Melbourne may have snatched the title of Australia’s biggest city but it seems Sydney is still calling the shots in the property sector.
“I think I’ve come bearing some good news.”
Coffee cups in hand, those words were as good as the early morning hit from the caffeine coursing through the veins of the bruised and battle-weary industry players gathered in front of CoreLogic’s Head of residential research Eliza Owen.
Speaking to a packed room at The Urban Developer’s Sydney Residential Development Summit, Owen said the Emerald City was showing signs of leading a broad-based recovery in home values.
“It appears there are some green shoots,” she said. “Over the past few weeks we’ve noticed another turn in the Sydney housing market.
“We’ve entered another phase in the cycle—an upswing.”
The latest data indicated values had risen 3 per cent after bottoming out with a 14 per cent peak-to-trough decline from January 2022 to January 2023—the sharpest and second largest fall on record for Sydney’s housing market.
Reflecting on the market’s rollercoaster ride over the past few years—with the city’s housing values soaring about 25 per cent before dropping on the back of the fastest hike in interest rates on record—she described it as “an extraordinary cycle”.
Owen attributed the Sydney market’s rebound in recent weeks to a combination of factors.
“I think it comes down to low levels of supply from a listings perspective, with people holding off selling fresh out of a downturn in value, and also from a construction perspective.
“Higher interest rates mean that we’ve seen a real decline in the amount of approvals in particular … and we think that’s going to create a bit more of a supply issue over the next couple of years.”
At the moment, there are about 19,500 properties listed for sale across Sydney—down about 15 per cent on traditional levels for the same period of the year—and the flow of new listings remains very subdued, Owen said.
“But we’ve also got the psychological aspect … which has people thinking—especially as there’s this perceived peak in the rate hiking cycle—that now might be the time to get back in.”
She said in the past couple of months mortgage lending for property purchases has started to “tick back up again” with the fastest growth among first homebuyers—historically the first to take advantage of a trough in the market—and investor loans also were on the rise in response to the perception the cash rate hiking cycle was at its peak.
Owner-occupiers—including upsizers, downsizers and rightsizers—were the dominant force in the mortgage market accounting for $4.5 billion in lending in March alone.
“This is another kind of corroborating data point that the Sydney housing markets are moving into the upswing phase of the cycle,” Owen said.
She also told The Urban Developer’s gathering of more than 200 property development professionals that the latest data indicated the high end of the market was leading the latest upswing.
“The more expensive the market, the higher the upswing in values we’ve seen over the past three months. Areas like Ku-ring-gai, Manly, Baulkham Hills and Eastern Suburbs, which have had about 5 per cent capital growth in the past quarter.
“Mind you, these are coming off relatively strong declines … but this is also a sign to us that we’re moving into the next phase of the cycle because the high end of the Sydney market is a leading indicator of the kinds of capital growth trends that ripple out to the rest of the city.”
However, given the development sector’s seemingly worsening woes and the current climate of economic uncertainty, Owen also offered a few words of caution to underline her forecasts from the latest data with a caveat.
“There are still some challenges in the housing market,” she said. “What we’re seeing is not the kind of guaranteed upswing that we might have expected through the 2010s where you have structurally lower interest rates on the back of the GFC.
“We still have a relatively high interest rate at 3.85 per cent. And if there is another unexpected spike in inflation, you might expect further monetary tightening off the back of that, which would essentially kill the upswing that we’ve started to see. So that is something to keep in mind.”
Nevertheless, Owen said the long-term fundamentals of the market were still good and on the tailwind side there was “an undeniable mismatch between supply and demand that is resulting from high levels of migration and a constrained construction pipeline”.
Asked where developers should be looking to strategically position themselves in the market going forward, she said: “I guess it would be those areas that are historically popular with overseas migrants. With 350,000 migrants expected this year I think that’s absolutely guaranteed demand”.
But despite strong demand and government policies coming through to increase returns, particularly for build-to-rent, Owens said the major challenge ahead remains the building sector and construction costs.
Quantity surveyor and Mitchell Brandtman partner Tass Assarapin told the summit the industry’s perfect storm of challenges prevails and costs continue to escalate—albeit somewhat more slowly.
He said there had been a cost escalation of 21 per cent in the past two years and for the first five months of this year it was up 3 per cent with a further 3 per cent increase forecast for the remainder of 2023—and a similar scenario next year.
With their margins squeezed, builders had been “on a precipice during the past 18 months”, Assarapin said.
“And, unfortunately, that’s going to be happening probably for another 18 months at the very least,” he said. “I’ve had about 15 projects on my books where builders have gone under in the past 18 months. It’s not just the big guys, it’s a lot of small guys as well.”
He said just as in other cities, the number of home approvals across Sydney was decreasing.
“But what’s interesting is if we compared it to what we had 10 years ago, we’re probably double the amount of approvals in terms of value than we were back then. So we’re still in a pretty hectic world but we’re still well short of homes.”
Willowtree Planning director Andrew Pigott agreed housing supply in New South Wales was in crisis and reforms were needed.
“The NSW housing targets were set in 2018. As it turns out, a fair bit has happened since 2018 and we see the opportunity to revisit those targets and really adjust them significantly,” he told the summit.
“We need higher housing targets, we need a renewed focus on meeting those targets … and there needs to be a carrot and stick approach with rewards and incentives for councils that meet those targets.”
Pigott said the state’s overarching planning framework—the Environment and Planning Assessment Act 1979—was outdated, and described the overall system as “old, highly complex, multi-layered and confusing”.
▲ Green shoots: Owen addresses the summit in Sydney.
After a more than century-long reign as Australia’s biggest, most populous city, Sydney lost its crown to Melbourne as a result of a statistical expansion of the southern capital city’s boundary in 2021.
But for many years now, Melbourne’s population growth has been outpacing Sydney’s largely due to overseas as well as domestic migration trends.
Owens believes Melbourne could well keep a tight grip on the title of Australia’s biggest city for some time to come.
“Sometimes when you get these virtuous cycles of population growth and jobs growth, it can attract more and more people to a city, particularly when it comes to overseas migration,” she told The Urban Developer at the summit.
“Melbourne does generally have a higher intake of overseas migrants to Australia, accounting for more than 30 per cent of net overseas migrants just in greater Melbourne alone.
“Those migrant communities can contribute to an ongoing swell in the population, especially now, when overseas migration is coming back so much stronger than we initially anticipated.”
Unlikely to help Sydney reclaim the mantle any time soon is CoreLogic’s latest data that shows in the past 12 months Sydney’s rent values have increased 13 per cent—one of the strongest market increases across the capital cities and greater regions.
Contributing to the city’s soaring rent value, rental listings across Greater Sydney have almost halved from 49,000 at the onset of the pandemic to 25,000 in April.
“Melbourne is a relatively more affordable city compared to Sydney,” Owen said. “So I think that speaks to the fact that if we don’t get the [housing] supply balance right to bring down prices, people do start to vote with their feet.”
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