The Sydney real estate market is surging.

CoreLogic data revealed that Sydney property prices grew 2.5% in February 2021 – their fastest rate in 17 years. This means  Sydney’s median house price has now risen 5.7% since the effects of COVID-19 wore off the market in October 2020, taking the market higher than its previous 2017 record.

In many cases, here on Sydney’s Upper North Shore, prices have been growing even more strongly. For the most part, Ku-ring-gai managed to avoid the worst of the price falls the property market experienced during mid-2020. For instance, the median house price in Turramurra has lifted 12.2% since the pandemic began, according to figures. Turramurra’s median unit price has risen an incredible 22.7% since the end of last year.

It is a similar story in Pymble where the median house price has lifted $236,000 since the start of the pandemic to a new high of $2,537,500. Neighbouring Gordon has also received an increase of 6.5% – or $152,500 – to the median house price since September 2020.

Meanwhile, the Upper North Shore recorded an auction clearance rate of close to 90% over February. To put that into perspective, anything over 70% is usually considered a seller’s market. Anything that lands between 75%-80% is considered ‘hot’.

The current market exceeds those measures by some distance.

What’s behind today’s rising market?

The single biggest factor behind today’s rising property prices is simply the fact that Australia has handled the pandemic remarkably well – both from a health perspective and an economic one.

The property market is usually a barometer for consumer and business confidence and rising Sydney prices show that people are optimistic. And why wouldn’t they be? The vaccine rollout has begun. We have, thankfully, gone some weeks without a local COVID-19 case in NSW. The US election is out of the way and some level of stability has returned to world affairs. In short, there is a glimmer of hope that normalcy may return to the world.

At the same time, household savings are up, the economy is growing, unemployment is falling and, despite our ongoing trade dispute with China, our balance of trade (or the amount we’re selling to the world compared to what we buy) has rarely been healthier.

Most importantly, interest rates are at record lows and the RBA has announced it will keep them there until wages begin to rise. This is having an incredible effect on people’s willingness to borrow. A 25-year mortgage for $1 million is roughly $1,600 cheaper to service each month when rates are 2% compared to 5%.

And, when interest rates eventually do go up, inflation is likely to rise with it. So even though borrowers’ mortgage repayments will rise, the size of their debt will go down in real terms.

Fear of missing out

On the supply side of the equation, there simply isn’t enough stock to meet the growing demand for Sydney property. SQM data shows there were around 27,000 properties listed in February across all of Sydney. By way of comparison, Melbourne, despite having a population of 300,000 fewer people, had more than 38,000.

This is creating a vicious cycle, where people considering a move hold off listing their homes because they’re worried they won’t find a property they want to move into. Their property doesn’t go to market and so potential buyers never have the opportunity to see it. They, in turn, hold off listing their own home because there’s nothing they want to buy. The same scenario is passed along the chain and, ultimately, everyone loses from it.

It also means that, when prospective buyers do see a property that matches their criteria they can be overcome by a strong fear of missing out. And few things encourage people to bid strongly or offer more than FOMO.

Winners and losers in today’s property market

Unfortunately, the losers in a rising market such as this one are those looking to step up the property ladder. The winners tend to be those downsizing (because in a rising market the gap between cheaper and more expensive properties grows) and those tapping out of the property market altogether.

That said, one positive to come out of the current market is that first home buyers aren’t finding it as challenging to enter the market as they have during previous booms. In January 2021, the RBA reported new home owner loan commitments lifted 10.1% over the month and 73.2% for the year.

Not only are interest rates making it easier to service a mortgage and borrow more, generous state and Commonwealth subsidies and exemptions are helping first home owners into the market in levels not seen for some time. So too is the fact that units have by and large not experienced the same price gains as houses.

Looking ahead

Almost all economists are forecasting a strong year, or even a few strong years for the Sydney property market. CBA forecast prices will rise 16% over the next two years; Westpac has forecast a 20% gain over the same period. The RBA has said Australian property prices could rise 30% over the next three years if borrowers believe current low interest rates are permanent.

With so many factors working to drive the market higher, it’s worth asking what it will take to put a brake on rising prices. My view is that the only real way the government can take some of the heat out of Sydney’s property market is to lean on APRA to tighten lending standards. After all, curtailing lending was one of the key factors in ending the 2017 property boom and driving a correction in prices.

Unless and until that happens, I expect the market to continue rising, with buyers continuing to enter the market and aggressively attempt to secure their home, before prices rise even further.

Benjamin Goben
CEO, Chadwick

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