Regardless of the market you invest in, it is imperative to apply a sound investment model to every asset you select. The Sydney market has proven that to us, once again. Sydney property market experts are raising eyebrows over recent developments.
Morgan Stanley Issues Warning
Financial analysts at Morgan Stanley issued a note in to investors in June suggesting a possible surplus of new apartments could affect values in inner city areas, while house prices could drop unless the RBA lowers interest rates.
Their report specifically said “without further interest rate cuts the current housing cycle is in danger of gradually fading.” In fact, during the past year 81,000 apartments were approved – which is nearly twice as high as the 44,600 average.
This could represent a huge change in the Sydney market, but it could be avoided. The report argues that cutting interest rates would lessen the threat of an oversaturated market in inner city areas.
It isn’t Just Morgan Stanley, Other Experts Agree
According to CommSec economist Savanth Sebastian, we should be prepared for a drop in sales: “I think the growth is not going to be what it was in the last 12 months.” He also added the rate of growth in the past 12 to 18 months is “not sustainable over the longer run”.
Like most analysts, he expect to see a crash in property prices, although he does seem certain there will be ‘restrained’ growth in prices compared to the recent double-digit growth.
What to Expect in the Coming Months
This extra supply has prompted the Reserve Bank of Australia to maintain interest rates at f 2.5 percent at its June meeting. Also, the RBA has changed its prediction that low rates would increase construction activity saying the lift in housing construction ‘is now underway’.
The Domain Group’s senior economist, Dr. Andrew Wilson, believes the RBA is taking a wait-and-see approach and interest rates will likely remain low for the foreseeable future.
“Unemployment rates have remained steady with solid jobs growth, although jobless levels in some states are still stubbornly high; latest wage growth data is benign reflecting the low inflation economy with the level of real wages generally declining.”
Cameron Kusher, writing in Property Observer, says that current data suggests that the growth in the number of new owner occupier housing finance commitments has peaked, although there is still plenty of activity in the owner occupier refinance and investment segments of the market.
“Total returns from residential property have been strong over the past 12 to 18 months; however, we believe that the peak level of capital growth has now passed and rental yields (will) continue to fall.”
What Does This Mean for You?
Currently, returns for investors are holding fairly strong, but they are likely to weaken, at least marginally. Add in that growth is slowing and the supply of housing is about to increase, and it is an interesting time indeed for the Sydney property market. Many investors will see this as a poor time to take bigger risks, and they are probably right.
Looking at the longer term implications on the market, it is likely that continuing demand together and low interest rates will protect the Sydney property market.
Our Recent Experiences
The numbers we have seen in the last few months reflect this trend.
For example, we looked at acquiring a unit block for a client with expectations of $3.2m which produced a yield of 4.25 percent.
The property subsequently sold to an Asian offshore investor at $3.9m on a yield of 3.4 percent – and this isn’t an isolated sale.
Rents for traditional inner city terrace housing have slowed over the last three months and there appears to be a glut of available stock acquired by investors over recent years.
Investors looking to make short term gains should be wary – the market should always be treated with caution, and particularly right now. There will always be opportunities for investors in every market and taking a long term view is always recommended.