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Investors looking to buy in Sydney are facing problems such as the cooling of the market, very high property values and the lack of home supply.
As a result, many are left waiting for the next development before they enter the market again.
Three property experts have had their say on the conditions for investors and what buyers brokers might expect to see.
AMP’s chief economist Shane Oliver is one expert who believes stricter lending rules and the transition of borrowers to interest only loans are a reason investors should be selling now.
But other experts are not so sure.
To buy, hold or sell?
To buy:
Rich Harvey from property show Buying Blind said that investors are in a great position to buy, emphasising the current low values and the rising demand in the market.
He said, "The Sydney market has transitioned into a correctional phase and prices have softened after the boom. On the demand side, there are waves of downsizers, upsizers and first home buyers wanting to get into the market.”
Harvey pointed out that population growth, mainly driven by migration and jobs growth, will increase demand. Restrictive planning rules, meanwhile, will continue to limit supply growth in Sydney.
He also noted that there was no need to worry about the large volume of new dwelling approvals recorded lately.
He said, "These are likely to be absorbed in the next two years and a deficit in supply [is] likely to return. The attraction of buying now is that vendors are far more negotiable on price as there is less competition amongst buyers."
Finally, Harvey suggested that the capital of New South Wales was also ideal for long-term investments.
He said, "If you are taking a long-term view of the Sydney market, then the same fundamentals of investing for growth will apply and will be underpinned by extensive infrastructure expansion, diverse employment opportunities, population growth and a world class city.”
To hold:
Looking at things with a different perspective, John Lindeman of research firm Property Power Partners had some reasons for opting to hold in Sydney.
Concerned about the high costs of homes in the city, Lindeman said that people should wait until a hike in salaries happen.
He said, "Sydney’s population is growing at its fastest rate since the late Baby Boom years and most of our new households will be renters for some time, because four years of high price growth has made Sydney’s housing market unaffordable for potential first home buyers.
"This will lead to a 'mark time' market in Sydney until wages and salaries rise sufficiently to generate another round of price rises or governments introduce new first home buyer incentives. Until these occur, rents will rise, prices will hold and so should property owners and investors."
To sell:
On yet another side of the coin, AMP’s Chief Economist and Head of Investment Strategy Dr.Shane Oliver advised investors to sell now.
Noting that Sydney home prices have already dropped around 5 to 6% from their high in August 2017, Oliver said that he expects this trend to continue.
He said, "The past 20 years have seen property prices go from around 20% below their long-term trend to nearly 30% above, average price to income ratios roughly double to around 8-9 times, and rental yields fall to around 1% after allowing for costs.
“This has gone hand-in-hand with a surge in the ratio of household debt to income from the low end of OECD countries to being at the top and until recently it’s been associated with a high share of new loans going to interest only borrowers. As a result, the Sydney property market is highly vulnerable."
Adding to these factors are stricter lending rules, the transition of a large number of borrowers from interest only loans to principle and interest loans, poor affordability, a "surge in the supply of units as the cranes top out," falling price growth expectations, Fear Of Missing Out (FOMO), and Fear Of Not Getting Out (FONGO). This confluence of factors is likely to cost the market another 10% or so of price decline over the next two years, according to Oliver.
It is also very important to keep in mind that increased lending standards help to heighten this uncertainty. Similarly, increased risk was observed among investors who re-evaluate their holdings as capital growth expectations decline. From then, these investors realise that rental yields alone are not high enough to deliver decent returns.
Oliver also discussed how falling rents and increasing vacancy are consistent with the background of a vulnerable property market – where the number of investors is at peak and unit supply is expected to grow.
"The old common sense investor adage “buy low, sell high” would be consistent with selling Sydney and buying property in bombed out cities like Perth or in other parts Australia that have lagged [behind] Sydney," he concluded.
In the end, the future of one’s investment lies in his or her hands. Make careful choices and own them.
