Property market update: Sydney, February 2020

As a result, the market only continues to decline due to lack of activity.

“The danger is that people are not delving deeper for their information. This headline-driven reporting makes buyers nervous and unwilling to buy. The lack of properties selling means that not only the real estate industry is depressed but there’s a flow-on effect to conveyancers, lawyers, landscapers, hardware stores, furniture stores and, of course, state government revenues,” he said.

“There’s also a general uneasiness that develops with all home owners that the value of their asset is being eroded and so they curtail spending.”

In fact, there are always opportunities in Australian property markets, even in Sydney and Melbourne, which have been receiving negative press as they both reached the peak of their market cycles and consequently saw value declines.

Additionally, since the beginning of the year, the decline in home values has become significantly less severe than projected – similar to what happened in 2010 when most media outlets reported a potential 40 to 50 per cent crash in the Sydney market, only to find that the actual decline was only at 6 to 7 per cent. This was followed by a couple of years of flat growth and then an unprecedented boom.

Rethink Investing’s Scott O’Neill said that, this time, the NSW capital could have it worse, with another 10 per cent fall before it eventually recovers, but it’s still not going to be as bad as the media portrays.

“With 70-80 per cent owner-occupiers, there’s no way the market is going to crash 40 per cent,” he said.

Ultimately, the worst looked like it has come and gone, according to ME’s consulting economist Jeff Oughton.

“There’s still downward pressures there, but there’s no traditional triggers of any crash. Keep watching, because if you are looking for more property, there could be a buying opportunity here over the next six months or so.”

Property value

In the week ending 24 February, major capital city markets saw property values continue to hold steady or decline, giving more power to buyers.

Perth saw the largest decline at 0.5 per cent, followed by Melbourne’s 0.2 per cent and Sydney’s 0.1 per cent. Meanwhile, Adelaide and Brisbane’s property values held steady.

Sydney and Melbourne are both predicted to decline by around 6 per cent by the end of 2019, which means average house prices further dipping by $58,000 in Sydney and by $49,000 in Melbourne, making both capital cities the cheapest they have been in four years.

Ultimately, Sydney and Melbourne stand as two of the best areas to snag a property bargain or get some decent discounts.

Still, there are fewer buyers that flock into the market to take advantage of these opportunities, thereby creating significant competition between vendors, which pushes them to discount prices in order to achieve a sale.

“The widening gap between seller and buyer price expectations reflects the fact there are fewer active buyers in the market and, as a result, vendors that are serious about selling may need to make some sizeable price adjustments in order to sell,” CoreLogic’s Cameron Kusher said.

“With housing market conditions continuing to deteriorate, buyers thin on the ground and a high volume of stock listed for sale, it is reasonable to expect that over the coming months vendor discounting may increase further.”

The median discount for the combined capitals was -6.3 per cent, the largest discount in 10 years, and larger than January 2018’s -4.7 per cent.

Meanwhile, Sydney properties are currently experiencing 13-year high discounts, with the median at -7.5 per cent – higher than last year’s -4.8 per cent.

In fact, while Sydney still stands as one of the most expensive property markets, the number of million-dollar suburbs in NSW declined significantly over the month. After 10 years of consistent rising, the number declined to 366 suburbs in February 2019, significantly lower than January 2018’s 469 suburbs.

“With credit conditions looking set to remain tight and value declines currently fastest for the most expensive properties, it is expected that in 12 months’ time the number of million-dollar suburbs nationwide will have reduced further,” according to Mr Kusher.

Supply and demand

Most capital cities, except Hobart, Canberra and Darwin, saw listings decline during the final week of February. Meanwhile, Sydney and Melbourne saw the biggest falls at 25.3 per cent and 24.2 per cent, respectively.

Overall, the average time for houses on market declined as houses remained more popular than units. Hobart recorded the fastest time on market for both houses and units at 45 and 33 days, respectively, while Brisbane recorded the slowest days on market for houses at 90 days and Perth for units at 104 days.

Across most capital cities, vendor discounting was between 5.7 per cent and 8.6 per cent for houses and between 5.9 per cent and 7.5 per cent for units, with Canberra as the low-end exception for both houses and units, Sydney as the high-end exception for houses and Perth as the high-end exception for units.

According to Simon Pressley, the tightening of housing supply has been cited as one of the main reasons for the downturn in Sydney and Melbourne. Both capital cities have witnessed loose supply in the past 12 months, which consequently affected the price growth in their property markets.

Housing supply is expected to remain tight as it gets increasingly hard to acquire finance for property investment, particularly for developers, the property expert said.

Rental market

Even though listings declined, several areas in NSW saw a rise in vacancy rates, particularly Sydney, the Illawarra and the Hunter regions.

The latest REINSW Residential Vacancy report from the Real Estate Institute of NSW showed that, overall, Sydney’s vacancy rate for the month rose to 3.7 per cent, up from 3.2 per cent, with inner and outer Sydney recording the highest increases. Meanwhile, middle Sydney stood as one of the few regions to buck the trend, with vacancy rate declining to 4.2 per cent from 5.1 per cent the month before.

“Feedback from real estate agencies in Sydney’s middle ring – such as in Parramatta, Auburn and Bankstown – has been that the higher vacancy rates are due to new apartment developments, which have led to a market surplus. Landlords are finding it difficult to adjust by reducing rent,” REINSW president Leanne Pilkington said.

“At the same time, real estate agencies in Sydney’s inner ring who report to us regularly – for example in Campsie, Gladesville and Artarmon – have shown a decrease in their vacancy rates this month.”

Despite the current trend in the Sydney rental market, Mr Pressley believes that the next two years could bring positive outcomes to investors as vacancy rates begin to decline, thus pushing rents to rise as a result.

“There hasn’t been much rental growth since the GFC, so again, that will be a positive for property investors on their profit and loss statements,” according to him.

Strategy

While experts believe that the Sydney property market may continue to fall in the near future, affordable areas could spur the recovery of the NSW capital as they continue to attract property buyers who are looking for good deals and bargains.

In fact, Mr Pressley believes that, along with the rest of Australia, the capital city could witness the best performance of its property market over the next three to five years, depending on socioeconomic activity.

“I have a very, very strong view that the next three to five years will be the best that Australian property markets have seen since the GFC,” he said.

“Still, a lot of what happens this year is going to be dictated by what happens with the final reports from the banking royal commission, as well as any changes around macro-prudential policies. Without an easing back of some of the credit constraints, it’s hard to see housing market conditions change greatly this year.”

While buying in Sydney may not be advisable for every investor at every location at the moment, there are undoubtedly opportunities in the capital city, especially for investors who take the long-term view.

Research

As the Sydney property market witnesses significant changes after its unprecedented boom, investors are strongly encouraged, now more than ever, to take their time to do research before ultimately making major investment decisions.

Apart from helping investors mitigate risks, proper research also shines light on opportunities present, even across softening markets.

Investors are advised to take advantage of the abundance of information publicly available.

“Researching’s easy. There’s so much information out there these days – you can look up property sales, you can look up property values, you can do all sorts of things,” Mr Plant said.

“Research is simply about finding an area that you like, that suits you. Now, whether or not you’re new to a town or either going to rent for six months or 12 months, just get the feel of it. See what you like and see what you don’t like.

“See what draws you to an area by way of what your budget is or what you feel comfortable with or where the schools are or where the shopping centre is or how far your work is.”

Further, investors can also attend open houses and auctions to get a deeper understanding of market supply and demand.

Among Mr Plant’s top considerations when conducting property research prior to a purchase are the location and size of the property, as well as its aspect and outlook.

“A lot of people forget aspect, actually. For example, in winter, it would be a bit cold facing south, but if you’re facing north, it would be just beautiful. However, would it be too hot in summer?” Mr Plant explained.

“This matters especially in cities like Sydney, Brisbane, Melbourne, where you’re getting a lot of high-rise and high-density dwellings. You don’t want to look out your kitchen window at a blank rendered wall that is three metres from you – it doesn’t do your mind a lot of good.

“Whereas, if you had a nice view, even if it’s just a view out to the street or it’s over on a main road… you’ve got activity.”

More than improving the aesthetics of the home, aspect and outlook also improve its overall liveability, allowing investors to enjoy consistent demand through the years.

Long-term investment

Keshab Chartered Accountant’s Munzurul Khan said that cash flow and risk mitigation are the keys to surviving the softening markets.

With the uncertainties in the current market resulting from the tightening of the credit environment and the conclusion of the banking royal commission, as well as the looming elections and regulatory changes, investors are advised to take a long-term view to ensure that their portfolio remains afloat.

Mr Khan also reminded investors that thriving in the current market could mean abstaining from purchases – and that’s okay.

After all, “you only potentially make a loss in property if you are forced to sell”.

The property expert highlighted: “This is the year of a lot of uncertainties. We don’t know what will happen in terms of macro-economics and the politics, what will happen with the royal commission. We don’t know, but while there is uncertainty, we go steady because property investment is not for a short period of time.”

“It's okay not to do anything. We’re keeping our powder dry and we will wait until the markets unveil what it’s going to look like within the next six to 12 months. We will never say no to buying opportunities but there has to be very genuine, valid reason for it. Otherwise, we stay on the sides.

“Once the market recovers, we’re ready to take action because we maintain our capacity to borrow, we have our finances in order. Basically, we’re in a position of power and strength to be responsive to the market and to capitalise on that market.”

Apart from keeping cash buffers, investors can also mitigate negative pressure on their portfolio’s cash flow without making new purchases simply by looking at locking in fixed rates on their home loans.

Hotspots

According to experts, the softening conditions of the Sydney property market create buying opportunities looking to get into the market without overcapitalising.

While the growth in the Sydney property market may continue to slow down in 2019, Herron Todd White’s Month In Review report said that property prices should plateau by the latter half of the year following the end of state and federal elections.

Sell or Hold’s Jeremy Sheppard said: “While every owner or investor needs to understand their unique financial circumstances before making a decision about whether to sell or hold, blindly waiting for a market upturn might not be the smartest financial decision.”

Apart from affordability, one of the factors that could spur growth in NSW are prioritised infrastructure projects, which are expected to influence jobs growth and population growth, ultimately improving the demand for dwelling across the state.

Industry bodies call for the prioritisation of infrastructure spending in order to support the growing nation through an improved economy and stable investment markets.

The Infrastructure Priority List by Infrastructure Australia enumerates the high-priority projects in NSW, including:

• Upgrading the M4 Motorway between Parramatta and Lapstone
• Sydney Metro rail network: City and Southwest
• Western Sydney Airport

The inner city and eastern suburbs of Sydney, which experienced only small declines, are also deemed as good investment areas as they retain strong demand for housing.

Herron Todd White’s report said: “The final complex in the Central Park precinct, known as Wonderland, has just settled and therefore the supply pipeline in the area is largely depleted. This suburb, in close proximity to popular educational institutions, Central Station, [Chinatown] and the CBD, makes it an attractive investment or home – provided you have a 20 to 30 per cent deposit.”

“Homogenous investor stock in highly supplied and secondary areas should be treated with caution in suburbs such as Waterloo, Rosebery, Mascot, Botany, Ultimo and Forest Lodge.”

The suburbs of Surry Hills, Centennial Park, Randwick, Kensington and Kingsford are also among the areas to watch as the upcoming light rail infrastructure project could spur demand.

“This will change the face of the city, with George Street becoming more user-friendly, businesses and cafes able to trade as normal, and (hopefully) decreased congestion. Developments around the Barangaroo precinct and Circular Quay area will further refresh the city centre.”

Luxury properties worth over $5 million are also expected to continue their strong performance throughout 2019.

Meanwhile, investors are advised to avoid the suburbs of Vineyard, Leppington, Villawood, Wyalong, Macquarie Park, Church Point and Mangerton – all of which recorded the largest negative growth over a period of one to three years.

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