Sydney April 2018

The month in review: Sydney

By Herron Todd White
April 2018

In a market as large and diverse as Sydney’s, there are quite a number of influencing factors which play a part in driving the residential property market. Some factors are more relevant to specific sub-markets, be the location or price point, while others are more likely to influence the market as a whole. While political and economic factors are the significant contributors, media coverage also plays a part in influencing buyer and seller sentiment which can fuel property market movements, particularly in a rising or falling market.

Interest Rates

Interest rates have historically played a large role in the fortunes of property markets. In Sydney, it is generally the lower and middle markets which are more sensitive to interest rate movements. Over the past few years, the greater western Sydney property market has witnessed a sustained period of positive growth, with only recent times beginning to show signs of cooling. This growth was as a result of a sustained period of low-interest rates, demand outstripping supply in many areas, overseas buyers entering the market, tax incentives, media interest and an increase in values in the entry level pushing up the middle and upper levels of the market.

Certain numbers played a big role in the growth. Amongst other things, one key number contributing to the success of this market was the interest rate figure. Investors and first home buyers have flocked to the western suburbs, like many other areas, to buy more affordable investment properties and first homes. The current cash rate of 1.5% since September 2016 has given potential buyers the ability to enter the property market for the first time and has also incentivised investors.

We do note that any significant increases in the cash rate may have flow-on effects to the home loan market leading to the potential for more distressed sales as homeowners and investors alike may struggle to meet larger repayments on highly geared mortgages. This could lead to pockets of Sydney experiencing a sharp decrease in values in the short term.

Investor Lending

In recent years, the banking regulator APRA brought in specific measures which made it more difficult for borrowers, particularly investors, to get approval for a loan. This was an attempt to cool a number of heated property markets throughout the country, particularly in Sydney and Melbourne.

In March 2017, APRA informed all lenders to curb new interest-only loans to 30% of total residential mortgage lending and tighten limits on loan-tovalue ratios. The banks were also instructed to keep investor lending comfortably below the 10% annual growth rate as per instructions are given in December 2014. In both cases, the announcements by APRA appear to have corresponded to changes in the Sydney housing market.

The graph below shows the level of investor housing credit growth, with a gradual to sharp increase noted between 2012 and 2015 and the post-announcement fall evident in early 2015.

Sydney 1

Data from the Australian Bureau of Statistics show a modest decline in the quarterly growth in the Sydney housing market which fell from 3.4% growth between the September to December 2014 quarter to 3.1% growth between the January to March 2015 quarter. This growth rebounded to 8.9% in the following quarter.

The following graph highlights the level of interestonly lending with a sharp fall noted following APRA’s March 2017 announcement.

Sydney 2

On this occasion, data from the Australian Bureau of Statistics shows a clearer pattern. Over the January to March 2017 quarter, Sydney had a quarterly growth rate of 3%. The following quarter this reduced to 2.3% growth and by the July to September 2017 quarter, there was a decline of 1.4%.

It would appear that the APRA restrictions have had the desired effect in Sydney, cooling a market which is more exposed to investors.

Infrastructure

There is a significant amount of infrastructure under construction or to commence in the short to medium term, including WestConnex, the CBD and South East Light Rail, the North West Rail Link, the Northern Beaches Hospital and the Western Sydney Airport just to name a few.

The $8.3 billion North West Rail Link has seen suburbs in the north-west such as Cherrybrook, Castle Hill and out to Rouse Hill benefit from stronger capital growth than surrounding suburbs. Whilst considered long overdue, this investment has been a large factor in the popularity of these suburbs. When major tunnelling began in 2014, the median dwelling value for Cherrybrook was $1.05 million. Now four years later, the median value for dwellings is $1.55 million (realestate.com.au).

For the northern beaches suburbs, the now $2.1 billion (according to the Sydney Morning Herald) Northern Beaches Hospital currently under construction has seen surrounding suburbs enjoy strong growth over the past few years. Originally announced in 2013, contractors were only revealed in 2014 and since then the area has seen extraordinary growth. In Frenchs Forest, the median dwelling value in 2014 was $1.1 million. Four years later the median value for dwellings is now $1.65 million (realestate. com.au). Whilst this growth can’t all be attributed to the new hospital, it has shown once again that sorely needed infrastructure can contribute to the growth of local areas.

The Western Sydney Airport to be built at Badgerys Creek is expected to cost around $5.3 billion. This infrastructure commitment as part of the planned western Sydney growth precinct has ignited the south-west of Sydney with a boom in house and land packages, as well as strong acreage sales over the past few years, thanks to newly rezoned areas and land earmarked for future rezoning. Areas such as Austral and Leppington have had large areas rezoned and subdivided. Three-bedroom houses on 300 square metre blocks are now selling for around $630,000 in Leppington.

This is a huge change to the area which was once only rural lifestyle and market gardens. With the Badgerys Creek site formally announced by the federal government in 2014, the area surrounding the airport has been recently named the Aerotropolis due to the substantial investment planned, particularly with technology, education and advanced manufacturing all linking up with these new residential areas.

Supply

While there has been a significant increase in the supply of new units and new housing estates in Sydney over the past five years, in many cases it did not make up for the significant shortfall which had built up in previous years. According to an article in the Huffington Post, the lack of supply of housing in Sydney may have pushed house prices up by as much as 70% over the past five years. This is more apparent in the inner ring and coastal suburbs where the opportunity for new land releases is few and far between.

It is expected that Sydney’s population will grow by 1.74 million people by 2036 (source: www.planning. nsw.gov.au). This will only add pressure to the available supply across Sydney.

Whilst there have been a number of new land releases in recent years, particularly in the southwest and north-west, these are not meeting the current and expected level of demand. The state government has forecast that 664,000 new dwellings will be needed by 2031 to cope with the additional population growth (www.abc.net.com.au).

The lack of supply has seen some councils approve redevelopment and zoning changes to allow for higher density development to meet the current demand. This has been evident in councils such as Sutherland Shire and Canterbury Bankstown where minimum requirements for duplex subdivisions have been eased, while other councils are allowing smaller allotments in new land releases or increased floor to space ratio and height limit allowances for unit towers.

Vacancy rates, supply and rental price levels

Some of the key factors to consider when looking at investing in property include vacancy rates and supply levels, which may have a significant impact on the potential rental price achieved and overall performance of the property.

Rosebery is a city fringe suburb, located six kilometres south of the CBD. Older style 2-bedroom units or modern 1-bedroom units rent for approximately $600 per week, with modern, higher standard 2-bedroom, 2-bathroom units usually commanding around $700 to $800 per week depending on overall size, position, views and quality of the development.

Rosebery has seen multiple new unit developments completed in recent times and as such, supply levels are increasing. This has been reflected in the slightly increasing vacancy. SQM Research shows that there were approximately 73 vacant properties in February 2018 with vacancy rates at the end of February of 1.9%. Vacancy rates even spiked at around 3% during the later months of 2017. While still at healthy long-term averages, this indicates an increased amount of vacant properties since January 2017 when there were approximately only 40 vacant properties.

Sydney 3

Another example is Wentworth Point which is located approximately 16 kilometres from the CBD and has had an influx of high-density apartment buildings within recent years. Vacancy rates peaked above 6% during some months of 2017 and as at the end of February 2018 vacancy rates were at approximately 3.5% according to SQM Research.

While vacancy rates and supply levels appear to be trending slightly higher, certain pockets and property types are above long-term averages for Sydney.

The Real Estate Institute of New South Wales (REINSW) issued vacancy rates as at January 2018 which indicates inner Sydney is at 2.1% and middle and outer regions are at 2.9% and 2.2% respectively.

Sydney 4

Given the amount of existing, under construction and future unit supply within Sydney, we consider vacancy rates and supply levels to be a key market indicator of property performance. Anyone looking at buying into this market segment should consider such factors, particularly when purchasing for investment purposes given that any vacancy period will have a direct impact on overall returns in the short term at least.

Vacancy rates are likely to continue at similar trends based on the amount of supply currently available and we expect the supply of new unit developments to slow over the next 12 to 18 months. However, if construction of high-density developments was to continue at record levels then there is likely to be an increased risk of further oversupplied pockets of Sydney which could put further downward pressure on value and rental levels until demand catches up. On the other hand, unique or quality properties within sought after locations are still in high demand and therefore likely to continue to demand premium rents with little or no vacancy periods.

Net Migration

It is well known that both overseas immigration and interstate migration can have a major impact on property prices. This has been clearly evident in Sydney, with overall population growth resulting in the undersupply of housing and consequently higher property prices. There are many reasons for this increased population, with Sydney’s extremely strong job market being the main pull factor.

Looking at interstate migration, it has been well publicised that affordability of the Sydney housing market is at a historic low. It is starting to become evident that although the Sydney job market remains extremely strong, affordability has started to lead to an increase in net migration out of Sydney.

There is also the added factor that during a peaking property market, Sydney homeowners are taking the opportunity to cash in and move to more affordable locations.

The graph following shows that historically, net migration out of New South Wales increases as Sydney house prices increase in comparison to other capital cities.

Sydney 5

Although it appears there is a trend of increasing interstate migration out of New South Wales, it is expected that overseas immigration and natural growth will lead to a continued overall strong growth in population. If this expected population trend does continue, it again comes back to the fundamental issue of demand and supply, something Sydney has struggled to get right in recent times. This is also the main argument as to why most researchers don’t believe that we will see any major housing collapse in Sydney anytime soon.

Unemployment

The unemployment rate has been fairly steady in New South Wales since the year 2000, sitting within a range of 4.7% to 6.3%. The highest recent peak was in January 2015 with an unemployment rate of 6.2% at a time when the Sydney median property price was undergoing significant growth. There is little doubt that if the unemployment rate was to rise to similar levels as the early 1990s it would have an effect on property prices. However, when the unemployment rate sits within the band it has since the turn of this century, it doesn’t appear to have much impact on property prices.

Sydney 6

Prestige Market

The prestige market in Sydney has received global attention and Sydney is certainly on the radar of the world’s elite for its stable economy, proximity to Asia, world-class health care and education and yearround climate.

The demand from overseas purchasers appears to have softened over the past 12 months. Some factors that have contributed to this include the increase to the New South Wales stamp duty surcharge for foreign purchasers (from an additional 4% to 8%) and an increase in the Land Tax surcharge (from 0.75% to 2%) for the 2018 tax year.

Despite this, the 2017 Global Wealth Migration Review showed that Sydney is currently the world’s number one hot spot for millionaire immigrants and more of the uber-wealthy are buying second homes here. Australia is attracting more high net worth individuals as migrants than any other country according to an analysis by consultancy New World Wealth in its 2018 Global Wealth Migration Review.

The prestige market is considered less dependent on affordability and instead, the market is driven by global flows of wealth and a supply versus demand balance.

In summary, the factors that will help stimulate the prestige market include the Australian dollar, domestic and international share markets, business performance, business confidence, company profits, Chinese interest in trophy homes, buyer activity from ex-pats and migration interest under the Significant and Premium Investor Visa Program.

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.