City Living: Rising rates have stopped Sydney's runaway prices, writes Jane Suiter
Dublin is not the only city which has seen a massive rise in property values over the past decade. Sydney, too, has been booming with dinner parties dominated by property chat and acres of newsprint about affordability problems for first-time buyers.
The Sydney Olympics and the Rugby World Cup in 2003 gave many Irish people their first view of the city and many were swept away. Sydney is a great mix of the old and the new. It has world-renowned beaches, a fantastic harbour, functioning public transport and great restaurants. The quintessential Sydney home with its veranda and cast-iron balcony is also really appealing. The harbour alone contains some 250kms of waterfront property, much of it developed fairly densely for housing.
Sydney, too, has seen huge immigration with thousands of young people joining the workforce. For over 10 years property prices have been rising. Like Ireland, the economy is doing well and GDP grew by around 3.5 per cent in 2004. And like Ireland rents have been falling gradually over the past few years making things a little tighter for investors. Sydney has also seen a steady influx of residents into the city with the population more than trebling since 1991, creating a huge demand for modern apartments. Overall property prices have been rising by up to 10 per cent a year for over 10 years and investors have been flooding the market.
But in the last year the Australian central bank has put an end to the party. Since mid 2002 interest rates have increased by 1.25 of a percentage point bring them to 5.5 per cent. The hikes led to a fall in the number of investors while speculators vanished and buyer confidence was replaced with caution. That is the kind of rise that many economists predict is in line for Ireland once the European Central bank begins raising rates. According to Jim Power, chief economist at Friends First, it is not a matter of whether but when Irish rates will rise by a similar amount.
The result in Sydney has been a fall in property prices. Some of the main suburbs have seen price falls between 14 per cent and 4 per cent over the past year. In recent weeks sellers have been forced to accept up to 25 per cent less than their preferred price while March auction clearance rates were the lowest recorded in 13 years.
Analysts expect another interest rate rise of a quarter of a percentage point later this month or in May, with the central bank determined to keep a cap on spending and inflation as wage pressure builds. Louis Christopher, research director at Australian Property Monitors, warns that another rate rise could lead to further significant price falls for houses in Sydney. "We would see up to an 8 per cent fall in Sydney for the year (2005) if we have another rate hike within three months of the last rate rise."
To make matters worse, many Australian lenders have tightened their lending on smaller apartments while tens of thousands have given up on plans to buy an investment property. Crucially, the New South Wales government, in a similar initiative to that proposed by NESC and the ESRI here, is to introduce a 2.25 per cent stamp duty on the sale of investment property from the beginning of June. That is likely to drive down prices further.
Sydney estate agents insist there is no cause for panic and are insisting the slump is a great opportunity for investors to snap up bargains. But it is still very unclear whether this is the bottom of the market and many people are still waiting on the sidelines to see what happens next. Many experts say that the market will remain in a downturn for the next few years as the central bank keeps up the pressure. But some are even more negative, the influential CommSec's Property Quarterly warns new home owners may take up to 10 years for properties to rise in value.
Mr Christopher warns that while there are bargains to be had, investors need to be careful that the bargain does not turn into even more of a bargain later in the year.The Australian press is full of such talk.
Investors are told that if they are keen to act sooner rather than later, they may find a few gems from discounts off the plans while some sellers are panicking because of a fall in demand and there are two-year-old high-rise apartments fetching prices less than their original asking price.
Yet much worse may be to come. Some forecasters are predicting that rates will rise to over 9 per cent by the end of 2006, a massive jump that is likely to lead to a number of distressed sellers who simply cannot afford repayments.
So is this what is in store for the Irish market when the ECB begins to raise rates? According to Mr Power, the likelihood is that Irish rates will increase by a similar amount to Australia but he insisted that the impact on property values should be more muted. Certainly Irish investors need not worry that rates could head as high as 9 per cent. And in the event of a 1 per cent to 1.5 percentage point rise in rates Mr Power insists the fundamentals will hold prices steady.
"The demographic profile with a large number of young people, continued migration, strong wage growth and a move to smaller household sizes are all very important," he says. "The one problem would be if the Government stepped in as they did in Australia and tax second homes. That would change the landscape altogether."
