The Smartline Report – August Edition

The month in review: Sydney

By Herron Todd White
August 2016

The factors that influence property demand within Sydney include regulatory and lender policies for investors and overseas purchasers, interest rates, currency fluctuations, infrastructure and overall buyer confidence.

In mid 2015 the Australian Prudential Regulation Authority (APRA) tightened the policy on lending practices for investment loans. These loans now have a slightly higher interest rate than owner occupier loans along with lower loan to value ratios. These changes were implemented to create uniformity across lenders, stabilise the property market and ensure the investment loans can be serviced in case of rising interest rates. Some lenders have also stopped lending to non-residents and temporary visa holders and at the same time have implemented restrictions to Australian citizens whose main income source is from overseas by limiting the loan amount to 70% of the market value. These changes have significantly impacted investor demand across the Sydney market, particularly for new units.

Official interest rates are at a historic low of 1.75% since the last rate reduction in May of this year. It is predicted by a number of economists that there may be up to another two interest rate decreases this year which could possibly stimulate the property market in the lower and middle price brackets.

Clearance rates remain fairly high across Sydney (76.2%) for the week ending 17 July 2016 (Core Logic Property Market Summary) compared to 79.1% for the same time 12 months ago, suggesting demand is still strong. However the number of total auctions has decreased from 794 to 459 over this same period, showing that slowing demand is being masked by falling supply. Property investors appear to have held off any property decisions until after the federal election due to the negative gearing changes proposed by the Labour Party. The Australian dollar can also influence demand in the foreign investment market.

The Australian dollar has fluctuated over the past 12 months and the foreign market has remained stable over this time. The prediction of interest rate decreases, which would likely lead to a lower Australian dollar, could also have an impact in the coming months. The foreign investment market has had a large impact on brand new units and dwellings across Sydney and this market would be affected if the Australian dollar was to significantly change, whether an increase or decrease.

Inner and mid city
After a long period of minimal infrastructure spending in Sydney, there are now quite a few projects underway which will have an impact on demand for property in the areas to benefit from that infrastructure. The light rail that goes from Dulwich Hill to the heart of the city has helped fuel demand in the inner west, which has resulted in an increased amount of new developments under construction in the area. Another line under construction from Randwick and Kingsford to the city will also benefit those suburbs and others including Kensington and Centennial Park.

The proposed WestConnex, which has been labelled the largest integration transport project in Australia, will also benefit demand in a number of suburbs in Sydney’s west by providing better access to the CBD and Sydney airport.

The prestige residential market in Sydney is generally considered to be properties with values in excess of

$3 million. These properties tend to be located within the eastern suburbs and eastern beaches, lower and upper north shore, northern beaches, some waterfront localities in the southern suburbs and the larger rural residential estates in the north-west areas of Sydney.

The prestige residential market in Sydney tends to move separately from the majority of the residential market and is affected by a different set of drivers and market influencers.

For example, interest rates, while a major influencer of the standard residential market, play a far lesser role in determining prestige market performance.

Demand for prestige residential real estate originates from both local and overseas high net wealth buyers and by that definition alone, indicates that this market is influenced by not only local conditions, but takes into account the local impact from issues affecting the global stage.

Recently, forces including a fluctuating equities market, continuing instability in global economic conditions, low levels of business and consumer confidence and ongoing weakness in business conditions, along with uncertainty surrounding the impact of the Federal election, continue to impact both demand for and performance of the prestige market.

With the Australian dollar remaining at reasonably low levels, demand from overseas and ex-pat purchasers has remained high, although with the recent introduction of a NSW stamp duty surcharge for foreign purchasers (an additional 4% charged from 21 June 2016) and a new land tax surcharge (0.75%) to be introduced for the 2017 tax year, there are concerns that overseas investors may tread more warily when considering Sydney prestige residential real estate.

Also, the impact of Chinese buyers (prevalent in the Sydney prestige market over recent times) may also weaken with ongoing difficulties surrounding moving cash out of China due to changes to capital control regulations and local bank and regulatory changes surrounding loans obtained based on overseas income.

Outer western Sydney
The large driver in this region of Sydney has been the shortage of lot creation to cater for Sydney’s ever expanding population base. This has been hampered by the lack of essential services (mainly town water and sewer) as well as transport links and amenities (parks, shopping and schools). This region is driven firstly by price and its relative affordability compared with the mid and inner rings. The NSW Government through its Sydney Region Growth Centres Plan 2006 earmarked thousands of acres previously zoned for rural residential uses located along the fringes for re-development. The past ten years has seen a snowball effect with infrastructure roll out being delivered.

This has had a strong effect on the market with first home buyers purchasing newly created stock in the form of house and land packages located in re-developed areas such as Riverstone, The Ponds, Schofields, Ropes Crossing and Bungaribee. These packages generally comprise a new product located on a sub 450 square metre parcel within a planned community. These first home buyers have been able to capitalise on the rapidly rising prices along this corridor and shift towards the traditionally highly desirable regions which surround these growth centres such as Castle Hill, Kellyville and Bella Vista which were previously unaffordable. The past 12 months has seen the long awaited north-west rail link reach its final construction stage and buyers who previously steered away from the region due to the lack of infrastructure are being drawn to the area.

The confidence of potential buyers in the market plays a large part in demand for property. The media coverage the property market receives, whether positive or negative, strongly influences buyer confidence.

As the winter months are generally quieter for property transactions and now that an extended election campaign is behind us, the property market should see an increase in market activity as we head into spring.

Please note that information in this publication is subject to change without notice. Smartline assumes no responsibility for any errors, omissions or mistakes in this document. © Smartline Home Loans P/L 1999 – 2016. Australian Credit Licence Number 385325

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