The Smartline Report – February Edition

The month in review: Sydney

By Herron Todd White
February 2016

We are predicting the residential property market in Sydney in 2016 to be a sharp contrast to the strong growth realised over the past few years. In fact since the start of the current growth phase in June 2012, Sydney has seen a 48% increase in home values (CoreLogic RP Data Home Value Index). This increase has eclipsed other capital city growth levels which averaged a modest 13.8% in contrast. It was widely agreed that as Sydney home values continued to increase throughout 2015, the levels and pace of growth were unsustainable. The changes began to be realised in the final quarter of 2015 when a number of factors appeared to spook buyers and finally put the brakes on an over-inflated property market. These changes included restrictions imposed by APRA on investors, interest rate rises by the big lenders as well as continuing affordability issues. Media reports on the shifting market also appeared to exacerbate the issue.

The turn in the market was seen through softening property prices and auction clearance rates which fell from peaks of above 90% to 55% in December, the lowest recorded in over three years (Home Price Guide). The numbers of potential purchasers attending open homes dropped considerably as did the number of registered bidders on auction day. Negative market sentiment appeared to kick in as the peak of the growth phase clearly passed and the idea of a seller’s market was no longer. This was reaffirmed when the statistics in the CoreLogic RP Data Home Value Index were released which noted a drop in dwelling values across Sydney, down 2.3% for the final quarter. It is becoming clear that prices at the end of 2015 were more in line with earlier in 2015, suggesting the June to September period is where we saw the peak of the market.

As 2016 begins, it is believed that it will pick up where it left off in 2015 with low clearance rates, increased selling periods, cautious buyers and declining investor interest resulting in more of a buyer’s market which hasn’t been seen for the past three to four years. A modest market correction is predicted to stabilise at the beginning of the year with values eventually levelling out and remaining flat throughout the remainder of the year. Many factors have the ability to affect the market including possible interest rate rises, global economic conditions (particularly the weakening Chinese economy), Australian dollar fluctuations, regulatory intervention, lower population growth (currently at a decade low of 1.35%) and possible oversupply of units.

As we continue to adjust to the dynamics of this changing market, areas of opportunity become harder to forecast. As we look for affordability and areas of growth potential, we must be cautious and remember that a change in mindset is required from that experienced over the recent booming market. There are however a few pockets of Sydney that we are predicting may continue to perform well in 2016, although of course not at the levels seen over recent years.

St George District
In the south, parts of Rockdale Council such as Sans Souci, Brighton-Le-Sands and Monterey represent areas for possible continued growth with units in these suburbs seen as relativity affordable in comparison with neighbouring areas taking into consideration the proximity to the CBD, Botany Bay, airport and possible light rail. Nearby suburbs of Carlton and Allawah are also considered to have some potential being more affordable than neighbouring Hurstville and Kogarah due to slight lack of infrastructure however still have local train
stations and good public transport links as well as easy access to arterial roads. Recent developments in Kogarah Council regarding changes to their LEP may present opportunities to purchase potential development sites with the prospect of lot amalgamation possibly benefitting existing homeowners. These potential development sites however are not expected to attract the same competition from developers as seen over previous years. Many properties in the southern suburbs which surpassed the $2 million barrier during the latest growth phase are expected to struggle to reach similar levels throughout 2016.

Eastern Suburbs
In Sydney’s east, established units along the SouthEast Light Rail corridor such as Centennial Park, Kensington, Randwick and Kingsford are expected to remain in demand despite decreased investor activity throughout Sydney. It is anticipated that the future public transport infrastructure will ensure the rental market remains strong in these suburbs. Units in Centennial Park (most fall in the $500,000 to $1 million price range) are still considered reasonably affordable compared to surrounding suburbs bearing in mind they will also benefit from a station on the new South East Light Rail at Moore Park. Eastern suburbs dwellings in the $1.5 million to $3 million price bracket, particularly in blue chip suburbs, are also expected to retain fairly strong demand throughout the year. Medium to higher price units ($1 million to $3 million) however could see softening in values in 2016. Vendors are expected to be chasing similar sale prices to those which occurred in the stronger market which will see increased selling periods and some value decline if vendors need to sell.

Inner West
The shift in the market is also expected to bring changes to the inner west of Sydney with demand likely to revert to the local blue chip suburbs which have historically performed well over the long term. Opportunities can also be seen in the proposed Sydenham to Bankstown Urban Renewal Corridor. The project, which covers 13 kilometres of the existing Bankstown rail line running from Bankstown in the west to Sydenham in the east, will cover 11 stations along its way crossing the Bankstown, Canterbury and Marrickville LGAs. Approximately 36,000 new dwellings are planned for the area by 2031. Many residents are opposed to the project because they consider high-rise or high-density developments do not fit the cultural or visual identity of local areas. It is anticipated that high quality developments in the area however will continue to perform well. An example of this is the Harold Park urban development in the suburb of Forest Lodge. It appears that 1- and 2-bedroom units are still in strong demand and we expect this to continue throughout 2016. The main driver behind this is the existing light rail stop within close walking distance (Jubilee Park station) and the proposed Tramshed redevelopment which forms part of Harold Park. This development will transform the original heritage listed Rozelle Tramsheds into retail stores and restaurants which will help popularise the area and drive demand. This infrastructure and planned non-residential development sets this new unit development apart from other, more generic developments which we forecast to soften in 2016.

When discussing what areas should be treated with caution in 2016, the result appears to be unanimous. As lending to property investors sank to its lowest level in more than six years in the final quarter of 2015 (Australian Finance Group), we anticipate that the suburbs with high levels of investor activity may struggle in the coming year.

Southern Suburbs
outhern suburbs of Miranda, Caringbah, Cronulla and Sutherland may experience an oversupply of units on the market with many new developments still in the pipeline and increased opportunities to purchase off the plan. We believe that the investor market, sub $1 million price point, is likely to be the softest market segment in the inner suburbs also. The extreme price growth has not correlated to increased rental, resulting in relatively poor yields. Suburbs where we have seen strong investor activity are likely to suffer the most because of this and we expect capital growth to be minimal. Suburbs such as Marrickville with a large number of established units under the $1 million price point will likely be the most affected by reduced investor activity. We have already started to see evidence of very soft prices and we predict that there may be a slight price correction for this style of property throughout 2016. Eastern suburbs are also not expected to escape the downturn in investor interest with sales of properties dominated by investment activity having noticeably softened. It has been noted that investors are now looking interstate given the current Sydney market and low rental returns.

Greater Western Sydney
As always in Sydney, there is still very affordable property the further you move from the CBD, despite strong growth over the past two years. With much investment in the outer suburbs in recent years we do believe that some sectors will remain relatively insulated from a weakening in their local market given the underlying supply and demand. Regions most likely to stabilise or show limited growth will be the suburbs surrounding the commercial centres of Parramatta, Castle Hill, Liverpool and Penrith.

These provide affordable housing options for first home buyers through to families and can be in good proximity to local employment zones and established infrastructure.

A neat and tidy 4-bedroom, 2-bathroom dwelling on a 600 square metre parcel in an area such as Penrith or the lower Blue Mountains can be obtained for $600,000. The same price point can be a 2-bedroom unit within an easy commute to Parramatta and entry level for a vacant land parcel within the Hills district. In the south west, in new suburbs such as Edmondson Park, Leppington and Oran Park, you can purchase a modern 4-bedroom, 2-bathroom home for under $800,000.

Major infrastructure including the Norwest railway line connecting Rouse Hill to Epping, the South West railway line through the newly developed estates of Leppington to Liverpool and the planned upgrades to the M4 Motorway are providing both job opportunities and future transport options which has had a positive impact on prices for both traditional homes in the area and the potential for higher density redevelopment. The speculative prices achieved in early 2015 for amalgamated development sites may not be realised in the short term as the market sees a correction and feels the impact of the withdrawal of investors from the buyer pool.

As sales of new units also begin to dip we could see further downward pressure on unit values. Data from the Housing Industry Association from the end of 2015 indicates that the sale of new houses and apartments dropped for three months in a row (to November 2015) with detached house sales down by 4.1% and apartments down 11.8%. As leading financial services company Credit Suisse reports that Chinese demand for global property will continue to fall then the situation becomes increasingly worrying, especially taking into account a recent NAB survey showing foreigners purchased one in every six new homes. As you couple this with the possibility of oversupply in many areas, it leaves us to pinpoint this as an area to be treated with caution in 2016. This includes new units in Botany, Mascot and Rosebery where a large number of poor quality complexes have been constructed in recent years. We anticipate these will be the first to struggle should demand for units in these areas fall. Areas like Canterbury, Wolli Creek and around the Green Square precinct will also not be immune from a decline in demand.

As always in times of a shifting market we believe those properties affected by negative factors such as busy roads, close proximity to train lines, power lines, industrial areas or poor infrastructure should expect increased marketing periods and reduced value levels from those experienced in 2015. Also, developers who purchased land at the peak of the market based on prospective continued growth now face the possibility of selling in a weaker market affecting profit margins across the board. Demand for sales of such development sites through 2016 are expected to take a fall on the strong competition shown over the past few years.

Prestige residential
prestige residential market in Sydney is generally considered to comprise properties with values in excess of $3 million. These properties tend to be located either 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 to the north-west of Sydney.

While the residential market to $3 million showed significant signs of weakening in the last part of 2015, the prestige residential market appeared relatively unaffected. While auction clearance rates deteriorated, buyer enquiry reduced and steady to increasing stock levels were felt throughout the broader Sydney market, this was simply not the case for the prestige market and this may set the scene for a positive start to 2016.

Our conversations with leading agents prior to the new year indicated that demand for prestige property remained strong across the board with limited levels of stock the norm and auction clearance rates remaining high. It would therefore seem that those positive indicators should give the prestige market a solid and somewhat positive kickoff to 2016.

In broad terms however, the Sydney residential market has been the subject of a significant amount of negative sentiment in the media over recent times which can only serve to reinforce the weakening confidence.

While the prestige market still buoyed by the weaker Australian dollar, may currently seem somewhat immune to the deterioration in the rest of the residential market, this reducing confidence may become contagious and at some stage during 2016 transfer to the upper levels of the Sydney market.

We consider that some areas through the waterfront southern Sydney suburbs may need to be treated with caution in 2016. These areas were the subject of numerous high value sales which we would consider as premium and may be the first to show weakening should the prestige market deteriorate.

We are also aware of a number of 2015 sales throughout the eastern suburbs which we would also consider premium and in isolation would give us cause for concern in 2016, though we consider the overall state of this market reasonably robust.

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 – 2015. Australian Credit Licence Number 385325

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