Sydney June 2018

The month in review: Sydney

By Herron Todd White
June 2018

In February we shared our predictions for the 2018 property market and how it would fare in comparison to the past several years of exceptionally strong conditions across Sydney. Those predictions outlined that the Sydney property market is diverse and that certain property types and locations would stabilise, however other property types, markets and submarkets would begin to show signs of weakening as the property fundamentals of supply and demand and tighter lending policies took effect.

Generally speaking, the wider market has cooled with transaction numbers falling, selling periods extending and prices declining. “Sydney dwelling values have fallen by 1.2% over the three months to April 2018 and they are 3.4% lower over the past year”, and “are now 4.3% lower than their July 2017 peak”, according to a recent CoreLogic report. This is highlighted by current auction clearance rates at around 60% across Sydney which is well down on this time last year.

Western Sydney

As in other parts of Sydney, well presented and highquality properties in Sydney’s west are still achieving relatively strong results, however less desirable and average quality stock is being discounted as buyers in many areas have more options and aren’t willing to pay strong money for average stock.

Interest in new land releases, whether vacant land or house and land packages, remains steady with developers continuing to stage releases to ensure demand remains relatively strong. This has resulted in a consistent level of demand for master-planned subdivisions.

We have noticed a number of settlement valuations for new units 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. An example is in Parramatta with an off the plan sale in October 2014 of $672,000 and recent resale in March 2018 for $630,000. Whilst not an indication of the wider Parramatta market, it does highlight that discounting does occur and if a large number of vendors have to offload property at the same time, it could lead to a market correction as new benchmarks are set.

Market drivers to keep an eye on during the remainder of the year are interest rates, any tightening of lending criteria and property supply. Any significant increases to 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 may struggle to meet the larger repayments on highly geared mortgages. This has the potential for some pockets of Sydney to experience sharp decreases in values in the short term.

Similarly, any large volume of supply flooding a particular market sector combined with an overall slowdown, tougher lending criteria and possibly higher interest rates will eventually lead to a sharper slowing of the market. We believe this is more likely with high-density units as investor participation is higher and as densities increase markets can be supplied quickly.

Another area to keep an eye on for the remainder of the year is suburbs that allow dual occupancy development following the recent release of the NSW Government’s new Low Rise Medium Density Housing Code. This will allow one and two storey dual occupancies, manor houses and terraces to be constructed under a fast track complying development approval. With duplex style development popular in some areas of western Sydney, this fast tracking of approvals may lead to more interest and participation in the market resulting in a boost to owners of blocks meeting the new minimum requirements.

Inner Sydney

The inner west and inner regions of Sydney include a vast range of property types that appeal to a broad spectrum of purchasers including first homebuyers, upsizers, downsizers and investors. Overall we are seeing the majority of these areas returning to longer-term averages with typical auction rates over recent months being closer to the 60% mark. Auction numbers and clearance rates for these areas during early to mid 2017 were generally well above 70%.

Housing market conditions in general have continued to slow after a period of sustained growth over recent years. For example, Sydney’s inner west has seen dwelling values come back by 6.8% as at 1 May 2018 (CoreLogic), the second largest fall across Australia’s capitals, although this region of Sydney has been performing extremely well for a sustained period of time and it is not uncommon for a previously heated market to experience a slight correction. There are also property types and locations that continue to be in high demand such as Annandale, which was named the most popular inner west suburb in a recent article by Realestate.com.au.

Annual change in capital dwelling values as at 1 May 2018:

The new unit investment market in particular is now feeling the squeeze as banks have tightened lending criteria across the board with a focus on interest-only loans and investment loans. This is intensified with lending restrictions on certain postcodes, most of which are high-density apartment markets around the city fringe locations.

Based on recent indications we anticipate that the property market will continue in a similar fashion for the remainder of 2018. We consider that the market will generally remain subdued with longer selling periods as buyers can be more selective and the frenzy style buying conditions are no longer a factor. Oversupply is a strong word, but there is some evidence of this in certain areas. The market is still to take many large-scale developments, particularly around Green Square. It remains unknown whether investors and overseas purchasers will have any issues when it comes time to settle. What we are seeing is an increasing number of units which sold off the plan in the past two to three years being valued below purchase price when they become due to settle.

During the heated market conditions experienced in recent times, it was common that most property types and locations performed well, however given that we are now within a different part of the property cycle there is likely to be a contrast between good quality properties and inferior alternatives. Property types that appeal to the broader market (owner-occupiers and tenants alike) and location fundamentals such as proximity to train or light rail, shopping, cafes, parks and other services and amenities will continue to be key in ensuring that a property performs well.

Other factors that may have a material effect on the market could relate to interest rate changes (RBA or bank rates), the banking royal commission, legislation and politics, media and overall consumer sentiment.

Eastern Suburbs

The eastern suburbs market is currently witnessing some mixed results which vary between market segments and property types. The first quarter of 2018 started fairly stably however more recently has seen some softening in values, extended selling periods and auction clearance rates falling to 68.3% as at 27 May, compared to 79.4% at the same time last year (source: CoreLogic).

The stronger sector of the market is currently good quality prestige houses in the $5 million to $10 million price range. In a recent article published on 23 May (realestate.com.au), prominent eastern suburbs agent, Alexander Phillips, stated that “it’s harder to sell a $900,000 apartment by the beach than a house for $8 million in Bellevue Hill in the current market”. As he points out, it’s just harder to borrow money, which is reducing the buying power for people looking for apartments. “If you had a two bedroom apartment in Bondi open for $900,000 you’d get four or five groups, but if you had a house priced at $6 million or $8 million in Bellevue Hill you’d get 20 groups… there are just more buyers at that price point at the moment,” he said.

While the prestige housing sector remains somewhat stable, the general unit market is showing signs of market resistance compared to previous years. A Bellevue Hill unit was originally passed in at auction, then set an asking price of $929,000 which was further reduced to $890,000 and was then sold for $870,000. Although not a significant reduction, this is something very rarely seen in the eastern suburbs over the past several years. Buyers have a more reserved attitude and we are expecting this to continue for the remainder of the year.

Southern Sydney

Like Sydney in general, the southern suburbs have shown mixed results over the first part of the year, generally down overall but with some suburbs showing more resilience than others. Market activity has slowed and auction clearance rates are down to 61.3% from 70.9% for the same time last year (source: CoreLogic). Whilst the region has shown an overall decline in dwelling values, Oatley’s 2018 median house price has increased slightly by 0.5% from 2017. Engadine, however, is a suburb that has shown a drop of 11.1% in its median price compared to 2017, almost wiping out the 15.2% increase it saw in the period from 2016 to 2017 (source PriceFinder). A recent example of the declining market is a home in McRaes Avenue, Penshurst, located in a wellregarded section of the suburb. This property sold in September 2016 for $1.5 million and sold again in May 2018 for $1.48 million, highlighting that in some areas, properties are now starting to fall back below late 2016 prices.

Prestige suburbs appear to be performing better however again there have been some mixed results as market activity in this section of the market has slowed compared to mid-2017. Burraneer has experienced a 5% drop in median sale price from 2017 while Sylvania Waters is up by 10.8% according to PriceFinder (although this is based on a small number of sales year to date).

New units are taking longer to sell with an increasing number of developers offering incentives to purchasers. An oversupply of units is still possible as a large number of new complexes reach completion over the next two years.

Lower North Shore

The Lower North Shore market is currently performing as we expected and in line with most other Sydney markets for the most part. A general slow-down is being reported by local agents in the area with fewer potential purchasers at open homes and fewer bidders come auction time. Although RP Data’s weekly auction results don’t specify the clearance rate for the Lower North Shore market specifically, it is incorporated in the North Sydney/ Hornsby sub-region break-down. This sub-region had a relatively strong 71.4% clearance rate for the week ending 27 May, the latest data available before this publication (source CoreLogic).

Although the general Lower North Shore market is showing some resilience, we do expect the market to further soften over the next few months and then stabilise towards the end of the year. The investor product in particular, as in other areas, appears to be constrained by difficulty in gaining finance. It is becoming evident that the restrictive lending environment is the main driver of softening prices, rather than an actual lack of confidence in the market. With the current banking royal commission being undertaken, we do not see any potential change in restrictive lending in the near future.

Prestige property on the Lower North Shore has also appeared to follow the current general market trend, with a reduced number of potential purchasers and these buyers now having the luxury of taking their time to make decisions in purchasing. This hasn’t necessarily resulted in reduced sale prices as yet, as we are still seeing some very strong results. In particular, Cremorne had a record suburb sale in March this year, with a prestige waterfront home selling for $18 million (source: Domain). Indicating the continued strength of the prestige market, that record lasted just over two months, broken by the sale of 8 Wonga Avenue, Cremorne in late May for around the $19 million mark (source: Domain).

The purchaser is reportedly a foreign buyer, showing that they are still present and remain confident in this segment of the market. The banking royal commission on lending restrictions will have less impact in the prestige market, which is likely part of the reason we haven’t seen the same clear softening market conditions for prestige property on the Lower North Shore compared to the general market.

 

Share

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.