Phenomenal sales activity continued to be the theme for Sydney over much of the summer, but the market’s price peak could be in sight
How far will Sydney’s property investors go?
That seems to be the relevant question considering the city’s now one and half years of solid price growth – fuelled, not by first home buyers, but almost entirely by an active investor base.
The situation has now reached a pivotal point. AFG, Australia’s largest mortgage broker, reports that January saw its highest proportion of home loans processed for investors since records began. Figures from the brokerage show that 53.4% of its NSW loans processed went to investors, accounting for $2.58bn. It was also a 14% increase on January 2013 activity.
General manager of AFG sales and operations Mark Hewitt estimates that much of the spike in activity has come about because of the low interest rate environment.
“We’ve had a very strong start to the year, with continuing trends of high investment activity in NSW,” Hewitt says. “With most people expecting the historically low rates to remain with us for much of the year, we’re preparing for even higher levels of activity now that people are getting back to work from the summer holidays.”
Data from Australian Property Monitors (APM) shows the kind of impact that large scale investor activity is having. By APM measures, Sydney house prices grew 6% over the three months to December – the second highest quarterly house price rise on the research company’s records.
APM calculations also had Sydney’s house price rising by 15.1%, pushing the city’s median price to the highest level ever.
APM senior economist Andrew Wilson attributes the rise to low interest rates, reasonable economic performance at a national level and rising confidence. While these drivers won’t be abating soon, Wilson says that further growth in house prices is looking increasingly unlikely over the months ahead.
Part of the reason is that so much of the recent activity has come from investors. The fact that first home buyers are not responding as well to the low interest rate environment means that growth is less a reflection of a market where the bulk of would-be buyers feel they can purchase. Sydney’s high prices may have a lot to do with that.
“The Sydney market has been supercharged by record levels of investor and changeover buyer activity in the $1m to $2m price ranges – particularly in the Upper North Shore and Inner West suburban regions,” Wilson says. “The current level of price growth in Sydney is unsustainable, particularly given the likely continued deterioration of the local economy and the prospect of a flood of new rental properties overshooting underlying market fundamentals.”
Beyond ridiculous
Further confirmation of Sydney’s rapidly approaching affordability ceiling was recently revealed in a global study of house prices. Demographia’s 10th annual International Housing Affordability Survey showed (in what will likely be no news to the majority of Australians) that Sydney remains one of the top 10 least affordable housing markets in the world.
The survey ranked cities in Australia, Canada, Hong Kong, Ireland, Japan, New Zealand, Singapore, the UK and the US on a decimal scale where cities that generated a median multiple between 4.1 and 5 were deemed “seriously unaffordable” and anything over 5.1 was categorised “severely unaffordable”. Sydney scored a 9.
Spotlight on: Sydney’s highest rental yields
Thanks to a 36% reduction in the median unit price, but no movement in rental prices, Ultimo now has the distinction of being Sydney’s highest yielding market. Despite the price falls, the market remains fairly robust in terms of supply and demand. The vacancy rate is just 1.7% and less than 1% of all properties in the neighbourhood are up for sale – a low amount.
The biggest red flag for the market is perhaps the fact that it is dominated by student housing, which includes a high proportion of studio and one bedroom apartments. These property types tend to see fairly volatile capital growth (as evidenced by the recent 36% fall in price) and are often recommended for investors who are after cash flow – and nothing else.
Similar red flags could be waved at Bella Vista which, although sporting a 9.1% rental yield, is within a corridor of large-scale development in Sydney’s north-west. Much of that has been concentrated in nearby Kellyville, but it means buyers have a lot of options within the general area. Bella Vista is also dominated by detached housing: units make up a small part of the market.
Suburb to watch: Granville
As the Sydney property market has been continuing its upward trend over the last year and half it has been inner city suburbs that have received the lion’s share of activity. That could change. As an increasing number of inner city suburbs push far past their traditional affordability ceiling and start showing decreasing rental yields a ripple effect might occur – activity and price growth could move to well-placed middle ring suburbs.
Granville would appear to be well placed as a beneficiary of that. It is 19km west of the Sydney CBD, but it is critically just 2km south of “second CBD” Parramatta. This has ensured that the area is very well connected to the rest of the city. An express train line takes commuters straight to the city and the M4 Highway into the city is at Granville’s doorstep.
When these attributes are considered alongside the suburb’s affordable price point it makes for a strong combination. The median price of units is just shy of $350,000 and because of the area’s demand among tenants, Granville remains one of the few places left in Sydney where rental yields of 6% are still possible.
As a benchmark, 6% rental yield is usually the point at which investment properties become cash flow neutral.
Amenities tick all the boxes: schools, a hospital, a selection of shops, parks and there is decent nightlife in Parramatta. The best units are located in the northern section of the suburb, near the Granville Train Station.
