Australia avoided a house price crash like those of Western economies because of its high and growing economic wealth at a time when developed economies were contracting. At the same time it avoided a credit boom by retaining strict lending requirements. Australia’s geographic position also helped, supplying a booming Asia with raw materials, goods and services.

The government response was timely too, it introduced a generous scheme to support first time buyers in 2008. This, and continued immigration fuelled demand against a shortage of new supply which helped to keep prices growing.

Australian GDP grew by 2.7% in 2014, which was higher than 2013’s 2.1%, but down on the 3.7% growth achieved in 2012.

The unemployment rate is comparatively high, at 6.0%, in part due to a slowing of the country’s mining industry, which had supported the economy for two decades. Australia’s slowing economy is in part due to its strong ties with cooling Asian markets and global demand for raw materials has declined.

In spite of this, residential prices have continued to grow. Interest rates are at a record low of 2%, having been cut 25 basis points in May 2015. The market is further supported by foreign nationals, notably the Chinese, who need approval from the Foreign Investment Review Board (FIRB) to purchase property (in common with all overseas buyers), and are restricted to new property or vacant land.

^{Source: Savills World Research}

Sydney

Prices in Sydney grew by 12.2% in 2014, according to ABS, compared to an average of 6.8% across the eight capital cities as a whole. Rents are among the highest in Australia – but rising at a slower rate than capital values so yields are diminishing. (Currently Sydney's residential gross yields stand at 4.1% which is lower than other Australian cities and asset classes).

Sydney, in common with most mature world cities, is restricted by land availability through geographical limitations, zoning restrictions and limited land release. As a consequence, the city suffers from the same supply/demand imbalances of many of its global contemporaries though it has far fewer international buyers competing in its local markets.

Recently, the strong residential market has created an expectation of capital gains which has encouraged domestic investors and increased rental supply, particularly in the new build sector. This has suppressed rents and yields, suggesting that the market may have become overly speculative.

While, in the longer term, we expect strong occupier demand on the back of a strong economy and immigration from Pacific Asia, it seems likely that there will be some adjustment in the near term. Slower capital growth will likely start to redirect investors to other Australian cities or asset classes, thereby correcting any letting oversupply and putting capital values more on a par with rents. Sydney seems set for a period of slower capital growth while owner occupier and rental occupier markets readjust in line with each other.

In the medium to long term, prospects for the city still look good. Demand for city centre locations is still strong, particularly from younger generations. This means that ‘City’ Sydney is set to perform best over the next five years and development opportunities will continue be focused on an intensification of the centre.