NSW excerpt from the September 2010 Market report

Softly softly is the message for the next few months in Sydney – but the market is coming back
It looks like Sydney may well be the place to stake a claim in for the coming months, if the predictions of many market experts are to be believed. While the market has softened since the beginning of the year due to the double whammy of rising interest rates and the end of the First Home Owner Grant boost – as it has across the board – a number of industry figures believe the scene is being set for another growth spurt.
Why? Well, it’s all to do with Sydney’s chronic shortage of supply. “The slowdown in activity has, to a large extent, been down to the rapid interest rate rises and the end of the First Home Owner Grant boost working through the system,” explains Angie Zigomanis, project manager at BIS Shrapnel.
“The First Home Owner Grant boost in particular created a significant demand increase at the bottom end of the market – effectively pulling forward today’s market – which had a positive knock-on effect on the rest of the market. A lot of that demand has now dropped off, with the opposite effect on turnover.”
However, Zigomanis believes that the environment is now stabilising, particularly as BIS Shrapnel projections suggest there will be no more interest rate rises until the December quarter, and any subsequent rises will be at a much slower rate than this year. That more stable environment, he argues, will see a resurgence in activity – and an acceleration in growth.
Matthew Bell, economist at Australian Property Monitors (APM), agrees.“The figures for the June and September quarters will have softened, but I don’t expect city-wide price falls,” he comments. “There may be some localised falls in sensitive areas such as the west and south-west of the city, but the more affluent inner-city market, which is more insulated from the impact of the interest rate rises, should perform better.
“However, by the end of the year, I expect that Sydney will be back up to average growth rates – although it will be an achievement if it tops an annual growth rate of 8% for this year.”
What’s putting the brakes on growth this year? It’s the same old enemy – affordability, which is still being poleaxed by Sydney’s chronic shortage of supply. Zigomanis believes that affordability issues will restrict growth to the mid-single-digits in the short term. However, as long as incomes keep rising and interest rates remain stable, the pressure is likely to reduce as time goes on.  

Bell is of a similar mindset, although he suspects the problem will persist in the long term, especially if supply doesn’t increase.

Bright outlook 
It’s next year, then, that the market will really start to improve. Bell suggests that a combination of first-time buyers coming back to the market as the ‘pull-forward’ effect of the First Home Owner Grant boost starts to recede, an ever-growing population and supply shortages will see confidence return to the market.

Zigomanis is even more bullish. “Sydney has seen weaker growth than Melbourne in recent months; in fact, the market has been relatively weak since 2004. Prices are 10% below what they were at its peak. There’s definitely scope for stronger growth to come through, probably towards the end of this year or early next year,” he says. That all adds up to good news for investors that can act quickly.
“Our broker contacts have reported a big jump in the investor side of the market,” says Bell. “It seems like it’s a good time for investors, especially as there’s little competition from first-time buyers at the moment.”
Zigomanis suspects that demand is likely to come in the profitable unit market – where rental yields are hovering near 5% – and in areas that have been hit harder by the interest rate rises. However, he cautions investors not to expect returns on a Melbourne scale.
“While we expect Sydney to show the strongest growth in the short to medium term, large short-term gains have disappeared. Additionally, we don’t expect affordability issues to stay very far away: in fact, we expect them to come back with a bang in two or three years, when the economy is firing on all cylinders,” Zigomanis says.
“At that point, interest rate rises will start coming back, as the RBA attempts to tackle the likely inflationary pressures. If you’re looking to invest in property, that leaves you with a very short window in which to act.”
However, Chris Lackey of WBP Valuers warns investors to apply caution when entering the current market, exercising patience, while conducting the necessary research of the market segment they are considering.
“Like all markets, Sydney prices rise and fall and compulsion can lead to a hasty decision that buyers may regret later,” Lackey says.
“Properties that are inherently inferior, either due to location or quality, are now selling significantly above value in short marketing periods, when they would ordinarily attract little interest and be priced according to their actual worth.”

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