Sydney's fundamentals are in place, but perhaps not the sentiment

The fundamentals for a solid year for property for NSW and especially Sydney are all there, excepting some requisite sentiment.

The residential market after such an extraordinary run was ripe for the spooking especially after Macquarie Group forecast, rather vaguely, that Australian house prices would fall by 7.5 percent starting this year.

Ofcourse a drop of 7.5% in Sydney - which is not what they were suggesting - would only take back around one tenth of the 73 percent gain in dwelling house prices accrued since the end of the global financial crisis in 2009.

The small uptick in bank interest rates, higher for investors than owner occupiers, didn't help the buyer confidence extend into the spring selling season.

Now John Symond, executive chairman of Aussie Home Loans, recently suggested there's been talk at the top end of town of more to come.

"It would not surprise me if over the next few months that the banks creep up their lending rates, but I don't think they'll go through the roof."

"They may go up another 0.1 or 0.15," he tipped.

"But at the moment I think consumers want every bit of help they can get to give them that bit of confidence."

Problem was Sydney over reached in early 2015. One research group even calculated the Sydney median house price had suprisingly surged past $1 million a whole year ahead of their scheduling.

Crazy is not where the market should be anyway, especially as households’ ability to borrow relative to their income should be the most important factor in their purchase decision. Not the fear of missing out which dominated much of early last year.

But don't think the negative sentiment will necessarily disappear soon.

Global ratings agency Moody’s got headlines earlier this month when they warned of increased mortgage delinquencies over the coming year as the regions most vulnerable to mining were starting to show “some signs of stress”. The NSW Hunter Valley especially.

But back to those fundamentals. New South Wales is benefiting from record low net interstate migration outflow, and strong, albeit easing, net overseas migration.

The collapse in completions between 2006/07 and 2011/12 created a sizeable dwelling deficiency. Thankfully completions rose from 8,400 dwellings in 2011/12 to 33,400 dwellings in 2014/15, however BIS Shrapnel forecaster Angie Zigomanis suggests the deficiency of 42,300 dwellings will take some time for the market to return to balance.

While rental growth is certainly subdued, investors will be bouyed that vacancy rates in inner and middle Sydney fell below the balanced market rate of three percent in 2005 and have not been higher since. 

Drive anywhere around Sydney and the emergence of an instrastructure spend is evident. Light rail in the east or progress on the new roads to support the Western Sydney Airport at Capri.

Yes macroeconomic cyclical factors are likely to periodically play something a spoiler role in price growth during 2016, but we ought emerge stronger from it. 

This article was first published in the Saturday Daily Telegraph.