Sydney's property rebuild

Sydney home values increased by 6.4% over the 12 months to July 2013, according to the RP Data-Rismark Home Value Index results. 

Based on the daily index results, Sydney values are likely to be another 1% higher in August.  According to the index, the housing market has achieved stronger value growth than that of the unit market, with values increasing by 7.3% and 3.2% respectively. 

The capital growth performance over the past year places Sydney as one of the strongest capital city housing markets for capital gains, trailing only Perth, where values have increased by 8.3% over the past year.  The recent increase in home values in Sydney has also seen them eclipse their previous peak; at the end of July this year they were 3.2% higher than their previous record high level.

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Looking across the regions of Sydney, it is evident that the housing market recovery over the year has been broad-based; in fact there isn’t a single region that has recorded an annual fall in values for either houses or units. 

For detached houses, value growth over the past year has been strongest in Inner Western Sydney (7.6%), Central Western Sydney (6.8%), Inner Sydney (6.3%) and Northern Beaches (6.1%).  Across the unit market, value growth has been strongest within Outer South Western Sydney (7.2%), Eastern Suburbs (6.7%), Fairfield-Liverpool (6.0%) and Inner Sydney (6%). 

At the other end of the spectrum, the annual growth in house values have been most moderate in Lower Northern Sydney (3.6%), Central Northern Sydney (4.1%), Central Coast (4.9%) and St George-Sutherland (4.9%).  For units, value growth has been much more moderate in the Sydney regions of Northern Beaches (2.5%), Central Northern Sydney (2.8%), Central Coast (4.0%) and Canterbury-Bankstown (4.1%).

Inner-city attraction

This data would seem to indicate that value increases over the past year for houses has been strongest within those areas closer to the city centre.  For units, the results are a little more mixed, with outer western and south-western areas of the city seeing strong value growth along with the well-established unit markets in Inner Sydney and the Eastern Suburbs. 

The results would seem to suggest that detached housing markets close to the city centre remain popular, however purchasers are looking for more affordable options.  As a result, I am not seeing Lower Northern Sydney and the Eastern Suburbs as the areas with the strongest value growth. Rather, it is relatively more affordable regions such as Inner Western Sydney and Central Western Sydney where value growth has been the strongest.

For units, the well-established inner-city markets remain a popular choice, while the restrictive cost of housing in certain outer areas of the cities and potentially the high yields on offer, is seeing growing demand for units in areas such as Outer South Western Sydney and Fairfield-Liverpool.

Sydney’s growth in perspective

Although the growth in home values in Sydney over the past year is impressive, it is important to put the value increases into perspective.  Home values across Sydney have increased at an average annual rate of just 2.5% over the 10 years to July 2013; that’s lower than the rate of inflation, which has increased at an average annual rate of 2.7% over the 10 years to June 2013.  

Due to the ongoing weak capital growth conditions in Sydney, real (i.e. inflation adjusted) home values are actually lower than they were 10 years ago at the end of the ‘boom’.  If you look at capital growth over the past 10 years across the other major capitals, values have grown at an average annual rate of 5.5% in Melbourne, 4.6% in Brisbane and 8.4% in Perth. 

Clearly Sydney’s capital growth performance has severely lagged that of the other major capital cities over the past decade, keeping in mind it was already much more expensive to begin with. 

Rising investor interest

The return to growth in values is undoubtedly welcome news for home owners and investors.  Once you start to consider the gross rental yields, as well as the growth in home values, no wonder Sydney is currently proving to be so popular with investors.  As at the end of July 2013, house values had increased by 7.3% over the year and their gross rental yield was 4.1%.  For units, values have risen by 3.2% over the year and gross rental yields are recorded at 4.9%.  Considering returns on many low-risk assets are so low at the moment, Sydney bricks and mortar, which has effectively seen no value growth in a decade, is looking quite attractive to investors on the back of extremely low mortgage rates.

Given the ongoing underperformance of capital growth across the Sydney housing market over the past 10 years, it is difficult to see where some of the current bubble commentary is coming from.  Yes, home values are rising after they have effectively gone nowhere for a decade, and there are some good reasons why values are rising. 

Population growth is once again ramping up, and Sydney along with the other major capital cities is a key benefactor of population growth, particularly when it is driven by net overseas migration.  There has been very little new housing construction across the city over recent years, with a persistent housing under supply, and of course the fact that official interest rates are at their lowest level in more than 50 years is also having a significant influence on the market.

Conclusion

I don’t believe that ongoing growth in home values at the current pace is sustainable over the long term, however the fact that value growth has been virtually non-existent over the past decade and mortgage rates are at such low levels, it’s no surprise values are heading higher. 

Just because they are climbing doesn’t mean there is a looming bubble, but the Reserve Bank will undoubtedly be closely monitoring just how high they go and whether or not we do see an increase in housing construction across the city and not just higher home values. 

Meanwhile, investors are looking to capitalise on these current advantageous market conditions while they can.

Cameron Kusher is a researcher at RP Data.