Tighter financing conditions and less investment activity continue to weaken the housing market conditions in Sydney and other capital cities. Can investors still find opportunities in NSW’s capital?
Over the quarter, overall dwelling values in Sydney decline by 0.3 of a percentage point. A huge part of the decline seen in the capital city was driven by premium suburbs, which dropped in value by 7.3 per cent.
As in the case of the past months, the comparatively smaller markets of Brisbane, Adelaide and Hobart did better than the “premium markets” of Sydney and Melbourne, experiencing a rise in dwelling values at 0.2 to 0.3 of a percentage point.
According to CoreLogic, the recent declines in two of the biggest property markets in Australia is deemed “the most substantial decline in housing demand”.
“Housing markets where prices are high relative to incomes could see less activity as prospective buyers find their borrowing capacity reduced. Investor confidence may also be impacted further if changes to taxation policies related to investment housing are debated throughout the federal election,” CoreLogic’s Tim Lawless said.
The slowdown in house price growth is expected to continue into the 2019 financial year due to further tightening of lending and the rising new stock levels that are tipping the market into oversupply.
After experiencing strong gains from since 2012–13, the house price growth in Sydney is now on track to record a negative number this year.
However, a slight correction in the market could be made possible by low-interest rates, the city’s stable economic environment and its strong population growth. Demand will continue to rise but it may not be enough to meet supply in the short-term.
Like most capital cities, the Sydney market recorded a significant decline in settled transactions over the last 12 months.
The capital city saw settled transactions down by 13.5 per cent even after the slight rebound caused by the surge of first home buyers in July 2017.
Monthly sales volumes have been consistently lower than the 10-year average since last year and listings also declined by 10.5 per cent.
In auctions, Sydney’s initial clearance rate declined to 52.3 per cent from 56.1 per cent, out of 830 homes, with 554 houses selling at a clearance rate of 48.2 per cent, while 276 units sold at a clearance rate of 60.4 per cent.
Meanwhile, average vendor discounting sits between 3.6 per cent and 7.6 per cent for houses, and between 4.9 per cent and 9.0 per cent for units.
Most of the new development, particularly in the apartment market, are absorbed by Sydney’s middle suburbs. Greater Sydney currently has more than 74,000 apartment units.
Due to this ongoing supply-and-demand trend in Sydney, property sellers are advised to be willing to find a compromise of price to avoid being in the market for longer and craft a finely-tuned marketing strategy to sell their property at an appropriate price.
The median house price in Sydney currently sits at $1,150,357, with higher prices in the inner suburbs.
Median rents for three-bedroom houses rose by 2 per cent to $520 over the quarter. All other sizes of dwellings either saw an increase or remained steady, except for three-bedroom houses in inner Sydney where median rents declined by 1.8 per cent.
Meanwhile, the vacancy rate in the capital city also rose by 0.2 of a percentage point to 2.3 per cent for the quarter.
The weighted average vacancy rate across capital cities declined by 2.6 per cent, indicating a tightening of the rental markets.
In order to fill the void, experts advise investors who own larger units to target families.
RiskWise’s Doron Peleg explained: “If you can attract good tenants, such as families, you can reduce the costs associated with the changes of tenants, as you reduce letting fees and other expenses as well as the vacancy of the property.”
In comparison, younger tenants who seek affordable housing tend to move around more, increasing vacancy rate and associated costs.
Most investors would think that the best step moving forward is to sell their properties in Sydney and moving on to other markets instead of experiencing negative cash flow and slow growth.
However, Keshab Chartered Accountant’s Munzurul Khan encouraged investors to hold their properties for a while longer to avoid additional expenses and a significant delay on their wealth-creation journeys.
According to him: “I think that's the big $64-million decision to make. Sydney is Sydney, it's not regional Victoria or Queensland or wherever else it is. It's Sydney, it's a world-class city. To replace what you're selling in a city like that, there's a bigger cost involved.”
“When there is a bit of profit after the property has been sold, that's the immediate gratification, so to speak. If we were to hold on to it, that is the additional level of the growth. That is the additional opportunity gain,” Mr Khan added.
Despite the lackluster performance of the Sydney property market in the past few months, investors may expect a slight correction brought about by upcoming initiatives and infrastructure projects.
In financial year 2018–19, the NSW government will be dedicating $15.3 billion on infrastructure.
From the said amount, $4.3 million will be for the Sydney Metro, $438 million will be for the upcoming Western Sydney airport, $282.8 million will be for Sydney’s major routes and motorways and $281.3 million will be for the alleviation of road congestion in the capital city.
A total of $3.6 billion will be spent on the 10-year Western Sydney Infrastructure plan, which includes the upgrade of the Northern Road, the linking of M12 Motorway and M7 Motorway to the upcoming Western Sydney Airport and other improvements on transportation, highways and railroads.
The Sydney Metro West, Sydney Metro Northwest and the Parramatta Light Rail are also set for upgrades.
Meanwhile, $1.5 billion will be dedicated to sports, arts and culture in NSW. Parts of it will be invested in the Sydney Football Stadium and the Western Sydney Stadium.
The NSW government will also be spending $8 billion on health, $6 billion on schools and $387.8 million on cultural and social activities.
If you’re still looking to invest in Sydney, experts advise looking for four demographic factors that indicate early stages of gentrification, including:
By identifying areas undergoing the early stages of gentrification, investors may secure significant returns on their investment, according to Property Investment Professionals of Australia’s Peter Koulizos.
“The secret is to get in early before everyone else realises what is going on,” Mr Koulizos highlighted.
Investors are also advised to seek areas where there are job creation, population growth and new home construction.
Sydney’s western and southwestern suburbs, including Leppington, Parramatta and Blacktown, emerged on the HIA Hotspots Report as some of the Top 20 hotspots across Australia due to the large pipeline of new housing that is expected to attract significant population growth.