Sydney’s Property Market May Have Hit a Brick Wall

In the recent property data from October to December 2015, it seems the Sydney Property Market had decreased by 3.1%, the first drop in property prices since June 2012. That is a wow factor. The biggest drop happened in Canterbury and Bankstown, which recorded 5.3%, while the south recorded a decrease of 4.3%. Areas in Double Bay or the East had also experienced a large decrease in property prices.

It was a surprise to see that the property price for houses in Adelaide had risen by 1.8%.  From the table below, we can see that houses in Adelaide are still the most affordable in the mainland in Australia, however, it is catching up with houses in Brisbane, as of December 2015, the difference between the median house price in Brisbane and Adelaide is a mere difference of 17,077.

Hobart, the capital city in Tasmania enjoyed the largest price increase in the October to December Quarter at 7.9%. In addition, the median house price is the most affordable in the whole of Australia at $359,837 as of December 2015.

property market

Since 2013, the property market in Sydney has risen by an average of 52.6%. It increased exponentially in 2015. According to an article by the Domain Group, it is expected that by the middle of 2016, most of the properties in the Sydney market will fall off from the multi-million dollar benchmark.

Hence, it is important to analyze what are the contributors which affect the house price. We had came up with this framework as illustrates in an equation which will hopefully helps you to understand the variables which might affect the house price now and the future.

P = Function (X, Y, Z, W)

P = Average Price of a property

X = Interest rate, or so-called opportunity cost to hold the property

Y = House Supply in the Area

Z = Expected demand of houses in the area

W = Expected return of the property in the area

It is a common understanding that If the expected demand of the houses exceeds the expected supply of the houses in the area, then the property price for the area would be likely to increase. In addition, it is important to measure the interest rate, which is termed as the cost of funds for holding the property, and also the expected return of the property in the area.

The expected return comprises two components: gross rental yield or the current actual return on investment, and the future expected return, which is measured as the expected growth of the property. If the expected return exceeds the cost of funds to hold the property, in theory, the property price will increase. If the reverse happens, then the property might drop. Saying that it is important to point out that the average rental yield in Sydney is around 1.5% to 3.5%, while in Adelaide, the average rental yield is around 4.1%.

All of these would factor into the auction clearance rate, and it is important to measure this yardstick closely. Auction clearance rate is a very good yardstick to see how the market is performing at a particular point in time.

If the auction clearance rate is higher, this means the demand is exceeding the supply, which indirectly means that the expected future return is exceeding the cost of funds or the cost of owning the property, and the expected future price will then be likely to increase.

If the auction clearance rate is low or is on a sliding scale, then it means the property price is likely to fall in the short to medium time frame, as people are losing confidence in the property market. Hence it is paramount to monitor the auction clearance rate on a monthly if not weekly basis to see the movement to gauge any sudden movement in the marketplace.

In an article written by the Domain Group (February 2016), the auction clearance rate last Saturday increased to 72.5%, which is much better than the 43% recorded the previous weekend. However, it is still lower than the same period last year which is 82.5%.

Hence it is important to review your existing investment properties, to see whether the actual rental yield is within your acceptable range, and also to talk to your accountant or tax agent to see not only the gross rental yield of the property but the tax effect rental yield ratio, which will incorporate the tax position of an individual into the equation to formulate whether the investment property is giving any positive effect to the rental property. We welcome you to give us a call at 0403-418-758 or email us at

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