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Sydney real estate set to be a long-term winner



I’d be an extremely wealthy man if I had a dollar for every time I was asked when the Sydney real estate market will run out of petrol. 

The fact is that until someone invents a fully-functioning crystal ball it is almost impossible to pick short-term market changes. That said, this week’s decision by the Reserve Bank to trim the hedges on the official cash rate back to a historic low of 2% will do little to take the steam out of the market in the short-term.

 

Map of Australia

 

Likewise, if the Federal Government decides to tweak the rules relating to negative gearing or capital gains tax discounts in the May Budget, I’d be very surprised if there wasn’t a significant run on property by investors looking to secure an asset under the existing tax regime.

However focussing on short-term factors such as interest rates, which property investors have little control over, can also cause us to overlook the bigger picture – and that is the Sydney real estate market has plenty going for it long-term – a fact the smart money have recognised and will continue to recognise.

First up, while there has been a government focus on replacing the mining boom with a construction surge, which includes the escalation of new housing, there is still a gap between supply and demand in many of our capital cities. Ongoing government red tape and slow poke approval processes are at the heart of the problem here and it’s an issue that will take time to resolve. The upshot is that we have significant population growth yet the new housing sector is struggling to keep pace with our growing population. More people and insufficient housing will help buttress real estate prices.

Sydney rental market

Sydney also has some unique natural borders that inhibit the expansion of new housing. In turn, this is forcing more people to scramble for real estate within the confines of the Hawkesbury River to the north of the CBD and the Great Dividing Range to the west. There is the Royal National Park in the south and to the east we have the Pacific Ocean. These are geographic boundaries which will always inhibit an urban sprawl, which is akin to a London or a Los Angles, and will help underpin Sydney real estate values.

As a Sydney-sider, I could be accused of parochialism but that fact is that the NSW capital is Australia’s economic and business powerhouse. Close to half of Australia’s Top 500 companies are based in Sydney and NSW, according to a government report[i] released last year. The same report said that over $54 billion in private business is invested in NSW every year and that the local economy is bigger than Hong Kong, Malaysia and Singapore.

With the housing market highly correlated to economic growth, it’s fair to expect that the values of quality, well-located Sydney property will continue to produce decent long-term returns.   

[i] A Global Destination for the World of Business

 

Angus RaineAbout the author: Angus Raine is a leading commentator on the Australian property industry and has been CEO of the Raine & Horne property group since 2006. Mr Raine started his real estate career over twenty six years ago, previously working with three blue-chip international real estate firms, before becoming director of Raine & Horne Holdings Pty Limited in 1998. Read more here.