Experts dubbed 2019 as “the year that new property market records were set” following the fall and subsequent recovery of the biggest real estate markets in Australia. How will Sydney properties fare in 2020?
CoreLogic’s head of research Tim Lawless said that the year 2019 can easily be summed up as “a year of records”.
“In 2019, we saw the housing market move through the largest and longest correction on record, followed by a fast-paced rebound in values through the second half of the year. Housing turnover fell to record lows in 2019, as did new advertised stock levels,” according to him.
“Interest rates reduced to levels previously unseen, while the concentration of investors in the market also plumbed new depths.”
Savills’ director of residential Chris Orr pointed out that the residential market in 2019 saw a slow start, with a cautious market coming off the back of years’ worth of price declines.
“With a NSW state election in March and subsequent federal election in May, buyers and sellers were in a standoff until results were clear, given the proposal of negative gearing changes that would severely impact the ongoing feasibility for many to invest in real estate,” he said.
Then, Australia witnessed one of the fastest recovery cycles, “with housing values bouncing back rapidly over the second half of the year, led by Sydney and Melbourne where values are around 9.5 per cent higher since finding a floor in May.”
According to Mr Orr: “After a Liberal win on both fronts, we began to see more confidence in investment and a willingness to transact, which was further encouraged by the APRA changes to both the interest-only loan cap for banks as well as the way banks were assessing borrowing capacities, which increased potential borrowing power for buyers.”
Premium-value suburbs in Sydney and Melbourne, in particular, have led the charge towards recovery. Seven of the top 10 best-performing suburbs for growth show a median value of at least $1.1 million.
Overall, 2019 has successfully ended in positive annual growth territory, with capital city home values around 2.2 per cent higher over the full calendar year – a remarkable difference from 2018, when capital city housing values were down 6.1 per cent.
Despite uncertainties, experts anticipate confidence levels continuously rising in 2020, particularly in Sydney, where limited stock levels are the main driver of price growth.
Mr Lawless said that markets are likely to go into “recovery mode” in the new year as housing prices catch up and ultimately overtake previous record highs.
However, the rapid rate of capital gains seen over the second half of 2019 is also expected to lose steam as stock levels rise, affordability deteriorates and the labour market weakens. Ultimately, while the pace of growth will remain positive, it will be slow for the most part, according to the property expert.
On the brighter side, as housing values and housing demand rise, building approvals are expected to trend higher, leading to recovery of the weak residential construction figures late in 2019.
Additionally, Mr Lawless said: “Lower interest rates should support housing demand; however, lower rates could possibly dent confidence as households [are] spooked by concerns around the economy and household finances.”
“First home buyer numbers [are] likely to fade as affordability impacts participation in the market, but investors are likely to be more active, chasing capital gains and opportunities for positive cash flow considering the inverted spread between mortgage rates and rental yields.”
The Australian property market, for the most part, saw a strong finish for the 2019 calendar year.
According to CoreLogic’s national home value index, dwelling values rose by 1.1 per cent over the month of December and by 4.0 per cent over the quarter, marking the fastest rate of national dwelling value growth over any three-month period since November 2009.
Over 2019, Australian dwelling values tracked 2.3 per cent higher, with five of the eight capital cities and five of the seven “rest-of-state” regions seeing the year out in positive growth territory.
Sydney and Melbourne recorded the highest annual capital gain among the capitals, with both cities posting a 5.3 per cent rise in dwelling values over the year. Meanwhile, Regional Tasmania, where values were 6.1 per cent higher over the year, led the regional markets.
Dwelling values were down in Darwin by 9.7 per cent, 6.8 per cent lower in Adelaide over the year, as well as across regional Western Australia (-11.8 per cent) and regional NSW (-1.1 per cent).and 0.2 per cent lower in
“The positive year end results mask what has been a year of two distinct halves – we saw capital city dwelling values fall by 3.8 per cent over the first six months of 2019 and then rebound by 7.0 per cent over the second half of the year.”
“The housing value rebound was spurred on by lower mortgage rates, a relaxation in borrower serviceability assessments, improved housing affordability and renewed certainty around property taxation policies post the federal election. Lower advertised stock levels persisted providing additional upwards pressure on prices amidst rising buyer activity,” according to Mr Lawless.
The Real Estate Institute of Australia (REIA) revealed that the weighted average median house price for the eight capital cities has increased to $743,776.
Ultimately, the increase was driven by Sydney and Melbourne, where house prices have consistently increased over the past months while other capital cities saw declines.
REIA president Adrian Kelly said: “The weighted average median price for other dwellings increased to $577,135 over the quarter, with prices increasing in Sydney, Melbourne, Adelaide and Hobart. Prices remained stable in Brisbane and Canberra and decreasing in Perth and Darwin.”
Several socioeconomic factors are expected to impact the Sydney property market in 2020. How can investors maximise opportunities and mitigate risks?
Real estate agents believe that Sydney, along with the rest of NSW, will see an increase in the number of downsizers in 2020.
According to Raine & Horne’s executive chairman Angus Raine, the next 12 months are shaping up to be the opportune time for empty-nesters in NSW seeking to downsize into a more “suitable” home.
“The key indicators favour downsizers in many Sydney markets with the number of properties for sale as much as 10-20 per cent fewer than this time last year, while many suburbs are achieving auction clearance rates of close to 80 per cent,” Mr Raine said.
“Meanwhile, buyer demand is up by as much as 30 per cent in some Sydney suburbs, while average Sydney property values have increased by 6.2 per cent over the last quarter.”
In the current market, downsizing could allow investors and empty-nesters to free up significant seven-figure sums, according to him.
Raine & Horne Concord’s principal Paul Pettenon identified Sydney’s Inner West as one of the markets with a significant level of demand from “committed buyers” – a fact illustrated by high clearance rates of up to 80 per cent.
This demand will benefit downsizers as house prices have consistently risen by an average of 8 per cent across the region over the past three months.
Further explaining the downsizing trend, Mr Pettenon said that downsizers who are making a move are selling in Concord, Concord West and Canada Bay for $2 million and “moving to contemporary three-bedroom apartments valued at $1 million in Breakfast Point, Pelican Point and Phillips Landing”.
“Inner West empty-nesters prefer to downsize locally to stay close to family and familiar services such as Concord Hospital,” Mr Pettenon said.
Apart from the downsizing trend, lower interest rates, loosening of banks’ lending requirements and continued foreign buyer interest will also play a big part in how the property industry will fare in 2020, according to Savills Australia and New Zealand’s CEO Paul Craig.
Australia will continue to attract foreign capital supported by a cheap Australian dollar, positive yield spreads to debt enabling positive funding from leverage and the lag effect of cap rate compression due to some skepticism of further runs in yield as the country witnesses a record yield lows/highs in valuation, he said.
Further, 2020 will see the commercial office sector continue to compress and the industrial sector continue to attract capital.
“We are concerned about the low growth in rents; however, the inbuilt rent bumps of 2-3 per cent will support overall,” he said.
“Retail is an interesting asset class and, perhaps with tough retail sales turnover, a forgotten asset class with opportunities… Retail is worth looking at, especially supported by population densification and rising or changing socioeconomic conditions of the surrounding demographic.”
RobertsDay’s co-founder and director Mike Day said that drop in car ownership, smaller houses, walkability impacting property prices, residential blocks atop shopping centres and “mini Melbournes” in outer suburbs are some of the 2020 trends that could have a flow-on effect on the nation’s property market.
Where communities used to be built around vehicles, the new year will see them built around pedestrians, cyclists and “light” modes of public transport such as e-bikes, trams and buses. Millennials and Baby Boomers will drive the demand for these changes, according to Mr Day.
Other trends that are likely to impact the property market in 2020 are the growth of “mixed-use” developments and the emergence of “overlapping use” buildings; growth in sustainable and affordable mobility on demand in suburbs; increase in the supply and demand for townhouses; the rising significance of “Walk Score”; and a separation of roads, bicycle paths and pedestrian paths.
Ultimately, whatever takes place in the next 12 months, as the beginning of a new decade, will set a precedent for the next 10 years, according to Mr Day.
“As our population grows and innovative new technologies and ideas emerge, future generations will look back at the 2020s and point to it as a decade that reshaped our cities – especially our outer suburbs – more than any other decade in the last century.”
As the Sydney property market recovers, investors are advised to be mindful of possibly confusing data.
Right Property Group’s Steve Waters said that it could easily be tricky to navigate the tightest Sydney market “we’ve seen in a very, very long time”.
Using the example of real estate data on Sydney could be confusing as the NSW capital emerges from a slump., Mr Waters explained how
“In terms of house sale, we’ve had a median quarterly growth of -2.82 per cent. So, it’s gone down a bit there. Median 12-month growth of negative 11.65 per cent , so it’s also gone down a touch. Median three-year growth of -2.82 per cent. And a median five-year growth of 25.45 per cent,” Mr Waters said.
“If you were to move on elsewhere throughout any parts of Sydney, you’re going to get that type of data where on the surface it’s quite conflicting. But it’s not until you dig a little deeper, until you really find out some truth behind it.
“In relation to Seven Hills, I’d probably suggest that there are some streets, some types of houses there that even contracted a little bit more than what that data is actually showing. I’d also suggest that the rebound over the last sort of three months has been quite stronger than what the data is showing as well, because remember, it’s just averaging out.”
The current low volumes could be creating a “perfect storm” of people wanting to buy property with nobody wanting to sell.
“Not too many people want to sell. And the people that don’t want to sell, don’t want to replace property in a market where it’s hard to buy as well, right? So, this is where we live right now,” he said.
In order to ensure growth and risk mitigation, CoreLogic advised investors to be realistic about the changing market as they determine the best strategy for them this new year.
Among their top 10 tips for smart property investment are:
1. “Do your homework”
2. Consider the location
3. Determine whether you’re going to build
4. Understand future ROI opportunities
5. Weigh up the type of investment
6. Determine possible renovation work
7. Consider DIY work
8. Walk away if you have to
9. “Sweat the details”
10. Protect your investment
“For 2020, we’re likely to see markets in recovery mode as housing prices catch up and then overtake their previous record highs; however, we expect the rapid rate of capital gains seen over the second half of 2019 to lose steam as stock levels rise and affordability deteriorates,” Mr Lawless said.
Moving forward, the work on the expansion of the Sydney Metro is expected to continue to attract investor interest, particularly in the suburb of and other surrounding areas, according to Ray White’s Between the Lines research. Pacific Highway has already seen a benefit to the transport growth.
As the Crows Nest Metro Line nears completion in 2024, the area is expected to profit immensely due to increase in buyer demand, Ray White Commercial NSW Sydney North director Scott Stephens said.
“This precinct is likely to be the greatest to benefit from the metro rail link to reactivate the high number of vacancies, providing a mix of food and services to cater for the various users of the metro throughout the day.
“Quality assets along Pacific Highway average gross face rents of approximately $725-$775 per square metre, while those in the suburban Willoughby Road precinct are achieving closer to $1,000 per square metre gross,” Mr Stephens highlighted.
Similarly, Sydney’s eastern suburbs will emerge as property hotspots in NSW as they boast average prime retail yields hovering around the 4-to-5-per cent-mark, thus resulting in strong demand from yield-chasing investors who have faced continued yield compression in the office and industrial markets.
Retail strata properties are also becoming a new talking point across the region, indicating that attention is being directed to less expensive areas as investors look to capitalise on infrastructure improvements such as the Randwick Light Rail, which has driven demand for surrounding pockets such as Double Bay and Woollahra to the traditionally popular and more expensive suburbs like Bondi.
Savills Australia’s executive metropolitan sales executive Ollie Ridley believes that investors are now becoming more creative as purchasing retail in these coastal hubs is not simply about securing a long-term income stream but also about redevelopment potential or the ability to be able to spark conversion with the implementation of a new tenant.
Apart from an unprecedented pricing uplift for well-located retail properties, he also expects investors to continue favouring the commercial property market in 2020 as the probability of further interest rate cuts is soon to become a reality.
Starr Partners’ CEO Sydney suburbs that are worth keeping an eye on this new year – most of which features significant infrastructure such as public transport, schools and universities, a family-friendly atmosphere, budding gentrification and affordable housing.Driscoll enumerates other
For those looking to implement a long-term play, RiskWise Property Research CEO Doron Peleg said that certain suburbs have holding periods over 20 years.
Talking about the different reasons people choose to hang onto properties longer, Mr Peleg explained: "It is well demonstrated that the long-term approach is very effective, and with transaction costs being extremely high, this provides negative incentive for home owners.”
“A couple of other reasons not to sell are that the primary place of residence is not subject to land tax and, in most cases, is also below the means testing threshold for retirees.”
Due to huge population growth in Sydney, as well as the systematic undersupply of family-suitable properties, he said that it is “very likely” holding periods would continue to increase as long-term price growth was evident.
“Obviously, the greater the holding period in strong markets, the greater the equity people have, so with property prices making a strong comeback, ultra-low interest rates, a more relaxed lending environment and auction clearance rates sitting above 70 per cent, it pays owners to sit back and see what happens.”
Moving forward, the NSW property market will be supported by good population growth, strong economic fundamentals, solid economies and healthy job markets, as well as solid economic growth and high government spending and private capital expenditure.