Sydney residential: Is the party over?

November 3, 2017 / By  

The Sydney housing market has gone through a significant uplift in the last few years, buoyed by strong population growth, a decade of under-supply and recent record-low interest rates. The market has also attracted substantial investor interest from Asia.

However, the market is now clearly late in the cycle and slowing. Macro-prudential measures dampening investor lending, slower foreign demand with tighter Chinese capital restrictions and a still-significant supply cycle have all softened sentiment in the market. This begs the question, is Sydney’s housing boom over and should investors avoid the market?

In our opinion, long-term investors need not be overly concerned. We acknowledge that the market is likely to experience some further slowing in the next couple of quarters as supply levels peak and investor demand continues to soften. However, investors can take heart in the facts that:

  • Any downturn is likely to be short-lived. Supply levels already appear to be falling away sharply due to tighter development finance, so any excess supply levels should be soaked up fairly quickly. This surplus supply should also be very limited and localised given that the rental market is still very tight.
  • Some strong long-term investment drivers still exist. These include strong population growth, a rapid expansion in the rental market and a significant infrastructure programme.

A new generation of renters

Recent 2016 Census results showed that the number of renters increased significantly in Sydney over the last five years. The proportion of occupied stock rented increased from 31.6 to 34.1 per cent in Greater Sydney, an increase of 70,000 rented dwellings.

The rental market remains particularly tight, with vacancy at two per cent and strong rental growth. Apartment living has also become more commonplace, with an additional 65,000 apartments being built in the last five years.

With first-home buyers unable to break into the market due to the high prices, younger generations have become more accustomed to renting apartments in better lifestyle locations. We expect this ongoing growth in rental demand to support long-term returns for investors.

A once-in-a-generation infrastructure boom

Investors are in a strong position to capitalise on a AU$73 billion (US$56 billion) infrastructure boom in New South Wales. This boom should support economic activity for some time and create value uplift for investments in areas that are located close to these future infrastructure developments.

Major rail projects are currently underway, including the South-East Light Rail and Sydney Metro. A second Metro rail project, Sydney Metro West, will aim to connect the existing CBD with Sydney’s ‘second-CBD’, Parramatta. Plans are also underway to build a second airport at Badgery’s Creek in Sydney’s west.

The Sydney Metro project in particular, will improve connectivity across Sydney and provide excellent opportunities to gentrify areas such as Waterloo and Bankstown into high-density residential precincts. Similarly, the Sydney Metro West project would be an important impetus for the urban regeneration of the Bays Precinct.

The bottom line is that investors should not fret about Sydney’s long-term residential prospects and the short-term market uncertainty may actually provide counter-cyclical investment opportunities.

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