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Considering the declining dwelling values and high rental rates, some experts believe that Sydney is at a risk of losing its ‘brand promise’. Can investors still find opportunities in its cooling property market?
Sydney is considered to be among the top 10 cities across the globe because of its student economy, lifestyle, and brand prominence.
However, the capital city shows its weaknesses through transport, congestion, low density and fragmented local government.
According to Property Council NSW’s Jane Fitzgerald, while Sydney is on the right track towards progress, it still has a long way to go for optimal performance and boosting of strengths.
She said: “We are in an enviable position as a city both nationally and internationally, but to embrace and manage megatrends such as an aging population, climate change, the rapid change of technology and greater urban growth, we should not be complacent,”
“Sydney isn’t operating as well as it could and we need to get our planning and city policies right to ensure we don’t fall behind comparable cities across the world. We have made inroads, now we need to deliver outcomes,” Ms Fitzgerald added.
While the smaller markets saw values rise in May, including Adelaide and Brisbane, the ‘prime’ markets of Sydney and Melbourne experienced a 0.1 per cent decline, according to the latest CoreLogic data.
Annually, the dwelling values in Sydney dropped by 4.2 per cent while Melbourne’s dwelling values grew by 2.2 per cent.
The national dwelling value decline in May marked the eighth consecutive month-on-month fall since the national market peaked in September 2017.
Combined capitals had a 1.1 per cent drop in value while combined regionals saw a 2.2 per cent growth.
According to CoreLogic’s Tim Lawless, the negative headline growth rate could be a sign of weakening housing conditions across capital cities.
“Regional markets are outperforming the capitals, affordable housing options are showing stronger conditions and the previously top performing regions are now amongst the weakest,” he said.
Despite the lackluster performance of the Sydney property market, local agents still notice a rise in demand for real estate assets in the capital city, especially from interstate and overseas buyers.
According to a survey conducted by bidding app Gavl, 20 per cent of interstate buyers and 15 per cent of overseas buyers in Sydney said that they have seen growth in their assets’ values.
Gavl’s Justin Nickerson said that this rise in demand is brought by the rising affordability in the market following the end of its boom.
He explained: “With Sydney and Melbourne cooling off since last years’ frenzy, the market is looking more affordable, which has led to interstate and overseas buyers coming back.”
“They’ve seen that there’s a lull, which means now is a good time to buy before a surge happens again. Overseas buyers see cities like Sydney and Melbourne as always being desirable with jobs and infrastructure, so they’ll invest now to reap the benefits later,” Mr Nickerson highlighted.
As dwelling values continued to drop, listings also fell in all Australian capital cities, the latest CoreLogic Property Market Indicator showed.
The decline in listings is lead by Darwin at 38.8 per cent, followed by Adelaide and Sydney at 11.8 per cent nad 11.6 per cent, respectively, the latest CoreLogic Property Market Indicator showed.
Meanwhile, as auction volumes held steady across Australia, Sydney’s initial clearance rate decline to 52.3 per cent from 56.1 per cent.
Out of 830 homes in the capital city, 554 houses were sold at a clearance rate of 48.2 per cent while 276 units sold at a clearance rate of 60.4 per cent.
In comparison, Melbourne’s overall clearance rate rose to 61.6 per cent and the comparatively small major market of Adelaide saw a strong clearance rate of 68.2 per cent.
Supply-wise, housing approvals were down in Sydney while unit approvals continued to rise at above the long-term average levels.
This data comes after Sydney was declared the most expensive Australian city to build in, according to the International Construction Costs 2018 report from Arcadis. Sydney ranked 19th in the global list, while Melbourne and Brisbane ranked 21st and 22nd, respectively.
CoreLogic’s Cameron Kusher said: “Difficulty with getting finance and the necessary pre-sales to proceed with large-scale projects is likely to mean that, moving forward, houses and lower-density unit projects are likely to be the preferred options for developers.”
“That’s not to say that high-rise projects still won’t occur but they aren’t expected to be occurring at the magnitude seen over recent years,” he added.
Reflecting the increasing regard on the advantages of affordability and lifestyle, Western Sydney has already been tagged as a capital growth area for units.
To date, Western Sydney has various development projects in the pipeline, overseen by local, state and federal governments, including the Badgerys Creek airport and the development of Parramatta as Sydney’s second CBD.
Soon, unit prices in Sydney could very well overtake the growth of house prices, according to economist Dr Andrew Wilson.
“The rental return for houses might be around 2 to 3 per cent ($1,100 – $1,600 per week), whereas buying two units at $1.4 million or three units at $900,000 might get you 3 to 5 per cent ($1,600 – $2,600 per week),” he said.
Aside from good infrastructure in the area, among the other factors that strengthen the city’s unit market are record levels of migration, strong economy, lifestyle offerings and high levels of demand from first home buyers.
Despite the availability of units and houses across Sydney, there continues to be a rental crisis in the capital city, as in most of Australia.
The Rental Affordability Index released by National Shelter, Community Sector Banking and SGS Economics & Planning in May determined Sydney as the second least unaffordable capital city to rent in, preceded only by Hobart.
Sydney requires 27 per cent of household income for rental payment, which puts lower-income households in high levels of rental stress. Rental prices across the capital city sits at an average of $736 a week for houses and $525 a week of units—this despite asking rents for houses already declining by 2.2 per cent over the year.
As a result of high rental rates, vacancy rates across Sydney rose, with the highest rise seen in inner and middle Sydney.
According to The Real Estate Institute of NSW’s Leanne Pilkington, vacancy rates in outer Sydney rose to 2.5 per cent, while inner and middle Sydney’s vacancy rates rose to 2.2 per cent and 2.9 per cent, respectively.
Financial stress, overcrowding and insecurity are the everyday reality for working families in Sydney and other capital cities, SGS Economics and Planning’s Ellen Witte said.
If the crisis in rental affordability continues, lower-income earners may be forced out of Sydney and other capital cities, which means that these areas could lose vital workers.
To protect these lower-income households, experts strongly recommended the establishment of a national housing plan and continuous financial investments.
Ms Witte said: “There are opportunities to further streamline development planning processes, but more importantly to invest in social and affordable housing for workers. The use of instruments like the density bonus and inclusionary zoning needs to be maximised.”
“The data demonstrates the need for national leadership and a national housing strategy. We need to bring the threads of tax reform, incentives to encourage greater investment by institutional finance and states, planning reforms and urban and regional development together to tackle this problem,” National Shelter’s Adrian Pisarski added.
Even in the middle of a rental affordability crisis, it’s still possible to purchase a property close to the Sydney CBD, based on the latest Property Pulse by CoreLogic.
In general, it’s more affordable to stay close to the CBD through units than through houses.
In fact, the furthest affordable suburb from CBD for units is under 20 kilometres, while the furthest affordable suburbs from the CBD for houses is over 75 kilometres.
Lakemba, at 12.4 kilometres from the CBD, offers units at a median value of $435,314, while , at 17.4 kilometres from the CBD, boasts a median unit value of $484,938.
Meanwhile, Bar Point, at 39.5 kilometres from the CBD, has a median house value of $379,776, while Spencer, at 45.8 kilometres from the CBD, has a median house value of $391,163.
Looking at the most recent data and market movements, the Sydney property market is undeniably past its peak, but that is not to say that wealth-creation opportunities have completely vanished in the area.
After all, Sydney remains as one of the strongest economies across the country.
One of the strongest growth driver in Sydney is its infrastructure, which only continues to improve through the years.
A $75 billion investment in transport infrastructure was announced following the release of 2018’s budget—projects that aim to improve accessibility between properties and, consequently, raise the profitability of portfolios across Australia.
Of the said amount, $1.5 billion will be directed to New South Wales, distributed as follows:
According to Property Professionals of Australia’s Peter Koulizos, the new infrastructure can help investors identify future hotspots.
He said: “If investors can find out where the infrastructure is going to be built, let's say new train stations in Sydney and Melbourne because it's the larger metropolises where public transport is more important than, and if they can buy within walking distance of that new train station—400 metres of five minutes away—then they could do quite well.”
Aside from infrastructure, the population of Sydney is also among its drivers of growth.
Instead of letting themselves be pushed out by rising property prices, investors and owner-occupiers opt to stay in the capital city by simply migrating into more affordable areas.
In the greater Sydney area, the biggest movements are in Camden, which saw 5,531 arrivals and a median house price of $745,000; The Hill Shire, which had 2,044 arrivals and median house price of $1,375,000; and Liverpool, which saw 1,068 arrivals and a median house price of $805,000, according to Propertyology data.
This trend of seeking affordable areas located in greater capital city areas instead of opting for properties near the CBDs is expected to continue for years as the capital cities’ markets struggle with high median prices.
Propertyology’s Simon Pressley said: “Sydney’s median house price will always be eye-wateringly high but it’s clear that more wannabe property owners are prepared to compromise proximity for affordability.”
“Affordability will continue to be the deciding factor for buyers in the years ahead, which augurs well for many of these outer-ring locations,” he added.
If you are not prepared to take the long-term approach in order to realise the positive effects of the growth drivers in Sydney, experts suggested looking into other potential hotspots surrounding the capital city.
Maroubra Beach in the local government area of Randwick is considered ‘the place to be’ for investor because of its impressive infrastructure, according to real estate agent Kiki Bermudez.
She said: “The incoming light rail, which is due for completion next year, have a lot of investors very focused on capitalising on it for ease of access right into the CBD.
“The Bondi-esque, so to speak. As that infrastructure improves, more people are into that area,” the agent highlighted.Pavilion, which is right on the coastline, has just made the area more
Other markets in and around Randwick display good fundamentals for property investment. In fact, 75 per cent of the residents of the city continue to buy more properties and a large number of investors remain in the market as well despite the recent tightening of lending regulations.
At the moment, smaller blocks are generally preferred by buyers since they offer a good chance for capital growth.
“It's a boom market. The speed of development is pretty hard going. It's changed a lot from just being industrial to a little hot bed of real estate now,” Ms Bermudez said.
Canberra is deemed as one of the best performing markets lately due to its population growth, high employment rate, income growth, good rental yield and low residential vacancy rates.
Since people in Canberra earn $300 a week more than the national average, investors can be confident of their ability to secure a tenant, lease at a high rate of return and enjoy a good chance of capital growth in the future.
According to Colliers International’s Shane Radnell, Canberra presents a lower entry point for purchase with a high rental return compared to Sydney, especially in the unit market.
He said: “Sydney median apartment prices are now at $740,000, while Canberra median apartment prices are at $411,000. However, the median rental yield for units in Sydney are only 3.85 per cent, while Canberra’s rental yields are much stronger at 5.84 per cent.”
“Just a seven-minute commute to the city centre and exceptionally close to the Belconnen Town Centre, University of Canberra and Lake Ginninderra, the new boutique mixed-use precinct of Parc offers apartments with oversized living spaces and abundant storage, all across from a popular local shopping and dining destination. Belconnen is clearly brimming with opportunity,” according to Mr Radnell.
Another suburb outperforming Sydney because of its existing and upcoming infrastructure is the Northern Beaches suburb of Frenchs Forest.
Frenchs Forest saw median house prices growing in the past 12 months and the new infrastructure in the area is only expected to increase prices further.
Last year, median house prices in the suburb sits at $1.583 million. In 2018, it rose to $1.645 million. On average, properties for sale stay in the market for only 37 days.
"Frenchs Forest has always been off the radar somewhat, even though it's only 13 kilometres from Sydney's CBD … however, the well-publicised major infrastructure projects have already changed that with demand exceeding supply and prices increasing as a result,” STRAND Property Group’s Michael Ossitt said.
Among the new projects in the area include the Northern Beaches Hospital, which opens in October, as well as a new town centre and high school.
Frenchs Forest is also expected to benefit from the road improvements, which include $500 million-worth of road upgrades and a second harbor crossing.
According to Mr Ossitt: “There are so many positives happening in the suburb that will create employment and demand for housing that I'm excited about the future of the area.”
Over the next five to 10 years, he expects the suburb to undergo a complete transformation—from being ‘off the radar’ to becoming a hub for property investors.
For more specific data and information on the Sydney property market, visit Smart Property Investment's Best Suburbs page.