Sydney property remains Australia’s most durable investment, but relatively high interest rates and low affordability have caused buyer uncertainty.
The Sydney real estate market is still awaiting the starting gun after the Reserve Bank decided to leave interest rates on hold in its February meeting.
Dr Andrew Wilson, senior economist for Australian Property Monitors said the RBA’s decision had increased buyer uncertainty.
Fragile confidence and low housing affordability in the Sydney housing market remains a significant barrier to increased housing market activity in a city that remains clearly Australias most expensive capital for housing, he said.
In the Sun-Herald’s 2012 Property Guide, St George Bank’s chief economist, Beda Deda acknowledged the market’s slow start to the year but sees a recovery on its way.
“As the rental markets continue to tighten, it will help set the conditions for a recovery to come through in house prices later in the year,” she said, adding that it is likely to be led by owner-occupiers.
Writing in the Sydney Morning Herald, Tim Lawless, RP Datas national research director, says that the Sydney market has demonstrated resistance to any downturn in the property sector.
He points out that the latest RP Data-Rismark Home Value index shows that Sydney values increased 0.7% in the December quarter and remained virtually flat for the full calendar year, recording a 0.3% decline.
The reasons for this are to be found in what Lawless calls “several interesting facts” that keep Sydney real estate ahead of all other capital cities in Australia.
First, Sydney home values haven’t been overly inflated. In the past 10 years, Sydney home values appreciated just 4.1% a year compared to Melbourne’s 7.1% and Brisbane’s 8.1%.
There’s also the fact that rental vacancies are low and rental demand is high. This is positive for landlords because it ensures good returns on investment properties.
An AAP report released 11 February said that rents in Australias most sought-after suburbs have increased by up to 13% per cent in the last year, including hikes of 11.7% in the Sydney north shore suburb of Cremorne and 11.5% in Surry Hills in inner Sydney.
Higher rents are also a stimulus for tenants to become owners. Housing finance data from the Australian Bureau of Statistics shows first-time buyers now represent about 20% of the overall owner-occupier market.
Another key factor is the under-supply of housing across NSW which the federal governments National Housing Supply Council says accounts for about 40% of the national housing under-supply tally.
The auction clearance rate mid-month lingered just above the 50% mark as ANZ and Westpac surprised the market by announcing small increases in their mortgage interest rates.
One might ask how the banks can justify raising their mortgage interest rates at a time the RBA’s Governor, Glenn Stevens, says that inflation is under control: “CPI inflation has declined as expected, as the large rises in food prices resulting from the floods a year ago have been unwinding”.
The RBA did say that if demand conditions weaken materially, the inflation outlook would be supportive of easier monetary policy.
“The Board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth and low inflation”.
The next move in the RBA’s cash rate is therefore much more likely to be downwards.
Annette Sampson took an exhaustive look at the real estate market for SMH Money, including interviews with several property experts. She turned up some interesting comments, including this one from senior research analyst at RP Data, Cameron Kusher:
Home values across Sydney have increased at an average annual rate of just 4% over the past 10 years.
“Although we dont expect property values to increase at a rate above inflation, we anticipate Sydney will continue to be one of the better-performed markets, especially considering that when adjusted for inflation, values remain below their 2004 peaks.
Ian Verrender, writing in ‘Business Day’, said theres little doubt that Australian property is likely to be subdued for at least the next few years.
“As in previous times, the property market appears to be settling in for a prolonged hibernation after a debt-fuelled run-up,” he said.
“The truth is that housing was never affordable. All thats changed in recent decades has been a shifting of the equation surrounding supply, demand and price”.
Australian Property Monitors’ Dr Andrew Wilson remains a confident proponent of Sydney real estate: “The resilience of the Sydney market reflects the underlying shortage of accommodation in the city, with a chronically tight rental market.
“This year is set to be one of gradual recovery in the Sydney market with median house prices expected to rise by between 3 and 5 per cent over the year”.
He says that first-home buyers will be relatively inactive early in the year due to demand from that group being brought forward before the end of 2011. However, he says that this will be offset by increased activity from “change-up” buyers in the middle price sector of the market and investors in the lower sectors – particularly the unit market.
“Although the prestige market will remain relatively subdued initially, expect some momentum to build through the year on the back of increased activity by aspirational buyers seeking value in quality properties in prestige locations, particularly in the $2 million to $3 million price range”.