The Sydney property market witnessed softening market conditions in 2018 as it came off the peak of the market cycle. Will 2019 see better investment opportunities in the New South Wales capital?
According to the Housing Affordability: Sydney and Melbourne Housing Market Update report by KPMG Economics, while house prices in Sydney and Melbourne will not go into free-fall, both capital city markets are expected to reach their lowest point this year.
Among the factors that will contribute to the continuous softening of the markets are the relatively high level of increases in the stock of residential dwellings in both Sydney and Melbourne, a decline in financing for housing investors and the tightening in APRA lending standards.
Once the markets have bottomed, they are expected to move into growth territory from 2020 to 2021, with Melbourne recovering sooner than Sydney due to the difference of the impact of local investors in both capital cities
“What we have found is that dwelling prices in Sydney are much more sensitive to the demand created by domestic investors than dwelling prices in Melbourne. It is predominately this factor that is causing the difference in expected dwelling price growth between the two markets,” KPMG’s chief economist Brendan Rynne highlighted.
Moving forward, the rising number of foreign students and the tougher regulatory actions and taxation measures by both federal and state governments are also expected to influence the property market, as is the declining confidence in property markets’ growth in Australia.
According to Property Council of Australia’s Ken Morrison, amid a changing market, political leaders must refrain from making any changes that will ‘undermine certainty, confidence or incentives to invest in Australian property’.
Mr Morrison said: “With the final report of the banking royal commission due in February, a state election in our most populous state and biggest property market (NSW) in March, and then a federal election in May, it’s crucial that our policy-makers take the longer-term view and support sensible policies that sustain and stimulate the growth of Australia’s biggest industry which supports 1.4 million jobs and delivers the places our growing population needs to live and work.”
Over the week ending 25 January, Sydney and Melbourne’s dwelling values fell by 0.3 of a per cent and 0.4 per cent, respectively, while Brisbane and Adelaide’s dwelling values went up by 0.1 per cent as continues to hold steady, according to CoreLogic’s Property Market Indicator.
Sydney’s median house price currently sits at $1,062,619 while its median unit price sits at $702,012—highlighting the sharpest price downturn in more than two decades albeit unable to surpass the 2004-to-2006 slump.
According to Dr Nicola Powell, the current slowdown is new territory for Australia’s housing market, with access to credit being the main driver.
“Downturns historically have been driven by interest rate rises, or significant changes to economic conditions. Given the low interest rate environment and Australia’s economic position compared to previous slumps, it’s clear that access to credit has been the main driver.”
“As banks preemptively tighten lending standards prior to the banking royal commission’s final report next month, it is unlikely we will see any further dramatic changes to the lending landscape,” she said.
While the Sydney property market leads the pack for affordability improvement along with the Melbourne property market, the capital city’s dwelling values remain one of the most unaffordable around the world.
Nestpick’s 2019 Neighbourhood Price Index identified Sydney as the 25th most expensive city to live in based on its overall percentage of disposable income required to pay rent, which currently sits at 51.77 per cent.
The Sydney central business district, meanwhile, emerged as the most expensive region across the capital city, followed by the Eastern Suburbs, the Northern Beaches, the Inner West, St George, the Hills District, the Northern Suburbs and -Bankstown, Macarthur, South-western Sydney and Western Sydney.
“We will need to see wage growth continue to exceed home prices in order to restore more appropriate levels of affordability,” Housing Industry Association’s Geordan Murray said.
Supply and demand
During the final week of January, listings dropped in all capital cities except Hobart. Sydney and Melbourne experienced some of the largest declines at 20.2 per cent and 11.5 per cent, respectively.
Houses remained more popular than units across capital city markets, but average time on market for houses continued to rise. Hobart fared best at 44 days for houses and 34 days for units, while Perth claimed last placed with 83 days for houses and 92 days for units.
Average vendor discounting sat between 5.8 per cent and 8.6 per cent for houses and between 6.2 per cent and 8.8 per cent for units. Sydney emerged as the high-end exception for houses at 8.9 per cent, while Perth was the high-end exception for units at 9.6 per cent.
Auction clearance rates also continued to soften over the quarter, with the combined capital city clearance rate declining to 43.6 per cent.
However, select suburbs defied the trend, including Sydney’s Bellevue Hill, which recorded a clearance rate of 80 per cent, Melbourne’s Hill with 71.4 per cent, Canberra’s with 58.3 per cent, Adelaide’s with 57.6 per cent and Brisbane’s Ashgrove with 33.3 per cent.
As listings decline, capital city markets see a rising need to bridge the gap in medium density housing in order to address both an ageing and quickly growing population and ultimately provide options that shall meet the needs of a variety of people.
The Low Rise Medium Density Housing Code aims to solve the ‘missing middle’ problem in the property market, fast-tracking complying development approval for one- and two-storey dual occupancies (side-by-side), manor houses, dual occupancies (one above the other) and terraces.
Suburbanite’s Anna Porter said: “Deferral of the code, which fast-tracks approval to 20 days if it is compliant, has been granted to councils like Lane Cove, Northern Beaches, Liverpool and Bankstown until July 2019.”
Several investors have already sought to take advantage of the deferral by buying blocks in the said areas, expecting a significant value increase in the future. However, capital growth may not necessarily be guaranteed, according to Ms Porter.
In fact, properties that are aimed to fill the ‘missing middle’ may experience devaluation due to a possible oversupply caused by investors and home builders jumping on the opportunity presented by the new planning policy.
“An automatic value increase because of a new planning policy isn’t a certainty—when there is a jump in supply of suitable sites, this can have the opposite effect.”
“We see some early adopters of the policy may be the winners, but those that wait will become one of many sites that will literally walk through the council planning process with ease and that reduces any expected uplift in values from the changing site use.”
“An oversupply of ‘easy to get DA’s’ may result in devaluing of development sites across greater Sydney over the next few years,” she highlighted.
Like property values, rental rates also continued to decline, with the nationwide weekly rental rate recording the lowest movement since national rental data was collected.
CoreLogic’s Quarterly Rental Review indicated at 0.1 per cent decline in weekly rents across Australia, dropping the median to $433 per week. Meanwhile, combined capital cities saw a decline of 0.2 per cent to $462 per week.
Across the capital cities, Sydney recorded the largest decline at 0.7 per cent to a median of $583 per week, followed by Darwin at 0.6 per cent to $463 per week and Canberra at 0.2 per cent to $539 per week.
Hobart, Perth, Brisbane and Adelaide, on the other hand, saw rises in rental rates, while Melbourne remained steady.
Meanwhile, rental yields in Sydney increased by 0.9 per cent to 3.24 per cent for houses and 0.1 per cent to 3.87 per cent for units
According to Domain’s Dr Nicole Powell: “It is a slow recovery from historical lows for gross rental yields, as dwelling values edge lower and rents modestly higher.”
“The numbers show that nationally, rents are holding firmer relative to dwelling values, given the improvement in rental yields.”
As rental rates decline, the supply of rental properties continue to be abundant, ultimately leading to a significant rise in vacancy rates across most capital cities, particularly in Sydney.
According to the REINSW Vacancy Rate Survey, Metropolitan Sydney’s vacancy rates rose by 0.2 per cent to 3.2 per cent, with the rise largely driven by Middle Sydney and Inner Sydney, where rental rates hiked up by 1.6 per cent to 5.1 per cent and 0.5 of a per cent to 3.0 per cent, respectively.
“Our feedback from agents suggests that the market is being flooded with new units, making older units more difficult to rent. As a result agencies are using tactics such as decreasing rent prices and offering free rent periods to secure tenants,” REINSW president Leanne Pilkington said.
As Sydney become more and more of a buyer’s market due to its softening conditions, property experts advise investors to refrain from selling properties in order to avoid incurring loss due to negative equity.
Instead, they should keep an eye out for buying opportunities as prices continue to decline.
“You want to be able to move quickly and take advantage of the opportunities as they present themselves.” mortgage broker Ross LeQuesne highlighted.
Nowadays, being mortgage-ready requires more preparations as banks and lending institutions continue to implement conservative lending practices, including a more meticulous serviceability assessment that focuses on the applicant’s living expenses.
According to Mr LeQuesne, investors with a pre-approval are well in position to take advantage of buying opportunities.
“To be finance-ready means you have a pre-approval in place. To get a pre-approval, you need the necessary documentation such as your bank statements, your payslips, credit card statements, ID and so forth. You want all of those handy to be able to apply for credit.”
“And, of course, look after your living expenses, because that's what the banks are going to be looking at. Keep records and documentation from as far back as 12 to 18 months.”
“It's really all about sticking to that budget and getting a pre-approval in place up to the maximum limit, then you're prepared to get a property.”
Between the federal elections and the results of the banking royal commission, the lending landscape is expected to see more changes in 2019.
Loan Market’s Bernand Desmond reminded investors: “In this market, there is no such thing as a one-size-fits-all approach anymore. Banks are changing every single day, and the worst mistake a property investor or consumer can do is go to the wrong lender by getting declined for credit.”
Apart from being mortgage-ready, investors are also encouraged to engage property professionals, where appropriate, in order to understand market movements and ultimately make the most out of the Sydney property market despite its softening conditions.
Mr Le Quesne said: “Quite often, like in anything, it's not what you know, it's who you know. When you’re able to establish this kind of relationship, if a good deal comes up, the agent will be on the phone to you quickly and you will be able to take advantage of that knowing that they're pre-approved and ready to go.”
“It's a changing market now that, often, it's better to have a buyer's agent because you need to have a read on the market and a true understanding of how it might fluctuate. If you're not using a buyer's agent, you're probably competing against a lot more well-educated, sophisticated, professional buyers.”
The National Australia Bank identified Bondi, Newcastle, Penrith, Surry Hills and Sydney as the NSW suburbs that are likely to enjoy above average growth over 2019.
Badgerys Creek is also likely to emerge as a top performer in the property market due to the investment opportunities brought about by future major infrastructure projects, particularly the new Western Sydney Airport and the new global city dubbed as the ‘Badgerys Creek Aerotropolis’.
These infrastructure projects are expected to spur population growth and jobs growth, ultimately inspiring improvement in the the Sydney property market.
For the construction of the Aerotropolis alone, over 200,000 jobs are expected to be created.
According to Starr Partners’ Doug Driscoll: “There are not many places anywhere in the country growing as fast as the south-west corridor of Sydney, and clearly demand for property will increase due to more jobs coming to the area."
The suburb of Miller may also experience significant growth, going through the same growth pattern experienced by two to three years ago.
Located approximately 24 miles from the Sydney CBD, St Marys enjoy relatively affordable house prices without being too far away from the benefits of city life.
“I think Miller is one of the last ungentrified suburbs in Sydney, similar to St Marys a few years ago and Riverstone before it was rezoned,” Mr Driscoll said.
“The median house price in the suburb is less than the neighbouring suburb of Hinchinbrook, and I think it represents phenomenal value. The area is relatively unknown, but it will start to become more gentrified as more development approvals are accepted, from high-rise apartments and townhouses.”