Property market update: Sydney, January 2020

Despite residential real estate in Australia and the Asia-Pacific region generally remaining sensitive to global uncertainty, lower interest rates, increasing immigration and continued increases to demand allowed Sydney to recover from the recent downturn and ultimately be poised for above-average growth.

While Savills noted that the ongoing bushfires may be a near-term mitigating factor for the wider market as the impact on national GDP growth is felt, “this is not expected to weaken capital city price growth for middle- to upper-priced detached housing or market sentiment”.

In fact, Savills Australia’s residential director Chris Orr said that luxury property in Sydney’s key markets have already bounced back.

“Sydney overall has recovered anywhere from 5 to 7 per cent in blue-chip areas; however, there are still some local markets where there is an oversupply of apartments, which has negatively impacted prices,” Mr Orr said.

“Australia, as a whole, is considered a growth market at the moment, given our recent financial regulations having changed for the better.”

According to Mozo property expert Steve Jovcevski, the good times will continue for property investors in 2020 as the market regains its losses from the previous years and strong momentum ultimately tips to drive markets moving forward.

Research suggests that overall capital city property values are likely to increase by around 5-7 per cent in 2020, with Melbourne and Sydney leading the charge at 10 per cent growth in value over the year.

Sydney, in particular, carries strong momentum from the end of the year, with a value growth of 2.7 per cent in the month of November alone.

“While 12-14 per cent growth may seem like a bold growth estimate, Sydney experienced a drop of 15 per cent over the past few years, so there is a recovery element to the sizable growth predicted,” Mr Jovcevski said.

Investors are encouraged to take advantage of this new property cycle and look at buying an investment property in Sydney, where there are great opportunities to buy established apartments for a significant discount than what would have been paid years ago.

However, Savills Australia and New Zealand CEO Paul Craig foresees a possibility of the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) stepping in once again due to an increase in clearance rates to around 70 per cent from around 40 per cent just 12 months ago.

According to him: “The RBA and APRA will become concerned as house prices approach 2017 highs (expected in May 2020), and we could see the reapplication of macroprudential measures to curb house prices and address affordability issues.”

Ultimately, the Sydney property market will recover, although it’s not quite clear near the peak of its cycle yet, CoreLogic Australia’s head of Australian research Eliza Owen said.

“It’s important to remember that the property market isn’t operating in this vacuum. It’s operating in an environment where government bodies and statutory authorities can see what is happening and can intervene to make sure that things don’t get too speculative or too risky,” she said.

Moving forward, despite uncertainties, Ms Owen remains confident that Sydney will offer good long-term wealth creation opportunities for property investors this new year.

Apart from the plan to establish three new central business districts, Sydney is also expected to benefit from continuous growth in population and jobs, thus keeping up the demand for housing across the capital city.

Naturally, risks will remain in the property market, such as overpopulation, but nothing that could not be avoided with thorough research and due diligence.

Positive house price expectations were seen across owner-occupiers, first home buyers and investors.

Over half (55 per cent) of respondents in the latest ME Bank survey predict prices to rise over the next 12 months compared with 38 per cent who predicted price rises two quarters ago.

The report also showed sentiment towards the property market improving for the third quarter in a row, increasing to net positive 21 per cent (up 3 percentage points from Q4 2019, and up 14 percentage points from Q2 2019 when the report first started).

“Considering a combination of market factors including the buzz of home value growth, a solid spring selling season, plus rate cuts and signs from the RBA that rates will stay lower for longer, it’s no surprise overall property sentiment has improved,” ME’s general manager Andrew Bartolo said.

Property values

The CoreLogic Hedonic Home Value Index showed that Sydney and Melbourne saw the largest growth in January, increasing by 1.1 per cent and 1.2 per cent, respectively.

Meanwhile, Hobart posted growth of 0.9 per cent, Brisbane with 0.5 per cent, Canberra with 0.3 per cent, Adelaide with 0.2 per cent and Perth and Darwin with 0.1 per cent.

According to Domain’s House Price Report, the growth in Sydney was widespread, with the numbers showing that every single region of Sydney grew in the last 12 months. This marks the end of deteriorating prices, with values growing annually for the first time in two years.

The CoreLogic Hedonic Home Value Index showed that Sydney and Melbourne saw the largest growth in January, increasing by 1.1 per cent and 1.2 per cent, respectively.

The city’s median house price went up by 6.8 per cent to $1,142,212, while median unit prices grew by 3 per cent to reach $735,387.

Throughout Sydney, the inner west region recorded the strongest annual growth, up 15.4 per cent, with the median house price now at $1,690,000.

However, CoreLogic head of research Tim Lawless noted that, although there is an “apparent recovery across capital cities, the speed of growth has lost some momentum over recent months”, with the national dwelling index slowing from a recent monthly peak of 1.7 per cent in November, to 0.9 per cent in January.

“Factoring in the seasonal affect, the latest results indicate a reduction in the speed of growth across most markets, especially for Sydney and Melbourne where affordability constraints are once again becoming more pressing. As advertised stock levels rise over the early part of the year, we could see some further dampening of growth rates,” Mr Lawless said.

Nationally, housing values recovered 6.7 per cent since finding a floor in June last year. However, CoreLogic’s national index remains 2.2 per cent below the October 2017 peak.

“With housing values rising at the quarterly pace of 3.7 per cent, we are likely to see a nominal recovery in the national home value measure within the next two to three months,” according to him.

As such, Sydney, as well as other capital city markets, remain “severely unaffordable”, based on the latest annual research by global housing affordability advocacy group Demographia.

Despite an 18-month downturn in the Australian housing market that saw national home values decline by 8.4 per cent, the property market has not been enough to ease affordability pressures as Australia’s housing remains among the least affordable in the world.

In fact, all five of Australia’s major markets (Sydney, Melbourne, Brisbane, Adelaide and Perth) were listed as “severely unaffordable”, recording a median multiple of 5 or above – meaning, the median house price was over five times the median household income.

On average, Australia’s major housing markets posted a median multiple of 6.9 – the third-highest among eight national housing markets in the world, behind only Hong Kong and New Zealand.

“Despite what has been called the largest Sydney price reduction in 35 years, house prices relative to incomes are more than double the rate of the early 1980s,” the report noted.

In Sydney and Melbourne, median income households need at least three years more of income to pay for the median-priced house than in 2004 when the first Demographia Survey was published.

A new research from ME Bank found that, despite growing positivity towards the property market, consumers still view affordability as a key risk and believe the current market lacks options.

In fact, 92 per cent of respondents agree that “housing affordability is a big issue in Australia”, up from 89 per cent in Q4 2019, while 14 per cent agree with the statement “I’m worried about property becoming unaffordable” – making it the top worry.

Supply and demand

Over the past quarter, CoreLogic reported a “significant increase” in clearance rates and auction volumes, with the combined capital city clearance rate increasing to 70.3 per cent from 26,923 auctions, up from a clearance rate of 43.6 per cent from 25,894 auctions in the previous corresponding period.

All major capitals reported higher clearance rates in the past three months when compared with the same quarter in 2018.

The highest clearance rate was recorded in Sydney (74.9 per cent from 9,546 auctions), followed by Melbourne (72.8 per cent from 12,870 auctions), Canberra (68 per cent from 937 auctions), Tasmania (62.2 per cent from 53 auctions), Adelaide (57.4 per cent from 1,385 auctions), Brisbane (45 per cent from 1,615 auctions) and Perth (39.5 per cent from 517 auctions).

According to Ms Owen, the rise in auction activity has coincided with the rebound in property prices.

“As prices in Sydney and Melbourne rose 6.2 per cent and 6.1 per cent, respectively, in the December quarter, a corresponding increase in auction market activity is expected. Vendors have been responsive to higher prices, with auction volumes up by 4 per cent year-on-year,” she said.

In the next 12 months, first home buyers aim to break into the property market, with 51 per cent hoping to enter the market compared to 38 per cent in the second quarter of 2019, according to a survey done by ME Bank.

Mr Bartolo said encouraging monetary policy and a long-term view of property growth are driving current first home buyers’ sentiments.

“In the case of first home buyers, the recent property price recovery has likely nudged them to get in while they can – as though it’s now or never – and has created a sense of FOMO. Low interest rates and commentary in the market for the support of first home buyers may have also contributed to an increase in home-buying intentions,” he said.

The report also tracked the perception of choice in the property market and found almost half (46 per cent) of total respondents believe there is not enough choice, with this figure jumping to 57 per cent among first home buyers.

“Housing supply has picked up slightly, but with prices rising and demand outweighing supply, there’s no wonder that almost one in two Aussies [doesn’t] think there’s enough choice available,” he said.

In terms of supply, a national drop in residential property listings has been witnessed through the past month, which has led to higher asking prices and some of Sydney’s best opportunities to sell in three years.

At the current time, the median asking house price in Sydney is $1,341,400, according to data from SQM.

Raine & Horne Double Bay’s head of sales Luke Hogan, highlighted how current market conditions are presenting vendors with a prime window for palming off property.

In the eastern suburbs, demand from overseas buyers and locals remained strong through the Christmas break, which makes “early 2020 a prime time for vendors considering a property sale”.

“We are still seeing average sales prices heading north, with demand for apartments and houses in the eastern suburbs very strong,” Mr Hogan said.

Strategy

While most experts believe that low interest rates are among the drivers of the speedy recovery of Sydney, it should not be the sole reason for investors to take a plunge into the Sydney property market, according to Right Property Group’s Steve Waters.

As Sydney makes its way towards recovery, it may not be suitable for every property investor.

He said: “You need to ask yourself the question: Where is my money going to work hardest for me? And what can I afford?”

If keen to invest in Sydney, Mr Waters encouraged investors to be looking at the “right here, right now” and establish what they can afford in order to avoid being beaten out by competition.

“Forget the purchase price for the minute and look for what you can afford out of your household budget to sustain the mortgage because there’s some competition out there now with individuals who are rentvesting and gaining momentum in the market,” according to the property expert.

Since lending continues to be relatively more conservative than usual, Right Property Group’s Victor Kumar said that gone were the days when investors could buy multiple properties each year.

New investors should create achievable goals via the purchase of three or four investment properties over the next decade.

Middle rings of capital cities hold good opportunities for first-time investors looking to set up the foundation of their portfolio, particularly in Sydney and Melbourne over the next year or two.

“Brisbane is another worthy location, which may not grow in value as fast as Sydney or Melbourne, but it is a steady marketplace that historically has superior cash flow. Of course, let’s not forget value propositions in Perth or Adelaide,” Mr Kumar said.

“Over time, you may also consider undertaking small development or investing in a commercial property to supercharge your cash flow even further.”

According to the property expert, the best timeframe to accumulate this sized portfolio is usually the first five years.

That leaves the final half of the decade for debt consolidation as well as implementing strategies, such as renovations or small developments, to create additional capital growth and cash flow.

Hotspots

CoreLogic revealed the subregions that recorded the most growth when it comes to annual change in dwelling values, with Melbourne-inner east taking out the top spot as dwelling values increased 12.1 per cent.

This was followed by Sydney-inner west and Sydney-Baulkham Hills and Hawkesbury, both at 8.8 per cent, Melbourne-inner at 8.0 per cent, Sydney-city and inner south at 7.7 per cent and Melbourne-inner south at 7.6 per cent.

Rounding out the top 10 for greatest change in annual dwelling value growth was Sydney-Ryde at 6.5 per cent and Sydney-Sutherland, Sydney-Eastern Suburbs and Sydney-Northern Beaches, all at 6.3 per cent.

Moving forward, in order to make smart decisions and maximise the use of data points, property investors simply must learn to contextualise data within an individual area over a long period of time, according to Ms Owen.

By doing so, she was able to determine the great opportunities across Sydney, which is currently in recovery after experiencing continuous declines over the past months as a result of various financial and socioeconomic factors, including interest rates, the federal election and serviceability restrictions.

She explained: “A good example of that is, when Sydney investors ask, ‘Where should I buy?’, we look at growth patterns across Sydney and, essentially, we see the same growth pattern that will play out across the whole metropolitan area.”

“Yes, it’ll be to different extents, but what will happen, in general, is you’ll get the start of a cycle happening close towards the CBD and the eastern suburbs. Then, the growth or the decline, it will ripple out across the rest of the city.

“So, when we’ve got people saying, ‘Where should I buy? Where’s the next hot growth spot?’, I’d say, personally, my opinion is any foothold you can get in the Sydney metropolitan will enjoy the kind of flow over effects of whatever’s happening in the cycle at that time.”

For those chasing capital growth, Select Residential Property Research Group (SRP) determined 12 Sydney suburbs that could see their median house prices rise by between $100,000 and $200,000 in 2020 alone.

Bangor in the Sutherland Shire scored 7.5 per cent in the growth forecast, tying with St Leonards, Launceston in Tasmania as the number one location for forecast median house price growth for the year.

Heathcote rounds out the top five with a forecast median house price growth of 7.1 per cent over the year.

Meanwhile, Domain determined several areas in NSW that are tipped for apartment price growth, including Newcastle, Wollongong and Canberra.

Heavily influenced by Sydney’s performance, the housing markets in both Newcastle and Wollongong are largely driven by their relative affordability.

Located just a few hours from Sydney, these two regions are packed with bustling new bars and cafes and surrounded by scenic coastline. Newcastle and Wollongong have both sustained stable growth over the past five years and are an investor’s dream.

CoreLogic determined that the average unit price in Newcastle sits at $655,000, with an average annual growth of 5.31 per cent and gross rental yield of 3.9 per cent; while Wollongong unit prices average at $570,000 with an annual capital growth of 5.94 per cent and gross rental yield of 3.92 per cent. Over the longer term, Wollongong has seen property prices show investors a 13.58 per cent return over the past three years.

According to OpenAgent, high property prices in Sydney and high rental demand due to the education campuses have also inspired some 1,100 people to move into the region every week.

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