2017 - warringalfs.com.au · sydney at a glance 2017 edition 1 there are approximately properties...

SYDNEYCAPITAL CITYREVIEW2017 | EDITION 1

E D I T I O N 1

20 17

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Content.22

PERFORMANCESYDNEY CAPITAL CITY REVIEW

EDITION 1 | 2017

SYDNEY AT A GLANCE

Executive SummaryOur View of The Key Sub MarketsState BudgetIndustry Value as a % of GSP

KEY INDICATOR 1 — AFFORDABILITY

Affordability Index vs. Price MovementsIncome Growth vs Price GrowthRent Growth vs Price GrowthFHBs as a % of Population

KEY INDICATOR 2 — DEMAND

Supply vs Population GrowthType of Population GrowthUnemployment Rate & TrendForeign Investment Approvals: New vs Established PropertyInfrastructure SpendingInfrastructure Spending as a % of GSP

04

09

13

19

23

KEY INDICATOR 3 — SUPPLY

Dwelling ApprovalsDwellings Under Construction Vacancy Rate vs Rent GrowthStock on Market vs Days on Market

KEY INDICATOR 4 INVESTMENTVALUE

Current Investment Value – Per Capital CityCapital City – Long-Term Price ComparisonPrice Growth vs Long-Term Trend

Positive

Neutral

NegativeNegativeNegativeNegative

PositiveNeutral

PositiveNegative

Neutral

NeutralPositive

Positive

NegativeNegative

Negative

CONTENTS

PositiveNegative

33


EDITION 1 | 2017

SYDNEYAT A GLANCE

2 0 1 7E D I T I O N 1

THERE ARE APPROXIMATELY

PROPERTIES CURRENTLY ON THE MARKET INSYDNEY.

16,230

Propertiesspend anaverage of

32 days on the market.

OVER THE PERIOD FROM 2012 TO 2016 MEDIAN PRICES GREW BY 68.8% WHILE HOUSEHOLD INCOMES WERE ONLY UP BY APPROXIMATELY 10,5%.

PROPOSED FEDERAL AND STATE INFRASTRUCTURE SPENDING IN NEW SOUTH WALES IN 2016 ISAPPROXIMATELY

As this disparity widens, the market is showing less and less value, and future price rises will simply be out of line with fundamentals.

2016 proposed infrastructurespending, compared to 2015

% of 2015 GSP spent on infrastructure

$10.2B

SYDNEY’S UNEMPLOYMENT RATE HAS PROGRESSIVELY FALLEN SINCE 2009 TO

THE POPULATION OF SYDNEY IS CURRENTLY 4,94M AND HOUSES APPROXIAMATELY 20% OF THE NATION’S TOTAL POPULATION.

4.38%This is a positive for future price rises and the economy in general.

By 2031, the population of metropolitan Sydney

is projected to accelerate, with more than

600,000 extra homes needed to accommodate

the additional expected 1,6M residents in the

next in the next two decades.

$1,7B

2%

16,23

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EDITION 1 | 2017

EXECUTIVE SUMMARYTHE INDICATORS, WHILST SLIGHTLY MIXED, ARE SUGGESTING THAT SYDNEY IS NOW COMING TO THE END OF ITS GROWTH CYCLE.

KEY INDICATOR 1 — AFFORDABILITY: NEGATIVE

KEY INDICATOR 4 — INVESTMENT VALUE: NEGATIVE

KEY INDICATOR 2 — DEMAND: POSITIVE

It is clear from an affordability point of view that the Sydney market is forming a peak with the Affordability Index being at 56%. Since 1985, where the Affordability Index has been this high the market has either stagnated for a few years or pulled back slightly. Over the last few years, prices have been rising much faster than both income growth and rental growth, resulting in dramatically falling yields and price-to-income ratios rising rapidly. Homebuyers are hitting an affordability ceiling and most savvy investors are looking elsewhere for value. Interestingly, Sydney now has the lowest first homebuyer participation on record, an indicator which typically demonstrates the relative health of a market.

Despite the high property prices, the Sydney population is still growing strongly at 1.39%. The key figure within this population growth is the 71,350 overseas migrants who settled in Sydney last year requiring instant accommodation. This is keeping upward pressure on both rents and prices, as supply is simply not keeping up with the demand and this is unlikely to change in the short term. Following the 2004 Sydney boom, we are expecting net interstate flows out of Sydney to rise as affordability issues push some of the local population into the cheaper capital cities – job opportunities permitting.

Sydney now takes the mantel as the capital city with the lowest yields in the country, currently running at 2.24%. It has also been well outperforming its long-term growth trend of 9.23% per annum over the last 3, 5 and 7 years. Against the other 5 major capital cities it is well in front of its long-term growth disparity averages. Looking at these 3 indicators it is hard to build a case for sustainable short-term price rises in Sydney.

KEY INDICATOR 3 — SUPPLY: POSITIVEConsistent with the low vacancy rate we have seen a sharp reduction in the sale market with the average days on market being very low at 32 days and stock on market being the lowest it has been in over ten years currently at 16,230 properties for sale. This indicates that despite high prices in Sydney, future short-term price rises are still possible.

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EDITION 1 | 2017

OUR VIEW OF THE KEY SUB MARKETS

PLEASE SEE BELOW FOR OUR VIEW OF THE SUB MARKETS.* Please consult our acquisitions team to discuss your specific research requirements.

CBD:CAUTION

MIDDLE RING:CAUTION

LIMITED VALUE

VALUE

CAUTION

AVOID

OUTER METRO:LIMITED VALUE

OFF PLAN:AVOID

CITY FRINGE:CAUTION

BLUE-CHIP SCHOOL BELT:CAUTION

The market is close to being overvalued and/or oversupplied. We see minimal growth over the short to medium term.


As there are approximately 16,230 properties for sale in Sydney, careful selection and due diligence are an essential part of the process. Price points, property type and suburb/street selection will affect investment performance of individual properties.

This market is showing some value opportunities. Overall, most fundamental indicators support growth.

The market is showing good value on most properties. There are many fundamental indicators that support strong growth.


This market is showing no value, and price falls in the short term are possible. There are no fundamentals that support price growth in the short term.

This market is showing some value opportunities. Overall most fundamental indicators support growth.

This market is showing no value and price falls in the short term are possible. There are no fundamentals that support price growth in the short term.



66


EDITION 1 | 2017

STATE BUDGET

P O S I T I V E

AS PER THE BELOW GRAPH, THE NEW SOUTH WALES STATE GOVERNMENT HAS BEEN OPERATING IN A SURPLUS SINCE 2013. THIS SURPLUS HAS BEEN ASSISTED BY AN INCREASE IN BOTH HOUSE PRICES AND PROPERTY TAXES. THIS IS A POSITIVE INDICATOR FOR FUTURE PRICE RISES.

77


EDITION 1 | 2017

INDUSTRY VALUE AS A % OF GSP

N E U T R A L

THE NEW SOUTH WALES STATE ECONOMY IS THE LARGEST IN THE COUNTRY, DOMINATING THE NATION’S SERVICES INDUSTRIES. AS CAN BE SEEN IN THE PIE CHART, NEW SOUTH WALES HAS A VERY EVEN DISTRIBUTION OF INDUSTRY SECTORS. THE REASON WHY WE FAVOUR MAJOR CAPITAL CITIES OVER REGIONAL AREAS IS DUE TO THE DIVERSIFICATION OF INDUSTRY AND THE STABILITY THAT IT BRINGS TO RESIDENTIAL HOUSE PRICES. OVER THE PAST 10 YEARS, GROSS STATE PRODUCT (GSP) HAS RISEN FROM $289B TO $474B - AN APPROXIMATE COMPOUND GROWTH RATE OF 5.06% PER ANNUM.

Currently, Financial and Insurance Services is the leading industry sector contributing 13.5% of GSP. Ten years ago, manufacturing represented 11.17% of GSP yet today it only represents 6.86%. Overall, New South Wales’ economy seems to be adjusting fairly well to globalization.

88


EDITION 1 | 2017

AFFORDABILITY INDEX VS PRICE MOVEMENTS

N E G AT I V E

THIS GRAPH DISPLAYS THE RELATIONSHIP BETWEEN AFFORDABILITY AND ITS IMPACT ON PRICE MOVEMENTS.

The Affordability Index (AI) is calculated using the median price, median income, a Loan to Value Ratio (LVR) of 80% and the current interest

rate. Calculated back to the 1960s, our index is a measure of average mortgage repayments Vs the average income.

Properties become unaffordable in Sydney when the market’s AI rises to around 47.5%, at which price points will almost always pull back.

Conversely, a low AI of 30 - 35% will almost always see prices rise.

Currently the AI in Sydney is hovering around the 56% mark, a sign that the market is nearing its peak and is unaffordable. This is a clear

negative for future price rises in Sydney.

99


EDITION 1 | 2017

INCOME GROWTH VS PRICE GROWTH

N E G A T I V E

THIS GRAPH DISPLAYS A 15-YEAR PRICE HISTORY COMPARED WITH 15 YEARS OF THE AVERAGE INCOME.

The relationship between prices and household income was relatively consistent in Sydney from 2006 up until 2013. However, over the

period from 2012 to 2016 median prices grew by 68.8%, while household incomes were only up by approximately 10.5%. As this disparity

widens, the market is showing less and less value, and future price rises will simply be out of line with fundamentals.

1010


EDITION 1 | 2017

RENT GROWTH VS PRICE GROWTH

N E G A T I V E

THE ABOVE GRAPH DISPLAYS A 15- YEAR PRICE HISTORY AND ITS RELATIONSHIP WITH RENTS.

Over the six-year period of 2006-2012 Sydney’s median prices only rose by approximately 22.8%, whereas rents increased by 58.5%. This

outperformance in rental growth saw gross yields progressively rise on blue chip apartments to 5%, making this an affordable market for

first home-buyers and an attractive market for investors.

Since 2012 however, the market has been playing “catch-up”, with median prices rising 68.8% over the four years to 2016 while rents only

rose approximately 12% during the same period. 1111


EDITION 1 | 2017

FHB’S AS A % OF POPULATION

N E G A T I V E

THIS GRAPHS SHOWS THE PERCENTAGE OF FIRST HOME BUYERS (FHB), RELATIVE TO THE STATE POPULATION AT THE TIME.

As can be seen in the graph there are two notable spikes. The first occurring in 2000/2001 which coincides with the introduction of the First

Home Owners Grant and the second coincided with the doubling of the first home buyer grant in 2008/ 2009.

The spike in 2009 has brought forward FHB activity to such an extent that we are now seeing a downward trend across most capital cities.

Whilst the downward trend in FHB is consistent across Australia, Sydney is now at its lowest FHB level in history, this is a clear negative.

1212


EDITION 1 | 2017

SUPPLY VS. POPULATION GROWTH

P O S I T I V E

THE POPULATION OF SYDNEY IS CURRENTLY 4.94 MILLION AND HOUSES APPROXIMATELY 20% OF THE NATION’S TOTAL POPULATION. BY 2031, THE POPULATION OF METROPOLITAN SYDNEY IS PROJECTED TO ACCELERATE, WITH MORE THAN 600,000 EXTRA HOMES NEEDED TO ACCOMMODATE THE ADDITIONAL EXPECTED 1.6 MILLION RESIDENTS IN THE NEXT TWO DECADES.

According to a number of sources, the Sydney market has been undersupplied since 2007. That shortage has been deteriorating progressively

to a current deficiency of approximately 13,953 properties. With population growth continuing at its current level, this is going to put further

strain on an already undersupplied housing market and limit the likelihood of price falls in the short term. 1313


EDITION 1 | 2017

TYPE OF POPULATION GROWTH

N E U T R A L

AS CAN BE SEEN ON THE GRAPH THERE IS A CONTINUATION OF HIGH NET OVERSEAS MIGRATION (NOM), MODERATE LEVELS OF NATURAL INCREASE AND INCREASING LOSSES OF NET INTERSTATE MIGRATION (NIM) FOR NEW SOUTH WALES.

Given that house prices in Sydney are becoming more unaffordable, we expect many more people to leave Sydney and look

for value and employment elsewhere.

1414


EDITION 1 | 2017

UNEMPLOYMENT RATE & TREND

P O S I T I V E

SYDNEY’S UNEMPLOYMENT RATE HAS PROGRESSIVELY FALLEN SINCE 2009 TO 4.38%. THIS IS A POSITIVE FOR FUTURE PRICE RISES AND THE ECONOMY IN GENERAL.

1515


EDITION 1 | 2017

FOREIGN INVESTMENT APPROVALS: NEW VS ESTABLISHED PROPERTY

N E G A T I V E

THIS GRAPH SHOWS THE LEVEL OF FOREIGN INVESTMENT THAT WAS APPROVED IN NEW SOUTH WALES RESIDENTIAL REAL ESTATE OVER THE PAST DECADE. THE BLUE BARS SHOW THE INVESTMENT IN OFF-PLAN PROPERTIES AND THE YELLOW BARS SHOW THE INVESTMENT INTO ESTABLISHED PROPERTIES. AS CAN BE SEEN THERE HAS BEEN A STRONG RISE IN FOREIGN INVESTMENT IN BOTH THE ESTABLISHED AND OFF-PLAN SECTOR.

Whilst we encourage foreign investment, the phenomenal rise has led to over-speculation and overbuilding in some pockets of Sydney - the

consequences of which are yet to be fully understood by the market. Given that the banks have now enforced tougher lending practices

on foreigners, this has the potential to reduce foreign investment anywhere from 20% to 60% in the 2017 financial year. The large swings in

foreign investment has distorted normal market cycles and this will lead to increased volatility and is a clear negative for the markets.

The total foreign

investment in New South

Wales has more than

tripled in the last 3 years

going from approximately

$6.9b to $20.2b. If we look

at it from an established

property perspective we

have seen 9 times the

investment that we saw

in 2005 and from an off-

plan perspective 6 times.

1616


EDITION 1 | 2017

INFRASTRUCTURE SPENDING

P O S I T I V E

FEDERAL AND STATE INFRASTRUCTURE SPENDING IN NEW SOUTH WALES WAS UP APPROXIMATELY $1.7B FROM 2015 CALENDAR YEAR. THE INFRASTRUCTURE SPENDING FOR 2016 WAS APPROXIMATELY $10.2B, LOGICALLY THIS SHOULD HAVE A POSITIVE EFFECT ON JOB CREATION AND WAGE GROWTH.

In our calculation we have only reviewed federal and state infrastructure programs down to $10m. We have apportioned the cost of the

program into an annual spend using the straight-line method for simplicity. 1717


EDITION 1 | 2017

INFRASTRUCTURE SPENDING AS A % OF GSP

N E G A T I V E

THE VALUE-ADD ATTRIBUTABLE TO INFRASTRUCTURE SPENDING IN NEW SOUTH WALES FOR 2016 WAS APPROXIMATELY 2% OF THE STATE’S 2015 GROSS STATE PRODUCT (GSP)

Compared to the other five major Australian cities, New South Wales contributed the second lowest as a percentage of GSP after Western Australia. This is a negative for future price movements.

1818


EDITION 1 | 2017

DWELLING APPROVALS

AS WE KNOW THE SYDNEY MARKET HAS BEEN UNDERSUPPLIED SINCE 2007 AND SINCE THEN WE HAVE SEEN PROGRESSIVE RISES IN THE AMOUNT OF DWELLINGS BEING APPROVED ACROSS GREATER SYDNEY. WE ARE ONLY STARTING TO SEE THE DWELLING APPROVALS AT A LEVEL THAT WILL CATER FOR THE INCOMING POPULATION SO WE DON’T SEE THE SHARP RISES OF DWELLING APPROVALS AS A NEGATIVE FOR THIS MARKET.

N E U T R A L

1919


EDITION 1 | 2017

DWELLINGS UNDER CONSTRUCTION

N E U T R A L

THE GRAPH ABOVE SHOWS DWELLING COMMENCEMENTS ACROSS NSW AND AS SUCH IS NOT AN ACCURATE INDICATOR OF THE DWELLINGS COMMENCEMENTS ISOLATED TO SYDNEY.

As we can see there’s been a sharp rise in unit commencements since 2010. Again, the sharp rise isn’t too concerning as this market is playing catch up from years of undersupply. If however this trend continues to increase, the Sydney market may be at risk of an oversupply of units in two or three years.

2020


EDITION 1 | 2017

VACANCY RATE VS RENT GROWTH

P O S I T I V E

THIS GRAPH DISPLAYS THE RELATIONSHIP BETWEEN RENTAL GROWTH AND VACANCY RATES.

Whilst most industry experts define a 3% vacancy rate as a balanced market, our research shows that for Sydney a slightly lower statistic

of 2.5% is a more accurate indicator of a balanced market. Vacancy rates below 2% will see rent rises. Once we move above a 3% vacancy

rate, rents will fall.

The last two quarters, we have seen vacancy rates drop from 2.4% to 2.1% and now to 1.9%. This confirms our view that the Sydney market

is undersupplied and population growth still exceeds dwellings being constructed. A vacancy rate of 1.9% indicates that there’s a high

probability of rental growth in Sydney in the 2017 calendar year. This is a positive for future price rises in Sydney. 2121


EDITION 1 | 2017

STOCK ON MARKET VS DAYS ON MARKET

P O S I T I V E

THIS GRAPH DISPLAYS THE AVERAGE DAYS ON MARKET (A-DOM) AND STOCK ON MARKET (SOM) FOR THE LAST EIGHT YEARS.

In 2015 a peak in the market looked to be forming as both SOM and A-DOM has been progressively rising since 2013. In 2016, surprisingly we saw SOM reduce to 16,230 properties for sale, which is the lowest point for over 10 years. Stock volumes this low means that there’s a high probability of price rise on the horizon and a very limited chance of price fall.

2222


EDITION 1 | 2017

CURRENT INVESTMENT VALUE – PER CAPITAL CITY

N E G A T I V E

THIS GRAPH DISPLAYS THE MEDIAN RENTAL YIELD OF A THREE-BEDROOM HOUSE IN EACH OF THE FIVE MAJOR CAPITAL CITIES.

We can see that Sydney’s median yield of 2.24% is the lowest in the country. This graph indicates that on a national level, Sydney is the least attractive from an investment value point of view.

2323


EDITION 1 | 2017

CAPITAL CITY – LONG TERM PRICE COMPARISON

N E G A T I V E

THIS GRAPH DISPLAYS THE PRICING RELATIONSHIPS BETWEEN THE FIVE CAPITAL CITIES IN AUSTRALIA SINCE 1970.

As can be seen in the graph, the Sydney market is the most expensive in Australia. This has long been regarded as normal in the Australian market. Against all capital cities, however, Sydney is well above its long-term price comparison averages. This is due to strong price growth in Sydney and minimal growth in most other capital cities over the last four-to-five years. This is a key negative for short-term price growth, as savvy investors will seek better value in the other states.

2424


EDITION 1 | 2017

PRICE GROWTH VS LONG TERMTREND

N E G A T I V E

THE LONG-TERM TREND FOR COMPOUND PRICE GROWTH IN SYDNEY SINCE 1971 IS 9.23% PER ANNUM.

While we don’t expect this high compounding growth to continue into the decades ahead, it is a worthwhile exercise to compare this against recent price movements.

Looking at the graph, it is clear that 3,5,7 & 10 year compounded price movements are well above the long-term trend, at 16.25%, 10.93% and 10.24% respectively. On that basis it is our view that Sydney price growth will be fairly constrained over the short-to-medium term. 2525


EDITION 1 | 2017

THIS PAGE INTENTIONALLY LEFT BLANK

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EDITION 1 | 2017

All property must pass our stringent investment criteria and be subject toa thorough due diligence process. Our low risk approach excludes 99% of all properties currently on the market. We never source properties direct from developers and we don’t buy properties off the plan or in new housing developments. We have a strict no commission policy preventingus from ever taking commissions from agents or referrers. We believe in providing quality ethical advice and exceptional customer service. We pride ourselves on delivering successful outcomes everytime, guaranteed.

Our objective is not to buy you a property. Purchasing a property is the last step in our considered and thorough process.Our mission is to understand and satisfy your needs – financial or emotional, in a low risk and efficient manner. Our objective is to build you wealth through sophisticated property investment. We believe in everything we do because we treat your investment portfolio like it was our own.

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2017 - warringalfs.com.au · sydney at a glance 2017 edition 1 there are approximately properties...

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