NSW excerpt from the August 2010 Market report


A booming prestige market; a struggling outer suburban market. Wait a minute – there’s something very familiar about all this…

Is it a boom? Is it a bust? It all depends whose veranda – or balcony – you’re sitting on.

“Falls are occurring at the lower end of the market, but they’re being hidden by the rises that are occurring at the upper end,” says Residex’s chief property analyst John Lindeman, explaining the 17% growth in Sydney house prices in the 12 months to April. “That’s exactly the opposite of what was happening last year. There was a 20% rise in the first homebuyer market last year, and that’s now flowing through the rest of the market. It’s more or less the First Home Owner Grant – the impact of those incentives is now rolling through the market.”

If you think you’ve seen this before, you’re absolutely right. Here is how the endless loop of the Sydney market works: unaffordability drives governments to introduce demand-side incentives. First homebuyers then flock to the market, paying too much for houses in outer-ring suburbs. The market overheats, causing the Reserve Bank to raise interest rates, which puts pressure on all homeowners and investors. This creates another wave of unaffordability and unmet demand. “That pressure will mount up and up until interest rates come down and new government incentives are introduced, and then we get the same thing happening all over again,” says Lindeman. “I’ve seen it many, many times.”

So what is the way out of this vicious cycle? Two words: increase supply. “We’re just not building enough new homes,” Lindeman claims. The Housing Industry Association (HIA) is also deeply concerned about this issue. New residential construction in NSW increased by 4.4% in the March quarter. However, financing problems and a lack of supply-side incentives may hamper progress through the rest of 2010. “The extremely high value of work approved but not commenced in recent quarters highlights the risk that actual construction levels will continue to disappoint,” says HIA chief economist Harley Dale.

Prestige hot spots

Despite the gloomy forecast, hot spots have emerged in established suburbs, such as Lane Cove, Chatswood and Willoughby to the north, and Vaucluse, Bondi Junction and Kensington to the east. These suburbs have averaged 7–8% growth in just three months. Excellent rents are being achieved across the north shore, east and inner west, with vacancy rates easing only slightly in April – from 1.1% to 1.3% – across inner-ring suburbs.

Vacancy rates are tight throughout Sydney, the Hunter and the Illawarra, according to the Real Estate Institute of NSW (REINSW). In fact, “the rental situation in much of NSW remains in crisis”, says REINSW president Wayne Stewart. “Over the last 12 months, the vacancy rate in Sydney has only reached a high of 1.7%, which is both limiting the choice for renters and pushing prices higher.”

Stewart expects the NSW government to introduce measures to assist renters in the forthcoming budget. This will further support investor opportunities throughout the state.

Rural blues

Country NSW continues its run as one of the worst performing rural markets in Australia. At the moment, Lindeman says, you would be wise to avoid most regional NSW real estate investments. “The best option I could think of would be Queanbeyan, and that’s only because of its proximity to Canberra and the fact that house prices are about 30% cheaper than they are in the ACT,” he says. “A lot of people are now starting to commute from Queanbeyan to Canberra. Queanbeyan grew by 20% in the last year and its average growth over the last 10 years is 11% per year, so it’s the best performing suburb in the whole of NSW over the long term. It’s still got a lot of growth left in it.”

Coastal holiday towns, once thought to be a sure bet, have defied expectations by not growing at all. “The problem is that you’ve got a lot of people who would like to retire, but who can’t because of the current economic conditions,” Lindeman explains. “They’ve perhaps lost a lot of money on the share market or superannuation. So people who would have moved to areas like [the north or south coast], haven’t been able to do so.”

Resort towns along the coast are falling in value, especially in Ulladulla and Gerringong in the south. “For some of them, when you go further south – Merimbula, Pambula – there’s been no growth for years,” says Lindeman. “It’ll happen, but just not in the next couple of years. I wouldn’t recommend buying now, but when you see your boss retiring, perhaps it’ll be time to get in.”

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