Premier state shows power to surprise

 

NSW property, and the state economy at large, is looking markedly better than a year ago, and there are two reasons for this.

Amid the tidal wave of negative media reports last year about the apparently doomed economies of Europe and North America, Australians are increasingly waking up to a reality of their own. The evidence for it has been there all along, but there’s a different feeling now. People are taking it to heart. And in NSW it is making a big difference.

“This reality is that many of those[overseas] markets have little impact on the Australian economy at all,” says Tim McKibbin, chief executive of the Real Estate Institute of NSW(REINSW). McKibbin believes the fact that Australia’s economic performance fared better than Europeand the US last year is slowly starting to sink in for most Australians, and this has resulted in a marked improvement in sentiment.“Over the last six months, Australians have realised that our economy and our trading partners are reasonably robust. The confidence that has come from that realisation has begun to surface and is evident through an improvement in the share market,” he says. McKibbin adds that the effect of improving sentiment should never be underestimated, especially in NSW. Australia’s premier state has seen two sectors of its economy – retail and housing construction – struggling of late,and their performance relies heavily on consumer confidence. Up until this stage, sentiment had been largely negative, but a more confident consumer outlook will do much to repair these sectors. As Australia’s most heavily geared state, NSW has also had a lot to benefit from interest rate cuts. McKibbin says they have breathed new life into the property market and the state economy as a whole.

“We’ve seen an improvement in property prices, and the NSW government announced that employment rates are also improving,” McKibbin says.

This is evident in RP Data figures, which show that Sydney median house prices have grown by 8.5% in the 12 months to February, while unit prices have also enjoyed a good run at 4.3% growth. The three months to February were kind to areas outside of Sydney too, with median house prices growing 7.2%.

 

Interest rate opportunity

 

That interest rates have opened the property market up is something of an understatement. Reserve Bank of Australia (RBA) data shows that Australian banks lowered discounted variable rates by 105 basis points in the year to February, the lowest since November 2009. Considering that 85% of mortgages granted in December were variable, this is a significant sign of where the market is at. In addition to variable cuts, fixed mortgage rates over the same period plunged 85 basis points to an average of 5.45%, according to the RBA, the lowest since they began collecting data in 1990. Deloitte Access Economics’ Business Outlook report says the phenomenon has been fuelled by fears of a slowdown in the mining sector. The Reserve Bank is making a bid to increase activity in more traditional sectors (manufacturing, tourism, international education), which all have a strong base in NSW.

“With a resource construction peak fast approaching, the Reserve Bank is cutting rates in the hope that ‘interest rate sensitive sectors’ will lift up to help fill that approaching pothole,” it says, adding that this puts NSW in reasonably comfortable position.

“NSW’s share of the resource construction boom is modest anyway, so the strength that Australia is losing will be less of a loss for the premier state… the interest cuts have the potential to drive a bigger upside for NSW than is true for the other states,” the report says.

For McKibbin, the cuts present a strong opportunity. “Property prices arenow returning to more traditional levels... We should also see transaction levels increase, particularly in the more affordable areas of the market,” he says.

 

Are Sydney prices out of reach?

 

With a median price of $627,500, Sydney house prices are not only significantly higher than the rest of Australia but they are also higher than just about every other city in the world, according to multiple reports.

RP Data February figures show that Sydney’s median house price is a good $77,000 more expensive than the market with the second most expensive housing in Australia – Canberra – and is closeto $140,000 more expensive than Melbourne. This comes after the Economist Intelligence Unit ranked the city third in its 2013 list of the most expensive cities worldwide. The only cities deemed more expensive were Osaka and Tokyo

in Japan. The study looked at multiple measures of cost of living, including property prices, to arrive at its results.

Another report by Demographia ranked Sydney property prices as the third most unaffordable after only Hong Kong and Vancouver in its International Housing Affordability Survey, a study of 337 major cities around the world.

 

Spotlight on: Highest 12-month rental growth

 

Northern Sydney has experienced major rental growth over the last 12 months; all but one of the top 10 performing suburbs are in this area. Among northern suburbs, the reasonably affluent lower North Shore has dominated rental growth charts, with areas such as St Leonards, Kirribilli and Wollstonecraft seeing some of the highest increases in median rent. Adjacent Artarmon had the fastest growing median rent across the whole city.

 

Wiley Park

 

Opportunity is knocking, and Wiley Park has just opened the door. Because the Western Sydney suburb’s unit prices are among some of the lowest within 15km of the CBD but rents remain comparatively high, the possibilities for cash flow hungry investors are plenty. The suburb’s current median gross rental yield is an attractive 7%, and that means most properties are cash flow positive, provided an investor sticks to some established rules of property selection: stay close to the Wiley Park train station and avoid the busiest streets, such as King Georges Road and Punchbowl Road. Roughly 14km from the Sydney CBD, Wiley Park has enough in the way of amenities to attract a diverse tenant base. The rest of the city is easily accessible via the train station, which puts the CBD within a 30-minute journey. Parks and schools abound, and although shops and restaurants are not within walking distance, they are easily accessible by car.

First home buyers are reasonably active in the area too, which has helped keep the market mostly stable through good times and bad. The median unit price of just $268,000 is one reason for this, but when coupled with the suburb’s convenient location, it has ensured a suburb that remains an evergreen choice for buyers.