Sydney Property Insights - January 2022

Welcome to this month's Sydney Property Insights newsletter. This month, I look back on the performance of the Sydney property market in 2021 and also provide a roundup of what the experts are forecasting for 2022. Finally, I'll give you my thoughts on what I feel will be the main things to watch out for this year.

The year that was - looking back on 2021

2021 was a year like no other for the Australian property market, with some of the strongest property market growth on record. According to Corelogic, Australian property prices grew 22.1% last year, with Sydney up 25.3%. The AFR reports that Sydney house prices grew by an unbelievable $1,000 per day over the year.

One of the key differences to previous property booms was the general uniformity of price growth across most parts of the country. Whilst houses noticeably outperformed units in most markets, it was rare to find a location that didn't see strong performance at a headline level.

Whilst most locations around Australia performed well, inner-city units were a standout under-performer. Many of these markets also suffered from a rental perspective, with much of the usual tenant pool still absent (eg international students). There are some green shoots starting to appear however, with recent border openings seeing some workers and students return to Australia. As the borders continue to open to more people, I expect demand for these properties to gradually increase. In Sydney, vacancy rates for inner-city apartments have decreased in recent times, however are still relatively high by historical standards.

The Sydney Property Market in 2021

As noted above, Sydney property values increased by 25.3% over the year. A convergence of factors helped push prices higher, including low interest rates, substantial amounts of government stimulus, and an increased household savings rate (which has averaged around 17% since the June quarter 2020, according to Bill Evans from Westpac). At the same time as demand increased (and the amount people had to spend increased) supply decreased. The result was the biggest boom in property prices seen in decades.

As we can see from the graph below, the Sydney property market has performed very strongly over the last 2 years...

... however, in recent months the pace of price growth has decreased.

The above graph shows that even though prices increased in every month during 2021, the pace of change steadily decreased as the year progressed. A key driver of this was a noticeable increase in supply which came onto the market, particularly from around September/October.

According to NAB Economics:

Since the first week of spring, total advertised stock levels have risen by 41% across Sydney, providing buyers with more choice and less urgency.

On the ground (I'm predominantly focused on the Inner West), I noticed fewer people at opens, slightly more realistic price guides, and an increase in properties being withdrawn from auction. Seasonality plays a part here, however it was clear that the momentum had shifted as we approached the end of the year.

“The heat is already out of the market. You might see prices increase a little [over 2022], but you won’t see them increase much.”

Chris Richardson, Deloitte Access Economics (source: smh.com.au)

So, where to from here?

I'm not one to blindly follow forecasts, particularly when so many forecasts proved so wrong over the first two years of the Covid outbreak. That said, they provide an interesting starting point to help get an idea as to what might be in store for the local property market this year.

The below graph provides a summary of the expectations for growth in the Sydney property market over the next 12 months, according to the Big 4 banks. It's noticeable how consistent the forecasts are, at around 6% for overall dwelling price growth. What's interesting is the divergence in thinking for what's in store for 2023. That's not unexpected however - the further out the forecast, the more unknowns creep in.

(Sources: ANZ | CBA | NAB | Westpac)

It's worth also considering forecasts from outside of the Big 4 banks. One of the most respected property research houses is SQM Research, led by Louis Christopher. Louis and his team have provided detailed forecasts for the Sydney market for 2022, which is shown below:

Source: SQM Research

What I like about this approach is that it the clearly sets out the scenarios that have been considered, including options for intervention by the RBA, and a potentially more aggressive APRA policy agenda (more on these later).

These forecasts are representative of expectations of the Sydney property market as a whole. Sydney is an incredibly diverse city, and the property market is no different. At different stages of the growth cycle, certain segments perform differently to others. This was evident in 2021 with the divergence in performance between units and houses. I like to keep an eye on market expectations, but I'm also very conscious that an individual property or suburb can perform quite differently to the market as a whole.

Moving forward, it makes sense that price growth can't continue at the levels seen in 2021. The supply/demand balance has partly swung back toward buyers, however property inventory is still below long-term average levels, despite recent increases in available stock.

Secondary properties, such as those on main roads, are less likely to attract the same interest that they would have in 2021. Some properties, which tick all the boxes, are likely to continue to see some eye watering results, however I feel the number of these will be far fewer than what we saw in 2021. It's still early days for the local property market in 2022, but based on the first two weekends of opens, the interest in properties in my part of Sydney is more 'patchy' than it was in 2021. We can't read too much into this yet, as a lot of people are still on holidays - February will provide a more reliable barometer as to what we might expect moving forward.

Key themes for the Sydney Property Market in 2022

The below is what I feel will be the key factors most likely to impact the Sydney property market this year. These have generally been widely covered in the media, and none of these will likely be a surprise to most readers. However, I feel it's helpful to list them out to provide some context as to what we might see this year:

• The impact of any new variants of Covid-19, and what impact these may have on consumer sentiment, workforce availability and supply chains across the country and globally. Any further lockdowns that disrupt open homes and/or auctions would also have an impact.
• The general turbulence typically seen in an election year. Federal elections can often have an impact on transaction levels (and sentiment) in the lead up to the election, particularly if there are policies which may materially impact the housing market. This year doesn't have the same backdrop as the 2019 election, with the abolition of negative gearing not on the table, however it's still a consideration.
• Interest rates. The RBA continues to argue the case for no increase in interest rates in 2022, however any continued inflationary fears may see this stance adjusted.
• The continued re-opening of Sydney to international migration. This is of particular importance to sectors that were heavily impacted by the departure of international students and key workers.

“As international borders re-open, rental demand is likely to be the main beneficiary, rather than home buying demand, especially across the inner city rental precincts popular with students and visitors”

Tim Lawless, Corelogic

(source: The Property Tribune)

• Increasing affordability concerns across the Sydney market, which are reported to be at their lowest level in a decade
• Stock levels. Listings increased in the latter part of 2021, and this helped take some of the stream out of the market. A continuation of this trend would see increased options for property buyers, and help keep a lid on further price increases. As always, stock levels need to be analysed at a local level. In a city as diverse as Sydney, property inventory can be high in some parts and very tight in others.
• Any further APRA intervention, in addition to the recent 0.5% adjustment to the minimum serviceability buffer introduced in October 2021.

What's coming up in future newsletters

In future newsletters, I'll look to provide regular insights on the Sydney property market, and provide some deep dive analysis on topics such as:

• A new take on the age old debate of units vs houses, and what it means for Sydney homebuyers and investors.
• A discussion around whether the 'exodus to the regions' trend might reverse in 2022, and what impacts this could have for the Sydney market.
• A look at Sydney's rental market, with a particular focus on inner-city suburbs that have been heavily impacted by Covid-19 related demand reductions.

Until next month, stay safe, and feel free to reach out if you have any particular questions or feedback, or if you'd like to see anything particular covered in future newsletters.

Cheers,

Brendan

Please note:?the above information and analysis does not constitute financial or property advice in any way, and it should not be relied upon. It’s important that you seek guidance from licensed professionals, who can provide advice based on your individual needs. No investment decision or purchasing decision should be undertaken on the basis of this information without first seeking qualified and professional advice.