Would you believe me if I told you there’s been a bit of upward movement in the inner city Sydney property market in recent times?
Of course you would! It’s not like you’ve been living under a rock, right?
Sydney actually presents an interesting, almost microcosmic reflection of how modern market ‘cycles’ tend to play out across the world today.
One could argue, when looking at Sydney as representative of the larger economic mechanics of our time, that it’s perhaps more appropriate to speak of markets in roller coaster metaphors these days.
Some parts provide an immediate thrill (over incredibly quickly) due to the inherent risks of riding them, other parts track on a nice even keel, slow, steady and without any imminent threat of falling to your death.
Then there are parts that track so far up; you know there’s only a swift downhill ride awaiting you on the other side.
Housing is increasingly perceived as an outright commodity in our monetary based society. Less and less do we talk about our homes as our ‘castles’, and reference all of those cultural associations from generations past.
Now the banter at backyard barbecues is about real estate as an asset in its own right. People want to let everyone know of the recent property investment acquired by their SMSF.
Back to Sydney…
The point I somewhat digressed from, is that as this new relationship we have with bricks and mortar evolves, it’s likely that we’ll see market cycles continue to shift in new ways and under new weight.
As such, we need to be more astute as property investors in how we perceive the highs and lows, and avoid getting caught up in the prevailing market hype that can derail our own investment strategy and objectives.
Only four or five years ago, Sydney was a city in prolonged hibernation when it came to the residential real estate market. The word comatose comes to mind.
It was, in fact, recovering from a major upswing on the back of the property boom we saw at the turn of this century. Catching its breath if you like.
Then around the end of 2013, we saw a hint of new life in the ‘old gal’. It seemed the market had finally found its feet and was ready to get back up and move on…with great momentum.
Leading the charge at the peak of the previous boom last decade, as well as this time ‘round, has arguably been property investors; as is evident from the below graphic by Pete Wargent.
Interestingly though, owner-occupiers haven’t been left as far behind as we’ve been led to believe by much of the talk around increasing affordability constraints across parts of the Harbour City.
In a Business Insider report, Wargent says “Rolling annual lending to owner-occupiers in New South Wales has leapt to its highest ever level at more than $70 billion….and rising fast.”
Is Sydney demand slowing?
We’ll take a closer look at the comparisons between the 2003/04 Sydney property boom and today’s version, a decade on in our article, Is Sydney real estate set for more of the same? For now, let’s focus on where Sydney is currently placed in its cycle and where various industry analysts think it’s headed…
According to BIS Shrapnel associate director Kim Hawtrey, a recent significant drop in auction clearance rates is a sure sign that Sydney has reached a ‘turning point’.
The number of properties exchanged at weekend auctions has long been used as a statistical indicator of where the market is placed in terms of buyer demand. This seems reasonable; given auctions have long been the traditional way of transacting inner city real estate in Sydney.
In the middle of this year, clearance rates across Sydney were breaking records, hovering at around 90 per cent for a number of weeks.
So when this figure dropped to its lowest rate in three years recently, at almost 70 per cent, experts announced that the seller’s paradise was coming to a close.
“There will continue to be stand-out suburbs between now and Christmas, especially those with strong location, location, location and those attractive to foreign investors,” Dr Hawtrey said.
“But equally, there will be an underlying loss of momentum for the broader market from here. We are at a turning point. We are seeing headwinds looming in the residential market … it will be turning point from a seller’s market to a buyer’s market.”
For equity-laden property owners who won’t necessarily feel the constraints of a changing lending landscape, as tighter serviceability controls are applied to investment based borrowing, this is good news indeed.
History teaches us that when it comes to Sydney, what goes up, and then comes off the boil, will inevitably start to go up again. Such is the nature of a tightly constrained market with an ever-growing population to accommodate.
If anything, these periods of stagnation that occur in some pockets of Sydney, could be seen as openings for astute buyers to acquire quality assets without the price pressures of excessive competition.
Opportunity knocks
While Sydney’s housing sector will no doubt take some time to return to a state of relative equilibrium, where sellers have to slightly lower their expectations to meet the market, some believe the boom is now on its last legs.
SQM Research’s Louis Christopher says it’s a question of sustainability. Quite simply, demand for inner city properties cannot continue at the current, frantic level because skyrocketing prices have pushed ordinary people out of the market.
With a prolonged period of lacklustre growth predicted, this could be the ideal time for investors to pay closer attention to Sydney. As we’ve seen in the past, any type of slowdown is just a momentary calm before another surge of eager buyers storms the city again.
Experts predict sunny horizons for the Harbour City
Dr Hawtrey says although clearance rates are slowing and the Sydney market is seemingly losing a bit of puff, there are still solid sales being reported from the OTP apartment sector in particular.
While some contend that apartment construction activity currently occurring across parts of Sydney will add to a general market slowdown, others suggest there’s just not enough land to build enough dwellings to accommodate the ever swelling populace.
This supply constraint in the face of continued demand, will no doubt see Sydney lead the charge when it comes to consistently escalating property values over the longer term, while preventing any type of significant price correction in the near term.
“There will not be any bubble bursting or a crash, we don’t see it as a bubble anyway but a calming,” BIS Shrapnel’s Dr Hawtrey said.
While properties might not transact as chaotically as they have been, remaining on the market for a little longer, UNSW Business School’s property economist Nigel Stapledon reminds us that this is just ‘business as usual’.
“The market always tops out. People are less confident. The market did get a rush of blood and in some areas prices may even pull back 5 to 10 per cent … Prices can fall but the market will not crash.”
Chinese apartment builder Chiwayland’s director Tomas Simpson calls Sydney “an interesting market”.
“Ultimately in Sydney we don’t have a lot of land here. It’s still going to go up … and based on our inquiry rates I think off-the-plan is still very solid,” he said.
“Also, auctions and off-the-plan are very different. With off-the-plan the buyer can put down a deposit and then take time to get funding. This makes the buyer very comfortable.”
It’s long been held that most of the buyers in these large, high-rise complexes currently under construction are cashed up foreign investors who can easily afford the inflated price tags often applied to this new developer stock.
According to Simpson, whose company is building luxury apartments in Sydney’s inner north suburb of Roseville with another Chinese developer, one thing hasn’t slowed in Sydney yet…and that’s interest from our Asian neighbours.
Want to know more?
Check out the next article in this special Sydney property market feature, where we consider how supply constraints amidst a growing population will potentially impact housing values across the Harbour City into the future, and the market variables which seemingly predicate strong price growth, if history is any indicator.
In the Canberra area and want to learn more? Join the Trilogy team and a leading Sydney property market expert on October 21, as we share unique industry insights into the Harbour City’s prime investment opportunities at this time. Click HERE to Learn More.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).