Sydney Property Market Update 2013

The property market can change dramatically in the short space of a few months. At the close of 2012 and early 2013 we had buyers and sellers reluctant to engage in property. We now have 70per cent to 80per cent plus auction clearance rates during winter, homes selling in 36 days or quicker and prices exceeding agent, vendor and purchaser expectations.

It could be 2003 again. I admit I am getting older and my memory is not what it used to be however back then I recall people effectively used their houses as credit cards to buy new cars, plasma TVs, boats and to invest in the share market. Remember the share market? Ouch. Lifestyle was an indulgence. That's not what's happening now. Australians not indulging is the reason why interest rates have fallen. I incorrectly anticipated the RBA would hold rates or increase them if property prices grew significantly. Underpin them plus allow a bit for inflation. No winners no losers and in the meantime let’s try and get some new homes built in Sydney, the least affordable city in Australia with an RP Data August median house price of $645,000. Rates have continued to fall and inflation on building materials remain relatively low so the opportunity exists to introduce new affordable housing to first home buyers.

We now have a proportion of people spending a lot on a limited number of properties. Are people panicking? Possibly. Whatever the case they are responding to shrinking returns and seeking security in a stable 4per cent to 6per cent return in a city with a residential vacancy rate of 2.2per cent in the inner region, 1.9per cent middle and 2.1per cent outer region. Anticipated income is steady and rents generally show annual increases. It's a comfortable investment. However I do have real estate agents confiding in me that this is not a “normal” market. These guys are the old ‘Obi Wan Kenobi’s’ of Real Estate. They have witnessed the rise, the falls and the market trends. Their opinions are not to be ignored.

WBP Property Group valuers have been witness to 10 per cent -20 per cent growth in some markets, however, in recent times most markets have experienced historically low rates. If your decision is to buy during this market, buy wisely. It's a market where compromised property can sell for an inflated price to an uneducated buyer. It may be a property on a busy road, land that is transmission affected, or an over priced new unit which in a normal market will struggle to sell.

RP Data is reporting lower vendor discounting of -5.5 per cent in the August market update. Median house prices are 3.2per cent higher than RP data's 2010 peak. That's a long recovery period. The RBA has reduced the cash rate by 0.5per cent. Housing stock remains in short supply notwithstanding there has been some improvement. In terms of sale volumes, NSW OSSR recorded 86,213 transactions for the 12 months to June 2013, which is up 22 per cent on the preceding 12 months. May 2013 saw 17,420 transactions, I would need to go back to October 2009 to find a higher monthly volume which coincidently was the last time we experienced interest rates at current levels. That was at a time when State and Federal Government home purchase incentives were generous with attractive grants and tax exemptions for new AND second hand dwellings however they favoured new dwellings. Activity was similar to the current market in which stock was limited buyers where motivated but investors were few. Locations such as The Ponds became a focal point for aspirational buyers and young professionals and the locality hasn't looked back. It was a honeymoon period in ways. It was a market that was probably no better or worse than now. The difference now is the buyers of existing homes are likely to be investors rather than first home buyers. The investors however are potentially unaware of the local market and are return driven as opposed to looking for a place to raise their kids in South West Sydney. The owner occupier can afford to pay $320,000 and the investor will pay $350,000 without blinking on the basis of an achievable gross 6per cent return, hence the rising market. However on a local market level some prices may not be sustained if investor activity slows and capital growth is not guaranteed. Self managed super funds are an increasing force to be reckoned with and hasty investor retreat seems unlikely. The ATO table below showing growth over recent years.

ATO Statistical Report March 2013
















Wind ups








Net establishments








Total number of SMSFs








Total members of SMSFs








An emerging trend of investors purchasing a property with the intention of constructing a new freestanding self contained granny flat in the rear yard has emerged. There remains a culture and demand for homes with converted garages or outbuildings illegally leased showing comparatively high 8per cent to 10per cent returns. They do however represent risk to owners, insurers and occupants should a fire occur within non-compliant structures. Therefore, there is merit and demand in providing an alternative source of income and increasing rental stocks of cheaper compliant housing via granny flats. However investors should be aware of potential over-capitalisation. A new flat can be $2000 per square meter or $150,000 by the time you have the completed product ready to lease in your yard. At that price it could cost more to build than the existing home on your land is worth. Demand will be primarily from investors so be sure to do your homework before committing. A better option may be to buy two cheaper strata dwellings which amount to the same capital investment however you can sell individually at any time with no land tax issues.

New dwelling market update

ABS June statistics reveal housing loans for new dwellings in NSW increased by approximately 30per cent in comparison to existing homes at 6per cent. I suspect the current increased transaction volumes are partly attributable to the settlement of many large-scale apartment complexes purchased off the plan up to 5 years ago that are now due for settlement. Overall total private sector dwelling approvals rose 1per cent in June and have risen now for 15 months. It's a “modest” improvement on the back of previous “modest” improvements. In contrast to previous unfulfilled Labour government infrastructure promises, the current government is effecting gradual change. South west and north western Sydney infrastructure growth is emerging which can only be positive. With railways comes the opportunity to introduce affordable sustainable higher density housing in new growth areas well located to the building industry workforce. Not surprisingly much of the construction workforce doesn't live in Vaucluse or Mosman and to travel to middle and inner Sydney is inefficient.

However you look at it, new dwellings are in strong demand. Evidence of this trend includes 38-40 Albert Rd in Strathfield, a new off the plan complex well located on the western outskirts of the town centre. Construction is yet to commence with stock including one bedroom units from $550,000 and two bedroom units from $670,000 with 39 out of 42 units exchanged quickly to local buyers. Lane Cove is undergoing a transformation with new units selling quickly, particularly one bedroom units. First home buyers will struggle in this market sector particularly if within 20km of the city. The June First Home Owner average loan size was $288,500 with FHO loan commitments increasing from 14.6per cent in May to 15.1per cent in June with most likely areas for new dwelling purchases being south west and western Sydney.

Confidence Returns to the market

According to Genworth Homebuyer Confidence Surveys, buyer confidence is at its highest since 2007 with 17per cent of respondents expecting to experience mortgage stress over the next 12 months compared to 27per cent in the last quarter. Statistics suggest much of the growth in prices are within entry level properties rather than higher range properties which seems realistic. Think west and south west Sydney for affordability.  The Fitch Q113 report has identified an average increase in mortgage arrears to 1.45per cent to March 2013, up from 1.2per cent in September 2012. NSW and QLD are the worst at 1.58per cent with South Western Sydney again deteriorating.

Greville Pabst, CEO

WBP Property Group