The prestige property market in Sydney – Is now a time to buy?

From the beginning of 2008, the financial press has been an unending stream of bad news about the sub prime crisis, asset write downs, savaged equities markets, the collapse of the US residential market and the prospect of worse to come in global financial markets.

Adding to the uncertainty on which the media feasts are the twitchy central bankers who have jettisoned the old idea that monetary policy was a sledge hammer with multiplier effects on the money supply that took months if not years to work through the system. Instead, tweaking the cash rate has become a monthly ritual occurring without any overarching economic theory capable of predicting where and when all this so called doom and gloom will end.

As occurred during and after the dot.com crash and other corrections, the contraction in the Sydney prestige property market ($2 million plus) has mainly been at the margins with lifestyle properties the early casualties especially on the New South Wales northern beaches, south coast and Southern Highlands.

Lower quality stock that failed to sell earlier in the year when the sub prime crisis first hit is selling with reduced price tags while large tracts of suburbs like Vaucluse have quietly been on the market for months. It is mainly this sector of the Sydney prestige property market that is fuelling recent media reports of a softening market conditions in some of Sydney’s most affluent suburbs: Australian Financial Review

Other new prestige developments that were over priced last year remain unsold and will remain that way until their owners eventually meet the market.

And down on swanky Woolloomooloo Wharf, one of Sydney’s best tell tale districts, the restaurants are feeling the pinch as the discretionary spending dollar dwindles.

However and here is the analogy with the quality end of the Sydney prestige property market (Curtis Associates): those restaurants and many like them are far from empty.

In a case of a ‘glass half empty or half full’, although clearance rates are down to 50% it still means that 50% of properties in fact sold and did so for prices showing no signs of weakness. Indeed, rumour has it that a new record for Sydney prestige property has just been set.

Away from rumours and looking at the evidence, these are some sales of prestige property in Sydney that have occurred in the five weeks to 16 September 2008:

• Over $28 million for 23 Victoria Street, Watsons Bay
• Over $27 million for 108 Wolseley Road, Point Piper
• $20 million for 114 Wolseley Road, Point Piper
• High $6 million for 12 Martin Road, Centennial Park
• $2.95 million for 1802/ 180 Ocean Street, Edgecliff
• $2.34 million for 532 Bourke Street, Surry Hills – a record price
• Over $4.million for 60 – 62 Cascade Street, Paddington
• Over $6.5 million for 3/8 King George Street, Lavender Bay
• $9.05 million for 57 Coolawin Road, Northbridge
• $4.6 million for 9 Coolawin Road, Northbridge
• $3.95 million for 16 Stack Street, Balmain
• $3.5 million for 46 Benelong Road, Cremorne
• $5.25 million for 18 Moruben Street, Mosman
• $4.021 million for 30A Morella Road, Mosman
• $3.46 million for 53A Raglan Street, Mosman
• $3.7 million for 11 Shellbank Avenue, Cremorne
• High $3 million for 5 Edward Street, Gordon
• $2.35 million for 48 – 52 Barton Avenue, Haberfield
• $2 million for 169 Stuart Street, Blakehurst
• $3.6 million for 1503/81 Macleay Street, Potts Point.

There have been at least two other sales above $4 million about which all details are confidential.

As with other buoyant economic indicators such as employment, investment expenditure and consumer confidence levels, these transactions are anomalous if all the pessimism in the media is to be believed. A similar story is emerging in parts of the arts world: Sydney Morning Herald

Why the resilience?

The short answer seems to be that there are Sydney prestige property buyers who are not convinced things are as bad as we might be led to believe. If the $20 million plus sales above are a guide, the strength of that conviction increases proportionately with the price tag.

The frenzy last year and against which current clearance rates are being compared must be seen in context. Much of last year’s activity was driven by abundant credit as well as investment and other bankers flush with cash bonuses. This exacerbated a chronic and continuing short supply of quality stock with sales volumes and prices soaring as a result. Even poor quality stock sold provided it was not hopelessly over priced.

The cheap credit and many of the bonuses have long since evaporated and the relatively soft correction now underway is exposing in its modest wake a confidence in the better parts of Sydney’s prestige property market.

The insolvency practitioners have not replaced the bankers, distressed sales at the top end are few and many prestige properties sell free of mortgages.

There are many objective reasons for longer term confidence:

First, with a shortage of quality land, the longer term trend will be a shortage of prestige residential properties in Sydney. As net population is forecast to grow over the next half century and the demographic trend is in favour of urban concentration, the underlying imbalance between demand and supply is set to continue.

Second, Australia’s relatively high interest rates have just been reduced by .25%. While this is the first reduction in seven years, more reductions are expected especially if domestic inflation remains in check.

Third, this recent period of modest correction in Sydney’s prestige property market has coincided with the Australian dollar rising over the past 11 months to near parity with the US dollar. In the past fortnight, it has traded below the psychologically important 80 cents barrier to its lowest point since 14 August 2007. According to some analysts, the longer term rate could be as low as 75 cents after the US Presidential elections and if domestic interest rates are cut further. This is reviving overseas and expatriate interest in Sydney’s prestige property market which has been subdued since the beginning of the year. At these levels, already world renowned Sydney prestige property, (Barclays Wealth), represents excellent value by international standards.

Fourth, is the commodities market and the demand in China and India for Australia’s mineral resources. Although growth rates are slowing in China and may slow further as the impacts of climate change are felt, those rates are likely to remain high by historical standards and may buffer developed regional economies such as Australia from some future trends in the US and Europe.

So, what is the answer to the question above?

It depends on your view of the current situation in overseas financial markets.

For those who believe Armageddon is yet to arrive, now is definitely the time to sit on the side lines.

For cashed up contrarians looking to buy Sydney prestige property before overall confidence returns, the answer is yes – unless of course, some economist comes along with a theory saying otherwise.