Is Sydney’s price growth sustainable?

With Sydney auction clearance rates again hitting just below 80% over the past 3 weeks, the property market continues to defy the doom and gloom bubble theorists.

What are the factors behind the current price growth and is it sustainable?

Buyers Domain look at the facts.

  1. Record Low Interest Rates: The RBA has kept the official interest rate at a record low 2.5% for almost a year now. Just last week, 3 of the big 4 banks dropped their fixed rates to record lows.
  1. Growing Population and Overseas Investment: Unlike many parts of the Western world, Sydney’s population is rising quickly. According to Urban Taskforce Australia, projections now indicate an increase of 1.575 million people over the next 20 years. By 2060, Sydney may have a population of 7 million which is not significantly smaller than the population of London today.
  1. Lack of Supply: State government figures released this year estimate that Sydney will need more than 600,000 extra homes over the next two decades to cater for the rising population. Despite this, the rate of construction has lagged behind the increasing demand since the GFC.
  1. Sydney’s Geography: Sydney’s geography is highly unusual for a major city. Land available for housing is severely limited by the ocean and Harbour to the east and north of the CBD. The Blue Mountains to the west, the Hawkesbury River to the north and the Royal National park to the south, further contain the metropolitan sprawl. These factors serve to increase the premium paid for well located land.
  1. Two CBDs: Partly as a function of Sydney’s geography, Parramatta has long been establishing itself as Sydney’s alternative CBD. More centrally located than the CBD itself, a large number of government agencies and businesses have been relocating to Parramatta for a while now. With a number of major infrastructure changes planned in and around Parramatta, this trend is set to continue.

The “Parramatta factor” is unquestionably behind the record house prices now being achieved in the area. Consider for example the sales of:

The factors listed above have combined to drive up Sydney’s median house price by 17% over the past 12 months (according to the Australian Property Monitors June Quarterly house price report). Of course, this rate of growth is unsustainable but whilst the conditions listed above are in play, and in the absence of a significant downturn to the economy, it seems unlikely that the bubble will burst.