Nila Sweeney

NSW remains a top choice of investors, as demand should continue to outstrip supply for the foreseeable future.

It has yet to live up to the result, but by nearly all forecasts out there say Sydney will is in the best position for future growth heading into the rest of the year and into 2010. Supply will remain short, while demand will continue to rise in the star attraction of Australia, say experts.

"Sydney has the largest pent-up demand in Australia," says Rich Harvey, managing director of According to Residex figures, no other capital city had lower growth over the last ten years for either units or houses. While other cities were seeing double-digit capital growth, Sydney has seen median values rise just about 6%.

One issue is that NSW economy as a whole has been decaying, with little infrastructure growth or residential construction to match the demands of a growing pool of residents, says Harvey. "That's helped keep prices where they are," he says.

But as in most other parts of the country, some section of the Sydney market have been doing more than just holding steady - they've seen large drops in sales prices. That struggling sector has been that of the luxury home. The higher the price, the greater the likely fall, says Harvey. But from an investor's point of view, that also means the greater the bargain, if you think you can afford it.

Harvey recommends those with the will and means to go for the marked down homes priced at $1m or above. "The properties that are in the blue chip locations are always in demand.

David Airey, president of the Real Estate Institute of Australia, says all the broad talk by economists and property experts about undersupply in NSW should be examined with a finer lens. "In NSW, there's not enough housing in some areas, and too much in the others," he says. "In Sydney especially, there's plenty of the more expensive properties, but not enough in the lower end to feed demand."

Aside from the lower end, rental properties in Sydney are especially in tight demand. Pino Tedesco, director of the Metropole Property Buyers Agency Sydney, says rents will continue to rise significantly over the next four years. "Sydney rents are set to soar," he says. Tedesco points to a population expected to rise by close to 23,000 this year and rental vacancies already running at an historically low 1.1%. "Economists suggest Sydney rents could shoot up a further 12% in 2009, on top of last year's 8% rise," says Tedesco.

The issue is that Sydney is dire need of more medium to high density housing, but with the cost of new development near prohibitive for many, especially with much tighter lending by banks, such projects are not likely to keep up with population growth for a while. "Putting all this together, there is only one way for Sydney rents to go, and that is up," says Tedesco. "This may be bad news for tenants, but it is good news for property investors."

Perhaps the best news for those tenants caught in the web of ever-increasing rents would be to secure a property of their own, says Stockland Residential Communities General Manager Barry Mann. He said his company is creating smaller blocks to cater for price-driven buyers, particularly at that entry level.

"My advice is to get into the market and, over time, trade up," he says. Mann says first homebuyers have generally been preferring smaller, more affordable blocks with a single garage, three bedrooms and a bathroom. An April study by RP Data also found that Sydney had by far the smallest backyard size of any Australian city, at 136m2, followed by Melbourne at 190m2. Affordability and location have become the new buyer priority, rather than size.

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