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Property prices: how low can Sydney go?

Sydney's property market has risen to stratospheric heights over the past decade but the atmosphere is thinning at its lofty altitude, and the question now is whether a controlled descent or crash landing is about to unfold.

Aerial view of Sydney's Northern Beaches at sunset.
The sun may be setting on the Northern Beaches real estate market, where house prices pulled back five to 10 per cent.

It is the country’s most expensive property market by some distance and its growth rate has been on fire over the past few years but how far the mighty will fall is arguably the burning question in Australian real estate.

With Sydney’s median property price currently coming in at a whopping $1,110,660, and for houses at an eye-watering $1,38 million, there’s potentially a long way down.

Compared to the national median dwelling price of A$752,507, Sydney is clearly an outlier even though other cities have also enjoyed record-breaking growth rates that were underpinned by heavy borrowing amid low rates, a supply shortfall and surging demand in what’s been a high-immigration economy.

Sydney’s real estate market has eased back 2.8 per cent over the last quarter and last month’s fall of 1.6 per cent was the largest fall in house prices since 1989.

With experts predicting further losses are imminent, Sydney could quickly be turning into a buyers’ market.

Historic Declines of Sydney House Prices

Source: Domain.

How low can it go?

Industry experts, including Bobby Haeri, Co-Director at The Investors Agency, are predicting property prices will continue to drop throughout the rest of the year and into 2023.

“I believe the Sydney property market over the next six months will continue to fall,” he said.

“Different markets around Sydney will perform in different ways, so it is hard to predict how far prices will tumble.

“Some markets have already dropped 15 per cent, others only dropped around 5 per cent, while some pockets continue to perform well and achieve growth.”

“I suspect we will see another 10-15 per cent decrease as rates continue to rise and as more supply comes to the market.”

On the flip side, Tim McKibbin, the Chief Executive Officer of Real Estate Institute of New South Wales, told Australian Property Investor Magazine that the current lull is only temporary.

“Interest rates are going up, however, we have seen them a lot higher and employment is strong,” he said.

“I anticipate the market absorbing any obstacles over the coming months and finding a revised platform where certainty and confidence will return.”

“At the beginning of the pandemic, a lot of property commentators predicted that the market would crash by 30 per cent, and we know how that ended,” he said.

“History has repeatedly taught us that when the market has a bull run it will ultimately slow and there will be a correction, and that’s happening now.”

Markets within the market

Michael Lowdon, the Director of Ray White Residential in Sydney’s CBD, said that despite tough times during the pandemic, Sydney’s CBD is now in a great position.

“I accept there are some buyers who are citing rising interest rates and media reporting of falling house prices as a reason to submit lower offers, not offer at all or put their search on hold, however, these city buyers remain in the minority, which reduces the risk of self-fulfilling prophecy.”

“The only times where prices may come under pressure is if there is a very limited time to sell, if a vendor needs to sell within a couple of weeks.”

“Or alternatively in very high-density buildings where there are multiple offerings of the same product.”

Mr Lowdon added that commercial buildings and apartments in the CBD are increasing in price rather than decreasing.

“On the flip side, very recent sales data show several building price records keep getting broken and record square metre rates paid.”

“If there are no underlying issues with a building or a specific apartment, then priced correctly they will continue to trade.”

It’s a different story for Sydney’s eastern suburbs, where house prices have decreased by a staggering $315,000 since reaching their peak in June 2021, according to Domain data.

Dr Nicola Powell, Chief of Research and Economics with Domain, shared the reasons why this generally affluent region has been significantly impacted.

“It’s clearly evident that there’s sharp falls unfolding in the most expensive areas of Sydney, with the median house price falling 8.5 per cent in the eastern suburbs since its peak after it was also the first Sydney region to hit a price peak.”

Regions including Baulkham Hills, Blacktown, Central Coast, Inner West, North Sydney, Outer South West and Blue Mountains have been shielded from the losses and their values are currently at their peak.

Frank Russo, Managing Director of Search Find Invest, offered his insights into how Sydney’s Inner West is performing.

“The Inner West is still the most affordable area of Sydney closest to the CBD and represents better value than the East and Lower North Shore,” he said.

“Once the market stabilises, potentially later this year if it isn’t doing so already, the market will return to a normal slow growth cycle.”

He also said he has recently seen more buyers return to the market.

“I have noticed over the past two weeks that buyers are re-entering the market, albeit a bit tentatively, and I feel the worst of the pullback has now already been priced in,” he said.

“As long as rates don’t rise too much higher, I feel the spring season will see buyers return and prices stabilise.”

The greatest falls over the June quarter were at the top end of the market, with the upper quartile down 4.3 per cent, while values for the bottom quartile fell only 0.5 per cent. 

There are several regions in Sydney that have recorded significant declines since reaching their peaks between June and December last year. Ryde has seen falls of $115,000, followed by Sutherland (-$95,000), Parramatta (-$50,500) and Northern Beaches (-$14,000).

Fuel for the fire

According to Mr McKibbin, there are a few key reasons why Sydney is experiencing and will continue to record property price drops.

“The market has been influenced by interest rate rises, cost of living increases, promised property tax concessions for first-home buyers and international turmoil,” he said.

“Additionally, the Governor of the RBA, Phillip Lowe, has made no secret of further interest rate rises.”

“The net effect of these factors has taken the heat out of the market, however, the lack of supply remains a reality.”

Mr Haeri said he believes prices are dropping due to homeowners’ rising debt-to-income ratio.

“History tells us that the higher the debt in a market the bigger the correction as rates rise,” he said.

“Sydney has come off 15 years of 150 per cent plus growth.”

“Debt levels were well above the 6-7 per cent household income that banks are usually comfortable with and since covid Sydney has also had a population decrease, with locals moving to more affordable locations along with many immigrants going back to their homeland as covid took hold.”

No renters’ reprieve

Unlike Sydney’s property prices, rents in the city are still increasing.

Over the last 12 months, SQM Research shows weekly rents for houses have increased by 21.2 per cent and currently sit at $828, while apartments remain the more affordable option at $528, which is still an annual increase of 14.7 per cent.

Median rents for apartments in Brighton-le-Sands, Ultimo, Zetland and Haymarket rose sharply over the past year, jumping by 20.5, 19.4, 17.2 and 18.7 per cent respectively.

Units continue to outperform houses when it comes to rent returns as tenants seek out affordable options.

Mr McKibbin said it is unlikely the rental market in Sydney will improve anytime soon.

“With high employment and a lack of available rental property, we are not going to see this market change as we will the residential sales market,” he said.

He added that councils have begun trying to mitigate the supply issues themselves.

“We have recently seen some councils, in an effort to increase the rental property stock, limit the number of days a holiday rental landlord can offer their property to the market.”

“Additionally, as a further disincentive, the councils have increased the landlords’ rates.”

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