Sydney’s resilient property market is continuing on the road to recovery, despite an end to government incentives

 Of all the non-resource driven capitals, Sydney is widely regarded as the most indestructible, when it comes to prices and activity. A large population and lack of space for development means buyers can usually be dredged up from somewhere in the harbour city to keep medians moving and markets with their heads above water.

However, two areas that are likely to continue to struggle are the first home buyer and prestige markets, due to an end of government incentives and a continuing level of caution at the top.

Affordable? Not for everyone

A recent report by the Real Estate Institute of New South Wales (REINSW) claims Sydney properties are at their most affordable in a decade, following a 13% fall from a 2010 peak. However, CEO Tim McKibbin admits this doesn’t mean it is inexpensive.

“We are saying this somewhat tongue in cheek,” he says. “A median house price of $565,000 and a unit price of $460,000 are sizable sums of money in any language.”

The REINSW report covered the three months until June 2012 and also reported a 5% fall in the 12 months ending at the same time. McKibbin believes the latter figure reflects the redirecting of first home buyer incentives to the new property market.

“The end of 2011 saw a flood of first home purchases to take advantage of the [stamp duty] incentives,” he says. “These transactions worked their way through the market in early 2012; all the sub $500,000 purchases disturbed the market and pushed the median down. We didn’t see much activity after that for a few months, but now first home buyers are beginning to return and there has been a 0.3% improvement in property prices in that lower quartile.”

The return could be short-lived however, with the NSW government’s $15,000 boost for purchasers of new properties replacing the First Home Owners Grant.

“It’s disappointing,” says McKibbin. “First home buyers are the obvious losers here, but if we take a broader view, they are also a trigger for the rest of the market. Those coming into the market and buying property enable the vendors to upgrade themselves, so it does have a flow-on effect.”

The NSW government is trying to stimulate the purchase of new homes and while McKibbin agrees the state desperately needs new properties to be built, he said it’s misguided.

“The government’s viewpoint presupposes that our problem is demand, whereas I think that it’s supply,” McKibbin says. “The inhibitors to that supply are not first home buyers, but a convoluted and expensive planning system. I don’t think redirecting first home buyers to new properties will fix the problem of supply.”

A new green paper released by NSW Planning Minister Brad Hazzard is seeking to illicit discussion relating to an overhaul of the current planning system and McKibbin says this is an important first step.

 Rents stall as vendors wait

A slowing in rental growth during July has caused investors some concern after the Sydney-wide vacancy rate reached 2.7%, the city’s highest level since early 2006.

Rents for two-bedroom houses have increased by 23% since 2008, but in the three months to June 2012, only inner suburbs recorded increases. The number of new tenancies created was also down on the first quarter of the year.

“We are seeing additional properties coming onto the market,” says McKibbin. “I suspect a flat market has seen people decide not to sell their property, which they would have done in better conditions, and rather put it up for rent while they wait for the market to improve.”

The stall should only be temporary, according to McKibbin, who says strong recent auction clearance rates will boost the number of properties coming to market and push the vacancy rate back down to around 1.5% in the near future.

Hammer strikes a spring in activity

The resilient Sydney market has shown a promising start to the spring selling season, with Australian Property Monitors recording an average auction clearance rate of 63% during September.

One weekend even returned a rate of 67%. These figures are well ahead of the 55% recorded for spring 2011, with senior economist Andrew Wilson expecting the Sydney market to fully recover by the end of the year as a result.

“There has been a significant difference in property turnover compared to a year ago,” Wilson says. “It’s still a patchy market in the sense that it’s the bottom and middle sections where buyer activity is being principally driven.”

A tough time has been had by the city’s prestige property markets in 2012, but Wilson says early signs are emerging that this may be changing.

“We are not expecting a bull market in the upper levels of the Sydney housing market,” he says. “We are however getting a higher clearance rate in the Eastern Suburbs, lower North Shore and even some activity on the Northern Beaches, which has been the real underperforming area throughout Sydney’s adjustment process over the last 18 months.”