When a national media campaign kicked off last week, signalling Sydney’s property market was set to cool – there was a temptation to jump on the bandwagon. There was a temptation to get swept up in the “critics circle” and to ram home the senselessness of Sydney’s buying frenzy.

But a closer look at inner-city market dynamics, suggests it’s too early to call a cool down. Especially if you’re a seasoned property collector who puts a focus on places within a 5km ring of the city.

That’s a different kettle of fish.

Inner-city Sydney property prices are still raging hot. Factors like supply, capital gains and foreign investor hype, mean clearance rates are still riding high. The big old boom may be unsustainable long term, but the underlying drivers of market exuberance, will not be easily quelled.

So is there a chill in the air? Not according to Malcolm Gunning President of the NSW Real Estate Institute of NSW or Paul Bloxham Chief Economist at HSBC. We caught up with both to run the numbers, check in on the statistics and discuss whether a return to normality is pending.

Sydney on the world stage

“What’s underpinning the inner city market is foreign investment,” says Malcolm Gunning, President of the Real Estate Institute of NSW. “Sydney is simply becoming more a part of a globalised economy.

“Sydney today has to be looked at as a global city ranking in the top 6-7 cities in the world. The inner-city here is going to be very much like a Soho in New York City or the like some of the better areas in Tokyo, Paris and London,” says Gunning who points out that 56% of investors in the inner city Sydney market are foreign buyers.

“Harbour front property, or beach front property – Bondi Beach – that top end of the market –will become more and more attractive to international purchasers without a doubt,” Gunning says.

Harbour front parks at Elizabeth Bay offer breathtaking views of the city.

Chief Economist at HSBC Paul Bloxham agrees Sydney’s boom is part of a worldwide trend.

“You can draw strong parallels between what’s going on in Sydney and what’s going on in a lot of major cities around the world. London, New York, Hong Kong – Singapore – a lot of the major cities around the world are seeing strong demand for housing met by insufficient supply, which is driving up prices,” he says.

Bloxham points to super low interest rates across the world. A situation where financial systems have still got plenty of liquidity, and this factor alone, is responsible for driving investors into the major city housing markets.

“By no means is this a unique feature just for the Sydney market,” Paul points out. “There is a global aspect to the story,” Bloxham says.

The Cool Change

Both these expert market trackers suggest a cool down might show up in mid to late 2016 – but they’re  quick to point out the unstoppable momentum tearing through Sydney right now. Gunning says growth is strong off the back of foreign investment and buying activity in Greater Western Sydney.

“We have strong migration into this state. We haven’t got much infrastructure spending at the moment, but we’re getting the brightest and the smartest coming to Sydney. We are getting the miners coming from Queensland or Western Australia to Sydney now for work opportunities.

“Our population in NSW is not growing, but in Sydney, it is still growing – between 25,000 and 30,000 net, per year . So these people have to be housed, this underlying demand needs to be met,” Gunning stresses.

Back in the CBD, he points to business confidence as a key factor affecting price growth in commercial real estate.

“Buyers are of the opinion there’s going to be strong commercial rental growth because there’s confidence in the Sydney business market generally.

“To give you a commercial snapshot, I’d say whether it be strata commercial in the CBD, or commercial premises in the inner city – demand is strong,” Gunning says.

Meanwhile Paul Bloxham, Chief Economist for HSBC believes investors will not have spirits dampened down by low rent yields or the top regulators calling for an end to the killing season.

“The prudential regulator has been turning up the dial on its regulatory settings, to try and slow down activity particularly in in terms of investors and their part in the housing market and although that may be starting to have some impact on investor willingness the fundamentals are still there, for continuing to drive a sustained growth in housing prices and ability to enter the housing market. He notes investors are still buying property hand-over-fist, on the lure of strong capital gains, they’re undeterred by rent yields that cannot keep up with house price growth.

“House prices are up 43% in Sydney, since the middle of 2012 – so they’re running at about a 16% year on year rate at the moment,” he says.

Gritty Camperdown, another suburb that’s enjoying a new found popularity, as a smart inner city suburb to invest in.

“That is, very rapid growth and it is certainly well ahead of income growth in the city, and it outpaces rent substantially. And while the first leg of that, is certainly what you would have expected given the fall in interest rates, the continual rise of those double digit price growth rates is unsustainable,” says Bloxham.

“I think in the Sydney market there’s a worrisome exuberance. There are signs that investors getting involved in the Sydney housing market are getting involved because they are expecting continued capital gains, rather than rental returns and that’s a worrisome development. That’s why you’ve got officials like the Governor of the Reserve Bank referring to the Sydney market as being “crazy”. That’s why you’ve got the authorities seeking to tighten up lending standards because they are worried that there’s an exuberance in the market that is excessive,” Bloxham says.

William Street, Paddington offers the intimacy of Parisian shop house street set within a clean, and safe Australian, Eastern suburbs context.

“We certainly have got in mind that house prices in Sydney do start to level out in mid 2016, or might even fall a bit. We have got in mind that they will be broadly flat, to falling, in 2016.”

At BresicWhitney we’ve identified an echelon of our repeat buyers who “collect” properties. Their buyer profile differs from the other categories of buyer identified. They play by a different set of rules and differ most strongly in what motivates them to invest again and again.

“The Collectors” tend to be more discerning and mature as an audience. Tune in next month for our break down of what defines the Property Collector and discuss what factors shape their behaviour in inner-city Sydney.

To read about other typical Sydney buyer categories, check out our recent article Keep Calm & Buy Property.

*A special thanks to Malcolm Gunning and Paul Bloxham for their contribution.