After several months of continuous decline, the Sydney property market is expected to bottom out soon and eventually begin its recovery. How can investors maximise opportunities in the NSW capital?
Following the conclusion of the federal election, property experts are predicting, with a high degree of certainty, that the Sydney and Melbourne markets are likely to start bottoming out in the next two years.
According to BIS Oxford Economics’ managing director, Robert Mellor, the Sydney and Melbourne markets could bottom out by the September quarter.
Meanwhile, CoreLogic’s head of research, Tim Lawless, said that key capital markets that have experienced massive drops, such as Sydney, will bottom out by the first half of 2020.
These predictions also follow the “several sweeteners” witnessed by the property market recently, including the federal government’s plans to allow first home buyers to purchase property with just a 5 per cent deposit and APRA’s announcement that lenders in Australia won’t need to assess loan serviceability based on an interest rate of 7 per cent.
Once the market settles, Mr Mellor believes that investors will jump right back into the capital city markets – with or without government incentives.
“If prices bottom out in two to four months, investors sitting on the sideline, they will get in. They won’t need the government initiatives. If they see the data in two-three months, see the data is flattening, they will buy.”
The possibility of rate cuts from the central bank, which will provide cheaper and easier access to finance, is also expected to increase investment activity in the coming months, according to him.
In the past 30 years, the Sydney property market has seen an average growth of 5.0 per cent, that is, from a median price of $194,000 in 1990 to $808,494 in May 2019.
Moving forward, property experts are confident that the capital city market will continue to thrive despite the massive declines that it has recently witnessed.
With credit being liquid and housing supply and demand remaining at healthy levels, Right Property Group’s Victor Kumar said that property Armageddon is unlikely to occur any time soon.
“We’ve got very strong fundamentals in our property market and we have one of the best economies available… Looking at Sydney, billions and billions of dollars are being spent on infrastructure, such as WestConnex, upgrade of hospitals, upgrade of freeways… and we even got a new airport coming up.”
“We’ve got money that’s been the cheapest it’s ever been since day dot, pretty much, and it’s likely that the cash rate will be reduced even more. I’ve been investing for 20-off years, and I haven’t seen money this cheap for pretty much ever.”
“Further, the population growth is increasing substantially because, one, the natural growth, and secondly, we’ve also got skilled migration that is certainly fuelling the demand,” Mr Kumar said.
By the end of 2019, Spagnolo Property’s Anthony Spagnolo believes that market conditions will be improving significantly, particularly in Sydney.
“It’s still a falling market, but by the end of the year, there may be some growth that will occur. There’s always deals out there, so if you have the approvals and serviceability, now is a good time in a slowing market to pick up some good deals,” he said.
CoreLogic’s May 2019 home value index showed dwelling values declining by 0.4 per cent in capital cities and 0.2 per cent in regional areas.
Nationally, the current dwelling value decline was the smallest month-on-month decline since May 2018.
According to Mr Lawless: “This improvement is primarily being driven by a slower rate of decline in Sydney and Melbourne where housing values were previously falling at the fastest rate of any capital city.”
“Sydney values were 0.5 of a percentage point lower over the month, while Melbourne values were 0.3 of a percentage point lower, the smallest decline in values across both cities since March last year.”
Over the final week of May, Sydney was able to avoid any movement in dwelling values and simply held steady, based on date from CoreLogic’s Property Market Indicator.
Meanwhile, Adelaide, on the other hand, recorded a value rise of 0.1 per cent., Brisbane and Melbourne lead the declines at 0.3 per cent, 0.2 per cent and 0.1 per cent, respectively.
As it witnessed continuous declines over the past few months, the Sydney property market eventually emerged as the capital city with the greatest improvement in housing affordability, according to the HIA Affordability Index by the Housing Industry Association (HIA).
Over the quarter, the affordability Index rose by 2.2 per cent, “the most significant improvement in housing affordability since September 2013”, HIA chief economist Tim Reardon said.
Among the capital cities, Sydney saw the greatest improvement, with the index rising 12.4 per cent, followed by Melbourne at 9.6 per cent, Perth at 7.7 per cent, Darwin at 5.9 per cent and Brisbane at 2.5 per cent.
“Affordability in Sydney deteriorated to an extent that in June 2017 it required two average Sydney incomes to be able to afford repayments on an average Sydney home. In just over a year, this has improved to only requiring 1.8 standard incomes to purchase the same home,” according to Mr Reardon.
“With the completion of new homes remaining at elevated levels, affordability is poised to continue to improve.”
Still, despite the decline in dwelling values, Sydney, along with three other Australian capital cities, was recently included in the top 23 international cities for luxury residential price growth as detailed in the Prime Global Cities Index – Q1 2019 report by Knight Frank.
Brisbane emerged as the highest-ranking Australian city for luxury residential price growth, coming in at number 14, followed by Sydney at position 18, Melbourne at position 22 and Perth at position 23.
According to Knight Frank’s head of residential research, Michelle Ciesielski: “Despite a recent cooling of the market in Sydney and Melbourne, these markets recorded yearly price growth of 2.4 per cent and 1.8 per cent, respectively, while Brisbane recorded year-on-year growth of 3.2 per cent and Perth recorded growth of 1.8 per cent.”
Sustaining the luxury markets in Sydney and Melbourne is the creation of more millionaires annually. From 2018 to 2023, the number of millionaires is expected to grow by 21 per cent, with a total of 116,049 millionaires in Sydney and 68,888 in Melbourne.
“Over the past five years, four millionaires were created every day in Sydney… [and] this is expected to rise to 11 millionaires per day over the next five years.
“In Melbourne, we saw three millionaires created per day over the same period, with projections it will rise to seven millionaires a day over the next five years,” Ms Ciesielski highlighted.
The positive growth in Sydney’s prestige market continues to attract high-end buyers who are looking for superb quality finishes, smart technology and high levels of privacy.
“With competition for limited stock, we expect to see positive price growth for luxury homes, albeit at a more sustainable pace than in previous years.”
Most capital cities saw listing volumes decline during the final week of May, except Hobart, Darwin and Adelaide, which rose by 9.7 per cent, 4.9 per cent and 3.3 per cent, respectively.
Sydney saw a decline of 25.5 per cent, marking its 15th consecutive week of new listing declines in the capital city.
Meanwhile, Melbourne, Canberra and Perth also saw declines at 24.6 per cent, 18.1 per cent and 17.2 per cent, respectively.
However, new analysis from CoreLogic showed that Australia still has 5.3 months’ worth of housing supply available for purchase – the highest figure since 2012.
While housing stock in Sydney is sitting below the country average at 4.1 months, the figure has been determined to be a seven-year high for the capital city, according to Mr Kusher.
“In comparison to the previous seven years, the months of supply figure is now the highest it has been at this time of year any time over that period. Months of supply is elevated due to much lower transaction volumes and an elevated volume of stock for sale,” he said.
Houses remained more popular than units over the month, but the average time for houses on market fluctuated across capital cities, according to CoreLogic.
Hobart was the capital city with the fastest time on market for houses at 38 days, followed by Melbourne, Sydney and Canberra at 46 days for the former and 50 days for the two latter.
On the other hand, Perth, Darwin and Brisbane had the slowest time on market at 87 days, 79 days and 73 days, respectively.
For units, Hobart was still the fastest at 39 days, while Perth, Brisbane and Darwin were the slowest at 89, 84 and 78 days, respectively.
Mr Kusher said: “The rapid rise in time on market is symptom of higher supply (advertised stock levels across the combined capitals are at their highest level for this time of the year since 2012) and less demand (capital city settled sales are down 16 per cent year-on-year).”
“Overall, the data points to a longer period of negotiation before a sale. This reflects the conditions of tougher finance and fewer buyers.
“In order to have the best chance of achieving a sale, [the vendor] should set realistic prices, maximise their marketing campaign to ensure their property stands out from the competition and be prepared to meet market expectations.”
Meanwhile, vendor discounting was between 5.2 per cent and 8.3 per cent for houses across most capital cities and between 6.7 per cent and 9.5 per cent for units, with Canberra being the low-end exception and Darwin being the high-end exception for both houses and units.
Over the last three months, 78.1 per cent of Sydney properties were sold below their original listing price – well above the decade average of 59.4 per cent.
As investors keep an eye on the Sydney property market, waiting for it to bounce back, InvestorKit’s Arjun Paliwal advised them to keep a closer look at five factors that are likely to drive growth into the capital city market: sentiment, credit, incomes, supply and rental yields.
According to Mr Paliwal, as the “backbone of property”, credit will ultimately play a major role in the recovery of today’s declining markets.
With the Australian Prudential Regulation Authority’s initiative to give investors more borrowing power, he believes that a major shift is bound to happen in the property market in the coming months.
“Property doesn’t move until credit moves because most people aren’t in a position to be able to buy properties fully in cash. When credit changes, there will be a big shift there.”
“If… the flow-on from these APRA changes, as well as other parts of the borrowing capacities are improved, that could then have a flow-on impact of availability of credit for people to go and lend to buy more property or buy higher-priced property, or compete for the same property to a higher price level due to that available credit that’s there.”
“With loosening up of credit, that could help make a shift in the environment of peoples’ capacities, and since the Sydney market has come down considerably over the last 12 to 18 months, that could then mean people now, when you combine improved confidence, more affordable prices and available credit that may improve or may increase, that then has an impact on flow-on of people being able to go and compete and purchase property, which again, flows onto price.”
To further gauge the profitability of Sydney properties, he advised investors to follow the movement of incomes, supply and demand, rental yields and even consumer sentiment.
Adding to the five main growth drivers, property group CBRE highlighted the importance of infrastructure, particularly the event and planned metropolitan railway projects across major capital cities, including Sydney, Melbourne, Brisbane and Perth.
CBRE’s A New Train of Thought report said that investment into metro rail infrastructure is planned to increase by 107 per cent over the next seven years – a spending that is predicted to flow through into the residential property market.
In Sydney, the Sydney Metro Rail will see 16 stations upgraded and 15 stations created, with $1.4 billion per annum planned to be spent over the next 10 years on suburban development.
Further, the recently opened North-West line, in conjunction with the South-West and CBD lines, is also expected to drive median house prices up artificially within the next five years, mainly due to development in the Sydney CBD, Macquarie Park, Rouse Hill, Marrickville, , Waterloo, Kellyville, Bankstown and Chatswood.
“Sydney will need close to 36,000 new dwellings every year up until 2036 based on population growth projections,” the report stated.
“Sydney Olympic Park is expected to house 23,000 residents by 2030, with development targets of 575,000 sqm of [greenfield areas] in the precinct. The Bays precinct will aim to redevelop 95 hectares of government-owned land, which will include a mix of affordable housing and land release for development,” according to the report.
Within the central business district, Pitt Street station andstation are expected to see mixed-use towers built, while Rouse Hill will continue to stand as the largest development precinct in the Hills Shire following a recent rezoning. More residential supply will be added through the Cudgegong Road apartments and Tallawong Station Precinct projects.
Castle Hill has also been considered to be a major hub by the NSW government, with a number of retail projects to be added across the area.
Moreover, Waterloo’s gentrification is expected to continue, with 5,000 new properties expected to be added to the market, and 6,500 more properties to be built as part of the development of Waterloo Metro Quarter and Waterloo Estates. An additional 33,000 sqm worth of residential space is also expected to come down the pipeline.
Finally, the Rydalmere and Camellia areas is expected to see an additional 12,550 dwellings over the coming years.
Buyer’s agent Nick Viner identified five suburbs that will signal the turnaround of the Sydney property market, which is expected to occur sooner than later following Coalition winning the federal election and APRA’s proposed lending guideline reforms.
Mr Viner looked at suburbs within the 10 kilometre-radius of the CBD as they are more reactive to price changes. Then, he considered fundamental drivers of growth such as infrastructure and facilities.
“The facts are that certain fundamentals ensure some suburbs react before others when prices begin rising again. By looking at those suburbs with the right fundamentals and observing historical price movements, I’ve chosen addresses where prices will most likely rise first.”
First on the list is Glebe, which – despite being “well below its peak” after declining by 17 per cent over the past year to a median price of $1.6 million – Mr Viner described as “enviable” due to its location.
According to the buyer’s agent: “Glebe is a stone’s throw from Haymarket and the rest of the CBD and is close to the University of Sydney, UTS and RPA hospital. The suburb has remained popular with a cross-section of purchasers from first home buyers to families looking to upgrade to downsizers.”,
“I have no doubt when real estate prices turn around, Glebe will be among the first to benefit.”
Next is Redfern, where gentrification will pave the way to the increase in property prices, ultimately recovering from the 16.8 percent-decline that it has witnessed in the past year.
The upcoming infrastructure in the suburb, including an expected upgrade to the Redfern Station and the upcoming Central Precinct Project, makes Redfern the location of “the city’s most exciting addresses”, Mr Viner said.
“The upside is this: new infrastructure is enhancing Redfern’s appeal. As confidence returns to the market, it will definitely be one to watch as among the first for value increases,” he highlighted.
Lane Cove, which lies seven kilometres from the CBD, is also expected to see property prices rise as it boasts being an administrative hub for the local council and being a major commercial centre.
Lower North Shore families are often attracted to the suburb’s proximity to schools, shops and transport – a demand that will counter the 16.6 per cent-decline witnessed by the market over the year.
Further, North Bondi and are also expected to be among the first to rise as they attract a variety of buyers, from luxury home buyers to first home buyers, small families and downsizers.
Other NSW markets where property buyers are winning, according to the May CoreLogic Market Trends data and the Real Estate Institute of NSW, are Narooma, East Kempsey, Clarence Town, South West Rocks, North Roth bury, Teralba, Narrandera, Vaucluse, Dunbogan and Smiths Lake.