Following an unprecedented property boom years ago, Sydney is now experiencing a continuous decline in dwelling values, driving investors to expect doom and gloom in the NSW capital. However, experts claim that the Sydney market is simply ‘going back to normal’. Are Australians better off investing in the capital city or avoiding it altogether?
The overall performance of the Sydney property market in August has undeniably been lackluster, much like most of the preceding months since late 2017. It joins other big cities, including Melbourne and , on a downward trend in price growth.
Still, the high prices in the capital city are significantly affecting investment activity more than the imbalance in supply and demand for dwelling. The current state of the market drives budding investors to invest in regional areas instead of suburbs near the central business district.
McGrath Estate Agent’s Bill Tsounias, one of REB’s Top 100 agents in 2018, said: “Our offices had the worst quarter we've had in the last 10 years in terms of sales results. Stocks are kind of dry as well, so your days on market are more—from 23 days to 30 days.”
However, these statistics are not, in any way, reflective of the ‘doom and gloom’ that some people are expecting to see in the New South Wales capital soon.
In fact, Mr Tsounias believes that the current market movements in Sydney are simply part of a normal market cycle. Sydney, according to him, is just ‘going back to normal’ following the property boom that saw historic highs in value growth across the capital city.
“A lot of agents are getting caught up with the head noise and we're finding that the media is making it out to be this big, big thing when it’s just gone back to normal. We are working harder, yes, but it’s just normal—we're still getting 40 people through an open house in our four-week campaign, where last year we would get 120,” he said.
If investors do the process right, the falling prices and lack of competition in the market could work to their advantage and ultimately help them succeed in their wealth-creation journey.
Most major capital cities saw value fall, with only one exception, according to the CoreLogic Property Market Indicator Summary.
Sydney, in particular, recorded a 0.1 per cent decline during the last week of August, tied with Melbourne and Brisbane, while Perth dropped by 0.3 per cent and Adelaide rose by 0.2 per cent. At the moment, the median house price in Sydney sits at $1.1 million while median unit price sits at $920,000.
CoreLogic’s Cameron Kusher said: “With dwelling values now falling and gross rental yields close to historic lows, the total returns from residential housing are not looking so attractive and a greater share of returns are coming from the yield component."
Over the past year, dwelling values in Sydney have fallen by 5.4 per cent.
Asking prices in Sydney are also down by 2.1 per cent over the month while overall returns declined by 2.5 per cent—the weakest results since 2009.
Listings declined across most capital cities, except in Hobart and Canberra where records rose by 10.4 percent and 4.7 per cent, respectively.
Meanwhile, where most capital cities see houses as the more popular dwelling option over units, Sydney stands among the best performers in unit sales, with only an average of 33 days in the market.
Vendor discounting was between 4.8 per cent and 7.1 per cent for houses and between 5.1 per cent and 10.1 per cent for units.
Over the next two years, Sydney and Melbourne are expected to see the highest increase in unit supply. The NSW capital will see 76,977 units completed until 2020, contributing to the 9.3 per cent increase in unit supply across Australia.
While the past five years saw a consistent increase in unit supply, values and rental growth are deteriorating—a trend that may not bode well for investors, particularly in Sydney and Melbourne.
Mr Kusher said: “Considering that dwelling values have generally trended lower over the past twelve months, buyers who have purchased a unit ‘off the plan’ may find the unit value at the time of settlement is lower than what they may have expected at the time of signing the contract.”
“In some cases, the settlement value may be lower than the contract price, implying buyers may need to top up their deposit in order to meet their lenders' loan to valuation requirements,” he added.
However, some experts believe that the record volumes of new housing can actually help push property prices down as house prices continue to fall and demand for dwelling dampen over the next 12 months.
Housing Industry Association’s Tim Reardon explained: “Due to fall in house prices, proliferation of punitive taxes on investors in the housing market, disincentives to overseas buyers and tighter oversight of mortgage lending for home purchases, we expect that the housing market will cool over the next couple of years, but the down-cycle that has emerged in certain segments of the market and locations will be moderate.”
Joining Sydney in the Top 25 regions for new unit completions over the next two years are Brisbane, Melbourne, Parramatta, Whitehouse, Ryde, Strathfield- - , Blacktown, Perth, Yarra, Maribyrnong, Dandenong, Penrith, , Glen Eira, , Monash, Darebin, Essendon, Holland Park, Port Phillip, Boroondara, -Coburg, Merrylands- and North Brisbane.
The prices of premium properties across Sydney and Melbourne are falling as well, and over the 2107-18 financial year, the number of sales of properties selling for at least $1 million has declined by 0.8 per cent.
Over the last year, 16 per cent of all houses and 8.8 per cent of all units sold in Australia are worth at least $1 million.
Across Sydney, in particular, 48.8 per cent of houses sold for $1 million or more, a significant decline from the peak in March 2018 at 50.4 per cent. Meanwhile, only 21.2 per cent of units valued at $1 million or more were sold in the past year, a slight decrease from the peak in October 2017 at 22.5 per cent.
According to Mr Kusher, this trend is expected to continue over the year following the consistent decline in dwelling values and much more rapid declines across the more expensive housing stock.
On the other hand, the smaller capital cities are likely to continue seeing the share of $1 million-sales increase in the coming months.
Much like premium properties, the volume of sales for properties under $400,000 are also declining. The latest Property Pulse by CoreLogic showed that sales of houses in the said price bracket fell by 1.5 per cent to 29.2 per cent while all unit sales fell by 0.8 per cent to 34.6 per cent.
In terms of stocks, the combined capital cities saw low numbers of cheap properties, with available houses priced under $400,000 at 13.9 per cent—a historic low—and available units in the same price bracket at 25.8 per cent.
Sydney, in particular, saw only 2.5 per cent of houses and 5.8 per cent of units sold for under $400,000, a further decrease from last year’s 3.1 per cent and 6.7 per cent, respectively.
On the other hand, regional areas have more affordable stocks for both houses and units.
This trend indicates the softening of the ‘premier markets’ of Sydney and Melbourne, according to Mr Kusher. However, should it continue for a number of years, investors may actually see a reversal of the declining trend in sales under $400,000.
The rental market across New South Wales saw modest success in the past month, according to the Real Estate Institute of NSW (REINSW).
While metropolitan Sydney and outer Sydney saw vacancy rates rise by 0.1 per cent and 0.3 per cent, respectively, middle and inner Sydney areas saw vacancy rates decline by 0.1 per cent.
Meanwhile, regional NSW generally saw vacancy rates decline, except in Albury, where it rose by 0.1 per cent, and in Riverina and Central Coast regions, where it remained steady at 3.1 per cent and 2.0 per cent, respectively.
The current trend in the rental market in in line with the winter seasonal trend, according to REINSW’s Brett Hunter.
In terms of rental rates, Sydney rents remain generally high but apartment median rents in metropolitan Sydney decline by 1.8 per cent to $540 a week. The NSW capital joins five other capital cities with median rents above $400—only Perth and Adelaide maintain cheaper rents.
Rent.com.au’s Greg Brader said: “The pace is changing for NSW. The cooling sales market in Sydney is putting pressure on landlords to consider stabilising or even reducing their rent.”
Overall, Sydney’s rental market remained stable this month, with median weekly house rents consistent at $600 a week. However, median apartment prices declined by 1.8 per cent, sitting now at $540 a week.
Despite high property prices across Sydney, a lot of first home buyers are still flocking to New South Wales, increasing the competition in one of the most populated states of Australia.
New South Wales came in third place in PRD nationwide’s report on home loan affordability despite recording a decline of 0.7 per cent over the past year. The state came after Northern Territory and the Australian Capital Territory, where home loan affordability index rose by 6.3 per cent and 2.2 per cent, respectively.
Even if home loans are considerably expensive, NSW stood as the most improved number of first home buyer loans over the year, rising by 80.8 per cent and topping the first home buyer loan category for the third quarter in a row.
“NSW, ACT and Vic are not usually known for their friendliness towards first home buyers, yet the states that are, such as Queensland, South Australia and Tasmania, had their number of first home buyer loans only grow by single digits, 5.0 per cent, 7.5 per cent, and 6.9 per cent respectively,” PRD nationwide noted.
Consumer sentiment has improved across the Australian property market, recording 106.1 points on the Australian Consumer Sentiment Index—an improvement of 9.8 per cent over the last 12 months and the highest point since December 2013.
The report said: “This is momentous in the Australian market, particularly as we are seeing capital city house median prices, particularly Sydney and Melbourne, slowing down. This truly marks a return to a more sustainable level of property price growth in Australia as well as a return to more confident consumers because of it.”
While the Sydney property market is definitely not in its prime and investors are better of being cautious, it’s certainly not the end of the world for those who have bought assets in the capital city over the past years. In fact, the slow downward trend could very well be followed by a slow upward trend.
Essentially, it’s simply history repeating itself—property markets experience booms and then softens before going back up again. This is why they are called ‘market cycles’.
Despite falling prices and high vacancy rates, all the drivers and fundamentals for property prices are increasing. Property value and rent fluctuations are simply part of the cycle.
Right Property Group’s Steve Waters call this the inflection point, where the value of the property grows and rent grows, too, but they can fluctuate. Rent growth can go past value growth and prices can rise but rents can fall as more people come into the market, much like what happened in Sydney.
Investors in the capital city should not worry themselves about being in a ‘bust market’ because aside from its strong local economy, the immigration and population growth in Sydney has been strong, too.
Propertyology’s Simon Pressley said: “Sydney and Melbourne have always had higher international profiles than any other Australian cities so it comes as no surprise that international visitor volumes to NSW and VIC continue to be strong. That strength has contributed towards Sydney and Melbourne's strong economy which underpinned some impressive property price growth.”
Sydney and Melbourne combined represent 40 per cent of Australia’s total population. One out of three Australians reside in New South Wales, and over the past year, the state’s population growth rate of 1.6 per cent was equal third with Queensland.
Of Greater Sydney’s 101,754 population increase, around 84,600 are overseas immigrants. More than 5,000 overseas migrants became residents in the city council areas of Sydney City, Parramatta, Canterbury-Bankstown, and Cumberland.
Aside from immigration and population, Sydney is also benefiting from construction, which has consistently increased through the years and includes huge railway infrastructure and other community development projects.
In order to weather the fluctuations in the Sydney property market and thrive in the changing investment landscape, experts advise investors to control their cash flow and protect their equity.
The current state of the markets has led to tighter lending regulations which make it harder for investors to access finance for the growth of their portfolio. Since property investment is, in essence, a ‘game of finance’, the inability to get funding equals the inability to acquire and ultimately control wealth.
To survive any market fluctuation, investors must be willing to change strategies to fit the current state of the market as well as their current personal and financial situation.
Right Property Group’s Victor Kumar explained: “If finance gets hard, you need to start to looking for more cash flow or stop buying for a little while. If you’re just starting to build out your portfolio, you got to start from good fundamental areas and make sure you’re aware of the amount of negative cash flow you’re going to carry since you’re in the acquisition phase.
“You shouldn’t have loans hanging around for a lifetime. You need to actively look at ways of paying it off so you can control the cash flow. If you control the cash flow, all of this dilemma of which strategy to implement fades away because you’re actually controlling the income – that’s what investing’s all about.
“You’re controlling the income and letting the wealth-creation or equity build-up happen in the background. In other words, look after your cash flow and the equity should happen,” he added.
Experts also discourage investors from stripping too much equity off of their existing properties. Instead, they should work hard to maintain a low loan-to-value ratio (LVR). An LVR of 80 per cent or lower is generally deemed low-risk.
If buying is still a priority, investors must make sure to buy within their means to avoid running the risk of being deep in debt once prices go down.
Acquiring high-growth assets in affordable belts minimises any drastic effect of market fluctuations, even in markets that are slowing down like Sydney. Moreover, this is the kind of long-term strategy that allows investors to protect their cash flow no matter the movement of the property market.
Mr Waters said: “I'm not saying going to the big end of town is the wrong strategy. This just gives us security that, at the end of the day, while we have the ebbs and flows of cash flow and property values, we have security in the cash flow.”
At the end of the day, it’s always a good time to buy in the Australian property market, as long as investors know where to look and what to look for.
In fact, smart investors who take advantage of flat markets by negotiating good property deals in areas with fewer competitions—way before the doom-and-gloom headlines are over and the media tells them it’s ‘safe’ to do so—are often the ones who get the most benefits once the property market makes its way up again.
Property investment, for most experts, is not about hotspots but understanding the factors that influence positive price growth, or simply the growth drivers, and making them the basis of your decisions moving forward.
Track the major market movements in Sydney and get to know more about the capital city’s growth drivers and hotspots through Smart Property Investment’s April 2018, May 2018, June 2018 and July 2018 market updates. Visit Smart Property Investment's Property Market News page to get updates on other major capital cities.
The information has been sourced from Domain, realestate.com.au, Rent.com.au and the Smart Property Investment website.