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Oh Sydney, how I love you!
I’m really fortunate to have lived overseas and travel regularly and no matter how many times I do, there’s nothing better than passing over the Harbour Bridge and hearing the Qantas choir belt out “I still call Australia home!” as we descend into Sydney Kingsford Smith airport. Always brings a tear to the eye.
For Australians living here and abroad, we’re regularly consuming news about the cost of living in Sydney, the price of housing and if you don’t earn a six-figure salary you should head for the hills. In this blog, we take a look at what has caused the market to go bananas and where we see it heading.
As we know, the Sydney market is cooling, which is bittersweet. Anyone holding property over the last five years has seen a median value increase of 74%. The current growth cycle kicked off in 2012 and reached the peak in July 2017. August ’17 saw 0% growth and from September to January we have seen a decline of -3.1% (all dwellings). If you’ve been holding property over that period, happy days! Even as the market retracts you’re still well ahead. For those looking to enter the market, it’s going to make things easier; prices are still high with the median price of a house $1,048,371 and unit $762,509 (as at 31/01/18). However, the fear of missing out (FOMO) and frenzied auctions have certainly subsided and for the most part, properties are transacting at reasonable levels again.
We can almost identify the exact weekend in May where we personally saw the auction bidder numbers fall off a cliff, properties passing in, and, once laughed at pre-auction offers - now being considered. There was a shift from a seller's market to a buyers market overnight. Sydney had finally reached its limits with investors and owner occupiers alike reaching their limits.
So what exactly caused the growth run?
The population was growing, the number of properties for sale and the number of new properties being built was low. And of course money - it was SOOO easy to get. If you had a pulse and $1 left in your bank account after your monthly living expenses and mortgage repayment, funds were handed to you on a silver platter. The words 20% deposit were in no one's vocabulary, with banks (the big ones) lending up to 105% of the property value and on interest-only terms. The media hype surrounding property ownership in Sydney was surreal. Fuel that with mum and dad investors using their property windfalls to purchase investment properties and the rising Chinese middle class buying up a storm (when there was no regulations to stop them).
The great housing affordability debate then kicked off, wage growth slowed and strict government policy was implemented. Come March ’17, APRA laid down new rules making it harder for property investors to draw on the equity in their properties to fund new investment purchases. Banks were instructed to undertake more thorough due-diligence before lending money. In the May budget, the federal government imposed a larger tax on foreign citizens purchasing property in Australia, this combined with foreign citizen stamp duty and land-tax surcharges and the outcome had the desired result - a market slowdown.
So where are we now?
The number of properties advertised for sale has increased by 26.5% in the past 12 months (December 2016 - December 2017)
There are a large number of off the plan apartments coming online in the inner ring suburbs (5-10kms from the CBD)
Vacancy rates are sitting at 2.3%
Herron Todd White are reporting houses and apartments to be in a declining market
Buoyant economies in other states are drawing interstate migration of those that can no longer afford Sydney
The interest-only loans that banks were handing out are reaching maturity, now moving over to principal and interest with peoples monthly repayments in some cases 60% more! And if you haven't planned for that, it's not going to be pleasant
Unfortunately, there are also a lot of people who have borrowed on the equity in their properties for holidays, cars and other investments, with the looming interest rate rise there will, unfortunately, be some people who simply can’t afford to maintain their home loans
We’re also seeing families stay put, using the equity generated in their homes to renovate and upgrade their properties as opposed to scaling up (which can be expensive*). This has caused a boom in the residential construction market, with quality builders as rare as hen's teeth and the average cost of construction works increasing by 30% in the past two years
Buyers have a lot more choice and a lot less pressure to BUY NOW, causing vendors to lower their asking prices.
On the ground, the Sydney CBD and surrounding suburbs are currently a construction zone, however, if you can live through the road closures and somewhat ordered chaos the outcome will be a far better-connected city with world-class amenities. Some of the major projects underway and proposed projects include:
The new CBD and South East Light Rail providing high capacity services from Circular Quay along George Street to Central Station, through Surry Hills to Moore Park, then to Randwick and Kingsford via Anzac Parade and Alison Road. This service will connect with the existing Inner West line that runs from China Town to Dulwich Hill
The Sydney Metro. This new standalone railway will deliver 31 metro stations connecting the South West, city and North West
WestConnex a 33-kilometre predominately underground motorway currently under construction connecting the Western suburbs, South Western suburbs, and a new Inner Western bypass of the Sydney CBD
Proposed $2B redevelopment of Allianz Stadium at Moore Park and ANZ Stadium at Sydney Olympic Park
The Barangaroo precinct; a world-class commercial, retail and hospitality hub and the location of the new Crown Casino
Multi-billion dollar redevelopment of Circular Quay
Redevelopment of the Sydney Fish Markets
The outer suburbs are also a hive of activity with restaurants, bars and cafes opening weekly
Areas like Parramatta and Penrith to the west and Miranda to the South are undergoing massive transformations with new housing precincts, high rise developments and community centres being upgraded and extended.
The positive is we firmly don’t believe the Sydney market is going to crash and burn. Sydney is a global city, with population growth, a strong economy and job creation. We believe there is going to be a sustained period of declines, stagnation and lower rates of growth for the next 3 - 5 years. For those looking to purchase an investment property, there are much stronger markets to be looking in and for those wanting to buy a home, it’s about finding an undervalued property that can be renovated to manufacture capital growth.
Milk Chocolate was founded seven years ago by Richie Ragel and Michael Cleary, to purchase residential and commercial property in Australia on behalf of our clients, looking for a home or investment property. To see how we can help you get in touch here.
*Selling agent commission, advertising fees, stamp duty, removal fees and conveyancer fees based on the median Sydney house price.
Sources: Australian Bureau of Statistics (ABS)/CoreLogic/SQM Research/NSW Government/Jobs for NSW.
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