Is Sydney heading into dangerous territory?
As eager property buyers push Sydney prices up another notch, investors are warned about
When a respected property analyst starts sounding caution about the speed and magnitude of the price gains in Sydney, it’s wise to pay attention.
“During the past 12 months we have witnessed one of the largest boom periods in the history of Sydney’s housing market,” says John Edwards, founder of Residex and consulting analyst with OnTheHouse.com.au.
“The boom conditions are usually caused by supply issues and greed. The latter comes about as a consequence of people believing there are low levels of risk and quality returns to be made by
entering a market.”
With more rate cuts expected in the coming months, Edwards warns that property buyers entering the market at this level are exposing themselves to serious risks due to the inflated property prices.
“I issue a warning to all: We have passed the top of a normal growth period and we are about to have the market stimulated and have further growth. That growth is taking us into uncharted waters where affordability will be potentially worse than we have previously seen.”
Edwards points out that at the current median house value at $900,500 as calculated by OnTheHouse.com.au, you would need to spend more than half (56.9%) of the family household income servicing the mortgage and have just a meagre $734 a week to live on and pay for other necessities.
“Even with interest rates for home loans at 4.5%, the median family in Sydney would only have $789 after tax and mortgage repayments to meet normal living expenses,” he says.
From boom to bubble?
It goes without saying that the exuberant buying in Sydney is starting to create a bubble that Shane Oliver, chief economist with AMP, believes would lead to price falls when interest rates start to rise again.
“Sydney has certainly become a bit bubbly,” says Oliver. “While it’s not a full blown bubble yet, it certainly made some people worry that the strong gains are now fizzing out. The fact that rents and income levels haven’t grown to match these strong price gains is making the Sydney market
Oliver expects property values to grow by another 8% this year after a further interest rate cut, but believes yield will remain low despite a tight rental market.
“The problem for investors is that the rental yields have been pretty low as a result of rising prices. I think there will be some upwards pressure on rents but I doubt it will keep up with the strong property values. At the moment, net yield for houses is just 1%, and 3% for units.
“The big risk for investors is the degree of vulnerability. When interest rates start coming up again, you could see prices falling by around 10%.”
The other dangers investors are facing include getting caught up with the buying frenzy and allowing their emotions to rule their heads, according to George Raptis, director with Metropole Buyers Agency.
“Investors may forgo their usual due diligence and get caught up in the emotions of the buying process as they lose sight of the big picture. They are willing to pay whatever it takes to make their dream purchase a reality,” says Raptis.
This could result in buying the wrong type of property in the wrong location and worst, buying one that isn’t considered an investment grade property, according to Raptis.
You could also end up being overcommitted financially and will be exposed when interest rates start
While there are worries about Sydney property prices punching higher records that it cannot sustain, the good news is the economy appears to be growing from strength to strength.
“NSW is now the strongest economy in Australia,” says Oliver.
“I don’t see this reversing any time soon. The lower interest rates, the falling Aussie dollar and the slowing resources sector have been the source of strength for the state.”
Deloitte Access Economics agrees in its report that the lower interest rates are boosting NSW’s fortune.
“Interest rates have always been a good indicator of the economic prospects in NSW,” the report says. “The state is home to the largest consumer market and mortgage market in the country. Low interest rates act to make existing mortgages cheaper, boost consumer spending power and have contributed to the growing wealth of Sydney-siders in a way that is unmatched in the rest of the country.” Also, because NSW didn’t have the boom in resource-related construction that was evident in some states, it is not as much risk on the downside according to the report. This means that, while business investment is a shrinking share of Australia’s economy, it is currently a rising
share of the state.
SUBURB TO WATCH
Kings Langley: Family friendly suburb offers diverse mix
Nestled 39km west of the Sydney CBD surrounded by a variety of parks, reserves and schools, Kings Langley is in high demand for the new generation of families.
With a vacancy rate of 0.66%, the demand for property in Kings Langley is skyrocketing. Houses are spending an average of just 18 days on the market.
Matthew Lucas of LJ Hooker says the entire suburb is looking very attractive for families. ‘’Kings Langley has mainly been more of a brick veneer-style suburb, it’s family orientated, with good schools surrounding it, and I think most importantly it’s close to motorways.’’
The suburb is well serviced by public transport infrastructure that connects to hubs like the CBD, Blacktown
. A trip to the Sydney CBD via the M2 Hills Motorway can be done in 30 minutes.
Kings Langley boasts an area with many larger familystyled homes consistently appearing on the market.
‘’A lot of them tend to be four bedrooms. You do have a fairly diverse mix, but a lot of them are larger style blocks anywhere from 600m2 plus. We’re getting a lot of the next generation coming through there now as well, particularly the first homebuyers who have grown up around the area.’’
Lucas says the entire suburb has been popular across the board.
Sought-after areas include Perry Street, Isaac Smith Parade and Regal Avenue which all offer the perfect balance in terms of access to schools and shopping centres.