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Property Bubble? What property bubble?

Thursday, October 04, 2012

Just about every time an American property guru arrives in our lucky country they start talking about our “Property Bubble”…… And we start fielding questions from clients about when “the bubble is going to pop?”.

The short answer is that we can only speculate about the future direction of Australian property prices. We are not even sure there is a bubble.

However, in relation to the existence of a bubble, there is one statistic that seems to surprise just about everyone.

The median Sydney property price has only risen by 21% since the end of 2004. Yes, that is an average of 2.6% per year for the last 8 years. This is almost exactly the same as Australia’s inflation rate for the same period.

This doesn’t look like a property bubble to us.

In fact, with the combined forces of;

1. strong population growth,
2. low unemployment,
3. sub 2% rental vacancy rates,
4. median rental yields at 15 year highs and
5. interest rates at 10 year lows,

one could easily argue that upward pressure on Sydney house prices is a more likely outcome.

Think of this simplified investment scenario.

A median house in the Sydney suburb of Hassall Grove will set you back $356,000.
Let’s assume that a 10% deposit was paid and there is a 90% LVR loan of $320,400.
The median rental yield for this suburb should provide you with a weekly rent amount of $390 per week.
The interest bill on the lowest 3 year fixed rate of 5.39% would be $332 per week.

Note, this calculation has not taken into account the potential tax benefits or the potential ongoing costs of the property but it does demonstrate how this market has developed some cash flow value. Something you rarely see in the middle of an asset bubble. source: smartlineblog

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