Boom, Bubble, Burst or Blow-up?

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What will we call the current property situation in 2025?

Another weekend down and another day where many around the country are saying “every bubble has to burst”, “Don’t worry it’s just a boom, it will level off”, “there will be complete blow-up and prices will halve” but the truth is no one knows. Some will be right in 2025 and most will be wrong. 

The problems with all these almost daily calls, predictions, estimates or guesses I like to call them is that they look at the property market as one market. Secondly, if we are going to acknowledge the truth everyone has invested interests in some form which is behind what comes out of their mouth most of the time.

Before we begin the one thing I would love for you to take away from this article is the property market is not one market.

It doesn’t just go pop for every property on every street in every suburb over night. We would love to simplify it just one market because it is easier to think about it as “the property market”.

Unfortunately, it is not like the share market and does not behave like it. If the outlook changes for the next five years and turns horrible, the whole share market will undoubtedly fall to a lower level.

Why?

Because the profits of most companies are now no longer looking as likely and that means no dividends. It also means the valuation (another name for the share price) of the company right now will look expensive if it is not going to make a profit. A company could be worth $100mil today if it going to make $10mil a year for the next five years but what if that turned to a $10mil forecasted loss. It would most likely not be worth $100mil any more would it?

The whole property market will not fall because the outlook is not great for the next five years. A good property will most likely still have a tenant through out and therefore the income will still come in.

Furthermore, It can actually work the opposite for some property as when the outlook looks poor, quality property in capital cities are actually seen as somewhere safe to put your money rather than to sell and runaway from. Lower interest rates which usually follow a downturn in world economies and also cause people to invest. That is fundamentally behind what we have seen in the last three years. The outlook has been poor for Australia, but prices are up 60-100% in some areas.

I would love to share a few of my thoughts on what concerns me about Sydney house prices in particular. I will focus this on Sydney because it’s what I see day in, day out but also the one market that is apparently going to burst the hardest.

The current losers in the Sydney price boom or bubble are Sydney-siders who do not own property. This is not just first home buyers. It can be older generations, families who have never been able to buy and many people returning from overseas, migrating here or moving from another place in Australia.

I cannot stress how unaffordable it is for young couples to get their first family home. Sure you may be able to get a nice little unit for $750k in a inner-city location but to get a home for a family or at least a bigger three bed room apartment it is now moving comfortably over the $1mil mark in an area close to the city. Sure they can move to the outer suburbs but the jobs are in the city and transport in to Sydney needs to be experienced on a daily basis for at least a month to get an understanding of why you would love to live a little closer to work than in the outer suburbs.

To put this in perspective, the younger generation would need to ideally save a minimum of $170,000 to get in to $1mil property. A very difficult task and it could take five years or more for a couple to focus on and save.

But lets say they do have the cash and buy at $1mil. This would still leave them with a mortgage of around $900,000. Let me be clear $1mil is not some four bedroom terrace in the beautiful Paddington. It is a semi, townhouse, three bed unit in the inner outer suburbs now.

A quick search of sold properties recently on realestate.com.au and you’ll see what I mean.

If the couple wanted to pay a $900,000 loan off over 20 years (not 30 years, a good idea) and interest rates went back to just 6.5%. They would need to save nearly $7,000 per month. As it is their home, the interest is not tax deductible and therefore that is equivalent to $115,000 of pre tax income. So if the couple wants to survive (also a good idea) and live a life that is worth living it will need to earn somewhere around $200,000. Not pocket change.

What makes this concerning is that it’s great having a home paid off in 20 years time, but if you are not looking to leave Sydney and sell, they also need to begin planning for retirement and putting their kids through education. With a young family, that is very difficult when one parent may not be able to work full time.

So affordability is an undoubtedly an issue for people who do not have or have never owned property.

If you have owned property in Sydney the past five or fifteen years you will have already have benefitted from the recent boom/s significantly and go in to the next property with cash.

It really is a case of have or have nots and the gap has just increased dramatically in Sydney.

So what would cause a bubble to burst in property one of two things. One the supply to increase dramatically or two the demand to fall drastically. If both happens, well that’s a blow up.

If we begin to look at areas where supply is dramatically increasing and where there could be a problem - it is in apartments. Apartments are something that can always increase in supply if there is more demand and land available to do so. That could be commercial areas being rezoned to residential or councils changing laws to allow people to build up in residential areas. Sure there are always small blocks of units getting built in built up areas but I am talking large towers as can be seen in areas like Epping and Chatswood or apartment heaven near the Airport.

These are areas where the apartment supply is increasing at the very pace of demand. If there is more demand for units in the CBD of Sydney, Epping or Green Square areas. What do you think will happen?

Yes you guessed it, no one in particular but Mirvac, Lendlease, Meriton, Crown etc will build another new shiny tower of cheap (cheaper the better for them) apartments for people to buy. The problem with this is they can get away with top dollar prices as people are comparing them to other two bedroom units in Sydney. People think that new is better and so of course a two bedroom apartment is worth $950,000? I can understand someone paying $950,000 for a two bed room unit in Rose Bay that has land worth $4mil over 8 units. But really is that new apartment worth nearly a $1mil? I can answer that for you now, it's not.

If you own one of these apartments; is it a good thing when a new tower is built somewhere close to your apartment?

In five years time, which apartment will be worth more- your one that is 10 years old, one built today that is five years old or the new one built in five years time?

I see it like a train. Every year more carriages get added at the front and your carriage gets pushed back a little. The ones at the front are always worth more than the ones at the back and your position within the apartment block itself actually works very similar.

Fast forward twenty years, your apartment will be old, run down and worthless in comparison to the new ones getting built in 2035 in the area.

If you own one of these apartments or are considering them, please think about this and really understand the laws of demand and supply.

Please call me and I will happily help you understand it better and hopefully you can make a better decision. It will have a huge impact on your future financially. The opportunity cost is enormous with property investing, enormous.

Fundamentally, land is what goes up in value, the building is what goes down.

Ok so this is a scenario where supply will always equal demand. More demand = more supply.

But what parts of Sydney do not have the luxury of increasing the supply when there is more demand. Houses!

Houses need land and Sydney is built out now a good 30, 40 or 50km perhaps. All the “good” land close to the city is gone and already has a house on it. So therefore, even if there is more demand there's no room for them to be built.

One point, most people never think about is the poor town planning in building Sydney itself in the wrong location. What were they thinking back in 1780 when deciding to build a capital city on a coast. Silly sods.

How could they not think through how that would affect property prices 230 years later?

Building a city on the coast means that there is only half the available land. Secondly with a huge harbour in middle it would make travelling difficult and that would cut in to the available land. Available land is supply. It's been halved.

Think of it like a jigsaw and every piece is a piece of land.

Why did it also have to be so pretty too. That just makes the land around the coast and harbour even more desirable where there is only limited land. It’s a horrible foundation for a world super city. Sydney has become that and that is why the property problems have grown over the years.

We do not really have a demand problem for housing in Sydney. We have a fast growing population, we have a lot of younger generation looking to buy and a planned 1mil people planning to move to Sydney in the next 10 years. The demand for Sydney housing will always be there.

If anything we currently have a supply problem. If there was more affordable housing closer to the city, we wouldn’t have this problem but there’s no land left. Releasing more land in outer suburbs will help but what people really want is land close to the city. What’s concerning is that even releasing more land out in the suburbs does not mean it will be affordable today. Houses are still selling for a $1mil+ in Kellyville 40 kms from the CBD.

So where the problems lies I believe is where supply and demand will be tested in a downturn. The areas where the supply will always equal demand will be the first to get hit if the confidence is lost in property (Rosebery). The demand drops as the cost to purchase is high, there’s limited money flowing from overseas, investors don’t want to take on risks and interest rates are potentially higher.

For example, the Chinese money drys up and the supply keeps on coming. More want to sell as it doesn’t make sense to keep and people begin selling which causes more to sell. The fall will be disastrous from current prices.

The second area I believe will be where the demand is only high because they can’t afford to buy anywhere else (Kellyville) and supply is low across Sydney. That is the outer suburbs.

Areas that have been pushed up because the inner suburbs have become unaffordable. These areas are getting unrealistic prices because the number of buyers acting with a fear of missing out mindset drives them to pay a bit more. Unfortunately however as well in a downturn unemployment usually hits the outer suburbs harder than inner suburbs so there will be a decrease in people buying out there and what people are willing or can afford to pay.

The final bit I see is where people are buying with common sense thrown out the window. These are people paying $1,800,000 for a $1,500,000 place when there is nothing similar going for anything like those figures in the area. I have seen plenty of these and my clients are usually the ones walking away shaking their heads. While they might not see a big fall, they may not see much growth for a long time.

There is an arguement that all properties will cool off the longer a downturn goes on. That would really depend on how bad a recession in the world was in and how bad our unemployment got for highly skilled workers in particular. There's also an arguement that the top end market would be smashed - $2.5mil+ but that's a counter arguement that money would flow there still from around the world.

If you are not buying in these three areas, you can be protected from a downturn in Sydney prices. If you look at the property prices in London and New York through the GFC you will see that good property will hold it’s value. Other parts of the USA and UK got absolutely smashed and down by 40%. Some mining towns here are right now down 50%+ and parts of Perth are down 20%+. It does happen so it’s important to buy smart and avoid any unnecessary risks.

Will there be a burst or blow up of the bubble?

Unfortunately, I believe in some markets there will be. Whether they blow up or just burst will depend on the world economy staying strong. If it doesn’t there will be people walking away regretting the two decisions they made, one to buy and two not to sell.

Some markets however will be fine. They will ride the next 10 years and get through it. You do want to be careful speculating in Sydney now but in 2025, Sydneys population will be much bigger. Australia will undoubtably be a more desirable and powerful world economy. The current boom will be long forgotten and we may even be in the process of having another.

So my advice is simple – if you are buying a home in Sydney, take your time and be careful. If you are buying an investment, you need to be even more careful. Take out all your emotion and really think through what is the best investment, you may even find that Sydney is not the best place to invest for you.

With all my clients, we talk through their decision in detail. Sometimes it makes a lot of sense and sometimes they walk out deciding it's not the right thing for them.