With the Sydney real estate market slowing after nearly a decade of unchecked growth, the question on everyone’s mind is what will 2018 hold?
Despite the recent dip in property prices Sydney remains Australia's most expensive city to invest in. The reality is that all the underlying fundamentals look positive, including unchecked population growth and low unemployment, though the prospect of interest rate hikes in 2018 need to be factored into your calculations.
As an investor you are also now paying more to borrow. These two factors, alongside the ongoing lack of affordability are the most significant factors impacting property investment in Australia.
What did the property market look like in Sydney in 2017?
Although 2017 got off to a positive start for the Sydney property market, the rest of the year has been marked by a contraction, though this did not apply to all of New South Wales real estate.
Property analysts CoreLogic recorded Sydney's median dwelling value fell 0.5 per cent in October to $905,917, the first drop in 17 months. Property analysts SQM Research also recorded falling auction clearance rates, another sign the market is slowing.
A slowing market did not impact on overall growth though, with CoreLogic reporting that the Sydney market still rose by a not unimpressive 10.5 per cent for the year to September 2017 (all dwellings). Sydney is also still the most expensive capital city in Australia, though the Melbourne market is currently growing faster (12.1 per cent) with Hobart the top performing capital at 14.3 per cent in the same timeframe.
"Falling auction clearance rates are a sure sign the Sydney market is slowing"
Is the Sydney property bubble going to burst?
All the pundits say no, with SQM Research asserting that a major downturn in Sydney property prices is unlikely. Why? They believe demand is still strong, and point to continued population growth as a mitigating factor. An interest rate rise or two in 2018 may well change this however.
What regions in Sydney are popular for investors?
So where are the best suburbs and Sydney's standout growth areas for property investment? That is a tough call, though there is value and the potential for capital growth if you search hard enough.
If you are an entry-level investor then Sydney's new growth hubs like western Sydney's Greater Parramatta, Liverpool, and Blacktown are quickly becoming independent satellite economies. Properties here are relatively affordable, and offer an increasingly attractive lifestyle after significant investment in local infrastructure projects and amenities.
Liverpool's local economy will get a boost from the new airport at Badgerys Creek, while Macquarie Fields has greatly improved train and road links to the CBD. Nearby Fairfield is also worth investigating, after local transport and infrastructure improvements.
For long term growth the best areas in Sydney's eastern suburbs are adjacent to the light rail line linking the city with the University of NSW.
Here Surry Hills, Randwick, Kensington and Kingsford should all benefit from the improved local transport options. The same applies to the inner west which has become one of Sydney's property hot spots, with families and upwardly mobile singletons flocking to Petersham, Stanmore, Croydon Park and Camperdown.
Other areas to consider include suburbs that are highly connected by public transport. In this case, renters are attracted to suburbs close to a train line, and for young professionals suburbs within 1 to 5 stops from the city are on their radar, making them highly attractive options for investors. Suburbs like Wolli Creek, Marrickville, Erskineville, Green Square and Ashfield are examples of this.
Should you invest in a Sydney unit or house?
When deciding to invest in a unit/apartment or house you should choose a property based on your overall investment objectives and strategy, including how much you can afford.
Houses have tended to outperform units in the Sydney market, though they do have a higher entry price, which makes apartments a more affordable first investment. The median price of an apartment in Sydney is currently $732,321 while a house is $1,167,516.
This is against a national median house price of $636,315, with units at $476,023 - which clearly illustrates the issue of affordability you currently face buying into the Sydney market. There are not many bargains in Sydney, with only four Sydney suburbs recording median house prices below $500,000 - all in Sydney's west.
The upside of poor affordability is that more people are forced to rent, which should help keep tenant demand strong for the foreseeable future.
The upside of poor affordability is that should help keep tenant demand strong for the foreseeable future
The median weekly asking rent for both apartments and houses is currently $550, which is consistent with prices for the same period last year. The overall rental market grew by 2.5 per cent in 2016/17. Gross rental yields for houses in Sydney were 2.7 per cent, with units at 3.7 per cent for this timeframe. Rental yields — the percentage of income return over the cost of a property — are at record lows in Sydney.
Is there an oversupply of apartments in Sydney?
Other capital cities have seen an oversupply of apartment put a brake on prices and rental yields, particularly in Brisbane. Is this a factor in Sydney?
SQM's Warren Christopher believes there is no evidence of an oversupply of units, at least for Sydney's CBD. There are signs of this elsewhere, particularly in Sydney's Hills district where vacancy rates have risen above the Sydney average.
What about regional alternatives to Sydney?
Is Sydney too expensive?
Then you should also seriously consider commuter towns and regional areas of NSW, including Newcastle, Wollongong and the Central Coast, which are all more affordable than Sydney with potentially better growth potential.
Consider commuter towns and regional areas of NSW if Sydney is too expensive for you
Shellharbour posted excellent returns for 2016/17 with year on year growth of 16.7 per cent, while Wollongong recorded +13.9 per cent. Newcastle is also now on property investor's radar as a desirable investment choice, after a major rebranding and investment in local infrastructure and amenities.
QBE's Australian Housing Outlook reports that the 7 year price trend for houses in Newcastle has been 6.9 per cent growth per annum, with apartments posting gains of 7.7 per cent.
How are property prices in Sydney expected to change in 2018?
SQM Research forecasts Sydney to post growth of anywhere from 4 per cent to 8 per cent in 2018, though they also point to the likelihood of interest rate rises in 2018 as the RBA looks to cool the market.
QBE's Australian Housing Outlook forecasts that house prices will decline by -4 per cent cumulatively over the two years to 2019, while they project the median house price to be $1,150,000 by 2020. They predict the median price of units will also drop by the same figure, to $760,000 by 2020. Housing affordability is likely to be poor in 2018, with property price growth continuing to outpace wage growth.
Housing affordability is likely to be poor in 2018, with property price growth continuing to outpace wage growth
Investing in property: where should I start?
New to property investment? Then you need to have a clear understanding about what's involved in property investing.
The best place to start is to research your market carefully. You also need to identify what type of investor you are, buy and hold (long term), renovate and sell (flipping) or are you looking for ongoing positive cash flow? Then consider what type of property will attract tenants and what suburbs are going to offer solid price growth and ROI.
When it comes to looking at specific suburb level data, look at:
- How many days a property is on the market (shorter time frames indicate a 'hotter' market)
- Auction clearance rates (a high rate indicates strong demand)
- Vacancy rates (low rates mean there is strong demand for rentals)
Don't be shy to get property investment advice. People like financial advisors and real estate agents in Sydney will both have local insights to share. And when it comes to selling your investment property a dedicated tax accountant can help you navigate the often complex rules that apply, particularly around Capital Gains Tax.
You should understand the difference between positively geared and negatively geared property, and the pros and cons of each approach.
You can also use the resources on this site to help you make your Australian property investment decisions, making use of our online property reports and tips to help you find the right real estate agent.