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Sydney real estate update: The tide has turned!

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After three years of what can only be described as the manic rise of Sydney property prices, the real estate market has finally cooled, and things are back to how they should be, writes Henny Stier, Buyers’ Agent at OH Property Group.

Until April-May 2017, the Sydney real estate market was experiencing a “feeding frenzy”. It was not uncommon to turn up to an open inspection to find a line of buyers at the front door. It felt like a stampede at some open inspections, with buyers racing to let the agents know of their interest. However, vendors and selling agents were gung-ho about rejecting early offers. Most were set on taking properties to auction, knowing that they were almost guaranteed multiple registered bidders and spirited bidding. With few exceptions, properties were selling for much higher than the price guides quoted. Buyers were gripped by a fear of missing out as prices kept rising. Many succumbed and bought C-grade properties at A-grade prices.

How is the market now?

Since mid-2017, the property market has gradually but clearly altered direction.

  • Sydney dwelling values were down 0.9 per cent in December, and 2.1 per cent lower over the December quarter
  • This was 2.2 per cent lower relative to their August 2017 peak
  • The city’s annual growth rate is now tracking at 3.1 per cent; a stark difference to just seven months ago when values were rising at the annual rate of 17.1 per cent*

By the last quarter of 2017, most of Sydney were seeing lower numbers at open inspections, longer days on market, and a lot of properties being passed in at auction or auctions withdrawn altogether. When a property did go to auction, there were few registered bidders and often only one active bidder – if any at all. Many vendors had to lower their reserve in order to meet the market if they wanted to sell under the hammer. Those who are not as motivated to sell will often pass the property in and let it sit until someone comes along willing to pay close to their asking; or it is put on the rental market. The outcome of this is softening prices as there are fewer committed buyers, and increasingly more desperate sellers – many of whom have already bought elsewhere and do not want to be stuck paying two mortgages for too long.

Even A+ grade properties which buyers would have fought over at auction nine months ago are taking several months to sell, and often at a much-reduced price from initial expectations. Many selling agents are scratching their heads and scrambling to find buyers due to poor turnout at opens. We are receiving daily emails and SMS from selling agents with headlines such as “motivated sellers”, “owners have bought”, “price adjustment”, and “open to offers”.

So… what changed?

A few key factors account for the dramatic swing in momentum.

  1. The continued rise of prices was never going to be sustainable. Sooner or later, it had to come to a halt. Fewer and fewer buyers were able to get onto the property ladder in Sydney metro areas and families were forced to look further away, such as in the Central Coast. Buyers have had enough and frankly a lot are priced out and have resigned themselves to renting in the foreseeable future. The Banks have also really tightened up on their lending requirements, making it much harder for expats, women on maternity leave, etc. to borrow. So essentially the buyer pool today is a lot smaller. There are quite simply fewer serious buyers out there.
  1. There were adjustments to lending and riskier mortgages. The Australian Prudential Regulation Authority (APRA) announced at the end of March 2017 that it had written to all deposit-taking institutions expecting them to cut back on interest-only loans (typically riskier mortgages favoured by investors) to 30 per cent of total lending. This, combined with the 10 per cent annual growth limit on overall investor lending already in place, has had the almost immediate effect of reducing the participation of investors in the housing market and putting the brakes on rampant house price growth.
  1. Chinese foreign buyers have toned down their enthusiastic buying of Sydney property. Beijing has imposed restrictions on Chinese nationals being able to take their money out of China. They still have lots of money – they just can’t get it out of China! At the same time, Australian banks have tightened lending criteria to mainland China investors due to APRA regulatory requirements, and in some cases, won’t lend to foreign investors at all. In addition, as of July 1, NSW doubled the stamp duty on foreign buyers to 8 per cent and increased the land tax surcharge from 0.75 per cent to 2 per cent.
  1. Demand and supply. Many sellers were holding off on selling their properties as they were waiting for the peak. As the media increasingly reports about the turning cycle, these sellers have now rushed to put their properties on the market. This has resulted in a large surge of properties in the last quarter of 2017, giving buyers plenty more choice and negotiation leverage.

Is the real estate market going to collapse?

Some selling agents are optimistic and think the market will bounce back in 2018. This is not likely. Instead:

  • There will be a lot of new stock as well as  leftover stock which did not clear last year
  • Supply is likely to out-strip demand, at least in the first quarter of the year
  • Buyers will continue to be price-sensitive and will choose to wait for better properties rather than settle for those which may have several issues

If you bought a property around the peak of the market, don’t panic. Despite the nominal reversal in growth rates since August 2017, Sydney dwelling values remain 70.8% higher than their cyclical low point in February 2012.  There is still a lot of buyers wanting to get into the housing market – so a total collapse is extremely unlikely in the established areas of Sydney such as the North Shore. What is conceivable though is a further softening of prices which will reverse some of the gain made over the past three years. But if you have a long-term horizon, then this shouldn’t worry you too much. However, it may be challenging if you are trying to sell a property after having just bought very recently at a premium.

In a normal market, the best properties typically sell for the highest prices. This wasn’t always the case for the past three years but is likely to be the case now. Problematic properties are likely to linger and possibly not sell unless the price is heavily discounted.

Stay tuned for Henny’s next article, exclusive to North Shore Mums, which will discuss the Top Buying and Selling Tips for 2018.

*Source: CoreLogic December Hedonic Home Value Index results

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  1. Hassan Pharaon
    Hassan Pharaon

    Interesting and great article about the Sydney real estate update. Looking forward to your next article r blog to be posted. Thanks!

    29 November 2018 at 12:56 pm Reply

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