By John McGrath, Property Expert
www.mcgrath.com.au
After a red hot summer, find out why real estate guru John McGrath tips continued growth in the residential market.
The first two quarters of 2010 will be the launch pad for a long period of sustained growth in Sydney property prices.
The market strengthened significantly in 2009 against a weak economy and I predict gains of 8-10% in most areas this year.
We saw a sneak preview in the last quarter of 2009 when properties between $250,000 and $1.5M all seemed to be enjoying a price surge due to increased buyer activity, notably at the lower end before the First Home Owners Boost disappeared.
In 2010, there will be further upwards pressure on prices across the board due to low supply and high demand, particularly from upgraders and investors.
The issues for 2010:
o Australia is vastly under-built and this is contributing to low supply and lacking affordability. In NSW, we’re seeing about 110,000 new residents a year, but we’re only approving a couple of thousand new homes a month. Although NSW residential building approvals have trended up 22% during 2009, there is a still a vast shortfall to meet population growth so the under-building situation is here for several more years.
o As confidence rises, so will stock levels – but will this be enough to meet demand? RP Data reports an additional 2000 new listings in NSW for the month of January 2010 compared to January 2009. But total advertised listings are still significantly lower than last year, meaning newly-listed properties are selling quickly.
o Home loan interest rates are likely to settle around 7.5%, which is historically reasonable for long term borrowers. The Big Four were at 6.5% to 6.75%, prior to the recent March rise by the RBA. My growth predictions for the property market would likely alter if rates hit 8% or more. There is a major disparity between the very low cash rate of 4.0% and home loan rates due to banks raising rates independently of the RBA.
John McGrath’s Market Observations
Here are a few of my key observations and views on the current market:
o We saw our own company’s Auction Days on Market tighten to 24 prior to Christmas (compared to 38 the previous year), which is about as low as the market ever gets, signifying buyers’ readiness to commit to good quality properties. The trend of wanting to buy close to the CBD or near Sydney’s beaches continues with a significant amount of enquiry from our buyer database looking in those regions.
o The prestige bounce back continues with Sydney’s upper end sector growing faster in 2009 than the lower end despite huge first home buyer stimulus. The recovery will likely be complete by mid-year so this is the last chance to upgrade into homes worth $3M-plus at a discount to 2007 prices.
o In 2010, the middle and upper brackets should increase as the economy strengthens and executive bonuses re-appear. I suspect we will see the $1.5m to $3m range start to increase strongly. In 2008-2009, we saw executive bonuses that were often the catalyst for property price pressure virtually disappear. The suburbs that were home to a large percentage of Sydney’s finance and banking executives suffered tremendously from a lack of buyers and an oversupply of property for sale. This will reverse quickly as buyers look to take advantage of the tail end of the GFC and upgrade before the expected market price rises take place.
o The baby boomer appetite for quality apartments close to the city and beaches will not subside in my opinion. This will force values for the best located apartments higher in the short and medium term as buyers fight to secure the best locations in a city with rapidly diminishing development opportunities in prime lifestyle locations. It seems that $25,000 to $30,000 per square metre is rapidly becoming the benchmark for luxury beachside and harbourside apartments.
o Houses in great locations will continue to be popular. It’s fair to say apartments have narrowed the gap over the past 10 years, but land in prime locations will always be a sought after commodity. I expect we’ll see a significant surge in demand for houses over the next five years as young and wealthy executive families in the 35-40 year age bracket opt for land over strata airspace.
o The return of investors will contribute significantly to strong buyer demand in 2010. Investors can be the difference between a boom and a normal market. Owner-occupiers are constantly turning over property as their lifestyle changes, whereas investors came in and out of the market depending on their investment criteria. Although the share market has recovered significantly, investors learned a valuable lesson on asset diversification during the GFC, with high rental yields the saving grace for many investors in 2009.
o Investor activity will replace any decline in first home buyer activity this year – we’re already seeing strong indications with 34% of loan approvals to investors in December 09 vs. 28% in February 09 (AFG Mortgage Index). I disagree with speculation of a mass pullback in first home buying in 2010; in fact we are seeing very little drop-off in the level of First Home Buyer activity since the Boost was removed.
o The NSW Government’s 50% stamp duty discount on new properties up to $600,000 has been extended until June 30. Great to see some stamp duty relief for investors as this has long been a barrier for small investors particularly.
o Gross rental yields around 5% will continue in 2010. Just as I expect property prices to rise, so too will rents as population growth and a slight decline in first home buying push up rental demand.
Smart Property Investing
If you’re thinking if investing in 2010, here are my top tips for choosing the right property:
• Always start with location, buy the best location your money can buy.
• Within 10kms of a major CBD or close to the beaches will deliver best growth. Walking distance to CBD transport, shops and cafes is also ideal.
• Be prepared to seek out new hotspots and take calculated risks on up-and-coming suburbs.
• Focus on capital growth not rental yield – capital growth creates mega wealth.
• Houses generally increase in value faster than apartments.
• Find something that feels great – don’t treat looking for an investment differently to a home.
• Look for property that has northern sun exposure and abundant natural light.
• Car parking will become far more valuable in the next 10 years – try to ensure you have parking.
John McGrath’s 2010 Investment Hot Spots
Houses:
• Cammeray
• North Wollongong
• Queenscliff
• Dee Why
• Coogee
• Lane Cove
• North Parramatta
• Erskineville
• Surry Hills
• Ryde
Apartments:
• Lane Cove
• Rozelle
• Naremburn
• Breakfast Point
• Ramsgate
• Manly
• Camperdown
• Terrigal
• Balmain
• Gladesville
Key Points & Predictions:
• Price gains of 8%-10% in most Sydney markets in 2010.
• Lifestyle locations close to the CBD and/or beaches will lead the market in capital gains.
• Mid to upper brackets to rise as economy strengthens and executive bonuses re-appear.
• Australia is vastly under-built and this will contribute to lacking supply and price gains.
• Stock levels are likely to increase somewhat in 2010 due to rising confidence in the market.
• Home loan interest rates are likely to settle around 7.5% in 2010.
• Strong investor activity will make up for any decline in first home buyer activity.
• Gross rental yields of around 5% will continue in 2010.
For more information and advice, please visit www.mcgrath.com.au