Why Sydney is set to become investors heaven

To understand why Sydney is being seen by the property experts as the one of the best areas to purchase in Australia, it is essential to understand the basics of supply and demand.

Demand – (as seen in the dark blue line on the graph) is largely driven by population change, and we are currently experiencing significant population increases. Figures just released by the Australian Bureau of Statistics showed that Australia's population grew by 2.1% to 21,779,000 in the 12 months to 31st March. Australia's population growth has not been this high since the baby boom of the 1960s! [Source; ABS 2009]

But more significant is the Australian Government's upgraded population forecasts, predicting our population is expected to increase by 65% to over 35 million people by the year 2049. Australia is in fact set to be the world's fastest growing industrialised nation over the next forty years, with a rate of population growth above that of even India. [Source: Australian Federal Government forecasts 2009]

Supply – (as seen in the light blue line on the graph) shows we have a significant and growing housing shortage in the region of 200,000 homes. It’s just not that easy for developers to find land, buy it, get the entire approvals necessary, sell it and then find sufficient builders to put houses/apartments on. It can easily be 4 or 5 years between finding land and there being something finished for someone to live in. And recently the situation has deteriorated, with developers finding it extremely difficult to secure finance to build anything (mainly due to the whole financial crisis/meltdown thing!).

The Sydney Property Market - Sydney will need an extra 1.12 million people in the next 25 years. It remains the most preferred destination for the 146,000 or so migrants who come in each year and 1 in 5 Australians currently reside there. [Source: Sydney Metropolitan Strategy]

But New South Wales residential housing market is in chronic undersupply with underlying demand for around 41,000 dwellings and a completion rate of little more than 16,000. [Source; ANZ Property Outlook, Sep 2009]

As the population explodes to 5.3 million by 2031, 640,000 new homes will be needed, with the majority (440,000) to be built in established suburbs. The most development will be in the CBD, equating to about 55,000 new homes by 2031. The plan is to have development around established suburbs within walking distance to shops and services. Two-thirds of the extra homes built in the next 25 years will be within 800m of a train station or 400m of high frequency bus services. Around 40% of the homes that will exist in 2031 have not yet been built! [Source: Sydney Metropolitan Strategy]

This strategy is really being forced upon Sydney because it is geographically different to most other cities. Sydney has physical constraints which prevent significant expansion, namely water and mountains. The NSW government now appears to have sorted out many of its issues – consequently NSW currently has the lowest unemployment, the highest job growth and the state economy is powering ahead.

For those after shorter-term growth, Sydney is attractive Whilst Perth doubled in value and most other major cities shot up over the last few years, Sydney remained relatively static. Macquarie Group’s head of real estate strategy, Rod Cornish, is on the record as saying, “It’s back to the future for Sydney’s affordability levels – a return to 1999 figures”. [Source: Rod Cornish, 2009]

So, just to be clear - historically property values on average double every 8 years but Sydney’s have effectively not increased in 10 years, it has a chronic housing undersupply which will only increase as population increases, rental yields are high and interest rates low and the state is enjoying excellent economic conditions. [Source: REINSW, ABS, Rod Cornish]

The question is when will all this start having a greater effect on the Sydney market? Ray White said NSW sales for September totaled $805 million, which was the second highest month on record. The September result was a 66 per cent improvement on the previous month. [Source: Ray White, NSW]

Auction clearance rates in some Sydney suburbs are running at over 90% at the moment. [Source: REINSW]

Investors are returning to the market now first-home buyers are backing off and rental yields are extremely attractive. Sydney has also recorded the highest median price growth of all capital cities for the last 12 months. [Source: Australian Property Monitors, Sep 2009]

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