Sydney heading for undersupply
Sydney unit prices are actually now rising, and I believe will probably continue to do so, for a number of reasons.
Firstly, interest rates are at or close to their peak now, with Australia's 3-year bond yield trading down towards 2.7 per cent, from around 3.7 per cent only a few weeks ago.
This largely reflects the emerging banking crises in the US and Europe - which are of course bad - but it is already reducing fixed mortgage rates in Australia, and potentially also portends lower interest rates Down Under over the next few years.
Secondly, although people like to talk about mortgage stress - which may indeed be a factor for some existing leveraged borrowers, especially portfolio investors - Sydney's economy is still cruising along just fine.
The unemployment rate in New South Wales is actually now among the lowest in the nation - at an unbelievably low level of around 3 per cent - which is something we haven't been able say much over the past couple of decades.
Thirdly, Australia's population growth is now running at a remarkable record high of almost 600,000 per annum, which in time will be almost impossible for the new unit supply to keep up with, given the woeful trajectory of new dwelling sales.
Sydney will be the most obvious initial beneficiary of the resurgence in long-term and permanent migration, the rapid return of international students, and to some extent regional COVID refugees being called back to their city offices (at least for 2 or 3 days per week).
Fourthly, construction costs for developing medium-density dwellings have often increased by about 50 per cent from pre-COVID levels, a dynamic which itself partly accounts for the recent crunch in building approvals.
Crucially, therefore, I believe we won't get any meaningful increase in the new unit supply until prices rise by at least 25 per cent from here, and possibly more.
Capital raisings show that a swathe of Build to Rent towers will start to emerge from the earth soon - especially in Melbourne - but most probably won't be delivered to the market until around 2026.
And fifthly, for the time being at least, New South Wales has exempted first homebuyers from having to pay stamp duty up to the $1.5 million price point, which is sparking a bit of competition in the unit market, with first homebuyers sometimes competing against downsizers.
With rents spiking alarmingly by up to 50 per cent in some cases for inner-Sydney apartments, buying a unit has often become a more attractive option than renting, although stock levels remain exceptionally low for A-grade units.
Rental crisis
In related news, CoreLogic reported today that Sydney unit rents are surging higher at a record annual pace of around 17 per cent and rising (this lags some way behind SQM Research's asking rents leading indicator, which is up by nearer to 30 per cent over the past year).
Source: CoreLogic
Rental vacancy rates for units in the capital cities continue to fall to all-time lows of 0.8 per cent.
Source: CoreLogic
This has been driven lately by sharp declines in Sydney and Melbourne - where vacancy rates are also now extremely low - and before that Brisbane.
Adelaide's unit vacancy rate is now close to nil.
Yes, I've heard all the counter-arguments, in particular about interest rates.
Noted and bookmarked!
