Sydney’s property market awakes in 2012 to find the devil is in the details

February 29th, 2012

3If proof were needed that buying property is a risky business, one needs look no further than the first few weeks of activity in the 2012 Sydney property market.

As discussed below, the devil is in the details which in some cases paint a very different picture to the one often conveyed by mainstream media and macro analytical research houses via their weekly reports of stable auction clearance rates, median property prices and regular private treaty deals.

Not so as this sample of $1 million plus sales from that edition confirms:

Address Price $ m Actual Sale Date
6a/5 Tambua Street, Pyrmont 1.73 18 November 2011
17 Palmerston Place, Seaforth 1.31 30 September 2011
35 Harbour Street, Mosman 1.78 7 September 2011
20 Haig Avenue, Denistone East 1.07 4 February 2012
237 The Promenade, Sans Souci 1.45 22 November 2011

A recurring theme of much anodyne mainstream property commentary has been the allegedly subduing effects on Sydney’s property market of the European debt crisis. Whilst that is undoubtedly true as a general rule and acknowledged in CurtiseCall December 2011, an analysis of activity at the micro level suggests that instead of buying the ‘global financial Armageddon once Greece defaults’ line, a sizeable minority of brave and  apparently savvy souls began the year by quietly buying Sydney real estate.

For those buyers, the stream of doom and gloom last year created the perfect storm in which to snare a bargain especially at the top end above $5 million where turnover remains very thin relative to past years.

In addition to cashed up Asian investors and high income earners such as partners of newly merged multinational law firms, this demand has come from buyers in the finance sector for whom and contrary to some other reports, life is still a case of waving not drowning.

The pain inflicted on some vendors has not been confined to the very top end but has occurred across all price brackets and has been especially acute in the case of vendors who bought their properties in or after 2007 when the debt taps were opened wide.

Appearing below are examples with similar results expected to be soon recorded against various properties above $1.5 million in other suburbs including Glebe and Kensington.

Address Last Sale Date Price $m Previous Sale Date Price $m % Gain/ (Loss) p.a.
25 Darvall Street, Balmain 11 Feb 2012 1.53 10 Feb 2007 1.4 1.9
41A Breillat Street, Annandale 27 Feb 2012 1.14 28 Feb 2010 1.14 0
12A Griffin Street, Surry Hills 13 Jan 2012 .99 5 Dec 2009 .99 0
36 Harris Street, Balmain 11 Feb 2012 1.467 5 April 2003 1.1915 0.25
35 Wybalena Road, Hunters Hill 25 Feb 2012 2.72 15 Aug 2002 2.716 0
20 Coronation Avenue, Mosman 27 Feb 2012 7.25 8 May 2008 8 -2.8
11 Alton Street, Woollahra 17 Jan 2012 1.725 5 Aug 2009 2 (9)

The trendy inner city suburb of Surry Hills further illustrates the fiendish nature of these details and the concomitant dangers of relying exclusively or at least too heavily on macro analyses in making a purchasing decision. Carrying this analysis to its logical conclusion, one could be forgiven for thinking of the Sydney property market not as a single market but as a series of sub markets operating under the one banner.

In the space of about six weeks between late December 2011 and the end of February 2012 and allowing for the Christmas shut down, this tiny suburb which occupies a mere 1.2 sq km in area, produced the entire spectrum of sales results making it difficult to discern a definite property trend.

At one end of the spectrum and as noted above, the vendor of the renovated but badly overlooked 12A Griffin Street, Surry Hills managed only to recoup the purchase price after two years whereas a fortnight earlier on 30 December  2011, the vendor of 18 Griffin Street a couple of doors away secured a healthy $785,000 for a renovator’s delight; a price which rendered the $810,000 paid off market on 9 December 2011 for the tired but renovated 19 Norton Street, Surry Hills an undeniable bargain.

Less than 200 metres to the east, the buyer also gained the upper hand snaring a two bedroom apartment in a warehouse conversion at 7/13 Corben Street, Surry Hills for $985,000 on 25 February 2012. This yielded the vendor a modest 3% gain per annum on the $875,000 paid on 17 April 2008 which was on par with the annual yield derived in each of eight years of ownership by the vendor of 34 Parkham Street, Surry Hills when that property sold prior to its scheduled 18 February 2012 auction for $1.03 million.

When the much hyped 32 Marshall Street, Surry Hills was passed in on a $1.25 million vendor’s bid on 11 February 2012, the buyers’ market in the suburb looked entrenched until, at the other end of the spectrum and in a clear example of buyers confounding some mainstream commentary about the top end, the vendor of 5 Bennett Street, Surry Hills set a new record by selling that property two weeks later at a hard fought auction for $5.71million.

Appropriate in this context is the following extract from the conclusion to one of the most authoritative and comprehensive recent analyses of the Sydney property market as published on 18 November 2011 by Katja Hanewald and Michael Sherris  of The University of New South Wales, Australian School of Business and entitled “House Price Risk Models for Banking and Insurance Applications.”

“…Sydney is a large international city with similar risk factors that would be found in most international cities. The major issues to be considered are the rates of growth and volatility of the whole market since this is the basis of most risk analysis involving products that depend on house prices…

…[S]ub-markets within a housing market can have quite different risk and return behavior in the housing market and that the risk factors that impact the variability of returns generate heterogeneity in the market.

 Economic factors and the market-wide index generate systematic changes in house prices but only explain part of the total variability.

Individual house price characteristics including the location of the house are important factors.

Socio-economic characteristics of a postcode area are also important factors…

The detailed statistical analysis of postcode-level house price indices shows that long termreturns to house investments vary considerably across postcode areas and that higher long-term returns are associated with higher risk, as is the case with most investment classes.

House price growth exhibits very large variations over short time horizons with standard deviations of up to 150% of average growth rates and that these variations reduce for longer time horizons.”