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Property prices: How high can our housing market go?

I don’t live in Sydney but I am up there almost weekly and have been for large parts of the year for more than two decades. I get to ­observe the city and its property market but I am not a skin-in-the-game participant. I like Sydney. In fact, I love Sydney. Indeed, I can see myself living there. If anyone spots an elegant two-storey ­terrace house with water views in ­Elizabeth Bay going for a million dollars or less, could they please give me a call?

There seem to be two res­ponses to the Sydney house-price silliness. From the young and the ­renting there is outrage and some finger-pointing that housing costs have skyrocketed beyond the reach of many. This is the fault of well-to-do baby boomers, of too many migrants, of negative gearing and/or of capital gains tax or, indeed, a combination of the above.

From middle-aged home-­owners, on the other hand, the response is one of furrowed-browed public concern about how terrible things are … mixed with private ­jubilation at their own rising wealth. For years prior to the ­current boom, as a Melburnian ­visiting Sydney the stock question I got was “When are you moving to Sydney?” followed by: “If you did you’d be lucky to afford a phone box in the eastern suburbs.” Sydneysiders, like Manhattanites and Londoners and Parisians, use their city’s stratospheric house-price admission as a cultural weapon to keep those damned “camping-out” colonials in their place.

To a lesser extent, the same thing is happening in Melbourne, where you could substitute Albert Park for Paddington and South Yarra for Double Bay. I am tempted to offer up Toorak in exchange for Point Piper but I think the Point Piper people would see this as a bit of a step-down.


That Sydney and Melbourne property prices have exploded this decade is an understatement. The gravity-defying elevation of house-price medians in both cities ­embarrasses analysts, academics and the apocalyptic, who have at various times gleefully predicted either a bubble and crash or a bubble and plateau. But Sydney’s sizzling property market proves them wrong every time. What is driving Sydney? Has Sin City done a deal with a real-estate satan? Well, let me tell you that we Melburnians wouldn’t be at all surprised.

There is something driving Sydney and it’s more than a Big Australia rate of growth. Sure, Sydney is adding 80,000 or so a year (compared with a long-term average of, say, 50,000), but it’s more than this. Sydney and Melbourne are at the forefront of the transformation of the Aust­ralian economy. Where these ­cities go, others follow ... eventually. Knowledge workers in health, education and professional services are fizzing and fussing around the central parts of our biggest ­cities. The boom in mining construction is long gone. The farmlands are being amalgamated into larger holdings. Manufac­turing plant in regional centres is either closing (for example, Townsville’s Sun Metals) or is under threat (for example, Why­alla’s Arrium steelworks).

The Australian economy has created a net extra three million jobs this century. It’s not that there’s no job growth elsewhere, it is that there are more and better paying jobs being created in our biggest cities.

Corporate head ­offices, health and university precincts and the greatest single source of job-generating magic on the Australian continent, government administration, are all centred in the city.

And in Australian terms Sydney sits at the apex of a mighty urban system and hierarchy of jobs. Sydney holds the head offices of the two big banks, Commonwealth and Westpac, as well as of the smaller Macquarie Bank and the Reserve Bank. Businesses such as AMP, super funds, private equity groups, Lendlease, Qantas, Woolworths, and Westfield are all based in Sydney.

News Corporation, publisher of The Weekend Australian, is based in Sydney. And so too are the Australian arms of global businesses such as IBM, Apple and Google, as well as franchises like Coca-Cola. The Prime Minister and the Governor-General both have weekenders in Sydney, presumably to escape Canberra’s unrelenting bustle.

Sydney’s airport connects with 50 global cities, including 15 in China (up from two 12 years ago and up by four in the past 12 months). Melbourne connects with barely 30 global cities. Sydney stands apart; it is the portal through which the Australian ­nation connects with the global economy. The brightest, the best and the most ambitious in the ­region are drawn to Sydney to test their mettle. Magnetism at this scale draws resentment.

Sydney is the biggest. Sydney is the richest. Sydney is the prettiest. Well … well … what about Melbourne? Have you seen the size of our arts centre spire? Melbourne’s there … but just trailing in Sin City’s wake. Both cities are oblivious to, or maybe even chauvinistic about, their dominance over the Australian continent.

But wait, there’s more. Sydney is benefiting from what I call the “Dubai effect” in which wealth-generating regions (like the Middle East) need lifestyle cities nearby for the elite to parade and to spend their success. The Saudis have Dubai, which is a more liberal city than Riyadh. Russian billionaires do not live in Moscow. As charming as the Russian capital is, it ­cannot compete with London and specifically with Belgravia as the preferred domicile for expat Muscovite billionaires.

Wealth in our time is stemming and streaming from China, which, to be blunt, does not offer lifestyle cities of scale. We do. Make your money in Shanghai, Shenzhen, Guangzhou, but buy an apartment, go to the casino, play golf, educate your kids at a local university in a safe, secure, lifestyle city an overnight flight away, such as Sydney. There will be an out­pouring of lifestyle wealth from China to Sydney and other Australian capitals for as long as the regu­latory environment permits. Sydney has the best connections; the Dubai effect will pump this city into the future.

And then we come to the “bunchification effect”, which I think is also underpinning the Sydney ascendancy. And, yes, I have just made up that word. It ­refers to Sydney drawing forward and bunching-up opportunity into a single frenzied decade, this ­decade.

Sydney underperformed after the Olympics partly because of governance issues. Investment opportunity stalled or was re­directed at this time. The burst of investment and home-buying ­activity after the global financial crisis was pent-up demand that had been lying dormant. After all, if Sydney isn’t tracking too well there are some people who simply refuse to countenance Melbourne, let alone other lesser capitals.

Jobs from the regions are being sucked into Sydney in a bunching effect. Investments that would normally play out over the next few years are being bunched back into the present.

The same logic applies to Melbourne, but to a lesser degree. And then there’s the fact that Sydney in comparison with Melbourne is constricted by its topography. Melbourne is well laid out — yes, like a cadaver — on a broad flat plain. Sydney bunches its best bits at the eastern end of a long urban sausage.

There will be for another 100 years intensive competition to get access to the best array of jobs on the Australian continent around the city’s harbour. Even Sydney’s geography is party to the house-price conspiracy.

Which leads me to where we are at the moment. The issue with affordability is how it’s defined. I have mapped Sydney suburbs where the median house price ­exceeded $600,000 in 2006 and which naturally enough clustered around the harbour and along the coast. (I should have bought into Elizabeth Bay a decade ago.) A decade later and Sydney’s $600,000 median line extends 50km from the city centre. The only reprieve is provided by public housing islands at St Mary’s — the setting for Struggle Street — and Macquarie Fields, both at the 40km mark.

The hipsters are right. It is impossible to get anything affordable within 50km of the centre of Sydney. The same map for Melbourne shows that it is possible to access sub-$600,000 housing 14km west of the CBD at Sunshine West. Brisbane offers sub-$600,000 housing 14 km north of the CBD at Kedron. Sydney stands apart. Affordability is an issue in Sydney, although the debate is less clear in other cities. In one sense, Sydney is a victim of its own success. Too pretty, too successful, too well connected.

Sydney should have pursued a bi-nodal model like Dallas-Fort Worth a generation ago, allowing low-cost housing to be developed on the Wollondilly plain, with workers commuting to hubs at Blacktown and Parramatta.

An interesting byproduct of the recent “wealthification” (yes, another made-up word) of middle Australia through the house price surge is “the million-dollar wall”. In 2011, a cluster of Melbourne’s eastern suburbs formed a block of pricey residential property where median values exceeded $1 million. Melbourne’s well-defined ­Richie Rich heartland extended from Brighton to Doncaster and included the usual suspects of Malvern, Toorak, Hawthorn, Kew and even Camberwell.

Five years later, Melbourne’s million-dollar-or-more median house cluster is on the move. Like a ­ballerina, the upmarket heartland jetties to the northwest and southeast.

If the sub-$600,000 line represents affordability then the million-or-more wall shows the bestowing of property wealth across middle Australia. Let me assure the non-Melburnian readership that Essendon North, Mentone and Forest Hill are everyday suburbs where locals must now feel enriched by the ­recent property price frenzy. Melbourne’s inner-city hipsters, dis­inclined to take up housing opportunities in Sunshine West, are likely to be offset by a larger number of newly minted suburban millionaires. If there is to be a strategy to make housing more affordable, I am sure middle ­Australia will want to retain their accumulated property value.

I’m in the bubble and plateau school of thinking when it comes to the future of Sydney and Melbourne property values. There are, of course, limits to the ascent of the value of a suburban house; there comes a point when a market can’t suck in or bunch-up any more investment potential. But I am also not surprised by the resilience of these markets.

The two biggest ­cities in Australia are perfect lifestyle destinations for the region; they offer a quality of life that is unmatched in this part of the world. And as long as we remain a growing nation and maintain social cohesion and offer transparent governance, our cities will continue to be prized and valued accordingly in an increasingly ­globalised world.


This article was originally published by  on the 3rd March 2017 via theaustralian.com.au


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