Why Sydney property will correct by 20% to 25% when it does or stagnate for a long time....

Two things strike me as fact:

  1. The average earnings return payback  (the total purchase price divided by the annual rental return – expressed as years) on a property well known to Altair just a few years ago was 18 to 19 years duration.
  2. The current earnings return payback  based on several properties (including  this one well known in Double Bay)  sold over the last few months and with unique insight into the rental amounts being received indicate an earnings return payback  now  of 24 to 25  years for each one.

That’s a 30% plus additional payback time on the capital expended, so a 20% to 25% correction seems quite probable given these circumstances at some stage. Will it happen quickly as in the post GFC and 1991 to 1993 fall, or will stagnation in prices take longer as in the 1974 to late -80’s phase, and be drawn out with no price increase over a decade???

The property referred to above in point 2  recently sold for $ 720k in double bay -  just 6 months later sold for $820k! 14% in 6 months!

The long running return on capital value has been 7% compound for that property over the past decade to the $720k sale. 5% is the normal long running CAGR since 2000.

 

By the way,  the chart attached shows the compound annual growth rate (CAGR) of just 1.03% from start to finish of the chart.

From the 1953 high to the end of the chart = 1.90% CAGR

From 1980 level = 2.50% CAGR

And 3.15% from 1990 to the end chart

Facts for thought!

Cheers, Phil


Altair Asset Management (Altair) is a high conviction, active Australian equities manager whose investment philosophy is based on understanding the drivers and impact of change. Altair applies macro thematic research to uncover trends which are...

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