the charts over the year to September 2022, with population growth of +114,400 or 2.2 per cent. 

Source: ABS

Sydney and Melbourne will take up the mantle of accounting for the bulk of population growth in 2023 as permanent migration increases. 

Record high immigration will take the pressure off the skills shortages this year. 

Jobs bounce as expected

Return to the office

We got the expected bounce in employment in February, with total employed persons rising +64,600 as Aussies returned from their long summer breaks. 

This solid increases came after two consecutive monthly declines, however. 

The 3-month average gain in employment was thus very modest at only +12k.

With population growth rates running now at record highs, we'll need to add around +30k jobs per month just to keep the unemployment rate on an even keel going forward (which won't happen now monetary policy is contractionary and confidence has been knocked lower). 

The unemployment rate ticked back down to 3.54 per cent, which isn't as low as we saw between July and November last year, but is still pretty darned low. 

New South Wales has the lowest unemployment rate around the traps at just 3.1 per cent.

Overall, this was a solid result which keeps the possibility of a further interest rate hike alive.

However, markets are now expecting interest rates to ease over the remainder of 2023, with a very fraught situation ongoing internationally and bank liquidity issues feared in the US and Europe. 

The labour force figures are expected to soften from here.