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NSW Property Values …. How high can they go?

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New South Wales and most especially Sydney has recently proved to be the stand-out growth market for Australian real estate.  Sydney grew 14.3% compared to Melbourne’s 8.1% pa for the September 2014 quarter.  The big question is what is really driving this exceptional property value growth?

NSW has two significant factors in its favour at this time.  One is that it is the fastest growing state economy in Australia at 6.3% on prior year and population growth, driven by migration.  Furthermore, it is not so dependent on the waning resources sector as notable states such as Western Australia and Queensland.  On the downside, for investors, rental yields have fallen as rent rates have not kept up with the increase in property value.  Add to this the fact that while Sydney’s transport infrastructure received a major upgrade for the 2000 Olympics, it has not kept pace with demand in recent years and is becoming very congested!

The big question on peoples’ minds is how high can the Sydney market grow.  There are those of us who recall significant market correction resulting in downward value trends in double digit figures over the past 30 years.  The Sydney market can be quite volatile.  Having said that, there is support for projections as high as 13% for the 2014/2015 and 2015/2016 periods (QBE Housing Outlook report).  This projection is driven by the expectation of continued strong economic growth, continued population growth, a fundamental underlying shortfall in new housing starts and now, a new cycle of lowering the prime interest rate.

All the above growth for NSW and Sydney fly’s in the face of a National market that is expected to subdue during 2014/2015 with growth of around 4% down from 7% in the prior year (Fitch Rating’s Global Housing & Market Outlook).