On the Sydney Housing Bubble: Evidence from Eastwood

Having spent Saturdays in Eastwood, it is impossible not to note the huge interest in property sales among the Australian Chinese community. Along the main pedestrian street, there are developer agents hawking property from Chinese developers in new condominiums across Sydney, the agents are Chinese, the ads are Chinese, the prospective customers are Chinese. At Eastwood station, there are three billboards for Chinese serving real estate agencies, including two from the same agency, featuring different photos of the same agents (strangely with different phone numbers). Looking at the guys on the right, we ask, whom do we trust and who is selling us a used car?

Realtors in Eastwood
Realtors in Eastwood

A rich market in speculative real estate is not proof of a bubble, but it is consistent with one. Sydney is building lots of housing, yet prices remain high, because there is a belief of insatiable demand from the Mainland, and prices are soaring there. So the wealthy in China are trying to secure money in a stable country in the same time zone (more or less) which respects property rights and rule of law. This used to be Hong Kong. It is now Australia, larger and more secure. If that asset rises in value at an above average rate (faster than stocks or other investments) all the better.

The demand from a fast-growing China is, over the long term, likely to continue, and can appear insatiable. But at what rate does demand grow? Sydney now has about 334 cranes, (compared with 165 in supposedly faster-growing Melbourne) (for comparison, Seattle had 58, the most in the US … I think Sydney has more than the cities in the US as a whole, it certainly comes close), will this satisfy supply? When does China impose capital controls? When do American or some other large country’s interest rates rise sharply, automatically increasing Australia’s official rates (which must rise in order to attract capital), which drives up mortgage rates in a country where everything is a variable rate, to the point where locals default? When does the confidence in the system fail?

These are questions for which there is no clear answer.

When I was in the US, before the global financial crisis I knew there was an issue in the real estate industry. Our still-in-high-school 18-year old tenants were issuing mortgage loans for some financial institution that they worked for after school and on weekends. I haven’t yet observed that here, but look around for signs that things are a bit overheated, and people who are too young to remember the last crisis, or too optimistic, think things can only go up. That this time will be different.

The ‘greater fool’ theory says invest, there will always be someone to buy you out later at a higher price. But if you are at a poker game and you don’t know who the mark is, it is you.