Is the Sydney market about to run out of steam – and if so, what markets are starting to heat up?
Interesting fact – did you know Australia has many property markets around the country that do not all move up or down as one? The Australian property market is made up of numerous sub markets around the country. Market movements will vary in each region based on a wide range of factors including population growth, interstate and overseas migration rates, supply and demand, job growth, infrastructure investment, and lifestyle factors.
For investors, to understand more it’s important to understand how markets are moving in order to invest in areas where growth potential may be stronger, where prices are likely to increase and where you can get value for money. Ideally, you want to be investing in markets which are on the rise, without being too close to the peak of the market.
Where is Sydney in the property cycle?
Sydney’s property values have experienced exponential growth in 2021. The median house price is now over $1.3 million. Compare this to just six months ago and it’s clear the Sydney market has shifted rapidly.
Our research suggests that we can expect Sydney houses to hit their peak in the next few months. Years of stagnant wage growth combined with surging prices will simply make housing unaffordable for many Sydneysiders, pricing them out of the market and reducing demand. By 2022 or earlier, we’re likely to see Sydney house prices stabilise and enter a period of much more subdued growth.
This is also in line with the cyclical nature of Sydney’s market that we’ve experienced over the last 40 years. Historically, we tend to see 5-6 years of strong performance which is followed by 7-8 years of more stagnant market performance.
If Sydney is about to enter a period of stagnation, does this apply for other property markets around the country?
While Sydney is nearing the top of the market, other markets around the country still have room for growth. For example Brisbane is a market with significant growth potential.
Typically, in the case of the Sydney and Brisbane markets, they tend to experience an inverse relationship. For example, between 2011 and 2018 Sydney’s growth outpaced Brisbane, growing by 100% compared to 24% in Brisbane. However, in the previous cycle, 2002 to 2011, Brisbane significantly outpaced Sydney, experiencing 143% growth compared to 27% in Sydney.
The reason for this inverse relationship is that when people are priced out of the Sydney market they will tend to migrate to other more affordable locations such as Brisbane. Population growth in Brisbane leads to price growth, while less demand in Sydney leads to price stabilisation and stagnation.
In Brisbane, we’ve started to see prices increase across the market, this will likely continue for some time off the back of strong population growth. Other markets, like the Sunshine Coast and Gold Coast, which also provide more affordable housing and a great lifestyle (which is more important than ever to buyers after a prolonged period of staying home during the pandemic and border closures preventing overseas travel) are also attracting an influx residents from the southern states (mainly Sydney and Melbourne) and therefore continue to grow.
What else should investors consider?
Investors should look at a range of other factors to understand different markets such as:
- Does the area and property type you’re considering purchasing attract investors or owner-occupiers? – It’s best to invest in areas which appeal to owner-occupiers as these tend to perform better and there is more competition for rentals as rental supply is limited
- Supply and demand – It’s critical for investors to understand the level of supply vs. demand within a suburb but equally as important to understand the potential level of future supply. Assessing vacancy rates is an effective way to understand current supply vs. demand levels. The future supply can be a little trickier. Broadly speaking, investors should try to avoid areas over-supplied with high-density apartment complexes as well as Greenfields suburbs with no limits on new land supply. These two types of locations are typically the first to suffer from oversupply issues with higher concentrations of investors rather than owner occupiers.
- Rental return – While property values have risen in markets such as Sydney, as a result the percentage of rent achieved compared to the purchase price (rental yield) has fallen. In markets such as Melbourne rental returns have fallen further due to extended lockdowns, however this is likely to rebound when international borders reopen and international students are allowed to return. A poor rental yield will affect your property’s cash flow and impact your holding costs
- Diversity of employment market – Purchasing an investment that relies solely on one or two industries (think some mining towns around Australia) can have a major impact on rental vacancies and prices if those industries enter a downturn. Selecting properties in locations with a diverse and growing employment market will help to mitigate this risk
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