Market comment: Sydney Real Estate at the Turning Point
Wed, 18 Jul 2012, Andrew Croll The current Sydney property market resembles its earlier self in mid-2009. Just like then, depending on which segment of the market is under discussion the opinions can range from pessimistic to optimistic and everything in between.At that time the GFC had torn through the top end of the market and properties that two years previously had sold for five or six million dollars were losing hundreds of thousands or more when they turned over in ’09.
Headlines trumpeted these losses, but what’s been forgotten is that in the market sectors more familiar to most householders things continued in a more usual fashion.
As now, there was a decline in construction of new housing. But relief was being offered by the Reserve Bank which set its cash rate at 3% in its July 2009 meeting.
And there’s not a lot of difference three years later with the cash rate at a very low 3.5% and a chance of it falling further. The headlines are familiar, but thankfully the cost of money is about where it was in the middle of 2009.
Confidence is the Key
The main difference has to do with consumer confidence. In July 2009 we believed economic conditions were improving. We thought we’d escape the consequences of the GFC and that the Chinese powerhouse would continue to roll ahead at full speed, pulling the Australian economy behind it. Now we’re not so sure.
It’s easy to find reasons to be negative. The Chinese economy is slowing, although still expanding at a healthy rate of 6% this year. The US economic recovery seems to have stalled with little jobs growth, although productivity has risen slightly. And it’s always a shock when long-established Aussie businesses like Darrel Lea chocolates slip into administration and Ford slashes its workforce despite a multimillion dollar handout from taxpayers.
A June survey by the National Australia Bank found that many Australians are worried about their jobs. ‘‘Employment security is now the biggest concern for homebuyers as interest rate concerns recede,’’ said the NAB report.
The release of the report coincides with news that the economy shed 27,300 jobs in June - the biggest monthly drop this year.
People who are worried about their employment status hesitate to take on new financial responsibilities, and therein lies the reason behind the recent slowdown in the Sydney property market. A lack of consumer confidence has been reflected in a lower willingness to borrow money to invest in real estate.
Go back three years and see what happened. By the end of 2009 conditions had changed for the better. The Australian economy was back in the black and expanding rapidly. Having stimulated the economy with rate cuts, the RBA had hiked its rate to 3.75% with more increases likely.
At that time, John Edwards, CEO of property analyst Residex, said there was only one word that could describe 2009 and that word was "remarkable!" He noted that Sydney’s capital growth of 10.2% for the year was amazing enough, but over the last six months of 2009 had achieved 21.4% percent on an annualised basis.
The Sydney market can not only shift dramatically, it can change quickly. From gloom to boom in six months was the transition experienced in 2009. Those who benefit most from this kind of change are those who take advantage of the conditions and acquire property while prices and interest rates are favourable.
Blackstone Buys In
One such investor is the New York-based Blackstone group which has bought $1 billion of Australian property and, according to an article in The Australian by Florence Chong, is expected to buy even more.
“Blackstone, which manages $US48bn in real estate and an equal amount in private equity, likes Australia's low unemployment, low government debt and the link to China, which it believes will continue to enjoy strong long-term growth, according to an industry source.
"A key attraction has been Australia's tightening office vacancies, weak construction activity and a general lack of new supply," the article said.
Admittedly, Blackstone isn’t a typical homebuyer, but its interest in Sydney real estate is worth a bit of analysis. One of its key investments has given it ownership of Sydney’s Goldfields House at Circular Quay.
Blackstone reportedly has planning approval to build 187 apartments on the property, which has been described as "one of the best residential sites in the world". This represents a great vote of confidence in the future of the city’s real estate market by a company that can choose to acquire property anywhere it wishes.
There are growing signs that the Sydney market is ‘bottoming out’ or ‘stabilising’ according to the Real Estate Institute of NSW in an AAP release on News.com.
The Institute notes that the median house price is down $40,000 from the previous financial year and the annual median house price for the 12 months to March dropped by 6.7 %.
However, the latest property update from REINSW found that prices for residential properties in Sydney had stabilised in the three months to March. REINSW CEO Tim McKibbin said that conditions represented a buyer's market.
"If you're sitting and waiting for the market to ease further I frankly can't see that happening," Mr McKibbin told AAP.
"Now is an excellent opportunity for purchasers to be coming into the market."
Like 2009 prices have mainly fallen in the top end of the housing market, with pricing in what he called ‘Sydney's most affordable suburbs’ remaining firm.
Bronwen Gora, the Sunday Telegraph’s property writer says the Sydney property market is “creeping out of the doldrums”. She points out that house prices below $1 million have recovered from the previous year, and Sydney's median house price has bounced back to $620,000 from $582,000 a year ago.
“RP Data figures show units, which are catching up to freestanding houses in value and popularity, have hit a median of $477,500, up from $465,000 last year.
“While Real Estate Institute of NSW figures last week showed the median house price had slumped to $560,000 in the 12 months to March, an autumn rush helped push the figure through the $600,000 barrier, according to RP Data”, said Ms Gora.
Spring to be Turning Point
Another analyst of the Sydney market, RP Data director of research Tim Lawless, said that prices were no longer going backwards but cautions that anyone looking for quick gains in less than three years would be disappointed.
He sees the biggest price increases resulting from young people and families buying properties in the inner city so they can live closer to the CBD.
Rod Cornish, head of real estate strategy at Macquarie Group, sees spring this year as being the real turning point for Sydney property.
"Particularly with two more rate cuts forecast later this year, Sydney home prices will start stabilising then and early into next year," he told Bronwen Gora. He also said he expected to see prices grow in 2013.
"The median price in Sydney is currently only 12% above where it was in March 2004 so it's been very subdued for a little more than eight years, during which time prices have been rising 1.7% per annum."
One of the key factors underlying the growing sense of optimism among property analysts is data from Australian Property Monitors showing unit rentals jumping 4.4% over the June quarter, bringing the median rent for units to $470 which is just under the $500 median rent for houses.
Figures from Australian Property Monitors show that higher rents, together with little or no capital growth, have pushed up yields to more than 5% for an average two-bedroom unit in Sydney.
Good rental income and the security of bricks and mortar are appealing to investors that have been disappointed by the gyrations and non-performance of the share market. Sales of apartments priced below $500,000 are booming across Sydney.
This is the biggest reason why the most recent data from the Australian Bureau of Statistics for the four months to the end of April showed a 6.3% rise in residential investment loans in NSW. Another important indicator, auction clearance rates, is holding firm near the 60% level at the start of the new financial year.
An article by Antony Lawes on Domain.com quoted property analyst and managing director of SQM Research, Louis Christopher, who said demand for accommodation in Sydney is forcing rents up at a higher rate than inflation.
Mr Christopher said that between 2006 and 2011 rents in Sydney increased by 7.4% a year, which was much higher than the long-term trend of 4% to 6%.
''The Sydney housing market, particularly at the middle and lower ends, is a landlords' market and we don't see any evidence that that is about to turn around,'' he told Antony Lawes.
The Sydney market is both cyclical and predictable. It’s at the bottom of a cycle, and using history as a guide, will predictably rise toward the end of this year.
At present, prices are negotiable and interest rates are down. This is one of those turning points that experienced investors will recognise and act upon.
Sources:
‘Flush with $13bn, Blackstone Group scouts for Australian property,’ Florence Chong, The Australian, 12 July 2012
‘Home prices won't keep falling: REINSW,’ AAP report on News.com.au, 28 June 2012
‘Rate cuts making property hot again,’ Browen Gora, The Sunday Telegraph, 8 July 2012
‘Investors quit shares for bricks and mortar,’ Stephen Nicholls, 14 July 2012
‘Buyers spoilt for choice with an increase in listings,’ Karina Barrymore, Herald Sun, 13 July 2012
‘NAB: House prices slide with more to come,’ Jonathan Swan, Business Day, 12 July 2012
‘An age-old debate,’ Antony Lawes, Domain.com, 14 July 2010