The month in review: Regional NSW
By Herron Todd White
The residential property market in the NSW Southern Highlands has been increasing for the past 18 months. This is most apparent in the lower price bracket, up to $1.3 million. Investor activity is strongest under $1 million with investors being a mix of local and Sydney based purchasers. Traditionally detached homes are the most common property type for buyers in the region, which are typically modern project homes on the periphery of the townships at East Bowral, Renwick or Moss Vale, or well located, renovated older style homes close to town centres. There is also demand for well located townhouses and villas, in particular with a seniors living focus for retirees, that are close to local amenities such as the hospital, shops and parks.
Price points vary for homes across the region from say $480,000 up to $1,000,000. Gross yields typically range from 4.5% to 5.5% In Moss Vale and Mittagong, a modern project style home can still be purchased in the $450,000 to $500,000 range.
The Southern Tablelands offers more choices and affordability for potential investors with lower price entry levels than the Highlands. Goulburn, with a population of around 24,000, has a steady workforce and is a popular country holiday destination. Due to the high real estate prices in Sydney, Goulburn offers an affordable option for Sydney investors and there has been increasing activity from this sector.
Depending on dwelling, land size and quality of the home, for between $400,000 and $500,000 an investor can purchase a new, modern home and expect a rental return of between $400 and $520 per week. Yields are in the range of 4.75% to 5.75%. There are not many strata title properties in this region, with the preference being for detached dwellings.
Investor activity has assisted in contributing to the increasing price and volume trends apparent in the Highlands and the Tablelands. Rental levels have been steady to increasing in the Highlands. In Goulburn, rental levels have actually marginally declined over the current period. This trend is due to additional supply together with some Canberra commuters leaving Goulburn to return to the ACT.
In our opinion, if lending criteria was to tighten, this would reduce investor activity in the Goulburn region to a degree. There would be less investment properties, vacancy rates would tighten and rental levels would increase. In terms of an impact on the overall Southern Highlands market, it is considered this would have minimal impact, as most buyers are local home occupiers and people relocating from Sydney.
NSW Central Coast
It’s not quite lights out for the investor, but it has been getting darker. For some time now, investors have been very active in the local market, but recent changes by APRA on investment borrowings forced on lenders have had an impact on this segment of the market. We see the will is still present, but the ability to finance the dream is diminishing.
For the most part, the local investor market has been driven by out of town buyers, mostly Sydney based, where property prices are seen as unsustainable and value for money is being sought outside the city limits. To this end, due to it being immediately north of Sydney, the Central Coast region has been favoured by these investors.
In the main, the type of property being sought by investors includes the typical 3- to 4-bedroom, double garage home in the suburbs. Minimised maintenance requirements and proximity to services and transport is seen as a bonus. This type of property is the traditional real estate investment and at present, our raw data suggests that gross yields are between 4% and 5%. Also included in the mix is the ability to value add and a popular trend has been the addition of a granny flat or second dwelling under the complying development rules. It definitely increases the income stream with gross yields seen between 6% and 7%. As time goes on, we will see whether this strategy works to increase value.
Away from the obvious though, we have seen a number of investment purchases for properties not previously considered as typical investment class property. This includes high value and high maintenance rural lifestyle properties. The purchase of this type of property is somewhat confounding as the returns are generally low and we can only guess that these buyers are banking on long term increases in the asset value. This, we think is pure speculation and a brave, but perhaps foolish decision leading into a volatile period in the market, if we are to believe that previous cycles are to be repeated.
If looking at the unit market, which includes villas and townhouses, we see these as another staple in the investment market. We guess that like many other regions, units have been just as popular when it comes to investment property and there are number of recently completed developments and others at the starting line. We are seeing gross yields for these properties between 4.7% and 6%.
In simple terms, the APRA led changes are designed to strengthen local banks’ reserves should another global financial crisis occur. When a body like APRA introduces these measures, they ought not be taken lightly – they are quite likely the closest thing we have to that mythical crystal ball.
The effect on the lenders has already influenced the market as activity has slowed a little and we see this becoming more obvious in the short term as both lender and borrower become accustomed to the new rules. Very recently, the major lenders have increased borrowing rates slightly under the guise of passing on the APRA changes to borrowers. It seems to us that this may just be the excuse needed to slow the market down a little and we suspect that greater levels of attention led by our policy makers and the media will accomplish this.
Should this occur, then the effects will likely follow that seen in previous cycles where the current seller’s market will end and a downturn in the market and values will be seen.
NSW Mid North Coast
This month we are looking at what investors are doing to our market.
Firstly, on a general note, Westpac has increased its lending rates for residential investment property loans by between 0.27% and 0.3%, and other banks have followed. There has been a trend of decreasing interest rates since January 2011 and during that time investors have seen capital values rise (sometimes significantly), rental rates rise and portfolio values increase. This recent increase in rates may have the effect of slowing the rate of investor sales within the residential market, however it is still too early to assess the impact of these changes.
In the low to mid market segment of the Mid North Coast ($250,000 to $600,000), investors are still very active, with many mum and dad investors, interstate and self managed super funds all competing within the same market segment. This is still causing values to rise but, conversely, it is resulting in decreasing yields and returns.
Recently we have noticed that while there remains good demand for rental properties, rents have steadied after a rapid rise during the first half of the year. Currently within our region, it is not uncommon to find low end investment properties being purchased with neutral to positive gearing.
There are large numbers of new dwellings currently under construction or about to start construction. These dwellings are often marketed to mum and dad and first time investors and often through wealth style investment seminars. If demand were to lessen significantly in this segment, we may find an oversupply of new dwellings coming on to the market over the next six months.
However, we also note that currently, potential owner occupiers are finding it difficult to compete with these investors and if the investment segment of the market was to cool, then the owner-occupier market may increase and take its place. We note that Westpac has advised that their fixed rate owner occupier rates will drop by 0.30% when their investment rate rises.
When investment loan rates do rise, the initial rise is unlikely to significantly curb demand in this residential market in the short term, with rental returns remaining above previous years. Yields continue to be acceptable to the investment market and compare well with other non-property investment strategies.