Author: James Gerrard CFP, Director/Financial Advisor at FinancialAdvisor.com.au
First Published on LinkedIn
The Sydney property market has risen by over 70 per cent over the past four years and as a result, gross rental yields currently sit below 4 per cent for apartments and below 3 per cent for houses. This has meant that property investors are increasingly having to put their hand in their pocket to fund the monthly shortfall of income over expenses (aka negatively gearing).
With long-term property growth in Sydney at 7.25 per cent over the past 30 years, the last four years has run at over double this rate causing a sharp decline in housing affordability as employment income (and the ability to save for and purchase property) struggles to keep up with the pace of property price growth. I may be proven wrong, however it is hard to see the same level of price growth continuing over the next few years as people I speak to simply cannot afford to borrow any more money to chase the ever growing property prices.
These include young couples in their 20’s an 30’s who have strong incomes above $200,000 combined, have stable jobs and have built strong cash deposits and yet, they cannot buy an average house in an average suburb in Sydney. It just seems crazy to me and I know it hasn’t always been the case for generations past. It’s just one point in time where the metrics are out of whack, even with interest rates at relatively low levels, housing unaffordability is at record levels.
Most people I speak to have mixed feelings about the Sydney property market. On one hand, they like the security of Sydney property given it’s reputation as the safest capital city property market in the country given its migrant appeal however on the other hand, they feel that the Sydney market is expensive having increased so much in recent times and are hesitant to purchase at what could be the peak of the cycle and further exacerbated by low rental returns.
But these same people feel that over a 10 year period, Sydney property prices are likely to be much higher than they are today. It’s just that over the short to medium term, there’s a fear that property prices may not grow and may stay flat for many years, allowing wages to gradually increase to a point where people can afford property again at which point the market will take off again.
The bottom line is that property investors don’t want to be paying hundreds of dollars per month into a Sydney negatively geared investment property that simply isn’t growing in value. Although they are not losing too much money, there is an opportunity cost of having money tied up in an unproductive investment.
Some of my Sydney based clients have pushed out of their comfort zones and purchased interstate in areas such as Adelaide, Canberra and Hobert where they believe there are better value metrics to be had with stated based economic and demographic reasons to see strong property price growth.
But for others, the sit tight and wait for a crash path has been actioned. I have a feeling there are literally thousands of people in Sydney who will the Sydney property to crash on a daily basis. If I had to guess at the chance of a crash in the Sydney property market, I’d put it at around 10 per cent. In my opinion, there would need to be a culmination of several nasty forces such as overseas political and economic instability mixed with rising unemployment, adverse property laws (increasing overseas investor taxes, increasing stamp duty, negative gearing removal etc) and poor domestic economic growth before we’d see a crash in the Sydney property market.
I tend to agree with my client and believe that we’ll see a few years of flat to inflation based growth in the Sydney property market. So where does the short-term rental situation come into play?
Speaking with Quirin Schwaighofer who is co-founder and COO of short-term rental specialist MadeComfy, savvy property investors are switching from traditional permanent rental arrangements and instead opting for letting out their Sydney investment properties via MadeComfy on a short-term basis and are reaping the fruits. Schwaighofer says “in some popular areas for short-term rentals such as McMahons Point on the lower north shore or Chippendale in the inner west has resulted in net rental incomes in excess of 8 per cent per year, which is over double what they were generating in the past when they had permanent tenants in place”.
Amanda Gould, Sydney buyers agent and CEO of HighSpec Properties says “I’m finding a spike in interest from investors who wish to consider an airbnb/short-term rental strategy as part of their overall property investment strategy. And it makes sense, you’d be silly not to consider all options on the table to get the highest return out of your investment, so why not at least consider short-term letting of an investment property even if you eventually do not go down this path”.
Craig Forman, Sydney mortgage advisor and director of CANE Financial says “short-term renting of an investment property has the potential to produce higher than average rental returns however a few things need to be kept in mind when considering this path. There is some uncertainty around the future of renting properties using airbnb given some body corporates banning airbnb and no clear Government legislation on it. Further, most lenders do not take into account the income to be generated via airbnb when they assess applicants for loans. So if you have an airbnb strategy, it’s best to speak to your broker as they will know the special lending criteria you will need to meet, as well as which lenders to approach to give you the best chance of getting your loan is approved”.
If you have an investment property or are considering an investment property, keep an open mind in regard to short-term letting and do your own investigations to see how it stacks up against the traditional long-term tenant arrangement. You may be pleasantly surprised!