The Sydney property bubble denial
The thing about a property bubble (or any asset bubble) is that it is not widely acknowledged until after it bursts. Sydney property prices are in somewhat of a unique position where not only are investors convinced of eternal price rises, even politicians believe it imperative to keep house prices high.
The need for so much intervention in the property market in Sydney in the form of controlled land releases, the impact of negative gearing and even the first home owners grant, shows that Australian property prices are in bubble territory. When investors are screaming that the government cannot take away their incentives or the market will collapse, then it’s easy to see that investors are in complete denial about the property bubble in Sydney and even on the Central Coast, Blue Mountains and South Coast.
First home owners and owner occupiers left holding the bag?
Australians love real estate but they also love gambling. In order for current investors to make their money they require first home owners and other owner occupiers to buy at an even higher inflated price. This means that there is a real danger of anyone buying into the current market to end up in negative equity once the music stops (and it will stop).
If you are a first home buyer or looking at upgrading your home, it is prudent to do your home work, especially in and around Sydney. If you talk to real estate agents (and if they’re open and honest) they’ll tell you how much investors have artificially inflated the price of houses and units all around Sydney and within about 1.5 hours drive of the city.
If you look at the graph above, you can see that prices have essentially gone vertical because of cheap credit. As we will explore in a graph further down the page, almost half of these new loans are also interest only! This means it is ESSENTIAL for investors to sell to another investor or owner occupier quickly at an even higher inflate price if they even want to break even. The numbers do not add up so don’t believe the property spruiking hype.
The property investor factor
Many inexperienced investors are piling headfirst into the market without any consideration for the value of a property, just spending the maximum that they can borrow. This is sure to force up the bubble even more. Check out the graph below to see the millions that are outstanding on highly leveraged Australian property. The problem for many Australians around Sydney is that investors have now priced themselves out of the Sydney market and have created a huge Central Coast property bubble as well as one on the south coast and in parts of the blue mountains.
What will happen to these bubbles now that even the Sydney market is falling very flat and rental yields are going backwards?
The big gamble on never ending Sydney house price growth
As the graph below shows, Sydney investors are taking a huge gamble on massive price growth in the short term. While nothing on this blog is financial advice, you should carefully consider the value of a property, and not just its listed price tag. With rents so low at the moment even experienced investors are selling up and renting for a bargain price.
While the property bubble might blow a little bit bigger, with banks now quietly acknowledging the asset bubble, interest rates for both investors and owner occupiers are only set to rise dramatically over the next few years – no matter what the RBA does.