The pieces are starting to fall into place for Sydney’s property market. After a year that can be fairly described as ‘average’ – city-wide median capital growth sat at 6.6% for 2010, according to RP Data, with the vast majority of the increase taking place in the early part of the year – it seems that the economic drivers are all in place for a profitable few years.
Firstly, Sydney’s population growth remains strong. While the national population growth rate has slowed to 1.7% (from its 2009 peak of 2.2%), NSW’s growth rate is holding firm at 1.5%, according to the latest Australian Bureau of Statistics (ABS) figures.
Secondly, the state capital’s chronic supply issues remain unaddressed. John Edwards, CEO of Residex, reckons that there is a shortfall of somewhere between 10,000 and 14,000 properties in Sydney. The city’s somewhat restricted geography is also putting pressure on supply, says Australian Property Monitors (APM) research director Andrew Wilson.
“Available land for new building is so far out of the city that it’s difficult to commute in,” he says. “That puts the pressure on inner-city development, as everyone seeks to move inwards – and that’s a lot of pressure on demand.
Thirdly, wages are on the rise. The ABS’s latest wages index has shown a 1.7% rise for the quarter – an increase that Wilson thinks is telling.
“We’re seeing a lot of competition for skilled workers as unemployment figures fall,” he explains. “Importantly for Sydney, we’re also seeing jobs in the finance and property sectors returning – effectively, the jobs that were lost in the GFC are now coming back. Incomes are essentially growing – and that’s good for property prices.”
The population is growing, wages are rising and supply is struggling to match demand. So why are experts predicting that price growth will remain flat until at least the second half of the year?
It all comes back to the city’s ever-present bugbear – affordability. A recent report by research firm Demographia argued that Sydney property prices were the second-most unaffordable in the world after Hong Kong. While pundits have criticised the findings, arguing that the methodology is flawed (it is based on ABS figures, which do not take into account units or townhouses) there’s no arguing with the fact that many Sydney price tags are on the steep side.
“NSW affordability is terrible,” says Edwards. He cites Residex calculations that indicate the average amount of money taken up by mortgage repayments currently stands at 69% of after-tax income per week.
“That’s going to be a huge constraining factor on growth,” he adds.
The spectre of further interest rate rises is also preying on the minds of market participants. Rich Harvey, managing director of propertybuyer.com.au, thinks that the likelihood of further rate rises is putting the brakes on.
“The RBA is still worried about inflation, and the possibility of more interest rate rises is having a slowing effect on market activity.”
Those two factors, therefore, are likely to hold capital growth back, with Edwards projecting total annual growth for 2011 at between 4 and 5%. That doesn’t mean that investors shouldn’t be looking at the Sydney market very carefully, though – especially in terms of rental growth.
“Rents are very clearly going up,” explains SQM Research’s Louis Christopher. “They’re set to increase by 5 to 7% this year.”
Increased demand is the simple reason: as first homebuyers are forced to delay purchasing due to Sydney’s affordability issues, demand for rental accommodation is increasing – never mind that it’s typically cheaper to rent than to own your own home. Edwards reckons the average cost to rent is just 38% of weekly after-tax income. Wage hikes are also playing a role, adds Wilson.
“What we’re seeing a lot of is the ‘buyers in waiting’ crowd,” he explains. “The profile of first homebuyers is changing – it’s increasingly couples with two relatively equal full-time incomes, and who are fairly income-rich. It’s a sector of people who are renting prior to buying, but have a goodenough income to pay a relatively high rent while still saving for a home.”
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