Low Home loan affordability does not prevent capital gain
Sydney is undervalued compared to other capital

The following charts, produced by the Reserve Bank, are very interesting.

Chart 1

Chart 1 (above) shows that since 1999:

• home loan affordability (the ratio of household income/home loan repayments) has been falling, and
• investment in dwellings has been flat, at about $14.5billion per year.
  

Normally, investment in dwellings should not be flat – it should be rising to reflect the increase in:

• population,
• construction costs, and
• dwelling prices.

This sustained underinvestment in dwellings has (as noted in our earlier reports) led to:

• low vacancy rates, and
• high rental returns.

Ultimately, supply must take increase to meet demand.  But supply will increase only when dwelling prices increase to the point at which investment in dwellings becomes profitable.  

Chart 2

 

Chart 2 (above) shows that:

• low affordability does not stop dwelling price increases – in fact, since the reduction in affordability started in 1999, dwelling prices have roughly doubled, from an index of around 130, to around 260 (using 1991 as a base of 100)
• the Sydney experience is clearly out of line with what has happened in other capitals:
  
  
  1. from 1991 to 2003, Sydney prices rose at about the same rate as those in other capitals (from an index base of 100 to about 250),
  2. since 2003, prices in other capitals have continued to rise to around either 300 (Melbourne, Adelaide, Canberra) or 350+ (Brisbane, Perth, Hobart), but Sydney has fallen, and
  3. just very recently, Sydney prices have started to recover.
     

Implications

Compass Capital Property Group believe that historical relativities will realign:

• If the Sydney index rises to 300 (to meet Melbourne, Adelaide & Canberra) there will be a rise of 20% (in addition to the general rise of the other capitals), and
• If the Sydney index rises to 350+ (to meet Brisbane, Perth & Hobart) there will be a rise of 40% (in addition to the general rise of the other capitals).

It is our view that:

dwelling investment is running well below demand – this has resulted in very low vacancies and very high rental returns,
• this undersupply will inevitably lead to continued property price growth,
• Sydney property is by historical standards very undervalued compared with other capitals,
• Sydney property prices are just now starting to rise and significant capital gains can be expected.

Should you have interest in property in Sydney (or indeed other areas) please contact us to discuss our selection of a small number of well‑located off-the-plan and new properties which offer very attractive rental yields (some guaranteed), and have prospects of very good capital growth.