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Turning Point for Sydney Property

21 November, 2010



New Sydney Housing Starts are Increasing – Phil Keeffe Today’s Sydney property market is a lot like 2009. Will history repeat itself and is this the beginning of the next boom?

The current Sydney property market resembles its earlier self in mid-2009. Just like then, depending on which segment of the market is under discussion the opinions can range from pessimistic to optimistic and everything in between.

As now, there was a decline in construction of new housing. But relief was being offered by the Reserve Bank which set its cash rate at 3% in its July 2009 meeting.

There’s not a lot of difference three years later with the cash rate at a very low 3.5% and a chance of it falling further. Thankfully the cost of money is about where it was in the middle of 2009.

The main difference has to do with consumer confidence. In July 2009 we believed economic conditions were improving. Now we’re not so sure.

A June survey by the National Australia Bank found that many Australians are worried about their jobs. ‘‘Employment security is now the biggest concern for homebuyers as interest rate concerns recede,’’ said the NAB report.

The release of the report coincides with news that the economy shed 27,300 jobs in June – the biggest monthly drop this year.

People who are worried about their employment status hesitate to take on new financial responsibilities, and therein lies the reason behind the recent slowdown in the Sydney property market. A lack of consumer confidence has been reflected in a lower willingness to borrow money to invest in real estate.

By the end of 2009 conditions had changed for the better. The Australian economy was back in the black and expanding rapidly. Having stimulated the economy with rate cuts, the RBA had hiked its rate to 3.75% with more increases likely.

At that time, John Edwards, CEO of property analyst Residex, noted that Sydney’s capital growth of 10.2% for the year was amazing enough, but over the last six months of 2009 had achieved 21.4% percent on an annualised basis.

The Sydney market can not only shift dramatically, it can change quickly. From gloom to boom in six months was the transition experienced in 2009.

There are growing signs that the Sydney market is ‘bottoming out’ or ‘stabilising’ according to the Real Estate Institute of NSW in an AAP release on News.com.

The Institute notes that the median house price is down $40,000 from the previous financial year and the annual median house price for the 12 months to March dropped by 6.7 %.

However, the latest property update from REINSW found that prices for residential properties in Sydney had stabilised in the three months to March.

Bronwen Gora, the Sunday Telegraph’s property writer says the Sydney property market is “creeping out of the doldrums”. She points out that house prices below $1 million have recovered from the previous year, and Sydneys median house price has bounced back to $620,000 from $582,000 a year ago.

“RP Data figures show units, which are catching up to freestanding houses in value and popularity, have hit a median of $477,500, up from $465,000 last year,” said Ms Gora.

Spring to be Turning Point

Rod Cornish, head of real estate strategy at Macquarie Group, sees spring this year as being the real turning point for Sydney property.

“Particularly with two more rate cuts forecast later this year, Sydney home prices will start stabilising then and early into next year,” he told The Sunday Telegraph. He also said he expected to see prices grow in 2013.

“The median price in Sydney is currently only 12% above where it was in March 2004 so its been very subdued for a little more than eight years, during which time prices have been rising 1.7% per annum.”

One of the key factors underlying the growing sense of optimism among property analysts is data from Australian Property Monitors showing unit rentals jumping 4.4% over the June quarter, bringing the median rent for units to $470 which is just under the $500 median rent for houses.

Figures from APM show that higher rents, together with little or no capital growth, have pushed up yields to more than 5% for an average two-bedroom unit in Sydney.

Good rental income and the security of bricks and mortar are appealing to investors that have been disappointed by the gyrations and non-performance of the share market.

Sales of apartments priced below $500,000 are booming across Sydney, and the most recent data from the Australian Bureau of Statistics for the four months to the end of April showed a 6.3% rise in residential investment loans in NSW.

An article by Antony Lawes on Domain.com quoted property analyst and managing director of SQM Research, Louis Christopher, who said demand for accommodation in Sydney is forcing rents up at a higher rate than inflation.

Mr Christopher also said that between 2006 and 2011 rents in Sydney increased by 7.4% a year, which was much higher than the long-term trend of 4% to 6%.

The Sydney housing market, particularly at the middle and lower ends, is a landlords market and we dont see any evidence that that is about to turn around, he told Antony Lawes.

The Sydney market is both cyclical and predictable. It’s at the bottom of a cycle, and using history as a guide, will predictably rise toward the end of this year.

At present, prices are negotiable and interest rates are down. This is one of those turning points that experienced investors will recognise and act upon.

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