Bamboo Trees & the Sydney Property Market

“The seed of a bamboo tree is planted, fertilized and watered. Nothing happens for the first year. There´s no sign of growth. Not even a hint. The same thing happens – or doesn´t happen – the second year. And then the third year. The tree is carefully watered and fertilized each year, but nothing shows. No growth. No anything. Then the bamboo tree suddenly sprouts and grows thirty feet in three months.”― Zig Ziglar
Australia’s Reserve Bank started it’s most recent round of interest rates in November 2011. At that time, the official interest rate was 4.75%, and today after a series of cuts, the cash rate is 2.50%.
However what is interesting is how delayed the market response has been. While official interest rates have been cut by 2.25% over a 2 year period, it has only really been in the last 9 months that the residential property market has taken off. As Australian Property Monitors (APM) has noted “Strong buyer activity in Sydney translated into a 4.2% rise over the September [2013] quarter which rocketed the median house price over $700,000 for the first time to a new record of $722,718”.
The APM further notes “Sydney median house price is now 11.6% higher than the previous cyclical price peak recorded in June 2011 and has increased by 9.0% over the first 9 months of this year [2013] – the best result of all the capitals”.
It is interesting that over 2012 the Sydney market remained soft, and some were suggesting that interest rates cuts had lost their potency, and would not prove as beneficial as hoped.
However they were wrong and with the benefit of hindsight it is now clear that there is a “lag”. As many people are on fixed rate mortgages and it takes time for official interest rates to flow on.
Fast forward to 2013, and suddenly you have a “perfect storm” of factors hitting the Sydney property market. First there is the impact of interest rates, and “pent-up demand”.
Secondly there is foreign buying. In a recent SMH article [Foreign buyers snap up residential] John Collett noted that “for the 3 months to September 30, 16% of new property was bought by foreigners, up from 11% in the previous quarter”. While foreign investors tend to prefer newly built property (such as off-the-plan apartments), in the eastern suburbs they are active in the upper end of the market.
The third major factor is supply. As ANZ Bank’s Chairman John Morschel recently stated Australia has not been building enough homes to meet the pace of population growth. Mr Morschel said he doubted a bubble had formed, but he warned that, “a bubble could emerge within two years”.
So the issue is whether new supply can keep pace with demand. In a recent article “Sydney’s soaring new building approvals buck national trend”, Anthony Lawes, stated that “The number of new houses and apartments being approved in Sydney is at the highest level in a decade”. The article notes that BIS Shrapnel’s Kim Hawtrey “believes Sydney was playing catch-up for 10 years of under building”, and in Sydney “we could absorb one-third or 50 per cent more approvals than there are at the moment for several years without exhausting demand”.
In summary, it is going to be an interesting next few years in Sydney, and it will be interesting to see how the boom plays out, and if the boom spreads to other capital cities.
Until next time…..Danny Doff Principal Laing + Simmons Double Bay