What’s going to drive Sydney’s property market in 2015? | Pete Wargent

We have been reading articles about an “inevitable” slowdown in Sydney property for at least 18 months now, but this hasn’t happened at all through the 2014 calendar year.consumer confidence falling

In fact from our experience, while the market is not displaying the same signs of mania that we saw at the end of 2013, there is still plenty of momentum in the market.

SQM Research forecasts +8% to +12% capital growth for Sydney in 2015, and +11% to +15% if there is an interest rate cut in the first quarter of 2015, which has now occurred.

Why hasn’t the market slowed?

The short answer is a huge demand from investors and now from owner-occupiers, and not nearly enough of the right type of dwelling stock.

007There has been plenty of nonsense written about a non-existent “oversupply” in Sydney, presumably written by people who have never tried to undertake the arduous task of buying property in the inner ring suburbs.

Sometimes, it’s true, folk see a few cranes on the horizon and assume an oversupply of property without considering the growth of the city’s population.

But while there is an oversupply of apartments in a few pockets, it can hardly be said to be the case on a city-wide basis.

If a “balanced market” tends towards a vacancy rate of 3 percent, then Sydney’s inner ring is a long way from that a just 1.5 percent as documented here previously.

BIS Forecasts

BIS (not the Bank for International Settlements or the indie pop bad…another one) have forecast that if the harbour city gets its act together and constructs a lot of new stock Sydney’s dwelling deficiency could reduce from ~55,000 to ~37,500 dwellings by 2017.

The majority of other states are forecast to have a net oversupply of dwellings by that time, particularly in South Australia and the ACT (neither of which have strong population growth to absorb new supply).

Source: BIS Shrapnel

This seems feasible, particularly if New South Wales can get itself up close to 50,000 dwelling starts in 2015.

However there may be a question mark surrounding one of the forecast inputs used by BIS Shrapnel.

As per the below graphic BIS forecasts that net interstate migration could pull up to ~17,500 persons per annum away from New South Wales to cheaper and/or sunnier climes.

Source: BIS Shrapnel

Economy is now transitioning

While this may have been a typical dynamic throughout the past decade, there is a structural shift looming, that being the end of the mining construction boom.

We see a markedly different pattern for the years ahead.

As our chart shows below, it was perfectly logical for Australians to relocate to Queensland and Western Australia from around 2002 forth for there was plenty of employment activity to attract willing workers to those states.

However, mining and engineering construction activity which has exploded to unheard of levels in the mining states since 2002 will start to pull back dramatically in 2015 as shown by capex intentions surveyed and as noted on this blog at the end of the last quarter.

Consequently we see net interstate migration from New South Wales fading to record lows.

In fact our chart shows that this has already happened, with net interstate migration away from NSW set to continue to a new record low next quarter too.

Whether or not Sydney can successfully address its dwelling deficiency will depend on whether it can sustain an elevated level of building approvals and dwelling starts into 2015, but this does not appear to have been happening over the past 6-9 months.

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Approvals in Greater Sydney have already meandered lower.

In any case, much of the construction is high rise stock or fringe housing, neither of which are property types which will satiate demand.

Hence why SQM forecasts that Sydney dwelling prices will rise further in 2015. And they’ll be right.

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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


'What’s going to drive Sydney’s property market in 2015? | Pete Wargent' have 3 comments

  1. February 11, 2015 @ 7:43 am Kev

    Hi Pete, great article. Just curious, has there been any stats about workers that may have moved from Sydney or other capital cities to work in the construction phase of the mining boom, and are now cashed up and heading back to Sydney?
    Could it have any impact on the Sydney market?

    Reply

  2. February 14, 2015 @ 2:37 am Michael Correll

    The lower AUD might make Australia more attractive to tourists and students, thus bolstering rental demand.

    Reply

    • February 14, 2015 @ 7:45 am Michael Yardney

      Michael
      The lower dollar should help local tourism – because it will be more expensive for Australians to travel overseas. And as you say it will be cheaper for overseas tourists to come here. But that won’t increasethe rents of residential property.
      As for more students – you’re right but they are attracted to the CBD where there is currently and oversupply of proeprties

      Reply


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