Increased affordability and recent housing price stability have placed Sydney in a positive position heading into 2013. An underlying shortage of property means upwards pressure on prices should remain in place.

The back half of 2012 saw the Sydney housing market string a few months of price growth together after seemingly finding its floor, according to RP Data figures.

Of the major cities, it was the only non-resource based economy that showed any significant signs of promise. Sydney has been one of the most resilient markets in recent years, according to RP Data’s national research director Tim Lawless, who claims dwelling values bottomed out in May 2012, after falling by 5% since November 2010.

“Over the 12 months to September, Sydney values were up 0.9%, the first annual rise since June 2011,” Lawless says.

A dense population, stable unemployment figures of just over 4% and tight rental vacancy rates of 1.8% boosted the greater Sydney area; complementing the harbour city’s fundamental strengths, which include a supply shortage, the presence of big businesses and the fact it’s a desirable destination for residents and tourists alike.

“The Sydney market is probably sitting at about 6.30 on the clock, the bottom being six,” says Charles Tarbey, Century 21 CEO. “It is definitely on the rise and rightly so. We have seen stable prices for a very long time, without any growth and some areas have gone backwards over the last four to five years, so I would suggest that Sydney is ready for a nice, steady growth plane.”

Looking forward, housing economists are divided over the extent of Sydney’s growth.

“We’re predicting CPI of 2.4% and we’re predicting Sydney house price growth of 2.1%, so in real terms, we’re predicting growth to fall,” says Residex CEO John Edwards. “We predict it will do really well by 2016. In Sydney, the recovery is all about affordability. It is close to being balanced as far as stock is concerned and there is potentially a slight oversupply of units, but housing is still relatively unaffordable. It will take a little while for that situation to change.”

Overall, median house prices in Sydney are forecast to lift by a cumulative total of 16%, or 5% per annum, to $790,000 over the three years to June 2015. This reflects a total rise of 6.3% in real terms according to the QBE LMI Housing Outlook report.

Supply and demand factors

1. Housing shortage

A perceived shortage of housing supply is what characterises the Sydney housing market and ensures prices continue to experience some upwards pressure.

“New South Wales generally, but mostly Sydney, is extremely tight,” says Paul Braddick, ANZ head of property research. “We’ve been measuring a pretty significant housing shortage at the national level, but more than half of that exists in Sydney.”

Braddick believes the city hasn’t been producing nearly enough houses since 2004, which has created substantial pent-up demand and prompted acceleration in rent prices. The shortage has come to the fore recently even in state politics, with Planning Minister Brad Hazzard opening a green paper on development policy, inviting the submission of ideas on how to address Sydney’s supply and demand imbalance.

In addition to this, O’Farrell's State Government was the first to discontinue the federal First Home Owner Grant, replacing it with a $15,000 incentive for the purchase of new property, in a bid to stimulate new home construction. Real Estate Institute of NSW (REINSW) CEO Tim McKibbin says that while it is encouraging that the premier is taking action, the move will discourage first home buyers from entering the market, making it harder to drive growth in the middle and top end.

“The inhibitors to supply are not first home buyers, but a convoluted and expensive planning system,” McKibbin says. “First home buyers have got the biggest task of all of us. They’ve got to make the quantum leap from zero into the market and they do need assistance. They are an important link in the chain and removing them from the market may stifle further sales and activity.”

2. Affordability

Experts agree that affordability is a significant issue for Sydney property buyers, despite a recent REINSW report stating that the market was at its most affordable in a decade. The Mercer Cost of Living survey released in June placed Sydney as the world’s 11th most expensive city, while in February, the Economic Intelligence Unit ranked Sydney as the seventh least affordable, out of 130 cities surveyed.

The good news is that a few stars may be aligning to improve the situation. Multiple rate reductions by the RBA have made home loans more affordable, while household incomes are trending upwards.

“If you just look at prices, you can see why people say that Sydney is miles [more unaffordable than] other states,” says Braddick. “But if you look at the relative move in prices over the last nine years, Sydney has slipped dramatically compared to every other capital. It had virtually no growth for the first four or five years of that period and it’s only been fairly recently that you’ve seen nominal gain.

Meanwhile, average incomes per household continued to rise over that period and looking just at average household income and median prices in New South Wales, that series is dramatically better today than it has been for a long time.”

APM senior economist Andrew Wilson agrees that affordability is close to the bottom of the house price cycle, but warns that a lowering of interest rates, while a blessing for some, is a source of concern for others.

“The RBA is signalling it is not convinced of the robust nature of the economy going forward,” Wilson says. “We still have fragile buyer confidence and a patchy housing market, so we’re not out of the woods in terms of a general upturn in sentiment and activity.”

3. Unemployment

Sydney is tracking well for unemployment; a rate of 4.1% is ranking better than most of the other states, with the national average pushing the low to mid 5% mark. Wilson says that while this figure is heartening and a solid platform for confidence going forward, it is crucial for the housing market that the figure stays put, or at worst remains under the 5.5% mark. Sustained job confidence will encourage those sitting on the fence to take on a mortgage.