From a buyer's Market to a seller's: Sydney is projected to deliver 8-12 per cent capital growth in 2021
The landscape of the housing market in New South Wales has shifted rapidly over the past three months from a buyer's market to a seller's one.
Only three months ago homebuyers in Sydney were in solid position to leverage on the prevailing market conditions. This is, however, no longer the case, with a sharp increase in buyer sentiment and auction clearance rates.
With regards to COVID-19, several vaccinations are likely to be rolled out in 2021 providing widespread confidence that a sustainable solution will ultimately be found, and consequently this will deliver a major confidence boost to the local economy.
However, investors buying rental apartments in heavily supplied areas are still taking an elevated risk with regards to both equity and cashflow.
The NSW market, jointly with VIC the most volatile market in recent years, is likely to experience strong price increases in the range of 8-12 per cent in 2021, due to a combination of events that have changed the landscape of the property market.
The Westpac-Melbourne Institute Index in relation to House Price Expectations surged sharply in the past three months by almost 48 per cent.
House price expectations are already being reflected in auction clearance rates figures, with auction clearance rates in the second week of November showing results of 73 per cent in Sydney. It should be noted, however, that a clear distinction should be made between houses and units in Sydney - the average preliminary clearance rates for houses during the 4 weeks of October was 81 per cent, well above units with 69 per cent.
In particular, the following areas delivered very high auction clearance rates over the past four weeks: Northern Beaches (83 per cent), Baulkham Hills and Hawkesbury (77 per cent) and Sydney – Inner West (75 per cent). These are strong indicators regarding the rebounding of the housing market.
Clearance rates in Sydney are likely to remain high and similar to pre-pandemic levels. With improved consumer confidence and auction clearance rates it is likely that while volumes will materially increase in 2021, auction clearance rates will remain high, above the 70 per cent mark. For owner-occupiers with interest-only loans, ultra-low interest rates make it typically cheaper to buy than to rent from a cashflow perspective in almost all areas of Sydney (Ryde excepted).
These factors combined with the proposed changes to responsible lending obligations have resulted in a materially increased demand for detached houses.
Areas attracting lifestyle buyers include Byron Bay, the Central Coast (North Avoca, Terrigal and Wamberal), the Hunter Valley, Wollongong and the NSW South Coast. Beachside suburbs especially are outperforming the wider market.
Houses and units, particularly rental apartments, have a completely different risk profile. The inherent risks of these two dwelling types that represent different buyer cohorts, are now being realised, with rental apartments carrying materially higher risk than houses.
Houses in NSW and particularly in Sydney now enjoy very strong demand particularly by homebuyers with medium to long-term holding strategies. In addition, it is highly likely that investor activity will increase sharply as houses are a preferred investment alternative and generally carry materially lower level of risk than rental apartments.
With only a low availability of stock of quality assets in popular areas (such as City and Inner South, Eastern Suburbs and Sutherland), increasing demand has been reflected by increasingly robust auction clearance rates, double-digit growth is likely for houses in Sydney and in most lifestyle areas in NSW in 2021. Therefore, new highs for housing prices in Sydney are once again on the horizon.
Higher risk in greenfield areas
Some greenfield areas carry a higher level of risk for houses in the short term due to an elevated level of supply. A prime example of this is Sydney – South West with the potential addition of 6,246 houses over the next 24 months, being a 5.9 per cent uplift on the established stock. However, while the short-term risk is elevated, over the medium to long term no dramatic price reductions are expected and houses still present a significantly lower level of risk than that associated with high-rise units.
A distinction should be made between family-suitable apartments and units in popular areas with limited supply, to areas with high supply of rental properties. Family-suitable apartments that are an affordable alternative to houses and units in popular areas, such as the Eastern Suburbs and the Northern Beaches, are likely to enjoy strong demand and material price increases.
However, rental units in high supply areas, present a higher level of risk. Irrespective of COVID-19, there are areas in Sydney that have experienced major unit oversupply in recent years. The risks associated with existing rental apartments has increased materially, particularly in SA4s that have a large concentration of young renters, such as City and Inner South, Inner South West and Inner West. Young renters are more vulnerable to the increasing unemployment and this is reflected in a sharp rise in vacancy rates not only in Sydney, but also across other CBDs in the country.
While buyer sentiment has improved substantially, the realisation of risks associated with high supply areas including price movements, constructions defects, and now high vacancy rates, make these properties, that are generally bought by investors, a high-risk endeavour.
The risks associated with these areas is likely to be mitigated over time with increased population.
Increased cashflow/serviceability risk
Vacancy rates have noticeably increased in some areas, such as In Sydney CBD, increasing the serviceability risk, particularly for highly leveraged investors relying on rental income and taxation planning to service their mortgage payments.
The following SA4 areas have experienced large increases in rental listings and large drops in rent: Sydney – City and Inner South, Sydney – Eastern Suburbs and Sydney – Inner West. Mortgage arrears in those high-supply areas should be closely monitored.