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Empower Wealth Blog post by Empower Wealth

2016 Property Outlook (Part 1) | Sydney & Regional NSW

Here are the other parts of the 2016 Property Outlook:

Part 1: Sydney & Regional NSW
Part 2: Melbourne & Regional VIC
Part 3: Queensland, Australian Capital Territory and South Australia
Part 4: Northern Territory, Western Australia and Tasmania


Transcript:

Bryce Holdaway: All right folks. It’s that time of the year where we sort of have a bit of a look at what might have happened last year in the property market in 2015 but more importantly Ben, have a good look forward and see what we think is going to happen in 2016.

Ben Kingsley: Yeah. I mean we like to do this each year. We’ve been doing it now for four years. I think it’s important that we sort of set the agenda in terms of where we say the marketplace is going in 2016.

Bryce Holdaway: I agree. So we’re going to do an around-the-ground around Australia but I think it’s really important to get the context of what we’re going to be talking about today because it’s really from the perspective of being a borderless investor.

So where is the best opportunity to put my money if I’m agnostic and I don’t care where I want to be versus the person who’s in their own backyard and they’re really specific about where they want to be? So we’re going to sort of flesh that out a bit more as we go through but it’s important to get that context, I think.

Ben Kingsley: Yeah, it is. I think we’re going to make some generic statements. So it’s really important to understand that with those generic statements, that’s the sort of rising tide of all the markets. So I think we want to dig a little bit deeper in this session and sort of talk more about specific types of property and what we think where the demand is going to leave and where there might be a bit of an oversupply in each of those markets as well.

Bryce Holdaway: I agree. So I don’t think we could probably start anywhere else other than the top performer of 2015 which was Sydney. It did exceptionally well.

Ben Kingsley: Yeah, it’s a great story. I mean when I say great story, it’s because through 2000 and sort of the mid-2000s and into the late 2000s and it just started to struggle. It was – the economic environment was sluggish. It was mismanaged from a state government point of view and I think we’ve now started to see some real movement in terms of infrastructure and those types of things.

So what we are seeing is yeah, I think it’s a booming economy and I’ve spent a fair bit of time up there and I’ve noticed it. I mean I lived there 10 years ago – sorry, a long time ago but I lived there for a period of ten years. So I can see some real changes happening in that market. So it didn’t surprise me that it had the run that it did but I suspect that what we will see is a softening across that broader market that we saw in 2015.

Bryce Holdaway: Wasn’t it interesting when you talked to people at the beginning of 2015 and it’s that what goes up sometimes must – the air must come out of it at some stage but everyone was thinking, “No way. This is going to keep happening.” You get that FOMO that we always talk about, the fear of missing out. But it’s interesting that a lot of people in that market have done exceptionally well. But some people who made some poor decisions around asset selection might be feeling a little bit fearful in 2016.

Ben Kingsley: Yeah, I think so. Let’s unpack that a little bit further. So what we’re saying is that some of the outer suburb areas have performed really, really well. They’ve moved from sort of 400,000 and 500,000 valuations to 600,000, 700,000 valuations. So they are significant double-digit growth areas.

But if you actually look at the underlying wage growth and what’s happening in those areas, there’s real economic stimulus out there which is great but I’m not necessarily saying it correlates straight away to higher income.

So once this FOMO settles down and sentiment starts to soften, I suspect those sort of newer state areas and those areas that ride on the fringes of town where there has been this sort of hectic buying and this sort of frenzy type buying, those are the areas for house and land that I would be a bit worried about. The other part of the market that we’re obviously worried about is the apartment area.

Bryce Holdaway: You bet.

Ben Kingsley: So tell them about that.

Bryce Holdaway: That’s what people are really susceptible to particularly doing a booming market where they think I’ve just got to buy property and they get caught up a little bit in this. I think that’s a really scary space for some people in Sydney in 2016. But it’s an international city. We talk about it all the time. It’s in top hundred. Melbourne and Sydney are in the top hundred as measured by population. So it’s never a bad idea to hold good quality real estate in that market. But I think the key part of that phrase was good, quality real estate.

Ben Kingsley: There’s nothing more scary for me than seeing those images on TV where there’s the apartment element and the frenzy of stickers going on and sort of people are hovering around, trying to secure that apartment on level seven. That is just crazy stuff.

That’s the classic stuff. So we will see unfortunately a few of those people who have bought and those properties are going to be realised and so late 2016 or 2017, some in early 2018 is that the valuations that they’re paid for on paper won’t necessarily stick up when the actual valuations get done.

Bryce Holdaway: It’s kind of a bit of the calm before the storm at the moment, isn’t it?

Ben Kingsley: Yeah, it is a bit and I think if the interest rates play on that, so we – I don’t think the RBA has an appetite for moving rates lower or higher for that matter until they see stronger signs of growth because there’s so much capacity in the economy at the moment.

But if we see the lenders going out there and changing rates higher, for effectively a bit of a margin grab, but using excuses like Basel III and all of these secured and making them safer and more robust financial institutions, we could see that that will start the play on the psychology of the buyer who’s then thinking, “Are they going to keep going with this? How much can I really borrow? Does my money buy me what it used to when interest rates were lower?”

Because that’s what we see. We see – traditionally when interest rates go low, we naturally see it’s universal. You see the cost of money going cheaper. We see asset appreciation when it comes to not only usually residential but also commercial and that’s – we follow that beautiful trend. We’ve got that rising tide lifting all ships but Sydney is a marketplace where I do love its economy. I love its economic activity.

I think it has still got some strength in that. I think their construction of what has been presold is going to create jobs and I think that has some ongoing effects. I’m hopeful that some of those valuations will stack up. But I’m fearful of the oversupply in that unit market and I’m still thinking that the outer suburbs, I think they’ve overcooked in terms of what the values are. So in some areas, the medians will come off five, ten percent.

Bryce Holdaway: It’s interesting too when you see the perspective of the real estate agent from behind the scenes. They’re starting to get a bit worried now because the frenzy and the activity and the “press hard four copies” that they’re experiencing from 18, 24 months prior is no longer there and they work a bit harder to get their listings. But I think that Sydney – if you can get your asset selection right, so avoid new green field estates, apartments and then you can get the investment grade suburb right, I think 2016 could be a good year to watch some really great blue-chip assets because I think it’s a little bit too early.

You want to get into that pre-emptive accumulation phase where you’re not in a huge frenzy market. If you can buy good, quality real estate in that capital city when the market conditions turn, when the negotiating power sits back into the buyer, that’s a good thing. It’s too early in early 2016. But I would certainly be keeping an eye – particular for people as I said at the top who are borderless and who don’t have a foothold into that market and who do want to have a foothold long term.

Ben Kingsley: I think you make a great point and I think this is universal across every fly-around that we do and that is there’s still scarcity in four-bedroom, three-bedroom houses with land and fully utilised areas close to large employments and is in good lifestyle drivers.

So what we do see is when a cycle does turn, there’s still that person who has been holding on, waiting to think, “Oh, why would I sell it? Why would I list now? Because every two months my values go up, $10,000.” So they’re now like, “Oh, actually, quick, I better list. I better get on.”

So I think if you’re watching the supply side, even in that sort of scarce area and then seeing the number of buyers around, that’s the sort of property investment research I think Bryce is talking about in the sense that that’s when you know don’t be greedy on the other side of it either and that is if a good buying opportunity comes up, and it represents fair value, not emotional value, but fair value, grab it because properties are long term investment. You shouldn’t be speculating on it in the first instance. So if you are ready to go, everything is lined up and you’ve been watching the market and you’ve got that confidence, grab it.

Everyone might have still buyer’s – oh, I had still come off a little bit disappointed. Trust me. Don’t be. In five or ten years’ time, the Sydney market will have another cycle. It’s an international city. It starts with …

Bryce Holdaway: And 70 percent of the market is buying for shelter. They’re not buying it as an investment. So the huge investment numbers that you saw in the finance approvals during that really great time in Sydney won’t be the case in 2016. But what about sort of outside of Sydney? Have you got any views on …

Ben Kingsley: Yeah, the Hunters – so I’ve got some challenges there. I mean you’ve got obviously a mix of agriculture and mining battling it out in terms of accessibility and sort of climate issues and sort of water table matters. So they’re the types of things that… and cold on the nose which they’ve got some very large opening cut mines. So from that point of view and commodity prices being lower, it’s not boding that well for some of those areas. But there is a flow in affecting them. If I look at areas like the Central Coast and sort of the South Coast and the fringes of the city ..

Bryce Holdaway: Lifestyle coast …

Ben Kingsley: Yeah, exactly. You know, all the way from Terrigal right up through to Sydney there will be a natural wave ride where I’m sort of thinking, well, up the coast, I can get the same type of home for $300,000 cheaper than I can get it in the Sydney basin. So maybe will I look at that or will I relocate elsewhere?

I think there will come a time where congestion not only for Sydney but also for Melbourne over the course of the next generation, people are going to make choices around do I want to go back to the good old Australia used to be and have more quality work lifetime or do I want to be in the engine room of our economies which will be Melbourne and Sydney. So not that bullish on those outer suburbs or the regional centres at the moment.

Bryce Holdaway: Yeah. Good point. So I guess in terms of summary for New South Wales and more specifically Sydney, it’s probably not the number one focus for borderless investors in 2016.

Ben Kingsley: Yeah, but I’m hearing people already call that a buyer’s market. It is not a buyer’s market yet. So it’s a balanced market. It will stay a balanced market and there will be tipping factors on each side where the sentiment, interest rates and all that play in the psychology of the buyer.

But if it stays pretty steady and the economy keeps moving and everyone feels like there’s confidence in the job market, I suspect there will still be some growth in the Sydney market. Certainly in the good pockets and those are going to scarce our assets, those townhouses, villas property on its own title, those types of places. I think we will still see some positive numbers.

Bryce Holdaway: Probably not just expect that double-digit growth that they’ve gotten used to.

Ben Kingsley: Yeah. Not in the last two years anyway.

Bryce Holdaway: Victoria …

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