When we look at housing bubble activity, the media loves to jump all over the top of the market. $20 million sales of trophy homes. Record Price! The heart of the housing bubble is at the other end of the market.
Mount Druitt is a suburb of Sydney which locals love to hate. There was a reality TV show last year called Struggle Street, based in Mount Druitt, turning poverty into entertainment for Australians.
In 2015 Mount Druitt was rated the 15th poorest postcode in Sydney (out of about 215 postcodes, so poorest 7%). The residents are poorer than average, and the area has the social issues impoverished areas have in all cities. Let’s look at the key statistics of Mount Druitt;
- Population – 57,177 (of Sydney’s 4.9 million).
- Median Income – $49,4k AUD per year ($37.5k USD)
- Crime Rate – 20% higher than Sydney average.
- Median Rent – $1,780 AUD per month (43% of median income!)
- 43% of homes are rented.
- 38km (23miles) west of Sydney Central Business District.
- Surrounded by suburbs such as Whalan which are up to 35% of homes are government provided for those that can’t afford their own home.
Basically, this is an area you don’t choose to live in. Either you grew up here, and stay due to local family links, or are here because of no better option.
The median house price in Mount Druitt is $691k AUD ($530k USD). This home price is an incredible 11 times median income to live in an impoverished area that is surrounded by housing commission (section 8) and is 38km (23 miles) away from work (over an hour just on the train, so likely minimum 90 minutes door to door commute).
Clearly, this is property investors driving the price up. Since median rents are only $1,780 AUD per month, an investment here will be far short of even covering their mortgage interest (let alone mortgage payment).
The investors have driven median rents up to 43% of median income, but rents can’t go any higher. People just cannot afford to pay that much of their income on rents, since they need to eat, and pay for that long train ride to work.
Real estate speculators have piled into Mount Druitt, expecting home prices to rise forever. This has driven gross rental yields down to a dismal 4%. Typically gross rental yields are higher in impoverished areas than luxury areas, due to the risk of poorer tenants being unable to pay rent.
Home Loan rates are currently approximately 5.3%. Therefore an investor needs the home to rise 1.3% above inflation just to break even on mortgage interest, and hope their impoverished tenants never miss rent or destroy the home.
The following are cities with a lower median home price than Mount Druitt, Sydney (Australian Dollar median home prices in brackets);
- 9 of the 10 largest cities in America (New York ($545k), Chicago ($305k AUD), Dallas ($280k), Houston, ($288k) Philadelphia ($312k), Washington DC ($515k), Miami ($385k), Atlanta ($237k), Boston ($557k))
- Tokyo ($355k) and Osaka ($230k)
- Singapore ($400k)
- London Exurbs ($487k) (London City is more expensive than Mount Druitt)
- Every UK city/town other than London GLA ($225k – $430k)
- Paris ($486k inner Paris, $418k outer)
But Sydney is different?
Sydney has a shortage of housing?
Why live in Paris, New York, or Tokyo when you could live in beautiful Mount Druitt.