Sydney house values recovered in the second half of last year, with the median house price of $595,000 exceeding the previous peak of $568,000 in February 2004.



The year's unexpectedly strong growth erased the remnants of the downturn that ran for three years from early 2004, during which Sydney house values eased off by about 6 per cent.



Despite the recent headlines about the dream of house ownership being unaffordable, it's still early days in the untested recovery cycle.



Among Sydney's most actively traded suburbs, just 270 suburbs of 500 now have median house prices higher than their 2004 median price, according to Australian Property Monitors.



As upgrading homemakers hit the market last year, the inner west was the undisputed engine room of the Sydney residential market. It had an 81 per cent clearance rate from 2475 house auctions, with an $840,000 average sale price.



The eastern suburbs was the nearest rival, with a 70 per cent clearance rate from its 2070 auctions. The east had a $1.23 million average auction price.



There was a $1.2 million average price on the northern beaches, which was the weakest district with just 49 per cent of 830 house listings selling under the hammer.



The lower northern shore recorded a $1.23 million average sale with a 69 per cent success rate at its 1060 auctions. The upper north shore average auction price was $850,000.



In the heart of the first-buyer belt, Canterbury-Bankstown, there was a $483,000 average auction sale price with a 65 per cent clearance rate.



The liquidity surge

The first half of 2009 was dominated by first-home buyers.



This government-induced activity allowed some to sell houses in western Sydney - Blacktown, Parramatta, Liverpool - and move a little further east, according to a BIS Shrapnel economist, Jason Anderson.



"These moves generated a strong upturn in Canterbury-Bankstown, Ryde and the inner west," Anderson says.



"BIS Shrapnel calls this a liquidity process, as it is a wave from one part of the city to another.



"Now that first-home buyer numbers are retreating, this dynamic will recede and, as a result, the liquidity will be reduced and focus will shift to pressure in rental markets and investor behaviour."



BIS expects Sydney's median house price to rise by about 7 per cent during 2010, as strengthening investor demand offsets the smaller number of first-home buyers.



But the decrease in first-home buyer demand will lead to less money flowing into the middle part of the market in the second half of 2010, Anderson says.



He anticipates price growth in the western suburbs will be a bit better than the city median, as rental growth accelerates and attracts greater investor interest for higher-yielding properties.



Early birds

Even before Tuesday's surprise Reserve Bank decision to keep rates on hold, an eastern suburbs estate agent, Bob Guth, envisaged buyers would be plentiful in 2010 - at least in the early part of the year.



"For those thinking of selling it may well be that the early bird will catch the worm," he says.



There are about 945 properties set for auction in Sydney this month, according to the latest APM data. This is slightly lower than February last year, when there were 1130 auctions.



Overall, listings remain well below levels from 12 months ago, according to Cameron Kusher from RP Data. During the month to January 17, 162,879 properties were listed for sale compared with 197,668 at the same time last year.



In the past month there have been 15,286 new properties advertised for sale, yet at the same time last year there were 26,900 advertised for sale.

An ANZ economist, Dr Alex Joiner, is upbeat due to the solid rebound in the jobs market and high consumer confidence.



"While we do expect home-price growth will decelerate, on balance we anticipate median house-price growth of around 5 per cent to 8 per cent over 2010," Joiner says.



Interest rate pain and gain

An economist at AMP Capital, Dr Shane Oliver, says once the widely expected recession failed to materialise, there were surprisingly strong gains in 2009 in average Sydney house prices on the back of generational lows in mortgage rates.



"This year is likely to see more subdued gains, with average prices likely to rise by around 5 per cent but with an even wider dispersion between top and lower-end housing," he says.



"Affordability will be declining as mortgage rates continue to rise and this, combined with the ending of the First Home Owner Boost and reduced loan-to-valuation ratios at some banks, suggests that low-end house prices could actually decline modestly."



Typically, an increase in the mortgage rate of 25 basis points reduces the long-run growth rate of house prices by about 1 per cent a quarter, according to an analysis of 20 years of data to 2006 by associate professor Glenn Otto at the University of NSW's school of economics.



But some commentators appear to have almost discarded the likely impact of interest-rate rises during the rest of this year.



The chief executive of Property Planning Australia, Mark Armstrong, suggests an investor-driven growth cycle will lead to continued double-digit price growth.



"There is no doubt price growth in Sydney this year will exceed 2009 levels and we could see as much as 20 per cent growth," he says.



But the managing director of Rismark International, Christopher Joye, expects the market to cool as mortgage rates normalise. He suggests capital growth rates will fall back to single-digit levels.



Despite this week's reprieve, real estate agent John McGrath warns interest rates could spoil the party if mortgage rates continue beyond 6.75 per cent this year.



An economist at APM, Matthew Bell, says rising interest rates and the full expiry of the First Home Owner Boost at the end of December were likely to slow activity for first-home buyers.



"The median price growth is likely to moderate across all sectors of the market in the first half of 2010," Bell says.



"But the medium-to-long-term outlook for property prices remains strong, as high population growth, rising incomes and a relative lack of new supply mean there will simply be more demand for housing than supply."



Seasonal shifts

Last year ended with the strongest December auction clearance rate on record at 70 per cent. Quite remarkable, given December has been the weakest auction month 16 times in the past two decades.



The next best December result was 61 per cent in 1997. Just as the end of the year is traditionally weak, the new year always offers brighter hopes.



Since records began 21 years ago, no February auction market has ever been weaker than its preceding December clearance rate.



One of the biggest changes in market sentiment during a summer break came between December 2008, which recorded a 44 per cent auction clearance rate, and February 2009, which opened the year at a very healthy 63 per cent.



Last year's overall 69 per cent auction success rate came as the median house price climbed, possibly by double-digit levels.



The Sydney growth was somewhere between 11.7 per cent, according to RP Data-Rismark; 12.1 per cent, according to Australian Property Monitors; and 12.8 per cent, according to the Australian Bureau of Statistics.



APM had the run extending well into the December quarter with 5.3 per cent growth in the final three months compared with RP Data's more subdued 3 per cent.



Prestige bonuses

Houses with a price tag of more than $2 million will have a good run this year as many buyers, especially those in the financial service sector, are back in the market, according to the chairman of Aussie Home Loans, John Symond.



"The recovery at the top end of the market is coming from executives who are in the financial service sector, which is now again producing bonuses for their higher discretionary expenditure," Symond says.



However, BIS Shrapnel expects the more expensive suburbs to underperform until there is a substantial recovery in corporate profitability.



"The reported rise for expensive suburbs in 2009 was largely recovering losses in 2008, as the concerns about recession faded," Anderson says.



"Market depth did not improve as much for expensive suburbs as western Sydney, so BIS Shrapnel doesn't think that turnover has been fully tested."



 

Mona Vale: Undervalued. Strong demand in the $750,000-$1.5m price bracket.



Turramurra: Didn't experience extraordinary growth in 2009, but robust prices tipped in 2010.



Paddington: Great location, strong demand from the affluent Sydney set.



Petersham: Strong recent growth and close to Leichhardt and Newtown.

North Narrabeen: Underperformed in 2009, but some strong sales in latter half.



Surry Hills: Has recovered strongly. Likely to rise with the upper end of town.