Sydney property market outlook

The Sydney property market has been one of the strongest and most consistent performers over the last four decades.Covid 19 Corona

In fact, Sydney was the strongest property market at the end of 2019 and after bottoming out in May 2019, Sydney dwelling values recovered most of the losses sustained in previous years and was heading for a new peak in the second quarter of 2020.

And then Coronavirus killed all those forecasts of double-digit capital growth for Sydney property that were made earlier this year.

So what’s ahead for the Sydney property market?

First let’s start with some context….

Despite a triple whammy consisting of:

  1. A pandemic that has kept much of the Australian economy on temporary life support, either via the federal government’s JobKeeper and JobSeeker schemes or loan repayment relief from banks.
  2. Australia slipping into recession, something we haven’t experienced for over 30 years
  3. World social and political unrest

…Sydney’s property markets have remained remarkably resilient.

In fact the median house price in Sydney is 11.1% higher than it was a year ago.

But the pandemic and its associated economic shock are likely to have long lasting impacts on our housing markets around Australia.

 

Sydney dwelling prices

Sydney dwelling prices

So far the biggest impact by COVID on our property markets  has been a decrease in transaction activity and rentals.

Total listings of properties for sale fell 39% between the national stage 2 COVID restrictions in late March and a gradual easing of restrictions commencing in early May, as vendors became wary of selling during the height of lockdown.

Similarly sales volumes of April and May this year were 11.3% below where they were 12 months earlier.

This is even more significant because last year April and May 2019 was the trough of the previous downswing – already a historic low.

But now that the restrictions have eased auctions are back, auction clearance rates remain high, private sales are occurring in the Sydney property market is looking strong.

Sydnsisep5 Auction Clearance Rates Auction Clearance Rates

 

 

 

But as you can see from the following table, while Sydney property values slipped in some areas, other regions still had higher values at the end of the last quarter compared to the beginning of the quarter in March.

Sydney Regions

Despite dwelling values holding their own, rents declined over the June quarter across several regions of Sydney.

The largest rental value declines were across the City and in the South Sydney region, where rental values were down 4.1% over the last quarter.

The following chart from Corelogic shows the performance of rentals by region for the last quarter ending June 30.

Screen Shot 2020 08 21 At 6.02.28 Pm

So…is it the right time to get into the Sydney property market?

Isolation

Clearly our housing markets won’t be immune to the Coronavirus economic fallout, but the impact on property values will depend on how long it will take to contain the virus, how deep our recession is going to be and how quickly it will rebound, how soon employment growth will rebound and the level of consumer confidence.

Other than Victoria, which moved into Stage 4 lockdown in August, the rest of Australia is starting to show economic green shoots with 45% of the jobs lost in the early part of the pandemic now restored.

However, I still see some further falls in property values may fall a little in the next few months, but that won’t really be a reflection of their “intrinsic value” but more a reflection of the market nervousness.

But sooner rather than later we’ll come to a point where property transactions and prices will reflect the fundamentals of the Australian economy, as opposed to the current structural changes taking place.

On the flip side of the coin, suppressed transaction activity means we expect to see a build-up of latent demand and the markets will rebound in the last quarter of the year.

Negative Commercial Property

It is understandable that many Australians expect the property markets to behave like it did during previous economic downturns such as the Global Financial Crisis in 2008.

However, unlike previous downturns that were essentially financially lead, this downturn is a medical problem that morphed in an economic issue because of a short-term shutdown of our economy.

That is very different from a recession preceded by economic excess and speculation.

Based on the predicted pace of the post-recession recovery, I would expect the pandemic to have a more limited and shorter-lived impact on house prices than either the early-1990s recession or the Global Financial Crisis.

But remember, there is not one Australian property market.

In fact, there’s not one Sydney property market either.

There are markets within markets dependent upon price point, type of property and geographic location.

So which part of Sydney’s property market is predicted to fall in value?

Is it all properties? That’s unlikely.

Is it median house prices? Or will certain types of property fall in value much more than the other than others?

In the short term:

  • “Investment grade” properties and A grade (above average) homes could fall in value by around -5%
  • B grade (average) homes could fall in value by up -10%,
  • C grade (less than perfect) will be the hardest hit as there will be a flight to quality.

The worst affected residential markets will be:

  • Apartments in high-rise towers – in fact this is these properties are likely to be out of favour for quite some time.
  • Off the plan apartments and poor quality investments stock (as opposed to investment-grade) apartments, particularly those close to universities.
  • Established homes in the outer suburban new housing estates, where young families are likely to have overextended themselves financially and with many people will be out of work for a while. Currently many first home buyers are taking advantage of the various incentive packages including HomeBuilder to buy newly constructed homes, leaving established houses in these locations languishing.
  • Properties in the blue-collar areas.

But this will be on a on very low levels of transactions and he pace of recovery from that point will depend on the state of the wider economy.


Now read: Latest property price forecasts revealed. What’s ahead in the next year or two?


All this means that you can’t just buy any property and count on the general Sydney property market to do the heavy lifting over the next few years, so careful property selection will be critical. 

So to help give you a better understanding of what’s really going on I’m going to explore the nitty-gritty behind Sydney’s market trends, the areas where long-term growth is still likely, and the impact of shifting demographics on the city’s future performance.

This blog is a little longer than normal, so if you’re looking for a particular element of the Sydney property market, use these links to skip down the page.

Fast Facts about the Sydney Property MarketMelbourne’s Many Markets
What’s special about Sydney?Melbourne’s Many Markets
Which Sydney areas are worth investing in?Melbourne’s Many Markets
What advice do you have for new Sydney property investors?Melbourne’s Many Markets
How can I stay on top of current information?Melbourne’s Many Markets

Fast facts about the Sydney Property Market

1. Sydney Property Market Prices

Let’s start with a bit of history…
In July 2015, Sydney broke its own records when the median house price hit $1 million, securing its place as one of the most expensive locations in the world to buy.

Data from Domain reveals a whopping 78 suburbs now boast a median house price of $2 million or more.

Five years ago the list was limited to just six suburbs. That’s the cost of living in an international city on the water offering unparalleled lifestyle

Prior to COVID-19 the Sydney property market was on the move having recorded its quickest turnaround in decades.

And now that policies restricting open homes and on-site auctions have been lifted, we are seeing activity across the local market pick up, however, some downside risk remains due to Sydney’s exposure to overseas migration as a source of housing demand as well as the likelihood that consumer confidence will remain at low levels.

The rate of decline in Sydney home values eased in August, with values down half a percent over the month compared with last month’s drop of 0.9% and a 0.8% fall in June.

Clearly home values are still falling, just not as quickly as they were previously.

Auction markets are also pointing towards stabilising market conditions, with the number of auctions held consistently rising since mid-May and clearance rates holding firm around the decade average at 63% through August.

The most expensive quarter of Sydney’s housing market has continued to show weaker returns relative to lower value homes, with the top quartile of the market down 3% in value since the end of March while lower quartile values are only 0.2% lower.

 

However some segments of the Sydney real estate market are really suffering.

Many of those who purchased off the plan a few years ago are now going to have trouble settling with valuations coming in on completion at well below contract price at a time when banks are more reluctant to lend on these properties.

Rental markets are likely to see weaker conditions due to the reduction in migration rates and less student demand, as well as a short term rental stock transitioning into the permanent rental pool.

Sure there are fewer good properties for sale at the moment, and almost all the good ones are for sale off market, however if you’d like to know a bit more about how to find these investment gems give the Metropole Sydney team a call on 1300 METROPOLE or click here and leave your details.

To help you understand what’s ahead for Sydney property I’m going to provide you with a lot of detail but the bottom line is Sydney is a world class city, which is land locked with limited room to grow to accommodate all those moving to Sydney looking for somewhere to live.

 

Dwelling Sydney

Sydney

2. Sydney’s Property Market Trends

Historically, the city’s property market has gone from strength to strength.

Over the last 40 years Sydney’s average capital growth was 7.4% meaning many properties doubled in value every decade.

But as you can see from the chart below, the Sydney property market is very cyclical (like all property markets.)

And changing demographics is playing a big role in driving shifting market trends.

The big house on a big block is no longer a sure-fire strategy for success, as single-person homes and households without children are increasingly favouring living in medium density inner city and waterfront apartment properties.

Meanwhile, families are trending towards locations that offer effective transport infrastructure, with access to amenities and quality education.

Upgrades to major highways and new rail links may close the gap between suburbs that were previously closed off by poor infrastructure.

While the number of property sales in Sydney is currently at very low levels, asking prices are holding up well:-

Sydney asking prices

 

Of course, we are currently in the middle of a financial crisis caused by COVID-19, but the following chart shows how Australian residential property has historically fared well against negative economic shocks

Annual Growth Rate

 

The following chart  shows how well Sydney dwelling faired over last year.

Residential Prices

 

Currently investors and home buyers are abandoning the off the plan apartment sector for many reasons including concerns about construction standards, and many of those who purchased off the plan a few years ago are now having trouble settling with valuations coming in on completion at well below contract price at a time when banks are more reluctant to lend on these properties.

At the same time interest from foreign investors has slumped.

The Sydney Apartment Market

Underpinned by continued overseas and interstate migration, in the past the metropolitan Sydney required about 41,000 additional dwellings per annum to accommodate its current level of growth.

To meet this demand the delivery of new apartment projects was vital, particularly as affordability pressures, demographic trends, changing household types  and lifestyle preferences drives the need for more diverse housing options.

And the came Covid19…

The new apartment market was already feeling the effects of a downturn in Off-the-Plan (OTP) purchaser demand.

OTP sales peaked in 2016 and slowed through 2017 before declining more sharply from 2018 as investors began to retreat as regulatory pressure resulted in more stringent lending practices and higher interest rates being applied to investor loans.

Foreign investor demand was also curtailed by, among other things, a cap on foreign investment within individual projects and foreign buyer stamp duty surcharges as well as capital controls by the Chinese Government limiting outbound investment.

Apartment supply has until now, remained high as projects have worked their way to completion.

COVID-19 Impacts

Green shoots in OTP demand began to emerge toward the end of 2019, however the impacts of the COVID-19 lockdown have caused significant ructions in the rental/investor market.

As the economy contracts, the sharp rise in unemployment will constrain the ability of many tenants to pay rent.

A moratorium on evictions has thus far prevented a large exodus from rental apartments although landlords will likely face lower rental income as rents are re-negotiated to allow for tenants’ revised circumstances.

The closure of international borders has caused a significant reduction in tenant demand as net overseas migration inflows effectively fell to zero.

So far, the owner occupier market is holding up, supported by low interest rates, which have improved affordability for those with jobs.

First home-buyer demand is being encouraged by stamp duty concessions.

In turn, this is supporting demand for affordable apartments that are suitable for owner occupiers.

Both upgraders and downsizers remain active where they are transacting within the same market.

Screen Shot 2020 08 27 At 6.41.59 Pm

 

Over the last few years, an apartment over supply and other regulatory and non-regulatory factors have resulted in the collapse of investor demand for Sydney “off the plan” apartments.

The reduced sales volumes have made it more difficult for developers to achieve the pre-sale hurdles required by the banks to finance developments, and a few new projects are on the drawing board.

This means that undersupply of apartments is looming.

But be careful –many of the new Legoland apartment high-rise towers will always remain secondary quality and become the slums of the future – steer clear of these.

The looming undersupply of new projects will lead to lower vacancy rates, rental growth and eventually property price growth of these new apartments and in turn will help fuel increase price growth of well located establish a purpose in Sydney.

Sydney

 

3. Sydney’s Rental Market

While over the long term rentals have grown in line with property values, more recently rental growth has slumped, in part due to the influx of rental properties that were previously let on short-term leases such as AirBnB and student accommodation.

As a consequence, overall yields have declined as can be seen from the following chart from SQM Research.

Sydney rental yields

 

 

Traditionally in Sydney, vacancy rates have been tight; hovering well below the level of 2.5% vacancies, which traditionally represents a balanced rental market.

However currently the overall vacancy rate in Sydney has crept up to close to 4%, but this varies in different locations.

At Metropole Property Management our vacancy rate is less than half this rate, in part because our clients have chosen investment grade properties, but we’d like to think it also has a bit to do with our proactive property management policies.

 

Sydney vacancy rate

4. Sydney’s Average Capital Growth

In 1993, the average house price in Sydney was $188,000.

However, dwelling price growth in Sydney has been very fragmented.

While some suburbs has just chugged along others are strongly outperforming.

You see…Sydney is comprised of dozens of smaller markets, each of which has their own drivers and supply/demand issues.

Sydney’s more affluent inner eastern, Lower North Shore and inner western suburbs have well outperformed these averages.

Houses: In September 2019, only 5% of Sydney suburbs had a median house value lower than $500,000, compared with 22% five years ago.

The proportion of suburbs with a median house value of $1 million or higher was 47% in September 2019, up from 34% five years ago.

Units: 29% of Sydney suburbs recorded a median unit value of $500,000 or less in September 2019, down from 49% five years ago.

The proportion of suburbs with a median value of $1 million or higher jumped from 2.9% five years ago to 14.4% in September 2019.

Overall Sydney is a city in gentrification, with the fingerprints of a younger demographic upping the desirability of the city lifestyle.

 

Sydney House Price Growth

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The following video traces the most important developments in the city’s history.

In its relatively short history, Sydney experienced near starvation, rebellion attempts, a gold rush, trade booms, the Great Depression, two world wars, and hosted the Summer Olympics.

What’s so special about Sydney?

5. Sydney’s demographics

Sydney is Australia’s most populous city and is also the most populous city in Oceania.

ABS statistics showed the population of Greater Sydney, which includes the Blue Mountains and Central Coast, reached 5,005,400 at the end June 2016 after adding a million people in just 16 years.

That was an increase of almost 83,000 on the previous year, and the city’s fifth largest annual population increase in absolute terms since 1901 with Sydney absorbing 78 per cent of NSW’s total population increase in 2015-16.

Sydney’s population grew by 1.7 per cent last financial year while the rest of NSW grew by 0.8 per cent giving the State an overall annual population growth of 1.6%.

Of course with our borders currently closed, immigration is going to be virtually non-existent in 2020 and probably in 2021, but once we reopen our borders, it is likely that Australia’s appeal to overseas immigrants is only going to be stronger and Sydney has always been a preferred destination .

Firstly it is an iconic world-class city, but also Sydney offers strong job opportunities.

Sydney population growth

It took the harbour city almost 30 years, from 1971 to 2000, to grow from 3 million to 4 million people but only half that time to pile on its next million.

This makes Sydney Australia’s only global city and a key city within the Asia-Pacific region.

Today Greater Sydney’s population is estimated to be 5.57 million people.

Population Growth Rate (year Ended 30 June 2018)

 

Interestingly around half of its population were born overseas, making Sydney the world’s most multicultural and ethnically diverse city, with over 250 spoken languages.

In fact more than 70 percent of the state’s population growth comes from overseas migration.

In fact New South Wales represents around 32% of Australia’s total population.

The median age of Sydney residents was 35 years, and households comprised an average of 2.7 members.

But drilling down deeper, within the CBD, the majority of dwellings are occupied by two adults without children, with the average age of residents reducing to 32.

With distinct areas of trendy, modern districts, Sydney has undergone incredible change since its early days as a settlement city.

Formerly gritty housing zones, originally built for labourers, are being revived and modernised, increasing their allure for those after a modern city lifestyle.

The Rocks is an excellent example of an area going through gentrification, with prime waterfront government housing transitioning to private dwellings.

These types of renewal projects are sure to bring new life – and growth.  sydney property market

Similarly gentrification if changing the face of Sydney’s Inner West.

Looking back European settlement in Sydney began in 1788, and in 1800 Sydney had around 3,000 inhabitants.

It took time for its population to grow – in 1851 its population was only 39,000, compared with 77,000 in Melbourne.

Sydney overtook Melbourne as Australia’s most populous city in the early twentieth century, and reached the million inhabitants milestone around 1925.

The opening of the Sydney Harbour Bridge helped pave the way for further urban development north of Sydney Harbour.

Post-war immigration and a baby boom helped the population reach two million by 1962.


Read more: There’s a 6 month moratorium on evictions – what should I do?


6. Sydney’s layout

One of the largest cities in the world, the metropolitan area has about 650 suburbs that sprawl about 70 km to the west, 40 km to the north, and 60 to the south.

Greater Sydney extends from the coast at the east back to the foothills of the Blue Mountains, with a relatively compact CBD located around ibondi beach sydneyts famous harbour.

South of the harbour are the desirable inner suburbs and densely populated beaches, including Bondi Beach.

North Sydney, connected to the CBD by the Sydney Harbour Bridge and tunnel, is home to a thriving business district and some of Sydney’s most affluent suburbs, including the Upper and Lower North Shores.

Plans are underway to build a motorway link to open up access between the pricey eastern suburbs and the western district, which makes up the majority of metropolitan Sydney.

Changes in positioning of major companies to outlying ‘mini-cities’ like Parramatta may see a shift in buyers heading to these cheaper housing areas and employment opportunities.

Developers have anticipated this, but as is often the case, they’ve gone overboard and there is now a significant oversupply of new and off the plan apartments in Parramatta

7. Sydney’s infrastructure

With leading universities, premier shopping districts, iconic landmarks and lively urban flavour, it’s clear why Sydney is considered one of Australia’s most desirable cities to live in.

Built around the world’s largest natural harbour, Sydney offers three efficient modes of transport in, around, and out of the city: road, rail and ferry.Sydney’s infrastructure

Anyone who lives in Sydney knows all too well that driving more than an hour each way to and from work is the norm.

But this is likely to change with light rail playing an important part in the future of transport in Sydney providing quick transportation around the CBD.

Further construction is underway to connect outlying suburbs to existing rail lines, with plans to extend the light rail system to the Eastern suburbs.

Sydney Airport, the busiest in Australia, handles over 35 million passengers a year, is located only 8km from the city and connects directly to 100 destinations around the world.

Proximity to major highways and rail systems can either boost capital growth or hinder it, and all aspects must be taken into account when considering any property purchase.

8. Sydney’s economy

Largely a manufacturing city in its heyday, Sydney has evolved into a metropolis of high-end, knowledge-based jobs in the business and financial services sector, earning itself the title of Asia-Pacific’s economic hub.

Tourism and hospitality are its next leading employment industry.

NSW property market data

 

job employment australia

Of course jobs creation and rising confidence also leads to population growth, which further fuels the property market.

Inner-city employees earn an average individual wage of $888 per week, compared with $619 for those working in the Greater Sydney area.

Sydney’s eastern and northern suburbs reported an unemployment rate of between 2 and 2.4%, with Parramatta and Blacktown topping 8%.

With the recent boom in property prices, many buyers are finding themselves locked out of the property market, which may signal an increase in long-term rentals.

More than 55% of dwellings in the city are rentals, where occupants – primarily single professionals and couples without children – are willing to pay a premium to live in the heart of the city near to their work and all the action.

9. Sydney’s growth

Since the 1970’s, Sydney and Melbourne have been locked in a head-to-head race for highest population growth, with both cities adding 1.7 million new residents over 40 years.

Overall, Australia’s growth rate is amongst the highest in the world, with the Australian Bureau of Statistics estimating that 66% of residents live in our capital cities.

With an estimated population of 8,046,070 persons, the population has increased by 123,813 persons or 1.6% over the past year, which is in-line with the national rate of growth.

The 123,813 person increase was the greatest since September 2017 and was made-up of natural increase of 53,711 persons, net overseas migration of 91,999 persons and a loss of 21,897 persons due to net interstate migration.

Natural increase of 53,711 persons was the greatest on record while the 91,999 persons increase due to net overseas migration was the largest increase in 12 months.

The loss of 21,897 residents due to net interstate migration was slightly lower than the previous quarter but up from 19,299 persons a year earlier.

Sydney population

 

The NSW government is planning extensive additions to its transport infrastructure to support future growth, with new motorway extensions providing an uninterrupted connection from Sydney’s south to the north, and major road expansions on the plans to ease city congestions.

Outlying suburbs such as Parramatta and Liverpool are developing into regional cities, and with improved infrastructure in the works, there is likelihood we will see significant population growth in these areas further from the CBD.

10. Sydney’s culture

 Sydney’s cultureSydney is truly a global city, welcoming a broad range of ethnicities from all over the globe.

In fact, nearly half of the people who call Sydney home were born overseas, creating the most dynamic and culturally diverse metropolis in the world.

Each year Sydney celebrates its famous multiculturalism with the month-long Living in Harmony festival, which brings its residents together to celebrate and promote cross-cultural understanding.

Housing in the inner city is attractive to those who love the city life, with tenants looking for properties that include the following features:

  1. Location – above all.
  2. Security.
  3. Storage space.
  4. Amenity including balconies.
  5. With street noise generally a given in city living, smart tenants are looking for added features – like double-glazed windows – to minimise the city sounds.
  6. Cooling – especially over summer
  7. Technology
    1. Healthy mobile phone signals
    2. Great WiFi connectivity.
    3. Multiple power points

Which Sydney areas are worth investing in?

11. Upper North Shore

Statistically one of Sydney’s safest areas, with beautiful parks, large land sizes and an easy train commute to the city, the prestigious suburbs of the Upper North Shore have seen a stable increase in pricing over the years.

Incorporating Pymble, Turramurra, Wahroonga, Warrawee, Killara, Lindfield and Roseville, the Upper North sees a ‘generational’ cycle, with wealthy families moving in to gain access to esteemed private education and excellent public schools. The family moves on once children are out of school, thus allowing the next generations of young families to begin the cycle again.

This trend has maintained steady supply and demand, making the Upper North Shore area one to consider for stable growth, particularly as it sits in the middle ring of the CBD.

In August 2015, the Upper North topped the auction leaderboard with a median dwelling price of $1.4 million.

12. Lower North Shore

Located just over the Sydney Harbour Bridge and featuring a boon of waterfront properties overlooking the Sydney Harbour, Middle Harbour and Lane Cove River, the Lower North Shore is considered one of Sydney’s most desirable places to live.

While the Upper North Shore attracts families due to the larger land lots and houses, the Lower North has a higher population density with a greater proportion of apartments and units, making it appealing to young professionals who work in the CBD.

The Lower North Shore consists of the suburbs of Mosman, Castle Cove, Cremorne, Neutral Bay, Kirribilli, Milsons Point, McMahons Point, Wollstonecraft, Greenwich, Longueville, Riverview, Linley Point, Lane Cove West, and Chatswood.

According to Domain Group data, the median auction price for a dwelling in the Lower North in August 2015 was $1.3 million, coming in third place behind the Upper North Shore and Northern Beaches.

13. City and East

Recently positioning itself at 6th on Sydney’s best-performing auction rankings, with a median dwelling value of just over $1 million, the suburbs in East Sydney and the city centre are home to Australia’s highest property earners, including Edgecliff, Rushcutters Bay, Darling Point and Point Piper. Urban Building

Densely populated and with land at a premium, most properties are small terraced housing or units/apartments, with a higher proportion of renters in the Eastern suburbs than elsewhere in the city.

Suburbs in the city’s inner ring such as Darlington, Chippendale and Darlinghurst have shown interesting changes in their demographic make-up recently, revealing a very high proportion of young, single residents who have populated the area for the social scene and city lifestyle.

Eastern Sydney is also highly desirable, as the home of the famous beachside suburbs of Bondi, Tamarama and Coogee.

While there is no train access to these coastal neighbourhoods, there are strong bus networks.


Read more (and watch the video): How will COVID-19 impact on your banking and loans?


14. Inner West

There is no end of demand from home buyers and investors who want to live in Sydney’s gentrifying inner Western suburbs.

In suburbs like Annandale, Croydon Park, Dulwich Hill, Enmore, Lewisham, Lilyfield, Marrkickville, and Newtown.

The suburbs within the region are characterised by medium to high-density housing and while they’ve been subject to gentrification, this process will continue for decades as the older workers and migrants make room for upwardly mobile high income earners.

What advice do you have for new Sydney investors?

15. Look for Sydney’s best properties in the inner and middle ring suburbs

A review by the Australian Housing and Urban Research Institute has found that suburbs located within 5 to 15 km of the CBD consistently see a level of capital growth that outperforms suburbs.

These inner and middle ring suburbs continue to see long-term increases in value because: harbour-bridge-343310_1920

Gentrification has changed the look and stigma of ‘ugly duckling’ areas into increasingly attractive places to live.

Sometimes, changes to an area, such as improved road and rail access or a change in demographic, can spur on the gentrification process in a neighbourhood, transforming it into an area that enjoys a steady increase in desirability.

While a rising tide lifts all ships and house prices have risen throughout Sydney, in general the outer and western suburbs have not had the same level of capital growth as Sydney’s inner and middle ring suburbs.

16. Steer clear of the new high rise Sydney apartment towers

We’ve seen an oversupply of newly built apartments happen Sydney.

The problem is not all apartments are the same.

Building Boom Melbourne

Some will make great investments increasing substantially in value over the long term, but many of the high-rise towers built in the last fifteen years will continue to underperform with poor, if any, capital growth in the foreseeable future.

Of course these Lego Land apartment blocks never made good investments.

They offered little scarcity and had no owner occupier appeal having been built with investors in mind, and often overseas investors who didn’t fully understand the needs of the local market.

Worse still… because of the high developer margins and marketing costs, many investors paid too much to start with and have since found that on completion their properties were worth considerably less than their contract price.

The sad reality for these investors is that today, in light of the many media reports of structural problems in some of these high rise towers, there is a crisis of confidence with apartment owners concerned about what unknown issues and liabilities may lie ahead for them and potential purchasers are holding back not wanting to buy themselves futures problems.

This sector of the property market has lost the trust of the buying public and confidence will take quite some time to restore as various stakeholders including state and local governments as well as the construction industry including building surveyors and certifiers scramble to shore up building sector.

You see…there tend to be three major types of building issues faces by apartment owners:

  1. Structural defects – These are the ones that grab the headlines but, in reality, major structural issues only relate to a small number of buildings.
  2. Fire issues – These often relate to inferior cladding used during construction. Cladding audits are ongoing, but so far 629 affected buildings have been identified in Victoria alone.
    And now it’s been revealed that there’s a list of  list of nearly 450 buildings across the state of NSW with potentially flammable cladding that the State Government is keeping it secret due to security concerns.The list, developed by the cladding taskforce and provided to State Parliament, was given public interest immunity, which restricts public access.NSW Police Counter Terrorism Command advised the addresses should not be published due to safety concerns.The unit said the information risked prejudicing the interests of building and apartment owners.
  3. Water issues – These are very common and occur to some extent in almost every new building – things like leaking balconies, showers and roofs. While these are a nuisance and can be expensive, they can usually be rectified.

Fact is, the buildings with major problems requiring mass evacuation are the outliers, but for those involved their losses will be significant as they will have hefty repair bills and have no real market for the sale of their apartment in buildings that could well become the slums of the future.

Two tiers of apartments in the future

Be mindful of a Sydney property oversupply

These issues will lead to a flight to quality, meaning well constructed, medium density apartments and townhouses will continue to be strongly sought after and will keep increasing in value, making them great investments.

At the same time tighter future construction standards will lead to increased building costs and therefore higher eventual asking prices for the next round of apartments to be built, underpinning the future value of soundly built established apartments.

Similarly, the solidly build older established two and three story walk up apartments built in the 60’s and 70’s that used to be called “flats” have stood the test of time and will continue to make good investments.

On the other hand, owners of poorly constructed high rise apartments in the many “me too” buildings built in the last decade or two will find the value of their properties will languish.

While some of these owners may be keen to cut their losses, they will find their properties difficult to sell and many will not be prepared to or financially able to crystalize their losses, just like many of the unfortunate investors who bought in mining towns during the mining boom are still finding they are stuck with underperforming properties which are worth considerably less today  than they paid for them many years ago.

17. Consider making the most of investing in Sydney properties

Sydney properties have exhibited strong capital growth over the long term and are likely to do so in the future.  Negative Gearing

But with their current low yields comes the challenge of negative gearing.

While this understandably concerns many first-time investors, I see it as a cost of doing business.

Here’s a quick explanation of negative gearing:

A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and depreciation – exceed the income it produces.

Since the costs of producing an income are generally deductible against the taxpayer’s other income, property investors can effectively offset some of the interest expense against their wages.

This has made some argue that other, less fortunate, taxpayers help these property investors meet their costs.

Why would you buy a property that makes a loss?

Generally it’s because property investors hope that their income losses will be more than offset by their capital gains when they eventually refinance or sell their property.Sydney property market

And in Australia capital gain is not taxed unless you sell your property, and then it is concessionally taxed; again evoking the argument that it favours wealthy landlords.

The truth is that negative gearing is more favourable for taxpayers who earn high incomes.

Imagine an investor had excess interest expenses of $10,000.

If they were on a marginal tax rate of 15 cents in the dollar they could use their loss and reduce their tax by $1,500.

But to a taxpayer in a higher tax bracket, one who pays 30 cents in the dollar tax, they could reduce their tax by $3,000.

So the benefits of negative gearing are greater the more you earn and the higher your tax rate.

While negative gearing has its critics, in my mind property investment is about capital growth of your assets rather than cash flow.

Cash flow will keep you in the game, but capital growth will get you out of the rat race.

In the long term well located properties in the inner and middle ring suburbs of Sydney will continue to be highly sought after and keep increasing in value creating wealth for their owners, be they home owenrs of real estate investor.

18. How I choose a strong investment property in Sydney.

If I accept that in the short term I’ll be negatively geared, then I must ensure I buy an investment grade property that will outperform the market averages with regards to capital growth and to do this I use my 6 Stranded Strategic Approach.  

  1. I would only buy a property that would appeal to a wide range of owner occupiers. Not that I plan to sell my property, but because owner occupiers will buy similar properties pushing up local real estate values. This will be particularly important in the next few years as the percentage of investors in the market is likely to diminish. SydneyTerraces
  2. I would buy a property below its intrinsic valuethat’s why I avoid new and off the plan properties which come at a premium price.
  3. In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area. This will be an area where more owner occupiers will want to live because of lifestyle choices and one where the locals will be prepared to, and can afford to, pay a premium price to live because they have higher disposable incomes. In general these are the more affluent inner and middle ring suburbs of our big capital cities
  4. I would buy a property with a high land to asset ratio.
  5. I would look for a property with a twist  – something unique, or special, different or scarce about the property, and finally
  6. I would buy a property where I can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to deliver me capital growth.

How can I stay on top of current information?

19. Get news, updates and advice by email house-computer-search

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au


'Sydney property market outlook' have 22 comments

    Avatar

    June 19, 2020 Ben

    Hi Michael,
    Thanks for your advice here, great insight. I’m now in a position to invest in a 750000 property in Sydney, with a 5-7 year time frame before purchasing my own property to live in a middle ring suburb (I understand this is a short timeframe for a property investment). This means me choosing between a house in a potential growth area in the west (such as in established suburbs affected by new amenities/stations coming in with the western sydney airport) where I already have one property, OR buying an apartment in a low rise residential affluent area like the northern beaches or inner west. Given the effects of COVID19 on immigration, employment and housing supply and demand within my investment timeframe, would it be more advisable to stick to a spacious established apartment in an affluent area, or look to some of the growth regions in the established/transport connected regions of the south west or Penrith localities? If all goes well, I’m hoping to hold my investment and extract the equity for my OO purchase.
    Many thanks.

    Reply

      Michael Yardney

      June 19, 2020 Michael Yardney

      Boy is that an important question Ben, and one I wouldn’t insult by trying to answer without having all the information, because the decision you make now will affect your next purchase and your next purchase – won’t it.
      Your budget is very restrictive for Sydney, and even though we are probably cities largest buys agent, I would have some other suggestions for you that you probably haven’t even considered.
      Maybe it’s best to look elsewhere such as Brisbane. Remember, you are not buying the Sydney property market, and you definitely won’t be buying in the best parts of Sydney. Simply wouldn’t be buying into the Melbourne or Brisbane property market either. You’d be only buying a property that fits in your budget that would outperform the averages.
      Having said that there are so many factors to take into account that the only way I’d be prepared to answer this question for you is by additionally running a group of numbers and figures and preparing strategic property plan for you. Why not contact my team at Metropole and let us help you make such an important decision.

      Reply

    Avatar

    June 1, 2020 FM

    Hello Michael,

    Really enjoy reading your articles. Very insightful.
    Is there any article that discusses about properties based in Central Coast, South-West Sydney and Western Sydney? I am a first home buyer and not sure which suburbs to look for that are more than 25km away from Sydney. Most suburbs I find are run-down and not that safe to live.
    What type of property (unit vs house ) I should think of purchasing (not for investment) provided I can only get $500K loan from the banks on a single income?

    Reply

      Michael Yardney

      June 1, 2020 Michael Yardney

      FM – There is a reason why I haven’t written about those suburbs, in fact you’ve mentioned a whole lot of them already.

      Why would you even try to live in a suburb like that? They are going to underperform in the long term, it would be better to rent where you want to live but can’t afford to buy and buy an investment property in a location that will work for you-

      Reply

    Avatar

    March 1, 2019 Abraham

    Great article Michael. I’m a relatively new property investor, and starting my journey in this strange state of the market.

    What would you recommend is a better investment (from both capital growth and yields perspective) in the current property cycle – a 2br older style brick unit in the Inner West (e.g. Dulwich Hill, Summer Hill) or a 1 br unit in inner East (e.g. Surry Hills, Darlinghurs, Paddington, Rushcutters Bay, Randwick, Coogee, Maroubra etc). They tend to be in similar price range.

    If you had to pick 1 property type/area in the 650-700k price range in Sydney, what/where would that be?

    Thanks,
    Abraham

    Reply

      Michael Yardney

      March 1, 2019 Michael Yardney

      Abraham – you’ll find I never give those type of recommendations here because it is really such an important decision and while our team is buying similar properties to those you describe, we have found that currently less than 5% of properties on the market are what we would call investment-grade. You really can’t afford to get it wrong!
      While you can do your research and get information on the Internet, what you can’t do is get experience or perspective and that’s what we can help you with. Why don’t you contact us at Metropole in Sydney and allow us to help advise you. Wouldn’t it be nice to have a crystal clear understanding of what to do? You can try and do it on your own, but why would you even do that Click here and leave your details and we will be in contact

      Reply

    Avatar

    February 22, 2019 Luke

    Great summary Michael!
    Your consistent advice on not buying off the plan high rise units has once again been proven spot on in the face of the Opal Tower debacle in Sydney. If you’re ever looking for a case study in future books this is a perfect one. I feel sorry for the people who have large sums of money tied up in this complex probably never to see a return on their money.
    I’ve applied your advice to acquire 3 investment properties in older style low rise blocks in the inner west over the course of this property cycle. I am looking forward to the next boom where these properties are primed for solid growth. All the while retaining their negative gearing benefits in the face of future changes proposed by Labor.

    Reply

    Avatar

    January 19, 2019 Jack Barlow

    Hi Michael,

    Thanks for sharing your article. Like most others, It was thoroughly helpful in its insights on buying, particularly for a first-time buyer like myself.
    I’ve recently gotten pre-approval for a mortgage as a single buyer. I was wondering what your thoughts were on buying in the City in a large block of flats. I’m looking for a 2-bed but I just wonder whether the price would just move sideways, maintaining its price but not growing due to its location. Do you think I would be wiser to buy in the suburbs where price growth might be easier to achieve. My research has led me to Maroubra as being a potentially good investment.
    Thanks for your time and insights once again.

    Reply

      Michael Yardney

      January 20, 2019 Michael Yardney

      Jack – congratulations on taking the step into property investment.
      Steer clear of the CBD – you’ll get little or no growth for quite some time.
      Where you buy and what you buy will depend a lot on your budget and your strategy – please read this blog to better understand what makes an investment grade property https://propertyupdate.com.au/what-makes-an-investment-grade-property-2/
      And why try and do it on your own – why not get my team at Metropole in Sydney to guide you and help formulate a strategic property plan for you.
      Why not leave your details here and have an obligation free chat with them

      Reply

    Avatar

    November 6, 2018 Tania

    Hi Michael. Great article – very informative. In the current market, what is a good rental return for houses and units in Sydney? Would you steer clear of company title small block of units near train station, even though rental return looks good (but long term sale not as good). Would you recommend waiting a bit, as market in Sydney will probably drop a bit further – we are not selling, buy looking at buying second investment.

    Reply

      Michael Yardney

      November 6, 2018 Michael Yardney

      Tania – please steer clear of company title – the banks don’t like them and don’t lend as much against them, meaning there is a smaller secondary market – always cheaper as they’re hard to sell.
      If you read my blogs you’ll learn that you don’t buy Sydney property for rental return – even thought he cash flow is important to pay the mortgage.
      What is you budget ? Is this an investment or your own home? that will make a difference to some of my answers

      Reply

    Avatar

    April 7, 2018 David

    Hi Michael.
    Great information and lots to absorb.
    I’m looking to slowly retire to Australia and am looking for great water views, or water front with a jetty for boat access.
    I dont need schools, railways or easy access to Sydney but don’t want to buy in a property graveyard either?

    It’s a life style driven investment so nice cafe culture, beaches, sailing etc.

    I’m looking for the magic, far enough out of Sydney to avoid crazy prices but in the zone that an aging population will be drawn to, so demand stays hot over the next 20 years.

    I’ve looked at Newport and Elvina Bay Area area but wondered if this is safer than looking for more firepower towards Umina and Gosford on the north of the hawks bury river ?

    All the best

    David

    Reply

      Michael Yardney

      April 7, 2018 Michael Yardney

      David -all nice areas for your criteria – a lot depends on your budget – the Central Coast hs a lot going for it

      Reply

    Avatar

    June 20, 2016 Andrew

    Hi Michael,
    Another insightful article, thank you.

    Just wanted to add some news articles related to point #9.

    http://www.dailytelegraph.com.au/newslocal/south-west/old-paper-mill-site-on-georges-river-will-be-developed-into-residential/news-story/e5b2e75b0df973bb2298f4b48eda4825 – Liverpool’s biggest residential development at the old Liverpool Paper Mill. Over 1000 apartments in the hub of Western Sydney.

    Not far down the road is going to be the new 7000 student University of Wollongong campus in Liverpool – http://www.smh.com.au/national/education/university-of-wollongong-to-open-liverpool-campus-20160502-gojypv.html

    According to you, would developments of this size have a tangible effect on the Western Sydney market?

    Reply

      Michael Yardney

      June 20, 2016 Michael Yardney

      Andrew – this type of oversupply will only make smatters worse for western Sydney – steer clear

      Reply

    Avatar

    October 29, 2015 Prashant Jain

    What a comprehensive coverage of Sydney. Great work Micheal. Very very informative and useful.
    I have been a follower of your newsletter for quite some years. This article certainly stands out. Congratulations.

    Reply

    Avatar

    October 28, 2015 Lynton

    Hi Michael another great article!
    The five stranded approach could also perhaps include the most important driver of capital growth over the cycle- a location with demand far exceeding supply. What is often left out is that growth boils down to the micro supply and demand data analysis at a suburb level, or stock on market (supply) versus the historical number of sales (demand). Categorically knowing the statistical ratio to supply/demand at the micro level at a point in time could determine the answers to the why?, when? and where you buy? – then comes the equally important what?
    It begs the question, are long term purchasers & investors buying at a new record price in Sydney and Melbourne over paying?
    Ultimately demand cannot exceed supply by “too much”. If it did, we’d have a concept called, “too much capital growth” or “too much profit (or equity)”.
    Older housing in established well located areas is elastic in its pricing despite low wage and GDP growth because equity has been rising, its an emotive decision (for non-investors), retirees and o/s investors don’t need finance, people are ahead on their repayments, and we are not making any more of it (scarcity) so its attractive to investors and owners alike.
    Ultimately to outperform the market the smart buyers that know how to select investment grade assets (the 5 strands) are confident of long term rising prices because they have also cannily bought primarily where demand exceeds supply – no easy thing!

    Reply

      Michael Yardney

      October 28, 2015 Michael Yardney

      Lynton
      You’re correct – we avoid areas that don’t have the correct supply and demand ratio

      Reply

    Avatar

    October 28, 2015 Bruce

    Hi Michael,
    What an excellent report! One of the most comprehensive free publications I’ve seen!
    Are you intending to publish a similar report for other capital cities particularly Melbourne.
    Would love to see the latest stats & insights into where the Melbourne property market is going for both house & apartments within the 10-15km radius of the CBD

    Regards
    Bruce

    Reply

      Michael Yardney

      October 28, 2015 Michael Yardney

      Thanks for the kind words Bruce – I’ve already published one for the Melbourne market here Brisbane will be next

      Reply


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