By Herron Todd White
April 2020

The past five years have provided good evidence of the factors that drive the Sydney property market. Fiscal, regulatory and monetary policies have all played their parts as the wider Sydney market went from strong growth to its largest decline in three decades before rebounding so quickly that the Sydney median price is already knocking on the door of the previous peak. Whilst traditional drivers such as employment levels and the national economic outlook do play a part, these have been fairly stable throughout that five year period as the market fluctuated wildly (in Sydney property price terms anyway). The current COVID-19 epidemic is going to have a negative impact on both of these drivers, so it will be interesting to see what impact this may have on the property market in the short to medium term

Low interest rates were a big driver in the market climbing until mid-2017, despite growing affordability issues as many first home buyers were either priced out of the market or had to reconsider the type of property or the suburb they could afford to buy.

We then experienced tighter lending policies as a result of APRA regulation and the banking Royal Commission which saw the market drop by around 15 percent across Sydney, with some areas dropping by more than 20 percent. Houses were harder hit than units, while the top quartile, excluding the prestige end, experienced the largest falls.

There was a triple boost to the property market in mid-2019, as APRA weakened lending restrictions, the Reserve Bank lowered interest rates three times within a few months and the Coalition government was returned in the federal election. The unexpected election result meant that the planned changes to capital gains tax and negative gearing policy proposed by the Labor opposition, would not eventuate. It is likely properties an

These three factors saw the Sydney market stabilise between June and August and then rise quickly between September and December, recovering around two-thirds of the median price decline experienced during the downturn. Houses and those areas that saw larger decreases during the decline were generally those that rebounded the quickest.

First home owner incentives introduced in January have also seen these buyers re-enter the market in greater numbers, providing a boost to the lower quartile of the property market. This was also the experience during the aftermath of the Global Financial Crisis as low interest rates and significant first home owner incentives saw this part of the market grow quickly at a time when the wider economy was struggling.

The unit market in Sydney has had some additional challenges to deal with over the past couple of years. Whilst prices did not decline as fast as they did for houses, issues around flammable cladding and the highly publicised structural issues of several buildings throughout Sydney have meant increased buyer caution in the new unit market.

Certain suburbs also had a large supply of new units reaching settlement at the bottom of the market after being purchased off the plan at the height of the market. More recently, the supply of new units has slowed and remaining developer stock in completed buildings is now more readily selling, in some cases at prices close to what they were achieving off the plan. It should be noted though that some developers are resorting to incentives or rebates to clear this stock.

Infrastructure spending has also increased in Sydney over the past few years with a number of large projects still underway or planned for completion by the end of the decade. This has helped fuel the local economy and provide a boost to those suburbs which directly benefit from these infrastructure upgrades.

Although clearance rates have remained high in recent weeks, there is no doubt that the COVID-19 outbreak will lead to a short term softening in market activity. According to CoreLogic, there were 749 auctions in the wider Sydney region for the week ending 15 March, down 28 percent from the 1045 auctions held in the week ending 1 March. They also reported that the preliminary auction clearance rate has dropped from 82.6 percent to 74.6 percent over the past two weeks. Despite this, median prices have continued to increase throughout this period.

It is likely that potential sellers will hold off listing their properties in the next few months as Australia goes through an increase and (hopefully) peak in COVID-19 cases. This lack of new stock on the market will likely help hold up property prices.

Inner Sydney/Eastern Suburbs Property Update

The CBD and inner Sydney suburbs are geographically within a relatively small area, however there are many sub-markets at play within these regions. As a generalisation, some of the bigpicture elements that impact on the market include interest rates, availability and ease of finance, affordability, changes to overseas purchasing and oversupply of new units in certain areas.

Interest rate cuts and improving general market sentiment along with a limited supply of established stock in many inner city areas have been some of the main drivers of strengthening market conditions and property prices over the past few months.

With proximity to the CBD, public transport and lifestyle amenities, the inner city is a popular choice for first home buyers. This market segment is currently performing well, with lenders favouring owner-occupiers over investors, interest rates at record lows and first home buyer incentives available from the government.

Upgraders were hit hard when lending was tightened last year, however as interest rates have dropped and APRA regulations have been relaxed, buyers have returned to properties within the $2 million to $3 million bracket.

A parkside residence at 2 Heath Street, Five Dock (below) recently sold for $3.555 million (PriceFinder) after 26 days of its auction campaign (source: RP Data). The property is built to a high standard with basement parking and enjoys views over the adjoining park.

Downsizers are also cashing in on the rising market, selling large suburban homes or inner city terraces and often entering the premium unit markets within the inner city, such as Jackson’s Landing at Pyrmont or Darling Point. The properties typical of the downsizer market are often tightly held, causing increased competition when one is offered to market.

Investor activity is improving due to relaxing APRA regulations and decreases to interest rates. However, the recovery occurring within this market segment is generally more limited, even more so within modern medium and high density precincts.

Some aspects are having noticeable effects on certain areas however, for example, interest rate reductions appear to be encouraging more activity and price growth particularly within the owner-occupier inner east and inner west suburbs, however this has not been as noticeable within higher density investor-focused suburbs such as Zetland and Waterloo in particular.

The number of new unit developments has slowed, largely as a response to tighter finance for developers. Sales agents are also reporting limited numbers of buyers for off the plan units due to the loss of confidence in the construction of such complexes after multiple incidents of major defects across Sydney. That being said, many complexes are under construction with existing pre-sales and this relatively concentrated supply pipeline of generic or investor grade stock is also causing the recovery within this market segment to be slower.

The slow down within this market segment is driving larger developers (with more financial clout) to improve their product offerings, such as Crown Group which has placed significant emphasis on the architectural features of recently settled complexes in Green Square and the CBD. Unfortunately some developers have been forced to cut costs and have delivered products that have underwhelmed their off-the-plan purchasers

Infrastructure projects are also significant within these areas; the recent completion of the light rail from Circular Quay to Randwick, which has caused an uptick in interest throughout the CBD and Surry Hills, is translating to higher auction clearance rates and price growth. Furthermore this is spurring growth in the neighbouring bridesmaid suburbs of Redfern and Darlinghurst. Furthermore, development around the Barangaroo precinct at the northen end of the CBD has improved the marketability of units in neighbouring Millers Point and Dawes Point.

The WestConnex Motorway project is also having some negative connotations for certain inner west suburbs such as Rozelle and Lilyfield in particular due to construction sites, interchanges, ventilation facilities and the unknown associated impacts for properties nearby.

Sutherland Shire Property Update

Downsizers are playing a significant part in driving the local market in the Sutherland Shire, as they sell their larger family homes for smaller threebedroom units or duplex homes.

These types of properties appeal to the downsizer market as they cash in on their large family home for a more modern and low maintenance alternative. Prestige units located in central areas near transport and shops have always been popular with the empty nester demographic and more recently, low maintenance duplexes with a lift, minimal stairs or the ability to have a bedroom and bathroom on the ground floor are also proving popular. We have also noticed a trend in the downsizer market to demolish the existing family home and build a duplex pair, staying in one and selling or renting the other.

Upgraders have also been active in the market over the past six months, with young families moving from a unit or townhouse to a detached dwelling or duplex. Upgraders are looking for something near transport, schools and shops, and often prefer modern or renovated properties so that they can move in with nothing to do. This is a change to what we have seen in the past as this demographic tended to prefer a dwelling they could renovate themselves and therefore increase the value.

First home buyers are generally attracted to twobedroom units along the railway line, particularly from Sutherland to Cronulla. However the recent increase in new unit complexes around the Miranda, Kirrawee and Caringbah areas created an oversupply with developers having to implement incentives such as cash back or stamp duty rebates to clear the remaining stock.

This oversupply issue has started to ease in recent months as the number of complexes under construction has reduced. Despite this we are still seeing examples of units that were completed mid 2019 for sale, with developers offering incentives to clear the remaining stock.

Speak with a Sutherland Shire Mortgage Broker today.

Northern Beaches Property Update

The first home buyer market is more sensitive to general economic factors such as interest rate movement and fiscal policy. Localised factors such as supply levels also play a part, with affordability being a key market driver. Brookvale is a popular suburb for first home buyers, having one of the lowest median unit prices of $745,000 as at December 2019, in comparison to the Northern Beaches median of $875,000 (source: CoreLogic). INFOGRAPHIC: Median prices (Dec 2019) Brookvale $745,000 Northern Beaches $875,000. The area has seen strong development over the course of the past decade, resulting in a healthy level of stock that has consequently placed downward pressure on values. Northern Beaches building approvals dropped drastically in 2018/2019 and are tracking at similar levels for the 2019/2020 financial year. There is a clear correlation between volume levels and building approvals and we would anticipate these factors to impact the first home buyer unit market.

For the upgrader market, we’ve seen strong demand from buyers outside of the Peninsular really driving this level of the market. Realestate. com.au reported that 2019 was the first time more outside buyers were searching for properties on the Northern Beaches than those within. The inner-west and eastern suburbs were key regions, with factors such as infrastructure upgrades including the B-line providing faster commuting options to the CBD, increase in flexible working arrangements allowing individuals to work from home more frequently, and the affordability of the area in relation to other Sydney regions proving key factors in this shift.

At the prestige end, Palm Beach is synonymous with prestige and a large number of these properties are owned by high net worth individuals from outside of the Northern Beaches, however there is also a strong local prestige market along the coastline.

67 Edgecliffe Boulevard, Collaroy Plateau is currently on the market through Knight Frank with a reported initial guide of $10 million, roughly $5 million above the suburb record. This brand new luxury asset is sure to appeal to both local and international markets due to the ultra-modern finishes, unique position and unbeatable views.

Whilst we have not seen any recent change in market sentiment and values to date, the outlook for the prestige sector remains rather uncertain. If the current global economic turmoil continues, we consider this will likely have a negative impact on demand and value levels.

Speak with a Northern Beaches Mortgage Broker today.

Western Sydney Property Update

Traditional drivers of the western Sydney property market include interest rates, the availability of credit, affordability, employment and infrastructure spending.

The first home buyer market has seen a bounce back in recent months with many local agents noting an increase in buyer activity. This can be attributed to continued low interest rates and some confidence returning to the market after a period of decline.

St Clair is a suburb within the Penrith LGA and is well positioned within the first home buyer’s price range. With a $662,000 current median dwelling price (source: CoreLogic), this suburb offers buyers detached brick dwellings on slightly larger parcels of land compared to their more easterly neighbouring subdivisions.

A St Clair dwelling recently sold for $642,000 and comprised four bedrooms, one bathroom and a single garage on 568 square metres of land.

Upgraders rely on the strength of the first home buyer and entry level market to allow them to secure the right price in order to upgrade. Traditional areas for upgraders have been new estates with low maintenance blocks such as in Box Hill in the north-west and Leppington in the southwest. These new estates allow local upgraders the opportunity to buy a larger modern house with quality inclusions.

A recent sale in Box Hill of a four-bedroom, twobathroom home with quality inclusions on a low maintenance 375 square metre block achieved a price of $1.01 million.

Prestige

The prestige market, generally considered to be above $5 million in Sydney, has tended to move differently to the wider market. As the wider market bounced back quickly after the GFC on the back of low interest rates and government incentives for first home owners, the prestige market saw significant price declines as share markets and executive bonuses were hit hard. On the flip side, the prestige market was generally immune to the recent wider market decline between mid-2017 and mid-2019, with buyers in the prestige market not as susceptible to the tighter lending policies which led to the downturn.

Given the GFC experience, there must now be some concern for the prestige market around the current COVID-19 pandemic and its effect on share markets and both local and world economies. Prestige agents however are currently observing significant demand in the prestige space, particularly at the lower end, in the $5 to $7 million bracket.

An example of this demand is a property in Bronte which sold through Phillips Pantzer Donnelley just five days into its auction campaign. The renovated, three level, semi-detached home on 536 square metres of land sold in early March for $5.48 million. The selling agent advised that this was a common experience in this price range, with a large proportion of similarly priced homes not even making it to listing, as agents match unsuccessful purchasers to potential sellers of other properties.

Another example of the current buoyancy in the prestige market is the recent sale of 8/41-43 Middle Head Road, Mosman. The property reportedly sold for $6.9 million in the middle of February and was only on the market for 22 days (source: RP Data). This property last transacted on 3 March 2018 for $5.675 million with no obvious improvements made between sales.

The Sydney property market is considered to be a safe market to invest in compared to others around the world and with the Australian dollar falling significantly over the past month, interest from overseas purchasers and ex-pats is also likely to strengthen.

Whilst there may be a softening of market conditions over the coming months as the number of COVID-19 cases in Australia increases and (hopefully) peaks, there are no current signs to suggest that there will be any long term downturn for the prestige market.

Speak with a Sydney Mortgage Broker today.

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DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.