Despite the current downturn, a significant level of positive sentiment remains in the Sydney property market, with analysts anticipating further price declines in 2019, before levelling out in 2020.
Early prudential tightening — particularly for investors — credit curbs, waning foreign investor demand as well as weaker price expectations have all contributed to the fall in values since the start of last year.
Sydney house values have declined 11.3 per cent over the past year while unit values are down 8.2 per cent, and property analysts are predicting peak-to-trough falls of 20 per cent.
Speaking at The Urban Developer’s 2019 Residential Summit in Sydney on Friday, Corelogic head of research Tim Lawless said to understand where the market was heading, you would have to follow the credit trends.
Credit availability would be key to the market’s future, Lawless said, as he claimed that is what inspired the current downturn.
“The problem isn't an economic downturn but a credit-related downturn.”
Lawless said a modest gain, albeit from a low base, in housing finance approvals, according to the Australian Bureau of Statistics released in February, was a positive indicator credit was starting to free up.
“This downturn isn't a recent phenomenon.”
“Even when values were rising we were seeing transactional activity falling away in line with credit policies.”
Currently the dwelling price-to-income ratio for Sydney is still upwards of eight times making a 20 per cent deposit challenging especially with lenders looking much more closely at the debt-to-income ratios.
While borrowers still face tougher lending standards, an interest rate cut next month could stimulate the market, but with credit availability the major hurdle for borrowers, the question remains, by how much.
Approvals for the construction of new homes in Sydney hit a wall in March as units and townhouses drove a seasonally adjusted 15.5 per cent decline in overall activity.
Approvals for private sector houses fell 3.2 per cent, while other dwellings, which includes apartment blocks and townhouses, plunged 30.6 per cent.
Over the 12 months to March, total building approvals for dwellings fell by a seasonally adjusted 27.3 per cent.
“Even though we are seeing a downturn in unit approvals and house approvals although not as distinct, we will probably see approvals start to flatten out soon with all the current supply being absorbed and two years down the track, desperate for new supply.”
“The market doesn't respond perfectly, instantly or quickly to changes in levels of demand, particularly around the unit sector.”
Lawless noted that a need for more diversified products and a return to quality and customer focus would align with opportunistic buyers looking to acquire new investments today and eager to take advantage of the opportunities as "the market pulls back".
“The track record, history and demonstration of quality projects over time I think is really important as well as the mix of target markets.”
Opportunities were also present in the "cookie-cutter development" market, where apartment buildings void of architectural aesthetics, with small floor plans and low usage of natural light remain had been hit the hardest with reliable foreign investor demand "falling off a cliff".
“You can look at markets, such as Waterloo, Mascot and Alexandria... those sort of markets where you do see a low-range of quality are finding it very tough.”
“Developments, focusing specifically on investors or an investor niche for example foreign buyers, are much more exposed.”
“Developers who have a much broader marketing strategy, particularly focusing on owner-occupiers over investors or a healthy mix of the two, seem to be down the lower end of the risk spectrum.”
Still, investors remain "quite conservative" with their money, particularly when dealing with markets that have seen significant downturn.
Developers targeting locations that were historically resilient in downturns with the greatest upside potential when markets "eventually turn around" remain steadfast opportunities while under-serviced markets around Sydney also could see up-swings.
“Looking at markets where supply is inherently constrained, generally around the inner-city fringes, greenfield projects and where transport is generally amenable, convenient and accessible,” Lawless said.
“These are probably the areas I would be very comfortable still buying in that particular market place and arguably where capital growth is still strong.”