Cashed-up property buyers who have been savvy enough to wait on the sidelines for sanity to return to the market may find good buying opportunities later this year as the frenzy in Sydney's property market exhausts itself.

Experts are divided on whether prices will drift lower during the next couple of years or drop sharply as a result of a stampede for the exits by buyers who charged into the new apartment market in search of quick capital gains. Forecasts range from a significant drop of 15 per cent across the board during the next two years to an expectation that house prices will grow 8 per cent and units up to 5 per cent this year.

The market is proving hard to read. While the auction clearance rates for the weekend before last were down 13 per cent compared with the same period last year, last weekend's clearance rates shot back to 82 per cent – where it was a year earlier.

For apartments, the auction market is performing particularly strongly with a clearance rate of 88 per cent for last weekend, compared with a clearance rate for apartments of 83 per cent for the same weekend a year earlier. "If the clearance rates continue at these levels then the property market is going to be stronger than we have all anticipated," says Australian Property Monitors' head of research, Louis Christopher. He says many record prices were achieved at the weekend and the "buyers are out there". However, Christopher cautions not to read too much into one weekend of auction data.

He says a few more weekends of data is needed before too many conclusions are drawn.

Housing finance figures for December, which have just been published, show that "substantial life remains in the housing market", says CommSec's senior analyst Craig James. New housing loans (housing finance commitments) in December rose, by 3.8 per cent, over November, the largest increase since June 2001.

"Overall the latest figures confirm that the housing market is slowing rather than slumping," says James.

"Both the flaps and landing wheels are down in anticipation of a soft landing for the housing market."

He says home buyers are clearly not being frightened away from the housing market by prophecies of doom.

And with good reason, he says. Interest rates remain near 30-year lows and the job market is strong. Growth in Sydney property prices did, however, slow in the last quarter of last year.

Property researcher Residex says house prices for the quarter in the greater Sydney metropolitan area (which includes the Blue Mountains) rose by 2.92 per cent. For units, the rise was 1.87 per cent. For 2002, the growth was 16.43 per cent for houses and 10.91 per cent for units, down from 23.6 per cent for houses and 13.75 per cent for units in 2001.

However, Residex's chief executive, John Edwards, who has been researching and collecting price data for 20 years, doesn't think a crash in prices is on the cards.

"It is not a disaster at all. The market is slowing as we thought it would," says Edwards. "There will not be any hard landing in the housing market in any sector."

If there is a difficulty in the Sydney housing market, says Edwards, it will occur later this decade – somewhere between 2007 and 2010.

The cause, he says, will be higher interest rates in response to higher inflation due to wages pressure. Edwards is forecasting that prices will rise by 8 per cent this year and apartments by "a couple of percentage points" less than houses. So would he buy an inner-city apartment right now?

"No. Total returns [rent plus capital gains] are not likely to be high enough when compared with alternatives such as houses and land, where there is not the same oversupply problem," he says.

While he thinks the prices of the established apartment market will rise slightly this year, he has a negative view of the prospects for off-the-plan apartments. "They are not a good idea at all in this market," he says. Off-the-plan apartments tend to have a premium built into their prices and this could easily fall if developers come under pressure to sell, he says.

For the established apartment market, the risk is less.

Empty nesters, he maintains, who are the "predominate" investors in inner-city apartments, have sufficient free cash flow to hold on and not have to sell, despite facing yields as low as 4 per cent.

Most property investors expect a yield (rent as a proportion of house price) of about 6 per cent. But Residex is out on a limb with its optimistic view. Other forecasters think that the market is in for a correction, if not a crash. Mark Rider, the chief economist with UBS Warburg, is sticking with his research findings of last year showing Sydney property prices about 15 per cent too high. "We have vacancy rates in Sydney and Melbourne that we have not seen since the last recession," says Rider. Vacancy rates are usually about 2.5 per cent but are running at 4 per cent.

BIS Shrapnel is particularly bearish on inner-city apartments. Angie Zigomanis, a senior consultant with the property forecaster, says inner-city apartments are rented by a fairly narrow market. BIS Shrapnel has found that most tenants in inner-city apartments are young professionals working in the city.

Zigomanis believes that the slowing of employment growth in the information technology sector since 2000, and more recently in financial services, has meant a reduction in demand for inner-city rental apartments.

He points out that many apartments are sold "off the plan" for up to two years before completion.

While developers are building fewer dwellings, it will take some years for the supply to fall back into line with demand. BIS Shrapnel says that a further 4100 CBD apartments will be completed in the year to June 30, 2004, and is forecasting a fall of 10 per cent by the end of 2005 within a three-kilometre radius of Sydney's CBD, with prices recovering in 2006.

Investors should keep a close eye on the auction clearance rates during the next couple of weeks, suggests Zigomanis. "I see bargains among some segments of the apartment market," he says.

Simon Tennant, the chief economist at the Housing Industry Association (HIA), disagrees.

Unlike our other forecasters Tennant thinks that the new "lifestyle" apartments will probably hold their value. "The developers are saying that they are still able to sell them," he says.

Tennant believes that vacancy rates of new apartments will stay low, but expects the vacancy rates of old apartments to climb higher.

"What you may find is that investors with 10-yearold apartments suddenly see their yield go to 2-3 per cent," says Tennant. "We could see a large number of similar units coming onto the market at the same time.

"We are talking about the possibility of bargains and investors should be keeping an eye on older units."

Sydney's population growth and NSW Government restrictions on the release of new land on the city's outskirts will underpin the continuing strong performance of the house and land market. "If you have land in Sydney you are bullet-proof, because that is one of the biggest constraints on development in Sydney – a lack of dirt," says Tennant.

A recent HIA/Commonwealth Bank research paper shows that, on average, payments on a new Sydney mortgage are about 40 per cent of after-tax income – the highest ever.

Buyers can't afford to pay higher prices, says Tennant. But he says that does not mean that prices for house and land will fall – only that prices are unlikely to rise much further during the next two or three years. He predicts that during the next few years, Sydney's middle- and outer-ring suburbs have the best chance of sustained price growth.

There will be nothing like the high double-digit annual returns of the past three or four years, but a steady 8-10 per cent growth during the long term will be sustainable.

But Brett Johnson, the managing director of Quartile Property Network, is the most bearish forecaster of all. "The overall trend is that we are clearly moving into a full-scale downturn," he says.

What happens in inner-city apartments cannot be isolated from the rest of the market.

Johnson says investor activity has been high, as it always is towards the peak of a boom.

But this time around in Sydney, investors are concentrated in inner-city areas. "I see a fall of up to 20 per cent in the inner-area, higher-value markets, including houses, over the next two years," says Johnson.

By "higher value" Johnson means the eastern suburbs, inner west, lower North Shore, much of the northern beaches and some of the Sutherland Shire, near waterways.

"Properties with values of more than $700,000 will be in dangerous territory and the higher you go the worse it gets," he says.

Unlike other forecasters, Johnson does not think that the rest of Sydney, including middle, and outer, suburbs, will escape unscathed.

He forecasts a 10 to 15 per cent fall across the Sydney metropolitan area during the next two years.

This means there will be bargains among inner-city apartments for investors. "But they should wait 12 to 18 months before we really see something that looks like the bottom, bearing in mind that the recovery will be a couple of years beyond that again," he says.

"So, there is no rush. There is no urgency."

Shrewd purchasing takes off

‘‘Everyone is confused about what to do with their money but I reckon it is more frightening to do nothing than something," she says.

Shaw is ‘‘very against" shares and doesn’t like the idea of handing her money over to a financial adviser. She likes property because she retains control and it’s an investment that is easy to understand.

‘‘I am just an ordinary person with a full-time job who has managed to do well from property," she says.

But that doesn’t mean that all property is a winning investment. ‘‘I say that people who buy in Cairns are buying a house and not investing." She buys in areas like Mosman because of its high demand with renters and its good capital appreciation. One of the Mosman units she bought four years ago for $265,000 was recently valued at more than $500,000.

Shaw is prepared to pay a little more than she thinks a property is worth to snap it up before auction. She has noticed a slight cooling in the market this year. She had to drop the weekly rent on her one-bedroom unit that overlooks Middle Harbour to $295 from $340 last year. She has also noticed that property sellers are prepared to accept lower offers, which a year ago they would have rejected.

Beach buy begins wave of solid investments

‘‘I was tired of procrastinating and purchased the property on the first day of looking," says the information technology professional. Troselj got into the market just as the property boom hit its straps.

Then, 14 months ago, he bought into an off-the-plan development, the Forum West apartments, in St Leonards. ‘‘I was a bit nervous about it and looked around for eight months before buying," he says. Even though he thinks that the new apartment has not produced great returns, he is confident that it is still worth more than he paid for it.

Troselj says the rent being earned on the Narrabeen unit has not risen in the three years he has owned it.

He is not fazed. A few weeks ago he bought a third property, a free-standing house in North Balgowlah, which he and his partner will live in. He says house prices never really go down. ‘‘They seem to pause," he says.

Reasons can always be found for staying away from the property market, but Troselj says he is confident that his property purchases will prove to be solid investments over time.

  Printer friendly version        Email to a friend