NSW Excerpt from the 2012 September Market report


 As investors mull over the preliminary results of the ABS Census 2011, released in June this year, some familiar alarm bells are ringing across the Sydney property market. Among the more ominous is that a theme of poor affordability just doesn’t seem to be quitting.

Census data shows the gap between what Sydneysiders are earning and what they’re spending remains dangerously close. Thanks to a 20% increase in mortgage repayments over the last five years, Sydneysiders continue to shoulder the biggest mortgages in the country, with median monthly household mortgage repayments at $2,167. This is compared to a national average of $1,800.

The Harbour City’s figure for median weekly rent has also risen since the last census was taken and is now at $351, almost 25% higher than the national average. This is significant for a city where the same census reveals that 31.6% of households are renters – an edge above the national average of 29.6%.

As mortgages and rents have gone up, so too has median household income, which is now at $87,516 a year, 24% up on 2006 census figures for Sydney. A recent Council of Australian Governments report confirms that affordability remains a struggle for Sydneysiders. The report indicates that just 24% of properties for sale in Sydney are affordable to households in the lowest 60% of incomes.

Residex chief executive John Edwards warns that this situation should not be taken likely. In his view, affordability concerns speak volumes about where a property market is heading. “A market can start acting in some interesting ways whenever price increases haven’t been matched by growth in income,” he says.

Edwards says that prices can only rise in an area provided they are at a level considered affordable to buyers. When property is considered unaffordable, growth in values typically starts to flatten or in severe cases, can even fall.

APM’s senior economist Andrew Wilson believes that this effect is already prevalent in Sydney. “We’ve seen a lot of stagnation in many Sydney markets, especially the more prestige ones, and there’s no sign of a recovery soon. That said, there are certain areas of the city that are showing growth, such as in the north-west and south-west,” he says.

Dwelling deficiency

BIS Shrapnel senior manager Angie Zigomanis says that his organisation has also noticed a flat period in Sydney prices growth, with June 2012 prices showing a 1% decline over 2011 figures.

However, Zigomanis believes that this reflects a wider trend of weak performance in Sydney prices that has lingered over the last couple of years. What’s keeping Sydney property afloat, Zigomanis says, is a chronic shortage of housing.

BIS Shrapnel’s Residential Property Prospects 2012-2015 reports that new dwelling construction in Sydney remains well below the level required by population growth. This has been evident in the city’s low vacancy rates and strong rental increases since 2006.

Despite an increase in dwelling commencements, the report adds that new developments are unlikely to erode this shortfall in housing and that this will ensure strong rental growth in the next two to three years.

Zigomanis believes the deficiency will ultimately serve investors well. “[The] deficiency will eventually encourage investors back into the Sydney market. Once there is evidence that prices have bottomed out and sentiment improves, the return of price growth will in turn promote further investor demand.”

He adds that the timeframe for this occurring should be fairly soon. “After showing signs of a turnaround in 2012/13, price growth should pick up in 2013/14. We are forecasting total price growth in Sydney over the three years to June 2015 to be 17%.”

To the north, south

Rising rents, higher interest rates and deteriorating affordability in Sydney could have a profound effect. Zigomanis says that because property prices in Newcastle and Wollongong are much lower than in Sydney, they could see a higher inward migration of ex- Sydney residents.

He forecasts growth in Newcastle and Wollongong median prices to be at 17% in the three years to June 2015.

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