Sydney

The Smartline Report – November Edition

The month in review: Sydney

By Herron Todd White
November 2015

In mid 2015 with interest rates stuck at record lows due to the slow down in the wider economy, the Australian Prudential Regulatory Authority (APRA) made changes in financial lending criteria in an attempt to prevent a property price bubble. As a result, Australian banks raised interest rates for property investors and introduced tougher loan-tovalue standards in response to a move by regulators to rein in the riskier corners of the country’s house price boom.

Two big announcements followed these changes in regulations, being an increase in variable interest rates and a maximum of 80% loan to value ratio for investors.

All four major banks have announced that they will increase their standard variable interest rates to be slightly higher for investment loans over owner occupier loans to meet the APRA requirements. This is a new decision and we have not seen the full effect this will have on the property market as yet, however we are seeing signs of slowing.

Now that investors can only borrow up to 80% of the property’s value, there is a significant buffer for the banks if the borrower was to default, however it becomes harder for an individual to actually save the 20% deposit or to use the existing equity in their primary dwelling or portfolio for the deposit. With fewer people able to access the 20% deposit, there will be fewer investors in the market. This could lead to less demand and more supply which directly affects the value of a property. APRA is hoping that with less investors in the market, this area will be filled with owner occupiers and will cool or slow the market down.

There are signs that the market may be cooling. There has been a continual decline in auction clearance rates in Sydney from low 80% in July 2015 to mid 60% in October 2015 according to Corelogic data. This is a combination of the record number of auctions listed (so volume sold as a percentage is decreased), the expectations of vendors to exceed prices that were being achieved by neighbours no more than three months ago and a decrease in the pool of purchasers as we enter into a new wait and see phase of the property cycle.

It is fair to say that much of the growth in Sydney in the past eighteen months has been fuelled by the investor market. On the ground, completing the mortgage valuations, we have seen that this has been a combination of local buyers such as baby boomers using the equity in their main dwelling to purchase additional property for their superannuation, interstate investors who have heard the get rich quick scenarios and are banking on quick capital appreciation and overseas investors looking to build a property portfolio.

Given that the changes took effect mid year, it is too soon to say what the full impact of the tightening of bank regulations has been on the property market but indications are that the regulations appear to be working. This change in criteria could have a positive impact on the first home buyer market which traditionally competes heavily with entry level investors and could open up opportunities for the owner occupier.

In conclusion, we believe the investor market in NSW will remain stable over the medium term as the banks have not made it impossible to buy an investment property, they have just tightened their criteria. These changes will not exclude people from entering the market as investors but force them to be in a more secure financial position before entering into any agreements.

In the past few years, Sydney has also had the benefit of many new developments partially due to a change in approval policy; partially due to the underlying demand and supply imbalance in the market and partially due to the demands of the overseas investment market that is regulated by government to the purchase of new property only. This product is appealing to investors and owner occupiers as developers and the government offer benefits such as reduced or no stamp duty, monetary incentives and non-monetary incentives. We have seen new developments or off the plan purchases become the most popular because of the combination of incentives received and, due to the heat in the market, the assured capital appreciation from purchase to settlement. To date we have not become aware of any changes in these policies and can only assume they will remain for the foreseeable future however doubt over immediate capital appreciation may see some investors withdraw.

As a snapshot we have provided some insights into the various sub markets of the metropolitan area and a review of the current investor market in each.

Inner City

Zetland, considered a city fringe suburb, is a very high density area with predominantly large unit complexes built within the past ten years. Due to the high density and relative price points, investor demand has always been high. Large developers such as Meriton have a high presence in Zetland and although now starting to become established, there are still plenty of new unit complexes under construction. Overseas investors seem to be in the majority in Zetland especially of new order stock and may be less influenced by interest rates and APRA changes. We are yet to see any slowing in this sector of the market. The median unit sale price according to RP Data’s Suburb Statistic Report rose from $795,000 in October 2014 to $885,000 in September 2015. The same publication reports the indicated gross rental yield at 4.2% with a median asking rental price of $650 per week.

Northern Sydney

In the northern areas of Sydney we have noted an influx of investor purchased residential units flooding the rental market, particularly around the Ryde LGA. Property managers have advised that prospective tenants have become more discerning in their choices, are negotiating asking rents down and are looking for units with additional features such as views, common property facilities and unit orientation. It is anticipated that it will take a longer than normal time for these units to be leased. Owners of these units will need to be competitive in their pricing in order to secure tenants. This will have a flow on effect to established units in the area with rental levels being adjusted down in the short term.

Currently the median unit price for Meadowbank is $643,000 with -1% growth in the 12 months as per APM with a median rental of $420 per week as per RP Data. This results in a gross yield of 3%.

Western Sydney

Just up the road in Parramatta we have noticed strong growth within the residential sector, especially over the past year. The vision of the suburb becoming Sydney’s second CBD has seen construction boom within the region, with unit development the main driver and overseas investment acquiring off the plan purchases one to two years in advance.

The past 12 months have been very good for dwelling investment returns compared to the rest of NSW, giving investors a capital gain of 13% to date with the median price for a house in Parramatta being $772,000. Advertised rent reached $490 giving a gross rental yield for property investors of 3% according to RP Data and APM.

The high level of interest in apartment living in Parramatta from both local and overseas investors was reflected with the strong sale transactions over the past 12 months with the suburb becoming a focal point for economic growth and increase in population. The median price for a unit in Parramatta is $541,000 with a capital gain of 12% to date and advertised rent reaching $460 giving a gross rental yield for property investors of 4%.

South Western Sydney

Investors in South Western Sydney have been very visible in the property market in the past 12 months. Typically investors are from out of town and are using the equity in their current dwellings to purchase an investment property in an outer ring suburb of Sydney which they expect will grow in value and provide consistent rental return due to the number of families moving to these areas for their affordability and general population sprawl.

Price points have generally been in the sub $750,000 range and being below the Sydney median price is one of the key factors.

Yields have not generally been the attraction for investors – the capital growth has been the driving factor. Therefore with the new APRA regulations and the reported slowing of the market, investors may leave the market allowing for first home buyers to finally gain a foot hold.

Inner West

Throughout the inner west suburbs of Alexandria and Erskineville, investors have always made up a high percentage of property owners due to the relatively close proximity to the CBD. However, over the past two years, investor activity has dramatically increased due to the construction of several new high density unit developments, particularly in Erskineville. A large industrial section at the southern end of Erskineville has seen the most construction and suddenly there has been an increase in supply and investors have flocked to the area. The price point of these units, at approximately $600,000 for a 1-bedroom unit and $850,000 for a 2-bedroom unit, appears to be at about the right level for investors in these areas. Many of these unit were purchased off the plan up to two years ago and at the time, a 1-bedroom unit would achieve around $550 per week rent and a 2-bedroom unit around $750 per week. This would have seemed like a fair yield at the time but we are now seeing these same units sell for significantly more due to the extremely strong growth in the market.

The consequence of this has been decreased investor interest in re-sales of these units due to a now very low yield. Local agents have recently stated that as investors try to increase the rental price there has been decreased demand, pushing vacancy rates up in the areas for the first time in years. This has the potential to lead to decreased investor demand throughout Erskineville and surrounding suburbs with more newly constructed stock to come onto the market.

St George District

The suburb of Wolli Creek, approximately 10 kilometres south of the Sydney CBD has become an investor hotspot in recent times. Again, this is a suburb that has seen a large scale transformation with many high density unit developments constructed. Investor demand has been fuelled by the addition of retail space in the area, including a newly constructed Woolworths, and Wolli Creek train station offering access to two major rail lines. The demographic of these investors has been both local and overseas.

According to the most recent RP Data Suburb Statistic Report, the median unit sale price in October 2014 was $640,000 and in September 2015 was $742,500. The same publication reports the indicated gross rental yield at 4.3% with a median asking rental price of $560 per week. This is the same story for investors seeing a dramatic gain in capital growth but resulting in a reduced yield. With this said, we have not yet seen any dramatic slowing of investor demand. It may be slightly too early to make a fair assessment on this, so we watch with anticipation how things will develop over the coming months.

www.smartline.com.au

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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