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Sydney in midst of residential market recovery

October 22, 2013 / By

Recovery is in sight for the Sydney residential market. Rising demand from intending home-owners and investors, including many offshore-investors, is colliding with a long-term under-supply of accommodation, to drive up dwelling prices and recently lift auction clearance rates to 72%, the highest level recorded in a decade. Nor is the action all on the demand side of the market. Offshore developers from the Asia-Pacific region, including China, have arrived and are looking to cater to local and offshore demand for apartments.

Sydney’s housing recovery follows a long period of under-performance. Matching the slow growth of the New South Wales (NSW) economy, Sydney established house prices rose by 19% between 2006 and 2011, compared with the national average of 30%, and a 45% increase in Melbourne house prices. Since December 2011, however, Sydney house prices are up 9% compared with 6% nationally, and the pace of activity seems to be accelerating.

Sydney clearly has some catching up to do, and there are grounds for thinking this process has just begun. The Sydney residential market is under-supplied. In the past five years, dwelling commencements in NSW have totalled 151,000 or 20% of the national total, well below the long-term average of around 33%. In comparison, Victoria reported 253,000 commencements over the same period.

There has been a significant rise in apartment development in inner city areas of Sydney over the past five years. This is a function of planning policy, conversion of commercial / industrial property for residential uses, population growth and a structural change in buyer preferences. The ‘grey’ cohort (people aged 65 years and over) is to grow at twice the rate of overall population over the next decade, further driving demand.

As a further stimulus to demand, home mortgage rates are at multi-decade lows. And in the Sydney housing market, which is still the most expensive residential market in Australia, home mortgages tend to be large. So the demand for homes and apartments in Sydney is particularly sensitive to changes in home mortgage rates. The recovery in the share market has further bolstered household balance sheets, encouraging Australians to revisit residential property as an investment option.

Forward looking indicators are encouraging. The NSW economy is expected to show improvement, with potential positive impact on the housing sector. Employment growth is expected to be subdued in FY2014 but the rate of job growth is forecast to pick up from FY2015 onwards.

In recent years NSW has been exporting young blue collar workers to the expanding Queensland economy where lucrative jobs were on offer in the mining industry and house prices were much lower than in Sydney. Many of these inter-state migrants were potential first-home buyers, explaining in part why house price growth, particularly in the outer suburbs, has been subdued. But inter-state migration is slowing as the mining boom subsides and Brisbane house prices have been catching up with the Sydney market.

And, of course, Sydney has always been a magnet for international migration. As a result, the two residential sub-markets likely to show most activity over the next few years are the outer fringes of the Sydney metropolitan area and inner Sydney City where migrants and students tend to congregate.

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