i'd take a guess that the only person able to lodge a development application with the council is the person who owns the property... not a prospective buyer
From what I understand, as long as you have written permission from the vendor allowing you to begin the DA process prior to purchase, then most councils are ok with this. You could always offer an option fee as a sweetener in case you discover the renovations can't be done. It will largely, however, depend on the Owners Corporation as to what will be allowable in strata buildings.
As far as my favourite capital city goes in terms of growth.....
I still believe that Sydney is and will continue to remain an international standard city of immense popularity, increasing migration and wealth and, despite all the current doom and gloom, will grow over time to remain a great investment choice. The demand is and will remain very strong.
As far as affordability goes, there is plenty of stock in Sydney under $500K- you just have to be willing to look and possibly compromise on your wishlist
As Joanna has rightly pointed out, don't just consider houses- expand your thinking to include medium and high density as demand for this type of living has increased as land supplies dwindle and prices rise.
My favs are still the North Shore (especially lower) the rapidly expanding Norwest region (some real sub $500K bargains for freestanding homes around which are in fantastic positions) parts of the Inner West and Inner CBD (I like Potts Point/Elizabeth Bay in particular). I also like particular Northern suburbs for their proximity to transport, their largely owner occupier population and their affordability. However, this isn't to say that the south doesn't have great buys- I just don't know that side of Sydney!!
The crappy thing about NSW is the state based taxes such as land tax that really eat into your cashflow (especially if purchasing in a trust or buying land higher than the current $352K threshold) however such laws do have the capacity to change (I live in hope!).