Reasons not to buy in Sydney – Simon Pressley

Simon Pressley says that an exodus is under way with thousands of people leaving New South Wales for more affordable property locations.  So where are they headed and does this spell the end of the Sydney boom?
Transcript: 
Kevin:  There’s a blog currently on the Real Estate Talk website written by Simon Pressley from Propertyology that prompts me to want to talk to him about it. He makes the comment that an exodus is under way with thousands of people leaving New South Wales for more affordable property locations – and why wouldn’t they?
Propertyology Managing Director Simon Pressley said more than 23,000 people migrated away from New South Wales over the 12-month period and that number is expected to escalate in the months and years ahead. Simon joins me.
Simon, thanks for your time.
Simon:  Always a pleasure chatting, Kevin.
Kevin:  Simon, what impact will this exodus, if it continues, have on the Sydney property market, do you think?
Simon:  It’s a direct reflection of its housing affordability, we feel. There’s a bit of a precedent that was set at the turn of the century – roughly from 2002 to, say, 2007 – where there were very large volumes of people exiting New South Wales for other states. In that era, Queensland was the biggest beneficiary. And it would appear that that sort of trend is continuing.
Certainly, that exodus out of New South Wales is continuing. That doesn’t necessarily mean that it’s going to be repeatable with all of them coming to Queensland.
Kevin:  But, Simon, we are hearing about an undersupply driving the market there. Is that real?
Simon:  No, I don’t think it’s real. It’s a perception that a lot of people have who live in Sydney because it’s so congested and expensive, and they process that to mean undersupply. It’s always going to be congested, it’s always going to be expensive, but the actual data shows that there’s been more new supply in Sydney over the last couple of years – and for the next couple of years, for that matter – than at any time before.
Of course, people then respond and go, “Oh, but our population growth is much higher now than any time before.” That’s actually not true. The population growth in Sydney over the last couple of years is comparable to, say, 2006 and 2007, but in those two years, Sydney built only half the volume of properties that they’re building now, and there was no boom in 2006 and 2007.
So, we don’t think there’s an undersupply or an oversupply. What we’re saying is there’s a lot more supply than what people probably realize is what’s happening, and in the next couple of years, there are going to be record volumes.
Kevin:  We always talk about the property cycle, don’t we? How does this fit into that cycle, or is it throwing it out?
Simon:  I think Sydney has definitely well and truly peaked. It’s in its fifth year of a strong price growth cycle. It’s rare for any property market to be that strong for that long. Typically, three years of good growth is quite a normal cycle. Of course, Sydney has had such a strong economy combined with low interest rates that we’ve all benefited from, and that’s probably why it’s gone into its fifth year. But I think it’s definitely at the end of its cycle now.
Kevin:  When we see that Sydney market adjust, it does actually go into a bit of a crash or a bit of a freefall for a little while. Is that likely to happen, do you think?
Simon:  Anything’s possible. I’m not forecasting that Sydney property values are going to significantly decline. We could see some modest decline, but things decline for a reason, and the common causes for property values to fall are either fast rising interest rates and/or really poor economic conditions.
Now, we’ve already had some out-of-cycle interest rate rises and Australia’s most expensive city also has the largest value mortgages, so that’s going to have some impact, more so on those who have investment properties than owner occupiers. But as far forward as we can analyze, its economy is likely to remain strong.
For that reason, I can’t see Sydney’s market crashing. I don’t expect strong price growth: modest growth or you could have a prolonged period of next to nothing.
Kevin:  Is it likely to mean that Melbourne is going to become our biggest city sooner than is currently projected?
Simon:  Possibly. Melbourne’s population growth rate has become over the last couple of years the fastest in Australia. It hasn’t always been that way. Brisbane and Perth and Darwin, for that matter, have always been the three strongest population growths, but in this current era, it’s Melbourne.
Let’s not forget, though, whilst Melbourne is not as expensive as Sydney is still Australia’s second most expensive city. So, if someone were to leave Sydney, let’s say, because housing affordability is just not there and go to Melbourne, are they going to be comfortable living 50 kilometers out of the Melbourne CBD where you can buy an affordable house? I’m not sure. They might move somewhere else.
Kevin:  From a pure investor perspective, are there better capital growth locations around Australia than Sydney?
Simon:  Almost everywhere, I would say. We wouldn’t have said that over the last five years, but as I said earlier, Kevin, I feel that Sydney is at the very end of its growth cycle. Other than Melbourne, most of Australia hasn’t really done anything over the last five to 10 years, really. So, we could generalize and say everywhere else has its growth cycle ahead of it.
Right here and now today, the hottest market in the country unquestionably is Hobart. We feel it’s still got a few good years ahead of it. Canberra is another one that’s performing well, though Canberra is a little bit on the expensive side as well. Brisbane we think has definitely got better potential than Sydney, although I think it is unlikely at the minute to have spectacular growth.
We’re encouraging investors to have a critical look at all of regional Australia. Region doesn’t always mean risky. It can mean risky if it’s a tiny, small mining town, but if you cast your eye to the really strong regional cities, many of those have some really good capital growth potential and better rental yields.
Kevin:  Always good talking to you. Get more information and read the full blog article on our website RealEstateTalk.com.au. Look for it under my channel. You’ll find it there from Simon Pressley at Propertyology. He’s been my guest.
Simon, thank you very much for your time.
Simon:  Thank you, Kevin. Have a great day.
 

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