04.26.2023 Local News

Has Sydney’s Property Market Bottomed Out?

Has Sydney’s Property Market Bottomed Out?

Sydney property prices rose in the past two months.

Can we expect the trend to continue?

After almost exactly a year of falling prices, Sydney’s median property price rose by 1.7% in February and March 2023. So does that mean the market has bottomed out, and we’re back in a growth phase once again? We look at the case for and against.

Signs the market has bottomed out

Here are the key reasons we think the market may have turned a corner, particularly here in Sydney’s eastern suburbs.

1. Interest rates may have stopped rising

While interest rates were not the only reason Sydney property prices fell in 2022, they did make a significant contribution to the falls. Many people we spoke to were holding off buying (or selling) because they were unsure where the RBA would eventually land and how their budget would be impacted.

In April 2023, the RBA paused its rate rises for the first time since May 2022 – giving many people confidence that this could be the end – or close to the end – of rising interest rates. This has since been reinforced by a review of the RBA, which found that people needed time to absorb the rises.

2. Auction clearance rates are good

In Sydney, most properties sell by auction (although we also do a significant number of off-market sales here in the eastern suburbs). That means the auction clearance rate can be a great guide to where prices are headed.

Generally speaking, anything over 70% indicates a seller’s market, and prices tend to go up. Anything between 60% and 70% suggests a market in equilibrium, while an auction clearance rate below 60% usually indicates a falling market.

For the past month, the Sydney-wide auction clearance rate has been hovering around 70%, according to Domain. On the weekend of 15 April 2023, it actually rose to 74%. While this might not be as high as we were seeing in 2021, when the auction clearance rate went as high as 90%, it still indicates a growth market.

3. Government incentives are working

Last year, the outgoing Perottet government introduced a scheme that allowed many first-home buyers to avoid stamp duty and instead pay an ongoing land tax. The scheme only applies to properties valued under $1.5 million – and we’ve noticed that this part of the market has started to heat up, with open homes for apartments attracting more people than previously. This is also reflected in Domain data which shows a higher proportion of people searching for properties under $1.5 million.

Our advice to buyers is that while government incentives can make property a lot more affordable, don’t limit your search criteria too much: you may miss out on other properties you may be able to afford.

4. The rental market is incredibly tight

The rentals market can have a direct impact on the sales market too. Over the past year, rents across Sydney’s eastern suburbs have risen by an eye watering 44.2%, according to SQM Research. Rents on houses have risen by even more, lifting 50.2%.

Higher rents do two things: they encourage investors to buy property and encourage tenants to become owner/occupiers rather than keep renting. Both of these factors increase demand for property and push prices upwards.

5. There isn’t enough stock

We’ve said many times before: there isn’t enough property for sale in Sydney. Stock levels have been down since the start of the pandemic, and there is no sign that this will change soon. In March 2019, there were 37,813 listings across Sydney. In March 2023, there were 30,054 – or more than 20% fewer.

As more people begin to arrive in our city over the next few years, the gap between the number of homes available and the number of people looking for accommodation will only get worse, putting added pressure on property prices.

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Unless we build many more homes, we can expect to be in conditions that favour rises rather than falls.

6. It’s becoming expensive to renovate

For the past few years, it’s been fashionable to renovate rather than move or even to buy a house in original condition, knock it down and rebuild. The reasoning for many people has been that this is a much cheaper – and more personalised option – than buying a new home and having to pay stamp duty.

However, with COVID-19 disrupting global supply chains and the cost of labour rising, construction work has become increasingly expensive, tipping the balance back in favour of buying new. This should continue to put pressure on homes up the property ladder.

Signs the market hasn’t turned yet…

While we’re hopeful that this is the start of a broad recovery in Sydney’s property market, we also need to acknowledge these counter-arguments.

1. Interest rate rises aren’t over yet

There’s no guarantee the RBA won’t raise rates a few more times yet. If it does, people may decide to hold off from buying or offer less.

2. More stock will come online

There’s no doubt low stock levels have conditioned the falls. However, a lot of people who have been holding off listing may decide that conditions suit taking their property to market. This will affect the relationship between supply and demand.

3. People have reached their borrowing limits

Higher interest rates have impacted people’s borrowing power to the point where they can’t afford to pay as much as they could during the 2021 boom.

4. This is a dead cat bounce

It’s an old investor’s saying that even a dead cat will bounce when thrown from high enough. The pace of 2022’s market falls was like nothing we’ve seen before – so a small rally was inevitable, even if the longer-term trend is for further decline.

5. Property is already overpriced

Finally, we need to acknowledge that Sydney property is more expensive than in other parts of the country – more than 35% higher than Melbourne’s and around 13 times the median income. That said, our property prices have always outperformed most other parts of the country due to ongoing strong demand and limited supply due to planning and geographical constraints.

Our view

While some of these counter-arguments are attractive, history shows the long-term trend is for Sydney property prices to rise. We believe we could be at the start of a growth phase once again, but that a tighter lending environment means prices won’t take off quite like they did in 2021. Regardless, we won’t know for sure until we’ve passed the bottom of the market, as there’s always a lag in data.

Want more?

If you’re thinking of buying or selling in Sydney’s eastern suburbs, get in touch