The top 5 factors to watch for Sydney’s market turn

With so many sets of data to watch, how do you know which ones are the most important?

According to Arjun Paliwal, founder of InvestorKit, the top five things to watch to know when Sydney’s market is going to turn are sentiment, credit availability, incomes, supply and rental yields.

1. Sentiment

“Even if there might be infrastructure, there might be available property deals that might look appealing, sentiment has so much more to do than just the deals and the numbers itself,” Mr Paliwal said.

“In the past, we’ve reduced sentiment. Things like media reporting regarding property markets or Australia as a whole has really reduced sentiment for people. Credit tightening and the banks in terms of changed in terms of how they’ve changed and tightened things over time, has again, has reduced sentiment with the flow-on on demand.

“Peoples’ confidence becomes low and they’re wondering how they might be able to buy something.”

However, there are signs that sentiment is looking to reverse with the recent Liberal Party victory at the 2019 federal election, which means a suite of negative gearing and capital gains tax reforms will not be happening.

“Liberals staying in with the surprise victory has really given some confidence to people from a high level to say economic plans, as well as infrastructure plans, plans for the budget, are most likely to stay in line with what was improved or in line to be approved, because of that consistency of the government, right? So that’s one thing that improves sentiment,” Mr Paliwal said.

What also could turn around sentiment is the recent changes being made by APRA that could allow for investors to borrow more.

“Sentiment is important to watch, that if these things eventuate from credit changes, the consistency around the political space, this will help give people that confidence around purchasing property in Sydney.”

2. Credit

Because of the APRA changes giving investors more borrowing power, this will open up credit more, which is an important thing, as Mr Paliwal considers credit as “the backbone of property”.

“Property doesn’t move until credit moves, because people aren’t in a position to be able to buy properties fully in cash, or at least a majority aren’t. So, when credit changes, it’s a big shift there,” he said.

“If … the flow-on from these APRA changes, as well as other parts of the borrowing capacities are improved, that could then have a flow-on impact of availability of credit for people to go and lend to buy more property or buy higher-priced property, or compete for the same property to a higher price level due to that available credit that’s there.”

“With loosening up of credit, that could help make a shift in the environment of peoples’ capacities, and since the Sydney market has come down considerably over the last 12 to 18 months, that could then mean people now, when you combine improved confidence, more affordable prices and available credit that may improve or may increase, that then has an impact on flow-on of people being able to go and compete and purchase property, which again, flows onto price.”

3. Incomes

As income is something that the RBA watches as part of its monthly cash rate decision, Mr Paliwal said this is something that investors should be watching too when waiting for Sydney’s market turn-around.

“[Incomes have] been lagging when you consider them in comparison to property price movement. Then when you consider the debt that we have as households, that income-to-household debt ratio is an important number to watch,” he said.

“Fortunately, we are in low interest rate environments. However, over the longer term, those income rises, although are unlikely to happen in large amounts right now, over the longer term, they’re going to be crucial for any sort of major shifts in the Sydney environment, because whilst confidence may be improving, whilst credit could change, that might bring on a few more buyers.

“But over time, income also needs to rise, otherwise prices might not see that same increase, because servicing a loan may not be enough.”

4. Supply

As gauging property profitability can come down to supply and demand, Mr Paliwal puts a large emphasis of supply, especially since Sydney is at record levels of supply at the moment.

This, along with vacancy rates over 3 per cent, has dampened prices in Sydney, he claimed.

However, this is not all bad news, as Mr Paliwal said that supply can be fairly predictable to predict.

“Large ways of supply usually show up in the form of building approvals, and then between the time of building approvals and completion is that time period gap, and then at completion, you’ll understand what’s coming through because of approvals at play,” he said.

“Now, when you compare it to the population that’s come along with it, obviously the supply is really outweighing that at the moment. However, what’s occurred over the last 12 months has been a massive, massive decline in supply approvals.

“So, if those approvals are declining largely, which they have been, and if that trend continues a little bit longer due to those sentiment, confidence, credit, all those factors coming into play, then come [2021]-2022, that could start to mean that supply starts taking a shift, because all these completion starts to go off the books.”

Regardless, supply is not likely to stop in Sydney any time soon, as it is seen as a viable city to live in by many, Mr Paliwal said.

“If that supply has shifts in the later years, which it’s looking like it will in terms of becoming tighter considering approvals have dropped off a cliff, then that could really mean that this current wave of supply that’s quite high may start to dwindle over the next one to three years,” he said.

5. Rental yields

The last major trend Mr Paliwal said was important to follow was rental yields. At the moment, Sydney rental yields have remained low on the average, which Mr Paliwal said was due to Sydney’s generally higher prices and rent not growing at the same rate.

“However, over this declining market trend, that has brought rental yields up because prices have now come down to catch up those rental movements,” he said.

“So, with yields increasing, that could be an area for people to look into from a buy-in point where they may be able to continue to monitor that and buy in at a time where their money goes a little bit further for them from a cash flow perspective.

“It’s also been a big reason why Australians have largely looked at other capitals in other regional cities to try their luck to see what sort of yields are available in line with purchase prices elsewhere, and other cities have fared better than Sydney.”

However, with the Sydney in flux, as price declines continue, rental yields have increased because the rental yield declines aren’t as slow as the price declines.

“So, that’s starting to catch up where areas in Sydney that used to, during the peak, have rental yields starting with a three, and now some areas are starting with a four.

“And so, when you start to see that shift, that might make it an appropriate time to buy in and get a proper moment for your cash.”

While these factors are important to consider together, Mr Paliwal said it is important to remember that any one of the five factors are not necessarily going to turn Sydney around.

“Sentiment is slowly shaping way, credit is a ‘watch this space’ sort of moment, incomes is unlikely to happen in the short term, so it’s much of a longer-term play, and supply is likely to happen over the next two to five years in terms of a tightening,” he said.

“Rental yields, depending on how much further the market moves down, could start to improve that; however, it’s likely to remain low in the Sydney market and Melbourne type markets in comparison to other capital cities.

“When investors are considering that time to buy in Sydney, obviously predicting the bottom is near impossible, but when you combine these five factors, we start to see those shifts in that time could represent a probable buying moment for people to start potentially riding future waves up.”