Property market update: Sydney, December 2018

According to Real Estate Institute of NSW’s Leanne Pilkington: “Some of the coastal areas have actually done better. The Central Coast market, for example, seems to be travelling along okay.”

“Obviously, the lending has tightened up no matter where you are, that’s a national conversation. But, certainly, places like Avoca and Terrigal are telling me that the market is still going along okay up there.”

Ms Pilkington expects ‘steady seas’ for Sydney in 2019 as elections loom.

“Typically, people just put off making decisions when elections are coming up, so I don’t think that we’re going to have a huge amount of change. After the federal election, there’s going to be a whole lot of pent-up demand. So, I think there will be some opportunities then," she highlighted.

At the moment, the Sydney property market continues to decline gradually. According to CoreLogic’s head of research Tim Lawless, the downturn is expected to last as long as the financial conditions remain tight since credit restrictions will continue to curb demand.

Moving forward, Mr Lawless expected lesser focus on interest-only lending, higher loan-to-value ratio lending, higher debt-to-income ratio and overall investment lending and an increase of opportunities for the owner-occupier and first-home buyer segments of the market brought by increased affordability.

“It's a great way to look at the market—look at the previous downturns and the trajectory of decline, then look at the upswing—to find out how long does it take property values to recover? Remarkably, it takes about the same amount of time for a property market to recover as what it did to reach a trough.”

As Sydney becomes more affordable due to the continuous decline in property values, Mr Lawless expects a substantial increase in investment activity across the capital city’s property market.

Five years from now, the property researcher said that, most likely, Sydney will have bottomed. If the state of the economy remains stable and the current cycle follows historical trends, he foresees the downturn ending by 2020, followed by slow growth across the capital city.

Property values

During the week ending 16 December, the combined daily home value index of capital cities fell by 0.6 per cent—with Sydney, Melbourne and Perth declining by 0.3 per cent, 0.5 per cent and 0.2 per cent, respectively, Adelaide rising by 0.2 per cent and Brisbane holding steady.

Sydney home values are now down by 11 per cent from its peak in July 2017, according to the latest data from CoreLogic.

Of all the capital cities, Sydney saw the largest annual fall for dwelling values at 8.1 per cent—its highest since May 1983.

CoreLogic’s Cameron Kusher said that the decline in home values are largely due to the combination of tightening credit conditions, a growing economy and mortgage rates at near record lows.

“Since the onset of financial deregulation in the mid-1980s, credit access at the time became a whole lot easier for borrowers,” Mr Kusher said.

“However, since macroprudential policies implementation began in 2015, accessing credit has become incrementally more difficult and where investors and interest-only borrowers are having to pay higher mortgage rates.”

According to CoreLogic’s Tim Lawless: “The downwards pressure on national dwelling values is largely confined to Sydney and Melbourne which, together, comprise approximately 55 per cent of the value of Australia’s housing asset class.”

Like most experts, Mr Lawless expects the downward trajectory to continue on through 2019.

Supply and demand

Meanwhile, as other states enjoy a rise in new home sales in the past month, New South Wales stood as the only state to record a decline, dropping by 3.3 per cent.

As the royal commission is slated to release their recommendations in February 2019, HIA’s Geordan Murray expects the current credit squeeze continuing through to 2019, thus affecting the level of sales in Sydney and certain parts of NSW.

“With the new home market already looking vulnerable, policymakers will need to proceed cautiously when responding to the commission’s recommendations.”

The number of listings was up 18.6 per cent, which translates to plenty of supply for buyers to choose from, while vendor discounting sits at around 7.3 per cent.

Despite the decline in sales, Sydney recently ranks in the top six of Knight Frank’s ‘global ultra-prime residential market’, which analyses the total value of transactions, the number of transactions and the average transaction value of major cities around the world over the last 12 months to August 2018.

The NSW capital recorded a total value of transactions at US$219 million and an average transaction value of US$43.8 million.

According to Knight Frank’s Sarah Garding, high-net-worth individuals continued to choose Sydney for its lifestyle and political stability.

“All ultra-prime transactions in Sydney over the past three years occurred in the Eastern Suburbs and all were for houses. However, this is based on completed properties and we expect that off-plan sales will further increase these numbers when further prestige apartment buildings in Sydney are completed,” Ms Harding said.

“Whilst Sydney is one of the smallest city markets in regard to transaction levels, it has some of the most spacious properties with the typical transaction encompassing plots of land, and an average saleable area of 1,976 square metres.”

“Not only do the properties cover large areas, but the majority have waterfront views and a private swimming pool,” according to Ms Harding.

Joining Sydney on the list are Hong Kong, New York, London, Singapore and Los Angeles.

Rental market

As listings rise, Sydney’s vacancy rates also increased to 3.2 per cent, with more than 22,200 properties available for rent.

SQM Research’s Louis Christopher said that these numbers are normal as the year winds up and the demand for rental accommodation drops. However, if demand continues to decline, oversupply may emerge in the capital city’s rental market.

“It is a renter’s market there, with bargaining power moving to tenants as some landlords struggle to fill their rental properties.”

Despite the rise in vacancies, the asking rent for a three-bedroom house in Sydney remains the highest nationwide at $708 a week.

Over the month, asking unit rents in Sydney were down by 1.1 per cent while asking house rents fell 0.5 of a percentage point.

Home loan market

As the 30 per cent cap on interest-only loans for banks and other lenders were lifted this new year, mortgage brokers expect investors to carry over the careful approach that they have adopted during the tightening of the lending market in 2018.

According to Pink Finance’s Nicole Cannon, this ultimately signals a more educated market of property investors where people are mindful of product, structure and long-term opportunities as well as the importance of paying down debt and building a cash flow buffer.

Brokers also expect a more competitive market as the restrictions on interest-only loans is lifted.

“The positive impact will be the ability for existing interest-only mortgagors, specifically investors, to refinance to another interest-only loan,” Atelier Wealth’s Aaron Christie-David said.

Australian Banking Association’s Anna Bligh said that the decision to lift restrictions ‘will mean all banks can offer more choice for customers who are looking to buy a house or apartment’.

“Increased competition across the industry will mean customers have more ability to shop around for the best deal for them when looking at an interest-only home loan,” she highlighted.

The challenge for investors now would come when finding and picking lenders which have the appetite to take on interest-only loans, given that APRA has vowed to keep its eyes locked on lending practices.

Moreover, many lenders have increased their prices on interest-only loans and may not relent moving into 2019.

According to Neue Black’s Marshall Condon: “Generally speaking, when the changes came in, the majority of the time it just wasn’t really palatable for clients to look at an interest-only loan because of the rate differential. I think the rate differential had more of an impact rather than the cap—but that was partly due to the banks taking advantage of that benchmark.”

“I don’t think we’re going to see a spike in interest-only loans until that price differential disappears. It is my point of view that the removal of the cap, therefore, won’t have too much of an impact on people getting interest-only loans.”

Still, the removal of interest-only loan restrictions is expected to yield benefits for investors across different property markets.

According to Real Estate Institute of Australia’s (REIA) Adrian Kelly, the relaxation of the cap would bring much-needed rental properties to regional areas where they are needed most.

It was also deemed a ‘sensible step that supports the strength and stability of our financial system which is the bedrock of the property industry’ by The Property Council of Australia’s CEO Ken Morrison.

“The availability of finance is vital to the sustainability and growth our property sector which employs 1.4 million Australians and contributes 13 per cent of our GDP. At a time when some of our largest residential property markets are cooling, APRA’s announcement provides welcome certainty and direction."

“Today’s announcement by APRA is timely, measured and underpins the importance of sound policy and governance for our financial system,” Mr Morrison said.

The cap on interest-only loans significantly impacted the investor market in 2018, with housing credit rising by only 5.2 per cent in the 12 months to September 2018, signalling the slowest increase since November 2013.

Across the country, loan numbers declined by 11.9 per cent, with a 3.7 per cent drop in first-home buyers, while the average loan size declined by 1.8 per cent.

2019 market predictions

Moving forward into 2019, property experts expect the property market to return to a ‘post-GFC’ state.

After the global financial crisis (GFC) in 2008, property prices percolated due to several changes in the market such as the decline in construction and the tightening of investment financing.

If these changes sound familiar, it’s because it’s almost the same pattern that is being followed by today’s property market. At the end of the day, the softening of major markets are all part of a normal property cycle.

Right Property Group’s Steve Waters said: “The reason why property prices really started to percolate after the GFC was because all construction stopped during the GFC because there’s no finance, no presales and so on and so forth. Then, population kept happening, immigration kept happening."

"It was all the right fundamentals, so it lurched from an oversupplied situation in some markets, just like how we are now, to an undersupplied situation in most markets. This is your normal property cycle. This is just history repeating itself,” the property expert highlighted.

Right now, he encouraged investors to maximise the value of their money by taking advantage of the bargains in the changing market.

“I think too many people are trying to complicate it. There's so much data out there and there's so much rhetoric that it’s confusing the consumer. But if you just break it down to the real basic form, this is a normal market. The market has just gone back to normality.”

In about five years’ time, experts predict a gradual upswing in the capital city’s market. However, a big part of Sydney’s recovery depends on the state of the economy.

According to Mr Lawless, certain factors can prolong the downturn further, including the lack of affordability across Sydney.

Even as the market experiences declines in home values, dwellings across the capital city remain more expensive than most areas in Australia. In fact, the typical household in Sydney will have to spend nine times their gross annual household income to buy medium-priced dwellings.

“What I'd really suggest—since the typical household is no longer able to afford the medium-priced dwelling, regulatory solutions must be targeting the middle to lower end of the marketplace,” according to the property researcher.

The declining rental demand and the dampening of population growth may also hamper the recovery of the Sydney property market as more renters opt to purchase homes in more affordable markets.

Household debt, which remains higher compared to average household savings, stands as a ‘big wildcard’ and the only non-market factor that could negatively influence the recovery of the Sydney property market, Mr Lawless said.

According to him: “As we see more interest-only loans being paid down and we see some subtle rises in wages growth, we'll start to see household debt coming down, but it's going to take a long time for household debt to reduce materially.”

“This really implies that households are very sensitive to the cost of debt. If we do start to see any further changes in mortgage rates or if we start to see some upward pressure in the cash rate, which isn't likely until at least late 2020, then we're going to see some effect in the household sector as they dedicate more of their income to servicing the debt and less to buying stuff.”

Among other predictions for the Sydney property market in 2019, according to Starr Partners’ Douglas Driscoll, are:

1. Politics to have a major influence
2. The rise of first-home buyers
3. Bank valuations will come in under purchase prices
4. Rates to stay unchanged in the first half of the year
5. People to pay down mortgages quickly
6. Fewer auctions with clearance rates of 50 per cent
7. Rental vacancy rates to rise

Meanwhile, Propertyology’s Simon Pressley said that there have been positive elements that occurred in the market which could be carried over into the new year and ultimately provide benefits for property investors.

For one, the Morrison government announced that the federal will be returning to surplus in 2019.

“Why that’s good for property investors is because it means our economy is the best it’s been in a decade, and the single thing that has the biggest influence on property markets is the economy,” Mr Pressley said.

Moreover, Australia had experienced two consecutive years of at least 300,000 jobs across states and territories, according to ABS data. With more jobs come higher demand for dwellings and better returns for investors.

Strategy

Amid a changing market, experts strongly encouraged investors to chase long-term investment opportunities in order to allow their portfolio to thrive through the ebbs and flows of market cycles.

Simply speaking, go back to the fundamentals of property investment, according to buyer’s agent Paul Glossop.

“The focus is on assets, which should be fundamentally strong assets over the long term, and cash flow. Cash flow is going to be a really important component in what's going to drive the interest of investors over the next three or four years,” the buyer’s agent said.

“Try not to get too excited by boom markets and too downcast about flatter markets and even potentially declining markets. As long as you’re well resourced and you have good cash flow for when things are a little bit slower, you’re good, because it’s about long-term goals and long-term gains.

“We go back to the fundamentals of this country and we are looking very, very stable. We've got five-year interest rates. Interest in money is not going anywhere. The cost of money is not going anywhere. Anyone who's fearing price hikes of two or three per cent is going to be waiting a long, long time.”

To maximise investment opportunities in 2019, Mr Waters advised investors to prioritise cash flow management and liquidity.

Investors must also be able and willing to adjust strategies accordingly based on personal circumstance and the movements of the market, which could mean having to sit on the sidelines instead of actively buying—a strategy that takes as much confidence and sophistication as other active investment strategies.

“This is sort of connected with having good cash flow management and knowing their situation. They don't feel obliged or pressured to buy when they don't think it's the right time to buy because they're not pegging themselves against other investors. Some of the best investors I've seen have had the confidence to make that decision,” Mr Waters said.

Moreover, investors can benefit from seeking opportunities across emerging markets instead of staying in their own backyard or following trends, according to the property expert.

Hotspots

Despite the current softening of the property market, Sydney continues to offer good investment opportunities for property investors through infrastructure development and other economic advancements.

The new Western Sydney Airport and its surrounding ‘Aerotropolis’ are expected to bring new opportunities, with an estimated $1.9 billion worth of economic benefits for Western Sydney and an additional $140 million throughout the rest of the capital city, according to Ernst & Young.

The Aerotropolis is planned to be a series of inter-connecting suburbs around the Western Sydney Airport which is expected to contribute about 200,000 jobs for the Western Sydney area.

Over the next 10 years, the NSW state government has agreed to invest over $3.6 billion into the Western Sydney Infrastructure Plan.

One particular suburb that could reap a huge part of these benefits is Gledswood Hills, which is within the 15-kilometre radius of the upcoming airport, Sekisui House’s Craig Barnes said.

As of December 2018, Gledswood Hills has a median dwelling price of $800,000 and an annual growth rate of 9.4 per cent, according to the REIA. It is also expected to see high levels of population growth with an additional 300,000 new residents by 2031, according to NSW government data.

Moreover, the population in the South West is expected to grow exponentially, with approximately 300,000 new residents by 2031, according to the state government’s Sydney Growth Centres Strategic Assessment Report (2010).

Mr Barnes explained: “The relatively new suburb of Gledswood Hills (Camden Council) is located within the epicentre of Western Sydney’s growth corridor. Investment activity is evident on all fronts and growth within the region is progressing at a rapid pace."

“Aside from Western Sydney Airport … localised infrastructure projects and amenity development are well underway, including major road and rail network upgrades, new schools, hospitals and shopping centres.

“The South West is still relatively affordable when compared to ‘like-for-like’ developing regions, such as North West Sydney. The South West offers excellent employment prospects via the development of infrastructure (roads, rail, Western Sydney Airport and Aerotropolis), accessibility to the major hubs of Parramatta and Sydney and is a short distance to the beautiful South Coast beaches, supported by prospective capital growth opportunities,” he said.

Right Property Group’s Victor Kumar also encouraged investors to look into ‘micro-CBDs’ of Sydney and other capital cities.

According to him, among the fundamentals that investors should consider when laying out investment strategies are location, population, public transport and other significant infrastructure around the area.

“You've got to adjust your strategy in terms of the distance from the CBD that you're buying and in line with the population. Once you've identified that, then you need to look at your micro-CBDs or the satellite CBDs. If I'm talking Sydney, that would be Parramatta, Campbelltown, Blacktown and Gosforth.”

“It’s not just Sydney anymore because the way our employment has been structured has changed substantially. In fact, if you look at the Greater Sydney plan, by 2036, they want every person living within the metropolitan area, that is 1.5 hour from postcode 2000, to be within half an hour travel distance from their potential employment,” Mr Kumar explained.

“You've got to realign the definition of the CBD, because that has actually changed, and you need to adjust your strategy accordingly for each state.”

Other top-performing suburbs in Sydney for 2018, according to CoreLogic, are Bellevue Hill and Point Piper, which recorded the highest median value for houses and units, respectively; Bellevue Hill and Millers Point, which recorded the highest median weekly advertised rents for houses and units, respectively; and Mosman, which recorded the highest total value of sales for houses.

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