The Sydney ripple effect - riding the wave

[MichaelW]

OK guys,

Most here would be aware of the concept of the rippling house price effect in any given area. See Change wrote some stuff on this a while back and did a good analysis of Rockhampton which he executed a successful strategy against. Here's an archived thread (has it been that long?) where See Change makes some good points, you still with us Cliff?:

http://www.somersoft.com/forums/archive/index.php/t-12770.html

Maybe I should have said at least five years.

I don't "know" . I'll be sitting on the fence watchin' .

Once I see the central areas of sydney move, that will be the key to start buying. First near middle of sydney , then further out in sydney , then Central bris, then middle / outer brisbane ... then back to Rocky or who knows where... maybe back to hobart , or even adealide and Melb this time.

See Change

Well its been "at least 5 years" since 2003 and the "central areas of sydney" are on the move. Open your cheque book mate! And here's a link to Seech's excellent Rockhampton thread which actually introduced me to the ripple effect:

http://www.somersoft.com/forums/showthread.php?t=11656

OK, fast forward to today. I want this thread to be a very focussed discussion on the Sydney market only and on where people think the price rises are at and where they're most likely to ripple to next.

Here's something to start the discussion off:

Balmain hotcakes push house prices higher

And here's some select quotes from that to help us form a picture of where the real movement is:

Inner West:

The median price for a house in the inner west rose 5.6 per cent to a record $760,000, Australian Property Monitors said.

The inner west first achieved a $600,000 median in 2002. This rose to $700,000 in late 2003, but dipped back to $620,000 by 2005.

Balmain was among the strongest suburbs to rebound in the area, its median price rising 23 per cent to breach $1 million in the quarter.

Concord West and Croydon also registered rises in the recent quarter of more than 20 per cent.

The growth in the area rippled to such nearby suburbs as Erskineville, where prices rose by 8.7 per cent, from $611,000 to $665,000.

North Shore, Northern Beaches and Eastern Suburbs:

Higher prices on the lower north shore, the eastern suburbs, the northern beaches and the upper north shore assisted the overall price gain, although median prices in these typically wealthy districts were well below pre-global financial crisis levels.

South:

Although the south rose by 5.8 per cent in the September quarter to $619,000, it is well under its median peak of $665,000 in 2003.

West and South-West:

The medians for Canterbury/Bankstown, the south-west and the west were also below their peaks of 2004.

Summarising the above:

So, we all know the FHB grant helped put a floor under the sub-600 market. But it appears that the West and South-West are still "below their peaks of 2004". So this probably isn't where the action is starting. I'd call that entry level market as stabilised but steady. I'd probably group the South in this category too.

If we look at the top end then its had a nice bounce back but is still "well below pre-global crisis levels". So definately not the boom area that is kicking this next cycle off.

Now, if we move to the focal area of this report, the inner west, we can see "the median price for the inner west is now a record $760,000". So, it would appear the old stalwart of the inner west is once again going to be the epicentre for the coming Sydney boom. Its already blown the $1M mark and looks solid. Its lead previous booms and looks like leading this one again. Its always been a favourite of mine and I almost bought a 3-bed townhouse in Glebe for $650K in 2006 but decided on my development site in Mona Vale instead.

So the logical question is where to from here?

The ripples have already started. As the piece points out: "The growth in the area rippled to such nearby suburbs as Erskineville, where prices rose by 8.7 per cent, from $611,000 to $665,000." So its spreading through the inner west. If you've always held a long standing appreciation for Redfern or the under-valued inner west then now might be your moment in the sun. Welcome others' thoughts on which burb in the inner west will be next to go.

And beyond the inner west, which sydney sub-region is likely to move next? I personally like the lower north shore and think it took a big hit and will bounce back nicely. Mosman, Cremorne, Greenwich, Aartarmon, St Leonards, Neutral Bay all look like good value to me. Of course my fingers are also crossed that the Northern Beaches still keep performing as they did this quarter. They might not be the next sub-region to go, but they'll catch the wave at some point.

OK, open to the floor. Where next and why?

Cheers,
Michael

 

[asdf]

And beyond the inner west, which sydney sub-region is likely to move next? I personally like the lower north shore and think it took a big hit and will bounce back nicely. Mosman, Cremorne, Greenwich, Aartarmon, St Leonards, Neutral Bay all look like good value to me. Of course my fingers are also crossed that the Northern Beaches still keep performing as they did this quarter. They might not be the next sub-region to go, but they'll catch the wave at some point.

OK, open to the floor. Where next and why?

Cheers,
Michael

They are all great areas Michael and will no doubt chug along nicely. But the problem is what kind of property will do really well in these areas? Houses and we all know what we get with houses - negative carry and massive land tax bills in lower north shore plus a rate of deterioration at 10x the rate of increase in rent. And throwing in $350k equity to get just one property is not really bread and butter for most people. Or you could look at units and bubble along at CPI + 3% but again, once all costs and strata levies (which are now hitting $1000 a quarter for bog standard units) are accounted for, doesn't leave much balance for wealth creation. I think development is where the games at. Add value but do it cheaply and move on or rent it out. Simply buying a standard home probably won't cut it unless you know how to turn sweat equity into hard cash.

I'm all ears...

 

[BV]

Michael

I am not convinced that all areas and regions will go back to the prices of 2003-5

I think the areas with the higher yields will have to move next because of increased investor activity.

However, people have learned their lesson and won't overborrow and the speculators no longer have the ability to buy unlimited numbers of properties with no money down so the market will be more sensible this time around.

IMHO

 

[pete_w]

I think we're heading towards another boom. I wont be a position to buy untill mid next year but at least i'll see how the summer sales season pans out.

Australia is economically a lot better off, as evidenced by the rate rise. overseas will be sleepy untill their spring/summer, then a convincing recovery over there will lift us while we sleep through winter.

or so i hope

 

[Deltaberry]

5 years since 2003. But Melbourne's already legged up in 2007, and it legged up again before Sydney in 2009.

So maybe the ripple effect works the other way. First Melbourne, then Perth, finally Adelaide... after a while, Darwin. And lastly, Sydney will one day move.

 

[Ajax]

"Well its been "at least 5 years" since 2003 and the "central areas of sydney" are on the move."

Is this evidence that the wave has started in Sydney...about as close to Sydney CBD as you can get and about as unrenovated as you can get (is there only an external toilet?).

I'm now waiting for Redfern prices to jump.

http://www.yourmortgage.com.au/news/3472/default.aspx

"Surry Hills property goes for $150,000k above reserve
22/10/2009


By Robert Carry

An unrenovated Surry Hills terrace on the Sydney suburb's Davies Street has sold at auction for $150,000 above its reserve price.

Laing & Simmons secured an $891,000 price tag for the terrace after seeing strong interest in the weeks prior to auction. Laing & Simmons Surry Hills director Brett Ozanne said his firm took over 200 potential buyers through the property for inspections and over 100 were in attendance at auction. "The impressive final price was the result of spirited bidding from 14 registered parties," said Ozanne."...

Link to the Davies Street house...check out the photos...its one tired old terrace house

http://www.lssh.com.au/pol/property...efault&xsl=470&f_HeadOfficeID=1&f_AgentID=470

And Mary Street terrace house has sold prior to auction

http://www.lssh.com.au/pol/property...efault&xsl=470&f_HeadOfficeID=1&f_AgentID=470

 

[see_change]

Hi Michael

As previously noted

We bought two units in Mosman in December last year . Have had nice increase in price purely on the basis of making a good buy and the subsequent valuation being considerably up on what we put into them . Not sure what they've done since then . No troubles with tenants.

Currently we arranging finance for our next purchases which we'll be looking for in the next couple of months.

These will be in our super fund and probably will be in lower North shore or lower Northern beaches. Again the time frame I'll be looking at these investments for is over the longer term . Good quality in good areas .

We know the areas and they're close to where we are.

Need to see how much the banks will lend us .. Will determine how many we buy.

For me fine tuning is more important if I'm looking at a shorter time frame which at the moment I'm not looking at .

Cliff

 

[Ausprop]

you guys crack me up. manufacturing and finance is dead. the only wealth being generated in this country for the next 30 years is resources. the boom is well under way in karratha, port hedland etc. my feel is prices there could be up 20 to 40% since the beginning of the year. Bris Perth and Adelaide will lag the ground zero towns. Then when the wealth is pumping thru the arteries some of it will wash up in Mel and Syd in the form of GST and govt slush funds, corporate profits and so on. Give it a bit of time but it will happen. Watch IRs tho - if the resources boom is as strong as it looks like it will be, rates will be high too - this will temper cap values in areas that aren't directly benefiting from the boom

 

[josko]

I agree with you Ausprop we are on the way to a nice resource boom ..

However, you can't acknowledge the signs of growth in one industry and ignore another.

Regards JO

 

[Ausprop]

what's the other tho?

I also acknowledge - and am a great believer in - the opportunities that result from demand/supply mismatches in the medium term. This is more important than factors such as growth, median prices, incomes etc

 

[josko]

what's the other tho?

I also acknowledge - and am a great believer in - the opportunities that result from demand/supply mismatches in the medium term. This is more important than factors such as growth, median prices, incomes etc

You said it.

Then why this statement?

you guys crack me up. manufacturing and finance is dead. the only wealth being generated in this country for the next 30 years is resources.

Maybe I have misunderstood but I am sure I have read elsewhere on this forum that you are positive about growth in property?

Or was it simply the recovery of the economy?


Regards JO

 

[Ausprop]

yes I am positive but I just think a lot of people let the tail wag the dog. as in, let's let resources recover, then worry about ripple effects

 

[BV]

The medians for Canterbury/Bankstown, the south-west and the west were also below their peaks of 2004.

Michael
this is actually true. There are pockets where prices haven't moved by much.
I actually went looking on saturday and bought a unit having a 7% yield
cheers

 

[BV]

manufacturing and finance is dead. the only wealth being generated in this country for the next 30 years is resources.

Ausprop
I dissagree, our finance industry is not dead, in fact it's still making good money at our expense....
As for manufacturing, it's still here but concentrating on particular markets such as specialist & high tech Engineering, infrastructure & rail technologies.
Our automotive industry is not dead either, we make good cars and we won't let our car makers go under.

 

[Witzl]

im just sitting and watching closely, waiting for the ripple to get out to the Hills area, so we can refinance our PPOR and buy a few more IPs out west.

We've already seen our two IPs increase in value in the past 12 months, in line with what michael said about the FHOG proping up "sub $600K" houses closer to their 2003/2004 peaks. They are still well below the peaks, but have already experienced some growth from their base level price.

For example:

IP1 = Padstow 2br townhouse.
Purcahsed July 2005 $296K.
Current sales >$350K.
2003-4 peak prices $370-380K (next door neighbour bought at this price)

IP2 = Colyton 3br house. 600sq.m land
Purchased Dec 2008 $226K
Current sales >$270K, current bank val $265K
2003-2004 peak prices ~$300K


I hope that the boom comes as this ripple effect, as it will be much easier to monitor and plan your IP purchases for maximum gains, rather than if it does something different.

 

[Ajax]

Bit of an acid test for my Redfern property to see what this property nearby by sells for on 7 November (auction). Interested if any ripple efect is happening from Surry Hills to Redfern (Surry Hills prices are on the move)

http://www.realestate.com.au/cgi-bi...r=&cc=&c=85176952&s=nsw&snf=rbs&tm=1257294963

Inspected this one last weekend...has potential for offstreet parking (STCA) which is bumping up the offers on it. Property has only 2 bedrooms and is quite small. Needs lots of tidying up. Could make a good investment with a lot of work.

http://www.realestate.com.au/cgi-bi...r=&cc=&c=85176952&s=nsw&snf=rbs&tm=1257294963

 

[MichaelW]

Ajax,

Be sure and post that result when it sells!

I'm also going to need to get a valuation done on my development soon as a condition of the funding, so will let you all know how it comes in. The banks are still pretty conservative so it will be interesting to see how it stacks up. I'm working on $2.5M valuation for the three at completion for my modeling.

Cheers,
Michael

PS Witzl, nice work. Sit tight and it will come to you.

 

[euro73]

Its interesting to see all the optimism. There is good reason for it, certainly. No one can deny the environment for property is in theory at least, primed for a boom. The supply shortage is undeniable, and the GFC disaster hasn't really affected Australia very much (so far anyway), so all things being equal, the optimism would normally be a pretty sound theory. Certainly the RBA is concerned about a property bubble, and is adjusting rates accordingly to take steam out of the "bubble". Having said that, I wonder whether everyone quite appreciates just how much more difficult finance has become incrementally over the last 18 months and whether a lack of , or limited access to investment $$$ will stop any real boom in prices? Talk of 30 and 40% gains in the short term seem unrealistic, simply because what used to be true in lending is no longer true and what used to be easy is not necessarily so, anymore. It was only a year ago that the world was on the verge of financial ruin. How quick we are to forget.

Some things to consider when discussing 30, 40% increases in housing prices in the short term.

1. Valuations are still problematic. Purchase valuations are one thing- they are different to refinance valuations though, which are significantly more conservative. Most investors need equity to grow their portfolio. We all agree with that I assume? Some individuals may not be reliant on good valuations as they have very low gearing, but the majority do need good vals as they rely on equity to fund the next purchase. If you think its going to be straightforward to get the valuations you need to access the equity needed to provide 10% deposit plus costs for a new investment purchase, it may not be quite so straightforward as people are assuming. I recommend you get a good broker who recommends a lender with whom you can choose your valuer.

2.Even if your valuation is ok, LVR's are pretty well hard capped at 90% for investment property these days, and 90% is not as easy to obtain as it once was. 90% loans are tough now. Mortgage Insurers are far tighter than many of you may have experienced in the past. In particular, anyone who hasn't applied for finance in the last 6-9 months may be in for a little bit of a shock.
Not saying loans are impossible- far from it. Australian lenders are still lending at 90% and we should be very happy with that, but make no mistake- high LVR loans aren't as easy as they once were. Now add to that increasing rates and therefore increasing lender assessment rates , and you will start to see reduced borrowing capacity.

Might be a really good idea to get a LOC against your PPOR right now, while vals are relatively buoyant on the back of the mini FHO boom, and while you can get 90%. Remmeber that there are no guarantees that LVR's wont be reduced further at some point. Australia might not have suffered a GFC, but our banks rely on securitised funding more than most nations banks do, so its entirely possible LVR's may be reduced further in coming months (Look at the UK, where LVR's are at 75-80% across the board)

Anyway, I think in any debate, both sides of any argument should be explored. I'm not saying there wont be good Capital Gain in property in years to come, but Im just reminding you all that even if the environment is brilliant (acute supply shortage and growing demand) you've still got to be able to get the money to make it happen. I cant quite see where 30 and 40% extra buying power is going to come from in the short term to provide the capital gains people on here are spruiking. Might happen, but the maths are going to make it difficult while the banks have cautious lending policies in place. It could be several years before the banks start to increase LVR's again, and we all know that borrowing power reduces as interest rates increase.

All in all, I'd expect more conservative capital gains in the vicinity of 10-15% over the next couple of years, simply because the money to finance a huge boom doesn't look likely to be available as freely as people seem to be assuming. Of course, if rates don't get much higher than they are now, that figure could be closer to 20-25%.

Anyway- just my two sided argument for your consideration.

 

[MichaelW]

Its interesting to see all the optimism. There is good reason for it, certainly. No one can deny the environment for property is in theory at least, primed for a boom.

All in all, I'd expect more conservative capital gains in the vicinity of 10-15% over the next couple of years, simply because the money to finance a huge boom doesn't look likely to be available as freely as people seem to be assuming.

Hi Euro,

Fair enough, and Fair enough...

Money is a tad harder to come by but its still available, and for a lot of buyers its irrelevant as they're rolling in cash. But even if the lack of available finance does limit short term capital growth, all that means is that the demand/supply imbalance will manifest itself in yield growth instead of capital growth.

I don't mind if I get my returns in capital or cash, its all good.

If prices do stay capped for a while and yields rise, then I'll just try and load up with as much property as possible before the banks ease up on lending and that pent up buying demand explodes.

FWIW, I don't think the lending environment will limit capital appreciation too much though. Time will tell... But I'm off topic in my own thread. The topic here is where the ripple will carry the current Sydney boom. Its underway already and rippling out. The top end is starting to take off now and rapidly recovering from its recent falls. The top end is a luxury market so is an "esteem" good in economics terms so doesn't behave in the same way as a "normal" good does. Affordable roofs over heads are normal goods so less volatile, premium properties are esteem goods so are more volatile and over-shoot upwards and downwards depending on the current market conditions. They're in rapid catch-up mode now and will probably over-shoot upwards again in the next 3-5 years.

Cheers,
Michael

 

[dajackal]

That's a pretty nice increase on your Colyton property in < 12 months. Were the prices here propped up by the FHOG? If so, what will happen in this area inbetween the time the FHOG expires and when the ripple effect moves out to Western Sydney?

Being quite new to property investing, what are some good leading indicators for the ripple effect coming out to Western Sydney?

I am currently refinancing my unit in the Inner West which has gone up quite considerably, but not sure whether it is a good time to be buying in Western Sydney. This is especially so since we've yet to hit peak unemployment and my understanding is that these types of areas are most impacted by unemployment.

-jay

im just sitting and watching closely, waiting for the ripple to get out to the Hills area, so we can refinance our PPOR and buy a few more IPs out west.

We've already seen our two IPs increase in value in the past 12 months, in line with what michael said about the FHOG proping up "sub $600K" houses closer to their 2003/2004 peaks. They are still well below the peaks, but have already experienced some growth from their base level price.

For example:

IP1 = Padstow 2br townhouse.
Purcahsed July 2005 $296K.
Current sales >$350K.
2003-4 peak prices $370-380K (next door neighbour bought at this price)

IP2 = Colyton 3br house. 600sq.m land
Purchased Dec 2008 $226K
Current sales >$270K, current bank val $265K
2003-2004 peak prices ~$300K


I hope that the boom comes as this ripple effect, as it will be much easier to monitor and plan your IP purchases for maximum gains, rather than if it does something different.