The RBA released its Financial Stability Review on the 24th of March. In the review, the RBA acknowledged that increased investor demand for housing causes speculative investment. This has occurred in the Sydney housing and unit market, which is less a place for finding somewhere to live, and more of a trading floor to make money.
This is supported by ABS data, which shows that home loans taken out by first home buyers have steadily decreased from 18.8% in 2012 to 14.9% in 2015.
The effect of more investors coming into the market, is higher volatility. Volatility is a measure of how extreme or dispersed your returns on something will be. The higher the volatility, the higher your returns will be. The flip side of this is that your losses will also be larger. Let’s look at the historical return of Sydney Houses and Units:
Graph 1: Historical Growth of Houses and Units in the Sydney Metropolitan Area
The graph demonstrates historical growth in houses and units for the Sydney metro region in the last 25 years. The way it is represented here is the rate of growth over the past 12 months, as measured at all the months between February 1990 and February 2015.
In the graph above, the growth rate movements are fluctuating with greater highs and lows from the year 2001. Sydney experienced a growth high of 25% in 2001, and a huge correction, to the point where growth actually contracted by 3% in 2004, and this contraction continued for the following three years.
Just before the graph cuts off, there are two little spikes in houses that show where it looked like the Sydney market was beginning to correct. Around the same time the RBA announced a February cash rate cut.
Demand related policies such as the government signalling crackdown on foreign investment and the RBA holding interest rates in March, suggests the Sydney Market may finally settle down. The question of how much a correction the market experiences, depends largely on supply.
Business Insider Australia reported at the beginning of this month that approvals for construction in Australia’s unit market has hit a
new record, exceeding housing approvals[1]. The article also suggests this is another signal that investment is driven by speculation rather than demand for places to live. It is estimated by the Australian Bureau of Statistics that approval for units[2] rose over 19% in one month. It is the second time in the history of recorded approvals that demand for units have exceeded houses.
We need to ask how many dwellings are being built, versus how many people are actually going to live in these dwellings. Having a house or unit as an investment property is not much good if there are no tenants to live in it, or no people to buy it off you.
Though there is no precise measurement of demand and supply in the housing market currently, we can at least look at the amount of people entering the country, versus the amount of residential dwellings on which construction has been commenced.
Throughout the last 10 years, graph 2 shows that dwelling commencements rise after a spike in population growth, which leads to a market correction and falling prices or slowed growth in prices. Looking at the movements below, we could be moving into this correction period at the moment.
Graph 2: Historical Changes in Australia Wide Population and Dwelling Commencements
Investors should remember that current high prices are not a reason to rush out and invest in new properties. Particularly at this moment, looking at where we are in the growth cycle in graph 1, we need to remember there is a time lag between current price signals and dwelling supply in the process of construction. In 2015, Residex expects Sydney’s unit market to grow very modestly. Record high levels of unit construction approvals could reduce this growth figure even further.
[1] McKenna, G. (2015, March 3). We just got further confirmation Australia's housing market is going bonkers. Retrieved from: http://www.businessinsider.com.au/we-just-got-further-confirmation-australias-housing-market-is-going-bonkers-2015-3
[2] Units are taken as the ABS definition of “private sector dwellings excluding houses”.
Source: Eliza Owen is the Market Analyst for Onthehouse.com.au.
