04.19.2023 Property News

Why Today’s Property Market Is Better Than We Expected

Why Today’s Property Market Is Better Than We Expected

Despite forecasts of continued decline in property values, Sydney’s median home value has risen for two consecutive months, according to CoreLogic.

Between late 2020 and the end of 2021, the Sydney property market experienced one of its most rapid booms of all time, with the city’s median property price rising 27.7% in the space of just 15 months. This was followed by a rapid fall, with the median dwelling price falling -13.8% between January 2022 and January 2023.

Many commentators believed this may have just been the beginning of a severe market correction, especially as interest rate rises and cost of living pressures started to bite into family budgets. Some forecast that Sydney’s median price would take another double-digit hit this year, leaving it as much as 30% below its market peak.

But over the past two months, a different story has emerged. Sydney’s median dwelling price has started heading north once again, lifting a total of 1.7% over the past two months.

We explore why this is happening – and why the property market here in Sydney’s eastern suburbs is actually better than even we anticipated.

1. There aren’t enough homes for sale

Property values are always set by the rules of supply and demand. Even though demand isn’t as strong as it was in 2021, the supply curve has also shrunk to meet it. There simply aren’t enough homes for sale at the moment to meet the level of demand that remains in the market.

Low stock levels have been impacting our market since the onset of the pandemic and were also a key reason prices rose so rapidly during the boom. For instance, SQM Research shows that in February 2023, there were 10,292 (or almost 29%) fewer properties for sale across Sydney than there were in February 2021.

2. There aren’t enough homes, period

That said, it’s not only that there aren’t enough homes for sale. As our city’s population grows, there aren’t enough homes in Sydney, full stop. That’s especially true in areas such as the eastern suburbs, where so many of the jobs are located.

Although this is well documented when it comes to a lack of affordable housing, it cuts right across the market, with too few homes available at every level. Now, with borders reopened, foreign students back, and the number of permanent immigrants increasing, Sydney’s housing shortage is likely to get much worse too.

Until this chronic shortage of housing is addressed, Sydney will remain a high-demand/low-supply market – meaning prices will rise, all things being equal.

3. The rental market is exceptionally tight

At the same time as the median property value was falling in 2022, the median citywide rent was rapidly increasing. According to SQM Research, Sydney’s median rent jumped 23.1% last year to go from $580 to $714. This year it has risen another 9.1% to $779.

Combined with lower prices, this means Sydney property is producing a much higher yield than it was a year ago. According to CoreLogic, apartments now return a median yield of 4.1% compared to 3.0% at the start of 2022.

This makes owning property more attractive to investors looking for income. For many tenants looking at the “rent v buy” equation, it also begins to tip the balance in favour of buying. We’re seeing both buyer groups slowly return to the market.

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4. The interest rate shock could be over

Sydney’s median value started falling before the RBA began raising interest rates. However, there’s little doubt that the 10 consecutive rate rises we received between May 2022 and March 2023 were the main reason prices fell so far. This wasn’t always because it meant people couldn’t afford to buy (although it has impacted a lot of people’s borrowing power); it was also because of the uncertainty it was creating, especially around budgeting.

After the RBA decided not to lift them in April, we saw people who were putting their search on hold begin to come out of the woodwork. But, even before that, people seemed to be growing more confident that the rate rises would be coming to an end and certainty would return. Now, even if the RBA lifts rates again, most buyers seem more prepared than they perhaps were in 2022.

5. The top of the market never slowed down

Because rising interest rates were the defining factor in the 2022 property market, those segments that aren’t directly influenced by the cost of borrowing never really slowed down. In particular, at the top of the end of the market, we were still seeing strong demand and very low supply. The moment a prestige property hit the market, it seemed to be attracting strong interest and offers, and several sales records were broken. Some premium properties sold even before they hit the market.

Prestige properties that suited downsizers – such as large apartments – were particularly selling well. Again, there simply are nowhere near enough properties to meet the demand from this increasingly important segment.

6. Construction costs are through the roof

When people want more space, they often choose between renovating or buying a new home. However, with COVID-19 disrupting global supply chains and the cost of labour rising, construction work has become increasingly expensive over the past two years. The latest ABS data shows inputs into the construction industry rose by 3.1% in the December 2022 quarter, with the cost of timber, board and joinery rising 5.4%.

It has also become increasingly difficult for people to book tradespeople, with one analysis showing homeowners now needed to wait for up to two years to get the skilled labour required to undertake a full-scale renovation.

In the debate over whether to renovate or move, this is tipping the scales firmly in favour of moving on for many people.

7. Last year’s falls may have been too big

A final factor to consider is the old adage that markets tend to overreact. When times are good, buyers think they’re better than they actually are; when they’re bad, buyers think they’re worse than they really are.

While interest rate hikes, cost of living pressures, high inflation and economic uncertainty should have caused the heat to come out of the market, there is the possibility that this went too far. The growth we’re starting to see now could just be the market reacting to this.

After all, the long-term outlook for Sydney’s real estate market remains strong. So buying into it for 10% less than a year ago, must be an attractive option for many people.

Want more?

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