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House supply question over Sydney market

AAP logoAAP 12/09/2016 Garry Shilson-Josling, Economist

Two big questions for housing investors right now are how much of the recent big-city price rises is due to reduced supply, and whether rental yields will be enough when prices stop rising.

Sydney could be the key test for both.

There were more homes on the market last week in the Perth, Melbourne and Brisbane/Gold Coast markets than in Sydney.

The number of new listings in Sydney is down by 20 per cent from this time last year and auctions over the past week were down by 33 per cent, according to a report from CoreLogic on Monday .

With fewer auctions, prices were squeezed up by 0.8 per cent in the week to be 10.8 per cent higher than a year earlier.

Reduced supply also helped to push the Melbourne market up by 1.3 per cent last week and by 10.4 per cent annually,

Prices were more subdued elsewhere: up 0.1 per cent for the week in Brisbane/Gold Coast and 0.3 per cent in Adelaide, and down 0.6 per cent in Perth.

Annual price moves were also subdued outside the big two: up 4.5 per cent in Brisbane/Gold Coast and 3.8 per cent in Adelaide, while Perth is down by 4.4 per cent from a year earlier as deflation of the mining-related boom continues.

But what happens in Sydney if investors suddenly decide prices are about to fall and, as they rush to sell out, supply jumps sharply - just as it has in Perth?

Life could suddenly get harder for sellers.

The other question is whether investors are relying too heavily on assumed hefty price rises and ignoring falling rental yields.

The CoreLogic August Rent Review last week showed that average rents in all Australian capitals, aside from Hobart, have failed to keep up with prices over the past year.

Rents stalled in Sydney and fell in Brisbane/Gold Coast, Adelaide, Perth and Darwin.

In Melbourne and Canberra rents rose, but not as rapidly as prices.

As a result, the average rental yield - rent as a proportion of the market price - was lower than it was a year earlier everywhere but the Tasmanian capital.

Average capital city rental yield was 3.3 per cent in August compared with 3.5 per cent a year before.

That looks like a small change but it isn't, especially considering the price changes that would be need to restore rental yields to where they were.

To lift the average rental yield by 0.1 percentage point from its current level, the average dwelling's price would have to fall by three per cent.

To put it another way: to get the average rental yield in Sydney should be four per cent rather than its current three per cent, then house prices should be 25 per cent lower than they are now.

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