Over $ 1 million in Sydney’s property market – Buyers beware. Danger might be lurking just around the corner

October 24th, 2012

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Undoubtedly turbo charged by a perception that a low interest rate environment is here to stay, Sydney’s auction clearance rate on the 22nd of last month rose to 67%. This was its highest level in two years. More alarming was the extent of that jump relative to previous months where the published clearance rates have generally hovered around the low to mid 50% mark.

Using as a litmus test the relatively busy inner west suburbs of Balmain, East Balmain, Birchgrove and Rozelle, this article is meant as a caution to $1 million plus buyers about the dangers of over exuberance especially if, as many predict, interest rates fall further during the forthcoming spring and summer buying seasons.

While this litmus test suggests that such buyers may still have the upper hand over vendors in the Sydney property market who, within five years of selling this month, purchased at or above $ 1 million, the rapid rise in clearance rates is a sure and early sign that it would not take much for the tables to turn and for those purchasers five years down the track to find themselves in the same situation as the hapless vendors who just sold to them.

Appearing in the table below are the details of the relevant transactions. To reinforce realities and making an adjustment many buyers and sellers in a folly prefer not to confront , we have taken into account , at current rates, the stamp duty likely to have been incurred by the vendors. No allowance has been made for other but unascertainable transfer costs such as interest, marketing and legal expenses. (It is also worth mentioning that the pain inflicted on vendors in the same district spread to parties transacting below the $1 million mark with, for example, 44B Hornsey Street, Rozelle selling on 27 September 2012 having been purchased on 11 February 2011 for $740,00 – still a hefty price for a property so close to the Rozelle Rail Yards which have previously been suggested as the site for ramps connecting a tunnel extending the M4 to the existing and also nearby City West Link Road).

View Table

Summarising:

  • Of the eight reported transactions over $ 1 million in those suburbs this month and before stamp duty is taken into account:
    • two vendors made a capital loss with the most significant being recorded at 4 Stack Street, East Balmain as the result of a transaction mentioned in CurtiseCall December 2010
    • excluding 43 Rosebery Street, Balmain which involved a re build (discussed below), the average gross annual capital gain made by each of the other five vendors was a miserly 2%. This included 22 Thames Street, Balmain; the capital gain on which was partially attributable to development consent to add accommodation having been obtained in the hiatus
  • When stamp duty is taken into account:
    • the number of vendors who made a capital loss rose from two to four
    • excluding 43 Rosebery Street, Balmain, the average gross annual capital gain made by each of the other three vendors fell from 2% to 1.74%
  • Whether or not the vendor developers of 43 Roseberry Street, Balmain made any money is a moot point. According to the relevant Council records, the building costs alone at commencement were $250,000
  • in a reminder of the importance to successful property buying of research and skilful negotiating at the micro level, these modest returns appear to have arisen regardless of macroeconomic conditions prevailing at the time of each original transaction including a peak in the Sydney residential property market (October 2007) and a trough not long after the September 2008 global financial crisis (March 2009).