Sydney sees home prices rise by more than 14 per cent as growth exceeds expectations

Every Australian state capital city's housing market recorded growth last year, and the standout was Sydney.

Tipped as a market to watch given improving affordability and a shortage of homes, particularly new stock, Australia's largest city out-performed the nation with 14.5 per cent capital growth, streets ahead of second-placed Perth (up 9.9 per cent), and Melbourne (8.5 per cent), according to property information company RP Data.

Nationally last year, residential markets recorded the strongest annual growth since 2009. In Sydney, house prices rose 15.2 per cent, while flat prices gained 11.6 per cent. However, with value growth outstripping rental growth, yields dipped, to 3.9 per cent gross for houses and 4.7 per cent for flats, compared to 4.3 per cent and 5.0 per cent, respectively, a year earlier.

Simon Hemphill of Savills Australia was not surprised by Sydney's result, but says few tipped the extent of the gain. "No one was forecasting 14 per cent. It exceeded all expectations."

Low supply is driving the rises, and demand from Asia remains strong.

"Chinese buyers are still looking to get their money out of Asia, and Australia remains a safe bet," he says. "There is a genuine lack of supply in Sydney, and unabated underlying demand. Once you have scarcity in the market, [stock] flies out the traps."

Recent new releases that illustrate this point include Sydney Greenland Centre in Bathurst Street, achieving rates of around A$16,500 (HK$114,815) per square metre; York & George on York Street, averaging A$14,000 per square metre; and Barangaroo on Hickson Road, with prices from A$16,000 to more than A$30,000 per square metre.

Sydney-based property company Crown Group, whose 2013 launches included Sky by Crown and Viva by Crown, says foreign demand accounted for 20 per cent of its sales last year.

Group CEO Iwan Sunito says Sydney has benefited from market cooling measures in Asia. "[Flat] prices in the CBD [central business district] are 30 to 50 per cent less [than] an equivalent location in Hong Kong or Singapore."

The government's spending of A$60 billion on infrastructure - hospitals, roads and a revamp of Darling Harbour - adds to the city's appeal, he says.

As Crown Group prepares to launch Sydney by Crown in the coming months, Sunito was not expecting a slowdown. "Just watch Sydney," he advises.

But Tim Lawless, RP Data's head of research, says it is logical to expect markets that have been very 'hot' in terms of capital growth will start to cool over the coming year. "In fact, we may already be seeing early signs that peak capital gains have passed in Sydney [and Melbourne]," he says.

One reason was that rental yields in both markets had "plummeted" over the past two growth cycles, as property values rose substantially faster than rental rates. Sydney's yield could act as a disincentive for investors, particularly considering the previous high rate of capital gain, he asserts.

"Growth rates across Sydney [and Melbourne] are currently unsustainable and it is reasonable to expect the capital gains to slow from the highs recorded over the second half of 2013," Lawless says. Investors are likely to remain a large component of the housing market over 2014, Lawless says, if interest rates remain low. "Direct property investment is likely to be a popular choice," he says. But he predicts a shift in investor demand away from the low yielding markets like Melbourne and Sydney, towards higher yielding markets such as Brisbane, "which are also much earlier in the growth cycle".

Market commentator John McGrath, CEO of McGrath Estate Agents, agrees.

Sydney's "phenomenal" result augurs well for another good year ahead, he says, with capital gains "possibly opening the door for more investment activity if people choose to leverage that new equity now". While the momentum should carry through in the early months of 2014, McGrath is not expecting the same intensity of demand for the entire year.

"My guess is 5 per cent to 10 per cent growth in prices this year, but certain market segments will perform better than others."

In McGrath's view, "lifestyle markets", those close to the city and beaches, will continue to see prices rises this year as they did last year. While Sydney's luxury sector - properties worth more than A$3 million - did not enjoy the same strength as the middle ranges, it is set for good growth.

"The share market is improving, people in the financial services industries are getting better bonuses and business confidence is increasing," McGrath says.

McGrath also sees no slowdown in the "surging demand" from Chinese investors seeking quality residential property in their favourite Australian state capital. Such is the demand that McGrath Estate Agents has launched a China desk and publishes a Chinese-language marketing magazine.

"I haven't seen a trend like this in my 30 years in real estate in terms of a brand new demographic entering the Australian market with such impact," McGrath says of the Chinese buyers. "We are seeing interest in several price ranges, from apartments selling between A$700,000 and A$3 million, to luxury homes selling upwards of A$3 million."

Neil Smoli, managing director of property research and investment firm Aviate Group, confirms the trend.

"Be it for security, wealth creation, to de-risk their portfolio, or even for their children, there is no doubt foreign investors are shaping the market in Sydney," Smoli says. "Foreign investors will target true CBD high-rise, high-density apartment projects for their investment, opening them up to significant concentration risk, not only when it comes to attracting tenants but also when it comes time to sell.

"The best calibre of tenants, those employed in professional services, typically prefer boutique apartments in near city locations."

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