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When and why did Sydney prices drop 24% in 2 years?

When and why did Sydney prices drop 24% in 2 years?
October 16, 2018 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

The late 1980s is a period of fond memories for many of us. And while society has changed significantly since then, some things are scarily prescient, especially when it comes to Sydney house price movements.

As well as Michael Jackson’s famous Thriller album going to number one, Crocodile Dundee was a global box-office hit, and Allan Border led Australia to victory in the World Cup cricket.

Back then, Bob Hawke was Australia’s very popular Labor prime minister and that popularity no doubt helped him to usher in significant economic change. In fact, the Hawke and the Keating Labor governments instigated a series of economic reforms designed to open Australia’s trade with Asia and reinvigorate the domestic economy.

From the mid-1980s, the doors to our economy were flung open by policies such as market deregulation and the floating of the Australian dollar.

The floating dollar also integrated Australian markets with the world and increased confidence in our economy.

The currency float also helped to create the groundwork for a series of deregulations including the licensing of foreign banks, the loosening of restrictions around loans, the lowering of tariffs and the move away from centralised wage regulation.

Interest rates in the mid-late 1980s were vastly different to today’s 1.5 per cent RBA cash rate. The cash rate was never lower than 10.6 per cent and peaked at 19.39 per cent.

With Australia in the midst of strong price growth across the country, capital gains tax was introduced in 1985 in attempt to slow down property investors.

Negative gearing was axed six months later, but within two years had been reinstated in the face of soaring rents, especially in Sydney and Perth.

According to data from REIA, the median house price in Sydney as at December 1988 of $214,500 cost almost twice as much as Australia’s second least affordable city, Melbourne ($122,000). That’s right, Sydney housing has always been bucket-loads more expensive than anywhere else!

Canberra ($108,000) was the next most expensive city, while each of the other capitals had a median house price of between $85,000 and $95,000.

Economic change

The Labor Party held a strong rein in New South Wales through the early and mid-1980s until Liberal’s Nick Grenier defeated Neville Wran in 1988.

Grenier came in to office shortly after the 1987 World Stock Market Crash that reverberated around the globe, triggering serious economic consequences. More people opted for the relative safety of property as an investment vehicle instead.

The 1980s was the era of the entrepreneur — the likes of Alan Bond, Christopher Skase and Robert Holmes a Court – but many failed to financially survive the 1987 crash.

While the economy was strong, it’s interesting that the national unemployment rate was more than 2 per cent above today’s rate, hovered around 8 per cent throughout the late 1980s.

High inflation and strong wage growth continually worried governments and repetitively increasing interest rate was done in attempt to take the heat out of Australia’s economy – a policy which, on reflection, some considered a poor decision that helped to push Australia into a recession in the 1990s.NSW Premier Grenier was also tussling with how to slow down Sydney’s booming house prices when he came to office.


What goes up

While we’ve recently been talking a lot about Sydney’s ballooning population, the rate of growth was much the same in the mid-late 1980s. So, too, was the public concern about congestion and housing affordability.

The flight to property, along with a period of easing interest rates, meant that the Australian property boom continued until Sydney prices started to fall from 1989.

Sydney’s price decline was in stark contrast to everywhere else. Perth was the only other capital city to decline (-2.1 per cent) while every other city boomed, with Adelaide (24.7 pe cent) and Brisbane (22.5 per cent) leading the charge.

What caused Sydney prices to fall before everyone else’s?

Well, it was a turbulent time for the banking sector, with long-established building societies trying to become banks, as well as several mergers, acquisition, and closures. Sydney has always been Australia’s banking and financial services hub.

The other reason is that history has taught us that price booms never last forever and are often followed by a period of falling prices. The first location to fall is usually the place that is the least affordable, which has always been Sydney.

That happened in the late 1980s in Sydney just as it is happening there again today.


What’s ahead?

It’s interesting to compare the conditions of 30 years ago to today.

After a four-and-a-half-year property boom that produced 65 per cent price growth, Sydney’s median house price peaked in July 2017 and has (so far) dropped by about seven per cent.

While I think it’s highly unlikely that Sydney median house price will drop 24 per cent as it did in the late 1980s, it is, nonetheless, a valuable reminder that property prices rise and fall in every location. No, Sydney is not in a league of its own!

History is also an important reminder that some people need that the performance of a property markets always varies widely from one city to the next.

It’s also worth noting that, while a lot has changed over the past 30 years, plenty of things are still much the same.

Sydney housing has always been much more expensive than everywhere else, and people have always been disgruntled about Sydney’s congestion and population growth.

Contrary to the stable national leadership that Australia had back then, which heralded the start of Australia’s unbroken period of economic growth, today’s political instability is never good for an economy or for property prices.

Of course, just like booms never last forever, nor do periods of price contractions. Plus, these days we have more education than ever before that teaches us that Sydney is not the “be all and end all” for a growing number of savvy property investors.

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