Despite much speculation that the Sydney property market is overpriced and ready for a fall, upward momentum continued into Q1 2010, although at a slower pace than expected. House prices rose by 1.4% in Q1 2010 while unit prices rose by 1.6%. However, over the twelve month period median prices have risen by 14% and 12% respectively. Remarkably and against the odds, this has taken prices above the peak reached in 2004.

ABS data suggests that house price growth has continued into Q2 at around 5%, with annual growth of just over 20% in Sydney. However, other providers of price data consider it has slowed further.

In real or inflation adjusted terms Sydney continues to sit below 2004 levels, suggesting no real growth for six years. This is similar to trends in the early 1990s where real prices didn’t reach previous peaks until seven to ten years later.

It’s the shortage factor.

A shortage of housing is set to drive rent upwards in the medium terms. Prices may follow, particularly in apartments in the middle and outer ring suburbs. For example apartment rents rose 2.2 percent in the September quarter, the highest rise in the nation. This coupled with flat property prices, rental yields are raising. Apartments, on average bring in 5.1 percent returns; houses 4.5 percent. Rents rising as expected, vacancy low but affordability an issue.

Vacancy rates tightened to 1.1%, down from 1.3% of the previous year. Rental growth of $10 per week in Q1 2011 was the first increase in rents for five quarters and amounted to an increase of 2.5%. With continued undersupply and a healthy level of population growth, rental growth should continue through 2011, particularly in the absence of any short term incentives to move into home ownership.

Dwelling approvals rise continues, but still around 10,000 short per annum. The dearth of new development has been well publicised Once again units were the driving factor, and continues the trend of the past ten years.

Over 80,000 people are likely to have moved to Sydney, generating a need of over 29,000 dwellings, before demolition and household change are taken into consideration. With no further rate hikes expected in 2011 pressure may continue on prices until rates fall in the first quarter of 2012 (if rate cuts do eventuate).

Affordability to decrease as rates and prices rise, and should limit price growth.

Not surprisingly affordability has been weakening as interest rates and prices (and thus loan size) increase. As at March 2011 some 34.5% of average household income was being used to service an average mortgage in NSW of just over $305,000. This is somewhere between the average 5 and 10 year proportions.

Population growth remains strong but as migrants slow, fewer leave interstate. Slowing international immigration appears to finally be eventuating, slowing to 39,000 people from almost 45,000 people in the previous two half years. However, as the gap between NSW median house prices and other States narrows, fewer people are leaving.

While the slowdown in international migrants is expected to continue as tighter immigration rules apply, the improving economy will continue to ensure that a high level of immigration is required. If the net loss interstate can remain low NSW population can continue to grow in excess of 100,000 per year.