Is the Sydney property market still a good investment?

August 18 2016
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The Sydney property market may have led the boom, but is it still the best Australian city for new investments?

Is the Sydney property market still a good investment?

The vast majority of property investors make their purchases locally while the national property market operates in waves. The Sydney market may have boomed but it will be quite some time before Sydney will again ride the wave and lead Australia’s housing market in price growth.

There are multiple reasons why this happens, many of which can cause a property investor to miss out on some of the best opportunities the Australian market has to offer. Consider the current environment – the cash rate is at an all-time low which has stimulated affordability in our most expensive city, Sydney.

I’d suggest that in 2016 Sydney is no longer the best place for an investor to purchase. This is because Sydney has just undergone a significant period of price growth, and in most cases new property investors are just paying for the growth of somebody else’s asset.

Typically, all cities follow a similar trend or ‘line’. What differs, however, is which city is at the top of the cycle each time. That is where the best opportunities can be found.

Consider the below table of the last ten years in residential property markets:

Leading Australian Cities for Price Growth
CITY	LAST LEAD PEAK
Sydney	2015
Darwin	2013
Melbourne	2010
Brisbane	2007
Perth	2006
Darwin	2005

Source: ABS 6416 Residential Property Price Indexes

There have been six major price growth peaks since 2005. In considering Australia’s top three cities alone, it is clear that Brisbane has endured the longest leading peak-free period, followed by Melbourne.

What this illustrates to investors is that maintaining a mindset of investing locally can strongly hinder a wealth-creation strategy focused on property.

When investing, it is crucial to consider leading peak-free periods, that is the amount of time since the particular city or region was at the peak of the market and higher than all the other cities or regions being compared against.

Focusing on one market individually, say Sydney, means an investor will have to wait for their city’s next leading peak, putting them back years (or a decade) each time.

It will be quite some time before Sydney will again lead Australia’s housing market in price growth for a sustained period of time.

What most property investors don’t realise is that ‘property booms’ are actually caused by people purchasing properties in droves at a particular time, which has a destabilising effect on the balance of supply and demand. People who invest prior to this are in short supply themselves, but are the ones who stand to gain the most benefit from their property investment ventures.

If this is the case, why doesn’t everyone invest prior to the boom and diversify their assets across multiple property markets?

It is due to a function known as irrational investor behaviour. People feel more comfortable making a decision others around them have made a similar one already. It is also known as ‘group think’. The problem is that as the group grows in size, the proportion of informed individuals in that group sharply declines. Before you know it, nobody actually knows why they made a particular decision in the first place.

Group think works for property in the same way as it works for the growth in users for a smartphone, fashion trends or a new app. There are always early adopters, followed by early majority, then late majority and, lastly, the laggards.

The biggest danger is in being a laggard, but the late majority investors lose out as well because they seek to join when the trend is very visible and in decline, even if that decline is invisible to the average person.

Once the most opportune city or region has been identified, the next step is to determine what property in that area is worth your investment. Operating in different states and cities can often be an uncomfortable step for a property investor. This is where property specialists may play a role.

Luke Graham, property investment manager, Omniwealth

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