Recipe for Sydney BOOM

[Land]

There are a number of factors which will influence the growth of the Sydney market, and they are all inter-related:

1. The supply vs demand inequality
2. Access to credit
3. Sentiment (the old fear vs greed equation)
4. The cost of renting vs the cost of buying

Once these factors come together, I believe that Sydney will take off again. At the moment, I see the following:

1. Massive supply vs demand inequality already exists - tick
2. Access to credit will improve when interest rates drop - awaiting a tick
3. Sentiment is still very poor, but this article ( http://www.news.com.au/business/money/story/0,25479,23961580-5013951,00.html ) is interesting as I use the mass media as very best measure for Joe Average sentiment, good to see some positive sentiment because it will start to kick in fear that the market will escape some people, or greed for capital gains - still awaiting tick
4. The cost of renting is rapidly increasing - nearly ticked!

Increasing rents should meet interest rates coming back down, and combined with improved acccess to credit and increasingly positive sentiment, will start the next boom.

This is my 'recipe' for the next upswing in Sydney, and everything is starting to slowly click into place. It's not a matter of 'if' but when....and it's been a long time coming for us long suffering Sydney investors.....

 

[oracle]

I more or less agree with your analysis.

Cheers,
Oracle.

 

[Sunder]

1. The supply vs demand inequality
2. Access to credit
3. Sentiment (the old fear vs greed equation)
4. The cost of renting vs the cost of buying

I disagree with your analysis.

1. Shortage - Tick
2. Credit - Massive cross. We're still below long term historical average interest rates, and we've got record defaults. No way.
3. Sentiment - Cross. There have been about 3-4 D&G stories for every boom story, and the comments on boom stories are always asking what kind of drugs the analysts are smoking. People aren't buying. (stories or houses)
4. Yield is still what, 2-6% vs 9-10%? A lot of gap to close. Cross.

I don't think we'll see a housing boom again until houses either fall substantially, or interest rates drop to 4% again... And I see the former scenario happening before the latter.

 

[Peter 14.7]

There are a number of factors which will influence the growth of the Sydney market, and they are all inter-related:

1. The supply vs demand inequality
2. Access to credit
3. Sentiment (the old fear vs greed equation)
4. The cost of renting vs the cost of buying

Once these factors come together, I believe that Sydney will take off again. At the moment, I see the following:
.....

May I further add what would be three subsets of point 1. pertinent to Sydney.

1. The supply vs demand inequality
1a. The significant lead time for development approvals
1b. The higher costs of trade labour in Sydney
1c. The lack of trade and technical labour in Sydney
1d. The longer construction build timeframes

Point 1a. is particularly poignant as the approval time for most Developments for multi unit housing ( any more than 1) is minimum of 12 months and more typically 2 years.

That is one of the reasons Sydney underperformed so much in 2004 and 2005 as when the market tanked in end 2003 there was significant as development under construction which continued in early 2005, swamping an already over loaded market with stock.

Very recently, dormant development sites around the CBD , sometimes for sale for two years, have been snapped up but approvals need to be revised, upgraded, construction plans draw, so any start is minimum six months off.

Evidenced by a very reliable inside source on Construction activity who told me he has the least forward orders on the books in seven years this financial year.

Peter 14.7

 

[Peter 14.7]

I disagree with your analysis.
I don't think we'll see a housing boom again until houses either fall substantially, or interest rates drop to 4% again... And I see the former scenario happening before the latter.

Disagree. Prices will not fall and rents will go up to improve the yield. Rates drop 1% and Sydney will fire.

Ask yourslef ....where will everybody live?

Peter 14.7

 

[Sunder]

Disagree. Prices will not fall and rents will go up to improve the yield. Rates drop 1% and Sydney will fire.

Ask yourslef ....where will everybody live?

Peter 14.7

Rates drop 1% What time frame are we talking about here? 5 years? I agree.

The market is pricing in 25bp before the end of the year though.

 

[Nathan]

I agree with all of you, been saying same thing for long while...

in 12-18 months i reckon...

good to see the doom gloomers arent on here ripping the thread apart.

getting me very excited knowing were near a catchup with a boom around the cnr.

 

[evand]

Prices did not fall in Sydney from about 91 to 98/99. Relative to inflation there was a loss of about 25% - 30% compared to prices in 89/90.

In that time rents continued to increase till they couldn't be ignored in the late 90s where prices began creeping up as demand slowly grew. Then investors stated chasing high yields and the boom began.

Prices can stay flat or even fall a little in Sydney for LONG periods.

Disagree. Prices will not fall and rents will go up to improve the yield. Rates drop 1% and Sydney will fire.

Ask yourslef ....where will everybody live?

Peter 14.7

 

[Peter 14.7]

Rates drop 1% What time frame are we talking about here? 5 years? I agree.

The market is pricing in 25bp before the end of the year though.

The market is wrong. Rate rises take 6 months to bite. Ironically drops take 1 months to bite. People want to believe in good news. We are yet ot see the full outcome on the last rises.

Traditionally RBA overshoot in both because they do not have crystal ball and have to take the "better to be safe than sure" approach.

I am with Nathan. I say no rises this year and until middle next and then drops end next year so 12 to 18 months. Good timing for Fed Election.

I will qualify this witho ne big out! And I can say this as I have been hawkish on Oil for three years. I think Oil WILL go to $200 in Dec and then drop as alternatives kick in and the new US President Obama gets out of Iraq and thus Iran. No-one will care who is in charge provided the Oil flows.

AND

If Mc Cain gets in and stays in Iraq like he says...then Oil has no limit.

Peter 14.7

 

[Land]

2. I don't think that long term historical average interest rates are anything to go by, financial markets are completely different to 50, 40, 30 or even 20 years ago. The economy is starting to cool (evidenced by the fact the Reserve is now holding off) and it typically cools more quickly than it grows, and to stop it cooling too quickly, interest rates drops will be required.
3. Sentiment hasn't swung.....yet...but you can be sure that people will get sick and tired of their rent increasing substantially every 6 months, and as it closes the yeild gap, the emotional factor of "for only an extra $40 a week we can own our own place" starts to come into play. Don't forget that 70% of the market is owner/occupiers.
4. Yeild is at 2-6%? I'd agree with the higher end of the spectrum for median priced housing. I think 5% is becoming the norm rather than the exception.

I'm not saying these factors have come into play yet, I'm personally guessing about 18-24 months, but it's coming.....

I disagree with your analysis.

1. Shortage - Tick
2. Credit - Massive cross. We're still below long term historical average interest rates, and we've got record defaults. No way.
3. Sentiment - Cross. There have been about 3-4 D&G stories for every boom story, and the comments on boom stories are always asking what kind of drugs the analysts are smoking. People aren't buying. (stories or houses)
4. Yield is still what, 2-6% vs 9-10%? A lot of gap to close. Cross.

I don't think we'll see a housing boom again until houses either fall substantially, or interest rates drop to 4% again... And I see the former scenario happening before the latter.

 

[RedPanda]

In current times, I would add "Housing Affordability" as an essential ingredient for a boom. Big Cross there too.

Everybody knows it's a matter of time. But that time may be a long way still. I would personally predict a gradually increasing annual growth reaching a maximum of 6-9% over a period of 3-5 years as a result of interest rate cuts and high yields. But nothing spectacular. Better opportunities elsewhere.

 

[Peter 14.7]

Prices can stay flat or even fall a little in Sydney for LONG periods.

Agree. Prices in Sydney has dropped since Mid to late 2003 so we are almost five years into this period. Your last period was 7 years. Kieran Trass prop cycle expert from NZ presented to SIG in 2004 and said his studies is 7 years was the magical number. So 2010.

Peter 14.7

 

[evand]

I disagree. Only isolated parts of Sydney have dropped constantly from 2003, being outer and South West. Northen Suburbs, Eastern Suburbs and Inner West have held up until recently where they have began levelling out in the last 6 months.

I think low interest rates, the booming stock market/economy and to a lesser extent the resource boom were responsible for the demand holding up in the inner/medium areas.

When the music stopped on 3 out of the above 4 it dampened demand there as well. I don't agree that the major boom that stopped in November 03 was the peak of the market.

Agree. Prices in Sydney has dropped since Mid to late 2003 so we are almost five years into this period. Your last period was 7 years. Kieran Trass prop cycle expert from NZ presented to SIG in 2004 and said his studies is 7 years was the magical number. So 2010.

Peter 14.7

 

[Sunder]

I'm not saying these factors have come into play yet, I'm personally guessing about 18-24 months, but it's coming.....

It seems we vaguely agree on the time frame. Next boom is about 2 years off. However, we seem to disagree on what is going to happen in the interim.

The market is not "taking a breather". It's wobbling against a wall, trying to avoid fainting after a 16 year marathon.

Meanwhile, oil and groceries is tripping one leg, while bad business and consumer sentiment is tripping the other. China might be trying to offer a shoulder to lean on, but our Communist friend seems to be only marginally fitter than us.

I agree the market will take off in two years, maybe a touch longer. But in the interim two years, there are going to be some serious bargains around. Mostly in middle class and below areas, but there will be some downward pressure on premium suburbs.

 

[Land]

Real prices in Sydney HAVE dropped since the end of 2003. I hold IP which has not grown since, actually dropped 5% in what I could sell for, but in real terms against infaltion have dropped a lot.

Oh, the other thing I forgot is that the sharemarket is tanking badly and now appears to be tracking sideways (below 5000 today), which usually makes investors look elsewhere i.e. to property.

 

[feihong]

Real prices in Sydney HAVE dropped since the end of 2003. I hold IP which has not grown since, actually dropped 5% in what I could sell for, but in real terms against infaltion have dropped a lot.

Oh, the other thing I forgot is that the sharemarket is tanking badly and now appears to be tracking sideways (below 5000 today), which usually makes investors look elsewhere i.e. to property.

No, cash is the best investment at the moment. Or, if you choose to short, you can get paid interest as well, on top of capital gain.

 

[Land]

Sunder - glad we agree.

We will be finishing off our dual occ about next Feb, and am hoping to score a few more bargain dual occ sites late in 2009 by which point I'm thinking interest rates will be coming off, and hold them through the next upswing before developing them.

One thing I think everyone can agree on, there will be some great IP shopping for the next 12-18 months!

Buy low -sell/refinance high
Buy low -sell/refinance high
Buy low -sell/refinance high

It seems we vaguely agree on the time frame. Next boom is about 2 years off. However, we seem to disagree on what is going to happen in the interim.

The market is not "taking a breather". It's wobbling against a wall, trying to avoid fainting after a 16 year marathon.

Meanwhile, oil and groceries is tripping one leg, while bad business and consumer sentiment is tripping the other. China might be trying to offer a shoulder to lean on, but our Communist friend seems to be only marginally fitter than us.

I agree the market will take off in two years, maybe a touch longer. But in the interim two years, there are going to be some serious bargains around. Mostly in middle class and below areas, but there will be some downward pressure on premium suburbs.

 

[Sunder]

Oh, the other thing I forgot is that the sharemarket is tanking badly and now appears to be tracking sideways (below 5000 today), which usually makes investors look elsewhere i.e. to property.

I think that's a convenient argument, based only on one example - after the 2001 dot.com crash.

1. If the stock market has tanked, people have lost money. Usually big money, what's left over to move to property?

2. If the market has tanked, wouldn't it be better to buy? Why risk moving your investment from one class that HAS crashed, to one that MIGHT crash?

 

[evand]

Can you say where in Sydney? As most know, Sydney is a tale of many markets. Some rising, some staying flat some falling through the floor...all at the same time.

Real prices in Sydney HAVE dropped since the end of 2003.

 

[Sunder]

One thing I think everyone can agree on, there will be some great IP shopping for the next 12-18 months!

Damn straight there is. I'm eyeing off an apartment that's got 7.5% gross yields! It won't be neg geared for long...