By John McGrath, Property Expert 
www.mcgrath.com.au
Real estate guru John McGrath reveals what’s hot in the property market this summer.
The only thing scorching higher than the Sydney temperature gauge over the past few weeks has been the auction clearance rates. With 70%-80% clearance becoming a regular occurrence in recent months, our Inner City offices hit an almost all time high of 92% recently. Historically, I’ve found that if the auction clearance rates are consistently above 75% for a period of 12 weeks then we are likely to see a strong surge in prices as buyers become more desperate and don’t want to miss the boat.
So what’s driving these boom-like statistics when in essence we are still on the fringe of the GFC? I think there are several factors at work:
• Australia’s economy is unarguably one of the strongest in the world with many people relatively unaffected by the impact of the GFC. And so we’re finding that a large percentage of the current buyers want to get set with some good quality property while there still remains a small discount to 2007 prices in many price ranges and before expected price increases in 2010.
• Interest rates, whilst having had three recent increases with several more to come, are still historically low. When you look at rates over the past 40 years, you’ll find that 7.0%-9.0% has been the range people have become accustomed to, so the current 5.5% is still attractive to buyers and investors alike.
• The population in NSW is growing rapidly, in some areas as high as 3.0%* in the last 12 months and there has been very little building activity to speak of to keep pace with rapidly growing population. Hence the State is somewhat bursting at the seams especially in the sought after Inner Ring (5-10 kms from the CBD). This situation takes time to re-balance as the developer market becomes active again so I anticipate the current housing shortage will be in place for at least a further 24 months. *Data source: ABS
• There has been a severe shortage of listings of properties for sale in the last 12 months. RP Data reports listings for Sydney houses are about 23% lower than the corresponding period last year, and 34% down on 2007. I suspect that as confidence continues to grow, we’ll see a spike in listings.
John McGrath’s Market Observations
Here are a few of my key observations and views on the current market heading into 2010:
1. The bottom-up led recovery has well and truly started to cascade upwards with second and third home buyer markets seeing spikes in prices over recent weeks. The strong results in the sub $500,000 price range have now moved up into the $500,000-$1.5million price bracket. In fact we are also seeing some very healthy top end results with one recent sale of a $23m estate in Bellevue Hill indicating that even the luxury end of the market may have recovered to its previous highs of 2007. And even though one swallow doesn’t make a summer, when the swallows start flying in, you can bet summer’s on the way!
2. We’re seeing strong anecdotal evidence of the return of investors, which is usually a catalyst for healthy price growth. In NSW, investors who buy newly built properties for $600,000 or less can take advantage of a 50% stamp duty break until December 31. That’s a saving of up to $11,245 per property, with 1,015 buyers benefiting from this tax cut to date.
3. Record population growth will keep residential property prices growing well into the future. The median Sydney house price cracked $600,000 for the first time in August and has now grown 9.4% YTD to $606,804. (Apartment prices up 8.8% to $457,274)*
*Data source: RP Data September Quarter
4. First home buyers won’t disappear in large numbers when the First Home Owner Boost expires on December 31. Remember it’s only the Boost that’s going, the Grant remains in place. Those still looking are not about to give up just because the $3,500 Boost has been removed. Interest rates are still low and the original $7,000 First Home Owner Grant remains in place along with stamp duty exemptions for properties under $500,000. No doubt that activity from First Home Buyers will pull back somewhat by early 2010, but I think investors will pick up the slack.
5 Interest rate rise: The cash rate peaked at 7.25% in March 2008. It has since tumbled to 3.0% in April and is now 3.5% pending the RBA announcement on December 1. Hence, interest rates are still more than 50% off their peak. The time to lock in attractive fixed rates has passed with the banks raising their fixed rates several times in recent months, independent of the RBA. Home buyers (mainly upgraders in today’s market) are now factoring in at least a 1.0% rise in rates by June 30 next year.
6. I anticipate further investor demand around April 2010. Some cautious investors will wait for evidence that recent price gains made in the under $500,000 segment will remain in 2010. They’ll have that evidence after the Autumn selling season gets underway in February next year, and then they’ll want to be part of the next growth cycle even though they may miss the first few percent of growth by then. I predict prices in the Inner Ring of Sydney and Beachside locations will rise between 5.0% and 8.0% next year. I remember reading a Warren Buffett quote, “So if you wait for the robins, spring will be over.”
7. Since my last Market Review, rental yields have dropped slightly from an average 5.3% for apartments to 5.1% and 4.4% for houses to 4.3%. I expect rents to also increase next year by between 5.0% & 10.0% due to the ongoing supply issues and this will keep current yields at least at around these levels.
Current Value Buying Areas
During the past 12 months, we’ve seen some declines in median house prices in some of the best suburbs and lifestyle locations which have created some great buying opportunities. Some of the areas I believe you will make strong capital growth in if you buy now are:
John McGrath’s Sydney Top Suburb Picks: Houses
• Artarmon
• Balmain
• Brighton-Le-Sands
• Curl Curl
• Gosford
• Haberfield
• Hunters Hill
• North Parramatta
• Northbridge
• Queenscliff
Sydney Top Suburb Picks: Apartments
• Balmain East
• Erskineville
• Glebe
• Leichhardt
• Manly
• Neutral Bay
• Pyrmont
• Ramsgate
• Terrigal
• Wollongong
Key points and predictions
• Market confidence is extremely high across almost all price brackets.
• Stabilising economy and finance sector will create a price surge in the prestige market above $3m in 2010.
• First Home Buyer activity will decrease in 2010 but not disappear with investors taking their place – the sub $500,000 market will hold at current levels with some areas continuing to increase their price growth trajectory.
• Record population growth will continue to push residential property prices higher over the next 24 months especially in the Inner Ring and beachside locations.
• Interest rates will continue to increase, but are still more than 50% off their peak.
• Investor surge likely in April as Investors get comfortable that FHB price levels.
For more information and advice, please visit www.mcgrath.com.au
