where is nsw in the property cycle

[lizzie]

hi all

i'm reading kieran trass's book "grow rich with the property cycle" for the second time and am now more confused than ever.

from all reports (including on this forum) nsw is supposed to have just recently entered the slump phase (boom cycle peaked around end 2003) but i am curious as to whether anyone thinks nsw may have begun to enter the recovery phase already. the reason i ask this is that two of kieran's three keys to the cycle recovering is affordability (interest rates, income and price) and vacancy rates.

vacancy rates in newcastle are hovering around the 1.8-2% and i believe sydney is similar. this is a very low rate and i have noticed that rents have begun to increase in line. affordability is also pretty good as interest rates are low (and look like staying low), house prices have dropped by around 10% and employment is high. the only other key factor kieran suggest is immigration into the area of which i have not researched but low vacancy rates and media coverage seem to indicate good inflow. developers are also pounching on anything that is well priced, and i recently bowed out from a potential three way bidding war with two other cash buyers (no conditions) for a 1000m block near the uni (another indicator of recovery according to kieran).

opinions?

another item from the book i wanted to bring up for discussion is, looking at the various graphs indicating percentage of growth each cycle, each boom cycle seems to have a substantially lower percentage of growth than the previous boom and seems to last slightly longer (and the subsequent slump slightly shorter), ie 40% average in 1970's boom, 30% average in 1980's and 20% average in 1990's - does this mean that eventually the cycle of boom/slump will even out to a gentle swell?

 

[Stewie]

Lizzie, I wrote a similar post in the Coffee Lounge yesterday (called Lets Talk Economics). I am reading about economics at the moment and it struck me that whilst the economy continues to grow and inflation is steady within the 2-3% bounds (and rates are relatively low) then we must still be in a growth phase. How can we have a crash when the economy is doing well? The past year or so when house prices have stagnated has been a period that has allowed wages to catch up, that's all - once this happens the growth will continue.

To my mind a crash will only occur when one of the fundamental measures changes, ie growth in the economy slows dramatically (unemployment goes up) or inflation starts to rise dramatically (rates go up) - we have not seen either yet.

It's an interesting debate!

 

[House_Keeper]

I can't comment on nsw, but I can comment on the Sydney inner west market which I am watching.

I have read kieran trass book and I found it excellent. One of the best property books I've read.

Based on the key drivers listed in the book, it seems to be that the Sydney inner west is somewhere in between the middle and the end of the slump phase. The main reason is that affordability is still low, and employment growth is a bit weak in Sydney.

 

[young_gun]

I think NSW property is still at the bottom of the cycle. Personally I think that it will noticably start to pick up midway through 2007 - midway through 2008. I dont think it has picked up because statistics throughout Sydney are still recording negative growth (check suburb snapshot on domain.com.au).

NSW has expirience stagnate growth since 2002 , and by the time 2008 hits this will be almost 6 years of stagnant or negative growth. Considering the average property cycle is about 7 - 9 years and on average houses double in value in this timespan , I think it will pick up once people relise property has gone through a whole cycle without growth let alone dobling in value.

If we look at this econimcally , I think we also may be able to shed some light on when property values will increase. In my opinion interest rates wont rise at all. This is because the negative effects it would have on the economy (due to the number of people who are mortgaged to the hilt from the last property boom) would be fare worse than controling inflation to the targeted 3 % . I think once people relise that property is starting to pick up and that its not going to slump in value they will start to invest as interest rates are still relatively low and alot of those people who have put off buying for the past 6 years will come back into the market.

 

[GreatPig]

I don't know about the key drivers, but I do remember Kieren saying at the SIG meeting that he thought the property cycle here seemed to be something like 10-12 years, roughly double the NZ cycle length.

If that's so, then then next peak wouldn't be expected until 2013-2015, with recovery starting some years before that.

If he's still around here, perhaps he'll comment.

Cheers,
GP

 

[lizzie]

There are definately signs that the property cycle is moving on:

Property boom -> over inflated prices -> lack of affordibility -> property slump -> decreasing prices -> eventually decreasing vacancies -> increasing rentals -> increasing yields -> increasing investor interest

And off we go again (but very slowly at first)
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i guess this thread is touching on the same questions raised in the sydney apartment market thread.

michael, do you think the recovery is on?

i believe it may be and that talk about the slump being a long one is just guesswork. yes, the last recovery/boom phase was exceptionally long, but according to data the slump prior to that phase was also longer than normal - who is to say that a long boom is followed by a long slump. perhaps it is the other way around, a long slump is followed by a long boom and that are infact moving into the very beginning of the recovery stage.

it has already been nearly 3-4 years since the peak of the boom in nsw with a normal cycle lasting around 8-10years from boom to boom (with recovery being slower than slump) so 3-4 years would possibly indicate bottom of slump time.

i note in our area there seem to be a larger than normal number of "desparate" sales, but also an increase in rents and increase in interest by seasoned investors in prime opportunities ... the next 12 months will be very telling.

 

[Ebbie]

Interestingly when I contacted someone at Residex last month they were predicting little to no growth for NSW areas (outside of Sydney) over the next 5 years. However they expect to see growth in the 'medium term' of 8-10 years.

 

[TomL]

Hi Lizzie.

You have analyzed the macro and slighly less-macro measures that KT espouses. I agree that they are useful to get an indication of what is going on.

What happens when you look at a lower level - what are properties selling for and at what YIELD are they selling for?

If you apply navras rental reality at this lower level it will show you if properies are still overpriced, or if they are selling at a fair value.

Macro is good, but I like this micro indicator better.

In shares speak, KT's indicators would be the setup, SN's rental reality is the entry signal.

Thats how I look at it.

T.

 

[MichaelW]

Lizzie,

We're still in the middle of the slump with no sign of a recovery as yet. What made you think there was?

Affordability is still at record lows and prices are still falling. Interest rates will hike this year to fend off inflation when it bumps over 3% which will further impact prices. Property will probably come off another 5-10% in Sydney this year and maybe start to plateau next year (2007) or maybe the year after.

The stock market is counter-cyclical and continues to boom. Expect another 10% plus year for the ASX.

Affordability is the key and we're a fair way off that returning to historic levels for Sydney. Here's the link:

http://wopared.parl.net/library/pubs/mesi/mesi54.htm

Cheers,
Michael.

 

[arriety]

I know this is only anecdotal but my friend justs Txted me this afternoon. Her house has been on the market since last August in Blacktown (way out West) and it finally sold today at 70K lower than original price. It's still a buyer's market out there!

 

[Jacque]

My two cents
We're in the middle of a correction slump and Sydney still has 12-18 mths to go before it hits bottom.
Naturally, there's always going to be suburbs/areas within specific suburbs that are virtually bullet proof or immune to downturns, due to their ongoing demand, however in general I believe that Sydney is in for a "quiet period".
Notice how few people are referring to property investment at social events? The tide has turned and now is the time to be keeping an eye out for the golden opportunities that arise from such an environment.
I, for one, am constantly looking for such bargains

 

[JP1746]

I used to lean more toward the "we're going to bump along the bottom for a while" view.

However, Given the Wespoint falure (see new thread above) and also the likelyhood of a .5% increase in rates by June, I am now thinking we may be in for a further dive / crash (call it whatever) of 15% to 20% at least, during '06.

 

[MichaelW]

JP1746,

Yep, looking good isn't it!

And how about this:

Growth set to rise to over 4%

Which can only mean one thing, interest rate rises as you mentioned above.

Bring it on! Rising commodity prices and rising interest rates is nirvanna for me. My stock is rising while house prices start falling as a result of investors in that sector feeling the pinch of interest rates. When the stock market softens or the housing market shows signs of life, I switch sectors again. Has everyone forgotten how these two are counter-cyclical...

I love the rollercoaster!

Cheers,
Michael.

 

[JP1746]

JP1746,

Yep, looking good isn't it!

And how about this:

Growth set to rise to over 4%

Which can only mean one thing, interest rate rises as you mentioned above.

Bring it on! Rising commodity prices and rising interest rates is nirvanna for me. My stock is rising while house prices start falling as a result of investors in that sector feeling the pinch of interest rates. When the stock market softens or the housing market shows signs of life, I switch sectors again. Has everyone forgotten how these two are counter-cyclical...

I love the rollercoaster!

Cheers,
Michael.

... And the rollercoaster loves me !

Cheers
James P

 

[willair]

Its always ok on the way up,but when when you start to go down is when the fun starts,ASX,down57.8 and its only 11.30.
willair..

 

[MichaelW]

Its always ok on the way up,but when when you start to go down is when the fun starts,ASX,down57.8 and its only 11.30.
willair..

Yeah, could be a quarterly correction in play. Its two steps forward, one step back with the ASX. 5% off then back up 10% seems to be the order of the day. Anyway, the trend is my friend...


Michael.

 

[Barracuda]

It's a wild ride on a roller coaster

The ASX could be more like a "Jump to the left" today, rather than a step backwards. As I type the market has opened and lost 1.5%...

I find it interesting when people say that affordability is increasing and wages are catching up. How many people do you know who have actaully received a decent pay rise in the last 3 years in their current role? Even changing jobs can be difficult to snag a decent rise in the current climate. Certainly none around in IT since 2003. There are still plenty of vendors holding out for 2004 prices without realisng that they've missed the boat.

I don't think we're at the end of the slump. I'd say that we're experiencing a soft landing which may yet be a rougher ride if the RBA decides to tweak interest rates due to a perception that we're all earning more or because we obtain across-the-board tax cuts.

I do think that there'll be some mixed messages in the market if tax-rates drop - a quick massive spend come 1 July that see some prices move, which might turn into a nasty surprise 3 months later.

Cheers

 

[MichaelW]

Barracuda,

Hmmm...... I know a Barracuda that lives in Wahroonga!

Couldn't agree more with your sentiment. I think interest rates are almost a dead cert to rise and that this will put even more downward pressure on property prices. We're only just getting started in this slump since 2003 and there's a few years yet to go before we can even think about more upside. Might even see a wee little recession before we turn the corner too.

Interesting times as always.

Welcome mate,
Michael.

 

[Kieran]

Hi Lizzie,

I have just read this thread so thought I would comment.
Feel free to send me a private message in future if you think I may be able to contribute to a topic (especially if it's about my favourite subject 'The Property Cycle'!)

Lizzie said:

i'm reading kieran trass's book "grow rich with the property cycle" for the second time and am now more confused than ever.

Lizzie, I hope my book hasn't confused you, but that you are just confused by the many 'opinions' of various commentators about the current phase of the NSW property cycle.


I have not recently assessed all of the Key Drivers for NSW or Sydney for that matter so my comments are purely based on my overall observations (ie not the normal detailed analysis such as I do on an ongoing basis for NZ).

I do believe NSW is in the Slump but also beleive you have a long way to go before the next Recovery (of course unless the Key Drivers determine otherwise!)

You need to consider all of the Key Drivers collectively (ie don't just focus on a couple because that can give you a 'false' reading). I know I have ifdentified a few Key Drivers which will typically 'herald' the next phase but you still need to look at those in perspective of all the other Key Drivers.

For example vacancy rates may be very low but if there is too much construction, low population growth, low ROI, soft rents, and property is only just below a height of unaffordability then there will not be a recovery yet.


Lizzie also said:

another item from the book i wanted to bring up for discussion is, looking at the various graphs indicating percentage of growth each cycle, each boom cycle seems to have a substantially lower percentage of growth than the previous boom and seems to last slightly longer (and the subsequent slump slightly shorter), ie 40% average in 1970's boom, 30% average in 1980's and 20% average in 1990's - does this mean that eventually the cycle of boom/slump will even out to a gentle swell?

Great question Lizzie!

Whilst history does tend to repeat it's not quite as exact as we would like it to be as you have identified. And if you consider the international property Boom since the year 2000ish you will find that this Boom has eclipsed the former 1990's Booms and been closer to the size of the 1980's boom.

I doubt we will ever see a consistent gentle swell in the property market because the emotional aspects of fear and greed can always quickly turn a swell into a tidal wave!

Housekeeper said:

I have read kieran trass book and I found it excellent. One of the best property books I've read.

Based on the key drivers listed in the book, it seems to be that the Sydney inner west is somewhere in between the middle and the end of the slump phase. The main reason is that affordability is still low, and employment growth is a bit weak in Sydney.

Thanks Housekeeper, Your feedback is genuinely appreciated and I get great pleasure these days from the emails I get every other day from someone, somewhere in the world who has read my book and shares your sentiments!

For more interesting Property Cycle discussion read my comments in this thread too
http://www.somersoft.com/forums/showthread.php?t=23885

 

[lizzie]

thanks for your comments keiran - i was focusing on there being a "majority" of key factors in play instead of "all". a lot clearer now and i will watch for the other factors to come in.