Sydney Growth

Where does everyone think the Sydney growth is going to come from? Your average family can barely afford the 500k price tag on a middle ring suburb at the moment. Sorry I just cannot see where the growth is going to come from, unless you buy really well.

While I do agree Sydney is a great place to invest long term, can you really see an upswing happening so soon? I would rather not pay the shortfall. Say a 500k house rented for $400 p/w will cost ALOT to hold.

I personally think Melbourne or Brisbane is a better bet at the moment and should return at least 3-5% p/a. Yields are starting to get better as well.

 

Hi Frank,

I saw this post in another thread and was going to reply there, but am glad you pulled it into a separate thread.

Its a relatively simple matter of demand and supply really. Remember that the $500K odd is just a statistical median. There's heaps of properties above that point and heaps more below. The high end properties have never stopped selling due to a heap of wealth in Sydney's upper echelon. Multi-million dollar sales are the norm and these properties are showing strong ongoing growth. The long 80% tail (pareto 80/20) is where all the "ordinary" buyer action is. Even in this subset there is still heaps of properties at the top end and heaps more at the bottom.

At the end of the day it all comes back to yields I guess. People trade up through properties so the higher price tags don't need to be justified for first home buyers. What is important is that the yield is good enough to warrant buying over renting. This is a bit of the argument I made some time back about the "tipping point hypothesis". Effectively yields are at unsustainably low levels at the moment so expect no immediate growth. But they are seriously on the improve. Its not the price tag that you need to look at, but the affordability based on yield.

e.g. As an investor a 6% yield would suggest its a good buy in Sydney regardless of the price tag. Growth prospects would also look good on that yield and location would further enhance your potential. That yield would also signal to home buyer wannabe's that it might make more sense to buy over rent given the spread between the two is now negligable.

So in simple terms, watch the rental yield lead indicator. Rents are set to skyrocket due to record low vacancies. Once yields recover prices across the board will start to move up again. There will always be entry level stock on new releases at the urban fringe, but existing stock will rise in value.

My townhouse development in Mona Vale on completion should be yielding over 4% ($600pw on $675K valuation), but for me it will actually be yielding around 6% ($600pw on $500K cost). So there's an affordability hurdle overcome instantly.

Note that the 4% yield I showed above is the actual yield achieved in this postcode today and its on the improve. I don't think it will be long before we see the start of the upturn. Mind you that's the "upturn", not the "boom". I still reckon it will be 3-4 years of single digit growth before the basic market economics will justify another housing boom in Sydney. And you may well be right that Brisbane and Melbourne might be better bets. But my money's in Sydney as its my home market and my development strategy is much better executed in my own backyard.

7 year cycles suggest 2010 before a boom and it might be a tad longer. But 2007/08 should see a return to single figure growth in Sydney and a return of developers to the market.

Cheers,
Michael.

 

Michael

Sim must have moved it

I do agree that the Sydney prestige market will always hold reasonable well and perform double digits year in year out, there is no shortage of wealthy people. But how many people can afford a house in Longueville as an investment property?

But the reality is very few investors can afford to hold such properties, but if you can they will perform well. Even Steve's 20% above median is a very sound strategy but costs to hold can be huge.

I also agree that rents are on the rise, but at the end of the day you can only really increase the rents every 6months - 12months depending on the lease length. I've had steady rises on my properties but it definitely takes a while to get the increases even in a tight market and many of these increases get eroded by costs increasing at a similar rate, interest rates, inflation etc.

I still think it will be longer than you think to hit 5% + yields again, unless you are renovating or building (as you are). An average family, earning say 100k combined will struggle to afford much more than the current prices. I'm talking about middle ring surburbs here, ie 400k-600k..

Lets also not forget vacancy rates in Brisbane and Melbourne are lower than Sydney. I wouldn't trust BIS predictions, I don't think they have got anything right.

I will keep my money in managed funds and consider another Brisbane place soon, but Sydney still isn't for me.

 

Lawyers who work in Mt Druitt ..... ( it's actually Hunters hill - though close enough )

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Don't forget that affordability is a function of both income and wealth. Wealth may come from various places:
- inheritance
- assistance from established parents
- share market and other investments
- business start ups, etc.

 

hi MichaelWhyte
you are very correct on your analysis for me and its this barometer that I watch is not the sales market but the rental market.
why because this gives me the supply and demand numbers that you also have looked at.
I look at markets that have a underlying rental increase this gives me demand.
against whats in the market demand and from that work out growth.
people use lots of ways of working out there plan of attack and trying to find where the next move is going to be.
and remember that by the time someone say annandale is the best place to invest you have missed it by about 8 months and you are buying at tyhe height of the market.
for me if you do not have your plan in place to meet the wave at this stage in sydney you have missed the best wave there are always others but you have missed by about 4 months unless you are going to build a single house.
as it will take that long to da and build it.
keeping your money in a managed fund is not a bad idea as long as that is part of your overall plan.
with regard to how will people afford property in sydney.
it simple as they always have from return
if the return is 5% and you are paying 7.2% you cover the short fall if you can't then you should not have bought in the first place and that doesn't matter if its in sydney or moscow.
sydney prices will increase and there is for me no stopping that.
and price will creap when rents hit a all time high.
I think you will see a very interesting thing very shortly and that is an auction but not for the sale of a property but an auction of the rent of a property now that will be very interesting.

 

Sydney is and always will be a segmented market- it may well be one city but is made up of many clusters of areas/suburbs that are starkly diverse to one another in terms of not only price, but demographics, prestige, popularity and amenities. As long as Sydneysiders can afford to pay, they will, and often at great personal pain to their levels of debt. It's a popular place to live, obviously!!

Let's not forget that, whilst Sydney may seem expensive, Perth's median is second in line now. Interesting times ahead.

Frank, your perception of Sydney being too expensive to invest in is a common one but let's not forget that there are alternatives to buying a freestanding place in Longueville (as nice as it may be!).

 

I'd actually disagree with this , well at least in terms of the previous property cycle. I havn't heard it mentioned for a few years , but a prevailing wisdom was that the top of the market tends to contract to a greateer degree than the middle / lwer segments . We know several people who sold their lower end properties in the late 90's and bought considerably more upmarket properties for not a significantly higher percentage. The biggest fall I saw in the previous slump was in an up market house in Pymble Ave . Sold for around 1 mill in 1989 , then in 600's in 94-95 . Would be worth close to three mill now.

Certainly at the moment the upper end is very strong , but that reflect the overall strength of the economy. At the moment the section of the economy that is weakest is the building segment and most people in the building industry live out west and this is where we're seeing the falls in Sydney.

If there is a change in the overall strength of the economy and companies decide that they need to concentrate on their core buisnesses and not to worry about spending lots of money on Lawyers , merchant banks on looking for a new aquisition or new markets to expand into because their local market has gone to the crapper , there could be a change in sentiment that could see a whole sale loss of jobs amongst some of our highest paid. While some of them do manage their money well , some of them have very large mortgages and rely on their annual bonus to keep ahead. All depends on the financial balancing act that goes on around us ....

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