What do Sydney’s falling property prices really mean?

We’ve now had two months of data that reportedly shows that Sydney property prices are falling. 

But what does that really mean?

After nigh-on five years of spectacular growth, is Sydney’s market teetering on the edge of a property abyss?

Some naysayers would say, “Yes, Sydney is about to burst like the over-inflated bubble that it is.”

But they’d be wrong and here’s why.

Number crunching

The latest CoreLogic data shows us that Sydney property prices fell by 1.3 per cent in May and recorded a flat result over the quarter. 

The thing is, rather than the real estate sky falling, that same data tells us that over the year ending May, prices increased by 11.1 per cent.

Who wouldn’t be happy with that annual capital growth?

The result was just behind Melbourne on 11.5 per cent, but was miles ahead of any other capital city.

Those numbers don’t lie – prices have increased more than 11 per cent in just 12 months, which is a strong result in anyone’s books.

Investment slowdown

History shows us that investors have previously made up about 30 or so per cent of property buyers in the market.

The strength of the Sydney market, however, pushed that figure to more than 50 per cent over recent years, which was never sustainable.

Now the abnormally high number of investors didn’t go unnoticed by the powers that be and we’ve seen directives from APRA over the past year to slow down investor activity, including ramping up interest rates. 

And it’s working, with April lending aggregates data from the Reserve Bank showing that investor credit rose by 0.55 per cent over the month – its lowest monthly increase since August 2016.

At the same time, according to CoreLogic, April housing finance data showed there was $12.6 billion in investor housing finance commitments over the month – again the lowest value since September last year.

The main point then is that the reduction of investor activity is impacting property prices in Sydney as is general affordability considerations.

Burst or flat-line?

Let me be clear: if Sydney’s property market did burst in a big way, our national economy would be in serious trouble.

And that’s why it’s unlikely to happen.

Firstly, for a market to burst in the true sense of the term, then prices would need to fall to the level they were before the cycle began.

Does anyone seriously believe that prices in our most populous city are going to drop by about 50 per cent?

Of course not. 

Let’s face it: Sydney remains our economic engine room and also is the recipient of the lion’s share of future major infrastructure projects.

It also has a paucity of land available for future residential development given its geographic constraints.

So even this handful of factors means that for the foreseeable future there will be strong demand for property in Sydney.

Unless you live under a rock you’re probably aware that property markets move in cycles.

Sure Sydney has had a longer upswing cycle than usual, but many people conveniently forget that its market did very little for a decade beforehand.

The lesson from all this is that Sydney’s market is taking a mid-cycle breather, where prices may soften by a few per cent before resuming their rise again

But that’s doesn’t constitute a bubble bursting.

Rather, it’s a sign of a normal market cycle, which might seem too boring for some commentators to talk about publicly.

What will your next step be?

If you’re looking to take advantage of the spectacular growth in the Sydney property market and looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.  

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy.