WHY POOR MINING PROFITS DRIVE SYDNEY PROPERTY PRICE RISES
Buying a home in Sydney is riddled with two types of decision-making, the first being the rational decision and the second being the emotional. If you’re anything like my wife and I, then often that equation is flipped on its head when home hunting. For us the date was April 23rd 2008 and the property market in Sydney was definitely booming. We’d just settled on a 4 bedroom, 3 bathroom detached dwelling on one of Sydney’s most sort after suburbs on the Northern beaches. Typical of a Sydney buyer in a boom market we’d lost out on several properties at Auction leading up to our purchase. In order to obtain the house we wanted we chose to increase our budget by a staggering 12% and finally secured ourselves a home. We paid a premium to secure the home ahead of the Auction date and successfully removed the chances of potentially losing another budding war later that day.
The story doesn’t end there however. The collapse of Lehman Brothers on September 14, 2008 marked the beginning of a new phase in the global financial crisis (GFC). The GFC is commonly believed to have begun in July 2007 with the credit crunch, when a loss of confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis. By September 2008, the crisis had worsened as stock markets around the globe crashed and became highly volatile. Consumer confidence hit rock bottom as everyone tightened their belts in fear of what could lie ahead.
For us, one of the reasons we’d bought with such confidence was that our business, an importer of mobile computer devices, was very well placed in April 2008. At the time of purchase, the Australian Dollar (AUD) was sitting at record highs of 95c to the USD and our profits margins were strong. In the coming months after we settled that all changed and we needed to tighten our belts dramatically as the AUD fell a staggering 30% to lows of 65c to the USD in the span of the next 6-months. This had a negative impact on importers like ourselves.
Cast forward to 2015; the property cycle is back to record highs post GFC and in the span of 7-years, the price we once stretched to pay for our Northern Beaches home, has potentially increased 40% over the same period. These sort of returns are a constant reminder to Sydney-siders that “now” is always the right time to invest in Sydney property. Whenever you’re buying.
The reality however about knowing when to buy is often a direct reflection of knowing when you’ll sell. Knowing we weren’t going to sell any time soon, and coupled with the fact that we’d purposefully purchased a home that needed no renovations, we knew we were willing to ride out the possible downturn in property prices. Perhaps we were lucky however as friends of ours that had bought at the same time, hoping to capitalise on neglected properties by renovating or building, weren’t able to ride out the storm and saw their homes depreciate in value and some of them are yet to see a return on their investment to-date.
Ultimately Sydney property prices are always a direct reflection of supply and demand, and when considering prime locations of Sydney such as the Eastern Suburbs or the Northern Beaches, demand always outweighs supply given the lack available land to build upon. Australians are very lifestyle oriented and living by the sea always an aspiration for many. It’s almost completely uncertain therefore as to when the Sydney boom will end – especially as more of us want to be by the sea, and yet the amount of homes available seem to be hitting a finite point as each year passes.
WHEN POOR MINING PROFITS INADVERTENTLY DRIVE PROPERTY PRICE RISES
This isn’t the same as good mining profits bringing in more money to the Australian economy in order to spike buyer activity. This drive is far more complex and probably the sort of government-initiated surge the government would rather avoid. To understand the intricacy however we need to revisit the mining boom of 2009 to 2012.
Small mining towns like Queensland coal mining hub Moranbah, and Western Australian port town Karratha, were demanding some of highest rents in the country, beating out prices in exclusive Sydney suburbs such as Vaucluse and Mosman. Developers knew this and looked to over-capitalise on the lack of supply of homes in these regions by building a vast quantity of homes in similar mining towns across the country.
Today the mining boom is now ended and property prices in these once booming suburbs are experience heavy losses – mostly due to oversupply and lack of demand. Plunging prices of Iron Ore, Australia’s single most valuable export earner, is now punishing both mining profits and government tax revenue. Stephen Walters, chief economist at JPMorgan, cites estimates from Australia’s Treasury that for every $10 per tonne drop in the Iron Ore price, the result is a loss of up to A$3 billion off the national budget.
Pressure is therefore mounting for a cut in Australian interest rates to help ailing mining profits. Such a move would likely help lower the Australian dollar, which would ultimately assist commodity producers which are exporting U.S. dollar priced goods like Iron Ore.
The dilemma is that any interest rate drop further plays straight into the Australian population’s affinity with owning their own home. A downward adjustment to interest rates (designed to incentivize mining exports by helping to lower the AUD) is inadvertently inspiring home buyers across the nation, and in particular Sydney, to spend big. Buyers now believe they have deeper pockets thanks to historically low interest rates and are therefore queuing up to outbid each other on Auction day.
Following the Reserve Bank’s announcement today, interest rates remain on hold for April 2015 without increase or decrease. The market sentiment however is that the Reserve Bank will likely follow-up February’s cut by 25 basis points to 2.25 per cent with another rate cut soon. There are definitely some signs that the economy is improving so the Bank may well be taking a wait and see approach with this latest decision. Even so, historically low interests don’t seem to be putting a slow on the current property boom across Sydney and beyond.
It seems the right time to buy is always “now” in Sydney, as long as you’re clear with why you’re buying and when you’re planing on exiting. I look forward to hearing your stories of when you bought and when you sold, and what were the results you experienced.