Sydney's million dollar market

When Austin Powers’ comic nemesis Dr. Evil strokes his cat, masticates his pinky finger and demands a million dollars, his ransom is incredulously dismissed as a relative pittance.

It’s a reaction you might now expect from your local real estate agent.

A million dollars will no longer even buy you the median priced Sydney property – you’d be a thousand bucks shy of the asking price.

In the Sydney property market, a million dollars is not the set for life dream figure it once was. Unfortunately for the vast majority of wage earners, it is as elusive a sum as ever. Put simply, house prices are again soaring while wages stagnate.

The average salary in Sydney only just tops A$74,000. For the median salary earner, the median property is mere fantasy. Even the bottom end of the market is now a genuine stretch.

“Sydney is outperforming all expectations and the recovery has been swifter than we expected - the median house price has again topped $1 million and at this pace, Sydney’s prices will be higher than 2017 peak levels well before the end of this year,” said James Nihill, Managing Director of Patrick Leo.

“The capital remains a firm favourite with investors and boasts seven out of Australia's top ten metropolitan housing markets, which is evident as clearance rates sat at 78.5 per cent last month.

With the threat of a possible recession looming, the RBA has reduced the cash rate to within an inch of its lowest possible levels and governments are also highly likely to expand incentives encouraging home buyers into the market.

John Lindeman, leading property market researcher and Chief Property Consultant at Property Power Partners, said high house prices were encouraging many frustrated first home buyers to move interstate.

“Sydney has a nett interstate population drain of 20,000 people each year, and the number is rising, with most of them moving to Brisbane and Melbourne, where housing is more affordable,” he said.

“Many of those who stay will purchase units along Sydney’s Metro and Light Rail growth corridors in suburbs such as Castle Hill, Epping, Bankstown and Parramatta, where prices are sure to rise as result.

“At the other end of market, recent price rises have encouraged retirees to take the money and run, by downsizing to smaller, low maintenance, easy access and well-appointed units in Sydney’s desirable beachside and harbourside precincts.

“The demand they are generating for high quality well-located units in suburbs such as Curl Curl, Queenscliff, Mosman, Cremorne Point, Pyrmont, Bronte, and Cronulla is set to cause high price growth,” Mr. Lindeman said.

Viruses and value

The Harbour City continues to lead the national property market recovery, with dwelling values up by 1.7 per cent in February, the biggest jump of all Australian capital cities.

The myriad potential dampeners on the rapidly heating market amount to nothing. Economic malaise, moribund wage growth, negative gearing proposals and buyers trying to time the bottom of the market – all have proven largely illusory as the market shakes off the bad news and runs with the good.

The stock market has caught the jitters from the coronavirus, fluctuating wildly in the US and shedding billions of dollars in Australia. For those waiting for the property market to take a hit, Chris Gray, CEO of Your Empire suggests it’s wishful thinking.

“For those sitting on the sidelines because of the coronavirus, while there is no guarantee, I think you’ll live to regret it - many people wait for the perfect storm but it never happens.”

Mr. Gray cited the contradicting factors that were driving prices higher, namely high rental yields, low interest rates, easy-to-borrow money from the bank and easy-to-buy property.

“It’s amazing how cold people were in 2017 - 2019 and then within months they’re bidding away without a rational thought in their brain,” he said.

“Some of the prices buyers are paying are ridiculous, but luckily that’s not happening for every property - you can still buy a great property at a reasonable price.

“Vendors and agents aren’t that cocky at the moment, but I can see that changing as the year progresses.”

The coronavirus was also a potential threat to the property market according to academic Peter Phibbs, School of Architecture, Design and Planning at The University of Sydney.

“What's really been driving the price increases over probably the last 10 years has really been interest rate affects,” he said.

“We've seen interest rates go down to historical lows so, given there's no more room to cut, investors probably realise that interest rates support's not out there anymore.

“We're unlikely to see dramatic price increases in the future and I think the interesting question is starting to be around the virus, as certainly the equity markets are being hammered - I guess the question is what that might do to confidence for some people in the market, in terms of making large commitments.

“Confidence is a funny thing amongst consumers, particularly, owner occupiers or first time buyers who might be thinking maybe a little bit more differently now.”

The virus concerns were also impacting Sydney’s population growth, he said, which has long been one of the catalysts spurring on Sydney’s price growth.

“What people don't realise is a lot of that growth is from international students, who have been growing about 15% a year in Australia.

“That sort of contribution to population growth could potentially be at some risk here.”

The great divide

So how does the market move independently of what people are earning to pay for it?

“Despite wages not keeping up with inflation, there’s still enough high-income earners that can still afford to buy in the inner city,” said Mr. Gray.

“They're not foreigners, they’re Aussies; they’re not speculating, they're in there for the long term and may never sell.”

Property Power Partners’ Mr. Lindeman agreed, saying the average income earner was being left to pick over the bones of the market.

“Only houses in the lowest priced suburbs of Liverpool, Blacktown and Fairfield remain within reach (of the average income earner), and once prices rise further, they will be beyond first home buyers’ borrowing power and become unaffordable as well,” he said.

Suburbs across Sydney’s north-west continue to perform well with property prices in the Baulkham Hills and Hawkesbury, Inner West and Ryde areas climbing by an impressive 16 per cent.

Mr. Nihill, of Patrick Leo, said it was yet to be seen if the market could indefinitely outstrip wage growth.

“The core issue the Sydney market will face this year will be affordability, with prices rapidly racing towards peak levels and wages growth simply unable to keep up,” he said.

“The key to unlocking growth lies in the ability to identify future hotspots that can reap higher than average capital gains,” he said.

For now, the humble wage earner can only dream about access to a crystal ball let alone affording the million dollars to follow its predictions. Like Dr. Evil, they may need to up their income demands.