Not all Sydney areas are booming: The city's three worst performing regions

Guest OBSERVATION

It might sound quite bizarre discussing areas that have not been good to existing property owners in Sydney. The general consensus is that all areas have done very well in the Sydney property boom.

That however is not the reality.

The facts are there have been large regions in the Sydney housing market that have significantly underperformed compared to the average Sydney-wide recovery that has taken place since late 2012. 

I have picked three full regions showing clear evidence of underperformance against the wider Sydney average. That doesn't mean prices have not risen in these areas. All areas have risen but some have done a lot worse for their property owners and put them behind the rest of the pack.

Here are three of the worst:

Sydney's Northern Beaches

• Sydney total house price change in last three years: 23.1%
• Northern Beaches' total house price change in last three years: 17.5%

Effectively, anything north of Manly and the further up the beaches you go, the flatter the recovery it’s been.

Suburbs such as Curl Curl, Newport, Bayview, Avalon and others have all been rising below the average. It’s a strange turn of events in that in much of the 1990s the Northern Beaches was almost the leader of the pack. So why is this happening?

Of course, many residents love the northern beaches. Many locals deem it “God’s country” and truly, the region does have some of the best beaches in the world.

That’s great for living but the real problem lies in the infrastructure. When it can take up to and hour and a half to drive to work that is just too much for most people. There has not been a major piece of decent road infrastructure for decades and yet the population has continued to build up.

Each morning those taking either the Pittwater Road or Wakehurst Parkway know exactly what I am talking about. Until such time there are underpasses, tunnels and a fix for the spit bridge (which should ultimately be a second harbour tunnel) this area is likely to underperform for the long-term.

Let’s not even talk about the rail line for there isn't one and we are unlikely to see one in our lifetimes!

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The Lower North Shore

• The Lower North Shore total house price change in the last three years: -8.5%

One of the most affluent regions in Sydney and generally has not been the best property performer for its existing owners. Over the course of the last three years, prices have actually fallen.

Now to be fair the falls took place over the course of 2011 where this market fell by over 15%. But even in the recovery period, the market has not done much.

I put this down to many areas in the lower North Shore being too expensive. When house prices get above $2 million, the number of buyers that can afford such prices narrow up very quickly and investors (which this overall recovery has been driven upon), are virtually non-existent.  

I've seen this in other areas around Sydney in that real estate priced above the $2 million market has been underperforming. Strathfield comes to mind as one example where, in a sea of surging prices, that suburb has seen underperformance for properties prices over $2 million. 

The reality is the majority of free standing homes in the lower north shore are priced at or above the $2 million mark and this is the primary reason why this region has seriously underperformed.

Eastern Suburbs

• Easters suburbs' total house price change in the last three years: 9.5%

Similar to the Lower North Shore, the market corrected back in 2011 by over 20%, and similar to the North Shore and other locations, it was the prestige end of the market that fell the most in that period and has underperformed the most in the current upswing.

Yes, property investors who have purchase or hold real estate valued under $2 million have experienced very good performance in line and above the Sydney wide average.

The one clear trend in all this is that anything where buyers are having to folk out $2 million plus for a house is largely being rejected. Quite simply it’s just too much debt, plus investors do not like to operate at these levels. Prestige property is simply not an efficient investment at these levels. Stamp duty is higher proportionately and in absolute terms; land tax is in play and also rises proportionately the higher the land value; rental yields tend to be lower and vacancy rates tend to be higher.

I also believe most Sydney families are still seeking a house with a backyard for the kids and quite frankly most prices for free standing homes in the inner ring are way out of the reach for most families including upper income earners and its been that way for a long time now. Instead families are looking to the middle ring and outer rings of Sydney and strangely that is where the price gains have been the greatest.

Consider the following charts for the Upper North Shore, Sydney’s West and Liverpool (click charts to open in new window).

It is no coincidence here that we have seen transport and infrastructure improvements in three of these regions, plus real estate is more affordable.

The interesting part in all this is that the price gap between affluent and affordable real estate in Sydney has narrowed up.  There is no question about this.

I think too that for those who do have budgets up to $1.7 to $1.9 million, they should consider taking a look at the real estate that is just above the $2 million mark, for there may well be some large quality differences for not that much just a few extra purse strings. 

Louis Christopher is the director and founder of independent property advisory and forecasting research house SQM Research.

SQM Research provides property related advice, research and data to financial institutions, property developers and real estate investors.