On tour with Dr Matt: Sydney, part one

On tour with Dr Matt: Sydney, part one

Many of you will know that I travel quite a bit delivering The Property Mentors unique style of property education around Australia, and last week, I travelled to Sydney, Perth, & Townsville from my home base of Melbourne. One of the things I do whenever I travel is of course to look at the local market, gauge local feedback about the area, and look for imbalances between the actual market conditions and the actual consumer sentiment. Whilst, I will leave it to Jacob, and the team at Ripehouse, to provide you with their comprehensive street level analysis of any particular area you may be interested in, I just thought I would share my macroeconomic view on the cities I visited last week.

Sydney - The Pros

In the interests of transparency I must confess that I lived the first 30 odd years of my life in Sydney’s southern suburbs. I spent many summers surfing the breaks around Cronulla and cycling around the Royal National Park. And really Sydney’s natural assets like it’s harbours, national parks, and beaches will always make Sydney a popular destination and domicile. Sydney, along with Melbourne, are the two economic, and property powerhouses, of Australia right now. Whilst Melbourne has a faster population trajectory, and is predicted to overtake Sydney as most populated city by the middle of this century, Sydney’s property markets are moving back towards balance after several years of outstanding capital growth over recent years.

In June 2014, the Government announced Rebuilding NSW – a plan to turbocharge NSW and invest $20 billion in new productive infrastructure, including a second Harbour rail crossing and a third Harbour road crossing. This plan is expected to create more than 100,000 jobs and boost the economy by almost $300 billion in just over 20 years. Flush with cash after selling off the 99-year TransGrid lease to the NSW Electricity Networks consortium for $10.258 billion the NSW government appears better placed than most state governments to effectively recycle state-owned assets into new job creating infrastructure projects. And after years of political uncertainty, The Baird Liberal state government has now embarked on investing a record $61.5 billion over four years, including the largest public transport and urban road project in Australia – North West Rail Link and WestConnex (valued alone at over $15 billion).

With most big ticket infrastructure initiatives they often positively impact property price growth 3 times over. Firstly, when they are initially announced (or even mooted). Secondly, when they start to undergo construction (psychologically this is where people start to see that it is real as opposed to planned) Thirdly, when the infrastructure is complete and residents start to experience the benefit of the assets.

Sydney - The Cons

Interestingly, being Australia’s most populated city, combined with a lack of initial town planning and foresight have also meant that transport problems can abound, with traffic congestion being one of my least favourite parts of this city. 

"Sydney's busiest roads can be gridlocked at any time of the day, any day of the week, costing our economy billions every year,” premier Mike Baird has been quoted as saying.

In fact in 2015, the Bureau of Infrastructure, Transport and Regional Economics (BITRE) put Australia's congestion bill at $16.5 billion, up 30 per cent on the 2010 cost of $12.8 billion,. The cost from traffic congestion is expected to further rise to around $30 billion by 2030. According to the BITRE report, Sydney leads Australia when it comes to immovable traffic. The 2015 congestion cost for the NSW capital is $6.1 billion in 2015 and is forecast to rise to $12.6 billion in the next 15 years.Melbourne will go from $4.6 billion to $10.2 billion, Brisbane from $2.3 billion to $5.9 billion, Perth from $2 billion to $5.7 billion, Adelaide from $1.1 billion to $2.3 billion, Canberra from $200 million to $400 million, Hobart from $90 million to $160 million, and Darwin from $30 million to $70 million.

Examples of some of the worst roads for congestion in Sydney include Pennant Hills Road, Cumberland Highway, Parramatta Road, Old Windsor Road, The Kingsway, Campbelltown Road, and the Pacific Highway from North Sydney to Pymble.

As of the third quarter of 2015 the median price for a house in Sydney was 12.2 times the median household income according to International Demographia International Housing Affordability Survey, giving Sydney the dubious distinction of being the second least affordable location of all the 86 major markets surveyed. And according to the The Rental Affordability Index released late in 2015, Sydney has almost no affordable rental housing for low-income earners east of Blacktown, a full 35km west of the CBD. This lack of affordable housing has at least in part, contributed to the rise of higher density and semi-detatched housing supply, as more people looked to apartments and townhouses as viable housing options in the face of escalating housing costs. 

The Australian Population Research Institute, in their October 2015 Research Report, predicts that Sydney will have to add a total of some 308,000 dwellings and Melbourne some 355,000 over the decade 2012 to 2022. That equates to an average about 30,800 new dwellings p.a for Sydney and 35,500 p.a for Melbourne. These figures are supported by a report on housing demand from NSW Planning and Environment tipped that Sydney will have an extra 1.6 million people by 2031, which will spur on the need for more than 664,000 extra homes.

And with Australian Bureau of Statistics (ABS) figures showing that Sydney took over the mantle from Melbourne as the leading capital for apartment developments with 35,538 approvals recorded over 2015 compared to 33,023 in Melbourne it would appear that much, if not all of the underlying demand for new apartment stock is likely to be well met (if not exceeded) in Sydney over the next few years. This will tend to place downward price pressure on apartments in Sydney in the near term.

With supply, especially of new apartments, now peaking at record highs, & when combined with low levels of inflation, global growth & wages growth, & high levels of private debt, we see that this will likely act to place downward pressure on price growth in Sydney in general.  However, as always there are sub-markets within sub-markets, making your research & asset selection even more critical in the Sydney market. 

Sydney - The Opportunities

Despite the relative lack of affordability for younger Australians, newly arrived migrants, older Australians, and overseas investors, are likely to see demand for well positioned detached housing, and quality townhouses/apartments with a high owner occupier demand continue to do well in the decades ahead. This market will likely be out of reach for first home buyers, and many investors, but a relative lack of new detached houses being built in inner and middle ring suburbs will mean that the supply:demand balance is likely to be permanently in the direction of strong demand:low supply. This is likely to intensify, if Labor wins government and abolishes negative gearing on established properties.

Additionally, boosted by the recent surge in house values in Sydney, I would also be looking to areas outside of Sydney, that may benefit from baby boomers looking to downsize, enjoy a sea/tree change, and from a larger percentage of the workforce being able to work remotely, in more affordable areas that have strong lifestyle potential. For example, the Illawarra region to the South, or the Hunter, Central Coast, & Far North Coast to the north.

With perhaps the biggest changes in 100 years to the planning landscape, Sydney's councils will be reduced from 43 to 25 and regional councils will be reduced from 109 to 87 under the NSW government's plans to reshape local government. For those looking to create their own growth, this will bring, a raft of potential new opportunities for astute developers taking advantage of the council reform process to deliver new development outcomes in areas previously locked out by restrictive council regulation.

Sydney - The Strategy

I am currently selectively entering this market looking to secure older properties in good suburbs, which have the ability to either renovate / subdivide to create new in demand housing types. However, the price points I would be recommending here are generally going to be in the $1-2M range and as such this strategy will see a smaller number of investors able to participate in this market. Similarly, we are targeting small-medium development sites ($3M-$30M) focused on unique, large, owner occupied townhouses or apartments based around selective opportunities that may arise out of the restructuring of the Sydney councils. 

Sydney: My Final Verdict: Look for selective, value-added buying opportunities.

Edit - From Jacob and the researchers at Ripehouse:

Generally we are seeing a slow down and low yielding environment in Sydney as a region. There are of course always exceptions. It is great to hear from an on the ground assessment from an investment expert and we have seen a number of standout "exceptions to the rule" markets holding strong in Sydney. Still providing localised growth drivers that are demonstrating strong metric health and acquisition indicators. In fitting with the observations by Matthew in the Sydney market, in this $1-2M range we are seeing the following strong investment candidates:

Westmead in NSW

Westmead in Sydney's inner West (Parramatta Region) is currently a very strong "Big Green" suburb - according to the Ripehouse Radar chart - suburb assessment page. This means that the on the ground market/metric health is excellent and it is in vogue by experts/researchers and also investors alike.

 
Harris Park in NSW

Harris Park in Sydney's inner West (Parramatta Region) - Also a very strong "Big Green" recommendation - look for similiar buying/growth indications in this South/East Parramatta pocket.

 

 

Be sure to look out for part two and part three of this series, where Dr Matt will be discussing the pros, cons and opportunities surrounding the Townsville and Perth property markets.

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