Home Flipping Frenzy in Sydney Sparks Warnings on Housing Risks

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Lana Taylor quit a job at Unilever Plc to buy, renovate and sell homes in Sydney, where prices have increased in 13 of the past 15 years.

Taylor, a marketing manager at the consumer goods company until October 2013, and two friends started Three Birds Renovations in July last year. Since then, they have bought and sold three homes in Sydney’s northwestern suburbs and made a gross profit of about A$600,000 ($441,000). They are working on the fourth, which will be ready for sale by Christmas.

“We aim to flip the property in six weeks,” said Taylor, 37. “We are kind of living the dream, where three friends, three mums are buying and renovating houses for a living.”

Sydney home prices soared 44 percent in the three years ended September, enticing speculators who’ve been partly inspired by home renovation shows on how to spruce up and sell homes for quick profits. The frenzy surrounding Sydney’s property boom, reminiscent of the exuberance in U.S. real estate before the 2008 financial crisis, has prompted regulators and Goldman Sachs Group Inc. to warn the market is overheated, while Bank of America Merrill Lynch and fund-manager AMP Capital expect prices to fall.

Since September 2013, more than 1,500 houses and 800 apartments have been resold in less than a year in Sydney, for about 20 percent more on average, according to online property listing firm Domain Group. That compares with about about 530 houses and almost 400 apartments in the previous two years.

People need to be careful because “house prices aren’t going to continue to rise much more quickly than income; debt levels can’t keep rising faster than income,” Reserve Bank of Australia Deputy Governor Philip Lowe said at a conference in Sydney Tuesday. “Ideally, we’ll now go through a period of quite modest house price growth. I think that would de-risk household balance sheets a little and would probably be good for the economy.”

Mortgage Risks

Rushing to buy and sell homes is underscoring a build-up of mortgage risks as households take on record debt, lured by home-loan costs at the lowest in five decades. The housing debt to income ratio touched a record high of 132.8 percent in the three months ended June 30 up from 119.4 percent three years earlier, according to government data.

“More and more people are being drawn into flipping homes and when interest rates rise or a lot more properties hit the market, they may be caught out,” said Martin North, principal at Digital Finance Analytics, which has partnered with JPMorgan Chase & Co. to produce mortgage reports for more than 10 years.

The profit from resales is too good to pass up when wages in the eastern states of New South Wales and Victoria, where most of Australia’s population lives, have increased less than 3 percent since mid 2013. The average annual income is about A$55,000 to A$60,000.

‘‘You’ve got people looking at short-term flipping of property as opposed to long-term investment,” Stu Benson, a sales manager at Domain Group, said by phone.

Macquarie’s View

This is something not lost on regulators, who have already tightened lending to investors. Treasury Secretary John Fraser in June declared a housing bubble in Sydney and pointed to home renovation shows such as The Block and House Rules as partly to blame for the frenzy.

Macquarie Group Ltd. on Monday said that prices are poised to fall because of weak population growth and increasing supply. Sydney and Melbourne home prices are expected to fall by as much as 10 percent by 2017 and investors need to be mindful of lower returns in the “medium term,” AMP Capital said in an e-mailed note Tuesday. Australia & New Zealand Banking Group Ltd. expects residential values to climb only 5 percent next year.

The housing juggernaut seems to be slowing down amid aregulatory clampdown. Auction clearance rates, used to gauge demand, have come down to 71.4 percent in Sydney from a peak of over 90 percent in April, while prices are showing some fatigue: home values in Sydney climbed just 0.1 percent in September from the previous month, the slowest pace since May, according to property researcher CoreLogic Inc.

That hasn’t deterred Taylor and her friends, who spent A$3.08 million on the three houses and A$365,000 doing them up. They sold them for a combined A$4.05 million. The gross profit is before stamp duty, legal fees and interest paid, she said.

If one sticks to budget, timeline and buys the right properties, and “as long as you buy and sell in the same market, you should be fine,” she said. “We have a renovation budget of about 12 percent of the value of the house and we aim to do about three a year.”

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