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NEXT ARTICLE Leaner Times For Super Property Investors

Like it or not, Australia – following in the footsteps of the rest of the world – is experiencing a housing slowdown. And this will impact just about all of us given that residential property is the major investment for most Aussies – according to BIS Shrapnel it has an estimated total value of almost $3,700 billion and comprises around 8.75 million dwellings.

Just how bad it gets remains to be seen. To date we’ve avoided the fate foretold by the doomsdayers like Professor Steve Keen, however the current contraction is real and economists and analysts alike agree that we’re in for a slow 2011 when it comes to property prices. The latter half of 2010 was certainly weak, with house price rises not even keeping pace with inflation.

Despite this, price growth in property is rarely uniform and some regions will experience strong growth in 2011 while others flounder. Each week TheBull will drill down on one area and take a look at one suburb that is running hot, and another that has got investors running scared.

This week we’re visiting the Sydney region, specifically the former blue-collar suburb of Kensington where properties now boast multi-million dollar price tags, and the infamous Sylvania Waters which fronts the Georges River and was put on the map by the Donahers – for better, or for worse.

Source: Commonwealth Bank

As you can see from the chart above, since 2003 Sydney prices have struggled to keep up with the rest of Australia, with all other capital cities outperforming their big sister by a considerable margin.

To make matters worse, in Sydney auction clearance rates are tumbling – down from 64% in September 2010 to just 40% this January. Aside from rising inflation (which means higher costs and also the real risk of higher interest rates), Sydney property is being impacted by lower investor sentiment and reduced foreign investment due to the tightening of restrictions on foreign ownership and a rising Aussie dollar.

Source: Australian Property Monitors

While the Commonwealth Bank highlights that the collapse of house prices in other countries has brought the Australian property market into focus, it believes that a “similar fall in Australia remains extremely unlikely”.

“Rising costs for essentials such as food, petrol and utilities over the near term will reduce household’s capacity for spending in other areas, including housing…but not to the extent sufficient to see house prices collapse,” says James McIntyre, Economist at Commonwealth Bank. Despite the threat of an increase in rates, McIntyre thinks that the near term prospects for incomes suggest a collapse in prices is unlikely.

ANZ’s Senior Economist, Property & Financial System Research, Ange Montalti agrees that there will be further weakness in property prices in 2011. He believes that the prospect of additional rate rises represents a “significant risk to house prices over the next few years” and weighs on both affordability and investor sentiment. ANZ’s chart below highlights its bearish outlook for property over the next 18 months.

Source: ANZ Economics

Inflation-adjusted prices for Sydney

CommBank’s report “House prices crawling nowhere fast” highlights that Sydney is an interesting case because adjusting for inflation house prices in fact peaked in the fourth quarter of 2003, on the back of a strong rise following the 2000 Olympics. This means that in real terms prices haven’t increased since 2003. From the peak in late 2003 the ABS measure of Sydney house prices fell by almost 10% before flattening in the first quarter of 2006. It then took another four years until house prices recovered. From early 2009 prices rocketed in the low interest rate environment following the GFC, rising 25% in less than two years to reach a new record high.

However, when you adjust for inflation, the gains completely disappear – evident from the chart below.

Source: Commonwealth Bank

CommBank’s McIntryre points out that “a Sydney house purchased in QIV 2003, whose value moved in line with the ABS index, would have not even recouped the increase in Sydney’s CPI over the period.”

However with rising immigration, low levels of new housing supply and a rental vacancy rate forecast by ANZ to dip below 1.0% in Sydney, there are positives and some suburbs are set to continue with strong gains through 2011.

Suburb on the rise: Kensington

 

Source: Google Maps

Flanked by Royal Randwick Racecourse, leading golf course “The Australian”, Moore Park and Sydney’s iconic Centennial Park, there’s no shortage of greenery in this inner-eastern Sydney suburb. Add to that the University of New South Wales, the Sydney Athletic Field (once home to the Australian Athletics Championships) – plus the Sydney Cricket Ground and Sydney Football Stadium only a drop-kick away in Moore Park – and you have an unparelleled mix of recreation and education in the area.

While it remains rich with migrants (more than 64% of residents were born overseas compared to the city average of 40%) and due to the university boasts a younger-than-average population (43% are aged 20-39 versus the city average of 30%) the demographics of the area have changed over the past two decades as property prices have soared.

Only 20 years ago this was very much a “battlers” area, filled with single-story, red-brick, terracotta-tiled homes with concreted gardens and school fencing. The only reason to visit the area was to blow your wages at the racetrack or for cheap drinks at the student bar of the University of NSW.

Today, these unassuming residences have been extended and have added a second story; or bulldozed and replaced with stuccoed mansions on the generous-sized blocks. The battlers have made way for latte-sipping inner-city types and those looking for more space at a lower price than their neighbours in the glitzy Eastern Suburbs of Sydney.

Racing has had a renaissance too, bringing tens of thousands of punters – and their money – to the area. On top of this the University has had new life pumped into it with the influx of foreign students studying courses such as the MBA at the Australian Graduate School of Management.

With the median house jumping from just over $1 million in 2009 to a whopping $1,730,000 in 2010, according to Australian Property Monitors figures, this suburb has come a long way from its battler roots. 

 Source: Australian Property Monitors

Suburb on the decline: Sylvania Waters

Source: Google Maps

The Donaher family put the suburb on the map when the BBC fly-on-the-wall documentary series about their suburban lives first aired in 1992. The Donahers bought their house for $435,000 in 1988, built a second storey and sold it for almost $2 million in 2003 – a $1.5 million gain in 15 years, or $100,000 a year. According to the SMH, that year house sales averaged $1.25 million and the top price fetched was $3.2 million. This surged further to to $1.54 million in March 2004.

The Donahers must have taken the suburb’s luck with them – since then prices in Sylvania have stumbled and last year the median price fell from almost $1.1 million to just $879,000 – almost $700,000 lower than in 2004.

 Source: Australian Property Monitors

With 70% of the population born in Australia (Sydney average is 60%) and 26% over the age of 60 (Sydney average is 16%), it’s hardly surprising to see people getting around in golf carts and sunning themselves in their boats. Hardly a sea change for the Donahers when they swapped their two-storey house on a canal for a property in the Gold Coast – you guessed it, a two-storey house on a canal.

Donahers aside, this suburb in Sydney’s Sutherland Shire – neighbouring the infamous Cronulla – boasts numerous waterfront mansions and is set around Gwawley Bay, in a stgelopment on the southern side of the Georges River. Almost 25% of the houses in Sylvania Waters are waterfront, and naturally it’s these properties that have seen the biggest gains, and largest falls.

With Sylvania to its west and Taren Point to its east, it’s not exactly prime location here amongst the canals. While prices have tumbled from record highs, an average price of $879,000 isn’t cheap and there’s every chance that there is further to fall.