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Where next for investing in the Sydney property market?

Where next for investing in the Sydney property market?

What does the apparent slowdown in the Sydney property market mean for current and prospective investors?

There are signs that the brakes are finally being applied to Sydney’s runaway property market. What does this mean for current and prospective property investors?

Historically low interest rates and strong investor interest have been two key drivers of Sydney’s supercharged real estate market. But since the start of the new financial year, and following regulatory action designed in part to temper the investment frenzy, the market has finally begun showing signs it may be swinging away from sellers and back to buyers.

Where’s the evidence of a Sydney slowdown?

One well-reported adjustment in the market has been auction clearance rates. After months of regularly clearing 80%, weekly clearance rates dropped down to below 65% by the end of October, according to CoreLogic RP Data.

Slowing median price growth is another sign of the state of play in Sydney. CoreLogic RP Data reports that in October, the Harbour City saw quarterly growth in dwelling values of 1.5% – half of that recorded by Melbourne.

Though this is by no means capital growth to sneeze at, it’s dwarfed by the 8.9% quarterly growth Sydney saw in the final quarter of the 2015 financial year, according to ABS figures.

Similarly, where Sydney property prices went up a staggering 18.9% in the 2015 financial year on ABS figures, according to CoreLogic RP Data they’ve gone up by “only” 15.6% in the year to October.

Available housing stock in Sydney also points to an ongoing readjustment in favour of buyers. According to latest figures from property research house SQM Research, residential property listings in the city are at a three-year high, up 11.6% from the same time last year.

“Higher levels of housing stock means more choice for buyers, which should ultimately result in some rebalancing towards buyers over sellers when it comes to negotiating on price,” says CoreLogic RP Data head of research, Tim Lawless.

“If the trend towards higher stock levels persists, we can expect Sydney buyers to face less urgency when it comes to making their purchase decision around property and higher discounting rates from vendors as they face more competition in the market.” 

Is Sydney in a bubble?

A recent report by global investment bank UBS found Sydney’s housing market to be significantly over-valued. In fact, of 15 world cities analysed it found only London and Hong Kong to be greater “bubble” risks – that is, at risk of a large downward price correction.

The report cited “gradually deteriorating economic conditions, a slowdown in China and tighter regulations” as factors increasing the risk of a significant medium-term price correction in the Sydney property market.

“Sydney’s market is catching up quickly and trending close to [a bubble]”, the report warned.

But Louis Christopher, managing director of SQM Research, is less wary about the future of Sydney property prices.

“We forecast the national residential housing market will slow down in 2016 predominantly as a result of a slowing Sydney housing market. However, we do not believe the market will record a fall in prices for the year,” he said.

“There might be one quarter perhaps where Sydney records a marginal decline. But that should be it.”

Simon Cohen, managing director of Sydney buyer’s agency Cohen Handler, doesn’t see property prices crashing anytime soon either. “If anything they might stabilise. But it’s still very cheap to borrow money [with interest rates low] and there’s still a lot of demand.

“Do I think prices will go up another 10-20% over the next few months like they’ve been doing? No. But I don’t think they’re going to drop either.”  

SQM predicts that, depending on RBA cash rate decisions as well as broader economic trends, including Aussie dollar movements, Sydney property prices will rise by at least 3% in 2016, but no more than 9%.

It also predicts that, regardless of all likely macroeconomic outcomes, Melbourne will take the mantle from Sydney as Australia’s best-performing capital city market for property value growth.

Brisbane is expected to perform as well as, if not better than, Sydney in percentage growth terms, while Hobart is also predicted to keep pace, with Adelaide and Canberra not too far behind.

Yielding new opportunities?

Sydney’s skyrocketing property capital growth has presented a dilemma for many investors – lower rental yields.

As Lawless points out: “Gross rental yields at record lows and affordability constraints are acting as a further disincentive [to investing], particularly in Sydney where the median unit price is equal to, or higher than the median house price in every other capital city.”

Slowing house price rises in Sydney, then, may present an opportunity for investors to jump in at a more affordable price point and enjoy higher rental yields, even though this could be coupled with reduced capital growth prospects.

Higher rental yields are of course dependent on rents growing at a faster rate than house and unit prices. And the good news for Sydney investors is that, according to CoreLogic RP Data, the top-performing suburbs nationally for median house rent increases were all in that city.

Of the capitals, Sydney saw the second-highest increase in rental rates city-wide over the 12 months to September, after Melbourne.

Where to next?

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. The commentary provided from external companies that are not a member of the Commonwealth Bank of Australia Group of Companies (the CBA Group) does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. The CBA Group does not accept any liability for losses or damage arising from any reliance on external companies and their products, services and material.