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

By Sachin Maharaj

Since the Pandemic, there has been significant negative news in the media all pointing to a fall in the property market, predictions ranging from 5% to 30% correction in the coming year. This conflicts with the resilience in Sydney’s property market with prices increasing in most suburbs and auction clearance rates remaining strong, albeit with low volumes. Sydney saw a fall in prices in June 2020 of 0.8%, however, over the 12 months to June20, prices were up 13.3%.

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.My top 7 key positive factors are noted below.

1. Record Low Interest Rates

With the overnight cash rates and swap rates at record lows, banks can still make a margin of 1.75% to 2.0% on mortgages and offer rates as low as 2.2%pa. This is the first time in recent history when in Sydney there are opportunities to:

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

The low interest rate and better borrowing power, post APRA changes are key factors helping the current property market.

2. Supply Versus Demand

The demand for housing will continue to outstrip supply, and in the 12 months commencing from when international travel opens (say Q2 2021), we will see demand increase exponentially causing a chronic shortage of supply. This will be caused primarily by the following factors:

1. Net Migration –Sydney currently requires 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 migrants in the first year after international travel commences.Australia will be seen as a safe haven during times of international strife and recession and the 1919 Spanish flu experience shows us that our population growth rates are likely to rise substantially once the panic is over and borders are opened again.

19. Returning Residents/Expats –Australia hasfared 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 home as health and family safety takes priority. In a survey done by Knight Frank in June 2020, 64% of expats surveyed said the COVID-19 lockdown had influenced their decision to buy a property in their home country. There are over 300,000 Australian citizens living abroad. Returning citizens can boost the net population growth in Sydney by 30,000+ 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. The interest in Australia is also spurred by the political unrest in countries like the US and HK.

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. Political and Economic Landscape

NSW is in a much stronger position than any other States to create employment, fund infrastructure projects and bounce back stronger as it recovers from the recession.

Australian economy contracted 0.3% in the March 20 quarter and is expected to contract over -6% in 2020. However, the bounce back in 2021 is expected to be as strong at around +6%.

A few facts of note:

• NSW governmenthas a strong balance sheet, has built more trust through Covid-19, Sydney’s unemployment rate was 3.9% (Aust 5.2%) pre-Covid-19 and is now 6.9%(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 vs Equity

• 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.
• Investors such as Superfunds including SMSF will be looking for more stable asset classes and likely move their weighting out of equity and commercial property with residential properties to be a strongbeneficiary of this move as returns of 4.5%+ are now available in Sydney as well as potential for capital growth.

6. Consumer Confidence

Once a vaccine is rolled out for Covid-19, consumer confidence is expected to improve substantially. Consumer confidence was at a 30 year low due to health concerns and this will reverse quickly.

7. Loan Payment Deferrals and Bank Foreclosures
   

As a result of the pandemic caused recession, banks have been incredibly 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 in possession sales’ of properties.

Forecast

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 expected, it could exceed 20%.

(The writer is an Experienced Banking, Finance & Real Estate Professional.)