Sydney February 2017

The Smartline Report – February Edition

The month in review: Sydney

By Herron Todd White
February 2017

2016 was a year of contradictions: an unsteady start with much speculation about the future; low investor confidence; higher bank interest rates than the RBA alongside progressively strong clearance rates; short selling periods and continual record breaking of the median price.

The year ahead is predicted to be another year of steady growth. The market in 2016 continued to produce high auction clearance rates regularly above 80% (Australian Economy Extract) across the greater Sydney metropolitan suburbs. This can be attributed to low stock levels and continued buyer demand.

We expect that this level of demand will continue in 2017 and predicted (possible) interest rate cuts suggest that stable growth will continue throughout the first half of the year and a possible slower second half of 2017. We predict to see on average double digit growth in Sydney throughout 2017, however we may see an oversupply of units due to their concentration in certain pockets. New quality stock in blue chip areas appears to be in high demand as does detached dwellings in the $3 million and above price point.

Eastern Suburbs
The eastern suburbs are set to stay strong, especially in the first half of the year with a strong but slower second half of 2017. The market has previously remained strong due to limited stock, high demand and buyer confidence. These factors will continue to support the market through to the end of the year. Detached houses around $1.5 million to $3 million and units up to $3 million are predicted to have a slower growth than previous years. The prestige markets (over $3 million) along the beachside and centrally located suburbs are set to have a slightly higher growth than previous years with stronger buyer confidence. The market saw strong growth in 2016 for North Bondi which had 22.4% growth and Paddington with 16% growth (pricefinder.com.au). We expect that these areas will continue to perform well this year in the over $3 million price point. As the eastern suburbs have had a strong three years of growth recently, there does not appear to be any suburb with an affordable price point.

Worth watching are Potts Points and Bondi Junction. Potts Point has had a decline in the entertainment precinct which has made this area more appealing to young professionals. As the nightclubs and night time entertainment have declined, it has made this area a quieter and slower paced neighborhood. Bondi Junction is still in high demand for young families and professional couples as the suburb is in close proximity to Westfield Bondi, Bondi train station and local amenities and high growth is still predicted.

Inner West
The oversupply of units caused by diminishing yields and possible increased borrower costs could be a major factor for the inner west unit market. In 2016 the suburb of Waterloo’s median price fell 0.3% after three years of double digit growth (pricefinder. com.au). This decrease in the median price in developments in the Waterloo area such as Rosebery and Zetland are from a lack of quality and size in each individual unit. As these areas are highly driven by investors, the changes the Australian Prudential Regulation Authority (APRA) made to investor borrowing in 2016 will continue to slow the investor market. The APRA changes slowed investment in these areas more than a highly owner occupied market, such as the detached housing market in the $1.5 million to $3 million price point. We predict strong growth for the detached housing market as high demand and low stock drive the market upwards and push affordable housing further out of reach within this region.

We would expect the $1.5 million to $3 million detached housing market to remain strong with the continued issue of limited supply throughout all suburbs in the inner west. We are seeing many up-sizers active in this price range, especially families who want to remain within the inner west. Traditionally these up-sizers would relocate to further out suburbs that represented far better value. However, these suburbs are now matching price points to the inner west suburbs closer to the CBD mainly due to now been linked by improved infrastructure such as the Inner West Light Rail. Purchasers may get slightly more land by up-sizing to these suburbs, but the gap seems to have closed over the past few years.

Burwood, Strathfield and Homebush are on our watch list for 2017 as unit oversupply and more development proposals are predicted. We have also seen longer selling periods in some of these completed new unit complexes compared to 12 months earlier. There also tends to be a trend towards the construction of smaller, low quality units which heightens the already talked about concerns in this new unit market sector.

Southern Suburbs
Quality dwellings and units are predicted to be stronger performers for the year ahead in the southern suburbs. The end of 2016 saw highly renovated and new high quality properties perform better than older or average stock.

Poorly renovated and inferior stock appears to be taking longer to sell and is not achieving vendor expectations. We anticipate that the price gap between new and older stock will widen by the end of 2017.

There is high demand and currently not enough stock to match and therefore potential growth for the $2 million plus unit bracket.

High quality units in the suburb of Cronulla is a market we expect to perform well this year. New units from $2 million with a very high standard finish and with a possible view will potentially be our best performer this year. Main drivers of this unit market are considered to be the shift in lifestyle for downsizers who have sold their family home in a strong market and are now looking for a quality, low maintenance lifestyle in Cronulla to remain in their local area with access to views, the beach and shops.

Although Gymea had a strong 2016, we predict that 2017 will be another year of double digit growth. Gymea has been popular with young families of late, due to the growing café scene, upgrades to the Gymea Bay Road and relative affordability of this location within the Sydney basin. Although the southern suburbs have had strong growth over the past three years, we are still seeing Engadine as a relatively affordable market with a median house price of $950,000 for December 2016 (RP Data).

Western Sydney
2016 was a year that saw continued strong growth throughout western Sydney with Core Logic indicating home values increased approximately 15%. Looking forward into 2017 we believe that values in western Sydney will continue to grow although not at the rates seen in previous years, but this growth won’t come without its challenges.

The upside for 2017 is demand is still outstripping supply in many areas.

Values will continue to climb until this changes and regardless western Sydney will always present a more affordable option than its more eastern cousins. The level of investment and infrastructure planned for outer western Sydney will lay the foundation for solid demand for years to come. Investment includes the second airport and surrounding development at Badgerys Creek, the Sydney Science Park in Luddenham and the continued expansion and development surrounding Parramatta.

Possible speed bumps for the western Sydney market include potential interest rate rises by the major banks, lower investment demand as rental yields drop, high supply of residential units and the potential for government regulatory changes disrupting the market, similar to the APRA changes in 2015.

A trend we believe is set to continue throughout 2017 is limited rental growth and low rental yields throughout western Sydney. With more affordable housing combined with low interest rates, many long term renters have left the rental market. Renters purchasing their own homes combined with strong investor demand has resulted in an oversupply of rental properties. If the cost of borrowing were to increase and further investment regulation were to occur the western Sydney market could take a hit as it has been a happy hunting ground for investors of all types over the past few years. With rental yields currently at circa 4% in areas such as Wilmott and Blackett, other areas such as Blacktown are experiencing yields as low as 3%. These tight yields are mostly on the back of a soft rental market and as such may deter many investors.

Within the new subdivisions of western Sydney we have seen building rates increase for the construction of new dwellings. Traditionally for project homes, these costs are fully absorbed based on sales evidence supporting their value. More recently we have seen a trend of incomplete dwellings that are missing various items such as flooring or a driveway return a lower value than the sum of the land and building contract. In addition post contract variations with high profit percentages built in are not returning a dollar for dollar value either. Fully completed or turnkey building contracts with everything included are more likely to return a dollar for dollar value. This is an important consideration when building a new home to ensure you are not caught out paying a large sum expecting instant added value.

Northern Sydney
Northern Sydney will continue to record steady growth in 2017. Demand in this area is still outstripping supply with the $2 million plus market in hot demand. We have seen some extraordinary sales occurring within Chatswood, such as a $6.5 million sale of a modern home close to Chatswood Chase shops, a substantial result for the area. With prices in this region more volatile than others we believe Chatswood is a high risk area.

Final caution
We have noticed a number of valuations for new units upon settlement not meeting their off the plan prices when purchased during stronger market conditions. We have seen this more commonly in some second tier suburbs in western Sydney and additionally in some pockets of the northern suburbs particularly with concentrated new stock and a distinct difference in value ranges between the new and original older style unit prices. Whilst mostly occurring for overseas buyers, this could trigger a flow of sales post settlement due to difficulties obtaining finance and rental yields not meeting expectations to service mortgage repayments thanks to high investor participation.

The areas with the lowest predicted growth for the inner city are the oversupply of new units around the city fringe areas, as it appears there will be less demand and more supply in these areas so more completion for the purchaser dollar. Developments that have been completed to cash in on demand will fall short in quality and therefore appeal to both owner occupiers and potential tenants.

Other areas we believe are at risk of oversupply or heavily investor led include Wentworth Point, Carlingford, Epping, Olympic Park, Macquarie Park and Parramatta. The supply of new units in these areas is well above long term averages.

One thing we can be assured of is that 2017 will offer up some surprises and create headlines. Sydneysiders love their real estate and our market never stays still. Let’s hope we are all ahead of the curve and can benefit from the surprises and unexpected gains. The areas we will be watching with the most growth potential appear to be the $2 million plus price bracket which in some pockets will represent land value and opportunity to develop or value add and in some will be properties with a high standard of finish and high appeal to just unpack the family bags. On average, we consider that 2017 will see a steady growth across all areas with buyer confidence generally high.

Find out more information and to chat with a local Mortgage Broker in Sydney.

www.smartline.com.au

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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