Yes, Sydney's expensive, so is it still a property investment option?
Sydney's high property prices have deterred many from investing in the city's houses and units, but history and data show that further capital growth may still be ahead.
Investors frequently hesitate to invest in Sydney for several reasons. The most common objections I hear are, “Sydney prices are too high,” “Sydney yields are too low,” and “Sydney has had its day.”
Even if these statements have merit, are they valid reasons for steering clear of Australia's largest property market?
Sydney property prices are high, but that might be a good thing
It’s undeniable that Sydney’s property prices are out of reach for many.
Rising property values create a division between property owners and those trying to enter the market, however, the reason prices keep rising is that they remain within reach for many.
Existing property owners can leverage the equity they’ve gained through rising prices when upgrading and even assist their adult children in entering the market.
The 2023 Demographia International Housing Affordability Report ranks Sydney as the second most unaffordable city globally, with Hong Kong taking the top spot. Remarkably, this lack of affordability hasn’t hindered price growth, and it might even be seen as a positive indicator for investors.
Other Australian cities like Melbourne, Adelaide, and Brisbane also rank highly in the least affordable housing market list, with a loose correlation between their ranking and long-term capital growth performance.
While researching for this article, I uncovered a piece published by a renowned property analyst in June 2017 that warned against investing in Sydney due to “ridiculously high” prices. A look back at most property forecasts suggests it is more guess than science.
Despite the looming downturn at that time, the Sydney median house price has surged from $1,178,417 in June 2017 to $1,538,017 in June 2023, disproving the assumption that high prices equate to stifled growth or a price retraction.
The Sydney property market has shown resilience during major disruptions, as seen with prices rising in the face of a pandemic-induced exodus in 2021 and again in 2023 despite rising interest rates, further underlining its potential for growth.
Low yields in Sydney: Does it really matter?
It’s true Sydney yields are lower compared to other cities.
Yields depend on property price and rent, so if prices outpace rents, yields will inevitably suffer. However, rental income isn’t the primary source of wealth accumulation.
It’s subject to income tax and doesn’t compound like capital growth does.
Sydney’s property market is best suited for investors with high incomes to support the necessary borrowing capacity and cash flow to cover rental income shortfalls.
Houses v Units: A closer look
Affordability concerns lead investors to look interstate for houses rather than buy a unit in Sydney.
Now, I’m not saying that all Sydney units make great investments, in fact, often they do not. Yet there’s a belief that all units under-perform houses.
CoreLogic data going back 30 years shows Melbourne has been the number one performer in both house and unit price growth (519 per cent and 354 per cent respectively), with Sydney nipping its heels (houses 507 per cent and units 340 per cent).
Granted, house prices in the ACT (431 per cent), Hobart (423 per cent), Brisbane (390 per cent) and Adelaide (370 per cent) have outperformed Sydney units over the past 30 years, but Perth house prices dragged the chain at 325 per cent growth.
Has Sydney property "had its day"? Not so fast!
The notion that Sydney has "had its day" isn’t new, and any investors who heeded this advice a decade or two ago will have missed out on some pretty impressive growth.
Over the past decade, Sydney has been the top-performing capital city, with dwelling prices increasing by 97.6 per cent. Over a 15-year span, Sydney house prices have risen by 163 per cent, outpacing other cities.
Property markets don’t get “just one run”, it’s not a race for the finish line. There is no terminus when we’re “all aboard the property train”.
It’s naive to think that Sydney has no further opportunity for growth.
A word of warning, we’re looking at aggregated data here.
According to the ABS 2021 Census, there are a tad over two million dwellings in Sydney, whereas every investor is looking at purchasing just one property at a time. Just because the “whole Sydney property market” went up 97.6 per cent over the last 10 years, doesn’t mean every unit, townhouse or house went up at that same rate.
I’ve seen evidence of some properties failing to double in value over that time while others have tripled in value.
Consider the investment downsides
Investing in the Sydney property market may limit your ability to build a diverse property portfolio due to its high costs, however, diversifying with subpar assets to spread risk isn’t the solution.
A single high-quality asset in Sydney is likely to outperform a collection of lower-grade assets over time.
The combination of high costs and low liquidity can strain investors. Be prepared with buffers and sufficient cash flow to weather rising interest rates or periods of vacancy.
Land tax is a cost to consider. The unimproved land value threshold is $969,000, which can be exceeded easily in an expensive city. And state government housing policy has not been seen to be overly conducive to property investment.
Investing in apartments with smaller land components is one way to mitigate this.
While the data favours houses over units, there are inner-city areas where high-quality apartments excel.
Avoid buying in areas with an oversupply of apartments or poorly managed buildings.
It always pays to dig deeper into the data. CoreLogic’s 30-year report shows that 19 SA3 (ABS statistical areas that are larger than a suburb but smaller than a Local Government Authority) outperformed the Sydney average. Fifteen of these are within the inner and middle rings.
In conclusion, Sydney’s status as Australia’s financial capital is a key driver of its property market’s enduring strength but not all Sydney suburbs or property types guarantee investment success.
The real key lies in selecting low-risk locations and identifying A-grade assets within those areas.
