David I think the current rental squeeze in Sydney is here to stay for a while.  A few reasons;  firstly there has been almost no new development (relatively speaking) in Sydney for several years, creating a shortage of new stock. Secondly, during this time Sydney’s population has been growing at close to 50,000 people per year, magnifying the affect of the shortage and, thirdly, the credit crunch and economic downturn may force people to sell their homes and rent for a period. This will however, be balanced by an increase in first home buyers who are doing the reverse. 

So all in all I suspect that rents will continue to grow steadily, albeit at slightly less aggressive rate than they have over the past 2 years.

Craig the first piece of advice I’d offer is be careful about overcapitalising.  I’d certainly look around to see what other options are available before retro fitting the external area into a 3^rd bedroom & also buying a second garage.  Whilst those changes may suit you they probably won’t suit the bulk of your next purchasers when you come to sell down the track. 

As an example the living area will remain the same size as it was before whilst the bedroom capacity goes up by 50% (ie from 2 to 3) – this may create an imbalance of living to bedroom space.  Also it will probably cost you at least $50K & even up to $75K to buy another garage (it differs from area to area but in general most inner city carspaces sell for $35K to $50K & garages from $50K to $75K excluding the CBD). 

You also may need Body Corporate & Council approval for the changes to the 3^rd bedroom.  So check out what else is in the market for the same as it will cost you to make the changes, it may end up giving you a far better return on investment.

Mike, I think the market will remain around these levels for at least 12 months. 

It's hard to predict minor changes up & down during that period but, overall, I doubt there will be any major fluctuation until we see either a significant downturn in the economy & sharemarket or movement in the other direction (which will take at least 0.75% interest rate decreases & a bright light at the end of the financial tunnel). 

Another thing to consider is that in general beachside suburbs best three months to sell are September, October & November. 

I suspect the peak of the current cycle is well behind us (probably last November), so don’t worry. Having said that the next logical question is whether the market will fall further. Hard to say.  

My personal view is that we are in for a longish haul back but it won’t change overnight. By the way that's not bad news unless you’re desperate to sell or a speculator. A steady market works well for most.  

I love Cromer Heights.  Great location without the price tag of nearby Dee Why (which I also think is a really cool spot).  It's a good strategy to find a great location & hunt around for a better value (lesser known) nearby neighbourhood.  

In answer to your second question sensible renovations add value but, unless you’re selling soon, renovate to enhance your lifestyle rather than focus on the gain.  Life is short.