Sydney Capital Growth prospects by Sub Region

[MichaelW]

Hi,

This post might be a long one so bear with me, but I want to outline a simple thought flow and its logical conclusions which can help inform your decisions as to where to buy in Sydney (or other cities by extension). Let me formulate an argument and conculsion for you and see how it goes.

Assumption 1: Income growth drives long term price and rent appreciation

There has been a lot of debate lately about what drives house price appreciation, but a common conclusion seems to be that income growth correlates with house price appreciation as well as other structural elements which can be isolated. Here's a few links that support this conclusion:

1. Ross Gittins July 2007

The true problem is that our homes are at the centre of our materialist ambitions. As our incomes grow in real terms over time we want to put much of the increase into our homes.

2. Greg Hoffman April 2010

Over time, though, you'd expect the earning power of property (the rent it can generate—or save you if you live there) to rise roughly in line with the growth in average wages.

Over the very long term it has to be this way.

3. Chris Joye October 2010

The managing director of Rismark International, Christopher Joye, said the disparity in house prices between the east and west reflected the broader disparity of incomes and income growth.

So, income growth is the long term basis for price and rent appreciation. But, structural changes such as interest rates in a low inflation environment can cause a corresponding step change in prices as ultimately interest servicability is a factor of both incomes and the rate interest is charged at. Other structural changes which can cause a step change in prices is the amount of household income brought to bear in servicing mortgages through the propensity to dual income households or pooled purchasing.

Asumption 2: Income Growth is uneven

1. Jessica Irvine October 2008

From the figures it is possible to derive a ''Mosman-Fairfield'' inequality index which compares average incomes in Sydney's richest and poorest areas. In 2003-04, a worker in Mosman earned 2½ times that of a worker in East Fairfield. By 2007-08 this had risen to 2.9 times.

''The ABS data shows a steady rise in income inequality across the country with average incomes for the top end increasing more than the middle income … that reflects the greater share of the boom time accruing to those already on relatively high incomes.

''And the incomes of the bottom end haven't risen as strongly, despite strong jobs growth for low-skilled workers over that period,'' he said.

So, in a strong economy, high income earners increase their incomes at a greater rate than lower income earners. This has a similar reverse effect in hard times where high income earners wages fall faster than low income earners.

Conclusion: High income suburb prices rise faster than low income suburbs.

It follows then, that if house price appreciation is driven predominately by wage appreciation AND that wage appreciation is higher for high income earners THEN house price appreciation should be higher in high income suburbs during the good times.

1. Jessica Irvine October 2010

THE median Sydney house price has more than tripled over the past two decades, but prices in the east and inner west have quadrupled, mirroring and compounding a growing income divide across the city.

So, there you have it.

1. Incomes drive house price growth.
2. High income earners have a higher rate of income growth
3. High income suburbs have a higher rate of price appreciation.

Or, for those who like to keep it simple: Follow the money.

QED as they say in academia.

Enjoy...

Cheers,
Michael

 

[FormerLurker]

good post - thou shalt be kudosed

 

[Piston Broke]

Well my experience is that generic data is useless for making isolated decisions.

 

[Able]

A point to consider is that stat used is 'media house price' and that some portion of the change is due to renovations, improvements or redevelopment.

For example the Sydney average 17 year change was 233% which equates to 7.3% p.a. However one cannot ignore that renovations, improvements and redevelopment have occured over the 17 years. I know quite often when i look at resales of the same property in Sydney (and this is not based on extensive research) i seem to see capital growth of around the 6% mark.

Regards

 

[Able]

Sorry, i should have added to the previous post..
My suggestion here is that the areas with faster rising incomes may (or may not?) see more spending (relative to the price of homes) on improvements etc. This woudl affect the median price change.

Regards

 

[MichaelW]

Fair enough, but the argument is that increasing incomes leads to increasing house valuations. Whether that is through value adding via reno or redevelopment or just bidding up existing stock is largely immaterial. It is the fact that the buyers in that market have the capacity to increase prices through their increased purchasing power.

What seems to follow all through history is that this capacity translates into outcomes. Prices do rise as incomes rise.

From that, it makes sense to understand where incomes are set to increase quicker and target these areas in the good times. Conversely, in the bad times you need to watch out for the areas where incomes are most impacted in the downturn such as luxury markets as these suffer the most.

So, if you believe we're still in the beginning of a multi-year commodity super cycle boom and that Australia is set to perform very well over the coming decade, then invest where this money will most impact incomes. Surprisingly, a lot of the wealth effect of the commodity boom will still be felt in Sydney and Melbourne's high flyer market. In Sydney, I expect the Eastern Suburbs and Lower North Shore to outperform other markets. By extension the Northern Beaches and Upper North Shore should also perform well through the coming economic expansion.

All good, looking forward to this economic cycle unfolding.

Cheers,
Michael

 

[JTBT]

Great post. I can see what your saying, but for someone starting out in property investing like myself it isnt feasible to go out and buy an IP in a suburb such as Mosman?

 

[Ausprop]

in premium suburbs the prices detach from earnings - few of the residents actually have a 9-5er. i see that as the biggest flaw in this argument.

 

[topcropper]

What's with the city CBD anomally? Only 2.1% growth in wages when all around is much more?

Would it be because some people are choosing to retire right in the middle of the CBD? I've got no idea but there must be a reason.



Also, the map shows wages growth from 03/04 to 07/08. This would capture the entire recent stockmarket and global finance boom, but not the bust that's happened since. I'll bet that a lot of the difference in wages growth from those in the wealthy Eastern parts has come back a fair bit since 08.


See ya's.

 

[BV]

Michael
Like the last 3 posters I'm also skeptical about the whole concept.
cheers

 

[Philip Thomas]

Fluctuations in Housing Prices

Well done Michael, this is an excellent post & no doubt will spark a lot of debate.

There is certainly a correlation between income, affordability & house price variations. However there are a few more drivers here, namely unemployment rates, local, state, national & international business cycles, interest rates & population growth / movement.

Then within suburbs there is volatility. In a suburb like Mosman, Toorak, Peppermint Grove, the high end within that market is heavily influenced by equity market performance (as bonuses are often tied to stock price performance).

So when the stock market is down the top end of these expensive suburbs are usually effected. Likewise when the stock market is strong there is high growth in the high end of these expensive suburbs.

This growth in the top end can be substantially different to the property price growth for entry level properties within the same market.

This phenomena can be the same for many suburbs across Australia & not just the most expensive.

Also need to be careful looking at a Local Government Area as a whole (as per the income map). Each LGA can be very large & diverse with substantial variation in income & house price values & movement.

Philip

 

[MichaelW]

So when the stock market is down the top end of these expensive suburbs are usually effected. Likewise when the stock market is strong there is high growth in the high end of these expensive suburbs.

This growth in the top end can be substantially different to the property price growth for entry level properties within the same market.

Hi Philip,

Your above two paragraphs is the crux of my argument. Incomes at the top end have a much larger non salaried component from their investments, bonuses etc so that they are much more dependent on the economic cycle.

When times are good, as I argue they are now and set to get significantly better on the back of an unprecedented mining boom investment, then high income earners benefit the most. Its not fair, but its reality. During the good times the top end of the market takes off due to the huge income impact for top end earners. Lower income earners still benefit from the boom, just to a lesser degree than the top end.

Cheers,
Michael