Has the Sydney Property Market hit the bottom of the Cycle?

May 2023

Lack of stock impacting fuelling the prestige market

Has the Sydney Property Market hit the bottom of the Cycle? 

CoreLogic reported that Sydney’s median property value rose 3.0% in the three months to 30 April 2023. Does this mean we’ve returned to a growth cycle? Or is there more to it than that?

How has the Sydney Property Market been performing?

Between January 2022 and January 2023, Sydney’s median price slipped -13.8%, according to CoreLogic. Over that time, house prices fell -15%, and apartment prices declined -10.4%. These falls, however, need to be put into perspective - especially as they come off the back of  an unprecedented boom over 2021.

What was unique about the ‘COVID market’ was the sheer pace of growth. Sydney’s median house value lifted 29.7% during 2021 - or almost $1,000 a day. It’s true that other boom markets may have lasted longer and led to greater growth. For instance, the boom of 2000-2004 saw prices rise 76.4% nationally. But that lasted four years. The growth from 2020 to the end of 2021 was the shortest and sharpest boom our property market has ever seen.

The role of interest rates

A key reason for this growth cycle was interest rates were at record lows, so buyers had access to cheap cash. The Reserve Bank of Australia (RBA) kept the official cash rate at just 0.1% between November 2020 and May 2022, even as we avoided the prolonged COVID recession many had forecast.

Since then, the RBA has lifted the official cash rate 11 times, taking it to its current level of 3.85%. In the process, the interest rate on the average standard variable home loan rose from around 2.75% to 6.5%. As a result, the median monthly mortgage repayment on a $1 million principal and interest 25 year home loan has risen by more than $2,000 a month.

We believe that the full impact of these rate rises hasn’t yet been felt. When interest rates fell to record lows, an unprecedented number of people chose to fix their interest rates. An estimated 35% of all mortgages remain fixed, with two thirds of these set to revert to variable rates by the end of 2023 - over 800,000 fixed home loans are expected to expire in 2023 and 400,000 in 2024.With these borrowers facing a 3-4% rise in their mortgage rate, some have forecast a ‘mortgage cliff’ when this happens, with many stretched mortgage holders being forced to sell.  Recently, some economists have argued that the impact of this “mortgage cliff” is overstated, given our relatively healthy economy.  Only time will tell what impact this “mortgage cliff” will have on the Sydney property market.

Supply vs Demand in the Sydney Market

The imbalance between supply of property and demand from buyers is a currently a major driver in the Sydney Property Market.  We believe that the main reason prices are beginning to creep upwards again is that supply levels have fallen well below demand.

Autumn is traditionally one of two busy selling seasons in Sydney when people are conditioned to both buy and sell. However, this year we haven’t had the run of properties coming to market that we usually do. If anything, we’ve seen the number of listings decline rather than increase as we head into Autumn. SQM Research confirms this, showing that in February 2023, there were over 30,000 listings across the entire city. However, by April 2023, there were just 26,000 - or almost -15% fewer. Sydney listings are -18.2% below the 5-year average.
So, while Sydney recorded an auction clearance rate of 76% on the weekend of 13/14 May 2023, only 367 auctions were recorded across the entire city. In late November last year, we were seeing almost double that number, at close to 700 auctions. And even this was down from the long-term average. Going back 5 years, it was common to see close to 1,000 auctions in a weekend across Sydney. In October 2017, a record 1,152 properties went under the hammer in Sydney in just one weekend.

Several factors are contributing to a shortage in supply at the lower end of the market including, increased migration with over 400,000 coming into Australia over the next 12 months, increasing rental cost and a shortage of new builds.

This chronic lack of stock is keeping a floor under prices and pushing prices higher as buyers have less choice. 

The prestige market never missed a beat

While this lack of stock is impacting the entire market, the shortage of supply is most acute at the top end. There simply aren’t enough prestige properties for sale compared to the amount of demand in the market. The prestige market is also not interest rate sensitive and is relatively immune from the impact of interest rate rises.

This chronic lack of stock means that when a quality prestige property is listed, it is selling very quickly and at a premium price. A large proportion of prestige properties are trading off-market without being listed publicly for sale.

Anyone who is genuinely interested in buying premium Sydney properties needs to be accessing off-market stock - approximately 70% of the prestige properties we purchase for clients are purchased off-market.

Can we expect the growth phase to continue?

So long as the current chronic lack of stock continues, the balance between supply and buyer demand will remain strained.  However, this doesn’t necessarily mean all market segments will experience the same growth.

At the entry-level, we’re more likely to see people feel the strain of rising interest rates. We also expect to see some investors decide to offload their properties rather than face higher monthly repayments. This should lead to greater supply at the lower end of the market and a potential further softening of the segment of the market.

At the prestige end, however, we expect supply will stay low, and demand will remain relatively strong. Interest rates don’t have the same impact on this market segment, and there are no indications that more properties will come on the market anytime soon. If anything, the lack of supply is causing homeowners to hold onto their property for longer because both upsizers and downsizers can’t find anywhere to relocate to. This creates a self-perpetuating cycle where supply levels continue to shrink further and further.

Although we’re cautiously optimistic about the Sydney property market, we believe that the second half of 2023 will see increased pressure on the lower-end of the market and that the top-end of the market will continue to outperform the rest of the market.

Want more?

Thinking of buying property in Sydney? Get in touch to find out how we can help you find your perfect home and secure it at the best possible price.

Deborah West
Founder & Principal