SYDNEY PROPERTY MARKET OUTLOOK

Sydney has a solid floor with a few cracks.

Propertyology has expressed concern about Sydney’s property market for a couple of years. In February 2015 we released a market report wherein we described Sydney as a House-Of-Cards property market.

The Fundamentals

• One third of Australia’s total population reside in the state of New South Wales (7.6 million people) and 4.8 million of these are in Sydney;
• Greater-Sydney can be broken in to ‘Metropolitan’ and ‘Western Sydney’. With a population of 2.3 million people (9% of Australia), Western Sydney on its own is bigger than the combined populations of South Australia, Tasmania, ACT, and Northern Territory;
• Sydney’s population growth rate over the last ten years (1.6%) is below the national average of 1.8% (rate of growth is completely different to population mass);
• With a median house price in the vicinity of $1.3 million and median unit price of $658,000, Sydney is the least affordable city in Australia. For the same price that we can buy a median value Sydney apartment we can buy a house in every other city in Australia with the exception of Melbourne and Perth;
• New South Wales has a long history of people immigrating away from Sydney to alternative locations;
• After a long run where the NSW unemployment rate was above the national average, courtesy of a strong services sector, Sydney has evolved to recently take the mantle of Australia’s economic powerhouse. It is no coincidence that Sydney’s property market has been strong with the jobs numbers in this chart.
• The results of the last two state government elections suggest that general consumer confidence is arguably better in Sydney than anywhere else in Australia. And, the 2015 state election saw the incumbent Baird government awarded a mandate to fund a pipeline of infrastructure projects which is bigger than anything seen since the lead up to the 2000 Olympic Games;
• While Propertyology believes that the general outlook for Sydney’s economy is very good, the reality is that fewer people can afford to buy a home in Metropolitan Sydney and large parts of Western Sydney, were housing is more affordable, have significantly fewer job opportunities;
• Yes, there are a few very good transport infrastructure projects now under construction however, it is highly likely that Sydney’s horrendous traffic congestion, loss of productivity, and high fuel costs will always be the worst in the country. And, the trend in that earlier Interstate Immigration graph is likely to continue.

Supply Pipeline Is Growing

20-odd years of babble about Sydney having run out of land and therefore having an under-supplied property market is exaggerated. Just pause and think for a minute about cities like New York, London, and Singapore. The collective minds of developers and city councils will always find ways to keep building properties. Metro Sydney’s land shortage will continue to be compensated by sprawl in the west and higher density construction.

For all bar one of the last 15 years, 60-65% of all new dwellings approved in Greater-Sydney were apartments. Affordability, proximity to jobs, transport considerations, and increased demand from Asian buyers is likely to see this trend continue.

The average number of new dwellings approved in Greater-Sydney each year for the ten years ending 2011 was 22,555. The annual average for the following four years (2012-2015) was a significantly higher 38,225. The trend is not abating either – 51,106 dwellings were approved in 2015 alone. As Sydney’s housing supply pipeline ramps up its population growth rates (demand) remain in line with historical averages. This is new territory for Sydney. Things are out of sync!

Although this is not an extensive list, some of Sydney’s LGA’s with potential for over-supply in the short-term include:

• Mid-North:  Hornsby and The Hills
• Lower-North:  Lane Cove, Ryde, and Willoughby
• Inner-South:  Rockdale and Hurstville
• Mid-South:  Canterbury and Bankstown
• Outer-South:  Camden, Campbelltown, and Liverpool
• Inner-West:  Ashfield, Burwood, Strathfield
• Outer-West:  Penrith

The trend for increasing building approvals is continuing during 2015-16 financial year.

The Foreign Investor Phenomena

Structural changes resulting from the revolution known as the ‘Asian Century’ has directly resulted in unprecedented volumes of properties being purchased in Australia by Asian investors. With Sydney and Melbourne having Australia’s biggest profiles internationally, they have been the centre of attention for the construction industry’s marketing teams. In a majority of cases, Asian investors buy brand new properties – only Australian residents are permitted to buy established properties.

Following a 1% decline in median values in 2011 and zero growth in 2012, unprecedented demand for Sydney property by Asian investors kick started Sydney’s 3-year property boom with 12% growth in 2013.

The significant increase in property holdings to Asian investors does pose some risk if significant destabilisation in Asian economies were to occur. We know that, when times get tough, investment properties are often one of the first assets disposed of in order to bring the household budget back in to order. High levels of resale stock never plays out favourably on property prices.

There have been reports that Sydney’s largest developer, Meritons, sold as much as 80% of their new apartments to Asian buyers over the last few years. But, tougher conditions around getting money out of China and recent tightening of Australian credit policies to foreign buyers is likely to result in an easing in sales volumes to Asian buyers.

Market Outlook

While not as big as the early 2000’s boom the performance of Sydney’s property market from 2013 to 2015 was still spectacular. But, contrary to tabloid rhetoric, outside of Sydney, most property markets experienced modest rates of growth and plenty of markets experienced price declines.

Propertyology anticipates that Sydney’s general economy will continue to be amongst the best in Australia for the foreseeable future however, we also anticipate that property price growth will be moderate with potential for several pockets to experience price declines.

Some off-the-plan buyers with settlements due in 2017 and 2018 risk losing their deposit as a result of tighter credit policies subsequent to the initial exchange of contracts and / or lower valuations in some of the potential over-supplied pockets of Sydney.

Sydney rental yields are already amongst the lowest in the country and, generally speaking, we believe that there will be some easing of rents over the next few years. During Sydney’s recent boom there were a high proportion of buyers who were investors (home loan approval data suggesting as high as 60% whereas 30-35% is about normal) meaning a lot more rental stock.

History has taught us that the biggest driver of housing demand is ‘affordability’.

Propertyology’s biggest concern for Sydney is interest rate risk. During this period where we are experiencing the lowest interest rates in Australian history some have forgotten that Sydney has officially the least affordable housing in the country. This is the primary reason why, from 2000 to before the recent boom, Sydney produced an inferior average annual rate of price growth to all other capital cities. In a market where many households are managing a mortgage of circa $800,000, it wouldn’t take many interest rate rises to put the Sydney property market back on its knees. Rate rises may not be likely to occur in the short-term, history has taught us things can change pretty quickly. When they do, Sydney’s property market will feel it more than most.

With circa 9.6 million properties to choose from in this country, one begs the question, “Why Sydney?”