Despite the downward trend in the Sydney property market over the past few months, most experts believe that the capital city will recover sooner than expected. Is it time for investors to jump back to the New South Wales capital?
After a long period of deterioration, Sydney, along with other major markets, has started showing signs of recovery based on fundamental market indicators such as dwelling values and supply and demand.
Over the September quarter, affordability has slowly improved, with the HIA Affordability Index recorded at 76.3 per cent—around 1.3 per cent higher than the last quarter and 2.2 per cent higher than the past year.
According to the report, Sydney’s housing affordability improved better than other capital cities.
“While it remains the least affordable market in the country – by quite a margin – the index is 9.0 per cent higher than a year earlier which is a significant positive step. The improvement in affordability has primarily been driven by the declining trend in home prices over the last year,” HIA economist Geordan Murray said.
Still, investors are reminded to be cautious about jumping into any major investment decisions in the NSW capital. At the end of the day, the market is at the softening phase of its cycle following an unprecedented property boom.
Right Property Group’s Victor Kumar highlighted: “Let’s say it did drop significantly in Sydney; we’ve had gains of up to 100 per cent, so if you’re giving back some, it’s not an ‘end of the world’ sort of thing—it’s a market cycle at work.”
“The market cycle is that you gain some, you give some back, you gain some, you give some back; it’s not a linear trajectory as such.”
For the week ending October 28, Sydney and Adelaide recorded the third-highest fall in dwelling values at 0.1 per cent, following at 0.3 per cent and Melbourne at 0.2 per cent. Brisbane was the only capital city that bucked the downward trend by climbing 0.1 of a percentage point.
Over the month, national house prices fell by 2.6 per cent to $781,787 while unit prices were down by 1.6 per cent to $549,163.
In Sydney, house prices fell by 3.1 per cent over the quarter to $1,101,532, while unit prices fell by 0.7 of a percentage to $734,775.
Except for Perth and Darwin, all capital cities are currently underperforming compared to last year, according to Domain senior research analyst Dr Nicola Powell. While this development might lead to worry among established investors, first home buyers may find it as a welcome change.
“Property prices across almost all capitals continue to fall. In many markets throughout Australia, gaining entry has become a greater possibility,” Dr Powell said.
The downturn has been aided by the tightening of credit as a result of regulatory interventions and the royal commission, which lead to rising mortgage rates and reduced borrowing power that impacted all capital city markets to a certain degree, according to the senior research analyst.
Over the last week of October, Sydney, along with Canberra, performed worst in terms of listings recorded, falling by falling by 12.3 per cent and 7.1 per cent, respectively.
Meanwhile, vendor discounting across most capital cities sat between 4.2 per cent and 5.8 per cent for houses and between 5.3 per cent and 9.6 per cent for units, with Canberra as the low-end exception and Darwin as the high-end exception.
Auction clearance rates in Sydney have also been trending under the capital city average at 47.2 per cent for houses and 50.1 per cent for units—a significant decline from last year’s 61.8 per cent of houses and 68.7 per cent of units sold at auctions, according to the latest Property Pulse report from CoreLogic.
Despite this trend, auctioneer James Pratt said that there are still some suburbs that attract attention from both home buyers and investors.
According to Mr Pratt: “For example, there’s a spot called McMahons Point … To give you an idea, the average sale price has almost doubled—what people are paying for the average house there has almost doubled in that area.
“Another reflection is obviously North Sydney, , even parts of the Eastern Suburbs. Their auction rates, week-in, week-out, are closer to 60, 70 per cent.”
Ray White’s Tim Snell, meanwhile, sees the Eastern Suburbs as a popular choice, along with, the Western Suburbs and the Northern Beaches. On the other hand, the east coast of Australia is currently experiencing challenges in the property market.
The suburbs with good investment opportunities are those with that provide more choice and more power to buyers, such as Mt Druitt, Colyton and .
“We’re in a stage now where there’s still plenty of buyers out there, most properties will still have at an auction ... one or two bidders on average at every auction, which means there is a buyer for every property in NSW, it just depends on whether the vendor is ready to accept the price change,” Mr Snell said.
Sydney and Melbourne have been largely responsible for inflating overall housing supply figures over the last three years due to the current softening state of their property markets, which is why investors are advised to take caution when buying in the capital city.
Although building approvals across Sydney have eased down in the past 18 months, they remain above historical average, according to Propertyology’s Simon Pressley.
Some of suburbs that are likely to underperform because of oversupply are Rockdale, Sutherland, Caterbury, Liverpool, Ryde, Hornsby, The Hills, Blacktown, Parramatta, Botany Bay, , Marrickville and Camden.
Median weekly house rents in Sydney remained steady at $550 per week, flatlining for a year and a half. Meanwhile, unit rents declined by 0.9 per cent, the first time since 2004. According to Dr Powell, the decline in unit rents is the market’s response to an increase in rental supply across the NSW capital.
Despite low gross rental yields, declining property prices have seen house and unit yields experience the strongest annual improvement since 2012.
“Advertised rental stock is currently at a new record high, with the growth in unit rentals hitting a pace not seen in six years. Tenants will find they have considerably more houses and units to choose from than this time last year,” Dr Powell said.
“If advertised stock levels continue to track higher at the rapid rate seen this year, it should put downward pressure on rents. Although strong levels of migration, combined with the barrier of high house prices, may help to counterbalance this scenario.”
Sydney vacancy rates were also driven down, according to new data from the Real Estate Institute of NSW.
Over the month, metropolitan Sydney saw vacancy rates down by 0.2 per cent to 2.8 per cent. Across inner Sydney, vacancy rates were down by 0.5 per cent, the lowest level since May. Meanwhile, outer Sydney declined by 0.2 per cent to 2.9 per cent as middle Sydney’s held steady at 3.1 per cent.
CoreLogic data showed that Australia is in the middle of an apartment construction boom, with almost 97,000 medium- to high-density projects completing construction in the last 12 months ending March 2018—84 per cent higher than the decade average.
Most of the new apartment projects are based in the inner city areas of the largest capital cities, where demand continues to increase due to population growth.
The Sydney suburbs of Potts Point and Woolloomooloo feature smaller areas of 1.5 kilometres and a population of 23,681, which resulted in a population density of 16,220 per square metres and a significantly high median unit value of $858,387, while the suburbs of Pyrmont and Ultimo has a population density of 16,170 per square metre and higher median unit value of $929,308.
Other NSW suburbs in the top 20 high population density areas list by CoreLogic area area Darlinghurst, Surry Hills, Redfern - Chippendale, Waterloo - , Bondi Beach - North Bondi, Glebe - Forest Lodge, Randwick - North, Neutral Bay - Kirribilli, - - , Kingsford, Lakemba, Bondi - Tamarama - Bronte and Wiley Park.
While Sydney is still undeniably a softening market, experts believe that there are ‘exciting’ opportunities for investors in the capital city.
Buyer’s Agent Institute’s Ben Handler said that the negativity surrounding the market today push most people to resist the urge of buying properties in the NSW capital. This trend places savvy investors in a unique position to capitalise on the current market.
According to him: “What that means is, the media comes out and … it seems like the world’s ending to a lot of people. It’s creating a lot of fear in people, and a lot of people are forgetting the fundamentals [and] that interest rates are the lowest they’ve ever been in the history of this country.”
“It’s an exciting time right now for people who really love investing in property for themselves and they’ve got a wealth of knowledge. The opportunity is: what a great time to buy now while everyone’s running around so fearful.”
“It’s a very exciting time to be buying property now, because a year or two years ago, it was very difficult because it was a seller’s market, highly competitive, and everyone wanted to buy and there was a lot of urgency. There’s better buying opportunity now,” Mr Handler highlighted.
At its current softening state, Sydney may not be an ideal area for chasing growth properties, but there are certain pockets across the capital city that offers properties with good growth potential.
Naturally, it would come at a price. Thus, experts advise investors to be cautious about looking for bargains in the Sydney property market.
According to Suburbanite CEO Anna Porter, investors who aim to buy low might be doing more harm than good to their portfolio if their ultimate goal is to achieve growth. In the current Sydney property market, it’s likely that properties bought at $500,000 and under could be valued just as low come selling time.
“It’s a budget where you do have to be careful. Sometimes people think if it’s a cheap property, you can’t go wrong, but sometimes cheap to buy means cheap to sell,” Ms Porter said.
In some instances, the prices are held down because there are a lot of older units and government-style housing around or the unit market is oversupplied.
“You do have to make sure you’re getting the right property and not having too many fundamental issues with the property at that price point.”
At the end of the day, the best time to buy in the property market, in Sydney or everywhere else, is when you can afford the purchase and the management of the real estate asset for the long term, according to mortgage expert Marissa Schulze
As the Sydney property market remains in flux, regulatory bodies have intervened with investment lending to alleviate the growing affordability issues in the capital city as well as its neighbouring states. Lenders have started to implement tighter regulations for the serviceability assessment, which has refrained some investors from actively investing in the past few months.
Ms Schulze advised investors to understand the changes that have been occurring in the property market as it moves towards a ‘new level of normality’.
“There will be a lot of great opportunities for particular investors moving forward if you get yourself into a position to be able to capitalise on those opportunities. Borrowers just really need to be aware of what is going on and the real variance between policies amongst the different lenders,” she said.
“I'm a big believer that you should never buy something that you can't afford to keep forever. Moving forward, that's going to be more important. You need to understand the cash flow of your properties and take into consideration the principal repayments.”
“It's just a matter of understanding the new rules and working with them so you can put yourself in the best position to take advantage of the opportunities.”
As the rules changes, experts hope that investors and home buyers alike are encouraged to be more responsible in managing their money and their assets. Moving forward, those who are in control of their finances are more likely to set themselves up for success in the future.
Most major markets in Australia, including Sydney, may be up for a long, stormy path in the near future but all of these fluctuations are part of a normal cycle, according to Real Estate Institute of Australia (REIA)’s Malcolm Gunning.
The secret to weathering the storm in today’s property market: Long-term investments.
According to the property expert: “You get lucky when you hold real estate for a long time. In markets like this, the seller loses a bit of momentum, but the purchaser has all the momentum. It's a cash flow game, so don't look at your prices every single day to see whether it's going up or down. Wait 10 years and then review your prices. You'll probably see it in a very different position.”
“Stay your course, know your numbers, and making sure that your cash flow position is fine. Don't get carried away. Property is still the biggest asset cloud in Australia.”
When looking for good areas to invest in Sydney, Property Investment Professionals of Australia (PIPA) chairman Peter Koulizos advised investors to consider affordability and gentrification.
Instead of simply looking for cheap properties, he suggested seeking ‘undervalued areas’ that are comparable to prime suburbs in the city or other major markets.
He said: “Prime areas are where lots of people want to be but, surely, that can't go on for long because as much as people want to live in that prime suburb, they can't afford it."
“So, I look for suburbs where the median price is lower than other surrounding suburbs. These suburbs are more affordable and they have similar amenities because you're only next door. It might be a little bit further to the shops or the train station, but it is very close.”
“In Sydney, Marrickville is next door to Stanmore but Stanmore is much more expensive. That area of Marrickville close to Stanmore, where you wouldn't know whether you’re in Marrickville or Stanmore, that's the sort of thing that I look for.”
Investors will do well to find gentrified suburbs as well as locations with developing infrastructure and explore their neighbouring areas where the ‘ripple effect’ might be taking place, according to Mr Koulizos.
Balmain, Rozelle, Lilyfield, , Redfern and Surry Hills are currently some of the most prominent gentrified areas where the industrial, trading and military past have been shed to make way for terrace houses, apartment complexes and the upper middle-class lifestyle.
“There’s a train line that's heading out through there, across Stanmore, Petersham, Erskineville, and there could be that ripple effect. Newtown has virtually finished that gentrification process. Erskineville has almost finished it. Then, it’s off to Enmore, St Peters, Tempe,” the property expert highlighted.
Meanwhile, property developers believe that a huge part of Sydney’s growth will be centered in the south-west region where billions of dollars of government investments have been committed for infrastructure and other major projects.
Edmondson Park, Menangle Park, Oran Park, Bardia, Leppington, Harrington Park and other suburbs in Badgerys Creek area and the south-west corridor of Sydney are likely to see 65 per cent of all of Sydney’s growth, Dahua Group Australia CEO Eric Li said.
According to Mr Li: “The private sector, state and federal governments are all collectively pumping billions of dollars into the area, which is fast becoming the epicentre of Sydney’s development activity. Hundreds of jobs are being created, new businesses are opening, home frames are everywhere and several cranes are visible across the region.”
“Major infrastructure projects are either about to start or have already started. New roads, hospitals, schools, sports and recreational facilities and education precincts will service population growth in the area.”
Bardia nearwill benefit from the Edmondson Park Train Station, the multi-billion Edmondson Park Town Centre project and the $35 million-upgrade to Bardia Public School.
The Badgerys Creek Airport and other infrastructure, both existing and planned, will be the catalyst that will drive investors and home buyers alike into the region.
Aside from infrastructure growth, population growth will also drive growth into the south-west corridor, particularly in the middle areas such as Campbelltown, Penrith and Liverpool.
Campbelltown City Council’s Lindy Deitz said: “Our focus is to ensure the three regional centres – Campbelltown, Penrith and Liverpool – have strong connectivity to the airport.”
“The airport will create a lot of business and employment opportunities; however, the fundamental metropolitan cities need to be anchors where people live, work and play. Its greenfield development opportunities and range of housing options enhance the region’s status as a wonderful place to live.”
Across the inner city, inner west, inner east, north, and western regions of Sydney are beds of renovation activities, particularly the suburbs of Darlinghurst, Paddington, Surry Hills, Newtown, Camperdown, Glebe, Chippendale, Leichhardt, Lilyfield, Strathfield, Little Bay, , Malabar, Matraville, , Bronte, Bondi, and Curl Curl, as well as certain places in the Sutherland Shire and St George areas.
Inner city suburbs, in particular, have been popular for additions and extensive renovations, as well as renovated properties to sell. Knockdowns, rebuilds, rear lane access for parking, additional attic-level bedrooms and ensuites have also emerged as renovation trends across the region.
Northern Sydney properties are also seeing intensive renovation and knockdown rebuilds on large blocks with first floor additions, while the Western Sydney region had become a hotspot for flipping activity and granny flat construction as a result of upcoming enhanced transportation projects such as WestConnex and the second Sydney airport at Badgerys Creek.
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, July 2018, August 2018 and September 2018 market updates. Visit Smart Property Investment's Property Market News page to get updates on other major capital cities.