The Sydney property market has been one of the strongest and most consistent performers over the last four decades.
Through the COVID period downturn, Sydney home values were down just -2.9% from peak-to-trough and in mid October the Sydney housing market turned the corner and has started rising buoyed by buyer and seller confidence.
At the end of 2020 Corelogic reported a +3.73% change in its Sydney Home value index over the last year, with houses +4.95% and units +0.98% (year on year.)
Rental markets haven’t been as resilient, with most of the downwards pressure coming from the unit sector.
According to Doron Peleg of Riskwise, Sydney is projected to deliver 8 -12 per cent capital growth in 2021. He said:
The landscape of the housing market in New South Wales has shifted rapidly over the past three months from a buyer’s market to a seller’s one.
Only three months ago homebuyers in Sydney were in solid position to leverage on the prevailing market conditions.
This is, however, no longer the case, with a sharp increase in buyer sentiment and auction clearance rates.
With regards to COVID-19, several vaccinations are likely to be rolled out in 2021 providing confidence that a sustainable solution will ultimately be found, and consequently this will deliver a major confidence boost to the economy.
However, investors buying rental apartments in heavily supplied areas are still taking a high risk with both equity and cash flow risk materially increasing.
The NSW market is likely to experience strong price increases in the range of 8-12 per cent in 2021 due to a combination of events that have changed the landscape of the property market.
SYDNEY DWELLING PRICES – Source: Westpac November 26th 2020
Buyers and sellers are now back in the market….
As you can see from the following chart, auction clearance rates at the end of 2020 were regularly approaching 80%, a level at which the imbalance of more buyers than there are sellers causes house prices to rise .
At the same time the number of property transactions occurring rose steadily.
Way back in September, before the Sydney property market really started to take off, Domain reported that large parts of Sydney had already recorded staggering double-digit property price growth over the previous year as buyer competition sent prices soaring.
“We’re seeing the upper end of the market recoup much greater value and it’s the opposite for the lower end of the market,” she said. “At the suburb level there aren’t many suburbs that are falling.”
Sydney property buyers have been lured back into the market by low interest rates, government tax cuts and other incentives and the easing of coronavirus restrictions, as well as a strong rebound in consumer confidence, boosted by the federal budget, success in containing the coronavirus and the prospect of further interest rate cuts.
Despite dwelling values holding their own, rents have declined over the year 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.
So…is it the right time to get into the Sydney property market?
Currently economic green shoots are appearing with the recession now over, many new jobs being created and over 70% of the jobs lost in the early part of the pandemic now restored.
While overall, the Sydney property market has now moved up from its low point, some sectors of the Sydney property market – in particular the off the plan and new high rise apartment segments will still languish in this new year.
Having said that, according to Corelogic, Sydney’s median house price:
- fell by 2.2% during the Covid crisis
- Is up 1.22% over the last quarter of 2020, and
- Is up 2.91% over the last 12 months
But these stats don’t show how fragmented the Sydney market is…remember, there’s not one Sydney property market.
There are markets within markets dependent upon price point, type of property and geographic location.
So what’s ahead for Sydney’s housing market in this new year?
Well here are some of the most recent forecasts that came out at the end of last year:
- ANZ Bank forecast Sydney property values could increase 9% in 2021
- Riskwise forecast Sydney property values could increase 8-10% in 2021
- NAB forecast Sydney property values could increase 4.4% in 2021
- SQM forecast Sydney property values could increase 7-11% in 2021
- Westpac forecast Sydney property values could increase 14% in 2022-23
But of course, not all Sydney properties will increase in value at the same rate. Considering the flight to quality following the challenging times last year
- “Investment grade” properties and A grade (above average) homes should keep increasing in value steadily and outperform.
- The price of B grade (average) homes should also increase, but not as strongly,
- C grade (less than perfect) will be the hardest hit as there will be a flight to quality as our property markets rebound.
The sectors of the Sydney real estate market likely to suffer most moving forward 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, where the side-effects of the recession we just experienced will be felt the most.
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.
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 Market
1. Sydney Property Market Prices
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 an unparalleled lifestyle
Prior to COVID-19 the Sydney property market was on the move having recorded its quickest turnaround in decades.
And now that we’re moving out of the Coronavrius Cocoon we are seeing activity across the local market pick up again.
During the pandemic Sydney housing values dropped by only 2.2%, demonstrating some resilience in the face of uncertainty.
Since mid October 2020 the Sydney housing market started growing again with Corelogic reporting a +3.73% change in its Sydney Home value index over the last year, with houses +4.95% and units +0.98% (year on year.)
Rental markets haven’t been as resilient, with Sydney rents down 2.8% since March, with most of the downwards pressure coming from the unit sector.
Since March unit rents have dropped by 5% compared with a 1.3% decline in house rents.
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.
NOW READ: Is now a good time to buy property?
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 let’s look at some of the Sydney property market’s best and worst performers for 2020.
Clearly the Sydney housing market is on the move as can be seen by the rise in asking prices:-
Source: SQM Research
The following chart shows how well Sydney dwelling fared through last years CoronaVirus pandemic .
The Sydney Apartment Market
To meet this demand the delivery of new apartment projects was vital, particularly as affordability pressures, demographic trends, changing household types and lifestyle preferences drive 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.
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.
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.
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.
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.
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.
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.
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 of 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.
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.
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.
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.
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 its famous harbour.
South of the harbour is 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.
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.
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.
However due to COVID-19 output in the New South Wales economy contracted in the 2019 20 financial year, declining by 0.7%. That was the first contraction in decades, with the state reportedly avoiding the early 1990s recession.
While some headwinds still remain, the states economic performance has increased as can be seen in the following chart.
Population growth in New South Wales has come to a standstill as a result of international border closures. The foreign student sector And international tourism, which are key sectors New South Wales have been hard-hit.
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.
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 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:
- Location – above all.
- Storage space.
- Amenity including balconies.
- 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.
- Cooling – especially over summer
- Healthy mobile phone signals
- Great WiFi connectivity.
- 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.
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.
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.
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
Being locked in a Coronavirus Cocoon has shown us the importance of our neighbourhood.
Social distancing during the COVID-19 pandemic made us experience many painful losses.
Among them were the so-called “third places” – the restaurants, bars, gyms, houses of worship, barber shops and other places we frequent that are neither work nor home.
If social distancing through coronavirus taught us anything, it taught us the importance of neighbourhood.
If you can walk out of your home and you’re in walking distance of, or a short trip to a great shopping strip, your favourite coffee shop, amenities, the beach, a great park, you will appreciate the benefit of the third-place – the importance of your neighbourhood.
While some people will move to regional Australia to have more space, the majority of Australians will want to continue living in our capital cities, but in lifestyle, destination locations which have great third places.
And it’s likely than in our new “Covid Normal” world, people will love the thought that most of the things needed for a good life could be within a 20-minute public transport trip, bike ride or walk from home.
Things such as shopping, business services, education, community facilities, recreational and sporting resources, and some jobs.
In planning circles, it’s a concept known as the 20-minute neighbourhood, and many inner suburbs of Australia’s capital cities and parts of their middle suburbs already meet a 20-minute neighbourhood test.
However, very few of the outer suburbs would do so and are unlikely to easily do so because it’s about more than walkability.
Tenants, too, will have similar wish-lists, and savvy property investors will strive to cater to this.
We know that location will do 80% of the heavy lifting in your property’s performance and that some locations outperform others by 50% to 100% over a decade with regard to capital growth and it’s likely to be those liveable locations that will be highly desired.
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:
- They are close to employment nodes.
- They offer a desirable city lifestyle.
- There is no further land available for release, keeping supply in check and demand high.
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.
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:
- Structural defects – These are the ones that grab the headlines but, in reality, major structural issues only relate to a small number of buildings.
- 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.
- 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
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.
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.
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 owners 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.
- 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.
- I would buy a property below its intrinsic value – that’s why I avoid new and off the plan properties which come at a premium price.
- 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
- I would buy a property with a high land to asset ratio.
- I would look for a property with a twist – something unique, or special, different or scarce about the property, and finally
- 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.
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20. Take advantage of independent, unbiased investment advice
If you’re looking at buying your next home or investment property in Sydney here’s 4 ways we can help you:
Sure our property markets are improving, but correct property selection is even more important than ever, as only selected sectors of the market are likely to outperform.
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