Sydney’s good fortune has finally come to an end, with the latest stats showing the biggest drop in values across all capital cities. One analyst even calls it a buyer’s market
While some may still have their misplaced faith that the Sydney market will continue to grow strongly, the latest stats from CoreLogic RP Data are sobering evidence that this is no longer the case.
Sydney’s exceptional run over the last couple of years started waning three months ago, and the latest data shows the biggest drop yet.
According to the CoreLogic RP Data Hedonic Home Value Index, Sydney lost 1.2% during the month of December alone. During the December quarter, values dropped 2.3%, the largest fall across all capital cities. This brought median dwelling prices back to $800,000.
While Sydney still racked up the biggest year-on-year gain at 11.5%, the recent decline is the most solid proof that the boom is truly over.
“Sydney was the main drag on the December results,” says Tim Lawless, head of research, CoreLogic RP Data. “Sydney’s 2.3% fall in the December quarter was in stark contrast to the first quarter of 2015 where values surged 14.1%. It also made Sydney the weakest performer of any capital city.”
Lawless blames affordability issues and regulatory pressures for the ongoing decline in values in Australia’s biggest capital city.
“The slowdown in the housing market conditions across Sydney and Melbourne is being driven by affordability pressures, rental yield compression and cyclical factors,” he says. “External influences such as the regulatory framework introduced by APRA have made it more difficult and expensive for investors to access housing finance. Added to this are the higher mortgage rates and more restrictive lending policies and loan servicing requirements by the banks.”
Andrew Wilson, senior economist at Domain, sees a similar trend in Domain’s results. “All good things come to an end. For Sydney, it’s come to an end,” he says. “Our results show prices have fallen as well in the December quarter. The trend has been apparent, there’s no doubt. The auction clearance rate has been tracking back, so we’re always going to see lower prices as a result of that.”
Wilson points out that the market is currently driven by fragile sentiment, but he believes it will pick up towards the middle of the year.
“The tapering of the market has really been a confidence issue, not much an affordability issue,” he explains.
“We haven’t seen significantly higher interest rates or a shake-out in unemployment or loss of population that has driven lower demand. Buyers are just a little wary about the market, which is not good news for those who want to sell their property now. I think a lot of buying and selling was brought forward during the boom, so now there’s a sense of pause in the market. Buyers and sellers are now sitting on their hands.”
Wilson went so far as to call Sydney a buyer’s market. “There’s a bit of a buyer’s market now in Sydney, but that’s the nature of the game. They shift. I think the prospect of a flat market will continue till the middle of the year,” he says.
Not all bad news
Despite the weaker result, Sydney property owners are still well ahead of the pack in terms of their net gains.
“The wealth created from housing in Sydney and Melbourne has been exceptional over the past 12 months,” says Lawless.
“In dollar terms, Sydney homeowners have seen approximately $82,000 added to their wealth, thanks to the strong capital gains over the year.”
While yields have fallen to their lowest point as a result of higher prices, Sydney investors still managed to rack up the biggest total return on their investments.
“Combining the return from both capital gain and yield shows Sydney investors would have seen an average total gross return of 15.4% over the year,” says Lawless.
Sydney investors also need not worry about the prospect of a massive drop in values as this is a distant possibility, according to Robert Mellor, managing director, BIS Shrapnel.
“While Sydney in some ways has bigger risks because of the massive increase in prices over the past three years, there’s no oversupply, so you can keep building at the higher rate that we’re seeing in Sydney at the moment and still not oversupply the market for at least three years.”
Wilson agrees and adds that Sydney still has the strongest fundamentals of all capital cities.
“Sydney still has the strongest economy in the Commonwealth,” he says. “It still has a strong migration and the underlying shortage of dwelling.”
However, he concedes that Sydney is unlikely to see big growth returning in the medium term. “Sydney is in for a period of adjustment. We’re in for a long period of low interest rates, low economic growth and low income growth. Therefore, the capacity to push prices higher is limited or isn’t there any more. The main catalyst of demand and price growth, which has been the investors, has fallen away as a result of the APRA intervention. Sydney tracked back the sharpest because of the downturn in investor activity driven by APRA policy. It will take some time to find a base.”
SUBURB TO WATCH
Surry Hills: Strong growth unlikely to continue
Sydney’s answer to Melbourne’s cafes and restaurants district, Surry Hills is a trendy suburb experiencing a massive surge in values. Just 2km from the CBD, the suburb is teeming with cafes, bars and coffee shops. It also boasts some of Sydney’s best nightlife.
Surry Hills is hip, young and one of the best places to find a small apartment. Its proximity to the University of Sydney campus and Central Station (a short walk) makes it a highly sought after area to live in.
As such, demand from homebuyers and investors has been exceedingly strong during the past three years. Since December 2012, median unit values have surged by a total of 33.3% to $753,000, according to OnTheHouse.com.au stats.
However, this strong growth is unlikely to continue due to affordability constraints. OnTheHouse.com.au predicts no growth for units over the next eight years.
