Monthly Sydney Property Insights

One of the more useful insights into the Sydney property market over the past month was a speech given on 23 April 2013 to the Citibank Property Conference by Luci  Ellis,  the Reserve Bank of Australia’s Head of Financial Stability Department.

Aptly titled Housing and Mortgage Markets: The Long Run, the Short Run and the Uncertainty in Between  this speech identified two long-run core themes very relevant to anyone investing in property in Australia generally and in the two most populous cities of Sydney and Melbourne in particular.

Based on the evidence discussed later in this article, many of its themes resonated with those of us this month bidding at auctions and negotiating property contracts at the coal face.

The first theme centred upon Australia’s transition via a process termed “disinflation” from a high inflation country in the 1970s and 1980s to a low inflation country since the early 1990s leading to higher loan to income ratios as people channelled their higher disposable income after lower living costs into higher borrowings. Over the longer term, that process fed into and bid up the prices paid for Australian assets such as real estate.

However and as Dr Ellis concluded this part of her speech: ” It…takes time for this additional borrowing capacity to bid up housing prices. But the transition does end after a while, and it is our assessment that…the transition period following the disinflation period is almost certainly over. The aggregate debt-income ratio has been broadly flat since about 2005… [implying that] trend housing price growth will be slower in future than in the previous 30 years…we think [that this ratio] is very unlikely to return to its 1970’s levels, or to rise rapidly once again.” (emphasis ours)”.

This article’s response to the latter comment and as the month just gone reminded us is that property buyers, especially when seized by a herd mentality, often have short memories.

The point of particular interest to present or prospective property buyers and as will be illustrated further below, is that “trend housing price growth” is one thing whereas what happens on a case by case basis in the short term can is often quite another. In the excitement of it all and especially at auctions, property buyers should not lose sight of where in the longer-term cycle their purchase is or could be occurring assuming the Reserve Bank’s longer-term assessment proves correct.

The second and arguably even more interesting long term theme reinforcing the wisdom of buying property closer to established centres and exposing the popularity of Sydney and Melbourne is the trend towards future higher-density living irrespective of slowing population growth rates.

In this regard and as illustrated in the following two and other graphs, Dr Ellis said: ” Yes, we have a lot of land. We don’t have much of an island where people actually want to live.. In general, desirable land is the land within or adjacent to existing settlements. Australia’s population is heavily urbanised compared with other developed countries…It is also quite concentrated in a couple of large cities…Perhaps more to the point, part of the reason why land seems in such short supply is that we each consume so much of it…Australian cities are the least dense, in terms of population per square kilometre than the cities of any other sizeable country, developed or emerging…It, therefore, seems likely that our cities will become denser over time. If so, the mix of residential construction will be tilted more towards medium-density and high-density dwellings than in past decades.”

Dr Ellis’s point about the short run was that in response to lower interest rates in the past 18 months or so and after a brief lag, loan approvals to investors and existing homeowners are up as are national dwelling prices.

In short: “monetary policy still works…and while some…borrowers are using the decline…to pay off their loans faster…at least some of them will take advantage of lower interest rates to spend more, or to buy a bigger home.”

The latter propensity was clearly evident throughout the Sydney property market in the last month especially, but not exclusively at auctions where the ferocity of bidding at times rivalled that experienced before the GFC, especially for better quality offerings such as 99 John Street, Woollahra; the position and upside of which was appreciated by at least four registered bidders who placed over 30 bids to push the hammer price on 23 April 2013 to $1.776 million.

Such action was not confined to the auction rooms with shrewd vendors selling prior to auction for prices dangerously over the odds on the comparable sales evidence. The sale of 16 Caldwell Street, Darlinghurst on 11 May 2012 for $1.43 million was one of many such examples of which this article is aware. That price represented a more than 9% jump in just over 10 months above the $1.31 million paid on 4 July 2013 for the arguably superior home six doors up at 32 Caldwell Street, Darlinghurst.

Private treaty competition was even fierce in those parts of Sydney where auctions are uncommon; an example being 17 Cavan Road, Killarney Heights which sold on 15 May 2013 for $1.145 million.

Another test of the strength of the 2013 Sydney property market also occurred last week when the auction averse vendor of 47 Darghan Street, Glebe indicated after the first open inspection that the first buyer to put $975,000 on the contract would win it. Her representatives were close to bowled over in the ensuing early morning rush.

Perhaps even more germane in reinforcing our earlier comment about herd mentality was strong competition this month for properties with fairly and in some cases, seriously negative affectations.

On the lower end of that scale was 111 Ocean Street, Woollahra were, in a similar scenario to the last, four registered bidders on the same night took the price for that immaculately presented property on a busy road to $3. 8 million.

Higher up that scale were examples all over Sydney such as:

  • 1 Union Lane, Erskineville in the inner west; a well renovated and freestanding former schoolhouse which charmed the winning bidder  into parting  with a colossal $1.65 million on 4 May 2013 regardless of its being south to the rear and footsteps away from an iconic 24-hour pub/nightclub
  • 8/24 Orwell Street, Potts Point in the eastern suburbs; a state of the art, north-facing one-bedroom penthouse with no parking or views and overlooked to the rear in a very ordinary street. This property sold on 9 May 2013 for $1.235 million which was close to triple the average sale price of the other seven units in the building
  • 6 Lockwood Avenue, Greenacre; a freestanding, south to the rear  1970’s project home a few metres from overhead high voltage lines for which the winning bidder outlaid $805,000 to fend off about 12 under bidders. That figure was 26% over its $650,000 reserve price which, on the comparable sales evidence, was its market value. The downsizing family wept with joy. It is doubtful that the winning bidder will do likewise any time soon
  • 22 Thorne Street, Edgecliff; which sold under the hammer on 8 May 2013 for $1.465 million. On the comparable sales evidence and as the marketing agent correctly quoted, that property should have sold for around $1.3 million. Although having direct park access as well as charming open bedrooms with expansive district views, the main living areas below were airless and subterranean in feel. Nevertheless, that sale locked in a healthy on paper capital gain for canny buyers who moved swiftly pre-auction to acquire the nearby 17 Glebe Street, Edgecliff for $1.110 million.

Also Read: How to find and buy property off-market in Sydney?

The activity continued unabated in the weekend just gone with Balmain/Balmain East notching up three reported sales over $2 million; the highest of which being 1 Bridge Street, Balmain for $2.735 million.

Other properties to watch over coming weeks which, in this article’s view, have similar potential to drive unwise buyers into a frenzy include 11 Goodwin Street, Ashfield; 2 Gibbes Street, Newtown and 18 Thomson Street, Darlinghurst.

To understand further the heat that is building in the market and which this article believes is largely driven by the low-interest-rate environment, an analysis of all reported sales between $1 million and $2 million in the five weeks to 16 May 2013 reveals 214 such sales. At first glance, this figure is broadly consistent with the 252 sales reported in the same bracket in the five weeks to 10 April 2013. That perception alters radically once allowance is made for the fact that 17 days of the immediately preceding five-week period saw many buyers absent from the market during school holidays.

And as for the impact of last week’s Federal Budget? What budget? We’re too busy shopping!



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