After a whirlwind of a year, Sydney’s market seems to be calming. But predictions for its future remain bright – and there are still some good investment prospects to be found
The frenzied winds that have surrounded Sydney’s property market in recent times look to be abating, at least a little. However, it would be a mistake to think the heat is disappearing from the market.
While both sales and prices continue to be strong, the market has slowed somewhat. For example, the latest RP Data-Rismark Hedonic Home Value Index results show that Sydney’s dwelling values grew by just 1% over the June quarter.
That was still enough to make the NSW capital the best performing capital market over the quarter. It also leaves the city’s median dwelling price at $690,000 – which makes it the most expensive of the capital cities.
RP Data’s Tim Lawless says that, from a total returns perspective, Sydney stood out as providing the most outstanding performance. “If you combine the capital gain with the gross rental yield over the financial year, Sydney home owners have got a total return of 20.2%.”
These results are stellar, but the seasonal lull in June has left interested parties wondering just how long Sydney’s market can keep up the pace. As optimistic and pessimistic assessments fly backwards and forwards, a number of commentators say the market’s immediate future remains bright.
Growth to continue
According to the BIS Shrapnel Residential Property Prospects 2014 to 2017 report, Sydney’s market is likely to continue to show strong growth – although it does forecast a fall-off in growth by 2016/17.
Angie Zigomanis, from BIS Shrapnel, says the market has surged due to a sizeable undersupply of dwellings and improved affordability from low interest rates. These factors should continue to drive the Sydney market over 2014/15 and 2015/16, with 14% price growth forecast over that time.
As affordability becomes increasingly strained, healthy sentiment in the market and strong investor demand should continue to underpin further price rises, he continues.
“Although new dwelling construction is rising, it takes time for the high level of apartment projects to work their way through to completion and impact on vacancy rates. Consequently, demand from investors should remain strong until new supply comes on stream in sufficient numbers to impact on the market.”
Increased supply is likely to hit the market around the same time that a tightening in interest rate policy is forecast. Much of the pent up demand pressures will have dissipated, so prices are predicted to decline over 2016/17.
The peak level of capital growth has passed by and can’t be sustained in the longer term, Metropole Property Strategists’ Sydney office director George Raptis agrees.
“Due to the low interest rate environment, investors are still feeling confidence and there continues to be a lot of activity on the ground. But I think the sting has come out of the tail a bit, as compared to the fever pitch frenzy late last year and early this year.”
There has been much comment on affordability problems and the fact that rental yields have flat lined in comparison to price growth. However, Raptis does not see these as huge issues for investors.
Once the pace of capital growth slows a bit rent is likely to pick up, he says. “As for affordability… 10 years ago, people weren’t earning as much and interest rates were much higher. There are higher salaries now and interest rates are at a historic low, so I think it is probably just as affordable.”
Identifying investment prospects
Taking advantage of the current low interest rate environment to invest in the strong Sydney market is still a good bet, Raptis says. But, given the whirlwind surrounding the market, it is crucial to marry that with buying the right properties in the right sort of locations.
He recommends looking at the inner, middle ring suburbs which are close to infrastructure and amenities, as well as work and lifestyle/recreation hubs. Alternatively, investors should look at suburbs which are piggybacking on a ripple effect from a “flavour of the month” suburb.
Find a suburb that is attracting favourable interest and then analyse the surrounding suburbs, Raptis says. “Look at things like whether there is the same sort of infrastructure and amenities, access to transport, atmosphere and feel, and so on. Because, if they do, history shows they can be sleepers and become sought after too.”
Suburbs in the inner west, like Croydon and Belmore, would be his pick for potential sleeper success stories. This is because they are near the currently popular Marrickville and Dulwich Hill, but comparatively affordable and also in the midst of change.
Suburb to watch
Eastlakes
Developed around an extensive lake system (which the suburb takes its name from), Eastlakes’ major attraction is its proximity to the Sydney CBD and Coogee Beach.
The suburb is 6km from the inner city, is near highways and has good public transport says Ersin Esmek from McGrath Coogee. “This means it is close to everything you might need. It is a great central location in the Eastern suburbs.”
Thanks to the lake system, a large swatch of parkland and a renowned golf course, Eastlakes also offers some good recreational options. In terms of amenities, there are several schools and a shopping centre in the area.
Esmek says the existing shopping centre is set to be knocked down and rebuilt more extensively as a mixture of shops and apartments. “It’s a biggie for the area as it means people will have everything they need on their doorstep. And it means lots of development and change over the next five years or so.”
Eastlakes’ market is dominated by one- and two-bedroom apartments, although there are some houses. This means it is an affordable option for investors and first home buyers.
It also has a healthy rental market and offers solid rental returns of about 5% per annum – which makes for good value for investors, Esmek says.
“Plus there is decent growth potential in the area. Currently, you can get a two-bedroom apartment for under $500,000. With the way the market is going, I think apartments will hit the $600,000 mark. Yet it’s still a comparatively affordable suburb to buy in.”
