At heart, the outlook for Sydney’s residential market is defined by three factors:
- Deterioration in affordability of new lots and new apartments
- Quantum of pent-up demand for new dwellings
- Stage of economic cycle and jobs growth
On affordability, the rise in established house prices has generally outweighed the increase in new dwelling prices. Consequently, the relative affordability of new properties remains supportive of demand at current levels.
Our expectation is that established house prices in Sydney’s middle ring can be sustained at 5% p.a. over the next three years, if conditions in the regionally localised economies can improve.
In terms of the potential for further release of pent-up demand for new dwellings, the rate of sales for established properties is a key reference point. Across Sydney, sales of detached houses have increased, but not above the range observed over the past decade (see chart below). There has been a clear shift in demand towards new houses & apartments, rather than a spike in established house turnover.
Figure 1: Number of house and unit sales across Sydney
Notably, sales of established (older) apartments have not revived, which probably reflects diminished FHB demand (due to isolation of the FHB grant to new housing). In addition, jobs growth has been weak to fair across most of Sydney’s middle ring, where the older apartment stock is concentrated. Combined with strong rental growth over the past seven years, owner-occupier demand for this market segment has become constrained.
Demand for new apartments has soared, in contrast to the low levels of old apartments. Sales to overseas students and new migrants led the way in 2010 and 2011. Most recently, the rate of sales to overseas investors (especially China) and local investors has spiked. Sydney’s superior property price growth attracted investors to premium grade inner city projects. In 2013 and 2014, demand has emerged in middle ring areas (Parramatta and Canterbury), where new projects have attracted buyers selling out of older apartments.
The prospect for greater turnover of older apartments becomes a key issue in the medium-term outlook for the middle ring property market. If household income growth improves and turnover of older apartments recover, then this should boost the number of upgrader sales for new apartments - if the price points for new apartments sit below local houses. This outcome will be easier to achieve in suburban locations, but may be achievable in centres such as Chatswood and Parramatta.
In an environment of slower price growth, the overall market is likely to shift towards owner-occupier demand.
Consequently, our focal point becomes the prospects for local economic activity and jobs (household income) growth. Our analysis points to a substantial upswing in Sydney’s construction cycle, across transport infrastructure, apartment building and non-residential building.
The most dependable impact comes from the existing building pipeline. At present, we estimate a rise of $1 billion per annum over the three years to 2017 in apartment building work done. Following the surge in apartment approvals during 2013 and 2014, there will be an extended period of expansion in building work (due to an average 18 month construction period, plus delays due to the scale of projects in the pipeline).
Transport Infrastructure is also set to expand over the four years to 2018, there is a major set of transport infrastructure works expected to occur – both road projects (WestConnex Stage 1, M5 East, M3 tunnel, Badgerys Creek ancillary upgrades) and rail projects in the form of North-West rail link, Moorebank intermodal terminal and the CBD light rail (Randwick-Central initial stage).
Figure 2: Sydney construction work done by sector
Source: ABS, MacroPlan
In total, we project a $14 billion rise in transport infrastructure works over the three years to 2017.
The commercial building development pipeline is headlined by the Barangaroo precincts and Darling Harbour redevelopment areas – but building approvals also indicate a higher rate of localised commercial, industrial and social projects in the outer ring suburbs.
In terms of the increase in workers, there are limitations within the existing Sydney labour force. The local unemployment rate is currently 5.8%. Working hours and hourly rates across the local construction sector workforce are expected to be increased. This process will raise household incomes, and improve mortgage affordability.
Beyond 2018, a further wave of infrastructure projects is being planned, contingent on State Government asset sales – in particular, electricity network businesses. If this process gains electoral support, then there will be a further boost to professional services employment over the next three years, as engineering, design and planning tasks start to roll out.