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- So…is it the right time to get into the Sydney property market?
- Sydney House Prices
- Sydney houses are outperforming apartments
- Sydney’s Million Dollar Suburbs
- Sydney’s Property Market Trends
- Sydney property market short term trends
- The Sydney Apartment Market
- Best advice for new Sydney investors
- A strategic approach to choosing a strong investment property in Sydney
Are you wondering what will happen to the Sydney property market over the balance of 2021 and into next year?
Well… based on how the market has been performing so far it’s likely that will see high double-digit Sydney house price growth in 2021, with most segments exhibiting strong price appreciation other than the inner city and high-rise apartment market.
And despite Sydney’s lockdowns, buyers and sellers are still transacting and Sydney property values:
- rose 0.5% in the last week and auction clearance rates were at boom-time levels over the weekend
- increased 1.8% over the month of August, and
- increased 20.2% over the last year.
And there is still plenty of growth left, as Sydney property values only recently exceeded their previous 2017 peak levels.
What a turnaround from all the pessimistic forecasts all the banks made in the middle of last year.
Of course, the Sydney property market has been one of the strongest and most consistent performers over the last four decades.
However, the rate of growth is slowing and it’s likely that the lockdowns will slow the number of new properties coming onto the market as sellers put their plans on hold till the lockdowns are lifted.
Having said that, moving forward extremely strong demand for houses in Sydney, particularly in the inner and middle-ring suburbs, is likely to continue with demand for apartments is likely to remain softer.
But let me clarify that…while well located, family-friendly apartments in Sydney’s inner suburbs are likely to perform strongly due to increasing demand from owner-occupiers and investors, apartments in high-rise towers are likely to continue to languish.
Real estate in Sydney’s larger regional locations, and in particular in lifestyle locations like Byron Bay, the Central Coast, the Hunter Valley, Wollongong, New South Wales south coast should perform strongly this year with beachside suburbs likely to outperform the wider overall market,
The resurgence of buyer interest in the Sydney property market has meant that auction clearance rates have consistently been in the high 80% range suggesting there are more buyers than there are sellers and this always leads to higher property prices
More investors are getting into the Sydney market now recognising that there are no bargains to be found, but that in 12 months time the properties they purchase today will look like a bargain.
SYDNEY DWELLING PRICE TRENDS – Source: Corelogic September 2021
The strength of the Sydney property market is also highlighted by the consistently strong auction clearance rates exhibited every weekend this year.
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.
So…is it the right time to get into the Sydney property market?
Sydney property prices have been climbing at a breathtaking pace in 2021 with more growth expected as strong demand from buyers outpaces the volume of new listings coming onto the market.
This has been good news for homeowners but heartbreaking for house hunters.
At the same time, there have been mixed messages in the media about what’s ahead.
Of course, there’s always the Negative Nellies wanting to tell anyone who is prepared to listen to them the market is about to crash, but other more solid commentators are suggesting our property market is slowing down.
And I agree, I believe the pace of capital gains has peaked, but I’m not suggesting home values are about to dip, far from it.
Rather I believe we’ve moved from a peak rate of growth to a pace of capital gain that will be more sustainable and there’s plenty of life left in the Sydney real estate market with property values likely to keep increasing throughout 2022 and into 2023.
Australia’s economy has experienced the V shape recovery everybody has been was hoping for, but nobody really expected such strong economic growth, employment growth and this financial security will underpin Sydney property market moving forward.
Currently, economic green shoots are appearing with the recession now over, many new jobs being created and over 90% of the jobs lost in the early part of the pandemic now restored.
However, some sectors of the Sydney property market will still languish this year.
The sectors of the Sydney real estate market likely to underperform 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.
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.
Fast facts about the Sydney Property Market
Sydney House Prices
During the pandemic Sydney housing prices dropped by only 2.2%, demonstrating some resilience in the face of uncertainty.
And now in 2021, we are seeing the Sydney property market soar ahead.
The following chart shows the strong increase in buyer demand as reflected by buyer enquiry on property portal www.realestate.com.au
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 landlocked with limited room to grow to accommodate all those moving to Sydney looking for somewhere to live.
Changes in Sydney property prices over the past two years
The research reveals that across Sydney, from the trough of early 2019 through to the end of 2020, prices fell in almost every Sydney suburb.
But any house price fall instigated by the coronavirus pandemic was short-lived.
By the end of 2020, the median hit a new record high of $1,211,488, which is just over $13,000 above the previous peak mid-2017.
Over the past two years, property prices have risen across almost all Sydney suburbs, with 94% enjoying property price growth, and a huge 43% of suburbs even seeing double-digit annual growth.
Leading the suburbs seeing the greatest growth was Alexandria with prices soaring by 30.6%.
Meanwhile far behind the pack was Sydney’s suburb of Marsfield which suffered a 10.1% decline in property prices over the same period.
Elsewhere, Blackheath and Palm Beach are the only two suburbs that have shown stable and continued annual growth over the past two years.
Other suburbs have shown very minor annual price falls, largely Central Coast suburbs such as Charmhaven, Hamlyn Terrace and Wadalba, the research reveals.
Sydney houses are outperforming apartments
Sydney is seeing a record high in the difference between house and unit medians at 52.4% as of June.
The difference in median house and unit values has skyrocketed since September 2020, as the housing market saw a recovery trend following eased social distancing restrictions across the city.
Unit values continued to decline through to January 2021, as low levels of investor participation, and subdued rental conditions saw less interest in unit stock.
As the Sydney lockdown reinforces the lasting impacts of COVID-19 on large cities, and monetary policy remains accommodative, Sydney-siders who can afford it may still be willing to fork out a premium for detached housing in the months ahead.
Sydney’s Million Dollar Suburbs
In Sydney, there are 340 house and 79 unit markets with a current median value of $1m or higher at May 2021; 25.4% more than one year earlier.
In Regional NSW, 55 suburbs (53 houses and 2 units) have a median value of ≥$1m; 267% higher than a year.
Over the year to March 2021, around 40% of sales across Sydney sold for at least $1m.
Bellevue Hill houses in Sydney’s eastern suburbs was the most expensive market, with a current median house value of $7,616,288. Byron Bay houses are NSW’s most expensive regional market with a median value of $2,343,546.
In terms of million-dollar newcomers, houses in North Avoca on the Central Coast have deemed Sydney’s strongest newcomer with a median value now at $1,466,568 (up from $991,507 a year ago).
In Regional NSW, houses in Lennox Head in the Richmond-Tweed region top the newcomers with a median value at $1,402,024 (up from $990,798).
NOW READ: Is now a good time to buy property?
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.
And now 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 year’s CoronaVirus pandemic.
Sydney property market short term trends
Sydney and regional NSW have been among the ‘top performing’ housing markets through the start of 2021 in terms of value change.
This follows a peak-to-trough fall in Sydney values of -2.9% between April and September of 2020, and a dip of just -0.1% in May 2020 across regional NSW.
Through the calendar year to April 2021, Sydney dwelling values have risen 9.3%, and regional NSW dwelling values are up 9.0%. Both dwelling markets are at record highs.
Within these regions, growth has largely been driven by the ‘high-end’ of the market.
This is reflected in CoreLogic tiered hedonic indices, which show the top 25% of Sydney values have increased 12.0% compared with a 5.4% rise at the ‘low’ end of the market since the start of 2021 through to April.
It is also reflected regionally, where quarterly increases have been positively correlated with median dwelling values.
With such rapid growth rates across already expensive markets, affordability constraints are likely to become most pressing across Sydney.
When adjusted for the median dwelling value, the rate of increase since the start of the year equates to a rise of over $80,000 in the median Sydney dwelling value, and almost $46,000 for the rest of NSW.
The uplift is also very broad-based. The only SA3 market across NSW recording a loss in the three months to April were Liverpool units, where values declined -0.8% in the period.
The Sydney Apartment Market
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.
3. 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?
4. 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.
Best advice for new Sydney investors
1. 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, barbershops, 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 that 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.
2. Steer clear of the new high rise Sydney apartment towers
We’ve seen an oversupply of newly built apartments happen in Sydney.
The problem is not all apartments are the same.
Some will make great investments increased 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 the 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 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 task force 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 ’60s 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.
3. 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 homeowners or real estate, investors.
And in the current low-interest rate environment, and the Sydney housing market at the lowest they ever have been.
A strategic approach to choosing 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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