Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - & author of Things That Make You Go of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, MacroBusiness.

Tuesday, 25 March 2014

Sydney to become a two-speed market

Buyers Eye

Back in late 2013, at AllenWargent we released our summer Sydney edition of the Buyers' Eye here, the aim of which is always to bring you tomorrow's property market news and trends today, and to share a few of our thoughts and insights on the period ahead for the property markets.

Incidentally, our corresponding winter edition for London is here

The key points of our outlook for Australia this year included the following:

  • having been a relative under-performer since 2004, Sydney would be the Australian property market to continue leading the property recovery through 2014, driven by very strong population growth;
  • the fundamentals of the Sydney property markets and economy are exceptionally strong and comparatively much stronger than elsewhere in Australia;
  • the recovery would be predominantly an investor-led phenomenon, with other sectors of the market (e.g. upgraders) to follow;
  • first-time buyers continue to struggle to get on to the housing ladder in Sydney; and
  • a strong pick-up in retail sales and certain other Australian economic data is expected.

We also offered some cautionary notes, which I'll consider in a little more detail momentarily.

APM chart pack

In this context, I was interested to peruse the slides presented recently by Dr. Andrew Wilson of Australian Property Monitors (APM) in conjunction with Domain. It's an epic chart pack which you can access here.

Some of the key points highlighted by Wilson included (among much else):
  • that population growth has indeed been a strong driver of the Sydney market;
  • Sydney's property markets are the strongest performers of the capital cities at present;
  • retail trade in New South Wales is booming in response to low interest rates;
  • economic growth in NSW is on the rise;
  • Sydney comfortably led annual jobs growth in Australia in the year to January 2014; and
  • NSW is by far and way the most fertile state for investor activity.

Source: APM, Domain

I should stress that I've only scratched the surface here. Wilson provided much more besides in the chart pack here.

Sectors of the Sydney market: good, bad and ugly

All well and good, but what property buyers and investors really want to know are specifics.

Back to out Buyers Eye for Summer 2013/14, and we made a few more key points:
  • while the inner west of Sydney was our favourite sector of the market in years gone by, the phenomenal 3-4 year price growth in that sector led us to believe that the inner west had "done its dash";
  • caution! Sydney is entering the first phase of a construction boom, and this buyers should be very wary of those sectors of the market where a lot of new supply is coming online (principally, within the inner south, but also in certain other hubs)
  • as a laggard in this market cycle, our "ones to watch for 2014, include a number of key suburbs to the north of the harbour bridge, in particular those with key transport links to the city via Sydney ferried and the north shore train line."
In summary, look to the lower north shore, since it has become very difficult to find value in the inner west.

To date, the inner west has remained imperiously strong, but that doesn't change our view that the best of the gains in this cycle have already passed.

In truth, no sector of the market peaks in any given week and nobody "rings a bell" to signify to the top of the market.

However, we are keeping a close eye on SQM Research's vendor sentiment index which may imply that inner west asking prices are peaking or have peaked (this hasn't yet stopped some properties continuing to sell for huge prices and for way over their reserve).

Lower north

Back to Dr. Wilson and his comprehensive chart pack. What for the lower north shore? In short, APM agrees that, as the comparative laggard, this is the sector forecast to have the strongest capital growth in 2014 (10%) and that the lower north shore is the sector of the market best placed in the Sydney regions price cycle.

Source: APM, Domain

Notably, the lower north shore has topped the charts in terms of regional clearance rates through February, but, for what it's worth, we do not expect this to continue, since increasingly there are properties coming to market with unrealistic vendor expectations, and as such they will be (quite rightly) passed in.

That doesn't change our view that the lower north shore will be the most favourable sector for 2014.

Risk areas

We made this point in our Summer 2013/14 Buyer's Eye, but I will make it again here.

There are areas, we believe, of significant risk in the Sydney market today for investors (perhaps somewhat less so for homebuyers who have a longer-term outlook). 

Just as occurred in Melbourne after prices starting racing ahead in the Victorian capital from 2006, Sydney is entering an apartment construction boom in an attempt to match the huge increase in the forecast population from 4.6 million to more than 7.7 million in the coming decades.

Source: APM, Domain

Apartment boom

In fact, this will be Sydney's largest every apartment construction boom with approvals likely to peak around 2016, and thus parts of the market may become oversupplied, particularly where the rezoning of industrial sites has already occurred (including suburbs such as Mascot, Zetland and Waterloo). 

The Sydney Central Business District also appears to be a sector of the market that could be headed for an oversupply of apartments.

Moreover, the newly constructed stock attracts a 'newness premium'. You hear this kind of thing bandied around a lot, but allow me to put a few numbers on this point for you. 

Some of the new stock around these new rezoned sites have 2 bedroom apartments which are "starting from around $800,000". In other words, the better 2 bedroom apartments with parking are selling for considerably more than $800,000, often approaching a number beginning with a '9'.

Sure, the apartments are shiny, new and easy to rent (and seemingly attract healthy enough depreciation benefits for investors), but they won't be new in a decade's time and the depreciating assets you can claim on will have, um, depreciated. 

And good established apartments in Sydney are easy to rent anyway, with vacancy rates in the inner/middle ring suburbs remaining very tight.

As for some of the new shoebox-sized stock close to the city around the Central Park area, I almost can't bring myself to type the prices, but suffice to say that a decent 2 bedder hits buyers in the hip pocket to the tune of around $1,200,000+...and if you want a view, about $1,650,000 (I think it's important to type those figures in full to ram the point home). 

I'd expect that many of these new apartments will be sold offshore.

By way of contrast, the type of investments we have been buying on the lower north shore for clients - generally 2 bedroom, 1 bathroom apartments in far, far more desirable locations - are generally priced between $650,000 and $750,000 and frequently have exceptional district vistas or Harbour Bridge views. 

Hopefully, that explains clearly enough why we consider much of the new stock to be risky.

Where next?

I tend to look towards Melbourne for clues as to where Sydney is headed next and I believe that to be in the coming few years we'll probably see rising apartment vacancy rates in some sectors of the market, with domestic investors continuing to focus (understandably) on the established stock in supply-constrained suburbs, keeping pressure on those dwelling prices.

Anyway, enough rambling for today. 

They always tell me that a picture tells a thousand words, and, for my sins, I was hanging around Mascot Square east yesterday in the midst of Sydney's dramatic flash-flooding, but managed to snare a few quick photos while there.

A few grainy photos from my unskilled hand would never be able to convey the scale of the Sydney apartment construction boom which is taking place, of course, but I believe I have captured the flavour of it. 

Oh, and yes, I got really, really wet.