Sydney's Housing Market to Continue to Grow

Sydney is Australia's most populous city and its housing sector offers investors unique opportunities with the security that comes with investing in a large and rapidly expanding market.

Property prices in Sydney have increased 25 per cent in the last four years, during which many other housing markets around the world have stagnated or even gone backwards.

The reason that Sydney's housing prices have continued to rise is simple - more people want to live there. Famous for its landmark Harbour Bridge and Opera House, Sydney is the business and financial capital of Australia, with an ideal climate and a relaxed yet cosmopolitan lifestyle.

Sydney has nearly five million residents and its annual population growth rate of 1.6 per cent is higher than the Australian average. It is also higher than that of any major western city outside Australia, yet less than half of this increase comes from births.

Most new Sydneysiders are overseas arrivals who come to Australia to start a new or better life, seeking employment or education opportunities for themselves or their children. They have created a steady demand for around 30,000 more dwellings each year, pushing up prices and making Sydney the most expensive city in Australia to buy a house.

The median price of a Sydney house is now around A$620,000 (S$786,740) and it is rising. Landed properties can be purchased on the outskirts of Sydney for around half this amount, but they are located far from the city centre. Sydney's idyllic harbour side location brings problems, as much of the land is locked away in parks or reserves and there is less available for housing. The urban footprint has spread as far south, north and west as there is land available.

It is almost impossible for overseas arrivals to buy a home until they settle and establish themselves, which can take many years. This has led to a rise in Sydney's rents, which are higher than any other major city in Australia.

High rents and prices have changed Sydney's landscape. They have led to the abandonment of the dream of a landed home for many young Sydneysiders and led to a boom in apartment living. Over half of Sydney's dwellings are apartments or "home units" as the locals call them.

The new medium and high-rise apartment blocks contain gymnasiums, swimming pools and garden barbecue areas. The units are fitted out to attract renters, while their design lowers maintenance costs for investors. Many of the suburbs where this transformation is occurring - such as Pyrmont, Ultimo, Camperdown, Double Bay and Broadway - are located close to the central business district and in the urban centre itself.

What makes these dwellings ideal for investors is that prices for home units are still less than 70 per cent of those of similar sized houses.

The Sydney inner urban market is unique because there are fewer development projects in the pipeline than there are in other cities such as Melbourne even as the rental demand is far higher. Rents in these areas are escalating as a result and housing investors from Singapore can buy off-the-plan units with confidence, knowing that both the rental yield and the value of their investment are likely to rise in the coming years.

Property Crash Just a Myth

ONCE again, the apocalypse has been averted and the four horsemen have ridden off to create havoc elsewhere. Rather than the much-heralded assault on the Australian residential housing market, as has been predicted for the past five years by an ever-increasing host of international and domestic doomsayers, we are instead witnessing an orderly retreat.

There's little doubt that Australian property is likely to be subdued for at least the next few years and that values here are likely to decline. As in previous times, the property market appears to be settling in for a prolonged hibernation after a debt-fuelled run-up. But those gleefully predicting a US-style crash in the Australian property market are so far wide of the mark it beggars belief that anyone bothers to listen.

About the only place there has been a US-style property market crash in the past few years is in the US, a catastrophe sparked by reckless lending and a total failure of regulatory oversight that ricocheted around the globe in 2007, sparking round one of the global financial crisis.

Those American-style excesses (loans to borrowers with no ability to repay) were almost universally repelled in this market. As a result, we've largely avoided the after-effects. That hasn't stopped the hyperbole by an ever increasing mob of normally reputable commentators. But the facts are far more sobering.

The official figures released this week by the Australian Bureau of Statistics clearly show a downward trend in the domestic housing market. Overall, we experienced a 4.8 per cent national decline in the 12 months to the end of December. But the manner in which the declines were carved out provides the most interest. Australia may be a nation in the throes of a once-in-a-generation economic transformation, with resources squeezing out traditional industries, but there has been little evidence of that in demand for housing.

Among the biggest surprises was that Brisbane, one of the beneficiaries of the resources boom, led the housing market price declines with a 6.7 per cent drop in the year to the end of December. Adelaide and Melbourne were next. But the biggest surprise was the pullback in Perth residential real estate, shedding a whisker under 5 per cent. Unlikely as it may seem, Sydney was the best performer of all with a decline of just 2.7 per cent over the year.

Australian residential real estate is expensive on just about any measure. And it is clear it has reached a tipping point, for it has outgrown the capacity of Australians to service the debt required to buy a property. Not only that, the stronger dollar has made our property more expensive for foreign investors. But to employ that argument as the exclusive rationale for a domestic property market collapse is naive and ignores basic economic fundamentals of market operations - supply and demand.

Given the tighter lending criteria imposed upon our banks during the boom years up until 2008, the only way that we will experience an American-style property crash here is if there is a serious lift in unemployment, which would spark loan defaults and a flood of distressed property onto the market.

That's not impossible. But it is highly unlikely given our current historically low unemployment level and our place in the global economy as a resources supplier plugged into the only growth region in the world right now.

For a US-style property collapse to occur here, we would need to see sovereign debt defaults across Europe, the disintegration of the European Union and an international banking crisis that would cripple even China. And if that happens, we'll have bigger concerns than the price of our homes.

As with any market, there is a delicate balance between supply, demand and price. For those pining for ''the good old days'' when we had ''affordable housing'', it is time for a reality check.

Housing was never affordable. All that's changed in recent decades has been a shifting of the equation surrounding supply, demand and price. In the good old days, the only reason housing was far cheaper - on an average earnings basis - was credit was restricted. Up until financial deregulation in 1983, our banks had to labour under the yoke of federal regulations that prohibited them from offering home loans to customers above 13.5 per cent. Credit was in such short supply, few were offered enough cash to buy a home.

It wasn't until our banks discovered cheap offshore credit in the mid-1990s, and brought the cash onshore, that we suddenly had ''affordable'' home loans. But the cheaper credit simply shifted the price of real estate higher.

It was a windfall for the banks, for the real estate boom resulted in ever larger loans. And those larger loans bloated the earnings of our major banks, a financial perpetual motion machine that now came to an end more than two years ago.

As a nation, it's left us with a serious, but not insurmountable foreign debt problem. (That's right, it's a private, not a government, debt that is the problem.)

It also is the reason global ratings agencies are considering downgrading our banks, particularly given the threat to international finance from Europe. And it goes a long way to explaining why our banks have aggressively switched back to domestic funding, to raising their cash at home. The adjustments are in place. A crash? Don't bet the house on it.

Property Crash Just a Myth

Chinese Buyers Pick Up Property in Australia

Foreign developers made up about 30 per cent of the Australian market last year, and China took up 9 per cent of that – an increase over previous years.

The China Daily News reported that more than 1,200 apartmentswere either planned, being marketed or were under construction by Chinese companies in Australia in the fourth quarter of 2011, according to real estate firm CBRE. The Chinese mainland was only led by Singapore (37 per cent), Hong Kong (20 per cent) and Malaysia (12 percent ).

They did not offer comparison numbers for 2010.

Chinese investment is being driven by rising Chinese wealth, a desire for secure investment, and freehold laws. “Unlike in China, once a buyer purchases property in Australia, it’s theirs forever and can be passed down from one generation to another”, Melbourne real estate agent Chris Bevan told China News Daily.

Bevan said his recent sales to buyers from Shanghai ranged from two-bedroom apartments priced at $300,000 to a luxury beach-front home for $18 million around Melbourne.

He said JPDixon, the company he represents, has attended property shows in Shanghai for the last three years. “(This)helps keep our real estate and economy growing,” he said. Another factor driving investment is the Australian education system: There are some 160,000 Chinese students in Australia, and many Chinese families who can afford it would prefer to buy an apartment nearby.

It's Going to Be the Year of the Unit - Apartments Sydney

New or old, apartments will be a popular choice for Sydneysiders in 2012.

It's just possible that apartments, especially those at the cheaper end, are one bright spot in Sydney's real estate market.

Prices generally for units have performed better than those of houses during the past five years, according to RP Data - with units recording average annual growth of 5.2 per cent compared with 3.6 per cent for houses. In the 12 months to December, RP Data reports unit prices rose by 0.9 per cent, while house prices fell by the same amount.

RP Data's senior research analyst, Cameron Kusher, says units should continue to do well this year and the more affordable ones should do best, even though there will be fewer first-home buyers now that the stamp duty exemption has ended for existing properties under $600,000 (it continues for new properties).

Kusher and other experts believe there are several reasons why units will continue to prove popular. The most obvious is that in a city as expensive as Sydney, they are the cheapest way into the property market. And with rents continuing to climb and the rental market in most suburbs very tight, this creates an incentive to buy.

A director of Richardson and Wrench, Peter Baldwin, believes the rising cost of renting makes buying a unit a much more sound option at the moment. ''It will be a price-factor thing,'' Baldwin says.

''The young ones won't be able to afford houses.''

A second reason for the popularity of apartments is that Sydneysiders are actually growing to like living in them.

''There's no doubt about it, people are embracing apartment living,'' says the senior economist at Fairfax-owned Australian Property Monitors, Andrew Wilson.

Prices

One of the biggest influences on the price of apartments (and houses) this year could be decided this week. The Reserve Bank is widely tipped to announce the first of several more cuts to interest rates on Tuesday, which, if banks pass the cuts on, would make prices more affordable.

The head of real estate strategy at Macquarie Capital, Rod Cornish, says if the cuts occur, affordability will ''be getting back to 2002 levels''.

''That is going to encourage the market to stabilise first and by the second half of this year, we think there will be some mild growth,'' he says. ''[That will be] predominantly growth in the mid-price range - $400,000 to $800,000 - because that's the one that will be most affected by the cuts.''

Baldwin says two rate cuts this year would be ''kindling to light the market'' and would ''really be a fillip to anyone'' buying. But he is not confident there will be much price growth. ''If it flatlines, that's the best possible result for the [apartment] market this year.''

Wilson predicts that if the economy continues to grow this year, the market for prestige apartments, along with the rest of the apartment market, should also start to pick up.

The managing director of Meriton, property developer Harry Triguboff, is more bullish. He thinks unit prices will rise by between 5 per cent and 6 per cent this year, although there will be nothing like a boom. ''Councils never approve enough [developments] so it will just go up gradually,'' he says.

On the lower north shore, apartments under $1.5 million will be popular because prices have stopped falling and buyers can see more chance for capital growth, says the principal of Belle Property Mosman, Tim Foote. ''I'm not predicting that prices are going to improve dramatically but I think there will be activity,'' he says. His office has already had strong interest from buyers this month.

The same is happening in the eastern suburbs and inner west. In Bondi, a unit that was for sale with expectations of $520,000 to $530,000 last year sold this month for more than $540,000, says the managing director of Morton and Morton, Ewan Morton. He says the start of this year has been much busier than that of last year, which he thinks is because buyers and sellers need to ''get on with things. They can't sit and wait forever.''

Baldwin predicts the most popular suburbs for apartments this year will be those close to public transport and within easy reach of the city centre, in particular Parramatta, Ashfield, Marrickville and the area from Epping back to Meadowbank. Buyers will mainly be owner-occupiers, especially upgraders, Cornish says, while investors will be more cautious until they see the market has stabilised and prices are rising.

New v old

The senior director of residential properties at CB Richard Ellis, Tim Rees, thinks there will be a lot of activity this year from buyers wanting affordable new and off-the-plan apartments up to $900,000. But the real ''market drivers'' will be several state government incentives that encourage buying off-the-plan or new dwellings under $600,000.

One of them, stamp duty exemptions for first-home buyers, has just ended for existing properties but they continue for new and off-the-plan dwellings. Another, the Home Builders Bonus scheme, gives all other buyers a full exemption on stamp duty for off-the-plan dwellings where construction hasn't started, or a 25 per cent discount where it has. However, this scheme finishes on June 30 and Rees says this will create a lot of demand in the first half of the year.

CB Richard Ellis alone has more than 12 off-the-plan projects earmarked for sale before July, all of which are in inner and middle-ring suburbs, such as Mosman, Homebush and Macquarie Park, Rees says. So far this year, they've sold 40 apartments, a better result than this time last year, which Rees says is also a reflection of interest rates coming down and a tight rental market.

The managing director of residential for Colliers International, Peter Chittenden, says there has been consistent interest in apartments under $600,000 in the past year, something he thinks will continue until closer to the June 30 cut-off. After that, some developers might extend this exemption themselves by offering to pay buyers' stamp duty to maintain their market share, Chittenden says.

Meriton, too, will be building several hundred more apartments this year than its usual annual total of 1500, Triguboff says, in areas such as South Sydney, Rhodes, Epping, Warriewood and St Ives.

Despite this strength in new apartment sales, Cornish believes there aren't enough being built to satisfy demand and there is ''not as much new construction as there has been in previous cycles''. Most of the demand will be for established apartments, he says.
Mani's ready to enjoy the calm after the storm

Mani Thiru has been in Australia for just six months but has decided now is the time to buy an apartment.

The British-born IT worker of Sri Lankan heritage spent the past decade in the Netherlands and came to Australia last year for work. Since arriving, she has lived in Mosman, near the beach.

She wants to buy in the same area and is looking for a one- or two-bedroom apartment, possibly with a view of the water, up to $600,000.

Thiru says she usually invests her savings in the sharemarket but economic uncertainty in Europe, cuts to interest rates here, plus the high cost of renting encouraged her to buy.

''The stamp duty concessions were in place last year, which I think inflated the prices, especially towards the end,'' she says. ''It felt like there was a lot of competition last year whereas now it seems to have calmed down.''

So far, Thiru has seen several units she likes, one of which is being sold by Adam and Jasmina Vernon of Belle Property Mosman.
Investors read the signs of the times

Just a few weeks into the year and already Bahar Etminan, the editor of fashion and beauty website rescu.com.au, and her town-planner husband were pounding the pavement looking to buy an investment property.

The couple, who have a young daughter, are renting in the eastern suburbs while they save up to buy a house. They have been investing in apartments every 12 to 18 months as a way of working towards this goal and already have several investment properties close to where they live.

They started looking for their latest purchase - a two-bedroom unit, possibly with a study up to $650,000 - towards the end of last year but Etminan says the time is right to buy because ''prices have come back a bit''.

They're looking in areas that they know - Woollahra and back towards Bondi Junction, Double Bay and Darling Point, all suburbs that are close to public transport, shops and have strong rental yields and good capital appreciation, she says.

''People are talking about the market getting lower and lower but, in the price range we're looking at, I don't think it's going to bottom out,'' Etminan says.

''It seems to be a fairly stable price range and also excellent for rental returns.''

It's Going to Be the Year of the Unit - Apartments Sydney

Big Four Tighten Grip on Market With Mortgages up $175bn

THE big four banks have further entrenched their dominance in the Australian market, growing by tens of billions of dollars despite Labor reforms to increase competition in the retail banking sector.

Exclusive analysis of APRA data by The Weekend Australian indicates that in the three years from when the global financial crisis hit in 2008, the big four have grown their mortgage books for owner-occupier housing by more than $175 billion, eclipsing smaller lenders.

'Predatory' lenders seek ASIC approval June 30, 2010 (Austrlia Mortgage)

Australian LENDERS named in a landmark predatory lending case have registered as consumer credit providers under the Australian Securities and Investments Commission's new national licensing program.

ASIC is taking over regulation of all consumer lending, including credit cards, store cards and mortgages tomorrow, replacing the state-by-state approach.

Bleier Mortgage Corporation, in Double Bay, and Permanent Mortgages, in Traralgon, Victoria, have registered to become credit providers. The registrations, the first step in gaining consumer credit licences, have been made although both lenders were named in a 2006 ruling in the NSW Supreme Court about predatory lending.

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Length of Reserve Bank's interest rate pause will depend on inflation

HOW long the Reserve Bank pauses on interest rate hikes hinges on the next Consumer Price Index release due late next month.
If the June quarter CPI shows underlying inflation falling into the RBA's 2-3 per cent target zone, Glenn Stevens will be encouraged to keep interest rates at neutral for most of this year, as he seeks to manage Australia's two-speed economy.

If it doesn't, the RBA will have to again increase its public inflation forecasts to the top of, or even above, its target zone. The RBA governor surely knows this would threaten the central bank's hard-won low-inflation credibility and force him to into a restrictive monetary policy mode.

This could result in rate hikes resuming from the scheduled August 3 board meeting.

The changed form of Stevens' report from Tuesday's monthly board meeting clearly underlines the new, neutral phase of monetary policy.

His statement was one-third shorter than usual, and by avoiding the usual discussion of the domestic economy it suggests the RBA is not searching for a trigger to raise interest rates soon.

Between October last year and May this year, the RBA lifted its cash rate from 3 per cent to 4.5 per cent in six 25-basis point steps.

Stevens this week called it a "significant adjustment" from the "very expansionary settings" in response to the global financial crisis.

Neutral monetary policy now is "appropriate for the near term".

While the timing is deliberately vague, the RBA's favoured choreography is to pause for six months or so after adjusting monetary policy in a series of quick, small steps.

Stevens's statement focuses on an additional reason for the RBA to stay on the sidelines for a bit. When he lifted the cash rate to 4.5 per cent in early May, Stevens suggested the Greek sovereign debt crisis had produced "very little contagion" outside Europe.

Almost immediately, however, the Greek crisis spread dramatically to global financial markets. Further bouts of market instability are likely.

Stevens now says the new sovereign debt crisis "will need to remain under review".

But he still expects the global economy to post trend growth this year, with budget tightening weighing on soft European economies, the US recovery becoming more established and China-based Asia expanding, perhaps too vigorously.

That underpins the Reserve Bank's central scenario that high iron ore, coal and other commodity prices will fuel national income and spending, and push the economy toward its trend growth rate of 3.25 per cent or so over the coming year.

Yesterday's national accounts suggest the economy is heading back to trend growth, expanding 0.5 per cent in the March quarter and 2.7 per cent over the year. But growth remains uneven as last year's budget stimulus gives way to a new wave of mining development. Retailers are complaining about soft consumer spending.

Stevens no doubt would love to keep the Goldilocks combination of trend economic growth, neutral interest rates and target zone inflation going as long as possible.

But, while the heat is coming out of housing prices, it's not clear that CPI inflation is becoming re-anchored inside the 2-3 per cent target.

In part, this reflects double-digit price increases for electricity, gas and water required to pay for a catch-up of infrastructure investment.

The shallow downturn means the economy is operating with less spare capacity than expected. The higher dollar has pushed down import prices and allowed retailers to discount heavily.

This is unlikely to keep giving and, with unemployment forecast to edge below 5 per cent, catch-up wage demands could start pushing up labour costs. In May last year, the Reserve Bank forecast that a sharp economic downturn would push underlying inflation to 1.5 per cent, comfortably below target, by mid-2011. But the inflation outlook has worsened in every quarterly forecast since then.

A mildly disappointing March quarter CPI result forced the RBA economists to tip that prices growth would edge down only slightly to 2.75 per cent this year and next before nudging back up to 3 per cent in 2012.

That prompted the RBA's May board meeting to increase the cash rate when a pause had been on the cards.

The issue is whether the June quarter CPI, slated for July 28, will again disappoint. To maintain the credibility of its low inflation regime, the central bank can't do nothing if inflation threatens to move above target again.

The Reserve Bank's mantra is that it had to go through the deep recession of the early 1990s to break the back of high inflation.

It had to work hard after that to establish the policy independence and credibility that has underwritten nearly two decades of low-inflation economic expansion.

It may have to do the unpopular thing again to keep that credibility intact.

Source: The Australian