The pause we had to have
A sharp fall in dwelling values during the recent quarter has placed Sydney well behind rival Melbourne. Experts say Australia’s biggest city is now facing a long period of sluggish growth after its breathtakingly strong performance during the past three years. Nila Sweeney explains
While it’s far from a struggling market, Sydney is certainly showing the classic signs of a contracting market.
During the January quarter, it again suffered the largest drop in median dwelling values of all other capital cities, according to CoreLogic RP Data. This follows the sharp decline it recorded in the previous quarter.
During the rolling quarter ending January, median values fell by 2.1%, a stark contrast with Melbourne’s negligible -0.1% drop.
While Sydney notched up a whopping 10.5% growth in median dwelling value during the past 12 months, this is also the slowest growth rate since the middle of last year, according to Tim Lawless, head of research with CoreLogic RP Data.
“Sydney’s capital gain of 10.5% is no longer the highest annual rate across the capitals,” says Lawless.
That title now belongs to Melbourne, which grew by 11% during the same period. While still a high rate of annual growth, Sydney’s annual rate of capital gain is now at a 29-month low and has been progressively softening since peaking at 18.4% in July last year, says Lawless.
CoreLogic’s results are mirrored by Domain’s statistics where it showed a dramatic 3.1% slump in house prices during the December quarter. Domain notes that this is the first fall since June 2012 and the sharpest quarterly decline in house prices reported by the city on record.
“The remarkable Sydney boom we’ve seen over the past three years is now clearly over, with the market unlikely to record any notable house prices growth until at least spring,” says Andrew Wilson, senior economist with Domain.
While the median house price still remains above $1 million (at $1,013,258), if current trends continue, Wilson says it will likely fall below this benchmark by mid-year.
“Sydney was certainly tired and emotional towards the end of last year, and prices went backwards. It’s really about the pause it has to have,” he says.
No need to panic
While the forward indicators, such as the auction clearance rates and sales volumes, point to a weakening market, Wilson says there’s no need to catastrophise it.
“The market started off the year on a slow note with a lower auction clearance rate and sales volumes but this doesn’t mean the market is about to tank,” he says.
The auction clearance rate at the time of writing was at 73% which, according to Wilson, is a relatively strong outcome, albeit significantly lower compared to the boom months.
“Properties that were on offer are finding buyers. Looking ahead, sales volumes are likely to fall further,” he says. “Sales volumes are now 30% down compared to the same period a year ago. I think it’s a reflection of vendors’ weariness. So it’s a question whether the sellers’ weariness will be followed by the buyers.”
Notwithstanding the pause that Sydney had to have and the shallow confidence at the moment, Wilson points out that Sydney’s fundamentals remain very strong.
“While prices have fallen significantly, it’s a sentiment-driven outcome, not driven by weak fundamentals or a recession,” he says. “It has a very strong economy and migration. Sydney still has chronic undersupply and it’s not likely to be addressed soon, if ever.
“I believe the market will rebalance itself sooner than later, but the prospects of the fast growth we’ve seen in the past three years are entirely remote. Price growth will be so much more modest going forward.”
2003 post boom vs 2015 post boom
Wilson expects the Sydney market to behave just like it did following the boom in the early 2000s where prices hardly grew from 2003 until the start of the boom in 2013.
“It will be a similar environment in a way that it will be a slow burn,” he says. “One thing to remember is that the economy then wasn’t as strong as it is now. Sydney at that time was going through an exodus of people. Lots of people were leaving the city. The opposite is happening this time around.”
However, the capacity to push prices once confidence recovers is just not there anymore, according to Wilson.
“Interest rates are still low but so is income growth. Even if interest rates will drop by a couple of points, it really doesn’t create the capacity to reignite price growth. Affordability is a real issue,” he says.
Based on this scenario, Wilson says that price growth of 4-5% this year would be a good outcome.
“It depends on how the economy pans out, but the market fundamentals are strong. It’s just that the capacity to push growth is now very modest.”
SUBURB TO WATCH
Casula, NSW: Under-rated suburb surges
Immediately south of Liverpool, Casula is beginning to catch the eye of investors and tenants.
Sales agent Glen Craigie of McGrath Estate Agents cites the affordability of its properties as one attractive feature. “Its location and being so close to main arterial roads make the suburb ultra-convenient,” he adds. “The most common renters have grown up within the Liverpool region and find convenience the key in staying within the area.”
Casula has ample retail and transport amenities to support its residents. The suburb is also accessible via reliable public transport, with its own designated train station and good proximity to M5 and M7 motorways.
Casula homes are highly sought after, and prices rise as the supply struggles to meet demand.
The best buys, according to Craigie, are the more affordable semi-detached housing. “Investors are attracted to townhouses, villas and duplexes due to the low maintenance for an incoming tenant,”
Craigie explains. First home buyers prefer single-level dwellings on large plots of land. Meanwhile, growing families opt for more sizable properties.
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