Sydney is transforming into three-city metropolis

Sydney property market is changing - the article

What’s happening

03.03.2020

Have you heard about the ambitious strategy to transform the Sydney metropolitan area? Plans are in place for Greater Sydney to become a three-city metropolis (basically, three suburb clusters):

  • Eastern Harbour City, centred on the Sydney Harbour CBD
  • Central River City, centred on the Parramatta CBD
  • Western Parkland City, centred on Western Sydney International Airport and Badgerys Creek Aerotropolis (a subregion whose layout, infrastructure, and economy are based around the airport as its commercial core).
Sydney map - it is tranforming into three-city metropolis

Source: CBRE – Western Sydney Airport

 

The NSW Government is trying to move away from the historical focus on the Eastern Harbour City. It is believed that the focus on this area, where the majority of office precincts and universities are located, has created an imbalance in access to jobs, and that this needs to change.

The idea is to create three cities within Sydney so that most residents won’t have to spend more than 30 minutes travelling to work or educational and recreational facilities. It is hoped that this new structure will encourage residents to stay within their own city boundaries rather than travelling to adjoining cities for work.

Another consideration is housing affordability, which has been a problem in Sydney. Median house price is predicted to reach well over $1.2 million by the end of 2020 [1]. To combat this, other more affordable parts of Greater Sydney need to be transformed in order to attract and accommodate a growing population.

What it means for the Australian property market

Generally speaking, the ‘Australian property market’ is understood to comprise the trade of all real estate located in Australia.

However, in such a big country there can’t be just one property market.
While many people tend to refer to the ‘property market’ in a general sense, the reality is that there are many smaller submarkets scattered throughout Australia. These local property markets are segmented by geography, price point, and property type.

It is common practice to separately review at least eight property markets in Australia – one for each state or territory capital city – in order to see the ‘big picture’.

As the proposed changes to the Sydney property market are implemented and it becomes a three-city metropolis, it seems that we will need to review each of the three major property markets within Sydney – Eastern Harbour City, Central River City, and Western Parkland City – separately.

Sydney map - it is transforming into three-city metropolis -2

Source: NSW Government Greater Sydney Region Plan

 

Reviewing the property market in this way will give us better understanding of what is happening within each individual Sydney area or suburb cluster. We can judge whether the infrastructure upgrades are bringing more residents to the area, whether jobs are being created at the predicted level, and many other metrics.

However, this review only goes so far. It will give us a ‘big picture’ only, because figures are always averaged. Every suburb is a little bit different, so we will also need to look at the statistics for each particular suburb if we are to understand what’s really happening at the local level.

Changing property market drivers

Each property market in Australia is very complex. Property prices are driven by broader (macroeconomic) factors as well as by local (microeconomic) factors.

At the macro level, the strength of Australian real estate markets is influenced by the Australian economy, total population growth, government policies, world economic events, and external political factors.

At the micro (local) level, property price growth will be influenced by local job creation, population growth, and property supply and demand. Local lifestyle factors, such as access to retail, transport, jobs, and health and education infrastructure can all increase demand.

As the Sydney property market changes and the city becomes a three-city metropolis, investors will be forced to change their approach to property selection. Success will come to those who are well informed and prepared for the new property investment landscape.

With that in mind, we’d love to share with you our list of…

Important factors to consider when deciding where to invest

1. Abundance of free land

It is important to know which areas of Sydney have an abundance of free land and construction sites. Just look at the size of some of the Land Release areas on this map!

In these areas supply is likely to outweigh demand, limiting property price growth. This is especially true for areas where high-rise development is allowed.

Sydney is transforming into three-city metropolis - 3

Source: NSW Government Greater Sydney Region Plan

 

2. Lack of funding and delays to infrastructure projects

Proposed changes to infrastructure, or indeed any projects related to area development, don’t always get off the ground. And even when they do, significant delays are not uncommon.

Bold projections are being made as to influx of new residents and job creation, yet official documents released by the Government show that some of the projects these projections rely on are not yet funded.

For example, the Greater Sydney Region Plan 2018 notes that two so-called “committed” projects, Western Harbour Tunnel & Beaches Link and Parramatta Light Rail Stage 2, are “subject to final business case, no investment decision yet” [2]. Routes and stops for some transport corridors/projects are indicative only.

Even though the project has been announced, such a major development could easily be delayed. Just look at the North West Rail Link, which was delayed for several years when participating governments failed to commit sufficient funds.

Many other projects, including the Inner West Light Rail, Eastern Suburbs Rail, WestConnex motorway, and M1 and M2 tunnel connections had to be announced and re-announced several times before finally getting started. And a new toll road in Sydney’s south – to be renamed the M6 motorway – will not be opened to motorists until the end of 2025, about a year later than planned [3].

All these delayed projects can impact property price growth and rent growth. So, whenever possible, we should investigate what stage project developments are at, and give more weight to projects nearing completion, or at the very least those that have been funded and where construction has commenced.

3. Unplanned changes to population growth projections

What if population growth doesn’t happen as planned? We may end up with more homes than residents to occupy them. As we’ve seen, population growth can be affected by unpredictable situations like bushfires and coronavirus.

While population growth has eased since peaking in 2008, Australia is still growing faster than most developed nations, partly due to natural growth (37.5% of total population growth for the year ended 30 June 2019) and partly due to strong overseas migration (62.5%).

Australia’s population is projected to hit 30 million by the end of the next decade. The Australian Bureau of Statistics estimates that the population of Australia increases by about one person every 1 minute 23 seconds, or 350,000 people a year.

“Based on our medium-growth projections, Australia will double its population by the year 2075,” said Bjorn Jarvis, Director of Demography at the ABS, “but under our high and low scenarios it could be as early as 2058, or after 2101.”

According to current population projections for New South Wales, between now and 2041…

  • NSW is expected to grow by an average of over 100,000 people per year
  • The population in urban areas around Sydney and in regional NSW will increase by 425,000 to reach 3.5 million
  • Greater Sydney’s population will grow to approximately 7.1 million [4].

However, demographer Liz Allen, from Australian National University, said that Australia may not actually reach the medium-growth projections modelled by the ABS. “We’re an ageing population that relies on migration to offset the potential adverse consequences of that ageing population,” she said. “Migration is what’s keeping our economy afloat [5].”

Of course, no projection is infallible, especially in today’s volatile landscape. We need to be alert to any unexpected factors that may influence population growth, property price growth, and projections made by government and economists.

Unpredictable events or situations can blow away economists’ forecasts. We can never be fully ready for these factors. There was no way we could have foreseen the extent of the devastating bushfires in 2019, for example, or the spread of coronavirus in China and other countries in early 2020.

There is a lesson we can all take from this. While it’s important to take a long-term view of the economy and Australian property markets, property buyers also need to allow for uncertainty and surprises. We can do this by carefully choosing only the best properties to invest in, by having risk minimisation strategies in place, and by diversifying (buying different property types in different cities).

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4. Changing population distribution across Greater Sydney 

As the proposed changes are implemented and Sydney becomes a three-city metropolis, residents will be distributed even more widely across Greater Sydney. We will start to see changes in the population, amenities, job availability, and much more in many areas across Sydney, and this will determine price growth for the future.

Property buyers create demand, which drives property prices up. When demand is focused on one particular area, such as the current Sydney CBD, prices can skyrocket, as occurred in 2017 when Sydney property prices increased by almost 20% [6].

As buyer demand shifts and redistributes across the three new cities within Sydney, property prices will reflect this trend and areas with less demand from buyers, investors, and tenants will experience lower property price growth.

This is why property investors should only look at suburbs with a history of constant above-average property price growth and property types that will be in continuous strong demand in the future.

 

Sources:
[1] https://www.domain.com.au/research/domains-property-price-forecasts-february-2020-928094/
[2] Sydney three-city metropolis plan (See note on page 11 )
[3] Commentary of Rich Harvey – President of REBAA and Chairman of the REINSW Buyers Agent chapter.
[4] https://www.planning.nsw.gov.au/Research-and-Demography/Population-projections
[5] https://www.smh.com.au/politics/federal/australia-s-population-projected-to-hit-42-million-by-2066-as-melbourne-overtakes-sydney-20181122-p50hjy.html
[6] https://www.theguardian.com/australia-news/2017/apr/03/sydney-property-prices-rise-almost-20-in-past-12-months based on CoreLogic data.

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