Sydney’s big boom

Anyone who owns a good quality, well-located property in Sydney owns a piece of financial security. iStock.com/Bkbook

• 2015 McGrath Report: Best suburbs to buy in
• John McGrath: What’s the price?
• John McGrath: Choosing an investment location

Following my previous column in the recently released McGrath Report on the national market and macro factors influencing Australian real estate, I’d now like to spend the next few weeks drilling down on the local trends occurring within each of the Eastern Seaboard’s major capital cities.

So let’s start where all the major action is happening — Sydney.

This has undoubtedly been one of the most spectacular booms in Sydney’s real estate history. According to CoreLogic RP Data, this growth cycle began in May 2012 and it’s been a strong climb since then.

On June 30 2013, Sydney’s median house price was $662,500 and it had risen 6.3 per cent over the year. Over the next 12 months we saw another 16.2 per cent rise and a further 17.8 per cent gain by June 30 2015. By September 2015, Sydney’s median house price was $900,000. Soon enough, we’ll have a million dollar median — in fact, some researchers say we’re already there but everyone measures the numbers a bit differently.

Further interest rate cuts earlier in 2015 extended the boom, along with strong demand from investors and a shortage of stock that resulted in auction clearance rates peaking at 89 per cent in May. The average time it takes to sell also reached record speed at just 26 days in 2015.

Lack of stock has been a big issue, particularly in destination suburbs where existing residents seeking to upgrade or downsize locally have been competing with an increasing number of out-of-area aspirants. By mid-May, total stock available for sale was down 21 per cent compared to the year before. Many home owners delayed selling because buying back in was simply too hard.

Things have since changed. As stated in our McGrath Report, stock levels began to improve in late winter and by August, stock was only 5 per cent lower than in August 2014. New statistics released since our report was published show stock levels are now 4.7 per cent higher than this time last year.

In reality, we are probably getting close to the peak of this boom. Interest rates are unlikely to rise for some time but affordability is starting to bite. Prices have risen to such a point that I believe more young families than usual will leave Sydney in favour of Melbourne, Brisbane or major coastal areas.

Many first home buyers are ‘rentvesting’ instead, which is a great option. We’re also seeing more investors heading to Brisbane for the highest yields of the major capitals (as well as the Gold and Sunshine Coasts) with all three locations offering excellent prospects for near-term capital growth.

Tighter investor lending criteria is having an impact in Sydney and this is a good thing, as it is weeding out the investors who are leveraging themselves too highly. However, this is only a speed bump in Sydney’s boom. Investors on good incomes using new equity in their homes or SMSFs are easily able to satisfy the new criteria of lower LVRs, tougher serviceability and slightly higher mortgage rates.

Natural attrition will be what ends this boom — a simple case of prices getting so high that owner-occupiers back off to see what happens next, while falling rental yields and limited prospects for much more capital growth prompt investors to look elsewhere.

Anyone who owns a good quality, well-located property in Sydney owns a piece of financial security. Despite predictions that Melbourne’s population will overtake Sydney’s in as little as 15 years, Sydney will always be the powerhouse property market of Australia due to high migration, work opportunities and an undersupply.

And it’s important to remember that boom periods are only part of a growth cycle. While I do expect this boom to cease soon, Sydney prices will continue to grow throughout 2016 — it will just be at a slower pace.