Outer-suburb markets could halve in value

Changes to Australia’s real estate market will be felt most harshly in Sydney’s booming outer suburbs, according to two experts, but just how drastic will the ensuing price correction be?
Changes to Australia’s real estate market will be felt most harshly in Sydney’s booming outer suburbs, according to two Suburbs in traditional mortgage belt areas – including Sydney’s Penrith – are likely to suffer most from any future rise in interest rates – as overextended homeowners and investors grapple with increased repayments and reduced demand.
Speaking to Smart Property Investment’s sister publication Real Estate Business, CEO of Century 21 Real Estate Group Charles Tarbey highlighted the current exposure risk of buyers in markets such as Penrith, with particular regard to off-the-plan developments.
“A property in Penrith [Sydney] that was $300,000 two years ago, is now selling for $700,000. It could just as easily go the other way, particularly if interest rates climb,” he said.
Sydney’s western regions have boomed in recent years, fuelled by investors and homeowners pushed out of the inner-city and increased infrastructure investment – but buyers failing to account for future rate rises in their repayment calculations are now at particular risk, according to Mr Tarbey.
“In 24 months’ time, if you’ve based everything on your salary today and the interest payments today, and the interest rates go from 4.5 per cent to 6 per cent, and the valuation comes down from 100 per cent of what you purchased it for to 90 per cent of what you purchased it for, there could be a very serious issue looming.”
Victor Kumar, director of Right Property Group, agrees that a rate rise will have an impact on the level of supply in the market, and subsequently, house prices – as people struggling to meet their repayments are forced to sell or have their homes repossessed.
“If interest rates do go up, certainly people would have issues with repayments because right now everyone’s basing their interest at five per cent and they’ve bought these properties without taking the impact of rate rises into consideration.”
“Certainly in the Penrith area and all of this mortgage belt area it will be felt a little bit more,” Mr Kumar said.
The tables have already turned in Penrith, according to Mr Kumar, with the supply of homes now outpacing buyer demand.
Investors also shouldn’t be surprised to see an increase in mortgagee sales in affluent areas close to the city, according to Mr Kumar.
“I believe that in the so-called ‘blue-chip areas’ as well and the inner-city ring it will be felt a lot more because people have upgraded and bought properties that are very easy to hold on to because of low interest rates. So obviously the increase in interest rates would have a stronger impact on a close to a million-dollar loan as opposed to a half-a-million dollar loan.”
And the Penrith area may just have a saving grace in the form of a high-profile infrastructure project – which should curtail any significant price decreases.
“You’ve still got a catalyst in the area which is Badgerys Creek – and Penrith and all of these areas are fairly close to that. If you take that catalyst away there would be a more significant impact, but I don’t believe it will be as big a correction or slowdown as everyone is touting it to be,” he explained.