Sydney's insane - where to next? Todd Hunter

Sydney's insane - where to next? Todd Hunter
Todd HunterMay 18, 2015

I may stand-alone here, but Sydney’s done – there I said it!

Normally, locations go flat when they become unaffordable or major infrastructure projects are abandoned but this time it may be at the hands of the banks, the governing bodies and the ATO.

Now making a statement like this is bold. Firstly, you need fundamental facts to back it up and these are the things I research – knowing where and when to invest, along with when to stop investing in an area. And lastly, we need an alternative place to invest. So, here we go:

The first sign for me that Sydney was on the cusp of a change was on April 23rd. A fundamental bank policy change that two major banks announced was the reason. This change stated that effective April 24th at 5pm, all Non-Resident lending Loan to Value Ratios (LVR) would be reduced from 80% of purchase price to 70%. Meaning borrowers must have another 10% cash to put towards the purchase.

One of those banks was the biggest lender to Chinese borrowers. The myth that the Chinese are all paying cash for houses is simply not true. The best Business Development Manager (BDM) that this bank employs has seen an immediate drop of 25% in mortgage volume since this change. Now that’s one BDM, for one bank, in one district of Sydney.

There is no question the overseas buyers are pushing our prices up but it’s not just the Chinese. They accounted for $27.7 billion in property transactions last year but the USA purchased $17 billion, Canada $15 billion and Malaysia $7.2 billion. The falling Aussie dollar has made our property much more attractive to them along with a buoyant property market.

But like usual, when there is money, there are Sharks looking for loopholes. So bringing sunshine to my eyes, are the ATO. Yeah, you won’t hear me say that too often. They are currently investigating 150 cases of unlawful purchases from overseas buyers. The loophole is done through trusts and companies. There appears to be a loophole in the FIRB’s (Foreign Investment Review Board) approval process for developers too. The great thing is that the ATO are a big enough player to bring this behavior to a halt and prosecute those offenders. Watch this space!

With the rate drop in May, one would think this would fuel more buyers to pay more. The funny part is that even though interest rates dropped, as a borrower your borrowing capacity hasn’t increased. wHy?

Banks are servicing your loan application at the 7% mark. This is a protection mechanism to safeguard you when interest rates rise in the future. This 7% mark hasn’t shifted in the last 3-5 interest rate drops. So no matter how much the rates still go down, your ability to service more debt will not increase unless your income does.

Banks must now also hold more funds in managed accounts per mortgage they approve. Meaning for every $300k mortgage the bank must hold $600k in managed funds. This has doubled in recent years. Hence we’ve seen Managed Funds increase to 3.05% in May when interest rates decreased. This was done to attract more consumers to invest their money. Consequently, this reduced the banks profits by another 0.25%. So it comes as no surprise that in mid May the interest rate war between the banks ended. One major bank no longer discounts interest rates for investment loans. The others will follow.

The governing body for mortgages, APRA (Australian Prudential Regulation Authority), have also told the banks that if their investment portion of their portfolio has increased by over 10% this year, then they must hold another $500 million in managed funds. Meaning banks will now be reluctant to pass this level and reduce interest rate discounts on investment loans.

The Median house price in Sydney has topped $900k. Insane, I know. Now according to the ABS, the Median income is $80,048 per annum. So a couple with two children, who each earn $80k, have a maximum borrowing capacity of between $800k – $1 mill. They have reached their cap.

So to summerise:

  • The banks are slowing up lending to Non Residents
  • The ATO are stopping illegal overseas transactions, plus reversing illegal purchases
  • Interest rates have dropped, but you can’t borrow any extra funds
  • The banks are stopping interest rate discounts to investors
  • The Sydney property market has seen fantastic capital growth for over 2 years
  • Property prices are unaffordable

Now given that investment loans now account for 50% of all mortgages written, the above corrections will see a drastic decrease in investor activity. This decrease will significantly impact consumer confidence across the board. And the end of the Sydney property cycle will be here.

Think about it… You have been inspecting houses for the past 2 months and you’re used to a high volume of purchasers inspecting and turning up to auctions. Then, the next week the volume is halved. Would that get you thinking? Is there something going on that I don’t know about? Your consumer confidence has just been shot.

So, after all this doom and gloom, wHere and wHat do we invest in?

The key to investing, is buying in great locations in the low part of the property cycle. Where consumer confidence is at its lowest. wHere is this the case?

South East QLD is an emerging market where those who get in RIGHT now will benefit. If you wait until Christmas, you have missed the boat. But the market to really focus on right now is Perth. Currently Perth is on the “No Go” list, which is exactly why I am there. With no-one buying, consumer confidence is non-existent. Hence, we have seen some significant price decreases. This makes for some great buying.

But why is Perth not performing currently?

The reason is that most people consider Perth as purely driven by mining, like it’s a giant mining town. I laugh when I hear this, as Perth is a capital city with over 2 million people. The same size as Brisbane, yes that’s right!

Sure, Perth has mining influence (as does Brisbane) but it has a whole bunch more too. The fall of the mining boom has made for some great buying though. Discounts off list price we have not seen in a few years. In fact, we are buying most of the properties at pre 2006-07 prices.

There are two points to be wary of though. Firstly, the rental market is also seeing a correction with rents dropping around 10% in the last year. Do your numbers with a low 5% yield not 5.7%+ and adjust your purchase price accordingly.

Secondly, Perth is winning across the country in the ‘smallest residential blocks’ award. They are down to 200m2. No, that’s not a typo! Stick to blocks over the 400m2 and above, as these will be the properties to see land value growth in the years to come.

So, I will be monitoring the property market in Sydney over the coming months, as property data is all past tense. And a change now won’t be reflected for another 3-6 months. But one thing I know for Sydney is – get ready for a significant correction, the writing’s on the wall.

TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based wHeregroup.

Editor's Picks

First look: MADE Property doubles down in Kirribilli new apartment market
Spyre Group brings successful Queensland blueprint to Melbourne with Hampton Ltd
Saxon Street by Milieu to bring new housing and urban design to Brunswick’s cultural core
Construction begins at Fishermans Bend Innovation Precinct
Gurner reveals new plans for final Jam Factory stage

Related Projects

16-22 Maud Street, Newstead QLD 4006
16-22 Maud Street, Newstead QLD 4006
16-22 Maud Street, Newstead QLD 4006
Price
Contact agent
35-37 Mount Street, Prahran VIC 3181
35-37 Mount Street, Prahran VIC 3181
35-37 Mount Street, Prahran VIC 3181
Price
Contact agent
118-124 Benelong Road, Cremorne NSW 2090
118-124 Benelong Road, Cremorne NSW 2090
118-124 Benelong Road, Cremorne NSW 2090
Price
Contact agent
118-120 Matthew Flinders Drive, Cooee Bay QLD 4703
118-120 Matthew Flinders Drive, Cooee Bay QLD 4703
118-120 Matthew Flinders Drive, Cooee Bay QLD 4703
Price
Contact agent
26-62 Kinross Road, Thornlands QLD 4164
26-62 Kinross Road, Thornlands QLD 4164
26-62 Kinross Road, Thornlands QLD 4164
Price
Contact agent
9-11 Baroonba Street, Whitebridge NSW 2290
9-11 Baroonba Street, Whitebridge NSW 2290
9-11 Baroonba Street, Whitebridge NSW 2290
Price
Contact agent
18 Ransley Street, Penrith NSW 2750
Perle, East Side Quarter, Penrith - 18 Ransley Street, Penrith
18 Ransley Street, Penrith NSW 2750
Price
Contact agent
Ernest Cavanagh Street, Gungahlin ACT 2912
Raya, Gungahlin - Ernest Cavanagh Street, Gungahlin
Ernest Cavanagh Street, Gungahlin ACT 2912
Price
Contact agent
39 Browning Street, South Brisbane QLD 4101
39-41 Browning Street, South Brisbane - 39 Browning Street, South Brisbane
39 Browning Street, South Brisbane QLD 4101
Price
Contact agent
675 Gardeners Road, Mascot NSW 2020
Kiara North, Mascot - 675 Gardeners Road, Mascot
675 Gardeners Road, Mascot NSW 2020
Price
Contact agent
187 Salvado Road, Jolimont WA 6014
Jolie, Jolimont - 187 Salvado Road, Jolimont
187 Salvado Road, Jolimont WA 6014
Price
Contact agent
47 Maning Avenue, Sandy Bay TAS 7005
Grace Residences - 47 Maning Avenue, Sandy Bay
47 Maning Avenue, Sandy Bay TAS 7005
Price
Contact agent
Cove Lane, Narooma NSW 2546
Cove, Narooma - Cove Lane, Narooma
Cove Lane, Narooma NSW 2546
Price
Contact agent
52-56 Ramsay Street, Five Dock NSW 2046
Ava, Five Dock - 52-56 Ramsay Street, Five Dock
52-56 Ramsay Street, Five Dock NSW 2046
Price
Contact agent
2375 Gold Coast Highway, Mermaid Beach QLD 4218
The Alfred - 2375 Gold Coast Highway, Mermaid Beach
2375 Gold Coast Highway, Mermaid Beach QLD 4218
Price
Contact agent
129-131 Russell Ave, Dolls Point NSW 2219
ALLURE COLLECTION - 129-131 Russell Ave, Dolls Point
129-131 Russell Ave, Dolls Point NSW 2219
Price
Contact agent
62 Constitution Avenue, Parkes ACT 2600
The Eastbourne on Commonwealth Park - 62 Constitution Avenue, Parkes
62 Constitution Avenue, Parkes ACT 2600
Price
Contact agent
155 Old Burleigh Road, Broadbeach QLD 4218
Sandpiper, Broadbeach - 155 Old Burleigh Road, Broadbeach
155 Old Burleigh Road, Broadbeach QLD 4218
Price
Contact agent
33 Vulture Street, West End QLD 4101
33 Vulture Street, West End QLD 4101
33 Vulture Street, West End QLD 4101
Price
Contact agent
19 Governor Terrace, Murarrie QLD 4172
Park Hill Village Collection, Murarrie - 19 Governor Terrace, Murarrie
19 Governor Terrace, Murarrie QLD 4172
Price
Contact agent
122 Marine Parade, Miami QLD 4220
Nalu, Miami - 122 Marine Parade, Miami
122 Marine Parade, Miami QLD 4220
Price
Contact agent
34 Jacaranda Place, Indooroopilly QLD 4068
34 Jacaranda Place, Indooroopilly QLD 4068
34 Jacaranda Place, Indooroopilly QLD 4068
Price
Contact agent
167 Old Burleigh Road, Broadbeach QLD 4218
167 Old Burleigh Road, Broadbeach QLD 4218
167 Old Burleigh Road, Broadbeach QLD 4218
Price
Contact agent
21 Queens Way, Yeerongpilly QLD 4105
Yeerongpilly Green - 21 Queens Way, Yeerongpilly
21 Queens Way, Yeerongpilly QLD 4105
Price
Contact agent
445-449 River St, Ballina NSW 2478
Solhaven - 445-449 River St, Ballina
445-449 River St, Ballina NSW 2478
Price
Contact agent
52 Sunset Boulevard, Surfers Paradise QLD 4217
52 Sunset Boulevard, Surfers Paradise QLD 4217
52 Sunset Boulevard, Surfers Paradise QLD 4217
Price
Contact agent
6 Jack Brabham Drive, Hurstville NSW
Horizon Hurstville - 6 Jack Brabham Drive, Hurstville
6 Jack Brabham Drive, Hurstville NSW
Price
Contact agent
49 Seena Drive, Edgeworth NSW 2285
49 Seena Drive, Edgeworth NSW 2285
49 Seena Drive, Edgeworth NSW 2285
Price
Contact agent
Lot 118 Ocean Steamers Road, Port Adelaide SA 5015
Lot 118 Ocean Steamers Road, Port Adelaide SA 5015
Lot 118 Ocean Steamers Road, Port Adelaide SA 5015
Price
Contact agent
203 Ashmore Road, Benowa QLD 4217
203 Ashmore Road, Benowa QLD 4217
203 Ashmore Road, Benowa QLD 4217
Price
Contact agent
774 Ripley Road, Ripley QLD 4306
774 Ripley Road, Ripley QLD 4306
774 Ripley Road, Ripley QLD 4306
Price
Contact agent
6 Homelea Court, Rivervale WA 6103
6 Homelea Court, Rivervale WA 6103
6 Homelea Court, Rivervale WA 6103
Price
Contact agent
7002 Ripley Road, Ripley QLD 4306
7002 Ripley Road, Ripley QLD 4306
7002 Ripley Road, Ripley QLD 4306
Price
Contact agent
3 Delos Way, Sorrento WA 6020
3 Delos Way, Sorrento WA 6020
3 Delos Way, Sorrento WA 6020
Price
Contact agent
77 Sutton Street, Redcliffe QLD 4020
77 Sutton Street, Redcliffe QLD 4020
77 Sutton Street, Redcliffe QLD 4020
Price
Contact agent
119 Queen Street & 86 King Street, Bendigo VIC 3550
119 Queen Street & 86 King Street, Bendigo VIC 3550
119 Queen Street & 86 King Street, Bendigo VIC 3550
Price
Contact agent
181 Prospect Road, Prospect SA 5082
181 Prospect Road, Prospect SA 5082
181 Prospect Road, Prospect SA 5082
Price
Contact agent
593-595 Albany Highway, Victoria Park WA 6100
593-595 Albany Highway, Victoria Park WA 6100
593-595 Albany Highway, Victoria Park WA 6100
Price
Contact agent
1-28, 40 Civic Way, Rouse Hill NSW 2155
1-28, 40 Civic Way, Rouse Hill NSW 2155
1-28, 40 Civic Way, Rouse Hill NSW 2155
Price
Contact agent
93-97 Bay Street, Brighton VIC 3186
93-97 Bay Street, Brighton VIC 3186
93-97 Bay Street, Brighton VIC 3186
Price
Contact agent
22-38 & 27-31 The Avenue, Coburg VIC 3058
22-38 & 27-31 The Avenue, Coburg VIC 3058
22-38 & 27-31 The Avenue, Coburg VIC 3058
Price
Contact agent
1F Ashline Street, Wollert VIC 3750
1F Ashline Street, Wollert VIC 3750
1F Ashline Street, Wollert VIC 3750
Price
Contact agent
Lots 100 & 900 Kentucky Court, Cockburn Central WA 6164
Lots 100 & 900 Kentucky Court, Cockburn Central WA 6164
Lots 100 & 900 Kentucky Court, Cockburn Central WA 6164
Price
Contact agent
1260-1272 Malvern Road, Malvern VIC 3144
1260-1272 Malvern Road, Malvern VIC 3144
1260-1272 Malvern Road, Malvern VIC 3144
Price
Contact agent
472 Regency Road, Prospect SA 5082
472 Regency Road, Prospect SA 5082
472 Regency Road, Prospect SA 5082
Price
Contact agent
273A Gorge Road, Paradise SA 5075
273 Gorge Road, Paradise SA 5075 - 273A Gorge Road, Paradise
273A Gorge Road, Paradise SA 5075
Price
Contact agent
270 The Esplanade, Miami QLD 4220
270 The Esplanade, Miami QLD 4220
270 The Esplanade, Miami QLD 4220
Price
Contact agent
2 & 6 Austral Parade, East Bunbury WA 6230
2 & 6 Austral Parade, East Bunbury WA 6230
2 & 6 Austral Parade, East Bunbury WA 6230
Price
Contact agent
5 Charles Street, Charlestown NSW 2290
5 Charles Street, Charlestown NSW 2290
5 Charles Street, Charlestown NSW 2290
Price
Contact agent
59 & 69 Merthyr Road, New Farm QLD 4005
59 & 69 Merthyr Road, New Farm QLD 4005
59 & 69 Merthyr Road, New Farm QLD 4005
Price
Contact agent