Sydney’s Property Market – Heading Up….and Up

Since the Pandemic, there has been significant negative news in the media all pointing to a fall in the property market, ranging from 5% to 30% in the coming year. This conflicts with the resilience in Sydney’s property market with prices increasing and auction clearance rate remaining strong, albeit with low volumes.

Once COVID-19 is under control, we should see a strong rebound in property demand and the potential for one of the biggest booms in the Sydney property market in recent times. This will be buoyed by a combination of factors including increased demand, record-low mortgage rates and boost in consumer confidence. In fact, I believe that the positives for the residential property market in Sydney are so strongly aligned, that the boom in the next 18 months will rival the boom we saw between 2015 and 2017. The top 6 key positive factors are explored below.

1. Record Low Interest Rates

With the overnight cash rates and interest rate swap rates at record lows, banks can still make a margin of 1.75% to 2.0% on mortgages, with the lowest mortgage rate in the current market at 2.09%. This is the first time the recent history when in Sydney there are opportunities to:

• Purchase a property and have lower repayments than the rent.
• Purchase a property which is positively geared

2. Supply Versus Demand

Apart from pockets of oversupply in some Sydney suburbs in the apartment market, overall, there is much more demand than supply. This has been caused by much lower listings and the delays in releasing land and approvals for new development. The demand for housing will continue to outstrip supply, and in the 12 months commencing from when international travel opens up (say April 2021), we will see demand increase exponentially causing a chronic shortage of supply. This will be caused primarily by the following factors:

1921. Net Migration – For the next 20 years, NSW Treasury has predicted that we require 38,000 dwellings per year to cater for population growth of 90,000 a year. With the pause in migration due to Covid-19, we will likely see an influx of 50% more in the first year after international travel commences. After the Spanish flu in 1919, despite expectations, capital city housing prices in Australia actually boomed in 1919 and then continued to rise by more than ten per cent each year until 1921.The similarities to the present are obvious – we already have one of the highest population growth rates in the western world and in the post-covid environment,Australia will be seen as a safe haven during times of international strife or recession and the Spanish flu experience shows us that our population growth rates are likely to rise rather than fall once the panic is over and borders are opened again.

19. Returning Residents/Expats – Australia and Sydney have faired very well compared to the rest of the world in handling Covid-19. It is expected that a significant number of Australian residents abroad will see it timey to return back home as health and family safety takes priority. This number is hard to predict, however, it can be up to 25% to 30% of the migration numbers in the first year.

1. Non-Resident FIRB Purchases

For the reasons noted above, there is already a spike in the FIRB applications for residential properties from citizens in UK, Europe, HK, Singapore, China and the less obvious countries like USA and Canada. This trend is likely to continue into 2021 and 2022.

3. Government Incentives

Australia’s Federal government and NSW government have provided significant stimulus packages to combat Covid-19 and targeted incentives to home buyers which include home builders grant and stamp duty exemptions. This was a further shot in the arm for the first home buyer market in Sydney which remained strong through the Covid-19 period. I expect the Home Builder grant to be extended further into 2021 with some amendments and further incentives from the NSW government as we see a housing led recovery for our economy.

4. NSW – Political Stability & Financial Strength

Notwithstanding the current second wave of Covid-19 in Victoria and the fluid situation in Sydney, NSW is in a much stronger position than any other state to create employment, fund infrastructure projects and bounce back stronger as it recovers from the recession. A few facts of note:

• NSW has a financially strong and stable government, has built more trust through Covid-19, Sydney’s unemployment rate was 3.9% (Aust 5.2% pre-covid) and is now (Aust 7.4%).
• NSW planned infrastructure projects for next 5 years is more than the rest of Australia added together. Bringing projects forward will have the effect of creating significant jobs.

5. Commercial vs Residential

• Vacancy rates in commercial properties is likely to increase and Investments in commercial properties will likely decline as a result of more employees working from home going forward
• Superfunds and other financial institutions will likely be looking for more stable asset classes and residential properties will be one of the benefactors of this move.

6. Loan Payment Deferrals and Bank Foreclosures
   

• As a result of the pandemic caused recession, banks have been very supportive of its customers and have already highlighted that they will continue to support customers that face hardship. As a result, it is unlikely that we will see much foreclosures and ‘mortgagee sales’ of properties.
• Australian banks have been strong and stable with adequate capital and liquidity levels and with easing APRA restrictions on residential lending, banks appetite to grow the residential loans book remains strong for this sector and there is healthy competition.

I would recommend that 2020 presents an exceptional opportunity to purchase a property in Sydney as the demand and competition in a tight supply market post the commencement of international travel in 2021 will see rising prices. For the 12 month period post international travel commencement, I predict price rises in Sydney of 10% to 15%, however, if the economic recovery is stronger than expec