5 reasons Sydney unit prices will rise

Sydney unit prices are now rising, and I believe will continue to do so for a number of reasons.

Firstly, interest rates are at or close to their peak now, with Australia's 3-year bond yield trading down towards 2.7 per cent, from around 3.7 per cent only a few weeks ago.

This largely reflects the emerging banking crises in the US and Europe - which are of course bad - but it is already reducing fixed mortgage rates in Australia, and of course, now portends lower interest rates Down Under over the next few years.

Secondly, although people like to talk about mortgage stress - which may be a factor for some existing leveraged borrowers - Sydney's economy is still firing along just fine.

The unemployment rate in New South Wales is actually now the lowest in the nation, at an unbelievably low level of around 3 per cent.

Thirdly, Australia's population growth is now running at a record high of almost 600,000 per annum, which will be almost impossible for the new unit supply to keep up with.

Sydney will be the most obvious beneficiary of the resurgence in long-term and permanent migration, the return of international students, and regional COVID refugees being called back to their city offices (at least for 2 to 3 days per week).

Fourthly, construction costs for developing medium-density dwellings have increased by about 50 per cent from pre-COVID levels, partly accounting for the crunch in building approvals.

Crucially, therefore, we won't get any meaningful increase in the unit supply until prices rise by at least 25 per cent from here, and probably more.

And fifthly, for the time being, at least, New South Wales has exempted first homebuyers from having to pay stamp duty up to the $1.5 million price point.

With rents spiking by up to 50 per cent in some cases for prime location apartments, buying a unit has often become a more attractive option than renting, although stock levels are exceptionally low for A-grade units.

Rental crisis

In related news, CoreLogic reported today that Sydney unit rents are surging higher at an annual pace of around 17 per cent and rising (this remains some way lower than SQM Research's asking rents leading indicator, which is up by more than 25 per cent over the past year).

Rental vacancy rates in the capital cities continue to fall to all-time lows of 0.8 per cent.

This has been driven lately by sharp declines in Sydney and Melbourne - where vacancy rates are also now extremely low - and before that Brisbane.

Yes, I've heard and noted all the counterarguments.

About Pete Wargent Pete is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. Using a long term approach to building businesses, investing in equities, & owning a portfolio he achieved financial independence at the age of 33. Visit his blog