On Real Estate in Sydney

As a new arrival, I have been studying the Sydney real estate market with dismay. To find housing, one typically goes through either domain.com.au or realestate.com.au. Domain is a spinout of the Fairfax newspapers (the Sydney Morning Herald, The Age) but is now bigger than both. Realestate.com.au is an offspring of the rival Murdoch newspapers.

A panorama of the development near Green Square in Sydney

The first thing one notices about Sydney are the exorbitant prices.  Australia has not had a recession for 25 years, (though economists have predicted at least 10 of the last 3 recessions) and prices have steadily marched upward (until the last couple of months at any rate). People have come to believe in the inviolability of above normal profits in real estate investments. And obviously owners in the system hope this to be true, so there is motivated reasoning.

On the one hand, land, they aren't making any more of it. And there is a large desire for individuals from Asia to buy real estate in Australia for a variety of reasons (as a form of wealth insurance by investing in a stable capitalist country with rule of law, to help children immigrate, just because they believe in the inevitability of ever rising prices. Further, there are politicians, presumably supported by their mates in the real estate industry, who will do anything to keep this game going, including letting people borrow from their Supa, their retirement scheme, to invest in more real estate. Sydney is certainly a desirably place, and the most desirable parts, with the highest accessibility and best views, are scarcer than inland areas.

On the other hand, most of Australia is pretty empty. In response to demands, supply is increasing in the city, there are cranes everywhere, and residential new starts are at historic highs. This should soak up the demand and, if in fact supply rises faster than demand, cause prices to drop some. Also, it is cheaper to rent than to pay the interest on a comparably valued house, much less own (excluding various tax gambits, like negative gearing)

My own view is this is a bit Bubbly. It seems like a Ponzi scheme or musical chairs, and you don't want to be the last one entering a Ponzi scheme.  Australia has a very long coastline, other cities are less expensive, and the amenities that provide value are steadily being spatially distributed.

So we are renting, for now, perhaps forever. My sense is that capital would be better invested elsewhere (or in cash - since the stock market is overvalued as well) than in such an obvious bubble. When conditions change, we will reconsider.

The real estate market differs from the US in a few ways. Stamp duty (about 5%) on property sales is a large source of government revenue (while normal rates are lower). (Notably, this is a weak form of land value capture, especially since much of the value is in the land rather than the structure). Also there is a single land registry which makes title search pretty trivial.

Karen Strojek writes about the Torrens Title System:

The story of Torrens and the Real Property Act of 1858 is fairly well known. Torrens took an interest in reforming South Australia’s chaotic deeds-based land system when an acquaintance lost money on a property, owing to a faulty title.

With help and advice from competent friends, and a sustained campaign for conveyancing reform, Torrens won the seat of Adelaide in the first parliamentary election of 1856. His Real Property Act came into effect in 1858. Soon afterwards, Torrens resigned from government to run the new land titles registry.

Under the new system, the location and dimensions of each land parcel were to be surveyed and registered. Every new land owner received a secure grant of title, guaranteed by the Crown.

Recently there has been discussion of privatising this database. It is not clear what the value added of the private sector is here.

Renting

Most rentals appear to be handled by Real Estate Agents (while in the US, it appears far more owner-driven). The agents will list the property on the above-noted websites. This ad will include a few photos (with fisheye lenses to make it look bigger) and not include a floorplan because that would benefit the renter not the landlord (unless it is a large unit). So you can't easily compare units before you go and see them, which is exceedingly annoying.  Even for sale properties,   which do have a floorplan, they often don't include gross floorspace.

The Agents then set an open-house window of 15 minutes, and wait for the hordes to flood in. Strangely, many showings are scheduled simultaneously (typically Saturday morning) so people are racing around looking at properties. So you get to kick the tires for a very short period. If you are interested in one or more properties, you apply. Fortunately there is an online application that is common to most agents called 1form. Unfortunately there are competitors to 1form, so it is not the 1form to rule them all. Agents make up nonsense about it not working with their system, but I think the agencies don't want to pay the associated fees or higher a coder.

The whole process is Dynamic Optimization. You must apply simultaneously to multiple properties, and keep looking until you put down money. If you don't, someone will grab the property out from under you.  The agents screen the applicants and the owners than look at the applicants and then you are notified. If you are interested, you must then put down a non-refundable Holding Fee. This will apply to rent if you ultimately sign, and takes the unit off the market until the contracts are signed (or not). Obviously you don't want to put deposits on more than one property, since then you will forfeit money.

Owning

The process of buying houses differs as well. The property is listed on the above websites. There are a few viewing times. And then there is an auction. In the US an auction is an indication of a distressed or foreclosed property. Here it is the most common way of selling.  (Though you can make an offer before the property is auctioned). The auction process seems to work for the benefit of the seller, playing on people's emotions and excitement. It reduces the work of the agent, and clears the market faster. A standard metric that is reported about the market is auction clearances.