Experts have rejected talk that the Sydney property market may plateau in coming months, with capital growth firing on all counts
“Prices in the Sydney market are heading in one direction – and that’s up.” These were the words of Real Estate Institute of NSW (REINSW) president Wayne Stewart in April – a strong vote of confidence for investors in Sydney.
The REINSW says that NSW property prices are continuing to strengthen, with no signs of flattening in the near future.
“At the coal face, we’re seeing more buyers active in the market than we’ve seen in recent years – a fact which is reinforced by the extraordinarily high auction clearance rates,” Stewart explains.
Residex data showed Sydney’s median house price climbing by 13.49% to $641,000 over the past 12 months while units achieved a 10.39% to $449,000 year on year growth.
Australian Property Monitors’ House Price Report for March says Sydney houses have experienced their highest level of annual growth – at 14.7% – since the end of the last boom in 2004.
Real estate agents on the ground are seeing similar growth. “It’s all firing, everywhere,” says Spiro Deligiannis, director of First National Real Estate in Marrickville.
He says the market will continue to grow tighter and prices escalate further, unless the government takes action in the coming months. Although interest rates are holding the market back slightly, buyers are certainly not as concerned about debt as they used to be, according to Deligiannis.
Housing shortage to push prices higher
Access Economics’ Business Outlook report notes that Sydney’s population growth, combined with stagnant housing construction, could lead to a return in overpriced housing.
“The rise in population gains in recent years occurred across a period in which new housing construction stagnated badly. The worrying result is renewed housing price gains in Sydney – a city where housing was already overpriced,” the report says.
“It is hard to get across just how tough things were in housingconstruction in NSW in recent times. The pace of new housing starts dropped to truly pathetic levels in early 2009 – the lowest in half a century. The lingering credit crunch is still having a nasty impact in the availability of loan funding to developers for building apartments.
However, the report also found that the number of building approvals and new home loans are rising.
Paul Braddick, head of property and financial system research at ANZ says that this housing shortage, combined with above-average population growth, may pave the way for further growth in the coming quarters.
“The fact that Sydney slipped dramatically over the past 6-7 years compared to all other cities, and combined that with the fact that of the national oversupply, half of it is in Sydney, it means it’s going to be very tight in Sydney and its going to take a long time to turn that shortage around. In our numbers, the shortage is actually going to get worse over the next five years, so it’s an underpinning factor for houses that is going to be strong. Sydney hasn’t reached its peak.”
John Lindeman, head of research for Residex, says the Sydney market is booming at the top end, while the lower end is experiencing a drop-off. “I expect the boom to slow and the market to settle into a moderate growth phase until the next round of interest rate changes,” he says.
Vacancies down, returns up
The current rental market in Sydney is great for investors but not so rosy for their tenants.
The overall rental vacancy rate in Sydney fell to 1.1% in March, dropping again for the second consecutive month, according to the REINSW.
While vacancies in Sydney’s inner suburbs (0– 10km from the CBD) remained stable at 1.1%, the middle suburbs (10– 25km from the CBD) fell by 0.7% to 1.1% and the outer suburbs (more than 25km from the CBD) dropped by 0.3% to 1%, according to the REINSW.
Deligiannis says high rental returns are being achieved across Sydney. “Even out west, I hear stories that the returns are so high it’s been generating between 8% and 9% rental returns.”
With average Sydney rents of $485 and $425 a week for houses and units respectively, returns stand at 3.95% and 4.94%, according to Residex.
Angie Zigomanis, senior analyst with BIS Shrapnel thinks the best areas to invest in are the more affordable areas in the outer suburbs such as the outer west.
“You’d probably find that at the moment, they have dropped values a little bit in the first quarter due to drop of fhb demand, but I suspect that into next year, you’d find prices start returning in those areas again. Look at older apartments as well because a lot of the depreciation has already been priced out the value of the property, showing a bit more value as well particularly if you look at the rental gain in comparison to what you’re paying,” says Zigomanis.
Margaret Lomas, director of Destiny Financial Solutions, points to regional areas like Nowra and Wagga Wagga as potential growth areas, thanks to strong population growth and good infrastructure planning. “I like Orange
and Bathurst in NSW too,” she adds, “as they’re rich in growth drivers and present great value, and both have strong expected population growth.”
John Edwards of Residex advises investors to look for well-positioned units close to transport hubs and more than a decade old as they are going to see the best growth but avoid suburbs where there are significant volumes of new developments taking place.
“These units are often found in areas which are currently seeing new unit development around transport hubs. As such, these older units are more likely to decrease in price due to surrounding pressure, as newer units are brought onto the market. As a direct consequence of this, these older units should allow better negotiated purchase prices. These units will tend to have less facilities in them, thus their strata fees are less. These units will present an opportunity for immediate gain with resale after minor refurbishment. The lower cost will ensure that the rental yields are higher,” says Edwards.
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