NSW - Excerpt from the March 2010 Market Report


While the economic fundamentals continue to improve, further upswing in prices is likely to be tempered by the chronic undersupply and deteriorating affordability

The strong rebound in Sydney's property values continues unabated despite a string of rate rises and the winding back of the first homebuyers boost. During the November quarter, median values climbed by a further 3.10% to $617,500 after racking up 3.73% in the previous quarter according to Residex. Over the year, house values grew by 9.29%. Units showed also recorded strong growth, surging by 8.58% over the 12 months to November 2009.

The figures compiled by RP Data showed similar bullish result - Sydney values have grown by more than 1% each month between January and November 2009, with a cumulative growth of 11.6%.

"Lower interest rates and improved affordability as well as a strong take up of the first homebuyer boost were key drivers of the rebound in home prices," says Paul Braddick, head of property and financial system research at ANZ. "This has been aided by a marked improvement in market sentiment as price outcomes belied the earlier pessimism."

Underlying the ongoing solid recovery is the dramatic tightening of housing market conditions. BIS Shrapnel estimates that dwelling starts in NSW has dropped by 26.5% in 2008/09. This resulted in a shortfall of 65,300 in housing in June 2009. By June 2010, this deficiency is expected to surge to 85,900 and to an intractable 105,400 by June 2012 unless there is a sharp increase in housing commencements.

Recently, some encouraging data has emerged showing a small recovery in building approval. During November, the Australian Bureau of Statistics reported a 3.5% increase in the total number of dwellings approved in New South Wales. The number of private sector houses approved rose 3.3% and has risen for 11 months.

But while there has been some improvement in dwelling approvals, it's still not up to the level that we're meeting demand says Tim Lawless, research director with RP Data. "There's still a huge amount to catch up on. Dwelling approvals have been so low for so long so there's still this big lag of undersupply and it's going to take quite a number of years to fill," he says.

This lag is particularly evident in the number of dwelling completions which has fallen to near record low in 2009-10 even as population across the state grew to a record.

During the past 12 months to June 2009, NSW population climbed by a robust 1.7% boosted by record-breaking number of international migrants (85,000) and a healthy increase of 50,000 people through natural growths. This is a dramatic improvement from a meagre 0.5% recorded in mid 2004 and has further increased demand for housing in a chronically undersupplied market.

"Demand for homes is increasing and supply isn't keeping pace, leading to higher prices and tight rental markets. It's a simple matter of demand and supply. With interest rates well and truly on the way up, the problem needs to be looked at sooner rather than later, as rate hikes add a further disincentive to building," says Craig James, chief economist with CommSec.

At just 1.3%, residential vacancy rates remain near record lows and as the market move beyond the temporary lift in rental supply following 2009 surge in first homebuyers, vacancy rates will tighten further.

"Average rents rose by a solid 6.7% over the year to September and affordability (both rental and purchase) will continue to deteriorate," says Braddick.

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