Property market update: Sydney, February 2022
Sydney’s property market reached a critical juncture in February, as the harbour city saw its first decline in property values in 17 months. Is the NSW capital truly on its way out of the recent boom, or is it just a downward blip in prices?
As Aussies bid farewell to the summer season, Sydney’s property market also said goodbye to its longstanding streak of gains at the end of February, with the city’s property values falling for the first time since September 2020.
The correction in the city’s prices, according to some experts, has been a long time coming and an indication that tides are slowly turning in favour of buyers.
“Not much of a decline, the equivalent of about $1,000 at the median value level, but I think it’s definitely a sign that the [Sydney] market is shifting slightly from a sellers’ to a buyers’ market,” according to CoreLogic’s head of Australian research Eliza Owen.
The expert explained that even before the Reserve Bank of Australia (RBA) raised the country’s cash rate – which most market commentators had feared would have the biggest impact on the city’s growth – headwinds have been brewing for the housing market.
“These come in the form of affordability constraints, higher levels of listings that are coming onto the market – particularly in Sydney, Melbourne – as well as a lift in the fixed mortgage rate space,” Ms Owen stated.
Meanwhile, CoreLogic director of research Tim Lawless noted that while Sydney and Melbourne were showing signs of decline, regional areas were still booming.
“Sydney and Melbourne have shown the sharpest slowdown, with Sydney posting the first decline in housing values since September 2020, while Melbourne housing values were unchanged over the month, following similar results in December and January,” he said.
For comparison, he explained that the regions were continuing to benefit from the COVID-19 trend of city dwellers opting to buy property in lifestyle-focused destinations.
He explained: “[Sydney and Melbourne] markets are also increasingly impacted by worsening affordability constraints as housing prices consistently outpace incomes. However, demographic tailwinds, low inventory levels and ongoing demand for coastal or tree change housing options are continuing to support strong upwards price pressures across regional housing markets.
“The slower growth conditions in Australian housing values [go] well beyond the rising expectation of interest rate hikes later this year.”
Meanwhile, Commonwealth Bank head of Australian economics Gareth Aird said the recent data might suggest that dwelling prices have likely peaked in the two largest capitals.
“The context of what happened last year with this phenomenon of surging prices meant prices had to top out,” he said.
“With talk about rates rising, and the Reserve Bank raising interest rates, that’s going to affect what people are willing to pay for a home,” the economist noted.
Banks have been lifting fixed mortgage rates for months, even though the RBA has not yet raised the cash rate. But once the cash rate rises, several economists expect reduced home buyer budgets could push property prices lower.
Will Sydney manage to bounce back come autumn season, or is the city on track for a u-turn in prices? For now, let’s see how the city’s market performed in February 2022.
Property values
CoreLogic’s latest data showed dwelling values in Sydney fell 0.1 per cent over February, the only city among capital markets to post a decline during the period.
This marks the first time the city’s property prices fell since September 2020 and reversed the 0.6 per cent gains recorded in January.
On a quarterly basis, property values in Sydney have risen by only 0.8 per cent, down from the 1.8 per cent seen in the previous three-month period.
While prices may have eased marginally last month, the NSW capital remains by far the most expensive city to buy a home. The median price of a home in the city – based on sales of units, townhouses and houses – stood at $1,116,219 at the end of the month.
Compared to the same period last year, property prices are now up by 22.4 per cent.
Taking a closer look at the data, the unit market’s weak performance during the month was seen to drag the city’s overall dwelling values. Apartment values fell 0.3 per cent in February, down from the 0.1 per cent gain it recorded in the previous month.
Compared to February 2021, units are up by 13.7 per cent. The sector’s median price is now at $831,793, representing a decline of almost $6,000 in average apartment values.
Meanwhile, Sydney’s median house price did not budge in February. Median values of houses in the city are now at $1,410,128, indicating an increase of $20,000 in prices month-on-month. Over the year, house values are still up 26 per cent.
Supply and demand
Aspiring Sydney property buyers had more choices in February, as sellers tried to take advantage of favourable conditions, resulting in a glut of listings.
New SQM Research data showed total residential listings in Sydney rose by 19.6 per cent in February to 27,662 from 23,136 in January. The monthly jump in stocks was one of the biggest among capital cities, second only to Canberra, which saw a 24.1 per cent increase during the period.
Compared to February 2021, the total number of properties for sale in the city is up by 3.3 per cent.
New listings (or properties that have been on the market less than 30 days) in Sydney saw an increase of 81 per cent from 8,371 in January to 15,155 in February. Over the year, new listings in the city are now up by 8.9 per cent.
Meanwhile, data showed that old listings or property listings over 180 days fell by 6.2 per cent from 3,655 in January to 3,427 in February. Year on year, old listings have fallen by 36.7 per cent.
SQM Research managing director Louis Christopher said the monthly gain in listings reflected the urgency of vendors to take profits after the unexpected price gains in 2021.
“We could see the upward trend in listings continue through the first half of the year as more sellers seek to take profits,” he said.
“However, the national housing market appears to remain reasonably buoyant – overall, supply remains below long-term averages and we are still recording capital city rises in asking prices.”
Over the month to 1 March 2022, Sydney’s asking prices were up by 0.9 per cent for houses and 1.6 per cent for units. Compared to the same year, houses and units are up 27.1 per cent and 7.1 per cent, respectively.
According to CoreLogic, the supply levels in capital cities help explain the divergence in housing growth trends.
Mr Lawless said that cities seeing slowing growth, such as Melbourne and Sydney, have seen advertised stock return to more normal levels.
Meanwhile, he noted that cities where housing values are rising more rapidly continued to show a clear lack of available properties to purchase.
In Sydney, CoreLogic reported that the total advertised stock is 6.3 per cent higher than last year but still 4.2 per cent below the previous five-year average.
Mr Lawless said more choice translates to less urgency for buyers and some empowerment at the negotiation table.
CoreLogic also noted that on top of the increase in new listings in Sydney and Melbourne, demand is also softening due to affordability pressures, higher mortgage rates and a general decline in consumer sentiment.
As new listings rise and total stock on Sydney’s market continues to normalise, the balance of power is likely to shift in the direction of buyers. For now, though, the latest data indicate that sellers still have the upper hand in the city’s market.
Auction markets
Although a healthy number of homes are still selling at Sydney auctions, agents are reporting that buyers are less willing to keep paying higher as more options become available.
CoreLogic reported that over February, a total of 3,309 properties went under the hammer in the city, with a final average clearance rate of 73.5 per cent.
Over the period, CoreLogic pointed out that Sydney’s auction volume steadily rose throughout the month, with the last two weeks seeing the number of properties at more than 1,000.
But despite volumes being higher compared to the same period last year, the property data provider also noted that clearance rates are lower in 2022 than in 2021. Throughout February in the previous year, final clearance rates in the harbour city clocked in between 80 per cent and as high as 85 per cent.
Ray White also reported that the number of Sydneysiders selling their property before it goes to auction is on the rise.
Over the past six months, the number of prior-to-auction sales in Sydney has jumped by almost 11 percentage points, according to the national real estate agency.
Between 1 July last year and 18 February this year, Ray White reported that 37.93 per cent of scheduled auctions sold before auction day in the NSW capital, compared to 27 per cent for the same period in 2020 and 2021.
Ray White’s chief economist Nerida Conisbee said a surging number of new listings, looming interest rate hikes and the upcoming federal election are all affecting vendors’ and buyers’ sentiment, causing a growing number to seal a deal before auction day.
“It is one of the signs that the market is slowing,” Ms Conisbee said. “Sydney’s prices are so much more extreme and now there’s just so much more property around for sale.”
It should also be noted that a few sellers are now reducing their reserve prices to secure a sale under the hammer.
“Auction clearance rates that high are normally consistent with prices still rising, but I think what might be happening is a lot of sellers suspect that we’re at the peak of the market and therefore they’re just happy to transact and sell with whatever the auction result ends up on,” Mr Aird said.
“Normally that’s a good indicator, but right now it might be sending a false signal,” he added.
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Rental market
Over February, SQM Research reported that Sydney’s asking rents grew by 0.9 per cent for houses to $761 per week and 1.4 per cent for units, reaching $494 a week.
Compared to the previous year, rents for houses and units in the city have risen by 16 per cent and 8.3 per cent, respectively.
Mr Christopher pointed out that the pricing growth is expected to surge over the year due to “an acute shortage of rental properties”.
“[The] shortage has already been translating into large surges in weekly rents across the country. It is now very likely market rents will rise by over 10 per cent this year,” he stated.
SQM Research also forecasts that the relaxation of international border restrictions on 21 February is also seen to add pressure to rental market listings.
With more people returning to the city as companies ask employees to return to the office, rents are also seen to continue rising.
“People are coming back to the big cities. Rental growth is likely to be sustained as employees return from regional areas where they have been living during the pandemic,” said Nancy Navarrete, the business development executive for Ray White.
Meanwhile, CoreLogic data showed that on an annual basis, both house and unit rents in the city rose by 8.7 per cent and 8 per cent, respectively.
Additionally, the report showed that over the rolling quarter, the unit sector had shown stronger growth in rents compared to houses.
According to Mr Lawless, this stronger trend in unit rents is most visible in Sydney and Melbourne. “Anecdotally, demand for unit rentals in these cities has been bolstered by a combination of worsening rental affordability deflecting more demand towards the higher density sector, where rents tend to be lower, and demand starting to return from overseas arrivals,” he said.
With the pace of growth in housing values softening while rental growth holds reasonably firm, CoreLogic noted that the national level of gross rental yields stabilised during the month at 3.2 per cent.
Sydney and Melbourne remained the only capitals where gross yields are averaging below 3 per cent. Sydney showed the lowest rental returns of 2.4 per cent among capital cities due to lower rental growth relative to a high rate of capital gain.
Vacancy rates
Domain warned that Australia is now on the brink of a “rental crisis” as the country’s national vacancy rate continued to decline and is now sitting at 1.1 per cent – the lowest in several years.
Sydney’s rental market tightened further in February at 1.7 per cent, hitting its lowest point since November 2017.
Domain noted that Sydney’s rental vacancy rates are significantly lower than they were before the pandemic hit.
The figures are also down from 1.9 per cent in January and lower than the 2.6 per cent vacancy rate seen a year ago.
Rental demand will continue to sharply rebound following the full reopening of international borders to double-vaccinated visa holders and tourists, following two years of closures, according to Domain.
The resurgence in rental demand will predominantly be in Sydney and Melbourne, the two cities to see the biggest drop in vacancy rates over February.
Domain predicted demand would continue to surge for both of those cities because they generally attracted more overseas migrants, international students and are popular tourist destinations.
Meanwhile, the rental stock continued to trend lower across all capital cities, consistent with increased demand seen in January absorbing availability. Data showed that during the period, Sydney’s rental listings fell 12.7 per cent to just 10,000.
As the nation opens its international border and all states’ internal borders, Domain anticipates that options for tenants will continue to decline as landlords convert investment properties back to short-term holiday rentals, further tightening market conditions.
The areas with the highest vacancy rates were Ku-ring-gai (3.1 per cent), Canterbury (2.8 per cent), Parramatta (2.6 per cent), Rouse Hill – McGraths Hill (2.6 per cent) and Blacktown – North (2.2 per cent).
Meanwhile, the areas with the lowest vacancy rates were Camden (0.2 per cent), Richmond – Windsor (0.3 per cent), Gosford (0.4 per cent), Wyong (0.4 per cent) and Blue Mountains (0.5 per cent).
As supply continues to decline, Domain is also predicting potential rental price increases across the country.
“While investment activity is rising, the opening of international borders will spiral rental demand since most overseas migrants rent upon arrival,” the report stated.
“This will be felt the most in inner cities and around universities – areas that still have elevated vacancy rates compared to pre-pandemic levels – as rental demand has been severely hampered by international border closures.”
Outlook for Sydney’s market
Looking back to the same period last year, Sydney was leading the charge of an unprecedented property boom in the country’s recent history. But in 2022, the picture couldn’t be any more different.
CoreLogic said that the factors that have powered the gains in property values last year – including record-low interest rates, rising household savings through lockdowns, an imbalance in supply and demand, government stimulus and strong consumer sentiment towards housing – are losing their potency.
With interest rates expected to rise, listings on an upward trend, housing affordability pushed to the limit and consumer sentiment on the decline, Sydney’s market is seen to have passed through the period of peak selling conditions.
The Westpac-Melbourne Institute Index of Consumer Sentiment for February showed that the “time to buy a dwelling” index was 35.7 per cent below the high point recorded in November 2020, reflecting a mix of affordability challenges and rising mortgage rates.
More broadly, CoreLogic also noted consumer sentiment could be further negatively impacted by Russia’s invasion of Ukraine, triggering a new wave of global uncertainty.
“With rising global uncertainty and the potential for weaker consumer sentiment amidst tighter monetary policy settings, the downside risk for housing markets has become more pronounced in recent months,” Mr Lawless said.
But the expert said that despite the gloomy outlook due to rising headwinds, there are still rays of sunshine for the city’s property market.
Mr Lawless said that on the upside, Australia’s economy is still strong, and more travel activity – both international and domestic – should increase demand for housing, which will have a positive impact on price growth.
“While a return of overseas travel is not expected to boost home buying demand immediately, we are expecting stronger rental demand in key areas such as inner-city precincts popular with foreign visitors and students. A lift in long term/permanent migration should provide a gradual boost to purchasing demand over time,” he said.
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