What’s the outlook for the Sydney property market?
That’s the BBQ talk on the weekends nowadays and it’s a very different discussion to a couple of years ago, during the heady days of the Sydney property boom.
But in reality the news isn’t as bad as the media makes out.
Recently QBE released its Australian Property Market Outlook – 2018-2012 and house prices are expected to bottom out over 2019/20, around 11% below the market peak in 2016/17 and then values are forecast to rise.
Obviously some segments of the Sydney property market are likely to fall considerably more than that average (we’re looking at you off the plan properties and outer suburbs), while some segments of the market are holding their own.
Here’s a summary of QBE’s forecast based on BIS Oxford research:
Sydney house market
Limited supply, a low interest rate environment and robust investor demand led to strong price growth in Sydney over the five years to June 2017.
The median house price peaked at $1,194,800 over this period, growing by a cumulative 84% (or roughly 13.0% per annum).
However, supply is now rising.
Annual dwelling completions in New South Wales (NSW) over the two years to June 2018 were 113% higher than the 10 year average between 2006 and 2016, and the NSW dwelling shortage has begun to fall sharply through 2017/18.
In Sydney, vacancy rates have increased to 2.5% as at the June 2018 quarter, up from 1.8% 12 months earlier.
This comes as the middle ring suburbs have experienced the greatest increase in new apartment supply through this cycle.
An uptick in dwelling completions and slowing population growth have reduced upward pressure on prices.
Together with tightened credit conditions, house prices declined in 2017/18 for the first time in six years.
The Greater Sydney median house price at June 2018 was $1,103,500, representing a 7.6% decline on a year earlier.
After seeing the strongest price growth in the 12 months prior, the inner and middle ring suburbs of Sydney have seen the largest fall in prices over 2017/18 (falling by 8.1% and 10.6% respectively).
Outer Sydney saw a more moderate decline of 2.8% over the same period, which was likely supported by its relative affordability appealing to first home buyers.
Investors
Sydney has been most impacted by the measures introduced by APRA to restrict interest only lending (favoured by investors).
Investors in 2014/15 accounted for over 60% of residential property finance activity.
Banks have both limited the availability of interest only loans and raised interest rates on these loans.
As a result, the value of loans to investors in NSW fell by 12.3% in 2017/18.
Tight yields and lower potential for capital gains over the medium term is likely to further discourage investors, and further falls in investor activity is expected.
Owner occupiers
Owner occupier lending has spiked in more affordable areas with the introduction of further stamp duty concessions for first home buyers introduced in July 2017.
First home buyer lending picked up by 74% in the 12 months to June 2018.
This surge in first home buyer lending has outweighed the easing in lending to non-first home buyers which fell by 3.6% in 2017/18 as this segment of the market have become reticent to upgrade or downgrade in the current soft market.
Outlook
Record dwelling completions are expected in 2018/19 with a strong pipeline of apartment construction likely to keep total completions elevated.
Softness in the apartment market will have flow on effects for housing by both keeping potential buyers in rental for longer, as well as encouraging potential buyers to opt for an affordable apartment over a house.
The combination of increasing numbers of apartments coming online, weaker underlying demand, an out-of-cycle interest rate rise in August 2018 and weaker investor activity is expected to cause a further fall in the median house price of 3% over 2018/19.
Prices are expected to bottom out over 2019/20, around 11% below the market peak in 2016/17.
The impact of slowing supply is likely to cause the market to tighten over the following year, with forecast 2% growth to take the median house price to $1,090,000 by June 2021.
Sydney unit market
The strong pipeline of dwelling supply, while also occurring in detached houses, has largely occurred in the apartment market.
The year to June 2018 has been marked by a record number of apartment completions in Greater Sydney.
Median unit price Price growth in the Sydney unit market has been lower than for detached houses.
Correspondingly, the decline in unit prices has also been lower.
The median unit price has fallen 4.7% in the year to June 2018, compared to a 7.6% fall in the median house price.
Although a tighter lending environment has impacted prices, the more affordable cost of apartments has meant that the stamp duty exemption for first home buyers (on purchases up to $650,000) has supported demand in the unit sector.
Outlook
The inner and middle ring unit market presents first home buyers with a viable option under the threshold for stamp duty exemption.
First home buyer activity is expected to continue to support demand in this market segment.
However, buoyant first home buyer demand is likely to be outweighed by weaker investor demand with further falls in unit prices expected over 2018/19.
With the Sydney market remaining in deficiency, rental growth is expected to remain positive with rising yields expected to attract investors from 2020/21.
Sydney’s median unit price is expected to reach $745,000 by June 2021 – around 7.6% lower than June 2017 levels.
New South Wales and Sydney regions
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