Caution for the optimists
Sydney Morning Herald
Saturday September 19, 2009
The experts are positive about apartment prices, despite some economic clouds on the horizon. The reduction in government incentives for first-home buyers and the prospect of higher interest rates are likely to coincide during the spring property market.Sydney's apartment market will therefore be particularly vulnerable, especially having outperformed houses in recent price growth.Apartment median prices outdid house prices in the past year with a 3.4 per cent rise, while houses fell nominally by 0.3 per cent, according to Australian Property Monitors economist Matthew Bell.Despite the looming twin concerns, Bell expects a 6.8 per cent price growth for apartments over the next year.Inner west and northern beaches apartments are tipped to perform best, with 8.6 per cent and 7.9 per cent gains respectively. The city and east will be the weakest region at 6.1 per cent, while growth in the upper north shore is tipped to be 6.2 per cent.Suburbs that suffered from heavy falls will stage the strongest recovery, Bell says."The very heavy falls were driven by external economic conditions, including a very weak sharemarket and very high unemployment expectations, which have since either reversed or had expectations reviewed positively," Bell says.The optimistic forecast is against the backdrop of Australians believing housing represents a safer investment than the stockmarket.Market research consultants Colmar Brunton recently found the removal of the government boost was more feared to lead to price declines than interest rate rises.The problem of the grant boostThe sustainability of the recovery will be put to the test moving towards next year, given low interest rates and the First Home Owner Boost had supported the property market throughout 2009, according to the chief executive at the Mortgage and Finance Association of Australia, Phil Naylor."Our research found 48 per cent of prospective buyers said the extra government grants helped them to afford a home, so the phasing out of this support is likely to impact this market," he says. €œGovernment incentives combined with low interest rates have brought forward the purchase of homes in the affordable price brackets. This market segment may be more subdued into the future."However, research by the MFAA found 14 per cent of first-home buyers were waiting until the boost finished in late December and until envisaged price moderation occurred before they took the housing plunge."Less-frenetic first-home buyer activity may encourage others to enter the markets, such as upgraders, empty-nesters and property investors," Naylor says.But with one in five first-home buyers looking to family to help provide the deposit, Naylor believes affordability is still a prime factor.High demandThe residential apartment market in Sydney had been in the doldrums since the overall residential market peaked at the end of 2003, argues BIS Shrapnel's Angie Zigomanis."Given strong rises in rents, there has been some urgency for first-home buyers to strike while the iron's hot and purchase what they can afford, rather than save for something else and miss out," Zigomanis says."The increased first-home buyer demand has translated to demand for existing stock. However, the availability of units for off-the-plan purchase has been limited as developers cannot get new projects off the ground due to constraints on funding because of the financial crisis."Consequently, additional apartment supply will be very constrained in the short term, driving further growth in rents."Although first-home buyer demand may weaken slightly, it should nevertheless remain relatively healthy."Any increase in investor demand is expected to only be marginal over the remainder of 2009, before strengthening more significantly in 2010, when the global economic environment becomes more positive."Growth in north and eastThe chief economist at AMP Capital Investors, Shane Oliver, says that after some softness last year, Sydney apartment prices bounced back reasonably well this year."Sydney's unit market is likely to see prices rise over the year ahead, thanks to the positives of a constrained supply situation, with rental property vacancy rates still down near 1 per cent, improved affordability and the return of investor demand," he says."However, price gains are likely to be constrained, particularly in 2010."Oliver notes that first-home buyer demand has already been pulled forward from future years, interest rates are set to rise and tougher lending standards are impacting on the flow of credit.He expects Sydney apartment prices to rise about 5 per cent in the year ahead."Expect better gains in the northern and eastern suburbs as they recover further from last year's weakness but more constrained price gains in the western suburbs as first-home owner demand slows back a notch."Yields softeningInvestors have enjoyed solid returns from apartments in the past few years but rental yields are now flattening, says the general manager of Laing+Simmons, Leanne Pilkington. "Landlords should be aware that any increase in rent on their property should be justified by high demand in the area," she says."There are anecdotal reports that renters are fed up with ongoing rent rises over the past three years. This has led some renters to reassess the cost of renting compared to the cost of managing a mortgage and those with the financial security are looking to purchase an apartment of their own."RP Data researcher Cameron Kusher agrees apartments are now witnessing a softening of rental rates, with rental yields moving from 5.7 per cent in the past four months to 5.5 per cent now. However, Kusher expects a reduction in first-home buyer volume, coupled with continued housing under-supply, could soon create more upward pressure on rents.And bargains?"High demand and low supply in most markets has driven prices up and bargains are sparse," Pilkington says. "The exception to this trend was new developments where low investor interest in multi-unit developments prompted some developers to drop prices."Inner and established suburbs continue to be the most desirable for an apartment purchase, while low levels of new development in these areas means this trend is likely to continue."Signs of fresh developmentSome regions of Sydney are showing tentative signs of life, with a fillip in development applications for new strata blocks.The number of new flats and townhouses approved by local councils in July almost doubled to 824 in July, ABS figures show.The Bankstown municipality's strata apartment approval during the 2008-09 financial year was 201, which was up on the previous year's 140 apartments. Warringah Council approvals peaked in 2002 and 2003, with annual approvals of about 830 new dwellings. During 2006 and 2007, annual approvals by Warringah slipped to about 110 dwellings but this rose in the recent financial year to 320.Other councils have yet to see any rise in new-development residential applications. Ku-ring-gai approved 300 apartments in the past year, compared with 900 in the 12 months from September 2007.Strata approvals by Sutherland Shire Council slipped to 74 apartments last financial year, down on the 124, 85 and 335 apartments over the previous three years.The City of Sydney approved 24 development applications with a total of 330 apartments in 2008-09, which was down on the 30 applications in 2007-08 to construct 1350 apartments. But there are a further 39 development applications totalling 5718 apartments being assessed. 'THERE ARE A FEW DEALS AROUND'Ingmar Bulk has recently sold his investment unit and is now looking to buy two more with the proceeds.The 42-year-old customer service manager at Qantas sold the one-bedroom apartment in the Carlisle in Campbell Street, Surry Hills, for $565,000 through McGrath agent Brendon Clark.Bulk paid $365,000 for the apartment off-the-plan seven years ago and has been collecting $470 a week in rent."It's been an incredible investment," he says."Now I'm looking in the Darlinghurst, Potts Point area for some two-bedders because I think those suburbs have plenty of potential."A car space and close proximity to the city, harbour and transport are all requirements."There are a few good deals around if you look hard," he says. "I'm spending a lot of time focusing on the market and talking to real estate agents. I'm looking at one place where $400,000 is expected and it's already rented out at $450 a week, so it'll pay for itself."He also believes it is essential as an investor to have a good team behind you, including the bank, financial adviser and accountant. "They're like my left hand and they all seem to work together to help you save on tax and get the best out of you and your finances."HOT SUBURBS*Dawes PointPoint PiperThe RocksAnnandaleBalmain EastCabaritaRozelleSt PetersMilsons PointWoolooware* THE MEDIAN PRICE IS TIPPED TO GROW 15% BY JUNE 30, 2010.SOURCE: AUSTRALIAN PROPERTY MONITORS
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