Sydney Property Market Overview

Throughout 2009 the Sydney property market has remained surprisingly resilient to the global credit crisis especially when compared to other international property markets. Low interest rates and a lack of quality stock are keeping a floor under many segments of the market and we are starting to see growth come back into the market.

The market has stabilised and is showing signs of recovery with high auction clearance rates, increasing loan approvals, increased buyer demand, investors coming back into the market and continued demand from first home buyers.

Sydney property prices started to experience negative growth in the September 2008 Quarter and this continued over the December Quarter. Property prices started showing a slowing decline and stabilisation over the March 2009 Quarter. According to APM Sydney house prices fell -0.2% over the March Quarter and -4.1% over the 12 month period to 31 March 2009. Sydney unit prices remained more resilient with an increase of 0.9% over the March Quarter and a decline of -1.2% over the 12 month period to 31 March 2009.

The June 2009 Quarter is showing the strongest Quarterly growth in houses and unit prices since December 2007. According to APM Sydney house prices rose 3.7% over the June Quarter to take the median house price to $529,926. Over the 12 month period to 30 June 2009 there was a decline of only -0.3%. Sydney unit prices increased 2.6% over the June Quarter and 3.4% over the 12 month period to 3O June 2009 taking the median unit price to $381.273.

The latest housing index published by RP Data and Rismark International confirms that growth has come back into the Sydney property market. According to the index Sydney house prices increased 6.56% during the July Quarter to a median price of $593,000 and unit prices increased 4.14% to a median price of $423,000. Sydney in the last 3 months has seen more growth than was achieved in the last 24 months.

The Australian Bureau of Statistics (ABS) figures also showed a strong recovery in Sydney property prices with an increase in Sydney house prices of 4.9% over the June 2009 Quarter and a decline for the 12 months to 30 June 2009 of only -0.9%.

We are seeing a number of signs in the market that suggest this upward trend will continue and indicate the market is heading for a recovery. These signs include strong auction clearance rates, increasing loan approvals, strong rental yields, housing shortage and historically low interest rates suggest this upward trend will continue. We look below at the some of the factors that are currently driving the Sydney property market.

Stock DOWN: A lack of stock is keeping a floor under many segments of the market. Stock levels are at 4-5 year lows and are down by around 30-40%. According to RP Data the total number of listings across Australia dropped below 120,000, which is well below the 12-month average of about 130,000. New listings are also well down at about 10,000 compared to the 12-month average of nearly 13,000. Given the low stock levels at SydneySlice we are constantly sourcing pre-market and off-market access to properties for our clients.

Auction Clearance Rates UP: Growing confidence among buyers and sellers has triggered strong results at auctions in Sydney. Sydney’s auction clearance rates are averaging over 70% with a peak of 78.4% during the week ending 23 August as first home buyers rush to cash in on the government boost before the September expiration date. Sydney’s auction clearance rates have improved substantially over 2009 coming from a 2008 average of just 40%. Last week the auction clearance rate for Sydney was 74.2% with $84.2 million in property being sold.

Consistent clearance rates of more than 70 per cent should give vendors greater confidence going into the spring selling season and should bring much needed stock onto the market.

Average Time to Market DOWN: The improved health of the Sydney property market is reflected in the improvements in the average time it takes to sell a home. According to RP Data the average time to sell a property is down to just 28 days compared with 37 days at the same time last year.

Buyers and Sale Volumes UP: Despite low stock levels sales activity and buyer numbers are up. We are seeing increased buyer activity due to a perception that the property market and interest rates have reached the bottom. Banks starting to increase interest rates has triggered many buyers, who have been sitting on the fence, into action.

Buyers are out in droves. It is not uncommon to have 50-60 buyer groups through a property at a first open. This increase in buyer numbers is converting into increased sales activity.

The Ray White Real Estate Group has reported that June Sales are up 33% on June last year. The groups total sales were more than $2.4 billion in June 2009 compared to $1.8 billion in June 2008. Across NSW Ray White Real Estate Group recorded $654 million in sales making it the second strongest June on record and up 41% on June last year. This trend is continuing with Ray White just recording its best ever NSW July Sales at $657 million.

Richardson and Wrench in Mosman sold $44 million worth of property in 18 days in June. These sales included properties from $2 million to $8 million and properties that had been on the market from 2 weeks to 12 months. In May–June the agency sold 80% of their entire stock which was $61 million worth of property and 90% of the prices achieved were in-line with or above vendor expectations. Similarly, LJ Hooker Mosman/Neutral Bay sold 32 properties in 31 days in July.

Boutique Agency Di Jones in Woollahra reported sales in June were the highest they had seen for 18 months and were up 130% on the same time last year. Di Jones exchanged 28 properties in June with an average sale price of $1 million and including 3 homes over $4 million.

Auction Results UP: Large buyer numbers and low stock are producing strong auction results. Registered bidder numbers are up and we are commonly seeing 10 plus registered bidders per property. We are also seeing reserve prices being significantly exceeded. For example, this month a derelict unit on the water at Elizabeth Bay ended up selling for $1.16 million well in excess of the $850,000 reserve due to competitive bidding from 15 registered bidders. The week before in Mosman, a knock down house sold for $1.5 million due to competitive bidding from 29 registered parties. A 3 bedroom unit in 'Rosemont Gardens' on Ocean Street Woollahra sold $300,000 above reserve, for $1.6 million at auction with 6-7 registered bidders competing for the property.

A converted warehouse in Darlington also sold this month for $1.28 million which was $340,000 over the reserve. 350 groups inspected the property and 25 of the 30 contract holders registered at the auction. A 2 bedroom unit in Spit Road Mosman sold for more than $120,000 over the reserve at $711,000. Over 300 groups inspected the property and there were 23 registered bidders at the auction.

Last week a property in North Bondi sold at auction for $1.8 million which was $60,000 over the reserve. Over 220 people inspecting the property and 12 registered bidders competed for the property.

House Financing UP: Housing finance figures are being driven by low interest rates and increased activity from first home buyers and investors. The ABS has released figures showing that financing commitments excluding refinancing are at their highest level in 18 months.

Housing finance figures from the ABS showed financing commitments increased 2.9% in May 2009 which is a 20.7% increase over the year. The data also showed an increasing investor activity for the third consecutive month. The number of new housing loans rose by 2.2% in May to its highest level in more than a year. Lending for owner occupied housing was up by 2.3% and lending for investment purposes rose by 2.4%.

Repossessions and Mortgage Defaults DOWN: According to the NSW Sheriff's office, the number of house repossessions between January and July 2009 has fallen 30 per cent compared with the same period last year. According to the statistics, 300 fewer homes were forcibly taken from their owners in the months to July compared to last year. There were 77 repossessions in June, the lowest number in 18 months, down from 151 in January 2009.

First Home Buyers UP: The decision by the government in May to extend the First Home Buyers Bonus has lead to increased activity from first home buyers. BIS Shrapnel forecasts there will be 180,000 first-home buyers in 2009.

The first home buyer market is interest rate sensitive and appears to be less impacted by the global credit crisis than the middle to high end of the market. According to the ABS first home buyers represented 27.1% of the total owner occupier house financing in June 2009. This is up from just 17% a year ago. The number of first home buyer grants issued in May and June were at record levels, suggesting that first home buyer demand is not yet winding back.

We expect to see first home buyer activity to slow as the deadline for the wind back of the First Home Buyers Boost approaches. The boost will be halved on September 1st 2009and removed entirely on January 1st 2010. As the first home buyers step back from the market we expect investor numbers to gather further momentum.

Investors UP: We are seeing investors returning to the property market. Investors are being lured back to the property market by low interest rates, improved rental yields and stronger capital growth prospects due to an overall improvement in confidence. After being badly burned by the share markets, investors are now turning back to residential property to provide long-term lower-risk cash flows.

Rents have increased on average over 30% over the last three years. The rise in rental rates, together with overall flat property prices over the last year has resulted in solid gross rental yield improvements for investors. We look at the rental market in more detail below.

Housing finance figures are showing the fourth consecutive month of increased borrowing by investors. The proportion of loans taken by investors rose to 29% in June according to Australian Finance Group.

We are advising investors looking to spend $600,000 or less to wait for first home buyer activity to start winding back before stepping into the market. There is currently a considerable overlap between the investors and first home buyer markets with both segments targeting similar properties.

Housing Approvals UP: According to the ABS, new home approvals hit a four-year high in June. Permits for new home building jumped 9.3% in June nearly reversing a revised 11% drop reported for May. June's result was the highest since May 2005. This is another clear sign that the housing cycle is beginning an upward trend.

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Below we take a closer look at different segments of the Sydney property market and what SydneySlice is seeing in these markets.

Low End: The lower end of the market ($500,000 - $800,000) in the Eastern Suburbs, Lower North Shore and Inner West continues to perform very well. Low interest rates, increased and extended first home buyer grants and increasing yields lure first home buyers and investors back into the property market. For example, an unrenovated semi in Paddington sold last month at auction for $855,000 with 8 registered bidders and $100,000 over the reserve. Another example, a small 2 bedroom 55 sqm unit at 4B Barcom Avenue, Darlinghurst had more than 150 groups through and 20 contracts issues. The property ended up selling for $516,000. A 2 bedroom unit in Mosman sold for $610,000 which was $40,000 over the asking price due to competition from first home buyers and investors. Another unit in Cremorne sold within one week to an investor for a building record of $595,000. A 4 bedroom home in Kingsford on 456 sqm that is rented for $530 per week sold at auction to an investor for $584,000. There were 12 registered bidders pushing this price well above the mid $500,000 price range.

$1 million Market: Good results and strong activity at the lower end of the market is flowing through to the $1 million property market. Sellers who are getting good results selling at the lower end are re-investing these funds to upgrade to the next level. There is increasing pressure on the $1 million price range with properties selling in the $1-$1.5 million level exceeding expectations. For example, 9 Congewoi Road Mosman sold this month at auction for $1.5 million well over the price guide of $1.1-$1.2 million. Over 300 prospective buyers inspected the property, 54 contracts were issued and there were 29 bidders registered on the day.

Middle Market: In the $1.5-$3 million market on the Lower North Shore and the Easter Suburbs a lack of good stock of family homes is holding this market up. We are seeing strong competition and strong result for good family homes in this price range. A renovated house at 70 Hewlett Street, Bronte on 206sqm recently sold for $2.12 million after only two inspections. Last month an unrenovated home in Albemarle Avenue, Rose Bay on 500sqm sold for $2.4 million at the first open. This was a strong result well over the $2 million price range. A renovated home in Woonona Road, Northbridge sold last week within 24 hours of the first open for $1.8 million.

Top End: We are starting to see the top end of the market $3-$6 million in the Eastern Suburbs and Lower North Shore strengthen. We saw this market come off 10-15% where vendors were under pressure to sell. According to Rpdata the top 20% of the most expensive suburbs saw a fall of 10.3% between Feb and Dec 2008.

However with increasing buyer activity and lower stock levels we are now seeing prices rising in this market. According to RPData house prices have risen by almost 6% between Jan-May in the top 20% of the most expensive suburbs. Last week a 4 bedroom home in March Street, Bellevue Hill sold for $4.7 million which was $600,000 above the reserve. Recovery at the high end of the market is starting to match the strengthening at the bottom end.

Very Top End: At the very top end of the market $10 million plus we have seen a slowing in the number of sales over the last few months and very few fire sales.  In June James Packer spent $18 million on a home at 40 Wentworth Road, Vaucluse. The Guilford Bell designed property is on 2374sqm and has 180 degree unobstructed views of the harbour including the Sydney Harbour Bridge, Opera House and city skyline. It is rumoured that Packer intends to demolish the property. 1129 Barrenjoey Road, Palm Beach a waterfront on 1200 sqm sold in June 2009 for $11.975 million. 15A Burran Ave, Mosman was sold by banker Glenn Willis for $10.25 million after being on the market for over 6 months. Original expectations were over $15 million. It is a fully renovated modern property with views on 1400sqm.

Coastal Holiday House Market: Last year a total of 35 properties sold in Palm Beach and Whale Beach. This year we have already seen 32 properties change hands and whilst there are still a number of properties for sale in Palm Beach and Whale Beach, the number of stressed sellers are rapidly declining. There are approx 6 properties still for sale that fall into this category in the Palm Beach/Whale Beach area and once these have sold we may see prices starting to climb again. There is not alot of stock coming onto the market this Spring and the properties that are coming on will be fairly priced. We believe if you are looking for an opportunity to buy a property at a significant discount to the rest of the market now is the time to buy at Palm Beach or Whale Beach before you miss out. The Central Coast and South Coast areas are still a buyers market with an over supply of houses on the market.

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While we are seeing a number of signs that suggest the property market is on its way to a recovery, we believe that this improved performance has largely been driven by the introduction of the First Home Buyers Boost and the 40% fall in mortgage rates.

The unknown is if this recovery is a short term blip in the market or the beginning of a long term recovery. We believe that a long term recovery is still some way off and that interest rates and the level of investor activity will play a large role in determining the timing and speed of any recovery. The real test will come over the next 6 months as the First Home Buyers Boost is withdrawn and interest rates trend up.

Despite the improving market we are still seeing some great buying opportunities for astute buyers. We expect spring to bring much needed stock to the market and with it better buying opportunities. The key to taking advantage of these conditions is to be across the market and be ready to move quickly if an opportunistic buy arises.

Interest Rates - 45 Year Low

For the 4th consecutive month the Reserve Bank of Australia (RBA) has kept Australia’s cash rate at a 49-year low of 3%. There have been 6 rate cuts (a combined cut of 4.25%) since September 2008 when rates peaked at 7.25%. Economists and the Reserve Bank are now deliberating how and when to start removing this monetary stimulus. The Reserve Bank has indicated that the “normal” or neutral cash rate is around 5.25 per cent.

In the August statement the Reserve Bank Governor pointed to the fact that worldwide economic stimulus was helping the global economy to stabilise. He also stated that economic conditions have been stronger than anticipated in Australia for a few months and that the risk of a severe economic contraction had now abated. He said that better than expected economic data in recent months had boosted consumer confidence and market sentiment both at home and abroad, "reducing the likelihood" of a rate cut.

The RBA now expects the home economy to record modest growth of around 0.5 percent over 2009, with growth gradually firming through 2010 – flouting talk of an imminent recession. The six interest rate cuts made by the RBA since last September, were made "in anticipation of a very weak domestic economy". "Movement towards a more normal setting of monetary policy could be expected at some point if further signs of durable recovery emerge," he said. The bank said "for the time being" its wait-and-see policy, with rates set at 3 percent, was appropriate given the uncertain economic environment.

The Reserve Bank Governor warned last week in a speech to the parliamentary committee that he will raise interest rates faster if he sees home buyers borrowing too much and a bubble forming in house prices. Mr. Stevens said the rising asset prices alone would not prompt a rate rise, but the RBA would raise rates faster than otherwise if it saw that a bubble fuelled by debt was threatening financial stability.

The Governor’s statements seem to suggest that the scope for further interest rate cuts is very minor and given this, the latest interest rate futures yield curve is indicating that financial markets believe that rates will not fall any further. The yield curve shows an expectation that in one year’s time interest rates will sit 1.5% above their current level. With the first increase in rates expected around November or December this year.

Economists have divergent views on the outlook of interest rates. TD securities expect the cash rate to fall to 2.5% over the next 6 months, while Citigroup predicts it will rise to 3.35% in the same period. Interest rate traders believe there is a 90% chance the RBA will raise rates by half a percentage before the end of the year.

The major lending banks have already been increasing rates over the last 6 months. The average standard variable rate for the Big Four is 5.78%. The average 3-year fixed rate for the Big Four peaked at 9.24% in July last year and reached a low of 5.66% in March 2009. It is now at 6.74%. The expectation is that the major lending banks will continue to break rank and pursue out-of-cycle interest rate rises as funding costs rise.

We believe any rate increases later this year or early next year will significantly impact the domestic property market. The impact will be hardest felt by the 1000's of first home buyers who have enjoyed unprecedented levels of Government grants and stamp duty relief. This has fueled the lower end of the market since the grants were increased in Oct 2008. Removing these Government grants, increasing interest rates, and if you are like us, taking a more conservative approach to the recovery, we believe you will see a possible dip in the property market and broader economy in the 1st half of 2010. The RBA is aware it is treading a fine line with regards to removing monetary stimulus and hindering the recovery.

Sydney Rental Market

Rents have increased on average 30% over the last 3 years to reach a peak. However we are now starting to see rents stabilise due to a weakening employment market and a large shift of renters to first home buyers due to the increased incentives. The global credit crunch has continued to have an impact on the top end of the rental market. $4000 plus a week properties are slower to move and we are seeing large rent reductions at the top end of the market.

In the March Quarter we saw a slowing in the rate of increase and in the June Quarter we have seen a further slowing and stabilisation of rental and yield growth.

Sydney rents increased 7.1% for houses and 3.8% for units in the 12 months to 30 June 2009. There was zero growth for Sydney house rents over the June Quarter and 1.2% growth for Unit rents over the June Quarter.

Rental yields have also stabilised. The gross yield for Sydney houses over the 12 months to 30 June 2009 increased by 1.8% to 4.66% and were steady over the Quarter. Unit rents increased by 1.6% to 5.22% over the 12 months to 30 June 2009 and saw a decline over the Quarter. SydneySlice recently bought a 3 bedroom art deco unit for an investor in Coogee for $740,000. It rented at the first open for $740 per week which is a gross yield of 5.2%.

Despite the slowing in growth rental yields are still strong and when combined with historically low interest rates we expect to see more investors coming back into the market in 2009.

We expect rents and rental yields to continue to stabilise and increase further over 2009/2010 due to low supply of new dwellings and very high levels of immigration and population growth.

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