Sydney investors trade yield for growth
As prices continue to run hot in Australia’s biggest city, investors seem happy to take lower rental returns in the hope of strong capital growth prospects
Another month, another strong performance for the Sydney market. Despite APRA’s move to quell the irrational exuberance of buyers, there’s no sign that buyers are abandoning the market in droves.
According to the latest results from CoreLogic RP Data, median dwelling values jumped 17.6% over the 12 months to August 2015. While this is a slight drop from the July growth of 18.4%, it’s a robust performance nonetheless.
“Australia’s largest city, Sydney, remains the hottest housing market,” says Cameron Kusher, research analyst at CoreLogic RP Data.
“While the recent data shows a slight slowing from the annual rate of growth in July, nevertheless it remains a rapid rate of growth from a historical standpoint and relative to the other capitals.”
The key driver of this ongoing strong performance is the low level of available housing stock on the market, according to Kusher.
In Sydney there are approximately 17,700 properties currently for sale. In late 2011 when market conditions were much softer than they are now, Sydney had around 40,000 properties for sale.
The flip side of this strong capital growth is that investors now have to deal with lower yields. Median rents across Sydney are increasing by only 2.3% per annum, which has resulted in gross rental yields falling to record lows, according to CoreLogic RP Data.
“The typical Sydney house is now showing a gross rental yield of just 3.1%, which is the lowest on record, while units are showing an average gross yield of 4.1%, which is also a record low,” says Kusher.
Strong spring season on the cards
Angus Raine, executive chairman at Raine & Horne, points out that while there’s currently a slight drop in properties being appraised for sale compared to last year, he thinks stock will ramp up quickly in the next few weeks.
“Listings have been down a bit during winter; that’s why we’re seeing those massive price increases. However, I think this is simply the calm before the storm. I think there would be a lot of properties entering the market for spring,” Raine predicts.
He believes the anticipated deluge of properties to be listed for sale will test the market in terms of how much more it can grow in value.
“There’s plenty of buyers out there at the moment, but there’s not a lot of stock, and this is partly what’s driving the prices up and the auction clearance to more than 80%,” he says.
“There’s just so much demand for Sydney properties at the moment, but the additional stock should still test the market.”
Most of the intense buying is occurring in the Lower North Shore, Inner West, Eastern Suburbs and St George areas, according to Raine.
“We have one case where one of our agents is selling a large apartment block for over $8m in the Eastern Suburbs, and the agent is now reporting there are over 40 interested parties inspecting the property. That shows how deep and wealthy the Sydney market is,” says Raine.
Rapid population growth – more than 50,000 people are moving to Sydney every year – is the biggest source of demand, says Raine.
“I call that insurance policy. There’s nothing better than solid population growth to underpin the market. That’s why investors love the Sydney market. All these people coming into Sydney every year have to live somewhere. The Sydney market is so deep and so resilient it should be able to withstand a flood of property coming on to the market.”
SUBURB TO WATCH
Cooks Hill: Desirable suburb surges
Don’t be put off by Cooks Hill’s high median house price of $795,000. There are some excellent options for purchasing property in this suburb for under $600,000. This includes two-bedroom houses on Bruce Street, which is within walking distance of the popular shopping and dining precinct on Darby Street. This kind of property would suit young professionals who can take advantage of the fact that it neighbours the Newcastle
For around the median price there are also three-bedroom houses on Bull Street that are ideal for families.
Houses in this suburb are already selling quickly, as they typically spend just 39 days on the market, which is a strong figure for the Newcastle LGA. Other indicators of healthy current demand are the auction clearance rate of 72.2% and the fact that there’s 1.12% of stock on the market, according to DSRdata.com.au.
This is not too surprising given the suburb’s sought-after location just a few minutes’ drive from Bar Beach, not to mention the trendy new cafes that have been popping up recently.
And one of the best things about investing in Newcastle is all the infrastructure development that’s underway. One such development is the $95m education precinct in the CBD. This will mean that 3,500 students will be able to attend this campus during the day, with the first students commencing in 2017.
Can you afford to buy in this suburb? Find out how much you can borrow