Sydney’s property market may have stagnated of late, but strong fundamentals point to a steady few years ahead.

Sydney’s strong growth may have eased recently, but those in the know believe that its property market is still holding up well and that there’s no risk of a crash any time soon.

“The market as a whole has consolidated, and there’s going to be slow and steady growth,” says PRDnationwide research director Aaron Maskrey.

“There’s a lot of hype that the property market’s going to burst, but I don’t see that at all. There are too many key underlying factors holding it together: cost of developing, population growth and even regulations regarding developing,” he adds.

Population growth has been one of the fundamental strengths underpinning Sydney’s property market for some time now, and figures that reveal the influx of new residents flocking to the Harbour City show no signs of abating.

“In NSW, the 1.57% population growth is well above the 1.1% decade-average growth pace. But importantly the current growth pace is around double the rate of growth existing around four years ago,” writes CommSec’s chief economist Craig James in his State of the States report.

While NSW is weak on home building and construction, James notes that the state benefits from historically high population and robust employment growth, and as such, is holding up better than all states except Victoria in terms of housing finance activity. Looking ahead, James expects NSW’s economic performance will continue to gather momentum as a result of a firmer job market.

CBD remains popular

Given Sydney’s ever expanding population, competition for property within sight of the CBD is fierce. Add to this the state government’s stamp duty exemptions on pre-construction properties, and off-the-plan opportunities being snapped up.

“The sub-$600,000 market, especially within 10km of the CBD, is still very strong. That’s due to the stamp duty regulations. So for off-the-plan, sub-$600,000 properties, both owner-occupiers and investors are still diving into that space, especially the investors,” explains Murray Wood, Colliers International’s national director of residential.

“There are definitely quite a few developers kicking off projects where they may have normally waited until February or March, when the stronger selling season comes. I think that’s purely because of the stamp duty effects.”

While the majority of buyer activity in central Sydney is based around the unit market, RUN Property CEO Rob Farmer has noticed some action in the sub-$1m house market.

“Properties under $1m are very popular. It’s also interesting to see investors going for houses around $600,000–700,000 rather than just the traditional two-bedroom unit. However, apartments remain very popular due to greater affordability, stronger rental demand and higher yields compared to houses,” says Farmer.

Upgrading problems

With first homebuyers and investors keen to snap up the stamp duty exemptions while they last, Wood believes that current owners hoping to sell and upgrade may find it hard to compete, causing the secondary market to stall.

“There’s hydraulic pressure that comes from somebody selling a $600,000 house then buying into a $900,000 house, and someone selling a $900,000 house who then wants to buy into a $1.6m house, and clearly you’re not going to have that if the bottom end slows,” says Wood.

However, fuelled by Sydney’s undersupply issue, land lot production is on the up in outer Sydney and upgraders willing to move further afield may be tempted to go for the opportunity to bag a new home.

BIS Shrapnel predicts that land lot production in Sydney will increase by 168% of its 2005/06– 2009/10 figure, to reach 5,280 lots during the period 2010/11–2014/15.

“The rise in prices for established houses has meant the premium required to purchase a new house compared to an established house has narrowed,” says BIS Shrapnel senior project manager Angie Zigomanis. “Consequently, upgraders have become more willing to sell their current dwelling to purchase a brand new house on a new subdivision.”

Future looks good

Upgraders aside, BIS Shrapnel certainly believes Sydney isn’t in for a crash any time soon. In a report written for QBE LMI, BIS Shrapnel forecasts that capital growth in Sydney will total around 20% in the next three years (4.2% in 2011, 6.2% in 2012 and 8.7% in 2013).

“Future median house price rises will be underpinned by a deficiency of dwelling stock across most capital cities, which in turn will lead to tight vacancy rates and solid rental growth, flowing through to investor demand,” says QBE LMI’s CEO Ian Graham.

Maskrey too predicts decent growth for Sydney in the near future, which he points out would be an impressive turnaround from its recent flat period.

“Because the Sydney market went through such a strong period of stagnation, any positive growth that it sees is doing well. I think for the next couple of years you’ll see property growth between 5% and 8%. And considering other capital cities around Australia, that’s actually quite positive,” says Maskrey.

Hot spots

Maskrey highlights Sydney’s inner south-east as one area where the demand for units is pushing up prices, highlighting Elizabeth Bay, Bondi Junction and Rose Bay as top performers whose median prices are still affordable for the area.

“Elizabeth Bay has had an increase during the past year of 55% of the median price, and the median price is only $655,000,” says Maskrey. “While in Rose Bay, the median price is $822,500, but in neighbouring suburbs median prices are close to $1m, so there’s potential for it to still grow.”

“Bondi Junction is an area with lots of amenities, lots of infrastructure and it’s still inner city. It’s had an explosion of activity, in both houses and units,” he adds.

Away from the state capital, Farmer believes that GFC-hit coastal holiday home locations in the mid-north, far north and south coast may now present good investment opportunities.

“Holiday homes were largely the first assets to be liquidated by people who needed cash to get them through the GFC. These areas have not yet recovered and they present good buying opportunities. Coastal locations might present greater re-sale value than ever due to the downsizer/seachange movement over the next 10–20 years as the population continues to age,” he says.

Vacancy rates

Vacancy rates have been falling throughout much of the state, with the monthly rate only increasing in three of the 22 regions measured by the Real Estate Institute of New South Wales (REINSW).

According to the REINSW’s September figures, the three urban centres of Sydney, Newcastle and Wollongong saw vacancy rates decline by 0.3%, 0.5% and 0.2% respectively, leaving their overall rates at 1.2%, 1.2% and 1.8%.

“We still have a rental crisis on our hands. There are simply not enough rental properties for tenants to live in at affordable prices. Vacancy rates are at record lows and there is no meaningful change in supply; it will take some time before this position changes,” says Farmer.

“Generation Ys in particular prefer to rent in their favoured lifestyle locations rather than saving up to buy an affordable first home out west. They want low maintenance properties close to the CBD, transport, cafes, restaurants and beaches,” he adds.