The month in review: Sydney
By Herron Todd White
The RBA reducing interest rates to a new record low of 2.25% (and markets pricing in a further 25 basis points cut to come) has appeared to have an immediate effect in the Sydney property market. Many agents have reported bullish prices over the past two weekends (7th Feb and 14th Feb) with a notable spike in the number of bidders. This has been reflected in the 83% clearance rate achieved over the weekend of the 14th February and 81% clearance rate achieved over the weekend of 7th February compared to 70% the week prior (31st January) and 71% prior to that (24th January). Agents have indicated that the number of enquires increased
almost instantly following the cut and are predicting a period of strong results in local markets.
The latest interest rate cut is expected to fuel the property market as prospective buyers decide they can afford to borrow more money on the lower rates.
This in turn, can push prices as up as buyers bring their bigger purse to auctions. We expect activity in the market to be particularly strong in the sub $700,000 region as we anticipate a large number of low to middle income buyers will continue to help drive prices upwards, helped by the ever-present investors. We do not expect this to change over the short term and we anticipate this portion of the market will perform well over the coming year, especially with a further rate cut expected as early as March.
As the majority of the banks have already promised to pass on the latest cut, investors are expected to respond and continue to remain a dominant force in the market just as they were throughout 2014.
Economists say lending to investors for residential property is now double the level it was in 2011 with housing loan approvals for investors currently accounting for a record high share of new loan approvals in New South Wales (increasing almost 20% as of the end of December 2014). A cooling off in the Sydney property market therefore is looking increasing unlikely, at least in the short term.
The future over the medium to long term however remains uncertain. One worrying fact is that rental growth has not increased at a level even close to the growth of Sydney property prices. This suggests that the involvement of investors appear to be speculative with many banking on capital gains rather than attractive rental yields. It appears that this increased investor activity (speculative based or otherwise) is driving housing prices to rise faster than fundamental factors suggest they should in the Sydney market.
Factors including the aforementioned falling interest rates, continued strong presence of overseas buyers (fuelled by the falling Australian dollar), tax incentives and positive market sentiment, has seen unaffordability levels continue to soar in the Sydney market with home ownership becoming more unattainable for many, especially young people looking to break into the market. This unaffordability however has not yet appeared to have had a significant effect on the market with regards to a levelling off and we believe that as long as investor demand remains steady, the market will continue on its current path of strong growth. It appears however that this growth in Sydney housing prices is currently running at an unsustainable pace and that at some point, this further growth is likely to be met by housing price declines over the medium to long term, a correction if you will, especially when the inevitable happens and interest rates begin to rise.
The prestige residential market in Sydney is generally considered to comprise those 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, with some waterfront localities in the southern suburbs, and the larger rural residential estates to the north-west areas of Sydney.
While we note the official cash interest rate was reduced to 2.25% in February 2015, being a new record low, we consider interest movements have reduced impact upon prestige residential market performance.
Generally, forces including the performance of the equities market, the state of global economic conditions, levels of business and consumer confidence, overall business conditions, and the value of the Australian dollar, are the strongest drivers of those high net wealth local and overseas purchasers investing in the Sydney prestige residential market.
The semi rural market
Lower interest rates and increased buyer confidence will continue to attract those looking for a lifestyle option on Sydney’s fringe. As the metropolitan area continues to growth in the designated north west and south west corridors, traditionally acreage locations are being developed into residential estates and those that want to continue this lifestyle option are being forced further out.
Affordable interest rates make this a desirable option particularly for those that are looking to enter the semi-rural market for the first time and have capitalised on the bracket creep in a modern suburb.
Price points are very flexible and will be determined by location; extent of arable land; standard of dwelling and scale of ancillary improvements from self-contained guest accommodation, stables aand sheds, outdoor living areas and privacy and versatility of floor plans.
Investors will look to opportunities in semi-rural villages particularly in the Hawkesbury and Blue Mountains as they are an affordable entry level for most and the returns will stay similar to more central suburbs given the tight rental market in these locations (Glossodia and Bowen Mountain), where traditionally a tenant in these locations will look to stay for a medium to long term.
The recent interest rate cut has maintained consumer confidence and has so far kept up the strong demand seen in 2014. Demand is still vastly outstripping supply and if the market conditions in the early stages of 2015 are anything to go by then the western Sydney property market looks set for another strong year.
As the inner and middle ring suburbs become more and more out of reach for the general house hunters prospective buyers are looking for cheaper alternatives but still want to maintain a similar standard of living. Residential dwelling approvals are at an all-time high indicating that the strong demand for these areas does not appear to be slowing down.
The positive market conditions coupled with the commencement of the much needed North-West Rail link is making new release areas within Riverstone, Marsden Park and Kellyville affordable options for first home buyers looking to build their dream home in a familiar location.
The south west counterpart, particularly the Liverpool and Campbelltown LGAs has seen increasing demand as another affordable living option to the south west. The rail link approval of Badgerys Creek airport will improve accessibility to the region and promote job growth which will only increase this demand.
Another key area of focus in 2015 is Parramatta. Parramatta Council has a clear long term vision for the future of the now labelled Western Sydney CBD. It will comprise of a core residential and commercial precinct with further enhancements to existing infrastructure including the Western Sydney University, Westmead medical precinct, Parramatta Stadium and the currently under capitalised Rosehill and Camellia precinct are all primary focuses for the project. With a central location, strong rental demand and future growth potential Parramatta and its fringe suburbs are always a popular choice for the astute investor.
Overall we consider the western Sydney market to be strongly positioned. While heavily reliant and sensitive to the economic client, confidence is currently high and buyers are willing and able to borrow at a greater capacity keeping the property market in a strong position. The biggest question of 2015 is how long the market will maintain these strong conditions. Those highly geared will be affected most when interest rates increase.