By Steve Waters
New data reportedly shows prices flat-lining in Sydney but it’s too early to call the peak of the market in my opinion.
CoreLogic data for April showed no growth over the month and 4% over the quarter. The results were the weakest since December 2015.
But what do these numbers really mean?
One month is not a trend
The latest data shouldn’t be viewed as any more than a snapshot of one month’s results, which also had two public holiday periods in it, including Easter.
While there is some negative market sentiment, and a loud media push to cool down prices in Sydney, it takes a lot more than one month’s results to prove that a slowdown has started.
All of the levers that are being pulled by the government regulator, as well as lenders ramping up rates for investors in particular, take much longer to impact the market generally.
People are expecting an instant result but it’s something that needs to be gauged in three to four months’ time.
The only way that you’re going to get an instant result is if you hike up the cost of money by about one percentage point – then you will have an immediate result.
So, I think it’s premature thinking at the moment.
Investor loans already higher
Interest rates on investor loans have been increasing over the past six to nine months, independently of the Reserve Bank, as lenders try to cool down investment activity.
Yet, I don’t believe that these rate hikes have had much impact on the market.
However, they hopefully will over the medium-term because sophisticated investors desire a more normalised market than what we’ve experienced in Sydney and Melbourne over the past three years.
As for long-term investors, their home loans are still a lot lower than they were two years ago – let alone 10 years’ ago!
The only buyers that may be effected by higher investment loan rates are new Sydney and Melbourne investors who perhaps have over-extended themselves financially to start off with because of a bad case of FOMO (fear of missing out).
Sydney is a tale of multiple markets
The Western suburbs have probably peaked, as I mentioned in my previous Sydney market update Click here.
The more affluent areas such as the Eastern Suburbs and Northern Beaches are still firing because there’s plenty of demand. There also remains huge demand from owner-occupiers in the Inner-City as well.
The Western corridor is starting to seeing a change in demand from investors to owner-occupiers due to affordability.
The North-Western corridor is performing strongly, especially house and land packages because of new supply coming online and its relative affordability.
I believe the Sydney market will start to see numbers that reflect a slowing down in turnover. That doesn’t mean that prices will soften necessarily but transactions may start easing, however, that will take months to come to fruition.
From an investors’ point of view, I don’t believe the Sydney Metro area is a market they should be focusing on.
The greater basin – such as Wollongong, the Central Coast and even Newcastle – can offer some investment opportunities based around affordability, returns, and the potential for capital growth and in particular, large blocks of land.
If investors are only interested in buying in their own “back yard” – which is not the best strategy – then they’ll have to go South or North to get any type of decent cash flow.
As I’ve said before, I believe that there are better opportunities in Brisbane and parts of Adelaide at the moment.
I think we will start to see a softening of the Sydney market, however some markets will continue to perform well such as acreage in the North-Western and Hawkesbury corridor, which is starting to see a rush on prices.
In the immediate term, house and land generally will hold up well and I doubt prices will go backwards at all, but they might flat-line.
What’s ahead for Sydney?
The key to the Sydney market is lending so unless interest rates are ramped up significantly, which is unlikely to happen, in combination with stronger lending practices, the market is likely to cool down in the months ahead but it certainly won’t crash.
Sydney remains our most populous and most popular city so its investment fundamentals remain sound, whether it’s a hot market or not.
Sure, investment activity might be hitting around 50% there but demand from renters is also extraordinarily high.
So, perhaps, instead of market intervention to try to slow down investor activity, we should view it as further evidence that Sydney is growing up to be an international city where an increasing number of people want to live.
By Steve Waters