Sydney investors chasing capital growth in for a rude shock, say experts

The property market in Sydney’s west has slumped dramatically, signalling looming problems for investors who were hoping to capitalise on price growth.

Instead, prices in the west have slipped by 7.3 per cent over the month of September and the auction clearance rate has hit a dismal 56.4 per cent – a massive drop from Sydney’s record rate of nearly 90 per cent in May.

“There’s no doubt that prices and auction clearance rates have weakened considerably in the west,” said Domain Group senior economist Dr Andrew Wilson. “It has now become the underperformer of the Sydney market and, to some degree, it’s dragging the whole of the market down.

“That’s particularly difficult for investors, as the western side of Sydney has been the epicentre of investment activity for NSW and nationally.”

Latest Domain Group figures show the median auction price in western Sydney has fallen from $841,000 in August this year, to $779,000 in September, a drop of 7.3 per cent.

Recently the other underperforming area has been the south west, which recorded an auction price drop of 1.8 per cent, with a clearance rate of 51.4 per cent.  

Shane Oliver, chief economist of AMP Capital Investors, said investors in the west could now be facing a tough time, particularly with the new Australian Prudential Regulation Authority (APRA) cap of 10 per cent a year on housing investor credit, requiring them to pay higher interest rates, and raise bigger deposits.

“With rental yields so low, investors are dependent on capital growth for a decent return,” he says. “Now with prices down, and future investor activity curtailed by the APRA actions making it harder for investors to borrow money, it will be even harder for those investors already in the market.

“Capital growth may not be forthcoming at all and investors should think twice before going there.”

On the plus side, however, it could be good news for first home buyers who are still struggling to get a toehold in the market, and attempting to do so in western Sydney. “We are now seeing 40 per cent less investors in the west,” said Doug Driscoll, CEO of agency Starr Partners.

“We used to get 50 people at open houses, and now we’re getting 15 to 20. It might be nervousness that’s driving the investors away, or the banks making it more difficult for them to borrow, or a combination of both. 

“But hopefully it’ll mean the balance between investors and owner occupiers can be re-established.”

Falling interest rates have fuelled strong price growth over the past two years, yet incomes have failed to keep pace, so affordability is the major issue out west, Dr Wilson believes. For investors, the APRA rules are now biting.

JP Morgan economist Tom Kennedy said housing investor loan growth is now slowing and that he expects it to be below 10 per cent by early next year.

Over 60 per cent of those loans are going to investors in NSW, said Dr Wilson. “And most of that is to higher-yielding, lower-priced properties in the west. That area is very popular with investors for those reasons.

“Now it’s found its way down to lower clearance rates in the west so it’s now looking like a buyers’ market rather than a sellers’ market. Another force for change is confidence, and it’s hard to measure that.”