NSW - Excerpt from the February 2010 Market Report

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Sydney recovers its stride

The long-awaited recovery is finally underway in Sydney. It appears, not even rising interest rate will dent investors' enthusiasm.

Many experts have long predicted a turnaround in the Sydney market, but very few expected the strength of the rebound seen over 2009.

"Over the first nine months of this year property values grew 9.2%," says Cameron Kusher, senior research analyst with RP Data. "If I had said last year that prices would grow that much in a year - let alone in nine months - they would have said I was crazy. It defies belief how well it's gone."

Low interest rates have fuelled buying activity in Sydney over the past 12 months. According to Residex, median house values surged by 9.35% to $615,500 over the year to November. This rate of growth placed Sydney as the second best performing market in Australia, next to Darwin and trumping Melbourne's earlier surge. The more affordable unit market has recorded an even stronger growth over the same period. Median values climbed by 10.40% to $434,500 while rental rate stood at 5.05%.

"Sydney is poised for good growth into 2010," says John Lindeman, head of research at Residex. "People are buying for the second and third time and that's good news for investors as that will get prices moving in the middle area."

And while much of the country is preparing for a slow down as the first home buyers grant boost comes to a close, Sydney is unlikely to be affected. "In NSW first home buyers got up to around 30% and they are now sitting at around 25%," says Kusher. "I think that will fall and mean fewer transactions but there will still be the rest of the market to keep it moving."

Kusher says that investors are returning to the market in response to this. "It hasn't been worth their while to compete with first home buyers because they don't have that skill to negotiate the good price, which investors want," he says. "Confidence is back and we haven't technically gone into a recession - the picture isn't as gloomy as everyone first thought."

Kusher says the recent interest rate rises may take some heat of the Sydney market, however, he believes this is a good thing for rental return.

"We're expecting the rate of growth to slow a bit over the next year - especially with the rate rise - but rents and yields will start to improve," he says. "I think really strategic areas will start to move this year - places with good transport that are close to amenities. Places that don't have that will fall behind."

Leaders and laggards
Kusher says that mid range stock, between $400,000 and $700,000, will perform best but the premium market is still lagging behind.

Lindeman agrees that the growth is moving away from first home buyers and into middle home market. "The worst area is still in the top end and that hasn't started to move. Growth starts at the bottom and moves up the ladder and it hasn't hit the premium market yet. However, there are exceptions such as the blue chip suburbs of Bondi and Paddington, which are showing good growth."

Outside of Sydney, Lindeman recommends investors to look toward high grade coal mining towns.  "There are a lot of new mines and developments in Newcastle and in Broken Hill and property prices reflected that. Over the last three months, values went up by 6%. The higher the grade of coal the better as I think there are going to be some constraints placed on the mining of low grade coal due to carbon pollution." 

However, that other regional favourite, Wollongong, is yet to show the growth that has been predicted for 2010. Several infrastructure projects are underway or completed, including the upgrade of the Princes Highway, the extension of the Northern Distributor and the upgrade of the Bulli Pass intersection and the $151 million South Coast Correctional Centre site at Nowra. The latter is driving Nowra's local economy and will continue to do so next year with 200 job created and $10 million per annum put into the local economy. But residential building is yet to keep pace with commercial. There are few new developments planned and the proposed subdivision of West Dapto has been revised and negotiations are still on-going.

Meanwhile, undersupply continues to be problematic. The NSW Government is expecting a population growth of 1.1 million people by 2036 and the Rees government estimates that 640,000 new homes will be needed. While there was a slight increase in building approvals during September, finance and development approvals remain difficult. "Something needs to be done to expedite that process," says Kusher. "We have under supply and the only way to fix it is to stop people coming to Australia - which I don't' think will happen - or get more product out there."

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