The autumn 2009 Sydney property market. Crisis? What crisis? Don’t believe everything you hear and read

We deferred this edition of CurtiseCall until after the 12 May 2009 Federal budget which announced the largest deficit in Australian history – $57.6 billion with net bebt forecast to peak at 13.8% of GDP in 2013 – 2014. The fiscal stimulus partly responsible for producing a deficit of that size will affect Australian property markets generally and the extension of the first home owners’ boost scheme by three months until 30 September 2009 will affect the lower end in particular.

Noticeably absent from the budget and also having a bearing on likely destinations for property investment in Sydney, is the Federal government’s paltry commitment to infrastructure spending in Sydney. This budget allocates a mere $91 million to a detailed design study of a central western rail link to Westmead Hospital.

That does not bode well for the deficit laden New South Wales State government’s CBD Metro project and an anticipated concomitant uplift in values around the Rozelle / Lillyfield areas.

Likened to a weather report, the Sydney residential property market between the budget and our last CurtiseCall on 16 March 2009 would read:

• rising temperatures in the outer suburbs up to $700,000
• improving conditions across Sydney between $700,000 and $2 million
• much calmer conditions over $2 million as vendors withhold quality stock from the market leading to low turnover
• isolated thunderstorms over $700,000 and especially at the top end where properties overheated during the 2007 credit binge have been forced to cool down – often behind closed doors.

The rising temperatures have resulted mainly from the first home buyers’ boost scheme particularly in the outer fringes of Sydney. As one of the first to comment of the dangers of the bubble created by that scheme (see our 6 February 2009 CurtiseCall) Curtis Associates remains concerned about the risk of negative equity before the grants return to their original $7,000 after 31 December 2009.

The improving conditions in the $700,000 – $2 million bracket reflects a return of confidence to the market.

It is as if buyers in that bracket, both local and now foreign, have had enough of the doom and gloom and feel that the Rudds, Swans and Obamas of this world are flying blind. In response, these buyers and investors have decided to go it alone, shake off the fear and get on with business even if it involves incurring debt which, contrary to other reports, is still readily available to credit worthy borrowers from Australia’s AA
rated banks.

And contrary to certain media reports of investors remaining nervous about buying property despite rental yields being higher than cash rates, several of those buyers have been of investment properties for top prices at compressed yields.

The $700,000 – $2 million bracket is where you shouldn’t believe some of the apparently authoritative reports you hear and read.

We refer in particular to the Australian Bureau of Statistics (ABS) latest report of a 6.7% national fall in the prices of detached residential dwellings on their own block of land in the 12 months to March 2009 including a 2.2% fall since the December 2008 quarter.

That statistic contrasts with those of Australian Property Monitors and RP Data / Rismark International both of whom recently reported slight increases in national housing prices between the December 2008 and March 2009 quarters. It should be noted that this is an ‘apples with oranges’ comparison as, unlike the ABS statistics, the Australian Property Monitors and RP Data / Rismark International statistics include units, terraces and semi-detached dwellings.

The ABS statistics naturally prompted some economists to warn that with unemployment rising, Australia could be in for a property crash similar to the United States and United Kingdom.

However, as lawyer, banker and noted author of Trillion Dollar Meltdown, Charles R Morris observed in the May 2009 edition of The Monthly, a recent ranking by the Wall Street Journal of the accuracy of the 2008 predictions of the leading 51 American economists from all major financial institutions and forecasting firms had found that all of those economists were wrong.

This led Charles R Morris to generalise, perhaps harshly:

“Economists of all persuasions will readily offer advice – confidently, eloquently and with panache. But they will be just opinions, for macroeconomics is not a science. Its methods are primarily analogical and metaphorical. Its data are gross and errorprone, and its models of economic interactions bear only a distant relationship to those in the real world.”

For those like Curtis Associates operating at the coal faces of the “real world”, the Australian Property Monitors and RP Data / Rismark International statistics are closer to the mark than the ABS.

Our perception is that despite:

• the Australian government having conceded the economy is officially in recession
• unemployment expected in the budget to rise to 8.5% by June 2011
• small to medium enterprises hitting the wall at the highest rate in 10 years
• five downward revisions by the IMF of the world’s and Australia’s GDP and
• the recent swine flu scare

the fears of Armageddon generated by the collapse of Lehman Brothers in September 2008 are receding in response to:

• reports of ‘green shoots’ in certain key US indicators
• suggestions of global share markets having bottomed
• a reported thawing of global credit markets
• an increase in Chinese GDP growth rate
• an appreciation of the Australian dollar against the greenback
• four of the 10 AA rated banks in the world being Australian
• massive Australian government fiscal stimuli and
• the Reserve Bank of Australia’s relatively upbeat assessment of the domestic economy leading it to keep the already historically low official cash rate on hold in May 2009.

This is some of the “real world” sales evidence in the $700,000 to $2 million bracket since the 16 March 2009 CurtiseCall on which our perception is based:

• Over 220 sales in the eastern suburbs including the city were reported. Those sales included many tales like the sale of a south west facing two bedroom unit in Rockwall Gardens at 201/1A Tusculum Street, Potts Point for a cheap $945,000 where the still occasionally troublesome brothel opposite did not stop that vendor making a 4.4% per annum capital profit in the three years since it was purchased for $835,000.

Investment properties purchased in this bracket included a mixed use corner block at 285 Bronte Road, Waverley which sold on a 5% gross yield for $1.786 million; 364 Crown Street, Surry Hills which sold for $1.585 million; a block of four units at 1 Victoria Street, Waverley which sold on a gross yield over 4.3% for over $1.8 million; a DA approved development site at 54 Coogee Bay Road, Randwick which sold for $1.610 million having been purchased in September 2002 for $1.125 million.

In a further sign that some bullishness has returned to the sub $2 million Sydney residential property market in the past quarter, one investor beat off other bidders at auction on 25 March 2009 to secure a solid, but seriously derelict terrace on the low side of the street at 12 Womerah Avenue, Darlinghurst for $900,000. Just up that street and on the high side, a fully renovated terrace at 55 Womerah Avenue, Darlinghurst sold on 14 January 2009 for $970,000.

• The story in the $700,000 to $2 million bracket was similar on the lower north shore where over 200 sales were reported since 16 March 2009.

Investment properties purchased on that side of the Bridge in this bracket included a strata titled semi at 52 – 54 Milling Street, Hunters Hill; a duplex at 6 Lambert Street, Cammeray which sold for $1.739 million; another duplex at 143 Penshurst Street, Willoughby which sold for an undisclosed price and a re-development site at 36 Chisholm Street, Greenwich which sold for $1.575 million.

• Buyers were also out in force in the $700,000 to $2 million bracket in the inner west with, again, over 200 reported sales in that region since 16 March 2009.

Investment properties in that bracket included a 10 room boarding house at 49 Cambridge Street, Stanmore which sold for $1.095 million; a block of six units at 374 Victoria Road, Marrickville and a block of four self contained units at 15 Bogan Street, Summer Hill which sold for $1.505 million.

The following sales evidence since 16 March 2009 shows just how much calmer conditions have been across Sydney in the $2 million and over bracket relative to the sub $2 million bracket:

• In the eastern suburbs, the number of reported sales was over 75 with a noticeable shortage of big ticket sales. Examples in this bracket included 71 Hewlett Street, Bronte which sold for $3.9 million; our old favourite, 38 Victoria Street, Potts Point which, as reported in CurtiseCall’s last Breaking News, eventually sold for $3.1 million; 3A Carthona Avenue, Darling Point which was picked up for $6.15 million; 103 Beach Road, Bondi which, despite the low turnover in this bracket, set a new price per square metre for that suburb when it sold for $3.05 million and 1 Greycliffe Avenue, Vaucluse which traded for $6 million.

Investors were not shy in that region over this period in the eastern suburbs. As is occurring throughout Sydney, residential unit blocks were a popular choice for savvy private investors with prime blocks trading at 2 Oswald Street, Darling Point for $2.25 million – a gross yield of 6.6%; 23 Manning Road, Double Bay which also had DA approval for eight new units; 152 Brighton Boulevard, North Bondi – also carrying a DA approval and selling for a massive $4.8 million and 17 Palmerston Avenue, Bronte which sold for a confidential but healthy price.

The stand out non-unit block investment purchase over this period was the huge $4.305 million paid for the dilapidated icon at 88 Elizabeth Road, Elizabeth Bay. As an indication of the appeal prime real estate has for Sydneysiders, fighting your way through the crowd during open inspections became the first of many challenges associated with that property.

• On the lower north shore in this bracket, things were also far more subdued with a mere 40 or so properties trading in this period over $2 million with the most interesting investment offering being the charming art deco block at 3 Clanalpine Street, Mosman which was sold as part of a deceased estate for $2.95 million.
• In the inner west, it was quieter still with less than 30 reported sales in the $2 million plus bracket including prime and rarely traded offerings at 25 Battersea Street, Abbotsford and 6 Woodside Avenue, Burwood.

Investors were even thinner on the ground in this district with no reported sales in that category over $2 million.

As for the isolated thunderstorms mentioned in our weather report above, Sunland’s luxury apartment development at 36 Louisa Road, Birchgrove is a prime example. Launched last year with $7.5 million price tags, these properties languished until their prices were slashed to around $5 million resulting in three of the six apartments selling earlier this year.

Across the city and in the lower $1 million plus price point, a similar example is to be found tucked away at in one of the best Surry Hills streets at 8 Richards Avenue, Surry Hills. This property was bought at the top of the market on 3 November 2007 for a huge $1.6 million. It is back on the market with a $1.375 million asking price. Irremediably dark inside, the owners will be lucky to get that for it.

And why are these two properties not evidence of price falls over Sydney? As CurtiseCall has consistently said throughout 2009, these adjustments are at the margins and involve properties that were overpriced even in boom times.

To sum up, more than 620 reported transactions in the $700,000 to $2 million bracket and over 145 transactions over $2 million in the three inner city districts (eastern suburbs, lower north shore and the inner west) over 58 days are not insubstantial statistics especially in the context of the global financial crisis that has led to a global recession.

Curtis Associates considers the one economist who has got it right is Harley Dale, chief economist of the Housing Industry of Australia who, according to the 6 May 2009 edition of the Australian Financial Review:

“…respects the ABS figures [discussed earlier] but said there might be cause to suggest its figures might be exaggerated with house prices flat to slightly weak, but not down 6.7 per cent in annual terms. At the top end, where most people are not and where the majority of house price value is, there’s no doubt house prices are weak and there’s talk of price falls between 15 to 20 per cent. [That is] definitely a buyers’ market. There’s no boom underway and if you want to get into the market and you are not over extending yourself it’s a good time to buy.”