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Quality concerns still plaguing Sydney’s residential market

Nerida Conisbee, REA Group

Sydney home buyers are still wary about the quality of new apartments, with the market for houses bouncing back much faster than the high-volume unit market in Sydney’s western suburbs.

Despite the doom and gloom predicted for the residential property market last year, the consensus at the Property Council of Australia’s NSW Residential Outlook 2020 event on Wednesday morning was that the downturn was more of a dip than a freefall.

Presenting listings data from realestate.com.au, REA Group chief economist Nerida Conisbee told the audience that Sydney’s residential market has seen the second highest growth of any city over the past 12 month after Hobart, with inner west suburbs seeing the most growth at 14 per cent.

But Sydney’s outer west is still seeing declines, especially the unit market. Conisbee says quality concerns are fuelling low consumer confidence, especially in new apartment developments.

But she says it’s too soon to worry about the unit market longterm, and that the quicker bounce back for housing is a reflection of Sydney’s unaffordability issues and tendency to undersupply housing.

Supply is also an issue – buyers might be back, but sellers aren’t listing.

“This is quite a consistent theme. On one hand we do have all this price growth occurring and high levels of confidence in the market, but it’s not flowing through to listings or buildings approvals, or retail.

“At the moment, all it’s doing is making people in the eastern suburbs pretty happy as the value of their homes is going up, and it’s also giving us huge levels of debt.”

For Conisbee, debt is the biggest issue. “One of the things in Australia is that every time interest rates are cut, or we get a tax cut, or whatever, we pile into housing, we love housing, and we have a lot of confidence in it.

“But it has created a situation that we are really indebted. And in a Sydney that unaffordability is really extreme. It takes a really big mortgage to get into the market.”

Rents have dropped

She says there’s also problems in the rental market, and investors will need to return before the market picks up in all areas.

Rents have declined, which is a product of oversupply that has occurred from Sydney’s late run to development at a time when the market started to struggle.

Investor interest is also reflecting the “housing versus unit” division. “Housing is where people are really concentrating on”.

Investor focus is on pricey inner city areas and coastal suburbs rather than the high volume suburbs in Sydney’s west.

First home buyers are more likely to consider high volume unit areas such as Blacktown and Parramatta, but these buyers are also more interested in houses.

When it comes to new developments, interest is clustering in Sydney’s northwest suburbs such as Schofields. “It’s not those high volume markets in western Sydney.”

Buyers worried about climate change and affordability

The biggest issues for buyers are climate change and affordability.

Conisbee says that the oldest Millennials are about to hit 40 but still don’t own housing, but this could be set to change as this demographic enters decision making positions.

Chinese investment cautiously returning

There’s been a massive dropoff happened in Chinese activity since the market turned in 2017. Chinese investors are now cautiously returning, especially from Hong Kong.

Conisbee says the coronavirus hasn’t seemed to have deterred searches from China – suggesting that people might be looking for “safer places to park their money” or are simply scouring foreign property sites because people are “stuck inside and bored”.

However, she says owners in rental markets that service a lot of foreign students are worried.

UK-based fund manager PfP Capital’s build to rent fund director Alex Notay says that international investors in general are still very interested in Australia. “You’ve got all the fundamentals we used to boost about in the UK, rule of law, and stability.”

But she says Australia could be made easier for overseas investors to get into.

“They fact that you don’t have a federal housing strategy makes it complex and confusing to get your head around all the nuances of each state and territory.”

Developers welcome the markets return, but acknowledge issues

From the panel discussion, all agreed that the Sydney market was improving quickly but consumer sentiment is still not where they’d like it to be.

Frasers Property Australia’s CEO Rod Fehring says consumer confidence is segmented, and that most of the capital is flowing into premium market.

Overall, Fehring is optimistic about the residential market in NSW. “The number of times doom and gloom is forecast would probably outweigh the number of times it would be optimistic by 10 to 1.

“Unfortunately our commentators get more headlines by the negative than the positive.”

Mirvac’s head of residential Stuart Penklis believes interest rate cuts have helped improve consumer confidence. “We’re seeing investors come back to the market, people are starting to gravitate to investing in residential.”

He also says 2021 to 2022 will be “all about supply” to meet the needs of a growing population.

Toga’s CEO, Fabrizio Perilli, also says that supply is an issue. “We’re at point where we have no stock completing this year. So now it’s all about the go forward.”

He is also happy with the green shoots in the market but says consumers are more careful. “Gone are the days where people would walk in and buy within the couple of hours because they felt the pressure.”

“People are assessing the developer, assessing the builder, seeing if they like the location, checking for prices around the market. People are doing their due diligence, and so they should.”

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