A new era for New South Wales.
 
Rental growth continues to shoot upwards as a new government steps in.
 
The new year has not only brought a long-anticipated change in government for NSW – it’s also brought a change in fortunes in the property market.
 
While Sydney has always been a solid performer, its growth has been somewhat subdued in comparison to other capitals over the last few years, due in part to population growth shrinking as workers headed north and west. Its economy – with its emphasis on financial services – also suffered badly during the GFC; while the first homebuyer boost had a major impact on the Sydney market, its withdrawal and 2010’s interest rate rises had an equally significant slowing effect. As 2010 turned into 2011 and fireworks exploded over the Sydney Harbour Bridge, RP Data recorded values as falling by 1.4% (for the three months leading up to the end of January).
 
Nevertheless, it seems that better times are on their way – and where rental yields are concerned, they’re already here. A perfect storm of low supply, rising population growth, increasing incomes and high demand – especially from first homebuyers being forced to delay buying a property due to affordability issues – is acting to ramp up rental yields, and it doesn’t appear to be letting up anytime soon.

“The rental market is very much undersupplied, especially in key inner-city areas,” says Rob Farmer, CEO of RUN Property. “Basically, anywhere within a 30-minute commute to the city is in rental crisis. We’re even seeing situations where tenants are scared to move out, as they’re unsure if they’ll be able to find something suitable within their budget.”

Farmer highlights that vacancy rates are consistently below 1%, and will continue to be so – putting pressure on supply and supercharging yields. He estimates that the rental growth was 7.5% over the last year, and expects it will continue over the next 12 months.

John Lindeman, chief consultant at Property Power Partners and author of Mastering the Australian Housing Market, thinks that unit rents could hike even further. “While we’ve seen rental growth of over 7% in the last year, there’s still room for more, in my view,” he comments.

“The median rental yield for units in many areas is still under 5%, and there’s certainly scope for significant hikes in [inner-city] areas like Pyrmont, Ultimo and Alexandria.”

He also adds that the rising yields will stimulate demand and eventually capital growth in the unit market.

“As investors see rental yields go up, it will promote more investor interest from those searching for yield, and we’ll then see prices go up. The flip side of that is we should also see more rental properties come on the market as more investors buy units.”

Lindeman remarks that, although investors aren’t moving en masse yet, the early signs are that activity is increasing.

Median pricing

Farmer adds that the sales market is likewise gathering a head of steam, also thanks to the undersupply situation.

“Our perception is that the market is actually quite strong, albeit a bit softer at the higher end,” he comments. “However, it’s clear that people are keeping their feet on the ground in regards to pricing. Those vendors who still have an expectation of boom pricing are the ones likely to be disappointed.”

Nevertheless, Farmer argues that demand for well-presented properties at the suburb median is still very high.

“Around the median range of any suburb is definitely the hottest part of the market, which could be an issue for investors who like to buy in that range,” adds Farmer. “In Hurstville, for example, we’ve had properties being bought within 4-6 days of listing. There’s a surprising amount of competition in that price range, which is good news for sellers.”

Overall, Farmer reckons the Sydney market is on solid ground, and the outlook is certainly one of steady positive growth. He quotes a recent auction he attended in the inner west as evidence, where 11 properties were sold at higher values than what equivalent properties were being sold for before Christmas, and where there were more bidders as well.

SQM Research managing director Louis Christopher is also bullish on Sydney, but he warns that investors shouldn’t expect double-digit growth.

“We think Sydney will be an outperformer for the next couple of years, not least due to the super-tight vacancy rates and good fundamentals backing Sydney,” he says.

“Undersupply will also drive rental and capital growth: currently, building approvals are lower than they were in 1984, when there were just 3.2 million people in Sydney – and now we’re at 4 million and counting.”

Christopher tips the inner ring for long-term growth, but highlights that the outer west could outperform in the short to medium term off the back of vacancy rates that are minuscule even by Sydney standards.

He cautions, however, that longer-term growth will be dependent on what happens with the macro economy, not least the interest rate outlook and China’s growth.

Lindeman also warns that Sydneysiders shouldn’t become overconfident.

“Most of the economic activity in NSW is linked to finance, business and the property market – so, if shares and housing do well, Sydney does well,” he says. “However, we’ve had an uncertain start to the year, with political instability and natural disasters around the world: those flashpoints around the world don’t do the share market any favours, and that could act as a brake on growth.”

He tips the medium to top end of the market as the next sector to experience growth, as older upgraders who’ve banked significant equity look to move on. He warns that the impending ‘grey wave’ of Baby Boomers retiring should be borne in mind when investing in these markets, as this could lead to softening in the longer term. Lindeman also advises keeping a weather eye on the Central Coast and Illawarra, as retiring Baby Boomers could fuel further growth in these regions in the coming years.