Expert insight: 3 factors that could hamper Sydney’s recovery

“This decline we're seeing at the moment, very much a slow melt, and I think the upswing is going to be quite a gradual process as well.”

“My gut feel is we'll probably move through the downturn sometime in 2020 and we'll start to see a gradual upswing in prices, but a big part of that is going to relate to what happens with the economy,” he said.

However, certain factors can prolong the downturn further, including housing affordability, rental demand and household debt, according to Mr Lawless.

Housing affordability

After the property boom, property prices in Sydney have been in record-high levels. As the market experience declines, dwellings across the capital city remain more expensive than most areas in Australia.

In fact, the typical household in Sydney will have to spend nine times their gross annual household income to buy medium-priced dwellings, Mr Lawless said.

“Housing affordability is pretty shocking across Sydney. We've got a dwelling price-to-income ratio in that's a little bit higher than nine times.”

“What I'd really suggest—since the typical household is no longer able to afford the medium-priced dwelling, regulatory solutions must be targeting the middle to lower end of the marketplace,” according to the property researcher.

Rental demand

Another concerning factor that could hamper the recovery of the Sydney property market is the declining rental demand, brought about largely by renters who are deciding to become first-home buyers in more affordable cities as well as population growth dampening.

“Both factors are easing rental demand right at a time when rental supplies have ramped up quite substantially on the back of a lot of construction, which means that rental yields are very low in Sydney as well.”

“Rental yields are really good barometers for measuring market value and whether or not property values are overvalued or undervalued. The gross yield in Sydney is about 3.1 per cent—only fractionally off a record low.”

“That suggests to me that we're seeing rents falling in Sydney. They're down about 2.5 per cent the last 12 months, and we're not going to see any real improvement in rental yields in Sydney at least within the next 12 months,” Mr Lawless said.

Household debt

Finally, Mr Lawless describes household debt as the ‘big wildcard’ and the only non-market factor that could negatively influence the recovery of the Sydney property market.

The average household debt across Sydney remains higher compared to the average household savings, but as the tighter lending environment affects the property investment landscape through regulatory interventions, experts believe that household debt will come down eventually.

According to Mr Lawless: “As we see more interest-only loans being paid down and we see some subtle rises in wages growth, we'll start to see household debt coming down, but it's going to take a long time for household debt to reduce materially.”

“This really implies that households are very sensitive to the cost of debt. If we do start to see any further changes in mortgage rates or if we start to see some upward pressure in the cash rate, which isn't likely until at least late 2020, then we're going to see some effect in the household sector as they dedicate more of their income to servicing the debt and less to buying stuff.”

Regardless of the possible duration of the downturn, investors are strongly encouraged to be prepared for a substantial downturn in the Sydney property market.

In fact, it could be the biggest downturn that the capital city has ever seen since the recession in the early 1990s.

"We should expect this housing downturn to be more substantial than what we've seen in the past, mostly because the past is a really low benchmark."

"This could be the biggest downturn the Sydney market's ever seen, and our data goes back to the 1980s, during the last recession. During the early 90s, we saw Sydney values fall by about 10 per cent over 24 months. Sydney's almost down by 10 per cent now. I think we'll absolutely see Sydney record a larger decline higher than 10 per cent, probably more like 15 per cent, and that could be over a long timeframe as well.”

“This downturn is very different. We haven't seen the normal catalysts of a market cycle just yet, which is typically monetary policy changes or economic conditions either worsening or improving. It's all about credit availability and finance regulation,” Mr Lawless concluded.

Tune in to Tim Lawless' episode on The Smart Property Investment Show to know more about the future of the Sydney property market, as well as other capital city markets across Australia.