The Context

Is there a correlation between Sydney property prices and other capital cities’ prices? That is, when Sydney property prices increase and the price gap between Sydney and other cities widen, do the prices in other cities start to pick up, and vice versa?

The findings will provide evidence about the opportunistic buying time to strategically grow the property portfolio value or take advantage of above-average capital growth.

To answer this question, I source quarterly median price data of established house transfers ($000) from ABS and calculate the ratios between the other capital cities’ prices and Sydney’s prices to detect the trends. 

There are three possible scenarios:

1. The ratio is stable - the pair prices increase at the same rate

2. The ratio is increasing - the prices of Sydney increase faster than the prices of the pair city

3. The ratio is decreasing - the prices of Sydney increase slower than the prices of the pair city

Why Sydney leads the Australian Property Market?

Sydney is the largest state economy and the most expensive housing market in Australia. The major characteristics of the Sydney property market are:

1. High level of price volatilities 

2. The long-term growth is in-line with other capital cities

Historically, Sydney, together with Melbourne have lead the national market during both boom and bust periods. This is due to the large population, high population growth, high immigration rate and large share of investors who are sensitive to the policy changes and shocks. When Sydney’s price starts to become unaffordable, the prices in other cities are likely catching up; and when Sydney’s price growth eases, the prices in other cities are likely slowing down.

Taking the Sydney market as the benchmark, the evidence about the points of time and/or the points of prices when the prices of the other cities would start to increase or decrease in response to the changes of Sydney’s prices would provide an opportunistic window to purchase or to sell.

The Data and Description

Median prices of established house transfers (Quarterly and by City) are collected for the period from 2000 to 2019. Then a range of indicators are calculated to detect the relative price movements between Sydney and its pair capital city:

1. Price Ratio - Other City Prices/Sydney Prices: the value of 70% indicates the other city’s prices are equal to 70% of Sydney’s prices

2. Price Index - where all city prices are normalised to the index of 100, this index is used to estimate the growth in each city individually over time

The Findings

1. Sydney maintains the highest housing price during this study period. Only Perth and Darwin were comparable to Sydney in two brief episodes in 2007 and 2009

2. The gap between Hobart and Sydney is the largest, while the price distance between Melbourne and Sydney is the closest. However, despite having the same size population and economy as Sydney, Melbourne’s price is still 25% lower than in Sydney

3. Fundamentally and over the long-run, the prices of other capital cities are significantly lower than in Sydney

4. Overall, the price distance between Sydney and the other city varies in a cycle: a period of decreasing price distance followed by a period of increasing price distance

5. The prices in all cities are trending upward, however, there are large discrepancies between cities: overall, the higher the price, the lower the capital growth over the very long-run.

6. Between the period of 2000 and 2018, Sydney’s price growth was about 20% lower than the other capital cities’ growth

7. When prices in other capital cities approach Sydney's price, it is recommended to sell properties in other capital cities, and to purchase in Sydney; and when the prices in other capital cities are diverting from Sydney’s price, it is recommended to buy in other capital cities

8. The turning points are listed as follows:

• It is recommended to buy in Melbourne when Melbourne prices are equal to 69% of Sydney; 

• It is recommended to buy in Brisbane when Brisbane prices are equal to 49% of Sydney

• It is recommended to buy in Adelaide when Adelaide prices are equal to 43% of Sydney

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