Property market update: Sydney, August 2019

In CoreLogic’s home values index recorded during the final months of the 2018-19 financial year, Sydney recorded a values spike of 0.2 per cent after consecutive months of plummeting into the sharpest downturn since the global financial crisis.

Further, Propertyology’s Simon Pressley cited Sydney, along with six other cities, as the top Australian locations with the most potential to unlocking economic development based on recently signed “City Deals”, which intends to create a “vision of prosperity, productivity and livability” for each “strategically chosen” city.

Western Sydney, in particular, received a City Deal designed to hit key benchmarks, including the completion of the North South Rail Link to allow for a 30-minute commute into the city of Sydney.

Despite still being overvalued, SQM Research’s managing director Louis Christopher said that “leading indicators now [suggest] the current September quarter will record about a 2 per cent rise, with the December quarter expecting to double that with a 4 per cent rise.”

Taking into account the declining prices of property over the first two quarters, the September and December growth would have property investors at least 1 per cent better off than they were during the same time last year.

Still, SQM Research said that Sydney still needs to fall by another 21 per cent to reach its fair value based on the relationship between nominal GDP and house prices.

“Housing price rises cannot outpace income growth forever. And the more the gap between the two, the more housing prices have to be supported by cheaper and easier access to credit,” Mr Christopher highlighted.

If left unchecked, the major capital city market could soon be heading toward another historic overvaluation similar to 2003 and 2017, according to the property expert.

He said: “Initial thinking is, they are unlikely to respond well and may introduce more lending restrictions once again. Then again, if the powers that be feel cornered due to perhaps rising unemployment pressure or the need to hit inflation targets, etc., they may well let the market run.”

Moreover, Pure Property Investment’s Paul Glossop said that he remains concerned for the house and land packages segment of the market, particularly in Sydney’s south west region where a significant portion of the NSW government’s infrastructure spending has been directed recently.

“Those are the ones which scare me the most,” Mr Glossop said. “People got caught up in the hysteria.”

According to him, house and land packages are often located at a considerable distance from city centres and infrastructure, because they were built on the “next bastion of available land” on the outskirts of Sydney.

In order to make the most out of the opportunities in the still recovering Sydney, Mr Glossop strongly encouraged investors to stick to the fundamentals — that is, consider the basics of supply and demand in the region, comprehensively assess personal finances and cash flow and avoid acting out of panic or fear in a heating up market.

Mr Pressley further advised: “Whether a City Deal or anything else for that matter in isolation, it’s insufficient to make a decision as important as investing in property. One must first understand numerous factors which influence individual property and analyse the collective sum.”

Property values

Data contained in CoreLogic’s Property Market Indicator Summary for the week ending 11 August 2019 has shown Sydney’s property values are down 8.8 per cent from the same time last year.

In the same month, CoreLogic determined that vendor discounts are commonplace across all capital cities and that the median time on market for both houses and units also significantly increased over the month across all capital cities.

Within Sydney, in particular, houses spend a median 38 days on the market and sell with an average of 7.1 per cent discount on the original listing price.

Apartments, on the other hand, spend a median 43 days on market and sell with a 7.3 per cent discount on the original sale price.

Over the past five months, Sydney’s peak discounting levels of 7.7 per cent have fallen to 6.3 per cent. While the decline may be considered significant, these figures are still the highest they’ve been since 2007.

According to CoreLogic’s report: “The heightened discounting is reflective of the weaker housing conditions over the past year, and the increasing level of discount has recently ceased as housing conditions have improved”.

Still, the decline in discounting levels should be taken as a positive sign that will ultimately contribute to the capital city’s eventual and full recovery.

“Certain capital cities are already showing signs that discounting levels are reducing, and with a housing recovery expected to continue, discounts should reduce further,” the report highlighted.

“Of course, lower interest rates and changed lending rules have enabled more buyers in the market, and at this point, the volume for stock remains low. As a result, negotiations in the marketplace are swinging from being in favour of the buyer to being more in favour of the seller and that is likely to also contribute to reduced levels of discounting over the coming year.” 

Despite the slow recovery from the decline in financial comfort levels over the past six months, investors were found to be more positive and optimistic about the future of prices, according to a report by ME Bank.

The report stated that the result of the federal election, released in May, greatly impacted how investors rated their comfort regarding their net wealth.

“The continued benefits of (negatively) gearing property investments buoyed property investors’ comfort with net wealth post the recent federal election. Coincidentally, over the six months to June 2019, property investors lowered their expectations for price gains in investment property during the next year,” the report said.

“The increase in comfort with investments is connected with strong rises in local and global equity prices, which appear to have offset any concerns with falls in the values of residential property investments and low returns on bank deposits.”

In particular, Sydney investors were found to be the most optimistic about property values, with 54 per cent expecting an increase, followed by investors in Brisbane, with 50 per cent and Melbourne with 44 per cent.

Over the past month, a significant number of Sydney properties still sold for more than $1 million despite the slow recovery of the capital city market.

In fact, 30.2 per cent of house sales achieved $1 million or more, down from 34.2 per cent a year earlier; while 16.4 per cent of unit sales sold for $1 million or more, down from 18.9 per cent last year.

Supply and demand

The annual decline in house value across Sydney has coincided with a significant drop in new property listings, according to CoreLogic’s Property Market Indicator Summary.

As Sydney’s property values went down 8.8 per cent over the past 12 months, the capital city also suffered from volume losses the most, with 28.3 per cent less new listings than were available at the same time last year.

The new listings data compromises calculations across properties advertised for sale in the past 28 days, with “new listing” defined as a property not previously advertised for sale over the past six months.

Across all capital cities, the number of new listings dropped by 21.2 per cent in comparison to figures from a year ago.

Further, auction numbers were down 9 per cent in Sydney, according to CoreLogic’s National Auction Market Preview.

Across Australia, 1,044 properties were going to auction for the week ending 11 August — a slight decline on the previous week when 1,108 homes were auctioned and significantly lower than the 1,402 auctions in the same week in 2018.

Both Melbourne and Sydney markets recorded clearance rates of above 70 per cent, the fifth week in a row for Sydney that rates remained at this level.

Overall, auction clearance rates across Australia’s capital cities held steady over 65 per cent, boosting hopes that the property downturn has bottomed out.

Growth drivers

While most experts are positive about the recovery of the Sydney property market moving forward, others are pointing to specific factors that could hinder the rise of the capital city market.

In particular, infrastructure investment is failing to keep up with the significant growth of Australian cities, according to Ken Morrison, chief executive of the Property Council.

The Infrastructure Australia’s 2019 Australian Infrastructure Audit recognised the critical infrastructure needs of the country’s growing cities, especially the big four, namely Sydney, Melbourne, Brisbane and Perth.

“We welcome the audit – it’s comprehensive, it’s credible and it’s a step in the journey to a comprehensive national infrastructure plan that we sorely need. Our biggest cities are growing rapidly, but their infrastructure base hasn’t kept up,” Mr Morrison said.

“Australia’s big cities are not experiencing a one-off growth spurt. They’re being shaped by economic trends that have turned them into increasingly powerful people magnets. From the inner city to the urban fringe, we need the infrastructure to power the economy and support high liveability cities.”

The population of Australia is expected to grow by 24 per cent to over 31 million by 2034, and more than three-quarters of this will be focused on our big four cities.

As such, the Property Council of Australia fears that the quality of life and economic productivity and competitiveness of Australia as a nation will suffer if the country and its leaders don’t commit to investing in these capital cities.

Along with infrastructure investment, Mr Morrison also highlighted the importance of good planning and strong governance to achieve the ideal outcomes.

“If our big cities fail, the country fails… Population growth, social, economic and technological change have all made the job of planning, delivering and operating infrastructure much more complex,” he said.

“This complexity includes the scale of projects, including the fact that so-called ‘mega projects’ of more than $1 billion value are becoming the norm.”

Strategy

Despite the optimism of experts regarding the eventual recovery of the Sydney property market, Right Property Group’s Victor Kumar reminded investors that, ultimately, there may not be a perfect equilibrium of supply and demand in the capital city.

In fact, there might be a few surprises in store from the property market before the year ends, he said.

“There is usually an oversupply or undersupply stock situation, such as too many new units being built,” Mr Kumar highlighted.

“In the finance sector, the same goes with lending either constricted or overflowing.

“Both of these factors have an impact on buyer and investor sentiment, but also the sentiment of vendors and selling agents, too.”

Other seasonal factors should also be considered, such as the effect of winter on market conditions, which, while purely psychological, might still affect market activity one way or another.

Tax season could also impact market conditions as investors wait on insights from their accountants to better understand their numbers and their ability to purchase another property for their portfolio.

As Sydney works its way toward recovery, Mr Kumar reminded investors that, at the moment, there remains an imbalance of buyers in the property market as many were stuck on the sidelines as they couldn’t secure finance until the serviceability calculations were reduced recently.

Thus, they are encouraged to stick to the fundamentals, which are ultimately pointing toward stronger market conditions over the next 12 months, mainly due to higher government spending on infrastructure, lower interest rates as well as incentives such as the first home buyer deposit scheme, which are all aimed at stimulating our economy.

According to him: “I believe we are now in a unique position that will see, by year’s end, the pendulum swing significantly back toward sellers… Within six months, the number of buyers will have supercharged, and they will be competing against each other to purchase property, regardless of its quality.”

“In essence, the market is currently in a sweet spot between market feast and famine.The smartest investors won’t delay before making their move.”

Meanwhile, for property investors with assets in their super fund, managing cash flow over the coming months will be critical, with rents now lower and vacancies now longer, Certainty Property director Cameron Black said.

While the strategy of buying a property through a self-managed superannuation fund (SMSF) was widely advocated a few years ago when prices and rents were on the rise, the property expert reminded investors that market conditions have since changed significantly, particularly in the past 18 months.

“[A huge volume of supply] is resulting in lower rents and longer vacancies, with vacancies stretching up to 60 days in some Sydney suburbs,” according to Mr Black.

“In light of this, it is more important than ever that SMSF trustees proactively manage their cash flows… That is, if the property is negatively geared, the fund must have sufficient cash on hand to make repayments.”

Certainty Property’s investment adviser Simon Peisley said that investors can implement several strategies to bridge the gap between rental cash flows and borrowings in SMSFs.

One of which is to look at the cost structure of the fund to determine if interest payments can be reduced.

“There have been a series of recent rate cuts, and there is no guarantee that your bank has passed through the entirety of the rate cuts. Keep in mind when negotiating that a number of providers have left the SMSF market, so there isn’t necessarily the same competition as in the residential mortgage market,” Mr Peisley said.

They should also examine the return they are receiving on the cash balance within their fund.

“This is one aspect of SMSFs that is often overlooked and is particularly important in this low interest rate environment. Cash is a generic commodity, and there’s no reason why you should not be paid the maximum market rate for making it available to a financial institution,” he said.

Finally, focus on how to maximise the cash flow generated from the investment property.

“The key here is to take a completely objective approach to rental income generated. If reducing the asking rent by $20 per week is going to save you from the property being vacant for four weeks as well as agent fees, then you should swallow your pride and consider it,” he advised.

“Similarly, ensure your property manager is proactive with arrears management,” Mr Peisley highlighted.