The month in review: Sydney
By Herron Todd White
Early to mid 2017 proved to be another period of growth, albeit at a moderate level compared with previous years. The end of 2017 however saw market conditions easing across some locations. Sydney represents a diverse market with various price points and sub markets with property types performing quite differently depending on a range of factors. While auction rates and activity levels have appeared to slow recently, we have still seen healthy growth overall with houses up 2.1% and units up 5.4% over the full year according to CoreLogic.
We expect that 2018 will be a year of steady growth, particularly for properties located in highly desirable regions with limited supply, high quality products and properties that are affordable for first home buyers and appeal to the wider market. On the other hand, there may be limited growth or slightly weaker market conditions in less sought after pockets of Sydney or areas with higher concentrations of new unit supply. If interest rates increase later in the year or APRA was to enforce further restrictions on lenders, this could exacerbate the situation and put further downward pressure on value levels across Sydney, particularly investment grade properties.
The eastern suburbs are expected to remain fairly stable this year with some product types and price ranges potentially showing a slight decline in values. Considered unaffordable for most, the eastern suburbs has always benefited by its limited supply of new product (particularly the harbour and beachside locations) which is considered to help maintain its stability compared to some other areas of Sydney.
The buying frenzy in 2016 and into the first half of 2017 has slowed to longer term levels. Smaller sized units (under 50 square metres) and investor style products are expected to see some softening throughout the year. Given that capital gains are expected to moderate slightly in the coming year and rentals for investment properties are showing fairly average returns, it is considered to somewhat impact this sector of the market. With buyers having more confidence and not getting carried away and over paying at hotly contested auctions as seen in previous years, vendor expectations will have to be realistic to meet the market.
Houses are considered to continue to perform better than units in the up to $3 million price range. Good quality homes above $3 million performed particularly well in the eastern suburbs throughout 2017 and we consider this to continue and remain stable in 2018. The large number of off-market transactions is expected to continue particularly in the prestige sector.
While most buyers looking to enter the eastern suburbs property market would generally be more than happy with any suburb, properties located in secondary positions (busy roads, proximity to a cemetery, properties with privacy issues etc) are generally the properties that are impacted first in a cooling market. We expect to see some of these properties having longer selling periods than previously seen and if the vendors need to sell quickly, then these property types may see a slightly lower sale price achieved. Overall we see the eastern suburbs market remaining fairly stable throughout 2018 with stronger price growth for higher quality properties and more sought after positions.
Auction clearance rates towards the middle to end of 2017 saw a moderate decline in the inner west with many choosing to withdraw their properties from the market prior to auction with the hope that the market may improve again at the beginning of 2018. This was partly due to vendor expectations which seemed to remain stubbornly high as well as a tip in the supply versus demand balance in parts of the region. We expect 2018 to continue this trend with some price points affected more than others.
Restrictions on lending imposed through tighter regulation means that a large portion of investors may be less active in the market. Many suburbs in the inner west such as Marrickville, Ashfield, Erskineville, Waterloo, Zetland and Rosebery rely heavily on investor demand and we are predicting longer selling periods in some of these areas as well as reduced demand. In some areas this impact is likely to be softened with the continuation of the first home buyer concessions. Areas where unit price points fall below certain thresholds will see increased demand from first home buyers. These locations will also continue to attract demand due to being situated within very close proximity of the CBD.
A predicted oversupply of units in certain areas is also likely to put increased pressure on the market. Areas such as Bankstown and the Canterbury Road corridor in particular have had high levels of unit approvals in the last number of years with pockets of oversupply issues likely to become a reality this year. Some developments in these areas are also considered to be below average in quality, being built and marketed towards the investor, with first home buyers perhaps wanting more for their money.
In addition to new stock, conversations with some local inner west agents indicate an increase in existing properties to hit the market early this year with many attempting to cash in close to what appeared to be the peak of the market last year for certain locations and market segments. Many of these sellers perhaps withdrew from auction at the end of 2017 and following the recent run of negative media activity, have decided now is the time to sell. With an already reduced buyer segment in some areas, this further increase in supply is likely to have an effect on the property market for the short term at least. We still feel there is good demand above the $3 million level, with quality renovations and dwellings finished to a high standard in traditional blue chip suburbs likely to remain in high demand as oversupply is unlikely to be an issue at this price point. As this segment of the market is not traditionally investor-driven, the current demand is also likely to remain as is.
For the inner city, the market is going to remain subdued for now, similar to the second half of 2017. We will see investor properties fail to reach the results of early 2017, however good quality properties and owner-occupier properties will likely still meet expectations. If further lending restrictions are applied or interest rates move up, we will likely see slight volume and price declines. We recommend sticking to the harbour side suburbs or areas such as Circular Quay and Millers Point as they are undergoing gentrification due to the government sell off and light rail. New precincts such as Loftus Lane are also set to reinvigorate the area. Areas at higher risk are the high density unit markets such as Green Square and similar style surrounding locations. If buying in these locations, negotiate hard, don’t rush, and buy quality or unique property as this will hold value better than cookie-cutter investor stock. Furthermore, it is probably worth buying for rental yield in the short to medium term as capital growth may be less achievable.
Our predictions for the south are that 2018 will remain stable with a few good buys this year. Properties in blue chip areas will most likely remain stable while properties in secondary positions (main roads or located near industrial areas) will notice the slower market conditions. The proposed F6 Highway will have an impact given stage one was approved in 2017.
$2 million plus units in Cronulla are worth watching as are high quality brand new or renovated dwellings in Cronulla and South Caringbah. Downsizers are prepared to pay $2 million plus for a high quality product within Cronulla and young families are seeking brand new or high quality renovated dwellings in areas such as Caringbah South.
Development changes in the Sutherland Shire might come through which will impact house prices with land area below 600 square metres (already agents are seeing not as much developer interest in allotments below 600 square metres) as Sutherland Shire Council may increase the minimum requirements for land size for a duplex site from 550 to 600 square metres.
New units in large complexes should be treated with caution as oversupply is possible in the Shire. There has been a large influx of new unit complexes being built particularly along the railway line from Jannali through to Cronulla. We have recently started seeing developers offer incentives to purchasers such as reduced or no stamp duty, gift cards and guaranteed rental returns to name a few.
Overall we expect the Sutherland Shire and St George areas to remain fairly stable (in the most part) this year given that most of these suburbs are located within approximately 20 kilometres or less of the CBD and are also a short drive to the local beaches and bays.
Whilst predictions are for a period of low growth, western Sydney will still be in healthy demand as it presents a more affordable option than its eastern cousins. This is highlighted by the median price for a 3-bedroom house in Penrith being $600,000 (source: Domain). The level of investment and infrastructure planned for outer western Sydney will lay the foundation for solid demand for years to come. This includes the aptly named Aerotropolis surrounding the second airport at Badgerys Creek, the Sydney Science Park in Luddenham and the continued expansion and development surrounding Parramatta.
Overall we feel the western Sydney market will continue to stabilise after a lengthy period of sustained growth, with certain pockets continuing to see slight increases mostly due to new and proposed infrastructure. In recent times selling periods have begun to lengthen, prices have become more stable and auction clearance rates are dropping. This trend may continue until vendors realise that times have changed slightly and meet the market. Similar to other parts of Sydney, possible speed bumps for the western Sydney market include potential RBA interest rate rises and stricter lending criteria by the major banks.
Whilst the vast majority of western Sydney comprises detached houses, the areas more at risk are new units, particularly units in areas with a high level of recent or proposed supply and new areas offering high density units for the first time. We have noticed a number of valuations for new units on settlement not meeting their off the plan prices when purchased during stronger market conditions, mostly in 2015 and 2016. 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 thanks to high investor participation. Losses on these property types are currently more likely to be realised if purchased and sold within a short period of time.
A focus on the northern beaches suggests this market will continue the trend seen in the later stages of 2017, with stabilising values and extended selling periods after a period of sustained capital growth. Units in Manly performed strongly with 11.7% growth in 2017 after 17.1% growth in 2016 (source: Pricefinder.com.au). Another popular and affordable suburb, Dee Why, performed strongly with 10.3% growth in the unit market after 9% growth in 2016 (source: Pricefinder.com.au). Housing affordability will remain a hot topic in 2018 as financial institutions tighten their lending policies and the recent capital growth makes it difficult for buyers to enter the market, having a downward trend on demand levels.
We consider suburbs surrounding the new $600 million Northern Beaches Hospital due to open in October 2018 will defy this trend. The NSW State Government has invested a significant amount in the new hospital and infrastructure upgrades.
The Northern Beaches Council is in the process of finalising the Northern Beaches Hospital Precinct Structure Plan. The plan involves the re-zoning of low density residential areas surrounding the hospital which will make way for a range of higher density residential styles and commercial uses. Medium density unit and townhouse developments, commercial development (including a new town centre, auxiliary medical and retail services) and recreational areas will surround the immediate area and are planned for stage 1.
The opening of the hospital will see renewed interest in the area and should the gazettal occur as expected next year, the area will see an influx of new development and housing styles relatively uncommon for the traditional 1960s style housing that currently occupies the area. It will be interesting to see how the area adopts the new property types, as the market shifts towards higher density living to help ease housing affordability and increase supply levels.
North Narrabeen and Narraweena have the lowest median house prices at $1.54 million and $1.55 million respectively (source: Realestate.com.au). The suburbs comprise typical older 1960s and 1970s style homes and offer value for individuals looking to enter the housing market at an entry level.
We anticipate that many markets across Sydney will continue to perform steadily however other pockets may look different to what we have seen in recent years. There will be more of a focus on quality property with a traditional long term view rather than buying for short term gains only. We would recommend that anyone looking at new units be very selective in the type of product and development, existing and planned infrastructure nearby, privacy and access to sunlight and the amount of existing and proposed unit supply as these are some of the factors which will likely determine how the property performs over the next couple of years. While there may be areas of oversupply, in general we would expect that any slight declines in value levels will be short lived and purchasing with a medium to long term view will reduce the risk in these situations.
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