While Sydney continues to decline, other less popular markets in NSW are catching up to the house price boom that the capital city has witnessed in the past years. How can investors maximise wealth-creation opportunities across one of the most populous states in Australia?
According to the Housing Industry Association’s chief economist Tim Reardon, the decline in foreign investment has been a significant driver of the current tightening of finance for investment properties and the decline in dwelling values.
Data from the Foreign Investment Review Board found that foreign investment has declined from $30 million to $12 million over the past two years.
The decline has significantly impacted the Sydney property market in particular, causing a downturn that “has not occurred in the last decade”.
“What we know is state government certainly acted to restrict foreign investors in the market. Punitive rates of stamp duty have certainly had an impact, differential exchange rates may have had an impact, falling house prices in Sydney and Melbourne may have had an impact.
“But if we look at the rest of the world, Toronto’s seen the same thing, London’s seen bigger reductions in foreign investor activity in residential homes than we’ve seen.”
“If those market conditions continue, then the correction we’re expecting in the market, the correction we thought would take two years, will have been achieved in three months,” Mr Reardon said.
Still, despite the current softening conditions in the NSW capital, the rest of the state continues to hold opportunities for investors.
While the credit squeeze has been evident in Sydney for quite some time as it stood to be one of the first areas to be impacted by tightening credit conditions, other markets across NSW are simply lagging behind in terms of decline.
According to Mr Reardon: “The rest of NSW is still catching up to the house price boom that Sydney had at that positive wealth effect, where you saw from house price increases, and possibly the great beneficiary of that is Newcastle [and] the Hunter region. Their market is going to come off a little this year, but not significantly.”
However, he warned investors that the noticeable reduction in multi-unit approvals and detached housing can negatively impact the balance of supply and demand in the state.
“It hasn’t been as sharp as what it was in the south-east corner of Queensland, but the market is still going to continue to correct back to more historically average numbers. For the next five years, we’re going to need the national economy to keep us up, and at this stage, all indications are the rest of the economy will hold us up from a deep downturn.”
During the final week of March, the daily home value index fell by 0.1 of a percentage point from the week prior, according to data from CoreLogic’s Property Market Indicator.
Sydney and Brisbane saw a 0.1 of a percentage point decline in property values, following Melbourne with the largest decline at 0.2 of a percentage point. Meanwhile, Perth and Adelaide saw no changes over the week.
Since July 2017, the property values in Sydney have declined by 13.2 per cent, which is deemed as “deepest and longest in modern times”.
Contrary to previous downturns that were driven by economic contraction or higher interest rates, the decline in Sydney are more closely linked to the tightening of credit conditions at the same time that the economy continues to grow and interest rates remains stable
Finder’s Graham Cooke said: “With the highest median house and unit price in the country, it’s not surprising that Sydney is expected to be hit hardest by the property downturn. If the predictions hold true, Melbourne and Sydney property still have another 6 to 8 per cent to drop this year. This means $60,000 more knocked off the average property price in Sydney.
Experts believe that house and unit prices will continue to move in Australia’s major capital cities, particularly in Sydney, Melbourne, Brisbane, Perth and Adelaide.
Sydney houses are likely to see the largest price decline, falling 6.21 per cent to an estimated loss of $57,758, while Sydney units could decline by 7.71 per cent to an estimated loss of $54,386.
“While this makes it harder for existing homeowners to build up equity, it could make Sydney an attractive market for first-time buyers with a deposit saved.”
“Right now, there’s no need to jump on the first property you like. Use this time to save for your upfront costs. Look for value before you plunk down your deposit. Buying at the right time could potentially save you tens of thousands,” Mr Cooke highlighted.
The only major capital city that may not see any significant decline is Hobart as its house prices are expected to go up 1.42 per cent to $469,559, while unit prices are expected to go up 0.2 of a percentage point to $361,722.
Supply and demand
While prices are declining, listings across capital cities are fluctuating, with Sydney, Melbourne, Brisbane and Perth witnessing declines while Canberra, Darwin, Adelaide and Hobart see increases.
Sydney has recorded declines in listings for six weeks in a row, although the degree of declined has eased slightly at 10 per cent.
Across the capital cities, houses remained popular than units, with Hobart recording the shortest average time for houses and units on market at 35 days and 25 days, respectively. Meanwhile, the longest wait for houses and units was seen in Perth at 90 days and 110 days, respectively.
Vendor discounting was between 5.3 per cent and 8.3 per cent for houses across most capital cities, and between 6.2 per cent and 11 per cent for units, with Canberra as the low-end exception for houses and units, Perth as the high-end exception for houses and Darwin as the high-end exception for units.
While the decline in housing supply continues, the Housing Industry Association predicts that apartment supply will bounce back later this year – that is, despite apartment approvals dropping by 50 per cent over the final quarter of 2018.
According to Mr Reardon: “At this stage, we can dismiss this [dip]. So, a quarter of that data for apartment approvals is not something that’s particularly interesting. If we see that continue into the second half of 2019, then we start to become a little bit more interested.”
In 2019, there are 12 months’ worth of apartments under construction and another 12 months of apartment building that has been approved.
“[It is] the first time in a decade the amount of apartments that are being commenced are equal to the number that are being completed, and that’s an important point. What we know is that 2019 will remain a record-year for completion of apartments. It’s the amount of work that follows through after that we’re going to be interested in,” he said.
In 2020, the housing supply across capital cities is expected to catch up to apartment supply. In fact, Mr Reardon believes that, while it’s a long way back from the level supply in 2018, it could still be “one of the best years on record” for housing supply.
With supply expected to rise in the near future, the property market depends on consistent demand to maintain the balance in the market.
The Australian Bureau of Statistics found that, over the 12 months to September 2018, the population of Australia increased by 1.6 per cent or 395,101 people, with the biggest drivers being net overseas migration and births outweighing deaths.
Interstate migration has also been cited as a significant contributor to population growth on a state-by-state basis. Over the same period, there are more than 394, interstate arrivals across the country.
CoreLogic’s Tim Lawless: “Australians are becoming more willing to move interstate, with the 394,193 arrivals over the past year the greatest number since September 2003.”
“With greater flexibility around working remotely nowadays, it’s no surprise that the trend towards more interstate movements is increasing – we would expect that this trend is set to continue over the coming years.”
Apart from a spate of tax cuts and cash handouts, the Morrison government’s federal budget may also impact property investors if a major infrastructure spend makes it through parliament.
Treasurer Josh Frydenberg committed to spending $100 billion on infrastructure projects over the course of the next decade, aiming to ease congestion in cities, unlocking the potential of regional areas, managing population growth and improving road safety.
The infrastructure plan, once passed, is expected to influence the growth and values of several surrounding suburbs.
Included in the plan are the $4 billion-Urban Congestion Fund, which includes a Commuter Car Park Fund and various road-based projects; $2.2 billion for safer roads; $1 billion for the improvement of freight routes and access to ports; and fast rail corridors in several capital cities, including Sydney to Wollongong, Newcastle, Bathurst, Orange and Parkes.
More trains and tracks are expected to be implemented across NSW as part of the railway-related infrastructure projects, including 17 of the Waratah Series 2 trains to be added to the 24 already delivered to the state. There will also be eight other express services on the T1 Western Line during the morning and evening peak.
In line with the upcoming federal elections, the Liberal government also promised to dedicate more than $6 billion for the delivery of a new high frequency Sydney Metro West rail line between Parramatta and Sydney city, which will be constructed next year.
Moreover, the Liberal government will be expected to deliver the first stage of the North-South Metro Rail Line, which will connect St Marys station and the upcoming Western Sydney Airport, during its term.
In addition, there are the Metro South West extension, which is planned to connect Bankstown to Liverpool; the Metro North West Line with an expected completion date of May; and the completion of the Metro City & South West which will go through the Sydney CBD and out to Bankstown.
Roads and buses in Sydney and regional NSW will also benefit from the proposed infrastructure project under a Liberal government, including over 14,000 weekly bus services added to networks in Western Sydney, North West Sydney, South West Sydney, Inner West Sydney, East Sydney, South Sydney, the Sutherland Shire, the North Shore and the Northern Beaches, the Blue Mountains, the Hawkesbury, the Central Coast, the Lower Hunter and the Illawarra.
Over $1 billion will also be dedicated to opening up the roads, address pinch point upgrades in south-west Sydney and install and implement smart traffic lights in over 500 intersections, as well as smart motorways, digital parking signage and drones and digital messaging.
Still, experts remind investors that these infrastructure projects are still merely plans and should not be the sole basis for investing in an area.
According to Property Investment Professionals of Australia’s Peter Koulizos: “You need to be careful because these are just plans, and previous NSW governments have been unfortunately renowned for announcing plans but not going about it.”
“Wait until the first sod of soil is turned, and then you have more confidence about following up your analysis on infrastructure spending.”
Apart from infrastructure spending, other policies that may impact property investors after the federal elections are One Nation, Sustainable Australia, The Small Business Party, The Liberal Democratic Party and Keep Sydney Open.
Before ultimately investing in Sydney, investors are reminded that, at the end of the day, a huge part of the capital city remains in a downturn.
Keshab Chartered Accountants’ Munzurul Khan, therefore, strongly advised doing good research and due diligence by identifying goals, capabilities and limitations, both personal and financial.
“Sit down with and assess your own goals. Go through what I like to call fact-finding. Where am I in terms of cash flow? In terms of professional advisory? In terms of personal circumstance? Once we know where we are, we can ask ourselves, “What can I afford?””
“Knowing yourself is step one, whether it is with a professional or by yourself,” Mr Khan highlighted.
Then, they are encouraged to establish an investment budget in order to find out how they can secure finance.
Let’s just say my budget is about $500,000 grand at about 4.5 per cent return. Which areas can I buy in? I go back to step one and look at my priorities and timeline, and, for instance, I want growth in 15 years, so we ask ourselves, ‘What are the suburbs that are likely to see the growth within 15 years.’
Mr Khan recommended looking into areas with strong population growth and new infrastructure line-up, such as Campbelltown, Eagleville and other Western suburbs, which represent good value at the moment due to the relative affordability of properties and the abundance of potential to add value through development.
Investors can buy a smaller block of land and build a duplex or do a subdivision in order to significantly increase their cash flow and ultimately maximise the wealth-creation potential of their assets.
CoreLogic’s Cameron Kusher also highlighted suburbs that contain larger average sizes of land, which are currently defying the downward trend as they witness stronger growth.
“As new development increasingly moves towards higher densities and smaller lot sizes for houses, large housing lots are likely to continue to be highly desirable. The desirability won’t be only for more space, but also where the potential for future subdivision may exist,” Mr Kusher said.
In Sydney, the suburbs of Ellis Lane, Grasmere and Douglas Park stood out as they all saw declines that were milder than the capital city change, from 2.2 per cent and 2.9 per cent to 4.3 per cent, respectively.
Satellite cities such as the inner city suburbs of Stanmore, Petersham and Erskineville also provide good buying opportunities this 2019, according to buyer’s agent Meredith O’Reilly.
Moreover, Bardwell Park has started to show signs of potential growth over the coming years, so much so that Ms O’Reilly described the area as “a new pocket [that could be] the next potential hotspot”.
Inner West suburbs also show potential for growth, supported by their good lifestyle and communities, as well as infrastructure and amenities.
For investors seeking solid yield, Property Alchemy’s Penelope Valentine recommended south-western Sydney and Newcastle.
“The biggest trend I’m seeing at the moment is the outer southern-west, so places like Edmonson Park, Leppington and Camden Park. There’s been some really great developments down there, and you can get a three-bedroom townhouse around there for about $650,000.”
“The rents there are anywhere up from $550 plus, so you’re looking at more than 4 per cent yield there, and they’re big properties and huge demand, so that obviously decreases the vacancy, which is a big important part of maintaining yield,” Ms Valentine said.
Newcastle suburbs of Wallsend, Edgeworth, Georgetown and Elermore Vale, meanwhile, “have been gentrified just recently, so they’re great places to invest, but also, they’re quite large blocks.”
Bianca Dabu, Smart Property Investment, 4 April 2019