Market Update

Sydney continues to operate as a two tier market – Sydney’s inner and middle ring suburbs are generally performing strongly on the whole, with some areas in the Eastern Suburbs and lower North Shore increasing by as much as 30% in 2007 and further already in 2008. However many outer suburban areas have experienced negative growth, influenced more by increases in interest rates and the cost of living, which are starting to hit home owners hard and mortgagee sales are on the rise.

Auction clearance rates across Sydney in June 2008 have generally been around 45 to 50%, however again figures for the prime areas of Sydney (Eastern suburbs, North Shore, Northern Beaches & Inner West) have been much higher.

We have noticed that auction prices (for prime areas) have generally been well above the selling agent's price guides, in some instances up to 30% above. This indicates a strong demand with buyers out in full force, a shortage of properties for sale, and we suspect also underquoting by agents. In these areas it is unlikely that small interest rate rises by the Reserve Bank of Australia or independent bank rate rises are likely to dampen consumer enthusiasm and have much of an effect on prices.

According to the Real Estate Institute of New South Wales, the latest Rental Property Vacancy Rate Survey results show that rental accommodation in Sydney is becoming even more scarce. The vacancy rate for Sydney is now at just 0.8%. As a result there is upward pressure on rental prices, and rental returns are improving.  This will continue to positively influence the level of investor activity as property investment (which was negatively impacted by a previously booming stock market and changes to superannuation rules) becomes a more attractive proposition.

The recent international financial market falls will no doubt have an influence on the general economy. Credit is tightening and the days of easy "No-Doc" loans are over. However hesitancy from potential vendors has created a shortage of listings and therefore keeping an upward pressure on prices in certain areas. Listings are down around 30% from the same time last year. We have signed up many investor clients this year looking to pull their money out of shares and into a perceived safer haven of "bricks and mortar".

As buyer's agents we are finding quality houses and units are generally selling well above expectations and are often selling well before their auction due dates in the premium areas. However compromised places with issues such as darkness, bad layouts, on busy roads etc are taking a longer time to sell.

Property forecaster BIS Shrapnel in their June report, expects Sydney residential prices to increase by 18% over the next 3 years. We would expect the premium areas of Sydney to perform far better than that forecast.

Henry Wilkinson of Homesearch Solutions has been quoted in a recent issue of Australian Property Investor Magazine as saying "He won't recommend clients into cheaper suburbs just because they're less expensive. He believes the way the spoils of economic prosperity are being divided, the blue-chip suburbs have greater upside". He further adds "Your average blue-collar worker isn't really getting much extra money out of the economic boom, and that it's the professional classes (inc business management, banking & finance etc) that are reaping the rewards of the current system and they tend to live in the prime areas. I'm of the belief that the premium areas are the ones to invest in. The way society is going, your blue-collar workers aren't likely to get big pay increases" says Wilkinson.

The following are some points of advice for property buyers in the current market :

• Safe bets are harbourside & beachside areas (particularly Eastern Suburbs & lower North Shore)
• We recommend suburbs with good lifestyle, cultural amenities (cafes, restaurants, pubs, shops etc) and urban vibrancy, which have performed well & should continue to do so such as : Bondi, Coogee, Paddington, Woollahra, Balmain, Glebe, Crows Nest, Willoughby, Neutral Bay, Surry Hills, Newtown, Manly and Leichhardt.
• If buying into a unit development then it should be in an area with good facilities and lifestyle features such as restaurants, cafes, cinemas etc (or the development of). This has been a contributing factor (on top of over-development) to the fall of areas like Alexandria, Waterloo, Zetland as people are looking for more than gyms, pools & tennis courts in their blocks for their living environment.
• If purchasing a unit look for older style small blocks in more established areas rather than in large new generic complexes, where future price growth is more risky. If purchasing in a new development ensure that it is built by a quality developer and has points of difference from other developments (ie the wow factor)
• Consider suburbs with good public transport links to the city
• It is a better option to buy in a quieter street in the next suburb rather than a busy street in your more desired suburb
• Don't buy into a mixed residential/industrial suburb thinking that the businesses & factories will all be moving out soon.

Some reasons to be positive about the future of price growth in the Sydney residential property market are :

1. Interest rates are still relatively low in historical terms
2. Low inflation
3. A good level of housing loan approvals
4. Record immigration levels
5. The Sydney exodus to South East Queensland has slowed down as prices there have become expensive
6. Lack of other good investment options (recent instability in the share market, low bank deposit rates)
7. Record employment levels
8. Relatively strong economic growth
9. Land shortages in the Sydney basin
10. Very low vacancy rates for investment properties, with rents increasing dramatically and luring investors back into the market
11. Change in the threshold for annual NSW Government land tax bills for investment property owners
12. The removal of mortgage stamp duty
13. Federal Govt tax incentives for investment properties (negative gearing, depreciation, capital gains tax rates)
14. A shortage of new housing developments