Property market update: Sydney, July 2019

CoreLogic’s head of research Tim Lawless said that, while Sydney has been showing signs of life, he could not foresee a fast recovery for the capital city, largely due to the ongoing tightness in housing credit.

Following the banking royal commission, lenders have moved away from the Household Expenditure Measure and have started examining borrower spending behaviours and expenses more closely.

“The ongoing tightness in housing credit is expected to keep a rapid rebound in housing values at bay, despite the lowest mortgage rates since the 1950s,” Mr Lawless said.

The RBA announced last 2 July that the official cash rate will be cut to a new record-low level of 1.0 per cent.

Meanwhile, BIS Oxford Economics, the research house which predicted that the Sydney and Melbourne markets will start bottoming out by the September quarter, remain hopeful about the recovery of the capital city markets.

However, due to the levels of supply in the current market and the supply yet to hit the market, he believes that any meaningful and widespread price rises could still be “a way off”.

According to BIS Oxford Economics associate director Angie Zigomanis: “Supply is running at record levels, with new dwelling completions having exceeded 200,000 in each of the past four years and expected to have peaked at a record of just under 227,000 dwellings in 2018-19,”

“This compares with underlying demand for new dwellings averaging around 195,000 per annum in the same period, which in itself is a record.”

BIS Oxford Economics predicted that median house prices will remain below their peak in four of the major capital cities over the next three years — particularly 14 per cent below peak in Darwin, 13 per cent below peak in Sydney and 10 per cent below peak in both Melbourne and Perth in June 2022.

Property values

Domain’s latest House Price Report said that house prices in Sydney fell by 0.4 per cent over the quarter, signalling a slowdown for prices.

Currently, the median price in the NSW capital remains over $1 million, but it is still 14 per cent below the 2017 peak.

CoreLogic’s Mapping the Market report found that 0.6 per cent of Sydney suburbs have median house prices that exceed $2 million, up by 7.4 per cent in the five years to June 2019, from 3.2 per cent.

Additionally, 31.4 per cent of Sydney suburbs currently have a median unit value below $500,000, down by 21.7 per cent from 53.1 per cent of suburbs five years earlier.

Meanwhile, unit prices also fell by 0.4 per cent over the quarter — down by 7.1 per cent over the year.

Over the month, Sydney, together with Melbourne and Brisbane, recorded value spikes of 0.2 per cent, according to CoreLogic. They were preceded by Darwin and Hobart, which saw increases at 0.4 per cent and 0.3 per cent, respectively.

On the other hand, dwelling values decline in Perth, Adelaide and Canberra by 0.5 per cent, 0.3 per cent and 0.2 per cent, respectively.

Mr Lawless said: “Our national dwelling value index may have found a floor in July, with dwelling values holding firm over the month following a consistent trend towards smaller month-on-month declines through the first half of the year.”

“The July home value index results provide further confirmation that the housing market has reacted positively to the recent stimulus of lower mortgage rates and improved credit availability; however, the response to date has been relatively mild.”

In the coming months, experts expect dwelling values to bottom out before eventually returning to positive territory later this year.

According to ANZ Research, the two consecutive cuts on interest rates, the easing of loan assessment requirements, and the election result have all contributed to the increased certainty around the taxation arrangements for housing and the shifted sentiment from “pervasive negativity to cautious optimism.”

Ultimately, ANZ advised investors to be wary of the risks that still exists in the Sydney property market, including the continued crackdown on living expenses for mortgage applications and an oversupply of housing in major markets that would stunt price growth.

“This all suggests that the (V-shaped) recovery is likely to be a fairly modest one,” ANZ Research said.

By 2020, the research house expects a price growth of around 3 per cent.

Supply and demand

The latest Housing Industry Association (HIA) figures revealed new home sales increased by 0.8 per cent in the second quarter of 2019.

According to AMP Capital chief economist Shane Oliver, several factors which emerged following the federal election have restimulated property prices in the past months.

These factors include the removal of uncertainty around negative gearing and capital gains tax discount, rate cuts, support for first home buyers via the First Home Loan Deposit Scheme and the removal of the 7 per cent mortgage rate test, he said.

“Home sales...could be bottoming following the lead from auction clearance rates, which bottomed six months ago. July average clearance rates were [the] best in Sydney since May 2017 and best in Melbourne since October 2017.”

However, while home values may not decrease any further, market demand continues to be suppressed. As a result, price growth could be minimal heading into 2020.

“Next year is likely to see broadly flat prices as lending standards remain tight, the supply of units continues to impact, and rising unemployment acts as a constraint,” Mr Oliver highlighted.

Unit market

With vacancy rates remaining high and supply continuously increasing, property investors could be facing a significant delay in the recovery of the Sydney property market, according to Certainty Property managing director Cameron Black.

“There is currently a 32-day average vacancy rate in Sydney, so it’s a bigger cost than people realise. If it’s a property bought off the plan and you’ve got lots of developments coming online at the same time that are all fighting for the same pool of tenants, in those cases, it can be up to two months.”

While vacancy rates tend to be higher in areas away from the coast and city centre, inner city properties are still not completely saved from the worries of being untenanted for long periods of time.

In fact, CBD vacancy rate is currently at 8 per cent — triple the national average.

With construction still booming in the NSW capital, the problem is unlikely to let up in the near future, according to Certainty Property director Simon Peisley.

“We have more cranes in the sky in Sydney at the moment than in New York and there’s a lot of stock still coming up. There are about 56,000 new apartments coming online in the next six months in Sydney,” he said.

Further suppressing prices and demand in Sydney’s rental market are several economic concerns, including Australia’s high levels of private debt and speculation that a recession is imminent.

“There’s really no room for the RBA to loosen [interest rates] any more, and if people lose their jobs they won’t be able to pay their rent,” Mr Peisley said.

“All of our debt has been transferred to households in this country, so if there’s an economic shift it would have much more impact compared to other economies.”

Investors who are keen to buy units or high-rise apartments in and around the CBD should ultimately be wary of the speed in which areas can lurch from undersupplied to oversupplied and vice versa, Right Property Group Steve Waters said.

Internal migration

Data from the Australian Bureau of Statistics (ABS), along with Propertyology’s analysis, shows that Australians are leaving big cities in favour of smaller cities and regional areas, thus driving up property prices in non-capital city locations.

Both Sydney and Melbourne saw the most growth in real terms, with each city gaining about 77,000 newcomers through overseas migration.

However, both cities also suffered from decreasing internal migration numbers.

The data shows that 14 of the top 30 councils recording internal migration losses came from Sydney, while six came from Melbourne.

Sydney was also the city that recorded the largest number of departures, with 27,434 residents leaving the NSW capital in favour of other locales around the country. The Sydney councils recording the largest losses to internal migration include Canterbury-Bankstown (3,970 losses), Cumberland (3,714), Randwick (3,232), Georges River (2,842) and Sydney City (2,840).

Likely contributing to increasing migration out of these areas are housing affordability issues or city congestion, according to Propertyology managing director Simon Pressley.

Auction clearance rate

Meanwhile, auction clearance rates are giving hope to investors who are looking forward to the recovery of the NSW capital.

CoreLogic data showed that 854 homes were taken to auction across all capital cities over the second weekend of July, returning a preliminary clearance rate figure of 69 per cent.

The previous weekend recorded “the highest final clearance rate since April last year” when 953 homes were taken to auction with a final clearance rate sitting at 64 per cent.

Sydney, in particular, saw a preliminary 77.2 per cent clearance rate over the said weekend, with 318 total auctions recorded.

Houses comprised 201 auctions with a 74.3 per cent clearance rate, while 117 units went under the hammer, returning an 82.1 per cent clearance rate.

At the same time last year, Sydney had returned a clearance rate of 46.9 per cent.

The capital city recorded a median house price of $1.15 million and a median unit price of $875,000.

Home loan serviceability

The Australian Prudential Regulation Authority (APRA) has made way for one of the major elements aiding the recovery of the Sydney property market when it finalised its guidance on loan serviceability assessment: It will no longer be necessary to assess loan serviceability on the assumption of a 7 per cent interest rate.

Instead, the lenders will be in the driver’s seat while authorised deposit taking institutions (ADIs) are given the ability to set their own review standards, factoring in a buffer of at least 2.5 per cent interest.

As of 21 July, the crowd of lenders who are easing their loan serviceability terms includes:

• Bendigo and Adelaide Bank has cut its interest rate floor from 7.35 per cent to 5.75 per cent.
• The Bank of Sydney has reduced its interest floor rate to 5.85 per cent.
• ANZ has reduced its interest rate floor to 5.5 per cent.
• Westpac has reduced its interest rate floor to 5.75 per cent.
• CBA has reduced its interest rate floor to 5.75 per cent.
• Macquarie has reduced its interest rate floor to 5.3 per cent.
• Suncorp has reduced its interest rate floor to 5.3 per cent.
• Teachers Mutual Bank has lowered its interest rate floor to 5.5 per cent.
• NAB has reduced its interest rate floor to 5.5 per cent.

Non-bank lender Resimac is among the latest lender to respond to APRA’s changes to its home lending guidance. Even though they are not bound by the regulatory board’s standards, Resimac has lowered its interest rate floor from 7.25 per cent to 5.75 per cent. The changes will not apply to Resimac Specialist loans.

More moves are expected from other non-major lenders moving forward, including AMP Bank. 

Strategy

Investors who are looking to hold properties in Sydney for the next 20 years to see them grow in value would do well to consider medium-density homes in areas where infrastructure and green space were plentiful.

According to Mr Black: “People are now understanding that there’s a real premium on land, and buying an apartment in a brand new complex with high strata fees is perhaps not as desirable as a house on a nice street that can house a family or some empty nesters.”

“We’re now seeing those medium-dense properties going further out from the CBD, particularly into areas like Parramatta and Badgerys Creek where you have all this new infrastructure coming in.”

The proximity of infrastructure as well as open space and amenities was an essential factor for investors looking for a property that would receive strong rental demand and hold its value in uncertain times.

Mr Peisley said: “Look for where there is potential infrastructure coming in as well as green space – so are there parks or swimming pools within walking distance, and places where you can go on the weekend,” he said.

Rather than worrying about missing the bottom of the market, both experts encouraged investors to do their research thoroughly when planning a purchase in order to maximise opportunities in the Sydney property market.

According to Mr Peisley, a few days’ worth of research can potentially save investors 10 years’ worth of lost income.

“That said, if an opportunity stands on its own and you’ve done the numbers on it, you’re going to do OK,” he said.

Hotspots

According to a report from realestate.com.au, Allambie Heights, located on Sydney’s northern beaches, has topped the list as the most in demand suburb in Australia as of July 2019.

It has a median price of $1.5 million for all dwelling types in the area.

This was followed by Melbourne’s Middle Park, which holds a median price of $1.98 million, and Adelaide’s Crafers, which holds a median price of $732,500.

Next up was another Sydney northern beaches suburb, Narraweena, which currently has a median price of $1.3 million, followed by Birchgrove, located in Sydney’s Inner West, recording a median price of $1.6 million.

realestate.com.au chief economist Nerida Conisbee said that most of the dwelling demand in the two northern beaches suburbs are from younger buyers due to their affordability.

For buyers looking for more affordable buying opportunities across the NSW capital, property valuer and advisory firm Herron Todd White revealed in its latest Property in Review report that Western Sydney contains the most properties at or below $500,000, but bargains can be found throughout the greater Sydney area if the buyer is willing to purchase units.

According to the report: “When buying property at this price point, purchasers will still have to sacrifice in some aspect, be it location, commute time, accommodation or the overall condition and features they desire.”

To the west, Parramatta holds some potential for buyers with a budget of $500,000, with one- to two-bedroom units on offer, while Penrith has two-bedroom units, three-bedroom townhouses and detached houses all available for under $500,000.

West Ryde, meanwhile, has one-bedroom units in the market for around $400,000, especially those close to amenities.

The widest range can be found in Campbelltown, according to the report, as it includes three-bedroom detached houses, one- and two-bedroom units, as well as villas and townhouses.

Across the Inner West, investors might be limited to a few studio and one-bedroom apartments, the report stated.

Marrickville, for instance, had a one-bedroom unit go for $455,000 in June this year with an estimated annual return of 4.5 per cent.

No houses in the region are recorded in the $500,000 bucket — the closest was an Erskineville one-bedroom cottage which sold for $720,000 in May.

To the north, Narrabeen, Balgowlah, Avalon and Dee Why offer opportunities to purchase units worth $425,000 to $450,000, with yields of up to 5 per cent.

Meanwhile, the cheapest house sale to sell in the region is in Beacon Hill, priced at $850,000.

The eastern region of Sydney also has affordable buying opportunities for those interested in studio or one-bedroom units. However, houses are simply out of reach.

Maroubra saw a one-bedroom, one-bathroom unit with one car space sell for $385,000 in May 2019 and is representative of what property investors can expect to purchase on a sub-$500,000 budget, according to the report.

Eastlakes recorded the most affordable house in the region at $860,000, followed by Mascot at $890,000 for a two-bedroom semi-detached house with no car parks.

Finally, in Southern Sydney, one- and two-bedroom units within the $500,000 bracket are available in St George and Sutherland Shire.

For those targeting beach living, Cronulla also has one-bedroom, one-bathroom units available between $400,000 to $500,000, the report noted.

Houses can be found in St George and Sutherland Shire for a little more money, particularly in the high $600,000 bracket. However, the report noted that these houses often come with some kind of flaw.

For instance, a three-bedroom house in Jannali which sold for $670,000 was found to be located right next to a school and a rail line, while a three-bedroom house in Engadine which sold for $680,000 was found to be located right on the Princes Highway and relatively close to a nearby rail line.