Sydney is heading into a giant and unprecedented investor-led property boom

If there was any residual doubt about whether low interest rates would push more investors into Australia's housing markets, well, there isn't now.

I'm not sure I understand all of the reasons why everyday Australians are more inclined to invest in residential property than, say, our counterparts in the US, but regular readers will recall that I was confident that this would be the outcome of lower interest rates (in the face of a chorus of articles and commentators suggesting in no uncertain terms that the housing markets would not respond to monetary policy, and that buyers should 'sit it out' and wait for an inevitable price correction).

It seems to be part of the Australian psyche, as well as a reflection of our tax system. Investors with surplus capital have seemingly been spooked by the share market crash rather than welcoming the wonderful buying opportunities, and instead turn to the property markets to seek returns in the low interest rate environment ("I've always done well in property").

In my opinion, and in that of others, the long-run outcome of this will be iniquitous "cones of wealth" surrounding our major capital city centres - in particular Sydney and Melbourne - just as we have seen unfolding in London and elsewhere over the past few decades. I don't expect that outer suburbs and regional centres, where the percentage of investors is much lower, will be impacted all that much.

Finance data

The Housing Finance data for October from the Australian Bureau of Statistics (ABS) showed a very substantial 4.1% seasonally adjusted increase in total dwellings housing finance.

Source: ABS

As you can see above, owner occupied housing finance increased by 1% through October, seasonally adjusted, and the recent data has sent the total number of owner occupied dwelling commitments well above their long run averages.

Source: ABS

The total value of dwelling commitments is in a roaring uptrend, the most recent sector of the chart almost vertical.

Source: ABS

The real driver and the real story of this release is the level of investor activity, which has increased massively over the month of October (+8%) and over the past year (+29%).

Note that this is easily the highest level of investor activity ever recorded in Australia.

Source: ABS

Combined with other data which shows that New South Wales is leading the levels of financing activity, this clearly suggests to me that the types of property which will 'outperform' the national averages will be those favoured by investors, in particular those located in the inner/middle ring suburbs in Sydney.

Meanwhile, there was positive news for the new dwellings sector, with he number of commitments for new dwellings strong.

Source: ABS

First home buyer activity

There is little point in analysing first home buyer activity in great detail. We know that the numbers are low, but, in NSW at least, we also know that the numbers are incomplete.

I missed out on a property myself to a first home buyer a fortnight ago, but I'm doubtful that he was recorded as such. Notably, he was somewhat older than first home buyers from generations gone by, a trend we might expect to see continuing.

New dwellings construction

And finally, finance for the construction of new dwellings is definitely moving strongly in the right direction with 11 consecutive monthly increases, but it would be fair to say that there is still a good deal of heavy lifting for low interest rates to do before it could be called a construction boom.

In particular, much of the activity has been in NSW and Western Australia to date, so other states have some way to go.

According to the ABS: "The number of finance commitments for the construction of dwellings for owner occupation (trend) rose 0.7% in October 2013, following a rise of 0.6% in September 2013.

"This is the eleventh consecutive rise since December 2012. The seasonally adjusted series rose 1.0% in October 2013, following a rise of 1.7% in September 2013."

Source: ABS

Summary

Housing finance is a useful indicator as to what is coming in the future, and the indicators suggest more of the same in 2014 while interest rates remain low.

Over the past 12 months, Sydney has recorded 14% growth, Perth around 10.5%, and Melbourne 7.5%. Even Adelaide, which was is my least favoured capital city suggestion due to there being a weaker supply/demand dynamic, has scraped together a tiny amount of capital growth, although the city's dwelling prices have comfortably underperformed inflation for years and years now.

Source: RP Data

In summary, we are heading into a giant and unprecedented investor-led property boom in Sydney. But if you've been a long-term reader of my books (and my blog), you already knew that...years ago.

His new book 'Four Green Houses and a Red Hotel' is out now.