Sydney Property Market - The Past & The Future
by John Hopkins, Executive Chairman
THE PAST - Settlement of Sydney
Up until the last decade, comparable property in Sydney was undeniably the most expensive market in Australia. Sydney has generally been a minimum of 10 to 20% more expensive than Melbourne, Australia’s next most expensive residential market.
A primary reason for this differential is the fact that Sydney was fundamentally settled and developed about 50 years before Melbourne. Even with Victoria’s gold rush of the mid 1800’s, which established the southern city as the internationally recognised ‘Marvellous Melbourne’, Sydney was, and probably still is, at the heart of the momentum of the development of Australia.
From a property perspective, this early European settlement was significant in establishing value and equity in the various local residential markets that form the total Sydney market and, in turn, Sydney became greater in value than any other residential property market in Australia.
Through the 1980’s, 1990’s and into the early 2000’s, Sydney had solid residential property market; and that price differential was evident.
There are four primary issues which have been at play, which have been at the heart of establishing Sydney's residential property markets.
Firstly, Sydney is a magnificent city. It has a national and international reputation that precedes it; with the city offering its Harbour and other waterways, cultural and entertainment amenity, beaches and the Blue Mountains, which all add to an exciting and wonderful lifestyle for its residents and visitors.
Secondly, add to these features the size of Sydney’s GDP, which is larger than Singapore, Honk Kong, New Zealand, Thailand and Malaysia. Sydney is the hub of Australia’s economic activity, with growth of 4.25%, which is .85% above the national economic growth level. In addition to this level of strength, New South Wales, with a population of 7.1 million people, has the largest state economy in Australia, which is presently representing 32% of the Australia’s GDP. As the capital city of this strong state, Sydney is the benefactor of all this activity.
Thirdly, continuing and substantial population increases have created for Sydney the largest population base in Australia, with 4.4 million people; this has created Australia’s largest residential property market.
And lastly, constraints geographically have impacted Sydney’s ability to expand. Specifically, these constraints are the northern waters, Hawkesbury River, the harbour and middle harbour, the Blue Mountains to the West, the ocean to the west, Botany Bay and the national parks to the south. All of which have necessitated a concentration on the property that exists within those features. That’s not to say Newcastle, Wollongong or even Shell Harbour aren’t part of the expansion and over flow of Sydney’s property market; because they are.
THE PAST - Mid 1990’s to 2010
History tells us that all organisations and communities go through cycles of success and happiness through to failure and unhappiness.
If we look to Melbourne in the late 1980’s to the early 1990’s, the city was in a dismal position. Politically, it was struggling; economically, it was in dire straits. It’s safe to say Jeff Kennett almost single handedly pulled Melbourne, and the state of Victoria for that matter, out of the mire. Now look where Melbourne is today; a great success story, with its property markets benefiting.
Sydney, on the other hand, has been in the political and economic wilderness since the mid 1990’s.
This has been at the heart of why Sydney’s residential property markets have been lack lustre and struggled. Sydney’s property market has experienced low growth in both capital value and income, so much so that Sydney is now fundamentally at parity with Melbourne property values.
This period of political and economic ‘wilderness,’ has created an upward momentum in Sydney residential property market. We can now start to look forward to the next 5 to 10 years with a confidence of growth.
THE FUTURE
There are four main points for us to discuss in terms of the future of Sydney's residential property market.
- Often, there is an intangible response to a down cycle, which comes in the form of a natural countercyclical up cycle. It is happening now; you don’t have to wait for it to start or speculate when it will happen, because it’s already here; the property industry is dealing with it as I write this communication.
- During those low years in Sydney, and as a subsequence of the drama of the GFC, there was a substantial lack of confidence in the profitability and risk factors of providing new dwellings; that is, market risk and planning risk. Developers, and their banks for that matter, weren’t game to buy sites for development. The consequence of this lack of confidence and reticence to purchase has been the build up of a major lack of supply in Sydney. Again, it can be seen in the market today, particularly in those popular inner urban locations where the markets are strong.
- Continuing substantial population increases have been occurring due to much needed immigration and birth rates. Together, these population increases are predicted at a rate of about 1.2% per annum of Sydney’s present total population; that is an annual increase of about 53,000 people each year, more than 1,000 people per week.
A consequence of the combination of these three issues is realised in the NSW Department of Planning's recently released paper titled ‘Sydney towards 2036.’ This paper predicts 770,000 apartments and houses will be required to house the forecasted 6 million person population of Sydney in 25 years time.
- BIS Schrapnel estimates there is currently an undersupply of 112,300 dwellings in Sydney; this represents the equivalent of about two years of demand. There is, and will be, a huge undersupply of residential dwellings which may bot be good for the community, but secures you as a property investor.
THE FUTURE - Where and What?
There are two important issues in regard to the future of Sydney’s property investment potential.
1. Best Inner Urban Major Metropolis from a demand, popularity and opportunity point of view
Firstly, residential investment property you purchase must be inner urban. Fundamentally, in regard to all major metropolises of the world (with a few exceptions), individuals will compete to have all those amenities that inner urban has to offer. Consequently, inner urban is where you will experience the greatest demand of both tenancy and sale; it is therefore where you will experience the greatest growth of both capital and income.
This general phenomenon is correct for Paris, New York, London and Tokyo, as it is for Melbourne, Sydney and other cities.
In addition to the above, specifically for Sydney, there has been a dearth of activity by politicians and the powers that be, in an attempt solve the city’s infrastructure problems; particularly, from a transport perspective. To be accurate, the powers that be have nearly left their run too late to resolve these major looming transport constraints. In the coming years, as those infrastructure issues become more acute, quality residential property in the correct inner urban areas will be even more sought after, as a result of Sydney’s slow response to these matters.
Those best inner urban area in Sydney are the eastern suburbs out to Bondi, down Randwick and Botany, then across to Marrackville. The south west and inner west. The lower north shore from Lane Cove to Chatswood, across to Manly and the northern beaches.
2. Medium-to-high density residential property
Due to the strong demand for inner urban property, and its relationship with affordability, there is an acceptance of medium-to-high density property.
Also, as a result of demographic changes, and following past world circumstances, there has been an increased demand and acceptance of smaller accommodation in Australia’s major metropolis property markets. This has been accepted by both owners and occupiers; for apartments, townhouses and small houses in inner urban locations.
Those demographic changes include the fact that people are marrying later, they are having fewer children per family, there are more separations and people are living longer; all of which increases demand for smaller accommodation.
Added to which, as a long term investor, it is much less problematic owning smaller accommodation in good condition, in terms of maintenance and tenancy issues.
IN SUMMARY
- Buy medium to high density property in the best inner urban areas of Sydney that I have mentioned.
- These markets have a great deal of upside for the immediate future, and for the long term will provide continuing strong demand of both tenancy and sale.
- The above will provide you, the investor, with appropriate levels of Returns, Security and Flexibility.
For more information, or to arrange an appointment with a John Hopkins Property Investment Adviser, please contact our Client Liaison Officer on 1300 726 082 or click here