Since the start of the pandemic, apartment prices across most of Sydney have suffered in price growth compared to house and land prices. Whilst Sydney’s median property prices is up 25.9% in the past 12 months, land prices in the same period is up 40% to 65%. Land in Sydney’s North West which were priced at $1800 sqm last year are now priced at $2800sqm (up 55%) and land in Sydney’s South West that were priced at $1,300 sqm a year ago are now selling for $2,100sqm (up 61%). This surge in land values has been fuelled by the lower interest rates, significant demand and the lack of supply. The supply of land simply cannot keep up with the surge in demand with thousands of buyers registering for future land releases and a ‘lottery’ system being introduced in some developments.
Huge gap between House and Apartment prices
However, there is now a significant gap that has developed between house prices and apartment prices. Whilst the median house price in Sydney is at $1,017,000 and apartment price at $687,000, that is, houses are 68% higher than apartment prices, there are a significant number of suburbs where this gap is a lot higher at 90% to 110%. This is the perfect time for buyers to identify the suburbs where there is the largest gap and opportunity for growth. This gap widened significantly due to the pandemic’s impact on migration and student numbers and the fact that a lot of home buyers were moving out of apartments into homes as a result of higher affordability.
Why Buy an Apartment Now?
The next 12-18 months is the perfect storm for apartment prices to surge for the following key reasons:
- Sydney will see a surge in migration commencing early next year. With the backlog of over 18 months and a normal migration year it is possible to see twice as many migrants (200,000+ per year for next 2 years) in Sydney compared to a normal year of 95,000. We need 38,000 dwellings in Sydney for a normal migration year. Supply of new homes will become a big issue to cater for this huge population growth.
- Tens of thousands of students will return to Sydney. Coupled with migration and expatriates returning home, rentals will surge which will cause apartment prices to surge as more investors will come into the market. I expect rental vacancies in Sydney to tighten to chronic levels at around 1% by June next year.
- Houses are becoming less affordable and house prices have already had a strong price run. Sydney households are spending 11.3 times their gross annual household income to buy a house, compared with 7.7 times for units. This is even less for units where the price gap is wider. Tim Lawless from Core Logic said that “Investors are the fastest-growing segment of the market at the moment, and demand from investors is often skewed towards the unit sector.” Buyer confidence is also being restored to the apartment sector with the appointment of the NSW Building Commissioner, however, in my view, there will be a premium for properties developed and built by Tier 1 companies such as Deicorp, Meriton and Mirvac. Tallawong Village in Sydney’s northwest is a development by Deicorp adjacent to the Tallawong Metro, which has experienced unprecedented sales in the northwest with over 200 apartments selling in 7 weeks.
David Milton, Managing Director of CBRE Residential said that
“Tallawong Village is highly attractive due to the location of the project being next to the metro and parks and the Developer- Builder, Deicorp, is a top Tier company. It provides a lifestyle choice and the product caters to today’s buyers needs”. Mr Milton is of the view that “the apartment market in Sydney’s northwest will continue to perform strongly over the next 2+ years due to demand coming from migration for high quality apartments and the large gap between house and apartment prices will continue to narrow”.
Headwinds
The key headwinds to watch in the next 6-12 months are interest rates and the impact of the recently introduced serviceability policies by APRA. In my view, we could see up to 50 basis points increase in the RBA overnight cash rate in the second half of 2022. Further, the serviceability rules will take some heat off the market particularly in the $1.5m plus market. For the apartment market in the $600k to $900k space, there will be little impact as any headwinds will be more than offset by the unprecedented increase in demand mentioned above. We will see a surge in apartment prices in suburbs with the highest price gaps versus houses.
My Prediction and Recommendation
My prediction is that we will see price growth in apartments up to 20%+ in the next 12 months. Making a property purchase decision can be very confusing, particularly in a city where there are ‘multiple’ markets. However, whilst the timing is perfect to buy an apartment now, in order to maximise your growth, I suggest you follow the following recommendations:
- Select a suburb where there is significant population growth and infrastructure spend. Further, the suburb’s current price differential between houses and apartments must be significant
- Focus your search in the lower price range eg $550k to $750k
- Buy an off the plan property now at today’s price which settles in 1-2 year period
- Ensure the convenience boxes are ticked – transport, shopping, parks, schools, hospital etc
- Ensure the developer-builder is a reputed company (ideally Tier 1)
(Sachin Maharaj is the principal of Nivas Real Estate and is a real estate, finance and banking professional).