Lack of supply the main Sydney property market price driver: HTW

The residential property market in Sydney continues to surge, property valuation firm HTW recently noted.

It was being driven by lack of stock, record low interest rates, strong population growth, continued strong presence of overseas buyers, tax incentives, positive market sentiment/ speculation and re-invest using equity build up from previous years property market growth, according to the recent Herron Todd White report.

"Australians’ confidence in property as a good place to invest has reached a three year high according to a recent NAB survey,” the report noted.

Herron Todd White says that there was a lack of supply versus demand in Sydney which was driving prices up.

It noted the demand versus supply issue in Sydney was highlighted in the data provided by CoreLogic.

Sydney has a population in excess of 4.6 million but with total listings of around 20,636 properties, only slightly greater than Brisbane at 19,043 listings but less than Perth at 21,377 listings and a population of near 1.9 million.

As a comparison, Melbourne with a more comparable population of 4.2 million has a total of around 28,305 properties listed for sale.

"We consider that the lack of supply is the main driver in the escalation of prices in the greater Sydney market.

"The Sydney prestige property market, generally considered to be properties above $3 million, has continued its strong performance into 2017.

"Factors which have been driving the prestige market include a limited supply of quality stock coming on to the market and a sustained period of high auction clearance rates in prestige suburbs.

"High net wealth (HNW) purchasers, both local and international, continue to be attracted to the Sydney market, with a recent Domain article quoting Lord Andrew Hay, global head of residential at Knight Frank, that globally “Sydney is in 11th position in terms of most desirable cities for HNWs to live and invest in”,” the report commented.

Nine Sydney suburbs have a median price of $3 million while foreign buyers will face increased stamp duty and land tax surcharges Herron Todd White says.

“As per CoreLogic data there are currently nine suburbs in Sydney with a median price in excess of $3 million being on both sides of the harbour within a short commuting distance of the CBD.

"Bellevue Hill in Sydney’s east has had a total of 70 dwelling sales in the past 12 months with a median price as at April 2017 of $4.777 million, a further indication of the strong demand levels for prestige property.

"Despite tighter rules around foreign buyers purchasing property in New South Wales and increased stamp duty and land tax surcharges on foreign purchasers, foreign investment into the prestige market remains strong, particularly from Asia.

"Further regulatory or taxation changes, either here or in Asia, would be the most likely cause for the prestige market to slow in the near future,” the report advised.

Herron Todd White comments that with the property market running hot in recent years, some Sydney homes are earning more than their owners with the price of a house increasing by more money each day than most workers earn in a week.

"The CoreLogic data reveals house values in Clovelly (eastern suburbs) had the largest daily gains over the past year at $1,931 per day, followed by Manly (lower north shore) at $1,808 per day.

"Worryingly though, growth in wages has not kept pace with house price increases which have seen borrowers continuously tapping into the equity in their homes or investment properties to further use towards additional investment properties,” the report warned.

New developments in many of the areas are also driving prices up Herron Todd White says.

“Throughout greater Sydney another factor that has been driving the market is government infrastructure spending.

"The suburb of Frenchs Forest in the northern beaches region has been a strong performer over the past few years thanks in part to the construction of the much anticipated Northern Beaches Hospital and surrounding infrastructure.

"This investment in the area has driven up demand for housing with strong sales occurring.

"The median value for dwellings in this suburb is currently $1.515 million.

"In March 2014 it was $966,500 representing approximately 60% growth (source: Corelogic).

"Suburbs along the under construction North West rail link have outperformed surrounding suburbs over the past few years mostly due to this substantial investment.

"Suburbs such as Cherrybrook, Castle Hill and out to Rouse Hill have all benefited from the higher level of demand from purchasers looking to be located near solid transport hubs.

"This is shown by Cherrybrook’s change in median price of 88% over the past five years to be currently sitting at $1.43 million,” the report commented.

A five bedroom house at 18 Woodcrest Place, Cherrybrook (above) has been listed for between $1.25 million to $1.3 million.

Similarly a four bedroom house at 29 Beechwood Parade, Cherrybrook (below) has been listed with a price guide of $1.35 million.

A five bedroom house at 9 Acer Court, Cherrybrook (below) was recently sold for $1.49 million.

Similarly a four bedroom house at 16 Elderberry Place, Cherrybrook (below) was recently sold for $1.43 million.

“For units, suburbs such as Mosman and Cremorne on Sydney’s lower north shore have remained strong for a number of years.

"Local agents have identified a sweet spot for 2-bedroom units of between $900,000 and $1.2 million.

"This will get you a larger, older style unit appealing to a wider market segment. This price bracket is well suited to a professional couple wanting a low maintenance unit within close proximity of the city.

"In addition this sweet spot is in line with the borrowing capabilities of a professional couple.

"In the western suburbs of Sydney we have seen strong interest in house and land packages in brand new estates.

"We note land in Austral starts from $360,000 and a 3-bedroom house and land package from $615,000.

"Although situated some 55 kilometres south-west of the CBD, this once semi-rural location is popular with young families wanting detached housing and a yard as well as future growth prospects and the low entry point compared to the average price of over $1 million,” the report stated.

Herron Todd White says that the Sydney property market is significantly outperforming every other localities, which could be the result of traditional factors.

“The Sydney property market has been significantly outperforming the rest of the Australian economy over recent years which we believe implies that it has not been affected by many traditional factors which restrict strong economic growth.

"It is difficult to say what it will take for the Sydney market to change course however many believe that it is nearing its peak of the cycle from an affordability point of view.

"A rise in interest rates of course would have a significant effect on the market however a rise in the official cash rate has not been hinted at by the RBA and it is assumed that this would only rise once the economy appears to be strengthening with inflation reaching targets.

"If interest rates did rise however, this would put a lot of pressure on highly geared investors and mortgagors.

"With rates of household debt at record levels, this could have a substantial effect on the property market.

"According to a recent RBA publication on household finances, average debts are now 89% greater than incomes, up from 67% four years ago.

"An anonymous survey by investment bank UBS revealed that 28% of people surveyed said their mortgage application was not totally factually accurate.

"This is another worrying sign that people are pushing the boundaries to get a foot on the property ladder and even a small increase in interest rates could severely affect the ability of these homeowners to keep up with mortgage repayments.

"Aside from interest rates, another factor which could force the market out of its current growth cycle extends to overseas buyers.

"Sydney continues to attract high levels of foreign investment with foreign buyers, mainly Chinese, making up 25% of all purchases of new dwellings in New South Wales over the past year according to a report by Credit Suisse.

"Any changes to regulations in China or in Australia which would restrict this wave of investment would surely have an influence on the Sydney market in particular,” the report commented.

Media plays a strong part in Sydney property markets Herron Todd White says.

“Many believe the media to have a very strong influence on the Sydney property market in general.

"This was shown at the end of 2015 and beginning of 2016 where a wave of negative media reports appeared to stunt the market for a short period of time.

"When potential property purchasers start believing there is a bubble, they will put off purchasing.

"This hit to the demand side would mean those who need to sell may have to do so at a discount.

"When the buying public starts to see properties selling at a discount then it strengthens the belief that the market has peaked or the bubble has burst.

"It is believed therefore that with any potential negative factor to hit the housing market, the media also has the power to exacerbate any consequences,” the report commented.

It is possible to curb Sydney’s heated market by initiating various ideas according to Herron Todd White.

“New South Wales government policy changes or changes to regulations on a state or national level also have the power to curb the heated market.

"Within the federal budget to be released on 9 May, plans are being drawn up to announce measures to tackle housing affordability. It is believed that these will mainly tackle the supply side of the market rather than the demand with the likes of new land releases etc.

"However any future changes to tax incentives such as negative gearing would have more influence on the market.

"Rental yields in Sydney are considered low however investor lending remains relatively high.

"If changes to negative gearing were put in place then housing as an investment in Sydney could suddenly look less attractive to a portion of the market.

"This would have an impact on the demand side of the market as investor lending is currently considered too strong.

"The issue here however is that any changes to federal taxation rules will also affect under performing areas outside of the strong markets in Sydney and Melbourne and that may influence the federal government’s decision.

"Policies in other countries show that it is possible to make changes that will have a considerable effect on housing markets.

"Policies currently trialed in Australia have so far failed to cool the Sydney market.

"These policies include an anti-tipping duty of 12% when property in Singapore is sold after less than one year; Hong Kong has a 30% transaction tax for foreign buyers and taxes on Taiwanese property sales can reach as high as 45%.

"In 2016, changes were made in Auckland which included a requirement of a 40% deposit from investors which appears to have slowed the also booming market.

"An increase in property taxes in British Columbia in 2016 also halted the runaway property market in Vancouver which was also heavily influenced by overseas buyers.

"Obviously all changes described are more severe than those implemented in the Australian markets such as the APRA restrictions on investment loans and tax surcharges on foreign buyers, which have so far been to no avail,” the report stated.

However Herron Todd White says that there are also other factors that could affect the property.

“Other factors with the ability to affect the Sydney property market include a stock market crash, major economic downturn or a significant decrease in projected population growth in the city.

"The risk of any of these currently looks relatively low,” the report advised.