Strong Sydney market powers on
16 May 2021

Extremely strong demand for houses in Greater Sydney and regional areas in NSW with double-digit growth expected in the next 12 months; demand for units overall remains softer.

Houses in NSW enjoy very strong demand, driven by ultra-low interest rates and very strong buyer sentiment. FOMO is a major driver in consumer behaviour both in Greater Sydney and in popular regional areas of NSW.

The Westpac-Melbourne Institute Index in relation to House Price Expectations has surged sharply in the past 12 months by 135 per cent. House price expectations are already being reflected in auction clearance rates figures, with final auction clearance rates in the first week of May 2021 showed results of 80 per cent in Sydney. It should be noted, however, that a distinction should still be made between houses and units. The average preliminary clearance rates for houses during the first week of May 2021 were 84.2 per cent, while for units preliminary clearance rates were slightly lower at 81.7 per cent.

In addition to being a preferred dwelling option by owner-occupiers, houses are also perceived as a preferred investment alternative and generally carry a materially lower level of risk than rental apartments. Consequently, the demand for houses is strong by both owner-occupier and investor cohorts.

However, the current strong price growth rates are not sustainable and will likely prove to slow over the second half of 2021. Instead of extremely strong growth, we will likely see 'only' strong price appreciation. It is likely that supply will increase materially in the second half of the year, with more vendors expected to look to lock in capital gains. In addition, higher prices make it harder for buyers to save the deposit or obtain the required loan. Therefore, it is likely that auction clearance rates will also prove to be a bit lower than they are now.

It should be noted that Regional NSW currently enjoys strong demand and delivered capital growth of 15.6 per cent over the past 12 months, substantially higher than Greater Sydney with 7.5 per cent over the same period.

As expected, 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. The increased popularity of lifestyle areas in NSW started well before COVID-19 and is likely to continue over the medium and long term, with lower and more sustainable price increases.

Houses

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 6,154 houses over the next 24 months, being a 5.7 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 is associated with high-rise units in the denser inner-city hubs.

Units

It should be noted that houses and units, particularly newer rental apartments, have a different risk profile, with new rental apartments often carrying materially higher risk than houses.

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, newer 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 can be 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.

Uncertainty surrounding external migration substantially increases the risk in the rental apartment segment, particularly in high-supply areas. The risks associated with these areas is likely to be mitigated over time with increased population.

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. According to SQM Research, vacancy rates for Sydney reached 3.4 per cent in March 2021, before declining to 3.1 per cent in April. In addition, unit rents in Sydney have fallen -4.9 per cent since March 2020. The following SA4 areas have experienced large drops in rent: Sydney – City and Inner South, North Sydney and Hornsby and Sydney – Inner West. Mortgage arrears in those high-supply areas should be closely monitored.