Sydney’s correcting property market: first home buyers and high net worth individuals could win in the long term

July 10th, 2018

Between 2012 and 2017, property values in Sydney rose a staggering 74 percent.

Now that we have come to the end of that five-year cycle, the party is definitely over. Sydney property prices have fallen, with economists predicting more drops to come.

As noted in our last Curtis Call special report, this correction may well be different to past corrections owing to a combination of factors including the less than flattering findings of the banking Royal Commission which, well before its report is due, has already led to tightening credit restrictions.

At best some analysts describe the Sydney market recalibration as a much-needed correction; at worst others see it as a sign of an impending property crash.

It isn’t all bad news, however.

For the first time in years, Sydney has turned from a sellers’ market to a buyers’ market. And buyers at the top end of the market have got something in common with those at the bottom end: both ultra-high net worth individuals and first time home buyers have opportunities to strike now. The tide, some say, is turning in their favour.

Or, to put it another way, as Chinese military strategist and philosopher Sun-Tzu once said, “In the midst of chaos, there is also opportunity.”

First time buyers: a chance to enter the market?

According to The May 2018 Decile Report by CoreLogic, Sydney “[d]welling values over the 12 months to April 2018 were higher across the 1st and 2nd deciles but were lower across each of the remaining market segments. The most substantial fall in values over the year occurred across the 10th decile (-7.2%) and the 9th decile (-6.3%)”.The 3rd decile starts at $637,327 whereas the 9th decile starts at $1,418,817 and the 10th decile at $1,828,895. As that range coincides with the range in which many Sydney first home owners buy, (especially if helped by their often richer baby-boomer parents), these falls represent a clear and new opportunity for that cohort of buyers.

“Properties once priced at $1.4 million are now worth $1.2 million,” Kenji Fukushima, sales associate at Sydney real estate agent Phillips Pantzer Donnelley (PPD) tells Curtis Associates. “Everyone has caught on now that prices have come off quite a bit. You are seeing people reenter the market.”

“A lot of the buyers in the past who were being priced out of the market now have the opportunity to get back into the market,” agrees Kim Hayes, sales executive at Ray White in Double Bay, Sydney. “It’s the perfect time to now start to think to get back in. Many are now saving ten to fifteen percent – that’s a lot of money.”

Or as digital property portal Domain reported in an article published in December last year: “With less competition from investors, this is the year first-home buyers are expected to get ahead. “

Making space: the investor exit 

Australia is witnessing ever-tightening credit restrictions, a reaction as mentioned to the sobering revelations from the banking Royal Commission. Meanwhile the Australian Prudential Regulation Authority (APRA) is reigning in errant banks. Checks and balances, in short, have increased.

This has led to investor mortgage lending seeing its largest drop in two years, according to the Australian Property Journal.

Investors, who rely heavily on borrowing, are increasingly being scared away. But there is an upside to this: it is leaving the market wide open to first-home buyers who can still benefit from generous stamp duty concessions.

At the end of 2017, Domain reported that many long-term investors are expected to leave “the market before further price falls, and overextended investors who couldn’t afford to refinance from interest-only loan to principal and interest loans would also leave more room for first-home buyers.”

“Investor demand is slowing, quite markedly, in part because of what might be termed buyer fatigue (the rental yield is relatively low) and because of a significant tightening in lending standards from the bank,” Stephen Koukoulas, managing director of Canberra-based independent analysis company Market Economics, tells buyers’ agent Curtis Associates.

“This latter point is only just beginning – I would expect to see a further retreat from the market from investors over the next year as the tighter lending rules come into play.” As such, “there is tentative evidence of first home buyer activity increasing” Mr Koukoulas says. Although he notes “this is more because of various state government subsidies than strong underlying demand.” 

Now or never

Ms Hayes, for one, believes falling prices in Sydney are simply part of a “normal property cycle” – with talks of a crash unwarranted. What is different from the past, however, is that it is now harder to get financing than ever before.

“The banks are just absolutely hammering the buyers – people who could borrow $3 million before can now only borrow $2.5 million,” she says. And this is a view echoed by several agents around town.

That means those looking to enter the market for the first time should jump in before lending tightens even further, she insists.

“I would suggest if people wait too long it will probably be harder to get credit. For first home buyers, if they don’t get in soon it’s going to be very difficult to get credit,” she says. “We see the credit squeeze as a long-term thing.”

High net worth individuals: bolstering the market

So what about Sydney’s ultra high net worth individuals (UHNWIs) and millionaires?

Australia continues to be the third most desirable city to immigrate to and invest in, after the United Kingdom and the United States, according to Knight Frank’s 2018 Australian Prime Residential Review.

According to that review, the “weight of money allocated to property is set to rise with a 23 percent portion of global UHNWIs considering buying an international residential purchase this year alone. Australia ranked in the top five destinations of where UHNWIs plan to buy prime property in 2018 [with Sydney] continuing to be sought after for its lifestyle destination.”

High net worth individuals, from both here and overseas, have accumulated cash after and often as a result of, the Global Financial Crisis (GFC). They are looking for a home for that cash as some alternative investments such as equities become too risky and yields elsewhere are minimal in this global environment.

Unlike the high end boom in 2007, when the prestige market was largely driven by bankers’ bonuses supplemented by plentiful credit, this time round there is a tsunami of such cash looking for a home. Sydney property may already be turning into a safe haven for refugees fleeing from equities and bonds.

Reflecting this, the number of Australian multi-millionaires, defined as having net assets worth USD$5 million and above, and the number of ultra-wealthy, defined as having net asserts worth USD$50 million and above, grew by nine percent in 2017.

With so much money floating about, this is a segment that is still looking to buy.

High-end properties over the $4 million mark continue to sell well, said Mr Fukishima. Ray White Double Bay recently saw record sales in the  sought-after beach suburbs of Bronte and Tamarama, with houses going for over the $11 million mark.

“Prime property demand follows positive wealth trends, rather than the dependence on growth in income for mainstream residential markets,” Michelle Ciesielski, Knight Frank’s head of residential research, told The Australian Property Journal.

Sydney property, then, may be feeling the pinch. But from $5 million upwards to the extreme high end the market is still strong – with opportunities potentially growing as prices fall and the wealthier segments of society get ready to swoop in.

It’s time to negotiate

In Sydney’s property boom, buyers often found themselves in aggressive auctions, out-bid by other home purchasers and investors desperate to get their foot on the ladder.

In past years, clearance rates at auctions numbered as high as 80 percent. Last December they dropped to just 58.2 percent, marking a two-year low. Properties auctioned in Sydney have declined from around 800 a week to just 250 a week.

On the downside that means buyers have less choice. On the upside, it also means they have less competition. And, crucially, buyers today have time on their side. They hold the negotiating power.

As Mr Fukushima says: “The frenzy has been taken out of the marketplace: people crawling over one another to try and get the property” no longer exists.

Sydney – still a sought after global hotspot

For all the doom and gloom it is worth remembering that Sydney is still one of the most desirable places to live, sought after both within Australia and across the world.

Reflecting this, the median house price in Sydney remains above the $1 million mark with the median dwelling (a combination of both apartments and houses) hovering at just over $875,000. Despite recent declines, prices are still 58 percent higher than five years ago according to property data and analytics company CoreLogic.

Many of Sydney’s inner-city suburbs, including the likes of Potts Point, Darling Point, Newtown and Glebe, and Sydney’s highly desirable beach suburbs, such as Manly, Bronte and Bondi, continue to be blue-chip locations. This means that those who can enter the market, taking advantage of slipping prices in the short-term are likely to win in the long-term.

Buyers should be wary, however, of purchasing apartments built in less established suburbs that are currently experiencing a construction boom. A glut of new apartment blocks – often demonstrating little attention to quality of life or smart top-down gentrification, as Curtis Associates has discussed in the past — are rising out of the dust in former industrial suburbs such as Alexandria.

These are mostly aimed at the foreign market, in particular Asian and Chinese buyers, who for years have bolstered Sydney’s property market. Be warned, however: these apartment blocks have a double risk of both over-supply and diminishing demand.

Government-led caps on foreign investment have included limiting sales for foreign buyers to fifty percent of all new apartment blocks and a hike in Australia’s Foreign Investment Review Board (FIRB) application fees. While 2015-16 saw 40,149 approvals granted from the FIRB, totalling $72.4 billion, in 2016-17 that dropped to just 13,198 approvals or $25.2 billion.

This, combined with an exodus of foreign students, as described by buyers’ agent Curtis Associates in April, and restrictions on removing money outside of China, has resulted in Chinese buyer numbers declining.

“Areas where there is a lot of development – multiple apartments for sale at any one time – that market is affected,” says Ms Hayes. “But the good quality properties, if it’s got north aspects, parking, in a good area, all the ducks lined up so to speak, there are still a lot of buyers out there looking.”

Time to upgrade?

It isn’t only high-net-worth individuals or first time home buyers, of course, who might be able to enjoy a silver lining to a patchy property market.

Mr Fukushima believes that now is the “perfect time for people looking to upgrade. If they own an apartment that has one or two bedrooms and are looking for something bigger then they are actually doing better out of it. It might be $50,000 off the apartment but it will be $150,000 to $200,000 off your next purchase, a house.”

Empty nesters, says Ms Hayes, are largely driving this market, as they downsize from houses to inner-city apartments. “They are a huge demographic who may not want to wait eight to ten years to sell,” she says. This will open up houses at potentially lower prices, as empty nesters are eager to jump ship.

To buy or not to buy 

Buyers certainly have an advantage – as long as they know how to navigate what has proved to be murky waters. Sydney is an increasingly complex and still falling market. But there are real opportunities for those who are not afraid to act.

Doing nothing, insists Ms Hayes, is a “lemming mentality: when prices go up, everyone rushes to buy. When it looks like that is changing, which is actually a good time to buy, they hold back.”

“I think it’s a great time for people to go against the grain,” she says. “It’s a matter of just making that first step and getting into the market, because once you are in you can sit there for eight to ten years, you will definitely make money. It’s about taking a long term view.”

“Some of the best real estate deals I’ve seen are when the market is changing,” adds Ms Hayes “Like it is now.”