Property market update: Sydney, September 2019

“The potential for risks to financial stability from falling housing prices in Sydney and Melbourne [have] abated somewhat, with prices rising in the past few months,” the regulators noted.

Improvements in Sydney and Melbourne were the main drivers of the national uptick as both capital cities saw home values rise by 1.9 per cent and 1.8 per cent, respectively.

Apart from the rise in home values, the improvement of auction clearance rates, the back-to-back rate cuts, the federal government’s tax deductions, and changes to mortgage lending guidance have also spurred a significant pick-up in sentiment across the Sydney property market.

Over the next three years, insurance giant QBE predicted that Sydney homes could increase in value by 5.8 per cent, following Brisbane’s 20.3 per cent and Adelaide’s 12.7 per cent.

However, the apartment market has a less-than-positive outlook, with values predicted to fall by 3 per cent in 2020, before stabilising in 2021 and growing by 2.9 per cent in 2022 for an overall growth of -0.3 per cent.

Overall, QBE’s CEO Phil White expects a brighter future for Australian property markets, especially “in our largest markets of Sydney and Melbourne, [where] property prices [could] stabilise as owner-occupiers are enticed back.”

“Although tighter lending standards, declining property prices and uncertainty related to the economy have deterred some, we still expect [more than 110,000] of first home buyers to be getting the keys to their very own property this year,” Mr White said.

Other economic indicators that are expected to drive the recovery of Australian property markets are:

1. The official cash rate is projected to remain low although would increase by 50 basis points by 2022 in a rise to 1.5 per cent.
2. Employment growth is predicted to fall to 1.7 per cent, with the unemployment rate falling to 4.8 per cent down from 5.1 per cent in 2019.
3. The consumer price index (CPI) will remain strong growing to 2.5 per cent up 80 basis points from 1.7 per cent in 2019.
4. Australia’s gross domestic product (GDP) will grow to 2.9 per cent up from 2.1 per cent in 2019.

Still, despite the expected recovery, experts believe that investors might remain reluctant to jump into the Sydney property market due to the high price of property, which may not be in line with the current income levels.

“On the bright side, both prices and auction clearance rates are slowly heading in the right direction in the Harbour City, but these results indicate that the previous market highs are still a way off,” according to Finder’s insights manager Graham Cooke.

Should property investors jump back into the Sydney property market today?

Property values

Despite home values rising by 1.9 per cent, experts said that the rebound in housing market conditions across Sydney will be “far more constrained” than expected.

Over the quarter, residential property prices fell by 0.7 per cent. The fall was led by Australia’s two largest cities, according to the Australian Bureau of Statistics (ABS), with Melbourne falling by 0.8 per cent while Sydney lost half a per cent.

In particular, ABS chief economist Bruce Hockman cited detached dwellings in Melbourne and attached dwellings in Sydney as the main drivers of the property prices decline.

As a result of the quarterly fall in dwelling values, Australia saw an overall price reduction of 7.4 per cent through the year in 2019. Meanwhile, over the same period, prices declined by 9.6 per cent in Sydney and 9.3 per cent in Melbourne.

“Sydney and Melbourne housing markets have seen residential property price falls moderate this quarter. A number of housing market indicators, such as auction volumes and clearance rates, have begun to show signs of improvement, though they remain below the levels seen one year earlier,” Mr Hockman said.

Only Hobart and Canberra recorded improvements in property prices over the quarter.

As such, the total value of Australia’s 10.3 million residential dwellings fell by $17.6 billion to $6,610.6 billion over the said period – marking the fifth consecutive quarter recording price declines. The mean price of dwellings in Australia is now $638,900.

While Sydney has indeed been seeing improving dwelling values and consumer sentiment over the past months, AMP Capital chief economist Shane Oliver said that these are unlikely to trigger a price boom in the near future.

Even if sentiment has improved following the Reserve Bank of Australia’s (RBA) back-to-back rate cuts in June and July, the federal government’s tax deductions, and changes to mortgage lending guidance, the price growth will still be constrained due to other economic factors.

According to Mr Oliver: “Our base case is that house price gains will be far more constrained than the 10-15 per cent [increase] implied by current auction clearance rates.”

Moreover, tighter lending conditions and subdued economic activity are also expected to weigh on price growth, as well as weak wage growth and a high level of household indebtedness.

While the improvements in the housing market will help in increasing demand for property and ease of access to finances, a more cautious household sector is likely to constrain the expected recovery across Sydney and other major property markets.

“Compared to past cycles, debt-to-income ratios are much higher, bank lending standards are tighter, the supply of units has surged with more to come, and this has already pushed Sydney’s rental vacancy rate above normal levels and unemployment is likely to drift up as economic growth remains soft,” he said.

“[We] don’t expect to see a return to boom time conditions and see constrained gains through 2020 [of] around 5 per cent.”

Supply and demand

As home values are improving, home sales activity has also risen as the appeal of historically low mortgage rates and the recent recent political and economic developments shift market sentiment, according to CoreLogic.

CoreLogic’s head of research Tim Lawless said that, in recent months, home sales have appeared to stabilise, with the six-month trend reporting a floor at around the same lows recorded during the last two downturns in 2008 and 2010-12.

The latest property market update by CoreLogic revealed that nearly 2,000 homes were taken to auction in the week ending 22 September – up by 21 per cent. Meanwhile, auction clearance rates remained elevated at above 70 per cent.

“The six-month trend has been tracking higher since June 2019, in line with a recovery in home values,” Mr Lawless highlighted.

Across the individual property types, houses are consistently outperforming units in terms of clearance over the last five weeks as clearance rates from properties are at 74.8 per cent while units remain lower at 712 per cent.

Sydney had 647 homes taken to auction, with a preliminary auction clearance rate of 76.6 per cent. This time last year, 861 Sydney homes went to auction with 51.1 per cent clearing.

The median price of a Sydney unit sold for $950,500, while purchasing a house will set you back $1,350,000.

Housing demand is expected to increase further in the coming months as mortgage rates are expected to fall further. Experts believe that there would be at least one additional cut to the cash rate from the RBA before the close of 2019, taking the cash rate to a new record low of 0.5 per cent.

Rental market

While buy-and-sell investors are seeing more positive movements in the market, those who buy-and-hold to rent their properties out are currently seeing a rental reduction as vacancy rates increase by 0.6 per cent over the past 12 months – the highest vacancy rate in the country, SQM Research said.

Over the said period, Sydney recorded rental declines for both houses and units of 4.5 and 3.3 per cent, respectively. The rolling months change for Sydney showed further falls, with a 1.3 per cent reduction for houses and a 0.2 per cent fall for apartments.

According to SQM Research’s managing director Louis Christopher: “While Sydney did record a slight decline, our expectation is the Sydney rental market will still fall from here.”

Sydney continues to have the highest vacancy rate in the country at 3.4 per cent. This time last year, the rate was lower at 2.8 per cent.

Growth drivers

Apart from the improving market conditions, future infrastructure in South West Sydney is also driving new investor demand across the region, according to property experts.

Professionals Narrellan’s executive property manager Michelle Nash said that projects such as the Aerotropolis, Western Sydney International Airport, Camden Medical Campus and Sydney Science Park are improving the appeal of South West Sydney for investors.

“Growing Greenfield suburbs” such as Gledswood Hills, Oran Park, Gregory Hills and Leppington, which are all within a 10- to 20-kilometre radius of the infrastructure hotspots and ARE already benefiting from such infrastructure, are also pushing the region to become a prime spot for property investment.

The expected job creation, as well as the lower market prices and vacancy rates compared to similar products in the North West, will drive dwelling demand in the region, Ms Nash said.

“Gledswood Hills, for example, has a relatively low percentage of rental properties due to a high uptake of owner-occupiers. This is an alluring proposition for savvy tenants and in turn makes the area an enticing option for investors.”

Similarly, Sekisui House’s sales and marketing manager Craig Barnes said that the South West is likely to drive the future growth of the Sydney property market.

“It is anticipated that much of Sydney’s growth activity within the next 10 years will be concentrated in the Western Sydney region, particularly greenfield developments with land availability. They are fast becoming destinations of choice for Sydney home buyers,” Mr Barnes highlighted.

“A broad range of affordable investment opportunities currently [offers] investors an attractive buying proposition within these developing suburbs prior to them becoming established. Lifestyle opportunities, future growth and connectivity [make] suburbs such as Gledswood Hills an appealing investment proposition.” 

Strategy

Propertyology’s head of research Simon Pressley said that there are five main opportunities for property investors to capitalise on in the current market, namely low interest rates, high yields, vacancy rates, median house price guides and economic development.

According to Mr Pressley, the country is seeing the lowest interest rates “in any living Australian’s lifetime”, which makes property financing more accessible than ever.

“It’s the cheapest time that you will have ever had in your life to do something proactive for your future. Take advantage of it,” he said.

Further, the property expert encouraged investors to seek locations where there are industries that have a strong outlook, including natural resources, education, agriculture, tourism, and renewable energy.

For investors chasing capital growth, Domain found that growth in house and unit prices across Sydney between 2014 and 2019 was most pronounced at both ends of the spectrum – in both the least and most expensive suburbs.

Properties in higher tier suburbs saw growth well above the typical increase of 30 per cent to 40 per cent, with Vaucluse experiencing a 77 per cent hike in house prices and Mosman seeing growth of 54 per cent.

Meanwhile, growth seen in the least expensive suburbs of the capital city may have been influenced by buyers searching for affordable housing as Sydney experienced significant price growth between 2012 and 2017.

In order to make the most out of the Sydney property market today, experts advise investors to avoid timing the market as it has the potential to cost them hundreds of thousands of dollars over the long term, according to the Property Investment Professionals of Australia (PIPA).

PIPA’s latest research, which looked at very capital city market over the past 15 years to determine whether time in the market or timing the market produced the best capital growth, found that an investor trying to time the market could potentially lose nearly $140,000 over a 15-year period.

“What the data also shows us is that no market is the strongest for a sustained period of time… Trying to time the market is not only extremely difficult for most investors, the transactional costs of buying and selling multiple times, including stamp duty and capital gains tax, eat up a significant chunk of your potential profit,” PIPA chairman Peter Koulizos said.

According to him, most investors have neither the skills nor knowledge to expertly select the best markets to invest in over the short term.

“Most people are only thinking of the potential price uplifts when they try to time a market and naively don’t consider the inherent risks involved in such a market gamble,” he said.

To further reduce the risks, investors are advised to do their research on the market cycle, look at growth drivers on the suburb level, buy a well-located property that is appealing to several demographics, negotiate well, implement a long-term buy-and-hold strategy and remain vigilant with the possible changes to the lending landscape.

Hotspots

Buyer’s agent Brady Yoshia said that, while it would take a little more time before Sydney rises to the level it was over 2016-17 period, today is the perfect time to invest in properties, but only for those who can afford it.

“Some properties are certainly going to achieve high prices based on the lack of supply, but the market is going to plateau for the next 12 months, I would say, and then we’re going to see a steady increase.”

Ms Yoshia said that three-bedroom house on the Upper North Shore would be among the investable stocks as it is currently more affordable that it was two years ago.

Further, she cited one- to two-bedroom apartments on the Northern Beaches as good investments, mainly due to their affordability.

“Two-bedroom apartments are always popular. Even if you’re looking on the train line, like Lindfield, Killara, Gordon, there’s some good buys there, particularly with the older style apartments,” she said.

“I also think that on the Northern Beaches, because some of the prices have come back quite substantially, there [are] some good buys. [Good] one-bedroom apartments [are] there as well, [particularly] in Freshwater, Avalon and Dee Why.”

However, she reminded investors that there isn’t much affordable stock left on the market at the moment.

“It’s really [about] working with a buyer’s agent to source the opportunities with the local real estate agent of that, within that area,” according to the buyer’s agent.

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