NSW Is it a good idea to invest in Sydney?

quite the opposite

YES if you like to buy A2 Milk at $15. NO if you instead bought Xero instead.

 

People still looking to crystal ball information rather then making decisions off risk management and individual goals.

Wrong approach imho.

 

The reality is based on what you think can cause uplift and what you think can cause downwards pressure on prices.

there’s not much upwind juice left, but the government has surprised us before with its policies that benefit landlords. Maybe we’ll get “investmentkeeper” support soon.

potential downwards pressure might not be visible yet, but you’ll be forced to hold an asset through all time high council rates, land taxes and gross yields of 1.5-3%, depending on what you find.

if you take a fairly generic property in a cheaper part of Sydney, purchase price @800k , rental @450, owner ship costs of 5% upfront and 1% annually, to calculate holding costs:

+ 21785 rental p.a. with 2% vacancy and 5% management fee

- 8 000 annual ownership cost

so it’s making you about 13785 p.a.

And if you forked out $160k deposit and $40k transactional costs, that leaves 640k

at 2.5% interest rate (optimistic over a 10+ year term) that’s $16k p.a.

So you’re “investing” $200k for the privilege of owning an asset that is losing approx $2 200 p.a. whilst you wait for the market to go up. Don’t forget you also forked out $40k in purchase costs.

If we are assuming it’s an established property, there’s likely little to no depreciation to claim.

Now if you do a DCF analysis and assume both rents and ownership costs track inflation, whilst land appreciates upwards, buildings depreciate. Then you’ll find that the property will have a low return as a “buy and hold forever” property.

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assuming interest rates are likely to go lower, expect higher prices.

assuming inflation pumps strongly, expect better rents, but also expect higher ownership costs, and higher interest payments.

assuming capital growth comes to save the day, it will need to outperform a baseline annualized return.

lets use an example (you can use any benchmark you want)

I’d say leveraged property ideally gets 4% (real, not nominal) or better annualised property growth. This means that in 10 years (2031), and using 2021 dollars, you need this 800k property to be worth at least 1.2m. If you take inflation at 2.5%, then this property would need to sell on the market at $1.54m at the end of a 10 year feasibility period.

this could be realistic if you see a substantial increase in supply and demand within a specific area.

for example in the Blacktown and Parramatta LGA , the 20 years of population growth from 2016 to 2036 is expected to be in excess of 50% higher than the growth from 1996 to 2016. So you might look for a well located parcel, grit your teeth, and buy with the plan to get your $$$ return in 2040! Maybe it will be worth the lifestyle hit and borrowing capacity hit, in the short and medium term..?

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it’s important to remember, generally land will go up based on supply and demand. Homes as a whole tho, - so this means townies and apartments are now included - will even more closely track interest rates and affordability (unless we reach a supply constraint issue with those too, see: Manhattan, San Francisco, Shenzhen, Hong Kong, etc - as opposed to Tokyo, where apartments have remained affordable). That’s because Sydney is becoming a city where land is at a premium, due to very little remaining that can be viably released.

Of course, all of this can change with significant technological changes, what if, in 20 years, 75% of jobs are 75% work from home and 25% require a drive to work. Then a typical person in the market for a home might willingly prefer to invest their hard earned $$$ outside of sydney... even if it has all the employment!

 

I ended up buying 1 in bris when i made that post. Wish i got atleast 2 more instead of offseting my loan which is fully offset atm the money would have been put to bettet use had i got more which i coulda have. Anyways at the time I didnt want to do that as i had different plans. But now im looking to buy again.. Kinda anoyyed at my self that i had the money in my bank account just sitting there when i could of got atleast 2 more and made nice gains.

 

Yeah your right. Screw it if in the future the prices keep rising in syd and assuming i haven't brought i might just move to another state and buy a ppor there. Or move into my ip which is in Brisbane. Im not going to pay 2 mill for a ****** house in the west unreal

 

"So you’re “investing” $200k for the privilege of owning an asset that is losing approx $2 200 p.a. whilst you wait for the market to go up. Don’t forget you also forked out $40k in purchase costs."
Didn't check each numbers, but based on the above figures $2200 per annum loss isn't bad.
Even a 2% annual increase over 10 years will give you 800k X 2% = 16k pa.
That's 16/200 = 8% ROI.

 

I feel that it's always good to invest in Sydney if you can afford it. Whether or not NOW is a good idea is something else entirely. Then you also have the issue of WHICH PART of Sydney is likely to perform best. I feel that your question is too broad to give an answer.

 

Spoiler: The math

It’s about 6.9% ROI at face value, after you deduct the 2200 net outflows. Tho it’s unrealized. If you realise in year 10 at 1.2m in 2021 dollars, that’s a profit of 360k not including selling costs. Deduct the 22k you paid in holding costs, that leaves 338k. Which is an annualised return of 5.4% p.a. on your initial capital. If you assumed selling costs of $15k or so, this number will be lower.

as a buy and hold, it might work if you anticipate rents will increase faster than inflation. In this situation the house will perform well as a buy and hold property

don’t take me wrong, I’m a big Sydney bull and love owning land, etc, etc.

but holding costs are fun when you have a market with tailwinds.

less fun if you have to hold it through 10 years of under performing growth.

in the above example, with a 10 year feasibility period, a house that appreciates 4% nets about 5.4% annualized return on your 200k invested, assuming it’s sold in 2031. If that’s the type of performance you can expect (it’s approx the performance of the last 10 years), then you will do well. The trade off is the illiquidity and the holding costs if you’re wrong! Will limit other investment opportunities that come up.

whilst no one can see the future, the next 10 years hasn’t been primed to perform like the last 10 years. Based on what we know now. Of course, anything can change or surprise us.

the reality owning land in a high demand area will always perform strongly over a long enough time period.

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tat the end of the day, a deal is a deal, if you find something that’s the right type of asset at the right price, you’ll do well, so long as you can afford to hold it.

 

Simple Excel calculations using safe assumptions


Leverage and compounding effect of property value increase makes PI very attractive,

 

Compounding works even better at the long end. After 40 years, combine with good estate planning….

 

Invest or not Sydney Median is now $1.41M it seems. It will be $1.5M in a few months and even this lockdown is not affecting prices. Been hearing lockdown actually is having opposite effect in that sellers are pulling listings, buyer demand is still at maximum - its just creating more pent up demand.

Just wait until lockdown lifts and Spring is here which is typically the hottest time for real estate. Its going to be exciting.

https://www.domain.com.au/news/sydn...smh&utm_medium=link&utm_content=pos5&ref=pos1

 

Did you end up buying in Sydney? I seen you posting about it in another thread about st marys

 

I will buy if you can finance me 80% LVR. No bank wants to touch me.

 

Whether Sydney is 'cheap' or not likely comes back to your view of interest rates (and to a lesser degree employment markets). Forget the median price levels.

IMO if borrower rates are stuck at 1.5% and were around 4-5% unemployment in 2024-2025, then Sydney is very cheap at the moment - there is a long way to go to the price adjustment. If borrower rates are above 5%, then Sydney is likely overvalued now. You can simply run the figures on many investments and adjust rate parameters to get a sense of where fair value of prices sits.

There will be a flood of money coming in over the years if rates are at this level (1.5%). Meanwhile there'll be some money leaving the asset class and much less coming in if rates are high.

 

i always think of relative value against average wage. using any metric sydney is way too expensive and its game.of.musical chair.

having said that blue chip luxury syd will always retain balue (10mio+ places). the mass market will be ok (ppl.need place to live). but its those 2-4mio prestige upper middle class area thats most vulnerable... when tough times comes they suffer most

 

I disagree. Vast majority of these homeowners do not have a mortgage that is of concern. The owners either bought it ages ago and have no mortgage or they have plenty of equity and low LVRs. My home is 2mill plus and the interest I paid on it for June was $125, absolutely not a concern. Because we upgraded, the amount we owed on the place when we bought it was always pretty low. If employed, there is a fair chance that the owners of these properties can do their work from home, rather than having to be out in the public. If they lose their jobs, they'll probably get a solidly good redundancy payment too, so there isn't really any stress. I guess if they have their own business though that can't operate during lockdown... that's another story. But "successful" people tend to bounce back.

People owning these homes may also have other investments - shares, IPs, a solid super balance.... It's the people who have LVRs of 80+% on their homes who are in a more precarious state and that's more likely to be found in the FHB suburbs and new apartment FHB owners. Of course, they may have other investments too, but the mortgage would be the main concern, (and other debts like car loans). I think Sydney houses will be fine in any case, still loads of demand for cheaper housing and land is restricted so I think houses will still keep going up in the long term.

I think units and apartments won't go up in price quite as much though because it's relatively easy to add a lot of supply. Think about Hong Kong's housing market. Houses are the domain of the uber rich only, the availability of land is such that the average person cannot afford one. The everyday person settles for an apartment. Of course, Australia has a lot of land and people are free to move to another location. But, expect to see Sydney's land prices keep increasing. Migrants want to live here, parents want to be able to send their kids to good local schools and keep them there, people tend to want to live where their family or friends are...

 

Expensive properties dont always have higher debt. Thats just fhbs projecting their own experience.

People buying in that 2+ category are often upgraders who have 50%+ deposits from a previous sale. People who own those probably bought when it was cheaper.

Being older, they often have other investments. If things go bad, they can sell. The lower lvr gives them more flexibility.

 

Yep. 100%

 

And where would you buy ? Lol