Sydney apartments tipped to outperform houses in 2016

There’s units for students, for downsizers and increasingly for young families priced out of Sydney’s house market.

The managing director of Cunninghams and Real Estate Institute of NSW president, John Cunningham, is tipping apartments to outperform houses in 2016.

Experts believe first-home buyers and empty nesters will boost demand for apartments this year.Photo: Jim Rice JRZ

The return of first-home buyers to the market is likely to put more pressure on apartment prices, he says, which could rise up to 5 per cent.

And there’s likely to be more enthusiasm for apartments from another sector, too.

Angus Raine, executive chairman of the Raine & Horne Property Group, sees pent-up demand from empty-nesters looking for three-bedroom, two-bathroom apartments. “In Sydney, there is very little stock fitting this description, which will underpin values in this niche category,” he says.

However, other experts aren’t tipping quite so much price growth.

“We’ve literally had a building boom in Sydney,” AMP Capital chief economist Dr Shane Oliver says.

“A lot of that will come on stream this year and constrain prices, which we’ve already seen in Sydney’s west and south-west.”

The managing director of CBRE Residential Projects, David Milton, described the first three-quarters of 2015 as one of the strongest markets in history for off-the-plan sales across Sydney, but says there will be a return to “a normal market” in 2016.

“With the fall in clearance rates and a lot of negative press, buyers responded by delaying their decision to purchase, so the December quarter saw less activity,” he says, “but a good number of those buyers are already out buying this year, and they are more comfortable, because they feel they have time to think about it.”

According to a report by Dr Nigel Stapledon, of the UNSW Business School, an average of 28,000 units will be completed in Sydney each year for the next three years, more than double the historical average.

But Dr Oliver doesn’t believe there’s any cause for alarm. “We’ve under-built for the last decade. Now the catch-up will see a softening in prices,” he says.

“As a general point, we haven’t gone into a significant oversupply. We’re just seeing a bit of indigestion, not US-style, massive overbuilding.”

Last year, unit prices rose by a healthy 8.7 per cent to a median of $655,845.

Domain Group chief economist Dr Andrew Wilson is forecasting growth of 1 per cent this year for Sydney apartments, citing the surge in new supply and  uncertainty around overseas investors as limiting factors.

But Sydney has the strongest economy in the country, Wilson says, producing 100,000 new jobs last year, with an unemployment rate well below 5 per cent and strong levels of migration to NSW.

“The prospects and underlying shortage of housing will continue to keep demand ahead of supply once confidence recovers,” he says.

Lending practices will help prevent an oversupply, CommSec economist Savanth Sebastian says.

“Banks won’t lend to developers unless a high proportion of properties are presold before building work is started.”

He notes that NSW population growth remains 7 per cent above decade averages, which means long term, demand for new dwellings will continue to outstrip supply.

SQM Research managing director Louis Christopher is also forecasting 1 per cent growth. “It might seem modest, but I think it would be a good result, given how strong growth has been over the last three years,” Christopher says.

“It’s a reaffirmation of just how strong the fundamentals are in Sydney.”

Frasers sales and marketing director Paul Lowe says the emerging trend for buyers from Asia to move into Australian units brings with it a more educated apartment buyer.

“They’ve been living in more dense, vertical areas for a lot longer. It’s a growing proposition, but while it’s not the norm across the whole of Australia, it’s changing inner-city landscapes quite rapidly.

“We can’t continue to sprawl, because our land is not as fertile going further west. Nor does it have the infrastructure.”

Owner-occupiers

High-end apartments designed for downsizers are in short supply in Sydney, particularly on the upper north shore and in the city.

Stone Lindfield agent Steven Kourdis says downsizers are moving out of big properties on the upper north shore and moving to prestige apartments on the lower north shore and the northern beaches.

However, Raine is seeing plenty of demand for new apartments priced about $800,000 in suburbs such as Pymble and Gordon.

“These suburbs are already situated close to decent transport utilities such as the Pacific Highway and the railway lines, which is a big tick for young professionals working in the city,” Raine says.

“It’s also appealing for empty nesters who no longer need to leave an upper-north-shore postcode when they make a decision to downsize.”

New offerings in the central business district should go some way towards satisfying buyers, Milton says, but an undersupply of apartments in premium locations means the sector will remain strong.

“More and more people want to live in the city, and some of the best-ever offerings will come on line this year.” he says.

First-home buyers

First time buyers are increasingly faced with affordability issues, Lowe says, but with family support and a drop in the number of speculative investors in the market, they may get lift-off this year.

As of January 1, the First Home Owner Grant was reduced by the state government from $15,000 to $10,000.

The grant is offered to buyers of new dwellings priced up to $750,000, which in Sydney’s inner-ring suburbs means the choice is often limited to small apartments.

Bradfield Cleary agent Georgia Cleary says buyers approaching her agency in the eastern suburbs tend to be getting help from mum and dad, and are therefore less reliant on government handouts.

NSW remains the worst-performing state for first home buyers, Wilson says, with loan activity comprising less than 10 per cent of total residential lending.

“The prospects for a sustained revival of first-home buyer numbers in NSW remain problematic, although the end to the extraordinary Sydney prices boom of the past three years will certainly provide some relief,” he says.

Investors

Justin Wang, managing director of the Property Investors Alliance, sold 2300 apartments in Sydney last year for a total of $1.78 billion, up nearly 50 per cent on 2014.

While transactions fell for PIA in the December quarter, Wang attributes buyer caution to negative headlines, rather than any underlying fundamental problems with the market.

“We won’t see the market crushed, but it will slow down,” he says.

“This year should get back to normal.”

Milton says as rental growth plays catch-up with capital growth, investors will be increasingly drawn to the apartment market and away from the turmoil of the sharemarket.

Foreign investors were 18 per cent of CBRE’s residential buyers last year, and despite bank restrictions on foreign investment, Milton expects similar numbers this year.

Lowe says foreign investors had a large appetite for Frasers’ off-the-plan developments in 2015.

And although last year’s upwards trajectory is not sustainable, Lowe expects the year ahead to show solid demand.