After a long and sustained boom, Sydney’s property market hasn’t tanked.
In fact, if anything, it has sustained the strong position it gained during the December 2015 quarter, with recent interest rate cuts having the potential to reignite the market.
Auction clearance rates are high, which is likely due to investors becoming more active, according to Andrew Wilson, chief economist at Domain Group.
“The prospect is emerging for a regeneration of investor-fuelled price growth, particularly given the recent cut in mortgage rates,” Wilson says.
“Recent weak price growth has consolidated yields, and with the prospect of a post-election change to negative gearing, investors may be rushing back into the market.”
However, Wilson is concerned that the influx of investors may disturb the price growth in the Sydney market as it settles following a volcanic period.
Sydney properties increased in value by 3.9% in the previous quarter for a total growth of 8.9% in the past 12 months, according to CoreLogic.
While the growth rate has slowed compared to 2015, strong job creation sustains the state and facilitates continuous population growth.
“The strong state economy, major infrastructure spending, strong population growth and low vacancy rates mean that some segments of Sydney’s property market are likely to revive in the second half of 2016,” says Michael Yardney, director of Metropole Property Strategists.
Apartment demand in the inner and outer cities
With April vacancy rates falling below 2%, there is significant competition among tenants for properties in good locations, such as gentrifying suburbs in the metro area.
Thus rental rates have begun rising.
With the launch of the new light rail system for Eastern Sydney, that pocket of the property market is expected to get even better.
By contrast, there is limited demand for properties in the outer city, and prices are dropping.
“The current lull in the property market is creating a great opportunity for both homebuyers and investors with a long-term perspective, but careful property selection is critical,” Yardney notes.
Homebuyers are picking homes to suit their lifestyles, and many have shown a preference for apartments with balconies over houses with backyards.
Meanwhile, investors aim to capitalise on apartments with renovation potential and that can generate capital growth “when the market itself won’t be doing the heavy lifting,” Yardney says.
These properties are in the Inner West, Eastern and Lower North Shore suburbs.
Nonetheless, Yardney advises buyers in Sydney to be wary of apartments, because many former industrial areas have become overcrowded with units.
By contrast, Sydney’s inner-city suburbs are experiencing an undersupply of good homes in response to high demand from investors and homebuyers.
Paul Glossop, founder and director of Pure Property Investment, suggests this level of demand may continue into the next decade.
Low yields in the rental market
Sydney is experiencing “historically low” rental yields, although they have increased slightly in non-developable areas.
Affordability and wage increases continue to constrain growth.
“The data suggest that yields are around 3–4% depending on the area, and we don’t see that changing,” Glossop says.
“Creative investors are always looking to add cash flow, through granny flats, share accommodation and developing blocks.”
At a micro level, certain pockets of Sydney are evolving in ways that will impact on the market.
The Western Sydney suburb of Liverpool is going through significant changes, which are expected to positively affect neighbouring suburbs like Casula and Moorebank.
Homes in more affordable areas such as Blacktown and Campbelltown are also sought after by tenants.
“Blacktown is going through a strong spending renaissance,” Glossop says.
“Look to add cash flow in three to six years to bolster your position via granny flats. And if you have stock in Sydney and Melbourne that are not inner-city apartments, I would ride the cash flow wave over the next three to four years.”
In terms of capital growth, the housing market in Wombarra has soared, with 50% growth over the past 12 months, building on its three-year growth of 20%.
A significant drop in the vacancy rate from 2.85% to 0.95% has been observed.
In the last quarter, Beechwood was one of the top performers, reporting 33% growth, likely because of its low prices and proximity to Port Macquarie.
But the weekly cash flows for both suburbs are negative at present, so they must prove they can sustain adequate growth to be good investments.