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ONLY THE LEAVES ARE FALLING
Mon, 22 Apr 2024Autumn leaves may fall, but not listings or prices
When the RBA’s board left interest rates unchanged at its March meeting it gave greater certainty to buyers and sellers in the property market, with data showing there are more properties listed for sale now than at the same time last year.
The minutes of the RBA’s March meeting also said underlying demand for housing was “brisk relative to supply”, driving up house prices and rents: “On the demand side, population growth remained high and the shift in preferences for more housing space that occurred during the pandemic was yet to unwind, despite worsening affordability,” the minutes said.
“On the supply side, new housing had been constrained by ongoing capacity constraints – particularly for finishing trades and where the required skills were easily transferable to non-residential construction – and rapid increases in construction costs.”
The RBA Board’s new schedule includes eight meetings each year so the next meeting will be May 6-7. The Board will also release its quarterly Statement on Monetary Policy to coincide with its announcement of the outcome of the May meeting.
The supply side has been assisted by new listings in Sydney being at a two-year high which gives more choice for those now hunting for a home. Owners who list their properties are being rewarded with good returns, with CoreLogic figures showing that across Sydney, 91.9 per cent of sales made a profit, up from 91.3 per cent in the previous quarter.
Domain chief of research and economics Dr Nicola Powell says that a number of factors have contributed to the increase in listings: “What the expectation is, is once we see cash rates come through that is likely to shift sentiment again. While it’s likely to still be pessimistic for some time, normally … when you see an improving consumer sentiment, it does then [translate] into higher levels of housing activity – more churn occurring in the market – and that in itself can create momentum.”
But she adds that it’s still too early to predict the course of the autumn selling season: “I do think that there is still sentiment out there among buyers that they’re mindful how much they take on in terms of debt, and how much they actually pay for a home…I think the overall backdrop of the cost of living crisis does make people more wary of the debt side of the housing market.”
It certainly does look like many owners now think this is a good time to sell their properties. PropTrack says new property listings in February were up 16.6 per cent on the same month in 2023. This was driven by the highest number of new capital city for sale listings in February since 2012, up 22.2 per cent on last year, with Sydney’s listings up a remarkable 33.6 per cent.
Demand from buyers is keeping up with the rise in listings. Expected rate cuts have helped home prices across Australia rise 6.79 per cent over the past year in March as signs of FOMO (Fear of Missing Out) have returned to the market. Sydney home prices rose 0.4 per cent in March to hit a new peak median price of $1,069,000, according to the latest PropTrack Home Price Index.
The price of housing shows few signs of weakening due to surging land values across Australia. What is happening is that the price gap between houses and apartments has widened to a new record difference since the start of the pandemic.
CoreLogic data shows that the price gap between apartments and standalone houses has widened by 45 per cent since March 2020 and January 2024. Over that time, house prices in capital cities rose by 33.9 per cent, or $239,000, while unit values in the capitals rose by just 11.2 per cent — equivalent to $65,235.
Several factors including the scarcity of houses and a desire for more space are keeping house prices higher than units. CoreLogic's Tim Lawless says that Sydney has seen the biggest difference: “Coming into the pandemic, there was about a 33 per cent premium for houses, that's now risen to 68 per cent."
Mr Lawless told the ABC the widening gap between house and unit prices in Sydney's property market appeared to be counterintuitive: "As a [housing] market, it's the most expensive and has the most affordability challenges, yet we've seen it also record the biggest widening between house and unit values," he said.
"It suggests that the buyers seem to be willing to pay this premium to have some space, to have a yard in a detached home,” adding "It's still loosely described as the great Australian dream, that people want their own block of land with a house on it and a bit of space, and I think that premium for space became apparent through the pandemic, and it seems to have held on.”
Buyers in the current market are looking in areas that are adjoining more popular regions, Domain data indicates. Home values in Sydney’s inner south-west, including Campsie, Earlwood, and Wolli Creek rose 1.7 per cent in the three months ending February to a median of $1,133,270. That was followed by the Central Coast (up 1.6 per cent), the outer south-west (1.2 per cent) and North Sydney and Hornsby (up 1.1 per cent).
Domain said the clearance rate in Sydney’s south-west rose 24 percentage points in February, the outer west and Blue Mountains went up by 20.3 percentage points, and the outer south-west increased by 13.5 percentage points.
However, Domain’s chief of economics and research, Dr Nicola Powell said while higher clearance rates in auction-centric markets were expected, it was the improvement in more affordable markets that was a standout: “What it showcases and supports the flight to affordability is the increase in clearance rates,” Powell said, noting that buyers were still mindful of mortgage repayments and taking on too much debt.
For a longer-range forecast of Sydney housing prices, Maree Kilroy, a senior economist at Oxford Economics, told the Australian Financial Review that surging demand would continue to outstrip the available supply of homes driving Sydney’s median price to $1.93 million in 2027.
“You have a fundamentally undersupplied market and with net overseas migration running at half a million people, a growing participation by foreign buyers, downsizers and cash buyers, demand has outweighed the drag interest rates would typically have,” Ms Kilroy told the AFR.
Cash still king
It will surprise a few people watching the ongoing dramas over housing finance that more than one in four properties purchased in NSW – and in Victoria, and in Queensland were paid for in cash in 2023. More than $129 billion worth of property were bought without a mortgage, and as you might have guessed, the majority of purchasers were older, often retired ‘asset rich’ Australians.
Research by Property Exchange Australia (PEXA) found that $454.7 billion worth of residential property was purchased in the eastern states 2023, and of that $129.6 billion were paid for in cash.
This means 28.5 per cent of properties sold in New South Wales, Victoria and Queensland last year were purchased without a mortgage — an increase of 1.5 per cent (or $1.9 billion) since 2022.
Julie Toth, chief economist at PEXA, told the ABC that the proportion of cash-only buyers is likely to grow in the future: "Our research found the demographic profile of cash buyers is different to mortgage buyers — cash buyers tend to be older and more likely to be retired," she said.
"They tend to have lower household incomes, but they also have fewer dependents and are more likely to be 'asset-rich', with accumulated property, savings and superannuation to fund their next purchase. The demographics also suggest that we might see an increase because the older age cohort is growing."
Drilling down into the details, PEXA found that the percentage of NSW properties purchased for cash in 2023 was 27.7 per cent, with the median cash-only purchase in this state totaling $770,000. Ms Toth said the data from NSW confirmed that Sydney is "the most expensive property market in Australia".
"Even though the proportion of cash sales are lower, the aggregate value still picks up when we're at such high property values to begin with," she said.
And in case you were wondering where in Sydney these cash purchases were being made, the suburbs with the highest proportion of properties bought in cash were Milsons Point (63.6 per cent), Darling Point (60 per cent) and Sydney CBD (54.3 per cent).
Housing shortfall
The current shortage of housing is going to worsen nationwide by 2026, according to the Urban Development Institute of Australia. The industry lobby group says that across all capital cities only 79,000 new homes will be finished in 2026, a drop of 26 per cent compared to 2023 and the lowest number of new homes in a decade.
Planning bottlenecks, a shortage of labour and skyrocketing materials costs are to blame, says the Institute, and the construction industry would have to build 300,000 new homes between 2026 and 2029 to meet the federal government’s target of 1.2 million, while in the meantime the population is expected to soar.
It’s more expensive than it’s ever been to build a new house in Australia. The average cost was about $490,000 in January this year – up nearly 10 per cent from about $446,000 a year earlier – based on ABS figures. In the three years before the pandemic, the average cost to build a house only increased by around 5 per cent, from roughly $315,000 to $331,000.
It’s not the fault of the zoning and building approvals, says Luci Ellis, Westpac chief economist, who says it’s due to a large backlog of properties that have been approved that are yet to be completed: “There are a range of issues in the production and cost of production of housing at the moment, including the [demand] from other parts of the construction sector,” Dr Ellis said.
Professor Nicole Gurran, an urban planning researcher and policy analyst at the University of Sydney, sees similar causes for the lack of new projects, which she says comes down to the combination of high interest rates, supply chain issues and worker shortages pushing up material and labour costs respectively.
"I don't think anyone's surprised at all to see that projects aren't coming forward for approval," she told 9news.com.au. "We need high property prices to fuel high levels of residential construction. That's why we've never in the past been able to build our way out of the price inflation spiral: we depend on that to produce the volume that the population requires.
"But because we've got so many people priced out of the market, it's a real mismatch between the financial drivers and demand and the underlying demographic drivers of housing need."
Denita Wawn, CEO of Master Builders Australia, says issues around critical infrastructure costs need to be resolved: "We need state and territory governments and local governments to resolve zoning issues and planning issues. [The] ability – or lack thereof – of developers to make a profit on their building projects is a key factor in whether Australia will hit its housing target.”
The NSW government has already announced plans to increase density and height limits by up to 30 per cent for developments where 15 per cent of the floor area is set aside for affordable housing. It also hopes to boost supply in the inner city by allowing more terraces, semis and walk-up flats.
But as a nation we’re falling behind, both in building sufficient new housing and by bringing in numbers of migrants far beyond our capacity to house them. For example, 106,900 residences were completed in 2023, a 9 per cent fall year-on-year, while in 2022-23 737,000 migrants arrived in the country contributing to a net gain of 518,000 people.
Susan Lloyd-Hurwitz, chairwoman of the National Housing Supply and Affordability Council, which advises the government on housing policy, called the plan to build 1.2 million homes in the five years to June 2029 ‘highly ambitious’: “Reaching it will require planning reform, a larger skilled workforce, a more productive home building industry, accelerated land release and a reduction in barriers to institutional investment,” she told The Australian Financial Review.
The shortage will equate to a shortfall of about 230,000 homes by 2029 according to Carlos Cacho, chief economist for leading investment and advisory group Jarden Australia. Mr Cacho says the shortage of labour is the biggest issue and noted there’s already large amounts of spending on public and private non-residential construction.
Renters’ tough times continue
Domain data shows that Australia’s national vacancy rate has fallen to a record low 0.7 per cent and the share of houses available for lease in Sydney and Melbourne has never been lower than it is now.
Sydney house rental costs have risen $20 per week over the past three months to a record $750, with units not far behind at a median $700 per week. Unit rents have soared from $510 in December 2019 to $700 today – an increase of more than 37 per cent.
A Herald article summarised the driving forces behind these increases: “Sydney’s longstanding affordability problem has mutated since the pandemic. Supply shortages, successive interest rate hikes and migration-fuelled demand have caused rents to soar over the past two years, exacerbating housing stress and carving into usually comfortable middle-class households.”
Domain’s chief of research and economics, Dr Nicola Powell, explains why the demand for units is still growing: “Units tend to be centrally located. They’re in the CBDs. They’re close to major working hubs and infrastructure hubs, whereas houses will be typically in your outer or in your middle suburbs,” she says.
Dr Powell does think the market will reach what she calls a “tipping point” later in 2024: “Some sub-markets will operate with more balance and rent growth will slow—some areas already show these signs,” she says. “We are seeing the number of prospective tenants per rental listing ease, suggesting some pressure has been lifted.”
The current high costs of renting in Sydney are contributing to a major change in this city’s population. A recent report from the NSW Productivity Commission warned that Sydney lost twice as many young people than it gained in a five-year period. According to the data, about 35,000 people aged 30 to 40 moved to Sydney between 2016 and 2021, – but an estimated 70,000 fled.
SQM Research data shows that the median weekly house rent is $1049, up 12.2 per cent year-on-year, and the median unit rent is $701 per week, up 10.5 per cent in the past 12 months, SQM Research data shows.
Affordability worsens
Research conducted on behalf of the Greens party indicates that affordable housing is now out of reach in the eastern capitals, including Sydney, with the average annual salary needed to buy a home without financial stress a whopping $164,400 – more than $66,000 above the average income. Even the cost of a unit would put the average earner under housing stress.
The data assumed prospective buyers had a 20 per cent deposit and would acquire a variable rate mortgage of 6.49 per cent over 25 years. The analysis deemed housing affordable if repayments represented less than 30 per cent of income.
So, how much would it take in the way of income to make buying a home affordable? The median sale price is for a house in Sydney in now $1.36m while the median sale price for units is $767,250. For someone to afford the monthly mortgage payments and not be under housing stress, the household would need to have a $272,000 deposit and to be earning $293,578 a year for a house. For a unit in Sydney, it takes a salary of $165,623 a year with a deposit of $153,450.
What a change from 2020. The year began with the typical free-standing Sydney house worth $974,000. This was quite a drop from the peak of $1,060,000 back in July 2017, but still an uplift from the market’s bottom price of $865,000 in June 2019. Then came Covid and default rates on mortgages seemed to almost disappear after mortgage interest rates collapsed and a range of government support programs arrived. Inflation too nearly dropped out of sight.
But that was then, and now interest rates are much higher, houses cost a lot more, most of the government support has been scaled back or eliminated, and inflation’s a daily concern. Not all those who’ve acquired a home with a mortgage in recent times have escaped the affordability issues.
A combination of inflation and high-interest rate loans have caused grief for a number of homeowners who have recently fallen behind in their mortgage repayments, as is shown in the latest minutes of the Council of Financial Regulators. This august group of economic watchdogs includes the RBA, Treasury, the Australian Prudential Regulation Authority and ASIC.
The language in the minutes of the financial regulators is measured: “Most households continue to be able to meet their debt servicing and other essential spending commitments, although many have had to make adjustments to their finances in a period of higher inflation and interest rates,” the minutes showed.
“However, hardship applications had risen materially over the past year.”
S&P Global’s most recent quarterly measure of mortgage-backed securities now shows a lift in the proportion of loans in arrears, while National Australia Bank’s outgoing chief executive, Ross McEwan, said in February that most of his bank’s customers were faring well, but warned it was facing higher mortgage arrears.
Housing and politics
Housing, or to be specific, the lack of it, has become a political football of major proportions. Both major parties agree that something needs to be done, and fast, to address the critical shortage of housing in Australia. The next federal election will provide an opportunity for them to place their proposed solutions to the problem before the voters.
An editorial in the Sydney Morning Herald gave Premier Minns a pat on the back for his plans: “As reports of homelessness, vaulting rents, interest rate rises and the inability of younger generations to buy dominate the headlines, Premier Chris Minns deserves credit for the way he has tackled the state’s housing supply crisis.”
But will it be enough? Rose Jackson, the NSW Minister for Housing and Homelessness, says she’s told the federal government they need to spend twice as much on fixing the housing crisis. She’s also told her Labor colleagues in Canberra that tax concessions for property investors should be reviewed.
"We want to see the national housing and homelessness agreement double its contribution from the Commonwealth to the states," she said. "We're talking billions here … billions of dollars need to be spent on this."
Andrew Leigh, the Assistant Minister for Competition, Charities and Treasury, told Q+A: "Fundamentally, the problem is that we're not building enough homes. All the policies you will hear the federal government talking about is about getting more housing supply out there, after a period where housing supply has fallen below population [growth] and home prices have gone through the roof."
The Albanese government had a try at promising to reform negative gearing in 2019 that didn’t go over well, and now say they’re not going to try that avenue of tax reform again. They have already introduced 17 new policies on housing and found $26 billion to target the housing crisis by increasing supply. But this is going to take a lot of time and the next election’s already on its way.
Labor’s help-to-buy scheme that’s designed to assist 10,000 homebuyers a year through shared equity is currently stuck in parliament because the Coalition and Greens aren't backing it.
The Coalition is still working on its policies for the housing sector. Peter Dutton’s cabinet reshuffling in March included announcing Andrew Bragg as the shadow assistant minister for home ownership. The first policy idea to emerge has been that homeowners could pay their superannuation into mortgage offset accounts – an idea that’s been criticised by some experts for its likelihood to raise housing prices.
Meanwhile, the Greens are targeting younger voters who feel they’ve been locked out of home ownership by high prices and supply shortages. They’re asking voters for the balance of power so they can implement policies that will cut rents, ‘massively’ invest in affordable housing, and create 100,000 new homes in NSW.
Sources:
‘Rents still rising across Australia; units nearly as expensive as houses in Sydney, Melbourne and Brisbane,’ Maria Gil, Domain, 12 April 2024
‘Economics firm makes huge call on Aussie home prices, tipping sharp increases over the next three years,’ Shannon Molloy, news.com.au, 9 April 2024
‘How the rental crisis ate its way into the middle class,’ Max Maddison and Nigel Gladstone, Sydney Morning Herald, 7 April 2024
‘Suburbs where you can buy a unit and actually make money,’ Elizabeth Redman, Domain, 5 April 2024
‘House prices continue to rise as number of landlords increase,’ Nadia Daly, ABC News online, 2 April 2024
‘The type of home that’s more expensive than ever,’ Jemimah Clegg, Domain, 3 April 2024
‘Population surge and smaller households fuelling home prices: RBA,’ Michael Read, Australian Financial Review, 3 April 2024
‘Australian house prices hit record high for fifth consecutive month,’ Petr Hannam, The Guardian, 2 April 2024
‘Australian house prices hit new high according to March PropTrack data,’ Jessica Wang, news.com.au, 2 April 2024
‘Australia’s home values keep rising despite cost-of-living pressures,’ Rachel Clun, Domain, 2 April 2024
‘Australian salary needed to buy a home without being in ‘housing stress’ revealed,’ Ellen Ransley, news.com.au, 1 April 2024
‘How much of a pay rise you’d need to buy a bigger house,’ Elizabeth Redman, Domain, 30 March 2024
‘The proof that Minns’ housing policy is the right call,’ The Herald's View, 29 March 2024
‘Homebuyer FOMO returns ahead of looming rate cut,’ Benn Dorrington, realestate.com.au, 28 March 2024
‘Australia's housing crisis has become a fierce political battle that could have major implications for the next federal election, Q+A and RN Breakfast host Patricia Karvelas, ABC News online, 25 March 2024
‘NSW minister's challenge to federal Labor colleagues: double housing fund, review negative gearing,’ Jason Whittaker, ABC News online, 26 March 2024
‘Affordable housing beyond reach in all Australia’s eastern capitals, data shows,’ Sarah Bashford Canales, The Guardian, 21 March 2024
‘Sydney’s most in-demand suburbs for home buyers now,’ Tawar Razaghi, Domain, 17 March 2024
‘It doesn’t have a future': The plan to save Sydney from itself,’ Shannon Molloy, news.com.au, 12 March 2024
‘More than one in four properties purchased in NSW, Victoria and Queensland paid for in cash in 2023,’ Kate Ainsworth and Mark Rigby, ABC News online, 13 March 2024
‘In a few months, Australia will start trying to build 1.2 million homes. Experts say lots needs to change first,’ Daniel Jeffrey, 9News, 17 March 2024
‘Are we entering a real estate sell-off?,’ Michael Janda, ABC News online, 15 March 2024
‘New housing supply to hit decade low,’ Larry Schlesinger and Michael Read, Australian Financial Review, 19 March 2024
‘Pressures grow as more buyers fall behind on their mortgages,’ Shane Wright, Sydney Morning Herald, 12 March 2024
‘More homes listed for sale as autumn shapes as first big test for the property market,’ Sarah Millar, Domain, 17 March 2024
INVESTORS V BUYERS
Tue, 26 Mar 2024Investors v Homebuyers, Minns v Councils – It’s a war out there
In the ongoing battle between investors and first-home buyers, it’s the investors who are presently the more active of the two. So active that lending to investors is at a six-year high share of total home lending – 36 per cent, far outpacing the first-home buyers’ share of just 18 per cent.
It should be noted that most home finance still goes to owner-occupiers who aren’t buying their first home, but it’s the investors whose share has gained the most in recent months. CoreLogic’s Eliza Owen says investors are looking forward to interest rate cuts that will drive up prices: “The recovery in investor finance began in March of 2023, which is pretty soon after the market bottomed out in value terms, so there’s a sense of taking advantage of the bottom of the cycle,” she said.
This optimistic approach to finance by investors is driving Sydney auction volumes 36 per cent higher than a year ago according to PropTrack. The firm says the higher clearance rates seen over the first two months of 2024 were encouraging more sellers to take their homes to auction.
In NSW investor lending makes up more than 40 per cent of all housing finance. AMP chief economist Shane Oliver said the share of lending to investors has been rising from a low base and had earlier peaked at 46 per cent of housing finance in 2015. He said that although many investors have been constrained by higher interest rates and are now cash-flow negative, owner-occupiers have been hit harder because investors can offset higher interest costs using the benefits of negative gearing.
Not all investors achieve the capital gains they’d hoped for. In some parts of Sydney, one in four investors have sold at a loss. CoreLogic analysis shows that across Sydney 11.6 per cent of all investor sales made a loss in the September quarter last year, and the median amount lost was $37,020.
According to CoreLogic: “In the Cumberland local government area, 26.4 per cent of investment properties that sold in the September quarter traded at a loss, followed by Parramatta (25.8 per cent), Burwood (23.6 per cent), Ryde (22.6 per cent) and Canterbury-Bankstown (20.7 per cent).
“The deepest losses were in Strathfield at a median $72,500 among those who sold in the red, followed by Canada Bay, Parramatta and Ryde on at least $45,000 each.”
By way of comparison, look at Camden where every investor who sold in the September quarter made a profit. The size of the median profit was $592,500. Median profits of more than $550,000 were also seen in the Hills Shire and Woollahra.
Ray White Parramatta Group selling principal Steven Fan said that many investors who purchased new apartments five or six years ago were now selling for a loss. “They bought off the plan when the market was hot, when they’re choosing to sell now, a lot are losing money,” he said.
Mr Fan also noted that a larger proportion of investors were prepared to sell for a loss than owner occupiers. Many have been upgrading to house-and-land packages, expecting they would deliver stronger capital gains: “Yes, they lost some money but they can carry this loss for their lifetime to offset [any future] capital growth and a lot will invest into other property.”
Rental pain persists
Suburbtrends’ February Rental Pain Index shows that an increasing number of suburbs recording what the Index classifieds as the “highest possible distress score”. The monthly report takes into account factors that include rent increases, rental availability, vacancy rates and affordability. These are combined into a single score, with 100 indicating “maximal rental stress” and 75 and above considered “extremely hard market conditions”.
PropTrack’s director of economic research, Cameron Kusher, says the rental market in 2023 had experienced low supply and strong demand, with the national rental vacancy rate at a near record low of just 1.1 per cent: “These conditions made it difficult for renters to find accommodation and saw landlords increase rents, a trend likely to continue in 2024,” he told realestate.com.au.
“While we expect rents to continue to rise this year, it’s likely that the rate of growth will slow. The already higher cost of renting and overall increase in the cost of living will limit rent price increases moving forward.
“Limited supply and high demand saw rental prices skyrocket in 2023, with the median advertised rent on Realestate.com.au rising 11.5 per cent over the year to sit at $580 per week. However, 2023 saw a slower rate of rental price growth than the 15.6 per cent increase in 2022.”
Sydney’s vacancy rates are low and will stay that way for the foreseeable future. Sydney's rental vacancy rates fell to just 1.3 per cent for the first month of 2024, the sharpest fall across the country, down from 1.7 per cent in December, according to SQM Research.
As of January 2024, there are just 9,114 available properties for rent across the city. This is much less than the 12,143 available properties recorded in June last year, which was also roughly in line with the number recorded in June the previous year.
This drop in numbers is largely the result of the housing market boom during the pandemic when many investors took the opportunity to sell off properties, in part due to uncertainty about rental demand but also because rising home prices provided the opportunity to sell out with solid capital gains.
Another cause of pain for renters is that over the five years since FY 2018-19 rents for the most affordable properties in Sydney have increased much faster than those for the most expensive properties, further putting affordable rentals out of reach for even lower income households.
There’s also been a slowing of new apartment construction due to rising costs and shortages of materials. International property firm, CBRE says that a severe undersupply of new apartments will be in place in Sydney for at least the next five years.
CBRE estimates that Sydney apartment delivery will average only 14,000 per annum over 2024 -28, while the demand for housing stock is likely to average 33,000 per annum over this period. This ongoing shortage of rental properties will ensure that rents will continue to rise and increase the rental pain felt across the Sydney market.
Minns v councils battle continues
The NSW premier, Chris Minns has commenced a battle with councils that looks anything like peace could be achieved anytime soon. By July 1, the government will give each NSW council a new set of targets telling them how many dwellings they are expected to deliver, and over what timeframe. The government says its changes to low- and mid-rise housing could yield 110,000 additional dwellings across the state by 2030.
The councils’ reactions have been mixed with some simply accepting the hand they’ve been dealt while others have reacted with hostility and headed for the courts in response to their targets and the methodologies to be employed to achieve them. Councils that are used to having authority over all development in their territory don’t like to surrender their powers when they’re told that new planning controls dictated by the state government will mean among other things that all low-density residential land in NSW will now have to permit subdivisions and dual occupancies regardless of councils’ prior regulations.
Councils have expressed concerns in a number of areas. These include the impacts on heritage, population growth, reduction in open space, increased density and ‘squeezing’ infrastructure. In reply, the Premier has given the councils the opportunity to come up with their own plans to yield a similar number of homes.
“If we can come to an accommodation with the mayors, the local councillors in Sydney, where we can get the number of houses that we need in the timeframe that is required, we will leave it up to them how they design their cities,” Minns said.
“There is – perhaps for the first time in a very, very long time – an opportunity for the civic leaders, the political leaders of NSW, to come together and finally make some progress when it comes to housing in Australia’s largest city.”
An example of this progress came when Meriton was given the green light to build hundreds of apartments on an inner-city development site, the former Suttons car dealership site in Zetland. A majority of City of Sydney councillors voted to approve the proposal which will create more than 800 homes plus a new supermarket, childcare centre and public park on the site.
Some councillors opposed the proposal because it lacked a commitment to incorporate a component of affordable housing. Sydney Lord Mayor Clover Moore commented it was disappointing to see councillors oppose a development that will help the City of Sydney meet the NSW government’s housing targets: “We, as a responsible council, can’t reject good, well-located housing because a developer is not exceeding its statutory obligations,” she said.
One side effect of the Minns-inspired planning changes is a boom in land sales in Sydney’s new housing corridors. Data from Research4 shows sales jumping 26 per cent in recent months with about 500 Sydney lot sales for the December quarter, a rise of 26 per cent on the previous three months and 24 per cent higher on the prior year.
First-home buyers’ struggle
Domain’s Kate Burke says that even a modest home is getting out of reach for first-home buyers:
“An average first-home buyer couple can no longer comfortably afford the loan repayments on an entry-level house in the nation’s biggest cities, and even units are slipping out of reach in some regions,” she writes.
Domain’s First Home Buyer Report, produced in collaboration with Commonwealth Bank-backed Unloan, says that young couples would need to put more than 40 per cent of their income towards mortgage repayments if they purchased an entry-level house in most capital cities, and the percentage skyrockets to almost 60 per cent in Sydney.
The report describes how a Sydney couple earning the average income for 25 to 34 years old would see 57.2 per cent of their income go to mortgage repayments if they purchased an entry-level house costing $927,250. The report also notes that buyers are not usually approved for such a loan. Even unit repayments in Sydney, 37 per cent of average income, are well about the 30 per cent figure for mortgage stress.
AMP chief economist Shane Oliver told Kate Burke that first-time home buyers face a challenging environment and the expected rate cuts from mid-year would do little to improve the outlook: “We will start to see some relief as rates come down, but that won’t help with the initial challenge of saving a deposit because it can mean lower rates on bank deposits … and it could push up property prices again [as borrowing capacity rises], so it’s a double-edged sword,” he said.
One possible way to help ease first-home buyers into a home of their own is government shared-equity initiatives including the federal government’s Home Guarantee Scheme (HGS) as they enable people to buy with as little as 5 per cent savings and without having to pay lender’s mortgage insurance. However, HGS and similar schemes have a cap on incomes and purchase prices.
Another scheme that might yet make it through the Senate is the Help to Buy Scheme, a federal government scheme that would allow first-home buyers to enter the market with a two per cent cash deposit and become a co-owner of their property with the government.
However, the Greens oppose the scheme noting that it would only help around 40,000 Australians over four years and could well simply drive up prices for all buyers.
Westpac Business Bank chief economist Besa Deda said young people trying to get onto the property ladder were likely to live with their parents for longer: “Household finances are under pressure and consumers have been very downbeat,” Deda said. “The pace of rent growth is easing but it’s still very strong.”
And even when they did eventually buy a property, the current and future generations of home owners would take much longer to pay off their loan than earlier cohorts, she said.
“To really resolve the housing affordability issue, we need a multipronged approach, reviewing a whole range of tax policies; negative gearing, capital gains, stamp duty, but also planning laws.”
Tastes change with prices
An interesting shift in popularity is doing a minor rewrite of housing tastes in Sydney. For years it’s been the case that houses in the upper quartile of properties perform the best, regardless of property market conditions.
Blue chip suburbs near beaches and in the inner city recorded some of the strongest growth in Sydney in the past five years. Bronte jumped 78.2 per cent to a median of $5.8 million, Glebe grew 72.8 per cent to a median of $2.73 million and North Bondi increased 67 per cent to $4,275,000.
Lately, however, this hasn’t been the case - affordability limits have kicked in and prices in the top quarter of the housing market, properties priced above $2.15 million, have fallen by about 0.4 per cent in the last three months.
So where’s the money going? More affordable house values are still rising, although at a slower pace than last year. The lower quarter, that is, houses valued below about $1.01 million, are up 1.3 per cent over last year. Values rose 0.6 per cent for the middle of the market.
House prices in suburbs on the outskirts of the city have recorded impressive jumps due to their relative affordability, as many are priced well below the citywide median of $1,595,310.
“Denham Court, Gledswood Hills. They’re all within a kilometre radius of Leppington. We’ve got the railway station, you’ve got the airport coming. You can see that being built, and it’s a realisation,” said Michael Cavagnino of LJ Hooker Leppington.
“It’s all about accessibility and affordability. We’ve had a lot of people moving out from the inner suburbs because the station is there as well as the flexible working arrangements.
CoreLogic research director Tim Lawless said the upper end of the market was adjusting after strong rates of growth. He said it was likely demand had eased as some buyers were priced out of the market segment, noting that values were up 11.9 year-on-year.
“People often think [the upper quarter] is immune to affordability pressures, but … given borrowing capacity has dropped quite a bit and house prices have risen quite substantially it makes sense that there would be some [buyer] deflection to the middle and lower marketplace,” Lawless said.
CoreLogic figures also show that the price gap between apartments and free-standing houses has widened by 45 per cent over the past four years due to three main reasons: rising underlying land values, the scarcity of freestanding homes available for purchase, and the desire for more space.
In that time house prices in capital cities rose by 33.9 per cent, or $239,000, while unit values in the capitals rose by 11.2 per cent — equivalent to $65,235. Mr Lawless attributes this gap to the scarcity of land saying: "That's probably been the key factor that's driven up detached housing prices so much higher than units. If you want an affordable detached house, you need to look further and further afield from the city."
As house prices become more unaffordable, it’s his opinion that apartment prices will most likely increase: "I think that's probably a fair enough outlook, that we will see more demand being deflected towards the medium and high density sectors, and that's where people's budgets will probably carry them, not really due to any preference shifts," he said.
"It's also probably fair to say, given how much this gap has opened up between houses and units, that units are becoming undervalued, at least in relativity to houses.
Commonwealth Bank’s head of Australian economics Gareth Aird said it was to be expected that growth across the market would moderate due to already high prices, constrained borrowing power and an increase in the number of homes for sale.
“All conventional metrics of affordability have deteriorated, so you get to the point where it’s hard for home prices to keep pushing higher at the rates that they have been, but that’s not to say prices will go backwards,” Aird said.
Domain’s Jemimah Clegg found some calculations that show just how far Australian home prices have soared above fair value. Houses in almost all Australian capital cities are overvalued by more than 29 per cent says data from the Real Estate Institute of Australia, with Sydney overvalued by 33 per cent.
AMP’s Shane Oliver says that with valuations so stretched, then if something like a severe recession happens prices could fall sharply, adding that this was unlikely to happen.
Who can afford a home?
It’s more than a little bit concerning that economists tell us only wealthy Australians can afford to buy a home. How can this be possible when the average household income of home buyers has increased to $220,000, a nearly 40 per cent jump from just four years ago?
It’s not like full-time workers aren’t paid reasonably well - the average full-time annual income in Australia is $98,098 as of November 2023, based on Australian Bureau of Statistics’ weekly earnings figures. But Australian borrowers are taking out fewer home loans now that in late 2023 and the ABS recorded a 3.9 per cent fall in January.
Jarden analysis of Commonwealth Bank data shows that almost a third of all home loan applicants now make more than $200,000. This gives them priority over their competitors in the loans market earning less than $150,000.
Jarden’s chief economist Carlos Cacho told Domain’s Jim Malo the analysis raised serious questions about who can afford to buy a home in Australia, despite recent price falls.
“What we’ve seen over the last four years or so is that the share of buyers who make median or below income has decreased from 30 per cent to 18 per cent,” he said. “It’s really been hollowed out. Part of the increase has been due to income growth being relatively strong but even when you adjust for that the shift is well and truly beyond that.
“Where to from here? It’s hard to see this getting better any time soon,” he said. “Affordability will be improved a bit if and when we see a rate cut by the RBA, but history shows it will probably make house prices go even higher. It’s really hard to move the needle with affordability. It’s just broken.”
Lenders are dealing with a more select crop of buyers – those with higher incomes than previously were seeking loans. Axton Finance director and mortgage broker Clinton Waters told Domain’s Jim Malo that high prices have squeezed out lower income buyers who have found current levels of repayments unaffordable.
“What we see at the coalface is that there is certainly a trend towards those with stronger incomes being approved for mortgage lending,” he said. “We see it as becoming very much a two speed market of those who can afford servicing and those who can’t.”
And, as for lower income buyers: “They don’t call us,” he said. “But my assessment of it is there’s a bit of resignation to the fact that this is unaffordable.”
Sources:
‘Rental affordability has gone from record highs to record lows in the space of just three years,’ Michael Janda and Gareth Hutchens, ABC News online, 9 March 2024
‘Sydney’s Rental Market Trends and Forecasts,’ Leanne Jopson, February 22, 2024
‘What will happen to first home buyers if the Help to Buy scheme sinks?,’ Maria Gil, Domain, 4 March 2024
‘Where you can still find a property for less than $500,000,’ Kate Burke, Domain, 5 March 2024
‘Auction activity ramps up amid fresh signs rate cuts are on the way,’ Sarah Dowling, realestate.com.au, 6 March 2024
‘How far Australian house prices have soared above fair value,’ Jemimah Clegg, Domain, 7 March 2024
‘Majority of voters back Minns’ housing density push,’ Alexandra Smith, Sydney Morning Herald, 7 March 2024
‘New home loan commitments slip in January as rate hikes squeezes borrowing power,’ Jack Quail, news.com.au, 8 March 2024
‘Price gap between houses and apartments widens to new record as land values surge in capital cities,’ Kate Ainsworth, ABC News online, 9 March 2024
‘Recipe for disaster’: Australia faces housing crisis amid surge in migration and decline in building approvals,’ Alex Blair, News.com.au, 5 March 2024
‘Extreme conditions for renters described as 'needle in a haystack type stuff' as housing crisis deepens,’ David Taylor, ABC News online, 5 March 2024
‘Sydney’s Rental Market Trends and Forecasts’, Property Market News, Leanne Jopson, 22 February 2024
‘Entire Inner West mapped for six-storey apartments,’ Max Maddison and Michael McGowan, Sydney Morning Herald, 6 March 2024
‘The Sydney suburbs where house prices have soared in five years,’ Tawar Razaghi, Domain, 2 March 2024
‘Out of reach’: It just got even harder to buy a home,’ Jemimah Clegg, Sydney Morning Herald, 19 February 2024
‘Land sales boom in Sydney, crash in Melbourne,’ Carolyn Cummins, Sydney Morning Herald, 28 February 2024
‘Just broken’: How much you need to earn to buy a house’, Jim Malo, Domain, 28 February 2024
‘The type of Sydney property that’s outperforming its neighbours,’ Kate Burke, Domain, 25 February 2024
‘Irreconcilable differences’: Minns concedes Rosehill city may not proceed,’ Alexandra Smith and Chris Roots, Sydney Morning Herald, 22 February 2024
‘Even a modest home is out of reach for first home buyers now,’ Kate Burke, Domain, 22 February 2024
‘Price gap between houses and apartments widens to new record as land values surge in capital cities.’ Kate Ainsworth, ABC News online, 21 February 2024
‘Hundreds of apartments get green light but without affordable housing,’ Andrew Taylor, Sydney Morning Herald, 18 February 2024
‘Thought property investors were sitting on the sidelines? They’re back,’ Elizabeth Redman, Domain, 15 February 2024
‘OnlyFans and stuff’: Rental crisis forcing Aussies into ‘desperate’ measures,’ Frank Chung. Realestate.com.au, 15 February 2024
‘Minns says a fight with councils is ‘the last thing we want’ - but he has one over housing,’ Michael Koziol and Anthony Segaert, Sydney Morning Herald, 17 February 2024
UPS AND DOWNS
Thu, 22 Feb 2024Prices up, cash rate steady, affordability down
2024 is underway, with a Sydney property market that’s still big on demand and short on supply. There’s also an ever-growing set of challenges for those wanting to enter the market that are the result of recent economic developments, as is shown by new data from CoreLogic.
Tim Lawless, CoreLogic’s director of research, says that households earning a median income can no longer afford a median-priced home in most capital cities including Sydney. Housing prices have rebounded even better than expected, despite last year’s interest rate increases:
“It’s hard to see this trend turning around until either housing prices fall or interest rates come down,” he told the Australian Financial Review.
“It’s looking more likely that interest rate cuts would help improve affordability this year from a mortgage serviceability perspective considering that housing prices are likely to hold relatively firm if not see some mild growth due to burgeoning undersupply.”
Prices increased by 0.6 per cent through the final three months of 2023 - the lowest quarterly increase in inflation since March 2021. This brought the annual rate down to 4.1 per cent from 5.4 per cent.
Housing prices most certainly haven’t come down. A median-priced Sydney home is now a record $1.6 million. To be specific, the median house price gained 2 per cent in the December quarter to reach $1,595,310, the latest Domain House Price Report showed. That represents a 10.6 per cent gain from a year earlier.
Although the 0.4 percentage point rise in national property values in January may not sound impressive, it represents an enormous financial gain for the Australian property market. In terms of dollars this means housing values just over the past month have gone up about $3,000 per dwelling.
Despite worsening housing affordability, the volume of home sales held slightly above average over the past three months.
CoreLogic estimated there were 115,241 dwellings sold over the three months ending January; 11.9 per cent higher than the same period last year and 0.5 per cent above the previous five-year average for this time of the year.
Affordability has dropped considerably in just the past couple of years CoreLogic data shows; in 2021 61 per cent of suburbs nationwide were considered ‘affordable’ for households buying an average priced home with a 20 per cent deposit, but in 2022 the figure had slipped to just 26 per cent of all suburbs.
More data from RateCity shows that in the past five years monthly mortgage repayments on a median-priced house have jumped to $4195 from $2030 in 2019, while house prices increased from 5.8 per cent annual growth in 2019 to 8.6 per cent in 2023.
And as always, Sydney is a statistical standout. Sydney has no affordable markets for those earning a median income looking to buy a median-priced house. It’s almost hard to believe that five years ago more than a third of houses on the market were affordable for median-income households.
Demographer Mark McCrindle of McCrindle Research explains why the old method of saving up a 20 per cent deposit to purchase a home is no longer viable: “It would take more than a decade to save the 20 per cent deposit, so homebuyers have to think of ways to fast-track that process such as accessing some capital from the bank of mum and dad,” he said.
“They could also look at group buying or moving into areas where they are not spending most of their income on rent or mortgage repayments. They can also consider renting for a while and invest their money in other areas.”
Another way of looking at the current market comes from AMP chief economist Dr Shane Oliver who said that house prices are now about 30 per cent less affordable than they should be, based on a comparison with what Australians can afford to borrow and therefore pay for a home.
He said that historical analysis shows that the two figures are typically linked and over time they will usually follow the same trend: “It’ll close eventually. But it’s debatable,” Oliver said. “In terms of will it close this year, to get that to happen it would require a massive cut in interest rates. We’re looking at three, but you’d need ten.”
Pressure off RBA
Some good news came at the end of January when the ABS announced that Inflation has fallen to its lowest level in two years, dropping to 4.1 per cent. This takes the pressure off the RBA for any further interest rate rises at this point in time.
More good news came on February 6 when the RBA announced it was holding rates steady at its first 2024 board meeting. The official cash rate of 4.35 per cent was retained, although the Bank said it couldn’t rule out the possibility of any future rate hikes at this time.
The good news came just in time for those taking out a new mortgage. The ABS has revealed the average new mortgage size as of December was a record high of $624,383 across Australia, with NSW leading the tally with an average of $785,405.
There’s now an expectation among market-watchers that the RBA will cut its cash rate at least once and perhaps even twice before the end of 2024 which would be good news for homeowners with mortgages considering that since the end of 2020 the monthly repayments on an average new loan have risen around 55 per cent while wages have gone up by about 8 per cent.
CoreLogic's head of residential research, Eliza Owen, says buyers are trying to get in ahead of expected rate cuts later in the year: "The uplift that we're seeing could be a reflection of an anticipation that interest rates have peaked," she said.
"That comes back to limits associated with high interest rates. And the fact that even relatively high-income earners are seeing a limitation to their borrowing capacity or might just be deterred from the high interest costs associated with those home purchases."
PropTrack economist Anne Flaherty said the RBA’s decision to keep the cash rate steady had been expected after the latest economic figures showed inflation slowed faster than the Bank had predicted.
"Headline inflation came in at 0.6 per cent over the December quarter, the lowest growth in consumer prices since March 2021 and below the RBA’s forecasts," Ms Flaherty told realestate.com.au.
"This continues the trend of declining annual growth in consumer prices and increases the probability that interest rates have hit their peak in the current cycle."
Retracements in sight?
You might be wondering if anything we can see now might eventually cause the Australian housing market to go into reverse. For now, the future seems assured, complete with rising prices.
The latest ABS housing loan figures show that in November the value of new housing finance was 13 per cent above that of a year earlier, and that’s a clear indication house prices will continue to rise for at least the next six months. Remember too that November was the RBA’s last interest rate rise for a total increase of 425 basis points, and with no further increases in sight there’s every reason to expect prices to keep going up.
Westpac senior economist Matthew Hassan told Domain that a lack of listings helped push prices higher in Sydney where the demand was red-hot: “The resurgence in population growth and migration flows and a significant tightening in rental markets and rising rents meant a price-led upturn,” Hassan said.
Hassan said he expected Sydney’s price growth to slow this year, as a lack of affordability impacted the market and buyer demand softened. While there were many units for sale in Sydney, buyers preferred houses and there were unit build quality issues in the news again, he said.
“It’s the $1 million question,” Hassan said. “As affordability worsens, are people going to stay put, go to apartments or move to cheaper areas or states?”
“Tax relief is coming through and there would be some other policies waiting in the wings because state and federal governments are keen for more new houses to be built,” Hassan said. “We do expect prices to rise, but something has to happen to really kick it along.”
Cameron Kusher, PropTrack's director of economic research, said that in Sydney PropTrack observed a "big uplift" in new listings which took some heat out of the local markets.
"And if we look at the data from APRA [Australian Prudential Regulation Authority], which looks at who's borrowing, we have seen more activity from people with larger deposits," Kusher said. "So you're seeing more lending to people who are fairly comfortable and probably not impacted by higher interest rates as other buyers."
Belinda Moore, a senior economist at the Commonwealth Bank of Australia (CBA), forecast that the value of houses will jump by five per cent over the next 12 months.
“Overall, we expect a lift in home prices of five per cent in 2024,” she said. “But more modest price gains until an easing in interest rates from the RBA later in 2024 (our base case in September 2024 for the first cut).”
Oxford Economics Australia says Sydney's median house price is forecast to increase by 5.9 per cent over the two years to June 2026, while median unit prices are expected to jump by 8.3 per cent during the same period.
But recent research from the Commonwealth Bank confirmed that it’s not just tenants who are feeling financially stressed. Figures from the CBA show that record numbers of both renters and buyers are now experiencing financial stress, meaning they spend more than 30 per cent of their incomes either on servicing a mortgage or on paying rent.
Exactly how these stresses will affect Sydney’s rental rates and property prices in 2024 won’t be known for some time, but there’s no doubt their impacts will increase over the next few months.
Rental pain persists
Rental prices in Australia’s capital cities rose 13.2 per cent in 2023 and are expected to continue their upward trend. Units in Sydney have seen especially sharp increases in 2023 with median rental prices rising 17.2 per cent.
The Domain Rent Report showed that house rents across the combined capitals held at a record high median of $600 a week in the three months to December. This was up 9.1 per cent year-on-year and remained unchanged over the quarter.
Domain chief of research and economics, Dr Nicola Powell described the rental market as ‘highly competitive’ in 2023 and said the market was ‘skewed in favour of landlords’.
“The perilous conditions saw the year hit a record-low vacancy rate driving the longest continuous stretch of rising asking rents (also at a record),” says Powell. “It’s the first time in almost three years that we’ve seen house rents across the combined capitals flatline…ending the record-breaking stretch of 10 consecutive quarterly increases.”
She said that Sydney remains the most expensive city in which to rent a house or unit at $730 and $680 a week, respectively: “Many dynamics are shifting in 2024 which is an indication that we’re moving away from this extreme period of rental growth that we’ve seen over the last couple of years … I do think that we will see better conditions for tenants in 2024.”
Everybody’s Home spokesperson Maiy Azize said renters were struggling to keep up with the continued increases: “Years of unchecked rent increases are taking a toll, with hundreds of thousands of Australians stuck in rental stress because they simply don’t have a choice,” Azize said. “Vacancy rates have crashed and they just cannot find an affordable rental.”
A report from PropTrack found the number of December listings was 30.2 per cent below the past decade’s monthly average. The company’s senior economist Angus Moore says there are signs of a slowdown in some parts of the country but rises will still be seen in most markets: “Maybe the small silver lining, the small comfort to renters, is it is a bit slower than what we saw the previous year, in 2022, when we saw growth just shy of 18 per cent.
“So there are some signs that things, at least in some parts of the country, are starting to slow down. But we’re still seeing very strong growth in places like Perth, Sydney and Melbourne. So we’re far from out of the woods for renters.”
The national rental vacancy rate that measures the proportion of all rental properties that are vacant and available rose 0.05 percentage points higher in November to reach 1.12 per cent. 3 per cent is considered to be a good balance between the interests of landlords and tenants, and latest data shows Sydney’s rental vacancy rate was 1.37 per cent in December.
The rental market may have begun a slight rebalancing as investors have begun returning to the property market, seeing the demand for rental properties increasing along with a surge in rental rates. In Australia more than 80 per cent of renters live in properties that are privately owned, meaning that renters depend on others to provide their rental accommodation.
After weakening in late 2022 the number of investors taking out loans for property has grown to well-above pre-pandemic levels. This should translate to an increase in rental stock, although for most of 2021 more rental properties were sold than were added to the market.
Over 2022 and 2023 the selloff of rental properties moderated, but overall the number of rental properties available for rent grew by just an estimated two per cent in each of those years. It’s now estimated that the total number of rental properties is roughly 250,000 homes less than if pre-pandemic growth rates had continued.
First-home buyers challenged
First-home buyers’ activity reached a new low in early 2023 but showed some signs of life late in the year. New owner-occupier loans rebounded 25.9 per cent by October, as shown by the latest figures from the Australian Bureau of Statistics. They finished the year up 6.8 per cent annually, but still below the five-year average.
The total number of first homebuyer loan commitments in December was 9491 Australia-wide, a sharp 8.4 per cent fall from November. The value of first homebuyer loans also fell 5.5 per cent to hit $4.8bn.
Meanwhile, loans to property investors have reached a six-year high as a share of total home lending. ABS figures show that more than 36 per cent of all housing finance in December went to investors. The first-home buyers’ share of finance, about 18 per cent, is just half that of the investors who are competitors in same space.
Master Builders Australia CEO Denita Wawn told news.com.au that the December decline meant first-home buyers now accounted for less than one third of housing loans: “During 2023, first home buyers struggled against the backdrop of larger than expected interest rate increases as well as resurgent house price growth,” she said.
“Strong rental price growth has also eaten into their financial capacity and slowed down the process of saving for a home purchase deposit.”
Curtin University research fellow Dr Christopher Phelps says his recent research showed that in 1998, older Australians had 2.6 times the home equity of younger Australians, but by 2018, this ratio had increased to 3.3 times.
“Older generations, who entered the property market in their 20s and benefited from the real estate boom of the 2000s, can use their existing property wealth to accumulate more housing wealth for themselves or their own children, creating a divide between and within generations.
“Young persons from well-off families are more likely to overcome deposit requirements and become homeowners, while those from less privileged backgrounds may not receive parental support, making it harder for them to own a home and access desirable areas with good job opportunities in our cities.”
Research by Suburbtrends found Australian households now need to earn more than $300,000 a year to comfortably afford to buy their own home.
The study analysed more than 22,000 property sales in 2023, finding median house prices were nine times household incomes — triple the so-called “median multiple” of 3.0 generally considered to be “affordable”.
Kent Lardner, founder and chief analyst at Suburbtrends, told Nine News the research showed home ownership was becoming out of reach for the average Australian. “The bank of mum and dad is great if you’re from the right parents,” Mr Lardner said.
“But if you don’t have access because you were born in the wrong postcode, or don’t have wealthy parents, then you’re increasingly being locked out entirely. Because if you move into the rental market, good luck trying to save a deposit while you’re spending 31 per cent or more of your household income on rent.”
The report found the median household income required to buy a home on Sydney’s northern beaches was $600,000 per year, and still as high as $283,000 in the city’s outer west and Blue Mountains regions.
Commonwealth Bank’s head of Australian economics, Gareth Aird, said Sydney’s price growth had been supported by the strong rental market, which gave first home buyers an incentive to purchase. Fewer homes for sale, a pickup in wages and foreign buyer interest had an impact, as had the bank of mum and dad.
“We’ve definitely had some wealth transfer coming through…it’s hard to know exactly how much that is worth, but that flow is definitely helping to support home prices,” he said.
But with stretched affordability weighing on buyer demand, and an uptick in listings now giving buyers more choice, price growth would slow until interest rates fall.
“Sydney is the least affordable it’s ever been [in recent history]…if you look at the amount of income now needed to service a mortgage,” he said.
ANZ senior economist Adelaide Timbrell outlined the major challenges for first-home buyers that were set to continue into 2024 - rising prices, higher interest rates and inflation, and more expensive rents.
“If you’re in the rental market you have less left over to save for a home…and inflation is running higher than usual, so your cost of living is also taking away from your ability to save, while higher interest rates are reducing your ability to borrow,” Timbrell said.
“House prices have also risen and will continue to rise, so your deposit is chasing after that too,” she said, adding that reduced borrowing power meant increased demand for cheaper properties, which was pushing prices up for that market segment.
Domain’s Maria Gil says house deposit costs have increased by 100 per cent in the last decade: “The amount of money buyers need to save for a house deposit in several capital cities has doubled in the past 10 years, making it more challenging for first-time buyers to enter the market without the help of the bank of mum and dad.”
Sydney buyers’ agent Michelle May said 2023 had been a tough year for first home buyers, and 2024 was likely to follow suit: “We had a fair amount of first home buyer interest, probably more than [in 2022] but we’re finding most of them will have help from the bank of mum and dad … we see a mix of cash gifts, loans and guarantees,” May said.
A survey of mortgage brokers by Jarden late last year found about 15 per cent of all borrowers were purchasing with family assistance, with two-thirds of those receiving a cash loan or gift with an average value of $70,000.
Building more housing
Keep in mind that NSW has been given the goal of constructing 75,000 new homes in 2024 to meet the target set by the federal government in August last year as part of a bigger plan to build 1.2 million homes across Australia over the next five years. NSW premier Chris Minns has admitted the government would fall short of the goal but was building as many houses and units as possible.
The Premier’s solution: ‘Build up, not out’, is supported by NSW Productivity Commissioner Peter Achterstraat who explained “If we keep playing musical chairs with too few homes, it is the youngest and lowest-income people among us who will lose.”
But the government can’t do the actual work of increasing housing supply; this depends on having the support of the housing and construction industries. Property Council of NSW executive director Katie Stevenson said short-term problems in the housing sector should not be allowed to sabotage long-term goals for the state to build almost 380,000 homes by the end of 2028.
Ms Stevenson mentioned ‘exceptionally high’ building costs as one of the problems: "We've got a whole lot of development going on here in NSW in infrastructure but also in other states, we've got Olympic infrastructure being built just over the border in Queensland, and that's drawing tradies away."
Master Builders Association executive director Brian Seidler agreed that finding skilled tradespeople would be difficult, but also nominated high interest rates and rising costs as stumbling blocks: "In the commercial sector, particularly when we're building apartment buildings, the developers…that is, the people who are putting up the money, are going to need the planets to align so that the outcome for them is worth going into the project and if it isn't, those sorts of projects get put on hold," he said.
The Guardian’s Peter Hannam says the federal government’s hopes are ‘fading fast’: “December recorded a drop in dwelling approvals of almost 10 per cent from November, the Australian Bureau of Statistics reported on Thursday. Approvals for apartments sank 25.3 per cent.
“For the full year, approvals totalled about 162,200 – the lowest annual rate since March 2013, according to NAB,” he wrote.
Leith van Onselen, Chief Economist at the MB Fund and MB Super, also notes that dwelling approvals, commencements, and completions are each tracking around decade lows at the same time as the nation’s population is growing at a record pace: “The upshot is that there is no end in sight to Australia’s housing shortage, with demand via population growth certain to continue overrunning supply.
“Instead of dreaming up fanciful housing targets, the Albanese government should instead take the pressure off demand by slashing net overseas migration to sensible and sustainable levels below 150,000 a year.”
AMP head of investment strategy and chief economist Shane Oliver has called for lower immigration to address housing affordability, saying “the role of high immigration levels can’t be ignored”.
“On our estimates it needs to be cut back to nearer 200,000 people a year to better line up with building industry capacity and to reduce the chronic housing supply shortfall,” he said in a September note.
The NSW government has already announced plans to build more than 200,000 homes and focus on higher housing density by building up, not out. It plans to build 138,000 new homes at rezoned sites in 31 suburbs, and 47,800 homes near eight major transport hubs, although this will be part of a 15-year plan.
Developers in those zones will be able to access a fast-tracked approvals process, called a state significant development, to ensure apartments are built quickly. This will apply to developments costing over $60 million with construction to commence within two years of approval.
Minns is finding a lot of resistance to his housing plans coming from local councils who say his proposed reforms are ill-conceived and will reduce living standards. In addition to the three councils we listed last month, the Canterbury-Bankstown council is considering legal action against the reforms while Fairfield Mayor Frank Carbone said the proposals would “turn western Sydney into Kolkota”.
However, perhaps surprisingly, a recent Ipsos poll found that 34 per cent of Sydneysiders somewhat supported developing existing suburbs for higher density, and another 18 per cent strongly supported the idea. Support (either strong or somewhat strong) for redeveloping existing suburbs to accommodate higher density rose to 52 per cent from 44 per cent this time last year.
Developers are already responding to the Minns government’s plans with a number of property owners in Sydney’s north shore suburbs reporting approaches to purchase their properties. The Herald’s Michael Koziol quoted from a letter to homeowners from developer Landmark Group, dated January 15, noting their land was earmarked for rezoning and saying: “We are currently speaking with your neighbours to drive this process and we would like to speak with you regarding the opportunity.”
A Roseville resident told Mr Koziol that she and her neighbours had been flooded with requests from developers in the weeks since the zoning changes were announced. The retired teacher, who lives alone in a five-bedroom house about 100 metres from the station, said she would be sad to leave her home of more than 50 years but that she would ‘probably move on’.
Sources:
‘Higher density is the key to solving Sydney’s housing crisis,’ Editorial, Sydney Morning Herald, 14 February 2024
‘Record numbers of renters and buyers under financial stress,’ Shane Wright, Sydney Morning Herald, 13 February 2024
‘Thought property investors were sitting on the sidelines? They’re back,’ Elizabeth Redman, Domain, 14 February 2024
‘Rabbit warrens and bottlenecks’: Labor councils join chorus of criticism over Minns housing plan,’ Michael McGowan, Jordan Baker and Max Maddison, Sydney Morning Herald, 8 February 2024
‘The graph that shows why the bank of mum and dad will be on the hook this year,’ Jim Malo, Domain, 8 February 2024
‘RBA keeps rates steady amid signs of cooling inflation,’ Daniel Butkovich, realestate.com.au, 6 February 2024
‘CBA predicts house prices to rise by 5% to record levels this year,’ Alex Turner-Cohen, news.com.au, 2 February 2024
‘What Sydney really thinks about high density housing,’ Michael Koziol, ABC News online, 3 February 2024
‘Australian housing approvals sink to lowest level in 12 years amid rising costs and planning delays,’ Peter Hannam, The Guardian, 2 February 2024
‘Size of Australian mortgages hits record high amid price spikes, rising interest rates,’ Hannah Moore and Duncan Evans, news.com.au, 4 February 2024
‘Defying gravity: Why house prices aren’t coming down,’ Elizabeth Knight, Sydney Morning Herald, 2 February 2024
‘Millions of home owners made $3,000 in January but they probably didn’t notice,’ David Taylor, ABC News online, 3 February 2024
‘Australia’s property market upswing continues as house prices and rents rise again,’ Cait Kelly, The Guardian, 1 February 2024
‘House deposit costs have increased by 100 per cent in the last decade,’ Maria Gil, Domain, 1 February 2024
‘House prices rose in January and are anticipated to keep going up if rates come down,’ Nassim Khadem, ABC News online, 1 February 2024
‘Inflation falls to 4.1 per cent, a two-year low,’ Shane Wright, Sydney Morning Herald, 31 January 2024
‘What the hell happened?’: The year Australian house prices broke,’ Frank Chung, news.com.au, 31 January 2024
‘Australian properties for lease fall to record low as rents soar,’ Cait Kelly, The Guardian, 30 January 2024
‘Putting our feelers out’: Developers swoop ahead of north shore rezoning,’ Michael Koziol, Sydney Morning Herald, 29 January 2024
‘Sydney home prices to skyrocket ‘by 23 per cent’, James MacSmith, realestate.com.au, 22 January 2024
‘Australia’s property market fully recovered from the downturn, national house price nears $1.1 million,’ Maria Gil, Domain, 24 January 2024
‘Sydney’s median house price reaches a new peak of almost $1.6 million,’ Tawar Razaghi and Melissa Heagney-Bayliss, Domain, 24 January 2024
‘Aussie housing construction hits “air pocket”, Leith van Onselen, Macrobusiness, 23 January 2024
‘NSW Premier Chris Minns says state will not meet its housing target, but is doing its best to boost supply,’ Jesse Hyland, ABC News online, 19 January 2024
‘Neither a pandemic nor interest rate rises: can anything dent the Australian housing market?,’ Greg Jericho, The Guardian, 18 January 2024
‘Rents highlight Australia's economic Achilles heel, but it's not what you might think,’ Michael Janda, ABC News online, 16 January 2024
‘Heritage can be part of Sydney’s housing solution,’ David Burdon, Sydney Morning Herald, 16 January 2024
‘Rent prices stall across the nation for the first time in three years,’ Jessica Taulaga Domain, 16 January 2024
‘Rental shortage eases in December but remains near record-low,’ Jack Quail, News.com.au, 12 January 2024
‘What are the chances of buying a home in 2024?,’ Kate Burke, The Sydney Morning Herald, 10 January 2024
‘Australian capital city rents up 13% over year as further hikes predicted for 2024 amid housing shortage,’ Cait Kelly, The Guardian, 9 January 2024
‘This couple couldn’t afford a home, so they invested in a rental instead,’ Nila Sweeney, Financial Review, 8 January 2024
CROLL COMMENT
Mon, 22 Jan 2024One good year likely to follow another......
2023 was a year of almost continuous property price increases across Australia. Nationally, Australia’s property values rose 8.1 per cent, while Sydney’s prices rose 11.1 per cent in the year to December despite five further interest rate rises that would usually have pushed prices downwards.
Many economists at the start of the year had forecast falls of up to 15 per cent but the opposite happened. Properties that were hit during the market’s downturn have mostly returned to their earlier pandemic ‘boom’ peak prices or gone even higher during 2023.
Westpac senior economist Matthew Hassan said the turnaround in prices was completely unexpected because it defied what were seen as basic economic principles: “You’d be hard-pressed to find another example of continued momentum in house prices in the face of interest rates rising at the rate they did,” he said. “It really caught people by surprise.”
(Incidentally, there is one official set of land value calculations that does show values falling in 2023, and that’s the prices compiled by the NSW Valuer-General which show a decrease of 1.6 per cent in the year to July. These are based on data captured in the second half of 2022 and the first half of 2023 when there was a decline that followed two years of very strong prices growth, so these values reflect a statistical methodology and not the current market.)
Australians got collectively wealthier in 2023 thanks to property. Total household wealth rose by $339 billion, or 2.3 per cent, in the September quarter, to a record high of $15.3 trillion, or more than $575,000 per person. The improvement was driven largely by the property sector. The value of Australians’ homes and land jumped by $250 billion in the quarter to a record $9.9 trillion. The previous record of $9.7 trillion was set in early 2022.
It’s ironic that the recovery in the property market has taken Australians’ wealth to record levels, but data from the Australian Bureau of Statistics (ABS) shows that for the first time since the Global Financial Crisis households are spending more than they earn.
St George Bank senior economist Pat Bustamante told The Herald’s economist, Shane Wright, that during the September quarter, households spent $1.4 billion more than they generated in income. The last time this occurred was in the September quarter of 2008.
He said to make up for the income shortfall, households increased their borrowings and were in effect “pawning the family silver” to make ends meet: “Elevated cost-of-living pressures, a higher tax take due to bracket creep, and higher interest rates have seen households dip into savings,” Bustamante said.
CoreLogic’s head of research Eliza Owen said 2023 was certainly unusual: “It’s pretty extraordinary to see values get to a new record high despite further uplifts in the rate-hiking cycle. At the start of the year, the market was a lot more exuberant. There was a lot more hope the cash rate would peak at a relatively low level and buyers were really taking advantage of the dip.
“A lot of wealthy buyers saw it as a great buying window. But as we got towards the end of the year, it’s clear the more affordable end of the market emerged as the more resilient and popular amid interest-rate constraints that are much higher than what we thought they would be.”
The year 2023 ended well. House prices have jumped by more than 5 per cent in one out of nine Sydney suburbs over the last three months of the year, even defying the recent slowdown in the market, data from CoreLogic shows.
CoreLogic figures also show that suburbs in Sydney’s inner west and inner south-west dominated the top-performing house markets in the city as buyers looked for properties offering good value for money and those with development potential,
What will happen in 2024
After the climb upwards in 2023 there’s an expectation of some sort of pullback in 2024, noting that price falls early in the new year aren’t yet on the agenda. Buyers are going over new listings with more care than a few months ago, which means properties are staying on the market longer than they were last October. However, Sydney’s prices are holding onto their 2023 gains and there’s still a housing crisis that governments have yet to deal with.
Taxation and accounting firm Quantiphy says to predict what happens in 2024 depends on whom you ask: “According to Domain analysts, prices could climb a sizeable 7-9 per cent in Sydney next year. Nationally, they’re tipping house prices to rise 5-7 per cent. These numbers are in line with Domain’s earlier predictions in their Forecast Report published back in June.”
Domain interprets the Sydney auction clearance rate’s recent slippage as signs of a shift towards a more balanced market where buyers and sellers can compete on a more equal footing than one that’s skewed against buyers.
Clearance rates in Greater Sydney’s outer south-west, Sutherland, Baulkham Hills and Hawkesbury, Central Coast and Outer West and Blue Mountains recorded clearance rates below 60 per cent in early December meaning buyers have more choice and less competition.
Quantiphy said the SQM forecast is much more humbling. “According to SQM’s annual ‘Boom & Bust’ Report, house prices are predicted to fall in five capital cities [in 2024], including Sydney. If interest rates continue to rise and migration slows, SQM anticipates a -6 per cent price correction in Sydney, or a rise of 3 per cent if rates stay put and migration continues to increase rapidly.”
AMP chief economist Dr Shane Oliver also sees a five per cent price fall in Sydney through 2024: “It looks like we’re now starting to move through the peak in immigration … and while there will still be shortfall in housing, I think we’re banging up against affordability constraints both in terms of rents and prices [which prompts households to consolidate and helps ease demand],” he said.
“The combination of constrained buyers and some further pick up in supply [as more distressed listings occur], will pull prices down.”
We reported last month that PropTrack has already predicted a 5 per cent increase in 2024 thanks mostly to ongoing property market stock shortages. A tight rental market with continually rising rental costs will help keep upward pressure on prices.
PropTrack figures also show that the rate of prices growth in Sydney contracted in November to just 0.3 per cent – its slowest rate of growth since December 2022. In another sign of a slowing market, Sydney’s auction clearance rate fell from a peak of 73 per cent in May to 64 per cent in November.
Tim Lawless, CoreLogic’s research director said that predicting 2024’s price trends won’t be easy.
“My best guess would be that rate hikes are probably done,” Lawless said. “We’ll probably start to see some growing speculation of rate cuts through the second half of the year.”
CoreLogic head of research Eliza Owen, sees signs that high housing costs are going to reduce demand in 2024: "Housing activity rebounded through early 2023 as buyers took advantage of lower prices, however, towards the end of 2023, affordability constraints have become more pressing, skewing demand towards the middle-to-lower end of the pricing spectrum," Owen said.
Commonwealth Bank chief economist Stephen Halmarick shared his projections for the year ahead with News.com’s Fergus Ellis. He said interest rate rises in 2023 had the desired effect of slowing down the economy, to a point where there was a high chance interest rates could finally start going the other way, with cash rate cuts instead of hikes.
“CBA is forecasting the annual rate of inflation back at three per cent at the end of 2024, well ahead of the RBA’s current forecast and closer to the Commonwealth government’s latest forecast,” he said.
“We also expect the RBA to begin a modest monetary policy easing cycle from September 2024 onwards,” he said.
Selling at a loss
Domain’s Elizabeth Redman expects some owners to sell at a loss in 2024. “Homeowners who bought in the last few years and have to resell fast are increasingly likely to cop a loss on their deal.
“Among home sellers who had owned their property for three years or less, the proportion of sales that made a loss edged up to 6.6 per cent in the September quarter, from 6.5 per cent in the June quarter, CoreLogic figures show. This compares with 3.6 per cent in the September quarter of last year.”
PRD Nationwide chief economist Dr Diaswati Mardiasmo said some loss-making sellers would be investors who find their investment no longer stacks up: “It’s no longer financially viable to them in terms of the outgoing cost is higher than the incoming rentals,” she said.
“Although rentals have gone up quite a bit and significantly in some places, so has the mortgage rates and the council rates and the insurance fees and the body corporate fees.”
ANZ senior economist Adelaide Timbrell said most homeowners can afford their mortgages, but there may be some selling to reduce mortgage stress.
“RBA analysis suggests that the vast majority of people can pay their mortgages on an owner-occupier property and all of their expenses without dipping into savings. Of those who have to dip into savings, RBA analysis shows 70 per cent have at least six months of a buffer.
The RBA acknowledges that 5 per cent of mortgage borrowers spend more than they earn but says it’s not worried because less than 2 per cent are at risk of defaulting on their mortgage payments. RBA research concluded that even a big jump in unemployment would leave mortgage defaults “in the low single digits”.
The RBA's head of financial stability Andrea Brischetto said the bank's research had found that most borrowers could afford their mortgage at current interest rates: "While just over 20 per cent of borrowers are estimated to spend more than 30 per cent of their income on mortgage payments, a much lower share — at around 5 per cent — is estimated to find their income insufficient to cover their mortgage payments and essential expenses," she said.
“But that doesn’t mean that no-one is selling a property due to higher mortgage rates, and it could be for reducing stress on their finances particularly if it’s a second property.”
A national effort
The federal government has determined that 377,000 more homes need to be built across Australia over the next five years. NSW treasurer Daniel Mookhey said this represents a big challenge: “But it is no doubt we do need to build more homes across New South Wales and Australia if we expect this generation and the next generation to be able to have a roof over their head and equally to be able to afford to live in a state like New South Wales as well.
“It’s certainly ambitious, it’s certainly possible but it requires a lot of things to go right for us to pull it off and we’ve got a lot of work to do.”
ABC economist Alan Kohler agrees it’s a big challenge, saying that when he and his wife bought their first house it cost about 3.5 times his annual salary; now it costs about 7.5 times the average annual income to purchase a median priced house.
“In other words, my children – and all young people today – are paying more than twice the multiple of their income for a house than their parents – and their grandparents – did, and it’s only vaguely possible because both partners work to pay it off,” he said.
A 2023 report from the Australian Housing and Urban Research Institute (AHURI) showed home ownership rates among younger people have been in decline for the past two decades: “Increased house prices and cost of living have worsened the challenge of home ownership, with households – particularly low-income ones – unable to keep pace with market changes through their saving and budgeting strategies,” the report stated.
The AHURI report also found that a household with a typical income needs to save at least 20 per cent of that income for almost seven years just to put together a deposit for a median priced home.
The National Cabinet has agreed to build 1.2 million homes over the next five years as part of a national housing accord, in fulfillment of Prime Minister Anthony Albanese’s election campaign focus on supply. To meet that 1.2 million goal, Australia will need to increase its pace of building by almost 40 per cent from where it currently stands.
Macrobusiness’ Leith Van Onselen says a look at the current housing construction situation shows the difficulty we will have in attempting to achieve this: “The latest dwelling approvals data from the Australian Bureau of Statistics (ABS) revealed that only 164,200 homes were approved for construction in the year to October, which is around 76,000 below the Albanese government’s target to build 1.2 million homes over five years, or 240,000 a year.
“The highest single year of dwelling completions was 223,000 in 2017. This occurred alongside low interest rates, lower materials prices, and relatively abundant labour availability, which is the polar opposite of current conditions.”
NSW housing rides the rails
The NSW government has made a series of announcements that in summary mean areas near Metro and heavy rail stations will become targets for greater housing density. A process of rezoning, supported by legislation to overcome locally-placed barriers, will be used to, as Transport Minister Paul Scully described it, “marry public transport and housing” to create more homes.
The first eight transport hubs targeted for rezoning by November next year are Bankstown, Bays West, Bella Vista, Crows Nest, Homebush, Hornsby, Kellyville and Macquarie Park. The government will determine the mix of housing types to be built in these areas with high rise developments located close to the identified stations.
Some other details about these rezonings have been announced, including that affordable housing will make up a specified percentage of homes and the government will provide funding for community infrastructure projects such as open spaces and schools where appropriate.
Significant changes will be made in heritage suburbs with existing local protections overridden if deemed necessary to support the construction of new housing. New planning guidelines explain that “a merit-based assessment will continue to apply to developments in these locations and relevant heritage controls will apply to the extent they are not inconsistent with the new standards”.
James Lesh, a historian and heritage specialist, says there is ‘little to no evidence’ that heritage classifications are barriers to housing supply: “Heritage is an easy target for a range of broader issues that are going on related to housing and affordability and access,” he told the Herald’s Michael Kosiol. “Our heritage areas are actually the densest neighbourhoods in our cities. We have heaps of people living in those areas. It’s those heritage protections that are making those suburbs so liveable, and the places where both the YIMBYs and the NIMBYs really want to live.”
There have been several negative reactions from councils affected by the Minns government’s plans. North Sydney mayor Zoe Baker said “this seems to be planning in the way totalitarian regimes do it. It’s like Ceau?escu in Romania, that we’re going to scrub everything and just put up towers,” she told Guardian Australia.
Darcy Byrne, the mayor of the Inner West Council, said: “Everyone knows there’s more housing density coming around transport hubs and in White Bay but extending high-density zoning into all surrounding suburbs is ludicrous and just won’t work.
“Given the massive cost of purchasing a terrace in Rozelle and surrounding suburbs, high-density rezoning wouldn’t deliver much new housing at all. You’d have to find a Saudi sheik or a Russian oligarch to afford the astronomical cost of buying up blocks of homes for redevelopment,” Byrne said.
Parramatta Council’s chief executive, Gail Connolly, was angered by the NSW government’s intervention that overturned a local planning panel’s rejection of a proposed 1080 home development at North Rocks. “Whilst [the] council acknowledges the state government’s desire to address the housing crisis, it needs to be done in a way that respects due process and the public policy principle of finality,” she wrote in a letter to Planning Minister Scully.
“Otherwise, the time and expense associated with local government and applicants engaging with planning panels will amount to wasted resources and will diminish the credibility of the local environmental plan-making process.”
Another battle between the City of Parramatta and the NSW government is shaping up over a proposed 34 storey tower on Hassall Street that includes retail space, build-to-rent apartments and car parking. The NSW Department of Planning and Environment supports the development but the Council opposes it saying the project poses a serious flood risk. It’s certain that there will be many more such conflicts as the government pushes ahead with its housing goals.
Return of the investors
For a time, it looked like the high and rising prices in Australian real estate were dampening the interest of investors while encouraging them to put their properties on the market.
BresicWhitney chief executive Thomas McGlynn warned recently that a large percentage of Sydney landlords were selling up: “We’re definitely still seeing a large increase in the number of investors looking to sell compared to a year ago, which has doubled in our books. I think there are a lot of investors who haven’t come to market yet, but many are thinking about selling and calling us about it.
“Generally, when you see a large number of inquiries, you’re going to see more investment properties come to market”.
But as 2024 gets underway, it looks like investors are back for a New Year’s shopping spree. As The Australian’s James Kirby sees it: “As investors sat on the sidelines through most of the year, successive monthly reports show prices and rents rising relentlessly. Sooner or later investors were going to move and in the last few months the pendulum swung.
As the CBA economics team has put it: “Demand from investors has outstripped that of owner-occupiers during the current upswing. Emboldened too by an expanding consensus that interest rates have peaked, investors are hunting nationwide.”
Many of these investors are from overseas. Record migration and China’s post-pandemic reopening have triggered a surge of foreign investment in Australian property, with international agents reporting a more than 400 per cent increase in property-related inquiries.
Treasury data shows that overseas buyers are flooding back into the Sydney market with buyers from mainland China, Hong Kong, Taiwan and Vietnam leading the influx. It’s a sign of the times that median house prices attracting interest from Chinese buyers are more than 25 per cent higher than they were in 2019.
The latest NAB residential property survey said real estate professionals estimated the share of total market sales to foreign buyers had increased for the fourth straight quarter, to a 5½-year high. The share of foreign buyers also increased in the established housing markets
Because the federal government believes there are too many empty properties across Australia at a time when there’s a serious shortage of available housing, it now plans to penalise foreign buyers who leave homes vacant by doubling their costs of fees for buying property, and by charging six times the current rate for foreign-owned homes left vacant.
However, federal treasurer Jim Chalmers said foreign investment was still welcome and especially if it increases housing supply: "There are too many properties empty around Australia, part of the challenge here is we do have these tough foreign investor rules but we want to make them tougher," he said.
Despite the recent changes to policies affecting foreign investors, Australian property continues to offer overseas investors the security of a stable government and a strong economy. Expectations of moderate inflation, reasonable long-term financial growth and good rental yields are factors that will offset the federal government’s rule changes for most foreign investors evaluating the potential of the Australian property market.
Sources:
‘Why did land values go backwards in NSW while property prices boomed?,’ Alexander Lewis, ABC News online, 10 January 2024
‘Sydney council rejects build-to-rent tower plan over flood risk,’ Megan Gorrey, Sydney Morning Herald, 9 January 2024
‘Easy target’: How heritage became a lightning rod in Sydney’s housing debate,’ Michael Koziol, Sydney Morning Herald, 8 January 2024
‘Experts tip another year of living with the property bubble,’ Mackenzie Scott, The Australlian, 7 January 2024
‘Sydney suburbs where property values fell most – and what happened next,’ Kate Burke, Domain, 7 January 2024
‘Australian property values rose 8.1 per cent in 2023. Here's what the market has been doing in your area,’ Hanan Dervisevic, ABC News online, 3 January 2024
‘A tailwind for prices’: The outlook for property values in 2024,’ Kate Burke, Domain, 4 January 2024
‘Property values bounced back across Australia in 2023, but there are signs of slowing,’ Helena Burke, ABC News online, 2 January 2024
‘Australia’s property market faces fresh peaks and troughs with slowing prices and interest rates tipped to drop,’ Peter Hannam, The Guardian 2 January 2024
‘Australian house prices end 2023 in two speeds,’ Leith van Onselen, Macrobusiness, 1 January 2024
‘Sydney Property Price forecast 2024’, Quantiphy, accessed 2 January 2024
‘Chief economist at CommBank announces big forecasts for the year ahead,’ Fergus Ellis, News.com.au, 22 December 2023
‘Pretty extraordinary’: How far property prices rose in 2023,’ Elizabeth Redman, Domain, 14 December 2023
‘Wealth reaches record levels but households can’t meet daily bills,’ Shane Wright, Sydney Morning Herald, 25 December 2023
‘Australia’s housing sector is in deep trouble,’ Leith van Onselen, Macrobusiness, 14 December 2023
‘Where property owners are selling at a loss,’ Elizabeth Redman, Domain, 22 December 2023
‘Investors pile back into Australia’s housing market,’ Leith van Onselen, Macrobusiness, 22 December 2023
‘Parramatta Council threatens a legal action against Minns government over housing,’ Michael McGowan and Max Maddison, Sydney Morning Herald, 23 December 2023
‘Why property prices rose in 2023, surprising even economists,’ Melissa Heagney-Bayliss, Domain, 27 December 2023
‘Get ready for the “real estate market reset”, Leith van Onselen, Macrobusiness, 17 December 2023
‘‘Builders: We can’t meet housing targets,’ Leith van Onselen, Macrobusiness, 22 December 2023
‘North Sydney mayor says Minns government overriding planning protections like a ‘totalitarian’ regime,’ Elias Visontay and Tamsin Rose, The Guardian, 13 December 2023
‘Stunning failure’: Finance expert Alan Kohler’s dire warning about Australia’s housing market,’ Shannon Molloy, Sydney Morning Herald, 12 December 2023
‘Foreign investors to be slapped with huge penalties for leaving homes vacant,’ Jake Evans, ABC News online, 10 December 2023
‘The suburbs where house prices are up more than 5pc,’ Nila Sweeney, Financial Review, 12 December 2023
‘The Sydney suburbs where it’s becoming easier to buy a home,’ Tawar Razaghi, Domain, 10 December 2023
‘RBA finds 5pc of mortgage borrowers spend more than they earn, but not worried about default risks,’ Michael Janda, ABC News online, 9 December 2023
‘Horrifying news for Aussie house prices,’ Leith van Onselen, news.com.au, 9 December 2023
‘Prepare for ‘significant change’: Rezonings will override local heritage rules,’ Michael Koziol. Sydney Morning Herald, 9 December 2023
‘How your suburb will be affected by Sydney's rezoning to address housing crisis,’ Catherine Hanrahan, ABC News online, 8 December 2023
‘Enormous opportunities’: Why it won’t be just eight Sydney stations getting mass housing,’ Michael McGowan, The Sydney Morning Herald, 8 December 2023
‘China leading Asian investor surge in Australian property,’ Tom McIlroy, Australian Financial Review, 3 November 2023
‘Sydney market forecast predicts more price increases in 2024’, Taylor Troeth, realestate.com.au, 8 December 2023
PLANNING FOR THE FUTURE
Fri, 29 Dec 2023Politics and planning changes – a different Sydney for the future
As part of its moves to take control of the state’s housing targets and increase the supply of housing, the Minns government has decided to abolish the Greater Cities Commission and give responsibility for determining these goals to the NSW Planning Department.
When the Commission produced its draft recommendations to the government in October, the report envisaged 92,000 new homes over the next five years with the bulk of the new construction in the City of Sydney, mainly in the areas around Redfern, Pyrmont, Green Square and Waterloo.
Mosman on Sydney’s North Shore would only have been required to add another 500 new homes, and wealthy Hunters Hill would have an even smaller target of only 150 new homes in the next five years. Such an uneven distribution of pressure for new housing would have raised some political issues no government would want to face in its first term in office and the report prepared by the Greater Cities Commission appears to have been its last.
New targets set by the Planning Department will see larger numbers of new homes set as goals for Randwick, Waverley and Woollahra council areas, as well as areas in the inner west, North Sydney and near Hills Shire NorthWest Metro stations.
In early December the NSW government published a list of suburbs that reveals those targeted for more high-density housing. It contains plans to rezone land to build 45,000 new homes by 2027 and identifies the first eight Sydney suburbs to be rezoned: They are Bankstown, The Bays, Bella Vista, Crows Nest, Homebush, Hornsby, Kellyville and Macquarie Park. Land within 1.2 km of these stations would be rezoned.
The rezoning reflects the Minns government’s new signature housing policy which it calls the Transport Oriented Development Program. It aims to increase density around key Metro and heavy rail stations to combat the state’s housing crisis.
The document also lists another 30 suburbs across the state where land within 400m of train stations will be rezoned to increase the number of new homes. The Sydney suburbs are: Rockdale, Kogarah, Banksia, Marrickville, Turrella, Dulwich Hill, Canterbury, Ashfield, Croydon, Wiley Park, Berala, Lidcombe, St Marys, Roseville, Lindfield, Killara and Gordon.
Land around stations in The Central Coast, Illawarra, and Newcastle/Hunter regions will also be rezoned in the second phase of the planning changes.
It’s anticipated that between the end of 2023 and October 2024, technical studies about the program will be undertaken and a precinct master plan finalised to inform rezoning decisions. The rezoning would then be done over the coming year before development applications could be lodged with councils and the NSW Planning Department.
The plan’s timetable predicts development assessments will be conducted in 2025 before construction commences in January 2026 so that occupancies can begin from November 2027 onwards.
Ancillary projects that increase the supply of housing can be incorporated into the plan if they are seen as suitable by the government. The government has signed a memorandum of understanding with the Australian Turf Club (ATC) after being approached with the idea of turning the Rosehill Gardens Racecourse into up to 25,000 homes and a school, with an accompanying Metro West station.
“This is exactly the type of proposal my government has been talking about over the last six months,” said Premier Minns.
In separate moves, the Minns government will force councils to lift existing bans on building terraces, townhouses and two-storey apartment blocks with the aim of dramatically increasing housing density. Three- to six-storey unit blocks, terraces, townhouses, duplexes and smaller one- to two-storey apartment buildings will be allowed in areas where they are currently banned by councils.
This will include areas which councils now exempt from two-storey developments because of heritage rules that ban such structures in areas deemed to have cultural value.
Planning Minister Paul Scully said heritage “must not deliberately be used as an excuse to avoid the responsibility for delivering more housing”, and all development “will need to be assessed in the context of the government’s proposed changes”.
The state government’s overhaul of planning laws will ensure low and mid-rise homes are built near transport hubs and town centres as well creating a greater diversity of housing that will help NSW meet ambitious national targets.
The suburbs on the ‘priority’ list all surround metro stations and are on a shortlist for rezonings which would supersede local planning rules to allow for taller apartment buildings than are permitted now.
An example of what a ‘priority rezoning’ conflict could look like can be seen the Minns government’s changes to planning in Macquarie Park, currently a business hub in the Ryde council area. The changes will allow about 5000 build-to-rent apartments on land currently zoned for commercial use, and an extra 3000 units on three sites that will be zoned for mixed-use.
The proposed changes would also include allowing taller buildings up to 190 metres (60 storeys) on some sites providing certain conditions are met. Ryde Council has stated its opposition to the government’s plans for Macquarie Park but these have obviously fallen on deaf ears and Premier Chris Minns has acknowledged there will be many more forced rezonings like this across Sydney as the government looks for ways to increase housing supply.
The Minns government will shortly release its official suite of proposed housing reforms in which priority rezonings at metro stations will play a significant role. Looking ahead, the government estimates that the eight density precincts, combined with plans to snap-rezone land within 400 metres of 31 train stations across the state, and an overhaul of zoning rules to allow duplexes and terrace houses, could result in about 322,800 new homes being added over coming decades.
A different year ahead
CoreLogic’s Home Value Index (HVI) shows us that Australia’s dwelling values have now reached a record high. Prices have simply kept rising, despite a series of interest rate increases by the RBA and increases in the cost of living for the average family.
The HVI estimates the value of Australian properties on a daily basis. It last peaked in April 2022, then slipped around 7.5 per cent down, reaching a bottom earlier this year, on January 23, 2023. Since then, the national HVI has risen by 8.1 per cent. Setting a new record high on Wednesday, November 22 this year. And it’s’ still heading upwards.
CoreLogic's executive research director, Tim Lawless, said the market’s ongoing upward curve is caused by the ongoing imbalance between supply and demand: "From a supply perspective, advertised stock levels have held remarkably low through 2023.
"Although inventory levels are now rebalancing as vendor activity picks up, listings remain 16.6 per cent below the previous five-year average nationally. At the same time, demonstrated demand, based on the volume of homes sales, is trending roughly in line with the five-year average."
Mr Lawless sees a very different year coming up in 2024, saying about where we are as 2023 comes to an end: “If this isn’t the peak, then it’s probably just around the corner.
“[In 2024], we don’t expect values to rise anywhere near as much as they have this year. I wouldn’t be surprised if we see a lot more debate across politicians and policymakers around housing affordability and homeownership, maybe reigniting some of the discussions around investment incentives as well, such as negative gearing and capital gains tax concessions,” he said.
There are also signs that vendors are withholding their properties from the market, leading to the lowest auction clearance rate in 32 weeks. 10.9 per cent of listed properties across Australia have been withdrawn from sale in one recent week, making it even harder for people to buy into what is clearly a market already short on supply.
The RBA gave borrowers a bit of respite by leaving the prime interest rate at 4.35 per cent at its December meeting, although any rise in the new year may not have much of an impact on property prices. AMP chief economist Dr Shane Oliver told Domain’s Kate Burke that strong demand fuelled by population growth and a decline in the number of people per household, together with the ongoing shortage of housing has overcome any impacts of rising rates.
He also said demand from a pool of buyers who were less sensitive to interest rate rises, such as downsizers or those with family help, was showing signs of weakening: “That pool of buyers I think is likely to be dissipating now as rates go higher and higher and more buyers find themselves constrained by higher rates.”
Impact Economics and Policy lead economist Dr Angela Jackson says more incentives are needed to increase housing supply: "We have the incentives wrong and desperately need reform.
"We need measures to increase supply — both new builds through planning reform but also unlock existing stock. Clearly housing supply is not keeping up with demand [and it means there are] young Australians carrying even more debt to get a foot in the property market," she said.
Phillip Oldfield, head of the School of Built Environment at the University of NSW, says without mandating the provision of larger apartments, families will be left behind in plans for a high-density future.
"We could say 20 per cent of any apartments in a new development have to be for families with children and have to be designed in a family friendly manner," Professor Oldfield said.
He said that at present the needs of developers and investors have been put above those of families, as is shown by the scarcity of 3-bedroom units.
"Most apartments that are designed and created are one or two bedrooms, and the reason for that is developers are creating apartments for the people who buy them, and that's often owner-investors," Professor Oldfield said.
Slowing but not stopping
There are those who predict prices will fall in 2024, although nobody’s seeing signs of it happening early in the year. SQM Research Managing Director, Louis Christopher said in his annual Housing Boom and Bust Report: “The base case forecast is for average national dwelling prices to change between -1 per cent to 3 per cent.
“Distressed selling activity is expected to jump, especially in NSW where we are already starting to see a new trend upwards in that data set,” he said, adding that distressed listings in NSW have risen 78 per cent since last year.
“The interest rate rises of 2022, 2023 and possibly 2024 will finally start to bite homeowners and would-be homebuyers alike,” Mr Christopher said.
“We’re not forecasting any type of crash by any means because the severe housing shortage and still fairly strong population growth are going to create a buffer to stop any type of double double-digit housing price correction for next year.”
"Another year of anticipated strong population expansion (albeit slower than 2023) plus an ongoing shortage of new dwellings, will limit the fall in housing prices to single percentage digits. Nevertheless, with expected slowing employment growth and the corresponding rise in unemployment, tipped to be towards five per cent by the year end 2024, this negative will more than offset another year of strong migration."
The PropTrack Property Market Outlook Report leaves no doubt. It has predicted Sydney’s house prices will continue to increase by up to 5 per cent in 2024.
Stephen Koukoulas, writing on Yahoo Finance, says “the house price is running out of puff” but he’s not expecting a house price crash. In fact, he says that it’s far from likely: “It’s been clear for the past month that, in the big cities, the auction clearance rates are off their highs and are now sluggish.
Mr Koukoulas sees a weakening in the labour market and a consequent rise in unemployment reducing the demand for property: “Demand for labour, as seen through the number of job vacancies and advertisements, is on a steady downtrend, a move which will inevitably see the unemployment rate rise in the next year or two,” he writes.
“Buyers are no longer bidding extreme prices just to get into the market. The prior boost to housing demand from the reopening of the international borders in mid to late 2022, and the surge in population numbers that accompanied that, has been largely satisfied.”
Macrobusiness’ Leith Van Onselen says falling auction clearance rates point to signs that the housing market is turning in favour of buyers as 2023 is drawing to a close: “The trend decline in auction clearance rates has been matched by a slowing in dwelling value growth.
“The property market is currently engaged in a tug-of-war between the stimulative impetus of record population demand and the dampening price impact of rising mortgage rates. The latest rate hike from the RBA appears to have successfully snuffed house price momentum.”
Ray White chief economist, Nerida Conisbee, said first home buyers were seeing the benefits of loss-making sellers vacating the market: “The market is definitely favouring first homebuyers. There’s a lot of the investors now that are really struggling to pay mortgages in the higher interest rate environment.
“It’s harder for us to track but we’re definitely hearing of investors selling. That typically benefits first-time buyers but it doesn’t benefit renters because it will take stock off the market for renters”. Ms Conisbee said.
Rental inaffordability
The latest Rental Affordability Index produced by National Shelter and SGS Economics found that housing affordability has fallen in every city except Canberra and Hobart over the last 12 months. Not surprisingly, Sydney experienced the sharpest decline in affordability where now 29 per cent of household income is soaked up by rental payments that have reached a median $650 per week – an 18.2 per cent increase since a year ago.
Not one coastal Sydney suburbs was found to have acceptable rental affordability, and inner-city locales are either unaffordable or extremely unaffordable. The Index concluded that the average household needs to travel at least 15 kilometres from the CBD to suburbs such as Campsie, Lakemba, Rosehill or Parramatta to find acceptable rents.
Ellen Witte from SGS Economics & Planning says this is having serious economic impacts: "It's really starting to hurt the economy - people have to live further away from jobs and businesses are struggling to find workers" she said.
“Key workers in critical industries are travelling further and further and being priced out of their city,” she told the Herald’s Rachel Clun. “We need a serious plan to provide the right housing at the right price to people who really need it.”
Data collected to compile the Index showed people on lower incomes suffered the most. A single person on Jobseeker pays at least 75 per cent of their income on a one bedroom city apartment, and single pensioners in Sydney would need to spend at least half their income on rent city areas. This data also showed that Seaforth in Sydney is the most unaffordable locality when assessed by prices per postcode, and rents there take up 65 per cent of the average household income.
New data from the Reserve Bank acknowledged that advertised rents have increased by 30 per cent since before the pandemic which is well above the rate of rental inflation: “Together with historically low vacancy rates and little sign that tight rental market conditions will ease in the near term, this is expected to keep rent inflation elevated for some time,” the RBA said in its latest statement on monetary policy.
The Bank also said that rental inflation neared 8 per cent in the year to September and was expected to increase further.
Making a bad situation even worse is the decline in rental listings found by PropTrack in their latest rental report showing a 5.7 per cent decrease since September last year. The number of inquiries for each listing increased from 24.5 to 24.8 per cent.
Converting to the long-term
As we reported in our November article, the Minns government has identified as many as 90,000 homes, including holiday houses, short-term rentals and vacant properties, that could be converted into long-term rentals. NSW Treasurer Daniel Mookhey has confirmed that a review of short-term rental accommodation will be underway by year’s end.
In addition to properties already on the government’s short-term rental register, Mr Mookhey said there are also as many as 47,000 holiday houses and 15,000 homes that remain vacant through the year which the state government believes could be induced to come into the long-term rental market.
The editorial in the Sydney Morning Herald on November 14 tackled the rental housing issue, saying: “With more than 2 million people in the NSW private rental market, policymakers must provide a robust response. Not all 90,000 properties will make it to rental markets, but the existence of such an under-utilised mother lode must affect housing supply. We need to see the details of the government’s review but the fact that it is being done is welcome.”
A new report from Macquarie University has recommended a combination of rent regulation and an effort to build more rental properties as steps needed to alleviate some of the housing crisis. The report, commissioned by Shelter NSW and the Tenants Union of NSW, also suggests either a fixed percentage cap on rents or an inflation-linked cap with a ceiling, alongside an end to no-grounds evictions. The paper also recommended that initial rents for new builds could be set freely to encourage construction of more rental properties.
Macquarie University research fellow in geography and planning and report lead author Dr Alistair Sisson said that limiting rent increases to the CPI during tenancies would safeguard tenants from excessive rent increases in the period while more rental homes are being built.
“Rent regulation is an important part of the policy mix that we need to improve housing affordability, security and quality in combination with increasing housing supply and really more importantly, building more non-market housing,” Sisson said.
NSW Rental Commissioner Trina Jones told Domain’s Tawar Razaghi that she was open to reviewing research on renting but that international evidence suggested rent controls can also have unintended consequences such as worse affordability, gentrification impacts, negative spillovers on surrounding areas and lower investment and maintenance.
Sources:
‘Stunning failure’: Finance expert Alan Kohler’s dire warning about Australia’s housing market,’ Shannon Molloy, Sydney Morning Herald, 12 December 2023
‘Enormous opportunities’: Why it won’t be just eight Sydney stations getting mass housing,’ Michael McGowan, The Sydney Morning Herald, 8 December 2023
‘Sydney market forecast predicts more price increases in 2024’, Taylor Troeth, realestate.com.au, 8 December 2023
‘Sydney racecourse to make way for extra Metro West station and new ‘mini-city’, The Sydney Morning Herald, Alexandra Smith and Matt O'Sullivan, The Sydney Morning Herald, 7 December 2023
‘Rosehill racecourse could be turned into 25,000 homes in Metro West revamp,’ Tamsin Rose, Elias Visontay and Catie McLeod, The Guardian, 7 December 2023
‘NSW government’s plan to address housing crisis by rezoning land around train stations accidentally revealed,’ Tamsin Rose, The Guardian, 6 December 2023
‘High density housing coming to 25 Sydney suburbs after plans leaked,’ Eli Green, News.com.au, 6 December 2023
‘Sydney house prices headed towards a double-dip downturn,’ Nila Sweeney, Financial Review, 2 December 2023
‘Property values set to plateau but political housing stoush continues,’ Rachel Clun, Sydney Morning Herald, 1 December 2023
‘Property prices stablilising after another boom, with rents still going up, especially on apartments,’ Emilia Terzon, ABC News online, 1 December 2023
‘This is where in Australia house prices have risen the most,’ SBS news, 3 December 2023
‘Vacant property taxes, levies and caps on the table as NSW Labor reviews Airbnbs and short-term rentals,’ Tamsin Rose, The Guardian, 4 December 2023
‘The untouchables: Swaths of Sydney protected from Labor’s housing intervention,’ Michael McGowan and Michael Koziol, The Sydney Morning Herald, 30 November 2023
‘NSW government accidently publishes list of suburbs targeted for high-density housing,’ Isobel Roe, ABC News online, 5 December 2023
‘Thought it was hard enough to buy a home? It just got worse,’ Elizabeth Redman, Domain, 29 November 2023
‘Families fear they'll be left out of Sydney's high-density future unless there's a shift toward building bigger apartments,’ Sean Tarek Goodwin, ABC News online, 5 December 2023
‘Minns to lift council bans on terraces, townhouses and low-rise apartments,’ Alexandra Smith and Michael McGowan, The Sydney Morning Herald, 28 November 2023
‘House prices are poised to stall – and possibly fall,’ Stephen Koukoulas, Yahoo Finance, 28 November 2023
‘Auction downturn snuffs house price momentum,’ Leith van Onselen, Macrobusiness, 27 November 2023
‘New owners will enjoy it’: Sydney suburbs that joined the $1m and $2m clubs,’ Kate Burke, Domain, 27 November 2023
‘It’s a thriving business hub. Now it’s rezoned for housing. Can this Sydney suburb really take both?’ Michael Koziol, Sydney Morning Herald, 22 November 2023
‘Greater Cities Commission axed in push for higher housing targets,’ Michael McGowan and Max Maddison, Sydney Morning Herald, 22 November 2023
‘Suburbs in Labor's heartland left off priority shortlist for housing density rezoning along Sydney metro routes,’ Amy Greenbank, ABC News online, 26 November 2023
‘Australian house prices are ‘back in black’, Leith van Onselen, Australian Property, 23 November 2023
‘Housing prices to fall in Sydney, Melbourne in 2024, report predicts,’ Adam Vidler, 9News, 22 November 2023
‘Sydney property prices to fall in 2024 as owners struggle,’ Georgia Clelland, News.com.au, 23 November 2023
‘Housing prices back at record levels, defying Australia’s interest rate rises,’ Peter Hannam, The Guardian, 23 November 2023
‘Property values reach new heights as demand outstrips supply, vendors take homes off market,’ David Taylor, ABC News online, 23 November 2023
‘Should 50 per cent rent hikes be illegal?,’ Tawar Razaghi, Domain, 25 November 2023
‘Rental affordability goes from bad to worse, with more to come,’ Rachel Clun, The Sydney Morning Herald, 14 November 2023
‘National Shelter says tenants have been smashed with rental hikes well beyond income growth,’ AAP, 14 November 2023
‘Renting affordability reaches all time lows across Australia,’ Eli Green, news.com.au, 14 November 2023
‘Renters in every capital city worse off as affordability in the regions deteriorates, Rental Affordability Index shows,’ Nicholas McElroy, Cason Ho, and Mackenzie Colahan, ABC News online, 14 November 2023
SUPPLY AND DEMAN
Thu, 23 Nov 2023RBA, ABS, BTR, FOMO and the Law of Supply and Demand
Domain’s property journalist Melissa Heagney-Bayliss recently asked economists from the big four banks the question “what’s the outlook for property prices in 2024?” Her conclusions from their answers were that house prices will rise between three per cent and five per cent; a lack of housing supply will keep prices high; and the November interest rate rise will be the last before cuts start later in 2024.
So, nothing dramatic in the way of changes to Sydney’s housing prices except probably that we’ll see new records set in dwelling values from this month onwards.
Aidan Devine from news.com.au also took a look ahead - two years ahead, in fact, and made his forecasts on what Australian property will do by the time 2025 is almost behind us: “Exclusive analysis of PropTrack data and KMPG property forecasts indicated much of the housing market was on course for another round of strong growth,” he said.
He adds that it’s likely the next wave of growth will raise prices in most locations well past the previous peaks they recorded in early 2022, a time when interest rates were at historic lows. His prediction for Sydney is that the average home will bring $1.53 million by 2025 and says that 42 Sydney suburbs will see a $2 million median price by the middle of that year.
KPMG chief economist Brendan Rynne told Mr Devine that a lack of supply will be one of the key property price drivers during the current financial year while developers struggle to get new housing projects off the ground: “House and unit prices will then accelerate further in the next financial year as dwelling supply continues to be limited, due to scarcity of available land, falling levels of approvals and slower or more costly construction activity,” Mr Rynne said.
He added higher demand due to migration, anticipated rate cuts by 2025, relaxed lending conditions, foreign investor demand and high rental costs to the list of price drivers, noting that house prices would grow faster than unit prices in the next couple of years.
NAB chief economist Alan Oster sees prices rising another 5 per cent next year, even if the RBA hikes interest rates again in early 2025: "We expect the board to form the view that a single 25 basis point adjustment to rates is not enough to mitigate the risks on inflation," said NAB chief economist Alan Oster.
There were signs that price growth was slowing, Mr Oster said, including an increase in listing and auction volumes that could soak up demand, meaning prices wouldn’t rise in 2024 as rapidly as they have this year. "We’re already seeing softness; therefore, we’re not expecting the current surge to continue," he said.
PropTrack economist Eleanor Creagh says there will be a “startling shortfall” between the number of people living in Australia and the number of homes for those people to live in. She references ABS figures showing a nett total of 300,000 migrants could arrive over 2023, and that Australia only completed around 170,000 new homes over the year to March 2023.
“Faster than expected population growth has meant more people are calling Australia home, against the backdrop of pre-existing housing supply issues, giving rise to a mismatch between housing supply and demand,” Ms Creagh said. “We need to increase our pace of building by almost 40 per cent from where it currently stands.”
In another effort to increase the availability of housing, the NSW government has announced it will conduct a review of short-term rental accommodation by the end of this year. There are around 43,000 short term rentals registered across the state and the government believes as many as 90,000 homes could become long-term rentals if a suitable package of benefits for owners can be devised.
About that 20 per cent price fall
This month Domain’s Tawar Razaghi asked an interesting question: “Whatever happened to forecasts of 20 per cent property price falls?” It seems almost impossible anyone might have thought such a thing, but it was a forecast not too long ago and deserves a bit of analysis.
In 2022 home prices dropped nationally from their peak by 7.5 per cent, according to CoreLogic data. The previous serious drop was in the period 2017 to 2019 when over 19 months the market fell 6.3 per cent, not quite equalling the early 1980s when a fall of 7.7 per cent was recorded over eleven months.
Sydney recorded a peak-to-trough drop in values of 12.4 per cent after hitting a high in January 2022 and finding a bottom in January 2023. Since then, Sydney’s home values have recovered 10.6 per cent and are now 3.1 per cent below their record high in January 2022.
Tim Lawless. CoreLogic’s head of research, told Domain the rate of price decline began to moderate in September 2022 when the sellers started staying away: “The key factor that kept a floor on the market was the supply side. Vendors retreated to the sidelines,” Lawless said. “Households were able to save a huge buffer and sellers didn’t need to sell on most occasions, and nobody wanted to test the market.”
Jonathan McMenamin, senior economist at Barrenjoey said they had expected in highly mortgaged markets like Sydney and Melbourne borrowing capacities would be hard-hit: “We were expecting the higher interest rates to take about 30 to 35 per cent out of borrowing capacity. But when the supply side responded as it did, the stock on the market nationally fell 30 per cent below its 10 year average,” McMenamin said.
“It did have an effect of providing a floor to house prices. We’ve never seen the supply side respond as quickly as it did which is what caught us off guard. This forced a build-up of buyers, especially ones largely unaffected by rising rates, to compete and pay a premium for the declining number of homes for sale.”
But are the price declines really behind us? AMP chief economist Dr Shane Oliver, who had earlier forecast 15 per cent to 20 per cent price falls, told Domain that despite the strength of the recovery, the risk of a double dip still remains high.
“This environment we’re facing is probably the messiest we’ve seen,” Oliver said, noting it was a push and pull between higher rates and low supply levels. “Ultimately, it depends on which of those dominates.
“It wouldn’t surprise me if the negative influence of interest rates takes an upper hand again.”
Oliver told news.com.au that the latest interest rate rise would reduce borrowing capacities by about 2 per cent, and the risk of another hike would keep buyer demand subdued, further slowing price growth.
"This will accentuate that slowing in price growth that we have seen and runs the risk that prices will turn negative again," he said.
"We’ve seen auction clearance rates slowing down, which suggests that still high interest rates have started to get the upper hand again over the huge supply shortfall we have on the back of booming immigration," he said.
"Historically when [clearance rates] fall below 60 per cent, it's associated with falling prices," Mr Oliver said.
Another believer in a possible downturn is Louis Christopher, Managing Director of SQM Research, who says: “Since the market is finely tuned it might only take one rate rise to create an additional slowdown in housing”, Christopher told The Australian Financial Review.
“The risks rise substantially [of] a period where the market goes into another downturn, assuming we get another rise”, he said.
Leith van Onselen from Macrobusiness said he doubts that the recent 0.25 per cent rate rise will trigger a price downturn: “Australia’s population is growing at a record pace at the same time as actual construction levels are falling and rents are rising swiftly on the back of record low vacancy rates.
“The lack of stock and soaring rents has created widespread ‘FOMO’ (fear of missing out) across the market, which is driving the price gains; under these conditions, it is hard to see how a single rate hike from the RBA would derail the housing market. More likely, the pace of price growth will slow further as borrowing capacity is reduced a little.”
More interesting
We know that interest rates are still on an upwards trajectory. That’s because the RBA raised the prime rate another 0.25 per cent to 4.35 per cent on 7 November just about the time Without a Fight crossed the finish line at Flemington. This takes the rate to a 12-year high and is the 13th rate rise since May 2022.
Only about thirty per cent of Australia’s top economists had thought the RBA would take its rates even higher, but the Bank’s governor, Michele Bullock, said inflation was still a threat to our economy: “While the economy is experiencing a period of below-trend growth, it has been stronger than expected over the first half of the year,” she said. “Conditions in the labour market have eased but they remain tight. Housing prices are continuing to rise across the country,” she said, and up went interest rates.
This will add another $100 to monthly repayments on a standard mortgage of $600,000. Federal treasurer Jim Chalmers acknowledged the impact on mortgage holders saying it would “make life harder for people who are already doing it tough”: “Now, the primary driver of inflation in the most recent data was petrol, but there are other inflationary pressures in our economy as well as the Reserve Bank is responding to that.”
Domain figures show that the mortgage delinquency rate in Sydney is now 0.71 per cent, up from 0.63 per cent in February. This means that seven out of every 1000 Sydney homeowners are at least a month behind in their mortgages. In some parts of Western Sydney the rate is as high as 2.5 per cent, meaning 25 out of 1000 mortgage holders in those suburbs are behind.
The growth in interest rates may even be slowing the dramatic price increases we’ve seen at the top end of Sydney’s property market. The upturn in the upper quarter of the market was rising around five per cent every quarter earlier this year but CoreLogic data shows these rose just 2.3 per cent over the past three months.
CoreLogic research director Tim Lawless said this slowing was largely driven by affordability challenges and an increase in homes for sale that have curtailed price growth: “Even within Sydney and Melbourne you can see the same trend, the upper quartile really led the [upswing] cycle in both of those cities, growth trended positive earlier … and then in the last few months it’s really clear that’s where the sharpest slowdown is occurring as well,” he said.
There are as usual no guarantees that this will be the last rate rise from the RBA, although it’s considered likely that this is that last increase for 2023. The Guardian’s Peter Hannam tells why:
“Inflation has been above the RBA’s 2%-3% inflation target range for a record 10 quarters, according to UBS. From projections made in August that goal won’t be reached until seven more quarters, and possibly later if forecasts by the International Monetary Fund – based on talks with Australian authorities – are correct.”
David Bassanese, chief economist for BetaShares, stated his forecast for interest rates: “My expectation is that the RBA will not rush into another rate rise in December but instead assess inflation and growth trends over the next few months, with a potential further rate rise in February if the [December quarter consumer price index] on 31 January remains uncomfortably high.”
Of the big four banks, only the NAB has put a figure on another rate increase that it expects to come by February when it peaks at 4.6 per cent. However, it also said the possibility of another rise at the RBA’s next meeting December 5 remains “live”.
Up not Out
NSW Premier Chris Minns has a plan to fix Sydney’s rapidly-growing housing crisis by increasing housing density instead of creating new suburbs further out from the CBD. As documentary producer Sean Murphy summarises the Premier’s strategy: “One: increase density. Two: more dwellings near public transport hubs. Three: more social and affordable housing. Four: better-designed houses and apartments. Five: do it all quickly.”
Mr Murphy also summarises what he sees as the two great hitches in the Premier’s grand plan: “Immigration and foreign investment – These are the domain of the federal government.” In other words, factors beyond a state premier’s reach that are causing so much of our housing crisis are beyond the problem Minns is trying to fix.
A September statement by the Australian Bureau of Statistics (ABS) shows that net overseas migration added 454,400 people to this country in the twelve months to the end of March this year, with about 130,00 of those looking in Sydney for a place to live. The Australian Contractors Association pointed out what this means for housing: “any quantitative gains from migration on the supply side are offset on the demand side because every new migrant needs a new home, a little extra road to drive on, another seat at the theatre”.
We’re simply overwhelmed with demand for housing and don’t have the human and physical resources to build as much housing as our current residents and the new arrivals require, which means a growing number of people will have to compete for whatever housing is built and prices will keep rising. The old law of supply and demand can’t be repealed.
Minns has recently shown he’s not afraid to bypass or override local councils by allowing up to 8,000 new homes in Macquarie Park despite the objections of Ryde council. 3,000 of these will be built within 800 metres of the two existing Metro stations and developers will be able to add up to another 5,000 build-to-rent apartments to the surrounding area on what is deemed “excess commercial land”.
Ryde council has voiced serious objections to the plan but the state government intends to make Macquarie Park a state-led rezoning precinct – a strategy that the Sydney Morning Herald says will be replicated across an estimated seven new housing priority rezonings across the existing Metro network.
The Premier says “we’re not going to be afraid” to override council objections, and “You can expect more of this across Sydney. We’re not going to do it in an arbitrary way, but we certainly will do it where we believe it’s crucially important for the growth and diversity of Sydney…We’ve made that decision. We just think the alternative is just intolerable.”
Mr Minns has already proved he’s not afraid to step on some fairly rich and powerful toes by converting half of Sydney’s Moore Park golf course to public parkland to create green space for local apartment dwellers: "We're certainly not declaring war on golf, what we are saying is that this golf course in the heart of the CBD which is already densely populated, it's a better use to make it a park than an 18-hole golf course" was his comment.
NSW planning minister Paul Scully says the rezoning of land at Macquarie Park will support the creation of homes and jobs that are accessible to everyone in the community, adding that the rezoning will add eight hectares of new public open space, a large indoor recreation facility, along with paths for walking and cycling. There are also proposals for two schools.
Property Council of Australia NSW executive director Katie Stevenson told the Sydney Morning Herald that the existing system meant any rezoned land was unlikely to see construction completed and “keys in the door of new homes” until mid-2029 “at the earliest”.
“We cannot wait for an accelerated precinct planning process to take place over six, 12 or 18 months if we are to deliver the record levels of housing required of us over the five-year window of the National Housing Accord,” she said.
Build-to-Rent growing
Build-to-rent (BTR) continues to grow with new apartment communities under construction across the country. These are built with the idea of creating homes for renters that offer a lifestyle and community to keep residents there for longer periods of time than the usual structures built for short term rentals or resale.
Mirvac’s new LIV apartments in Sydney and Melbourne offer bond-free leases and have already proved popular with people looking for a home they don’t have to buy or otherwise can’t afford. They also allow occupants to enter into long-term leases and to access amenities such as gyms and swimming pools, and the freedom to personalise their own apartments.
Mirvac has about $1 billion worth of BTR properties now under construction nationally. Angela Buckley, fund manager – BTR sector lead at Mirvac, says BTR properties are designed as a viable option that meets people’s needs at a time of high rental costs and skyrocketing property prices: “LIV properties provide security, connection, and community, but without the rental bond payment, without interest rate rise stress, and without the land or stamp duty taxes that all make purchasing a home unobtainable for many Australians,” she said.
Perhaps most important is that BTR communities are managed in a way that encourages the people living there to share in social events, day trips, access to services such as healthcare and entertainment, and special interest groups like playing bridge or choral singing. All this naturally comes at a cost but the developers have to deliver a package of benefits that is both desirable and affordable.
Homes in BTR communities are built with quality and living comfort in mind, unlike some recent apartments featured in the news that have been found to be undersized and poorly built. BTR apartments are typically designed with modern features and layouts that appeal to contemporary lifestyles. Developers often prioritize open floor plans, energy-efficient appliances, and other amenities that cater to the preferences of renters.
The BTR sector in Australia is positioned to grow rapidly with more than 50,000 apartments set to be built by 2030, according to Colliers International, a Canada-based diversified professional services and investment management company. With both the state and federal governments committed to increasing the supply of housing in Sydney, it’s not surprising that BTR is receiving support in such critical areas as development approvals and land use zoning.
The crumbling cliff
Fears of a ‘cliff’ that would swallow borrowers transitioning from fixed rate mortgages to variable rates have largely abated with a majority of mortgages being refinanced in a way that has proved manageable for the majority of borrowers. Despite the RBA’s raising its prime rate to a twelve year high, including a jump to 4.35 per cent on Melbourne Cup Day, about half of the cheap fixed rate loans have already transitioned to higher variable rates and most of the remainder appear to have the ability to follow suit.
The RBA noted: “The majority of current fixed-rate borrowers are estimated to have sufficient income to continue meeting their obligations after moving onto higher mortgage payments. The majority also have large savings buffers.”
More than one million fixed rate loans have already been successful in moving to higher variable rates, and this number will rise to almost 1.5 million by the end of 2023. Households with an average mortgage size of $585,000 now pay another $1,415 every month than they were paying before the RBA started its current rate raising cycle.
However, despite the rates surge, defaults and arrear rates still sit below their pre-pandemic averages with most borrowers expected to manage their higher repayments when their loans move up to the higher variable rates.
With regard to these remaining mortgage holders, the Bank said: “The majority of current fixed-rate borrowers are estimated to have sufficient income to continue meeting their obligations after moving onto higher mortgage payments.”
The RBA estimates that of all the remaining owner-occupier customers of the big four banks with fixed rate loans, about two-thirds have liquid savings equivalent to at least 12 months of scheduled mortgage payments – about the same as variable-rate owner-occupier borrowers. However, it did note that less than 20 per cent of fixed-rate borrowers who will roll off onto higher interest rates have much lower savings buffers that are equivalent to less than three months of scheduled mortgage payments.
So, yes, there will be some pain felt by some as their turn comes up to negotiate a new variable rate mortgage, but the RBA and the banks are doing what they fiscally can to minimise casualties as the cliff approaches.
“We have seen the peak of the expiring of those fixed rate mortgages,” PropTrack director of economic research Cameron Kushner told NCA NewsWire.
Kushner said despite pockets of pain alongside a broader fall in household consumption and savings, borrowers are handling the transition “reasonably well”.
“It’s usually those things that we don’t see coming that are really problematic – we’ve been talking about this fixed rate mortgage cliff for a number of years now, people have had a lot of scope and time to prepare when this did eventuate,” he says.
Sources:
‘The Sydney suburbs where homeowners can’t afford their mortgages,’ Tawar Razaghi, Domain, 12 November 2023
‘Short-term rental review targets 90,000 homes,’ Alexandra Smith, Sydney Morning Herald, 12 November 2023
‘Minns’ housing plan has two problems he can’t solve, Sean Murphy, Sydney Morning Herald, 9 November 2023
‘Plan to fit 3000 homes between two metro stations in northern Sydney revealed,’ Michael McGowan, Sydney Morning Herald, 9 November 2023
‘Expect more of this’: Minns vows to override councils on housing as Ryde objects to latest plan,’ Michael McGowan, Sydney Morning Herald, 10 November 2023
‘RBA interest rates: Reserve Bank hikes cash rate by 25 basis points to 4.35%,’ Peter Hannam, The Guardian, 8 November 2023
‘Another rate rise? It’s the last thing we need,’ Noel Whittaker, The Sydney Morning Herald, 8 November 2023
‘Household borrowers weather interest rate storm but more pain on horizon,’ Jack Quail, News.com.au, 29 October 2023
‘Australian house prices face “another downturn”, Leith van Onselen, Macrobusiness, 7 November 2023
‘Ajay expected house prices to fall in his Sydney suburb. They didn’t,’ Tawar Razaghi and Melissa Heagney-Bayliss, Domain, 29 October 2023
‘Whatever happened to forecasts of 20 per cent property price falls?,’ Tawar Razaghi, Domain, 20 October 2023
‘A tiny, geometric shoebox’: housing crisis prompts debate on minimum apartment sizes in Australian cities,’ James Norman, The Guardian, 28 October 2023
‘What your home will be worth in two years,’ Aidan Devine, News.com.au, 15 October 2023
‘The fixed rate mortgage ‘cliff’ was a myth,’ John Kehoe, Australian Financial Review, 13 October 2023
‘The bond-free rental: how Build-to-rent is shaking up Australia’s rental market,’ Benn Dorrington, realestate.com.au, 13 October 2023
‘Sydney poised for priority zones to solve housing crisis,’ Michael McGowan and Max Maddison,
Sydney Morning Herald, 31 October 2023
‘NSW decision to claim part of Moore Park Golf Course for public park driven by rise in apartment living,’ Sean Tarek Goodwin and Jean Kennedy, ABC News online, 23 October 2023
‘Prices for one type of property were booming. Now they’re losing steam,’ Kate Burke, Siydney Morning Herald, 3 November 2023
‘The graph that shows how buying a house just got even further out of reach,’ Tawar Razaghi, 27 October 2023
UP UP & AWAY
Tue, 31 Oct 2023Sydney’s property rebound surges ahead as more rises forecast
The rebound in housing prices across Australia has brought joy to homeowners but caused some problems for newly-installed RBA governor Michele Bullock. Along with the $336 billion resurgence in prices calculated by the Australian Bureau of Statistics has come more threats of inflation, and that’s been a driver of cash rate increases in previous months when the Bank raised its prime rate as a counter-inflationary measure.
However, this month at its October meeting the RBA kept the official interest rate at 4.1 per cent for the fourth straight month – a rate below that set by central banks in many other developed nations. Although the rate of inflation is still beyond what the Bank would like to see, the annual rate of growth for core inflation continued to slow a little and mortgage holders got a reprieve from any rate increase.
There’s more good news for property owners from CoreLogic statistics, and that’s because the month of September became the eighth consecutive month of increases in the values of houses and land, and the median house value of a house in Sydney rose one per cent to just under $1.4 million. Meanwhile, the median value of a unit in Sydney increased to $828,000 and is almost at its previous record high.
18 Sydney suburbs have already reached their all-time high property prices. Glenhaven, Breakfast Point and Strathfield are three of the areas where values have already exceeded their boom-time prices with values expected to continue rising.
The median dwelling value in Glenhaven is 4.7 per cent higher than its previous peak, while values are up 4.1 per cent in Breakfast Point and 3.3 per cent in Strathfield and North St Marys, according to CoreLogic data that includes houses and units.
Values in western and south-west suburbs like Dean Park, Pemulwuy, Punchbowl and Claymore reached new highs in September with each up at least 2 per cent on their previous peak. Rushcutters Bay, Pymble, Belfield, Burwood and Mortlake are among the others that have gone above their former highs.
CoreLogic’s head of research, Tim Lawless, said that nationally home values were just 1.3 per cent below the record reached in April last year, and that he thought a new record price will be reached by the end of November.
CoreLogic’s Eliza Owens said this was an unusual year: "Through the start of 2023 values started to rise and that comes in spite of four rate rises through the start of the year. It's probably a reflection of the extraordinary mismatch of supply and demand in Australia's housing market."
The Daily Telegraph’s Fiona Killman commented on PropTrack’s figures from September showing Sydney’s prices have almost fully recovered from their 2022 downturn: “The latest rise has come despite more properties coming to market in the first few weeks of Spring, with buyer demand at an all-time high.
“PropTrack’s Home Price Index for September has revealed that Sydney home prices climbed for the 10th straight month…and are up more than 7 per cent from this time last year.”
PropTrack senior economist Eleanor Creagh told Ms Killman: “Prices are now up 7.43 per cent from their low point recorded in November 2022; the Northern Beaches, North Shore, southwest Sydney, Parramatta, inner west and the Eastern Suburbs led the way over the third quarter, with price growth over 2 per cent.
“Home price growth has been driven by record levels of net overseas migration, tight rental markets and a housing shortage. Looking ahead, interest rates have likely peaked and population growth is rebounding strongly. Together with a shortage of new home builds, prices are expected to rise,” she said.
PRD chief economist Dr Diaswati Mardiasmo told ABC News she too believes property prices will increase further: "Dwelling supply, especially for houses, has dwindled significantly," Dr Mardiasmo said.
"The number of loans issued for the construction or purchase of new homes are at their lowest since the GFC in 2008. This means that the supply of new houses is very little, and unless people are happy to switch from buying a house to an apartment, the competition for houses will continue to increase, and thus their prices.”
Commonwealth Bank chief economist Stephen Halmarick told the Herald’s Kate Burke that he also expects Australian property prices to reach new highs next year, predicting an increase of seven per cent this year and another five per cent in 2024.
“It’s a simple matter of demand versus supply, we haven’t been building enough new residences, and we’re now in this post-COVID surge back in net migration,” he said.
“Even though mortgage payments as share of income are very high and likely to go higher, the demand and supply equation just keeps putting upward pressure on prices. By around this time next year [prices will be] back to an all-time high, the outlook beyond that depends on labour market... as well as the amount of supply coming on.”
A new report from accounting firm KPMG says house prices will surge over the next 18 months, due mostly to a shortage of supply while demand continues to grow. The details in the forecast show a national rise of 4.9 per cent, followed by an increase of 9.4 per cent in the year to June 2025.
And the anticipated surge will not be limited to suburbs near the CBD according to PropTrack senior economist Angus Moore: “Well-located suburbs with spacious properties have experienced strong growth recently with many home buyers valuing lifestyle factors over proximity to the CBDs of Australia’s largest capitals.
"One of the things we have seen throughout the pandemic is a bit of a premium placed on larger homes and homes close to amenities like beaches and national parks," he said.
While there were suburbs where prices grew by more than half a million dollars in every state except Tasmania and the Northern Territory, houses in suburbs in NSW made up more than half of those on the list.
Unit prices will also grow although at a slightly lower rate of 3.1 per cent by June 2024, then another six per cent in the next twelve months. The report also forecasts interest rate cuts by the next financial year.
But the latest news on interest rates indicates quite a lag before they actually begin to decline. The Australian Financial Review surveyed 42 economists and only five predicted rate cuts will start moving down in 2024.
Late in 2022 the statistical midpoint of when these same economists thought rates might start to fall was February 2024. It then became May 2024 and is now August 2024. Half of these economists are forecasting another 0.25 per cent increase before the end of 2023 which would raise the official cash rate to 4.35 per cent.
Rent rises slowing
CoreLogic figures show that national rents are up by 8.4 per cent over the past year while rents for units in Sydney have increased by 14.3 per cent. Vacancy rates are down to one per cent across all capital cities, compared to a rate of over three per cent before the pandemic.
Vacancy rates fell to 1 per cent across all capitals, while in regional areas the vacancy rate dropped to a record low of 1.2 per cent. Before the pandemic, the long-term capital city vacancy rate was 3.1 per cent.
It’s interesting to note, however, that the pace of rent increases has slowed despite the record vacancy rate. Tim Lawless explains: “The slowdown in rental growth may seem counterintuitive at a time when vacancy rates are tightening.
“However, this is probably a signal that rental affordability constraints are forcing a structural change in household formation as group rental households reform and renters seek to maximise their tenancies in an effort to spread rental costs across a larger household,” he told the Herald’s Shane Wright.
CoreLogic’s latest housing affordability report showed that the share of household income required to rent a median price dwelling rose to 31.4 per cent nationally in the June quarter, up from 30.8 per cent in the March quarter.
KPMG Chief Economist Brendan Rynne said he expects strong rent growth to continue: “Based on our projections for new dwelling completions and the Treasury’s population forecasts, we estimate that annual rent growth will be 5.6 per cent over the next two years – which is 2.5 per cent higher than the long-term average of 3.1 per cent”.
Some unit values go in reverse
Looking back over the past five years, Elizabeth Redman and Melissa Heagney-Bayliss from Domain found a few Sydney suburbs where unit prices have, as they put it, ‘lost ground’ and median prices are actually less than they were five years ago.
As you’d expect, these suburbs are mostly in neighbourhoods where the construction of new apartments has exceeded demand and this has put downward pressure on prices. In some other areas where sales of smaller, entry level units have dominated the calculations, average prices have been pulled down
Domain uses Rushcutters Bay as an example: “The steepest fall was in Rushcutters Bay, where the median unit price over the year to June was $690,000, down 19.4 per cent from five years earlier. The harbourfront neighbourhood includes a significant stock of smaller, studio or one-bedroom units, and their growth prospects can be limited.”
Richardson & Wrench Elizabeth Bay Potts Point’s Angelo Bouras said that Rushcutters Bay had a significant difference between the prices of studios and newer high-end residences: “A lot of those higher-end apartments have not been trading and what we’ve seen is a lot of turnover with the investor stock, circa $500,000, $700,000 – that’s been trading a lot more,” he said.
He added that about five years ago there were a significant number of transactions in higher-end new builds that boosted the suburb’s average price at that time. Newer unit stock built largely for investors sold for much lower prices.
Other areas that have seen median unit prices fall over the past five years included Chippendale (down 19.2 per cent, Blacktown (down 18.9 per cent), and Eastgardens, Harris Park, Eastwood, Rosehill, Wiley Park and Rosebery, all of which recorded falls of 16 per cent or more.
CoreLogic’s Pain and Gain report shows that about one in four sellers who had held their property for six years of longer in some of Sydney’s unit-heavy council areas made a loss on the sale of their property in the June quarter. The highest percentages of loss-making sales were in Strathfield (29.9 per cent), Parramatta (27.4 per cent) and Ryde (25.8 per cent).
Quantify Strategic Insights principal Angie Zigomanis said higher interest rates and higher mortgage repayments were impacting prices at the more affordable end of the unit market, but that he expects unit prices to rise as houses become even more expensive: “I think to some extent there will be a pick-up in unit prices – people are being priced out of certain markets and they’ll look to a unit instead,” he told Domain.
Houses, meanwhile, fared pretty well while some units were struggling. In the June quarter, 97.8 per cent of Sydney house owners resold for a profit, making a median of $560,000. In comparison, 84.4 per cent of Sydney unit owners resold for a profit, making a median of $205,000.
Affordability challenges
Leith van Onselen, Chief Economist at the MB Fund and MB Super, has highlighted the challenges faced by homebuyers trying to buy a home and by those looking to rent one.
He analysed figures from CoreLogic and found that the time necessary to save a 20 per cent deposit on the median priced home in Sydney in the September quarter has increased to 12.3 years, up from 11.8 years in the March quarter. He also found that the share of household income required to rent a median priced dwelling rose to 31.4 per cent nationally in the June quarter, up from 30.8 per cent in March.
Mr van Onselen quoted KPMG chief economist Brendan Rynne who forecasts strong property price and rental growth over the next 18 months, driven by strong levels of net overseas migration:
“The supply issue will combine with several other factors to push asset prices up – higher demand due to heavier migration, anticipated rate cuts moving into financial year 2025 and potentially relaxed lending conditions”.
“Based on our projections for new dwelling completions and the Treasury’s population forecasts, we estimate that annual rent growth will be 5.6 per cent over the next two years – which is 2.5 per cent higher than the long-term average of 3.1 per cent”.
An attempt to make housing more affordable was revealed in the latest NSW budget with Treasurer Daniel Mookhey incorporating measures to boost supply, provide aid to renters and additional support for first-home buyers.
Gone is the former government’s property tax scheme for first-home buyers which allowed them to pay an annual levy instead of what would have been stamp duty on the transaction. About 4800 housing purchasers had elected to pay the annual levy before the scheme ended.
Under the new Minns government’s reforms for properties priced between $650,000 to $800,000, more than 1000 first-home buyers have paid no stamp duty on their purchase, and 650 first-home buyers have had a stamp duty concession for homes between $800,000 and $1 million.
Mortgage cliff still there
The need to refinance low-interest loans made during the pandemic has stimulated a round of negotiations between homebuyers and their financial institutions that appears to have avoided the worst fears of those who foresaw a ‘mortgage cliff’ causing forced sales and putting unbearable pressures on mortgagees.
The latest RBA data shows that the majority of Australians have already moved from cheaper fixed-rate home loans to more expensive variable rates. About one million Australians are now paying a more expensive variable rate on their mortgages.
Another 520,000 loans are expected to roll onto higher interest rates in the second half of 2023, followed by a further 450,000 loans in 2024 so the cliff’s not exactly behind us yet. However, the relative ease with which the first million mortgagees have transitioned to higher rates offers hope that the majority of remaining low-interest loans will be refinanced without forced sales or defaults.
"About 70 per cent of these borrowers have sufficient savings in their offset and redraw accounts to finance their cash flow shortfalls for at least six months, assuming interest rates remain around current levels," the RBA said.
"However, the remaining 30 per cent of these borrowers (or around 1.5 per cent of all variable-rate owner-occupier borrowers) are at risk of depleting their buffers within six months – and so are at higher risk of falling into arrears on their housing loan,” the Bank cautioned, saying these were mostly lower-income borrowers.
Meanwhile, news.com.au’s Alex Turner-Cohen reports that secret RBA briefings have revealed a surge in the number of middle-class Australians on six-figure salaries seeking financial support.
In July members of the RBA’s Financial Stability division met with representatives from the National Debt Helpline (NDH). Notes from the briefing, sent as a confidential internal memo to analysts at the Reserve Bank, revealed the NDH has seen a “significant increase in hardship requests” in recent months.
“The NDH is experiencing an increasing volume of calls from people who have not experienced financial hardship or drawn on social services previously. Many callers were gainfully employed. Examples were given of mortgagees on six figure salaries residing in prosperous suburbs of Sydney,” the memo reads.
"This new cohort of 'solid middle to upper income' callers was on top of the more familiar cohort at the lower end of the income distribution who had more often required (or been close to requiring) the help of financial counsellors and social service," the RBA email said.
Federal Treasurer Jim Chalmers said the success of the transitions to date was “welcome news” but acknowledged that many households were still facing a cost of living strain: “We know that higher interest rates are putting pressure on family budgets, but this data shows that more people have transitioned off fixed rates in the last year than will in the year ahead and that’s welcome news,” Chalmers said.
EY chief economist Cherelle Murphy told the Herald’s Lisa Visinten that while many people were facing mortgage stress, households had also put record amounts into savings and offset accounts and redraw facilities during the pandemic era, which had served as a buffer against the hiking cycle when the pandemic had ended.
“They’ve been planning for it and they have been saving a lot during the Covid years, so they are in as good a position probably as they ever could have been to cope with [these] sharply higher repayments all at once,” she said.
Developers up to speed
NSW developers are hoping for rapid reform to the state’s planning systems to speed up building approvals and make it possible to put more dwellings in a given area – apartments, detached houses or medium density housing, all with the intention of meeting the national Housing Accord target of 378,000 new homes across the state.
This means NSW needs to construct 76,000 new homes each year for the next five years – twice as many as the state is forecast to deliver, and more than has ever been built, if this state is to meet the federal government’s housing target
The Urban Development Institute of Australia (UDIA) chief executive Steve Mann said the scale of the challenge should determine the scope of the reforms necessary: “The NSW government has a short window of opportunity to deliver a comprehensive suite of policy initiatives that must start delivering change on the ground from next year if we are going to deliver 378,000 new homes in NSW by 2029,” he said.
He called for extending Transport Oriented Development – building high-density housing around new train stations across the city’s railway network as a way to boost supply and create greater connectivity in Sydney.
Urban Taskforce chief executive Tom Forrest said Victoria’s four-month approval time for developments is light years faster than in NSW and called on the NSW government to manage the currently extensive waiting times slowing the state’s planning system: “We have a housing supply crisis; we can’t afford to appease every local council or community group. The consequence of failure is people who will be unable to put a roof over their head.
“The government is saying all the right things. The planning system, though, gives too great an emphasis to residents who are too often ageing Boomers who don’t want to see change. That’s where boldness is required, and that’s where there is a bit of political risk,” he said.
Community or social housing is an area that’s especially concerning for governments across Australia. Scott Langford, chief executive of NSW’s largest community housing provider SGCH, believes the government is about to release a draft investment mandate giving the National Housing Finance and Investment Corporation (NHFIC) directions about the type and location of projects that can be funded.
Langford said the delay in getting the bills through federal parliament meant community housing providers, investors and the housing corporation have been able to do preparatory work and many projects are ready to go.
“We’ve got a series of projects we’d want to put forward in the initial rounds, which could support up to 570 homes, and we’ve got others that would support up to 1000 homes in 12 to 18 months,” he said.
Sources:
‘Experts predict interest rates may not start to fall until 2025,’ Michelle Bowes, News.com.au, 3 October 2023
‘RBA interest rates to be paused at 4.1%, economists predict for October meeting,’ Alex Turner-Cohen, News.com.au, 3 October 2023
‘Reserve Bank to keep interest rates on hold but many more Australians to soon hit breaking point,’ Nassim Khadem, ABC News online, 3 October 2023
‘The 207 suburbs where house prices shot up $500,000 or more – is yours on the list?,’ Daniel Butkovich, realestate.com.au, 5 October 2023
‘Property values are tipped to reach a new high. Here's how much prices have risen in each capital city,’ Hanan Dervisevic, ABC News online, 5 October 2023
‘The RBA is betting against the world on interest rates,’ John Kehoe, Australian Financial Review, 11 October 2023
‘More borrowers coming under financial stress as RBA issues grim six-month warning for group of mortgage holders,’ Daniel Jeffrey, Channel 9 News, 7 October 2023
‘Reserve Bank to keep interest rates on hold but many more Australians to soon hit breaking point,’ Nassim Khadem, ABC News online, 3 October 2023
‘RBA interest rates to be paused at 4.1%, economists predict for October meeting,’ Alex Turner-Cohen, News.com.au, 3 October 2023
‘Australian housing affordability collapses,’ Leith van Onselen, Macrobusiness, 26 September 2023
‘House values almost back to peak, adding to RBA’s inflation fears,’ Shane Wright, Sydney Morning Herald, 2 October 2023
‘Australian house prices on track to hit new record high, latest property data shows,’ Isobel Roe, ABC News online, 2 October 2023
‘Sydney home prices close in on surprising new peak’, Fiona Killman, Daily Telegraph, 1 October 2023
‘The Sydney suburbs where property prices have lost ground over five years,’ Elizabeth Redman and Melissa Heagney-Bayliss, Domain, 30 September 2023
‘The Sydney suburbs where owners are selling property at a loss,’ Tawar Razaghi, Domain, 21 September 2023
‘Housing affordability targeted in $13b budget makeover,’ Alexandra Smith and Matt Wade, Sydney Morning Herald, 19 September 2023
‘Australia passes the halfway point of the mortgage cliff. But the pain’s not over,’ Lisa Visentin, Sydney Morning Herald, 16 September 2023
‘Struggling to buy a home? This graph shows why you’re not alone,’ Jim Malo, Sydney Morning Herald, 20 September 2023
‘Aussie house prices ‘set to soar 15 per cent’: KPMG,’ Taylor Troeth, The Daily Telegraph, 27 September 2023
ON THE LOOKOUT
Wed, 20 Sep 2023Listings up, property prices up, interest rates steady
August was quite a month in Sydney property, and September is following the trend. First, prices of Sydney property continue to rocket ahead. CoreLogic’s figures showed Sydney’s prices rose 1.1 per cent in August while more stock has begun arriving onto the market in time for the Spring selling season. New listings jumped up eight per cent over the four weeks to August 27 and the recent rises in listings have been quickly absorbed by the existing demand.
One guaranteed way to keep the property prices pot boiling is what happened on September 5 when the RBA left its prime interest rate on hold at 4.1 per cent for the third straight month. Unless there’s some sort of unforeseen nasty economic surprise in the works, it looks like the RBA will leave its rate on hold for some time while new Bank Governor Michele Bullock settles in.
CoreLogic recently released data showing that nearly one-third (32.7 per cent) of new for-sale listings were added by investors. This is an increase from the decade average of one-quarter and is largely due to the fact that the majority of investment properties are owned by older Australians who are now cashing in their property investments.
These older investors are also being encouraged to sell their investment properties by a rising demand from new investors. Housing finance data from the Australian Bureau of Statistics shows that investor demand in nearing the previous 2015 peak, and the share of new mortgages going to first-time investors has risen to 35.3 per cent, the highest since 2017.
REA Group economist, Angus Moore told Sky News that investor demand is growing across Sydney: “What we’re seeing at the moment is just the fact that rental markets are really attractive for investors. Vacancy rates across the country are extremely low [which] means you just have very low risk of your property sitting vacant, so that’s quite attractive to investors”.
“You’ve still got migration rising in Australia. You’ve still got the lack of building taking place. So, the equation is rents are rising, they’ll continue to rise which again will tick the odds in favour of these investors who are obviously smelling the breeze”, he said, adding that interest rates might have peaked and this also makes investing more attractive.
Lisa Calautti from news.com.au says: “Interest rate rises, land tax increases and the opportunity to bank big price gains is driving a spike in landlord exits from the property market.”
She notes that figures from PropTrack show that 28 per cent of NSW properties sold in July had been listed for rent since they were purchased which was the highest share of investment home sales since late 2018.
Jim Cross, principal of a McGrath agency in Victoria, notes that a number of long-term investment properties have recently come onto the market: “Those properties require substantial capital expenditure to bring them up to the new living standards,” he said.
“Some landlords are choosing to capitalise on the equity they hold in those properties by selling them. Investors holding older properties that require maintenance are selling them and then getting back into the market to purchase new properties to access better tax benefits and lower maintenance costs.”
PropTrack senior economist Paul Ryan says the trend of landlords selling their investment properties first emerged at the start of the pandemic: “Initially, I think there was a lot of uncertainty about investors’ own jobs, and uncertainty about borders closing and demand for rental properties,” he said.
“As the pandemic progressed and the rental market got tighter - and obviously home prices increased quite significantly - I think a lot of investors themselves were moving to bigger homes and needed the equity, and prices were up significantly, so it seemed like a good time to sell property.”
He said that during the past few months there has been a higher rate of investor sales making up a larger proportion of market activity: “That may start to signal that there is some emerging financial pressures from higher interest rates,” he said, noting loan arrears still remain very low.
Finder home loans expert Richard Whitten told realestate.com.au that a far greater number of property investors could look to exit the market this selling season with his firm’s recent survey finding the equivalent of almost 900,000 investors may have to put a property up for sale due to the rising cost of living.
“Two thirds (64 per cent) of people who own investment properties have an income under $80,000 per year, despite the assumption that property investors are high income earners,” Mr Whitten said.
“In fact, only the minority (7 per cent) earn more than $180,000 a year. While a property investor’s assets may be very valuable, they need cash to pay their mortgage each month.”
“Investors will try to pass some percentage of rising costs on to tenants but that is a delicate balance. The rental market determines what landlords can charge, and tenants can’t simply absorb all of an investor’s costs.”
Falling rates
Inflation seems to be reasonably under control, falling from a high of above seven per cent to a more tolerable level of six per cent, and the Reserve Bank has held rates steady for three successive months. Thinking optimistically, those in the property market are looking for a time when rates start falling again.
There is of course a chance that the RBA will raise interest rates again before the end of 2023. Money markets say there is still a 50 per cent chance of one more quarter-point increase to 4.35 per cent, but three of the big four banks have said interest rates have peaked, with only the NAB expecting one more rate rise
The banks’ economists have all forecast rates to move down, although not this year, down to 2.6 per cent by the end of 2025 (Westpac), to 3.1 per cent by the end of 2024 (CBA), to 3.1 per cent by early 2025 (NAB) and to have the first cut in late 2024 (ANZ).
The Herald’s Nicole Pederson-McKinnon notes that despite more than 10 of the smaller lenders increasing fixed rates by an average of 0.40 per cent in the past two weeks, moves by the larger players in term deposits and fixed-rate mortgages are reflecting longer-term expectations with rates intended to attract both borrowers and depositors.
CBA has implemented rate cuts on one and three-year fixed rate loans, by 15 basis points and 35 basis points respectively. Macquarie Bank has cut 25 basis points on its one-to-five-year fixed-rate loans for owner-occupiers.
When it comes to term deposits, you can earn as much as 5.2 per cent a year for five or four years from Judo Bank, 5.35 per cent for three and two years from Australian Military Bank and 5.25 per cent for one year from both Great Southern Bank and ING.
Ms Pederson-McKinnon concludes: “In any case, the good news for variable mortgage holders is that we may be set for rates 1 to 1.5 percentage points lower. But we might be stuck with the current high rates for possibly a year more.”
Unit savings
For some time, there’s been a quantifiable gap between the prices of houses and units in most Sydney suburbs. Lately this gap has widened until now more than $7 million separates median house and unit prices in some suburbs like Bellevue Hill and Vaucluse. Across Sydney houses cost around double the price of a unit and this is making it harder for buyers to upsize.
Domain’s Kate Burke says that unit values in some more desirable pockets of the city are now less than a fifth of typical house values: “The widening divide is pushing more buyers to apartments, and keeping them there, as the cost of upsizing locally becomes unreachable for more Sydneysiders.”
She gives some examples from Domain’s statistics, including that units in Bronte, Mosman, Lindfield, Strathfield and Freshwater cost less than a third of each suburb’s house median, and notes that sizeable gaps are also seen in comparatively more affordable suburbs like West Ryde, Carlingford and Ashfield.
Domain’s figures also show that greater Sydney’s house median of about $1,538,000 is almost double the unit median of about $773,800. Five years ago, a typical house cost about 50 per cent more than a unit, but house values have soared since, while unit values have relatively declined.
KPMG urban economist Terry Rawnsley told Domain the biggest price gaps were in well located, often already dense areas, where blocks of land commanded the highest premiums, and apartments tended to be in older blocks.
He also said the gap was smallest, but still sizeable, in outer suburbs and regions where apartments tended to be larger, and newer and better located than median priced houses. It would be easiest to upsize in Riverstone, Terrigal and Marsden Park where houses were about 15 to 25 per cent more expensive than units, while house prices in Penrith and Campbelltown were about 45 per cent more expensive.
Finance for first-home buyers
Withdrawals from the Bank of Mum & Dad are showing up in some recent figures from the Commonwealth Bank of Australia. They show that the average first home buyer deposit rose by almost 50 per cent, from $108,400 at the start of 2020 to $159,000 in the first few months of 2023. CBA attributes this increase to funds from parents helping their children acquire a home.
The figures are from a report by the National Housing Finance and Investment Corporation (NHFIC) with the Commonwealth Bank. They also show that the average gross household income for first home buyers with the Commonwealth Bank in early 2023 was about $117,000 and the average purchase price was just under $629,000.
This becomes even more significant when PropTrack’s economic data found that Australian households on six-figure incomes can only afford around 13 per cent of homes on offer across the country, and it’s worse in Sydney where the median income can only afford seven per cent of homes currently on the market.
The Intergenerational Report released by Treasurer Jim Chalmers said the decline in home ownership across Australia has been most significant among younger age groups: “Home ownership fell by 18 percentage points from 1981 to 2021 for those aged between 30 and 34, and 17 percentage points for those aged 25 to 29,” the report says.
Saving a deposit is becoming a serious issue for many first-home buyers. Louis Christopher, the founder of SQM Research, said: “The average first-home buyer, even a couple, on the average household income, would likely take up to 10 years to save a $159,000 deposit,” he estimated.
Richard Whitten, home loans expert at comparison website Finder, says many first-home buyers cannot afford to save such large deposits: “Saving a deposit is a big barrier to getting a start on the housing market, particularly with the costs of almost everything, including rents, going up,
“Wage growth over the past few decades simply hasn’t kept up with skyrocketing property prices,” Whitten says.
A Finder survey of first home buyers found that 11 per cent had received financial help for the deposit, with the average help per person amounting to just over $56,000. Another 9 per cent said their parents were guarantors for their home loan and a further 12 per cent said they received financial assistance from their parents in other ways.
Help to Buy
A report by real estate analysts PropTrack has found housing affordability in Australia has hit a record low, with only 13 per cent of Australians that earn an average income being able to afford to buy a property. The report also concluded it's taking people longer to save for a deposit, finding the average Australian household would need to save 20 per cent of their income for more than five and a half years to buy a median-priced home.
The Albanese Labor government recently announced details of its ‘Help to Buy’ scheme that lets those who qualify move into a home they intend to purchase with a 2 per cent deposit. It’s in fulfillment of a commitment given in the leadup to the 2022 election and gives people an "equity contribution" of up to 40 per cent of the cost of a new home, or 30 per cent for existing homes.
The bank loan component, therefore, will be 60 or 70 per cent of the purchase price. It’s what is also known as a shared equity scheme, where the government owns part of the equity in your home, which you repay over time, either when you sell it, or over the time you live in it.
The scheme will run for four years, beginning in 2024, and will eventually support 40,000 low- and middle-income families to secure a home of their own, whether it’s a house, unit or townhouse. There are, of course, conditions these buyers must meet, including having a minimum 2 per cent deposit and the ability to finance the remainder of the loan.
Other requirements include that the purchaser’s annual income must be $90,000 or less for individuals, or $120,000 or less for couples, and the purchase price caps in NSW are $950,000 in Sydney and regional cities, and $550,000 for the rest of the state. The scheme is also capped by location, so all the available places won’t be used in one area.
University of Sydney economics Professor Stephen Whelan says the scheme will only help a relatively small number of people, and these caps mean they’ll be forced to buy on the city’s fringes since Domain data shows the median house price in Sydney is $1,538,017.
“Caps in terms of the value of a home [mean] it’s not going to be in the desirable inner-city areas where prices are high and you have close access to amenities like transport, childcare and schools,” Whelan said.
Cameron Kusher, director of Economic Research at REA Group, commented: “"Taxpayer-wise, it is basically a free loan that is being given to help people get into the market."
"They only have to repay the equity on sale, with no rent component during the life of the loan," he added. "So there is a cost to the government for running the scheme, but I think it is a case of taxpayers taking one for the team to help those less fortunate in this high interest rate and high property price market," he said.
The government won’t charge any fees or interest, but it will retain a portion of the capital gain when the property is eventually sold, equivalent to the percentage of the initial purchase price when the property was first acquired.
All Australian states and territories agreed at the national cabinet meeting to pass legislation this year to enable the scheme to be implemented in early 2024. Help to Buy will only be available to residents in states and territories after they have passed legislation supporting the scheme. Places in the scheme will be allocated between states and territories on an equal per capita basis.
Since WA, NSW and Victoria already have shared equity schemes in place, and Queensland has a state Labor government with no upper chamber, and all jurisdictions have agreed to progress the legislation, there is unlikely to be any issues with getting all the necessary legislation passed.
Renting
Anglicare’s latest Rental Affordability Snapshot analysed 45,895 rental listings across the Australia and found that only 2.4 per cent of them were affordable for an ambulance worker, just 666 listings or 1.5 per cent were affordable for nurses, and a mere 504 listings or 1.1 per cent were affordable for aged care workers.
Over the time the study was conducted throughout 2018-21, Australia’s vacancy rate just 0.8 per cent of all homes. Since about one-third of all Australians rent their homes, stiff competition for any vacancy that arises is the usual case.
CoreLogic’s Rental Value Index showed that rents across Australia have risen at the fastest rate in the last fifteen years, topping ten per cent in late 2022 and early 2023 - above the 9.7 per cent rate in the GFC. Even more important is that the proportion of household income spent on housing is currently 55 per cent higher than it was in June 2005.
Domain’s figures show that asking rents across the capital cities rose 26.1 per cent for units over the year to June, well above the 3.6 per cent rise in the ABS wage price index over the 12-month period. Median asking rents for houses in the capitals rose by 11.5 per cent over the year, more than three times faster than wages.
Westpac senior economist Matthew Hassan told Domain that tenants faced a dire rental market caused by a shortage of housing.
“It’s a pretty nasty situation for renters, particularly those that are on low or fixed incomes, it’s a disaster,” he said. “There’s not many options available for people as well. It’s the pointy end of a pretty bad shortage of housing that we’re finding at the moment.”
“Across the capital cities [the vacancy rate is] sub 1 per cent,” he said. “We’re at what I call frictional vacancy rates, which only captures the properties that are vacant when people are moving across properties.”
The parallel cost of living crisis was exacerbating the issue, Hassan said, and the lower levels of building approvals and completions meant there was little hope of a supply side solution.
The Albanese government has given national cabinet a set of proposals intended to boost housing supply between 2024 and 2029 and at the same time improve renters’ rights. Under the proposed $3 billion New Home Bonus, states and territories would receive $15,000 in federal funding for every dwelling built above the earlier 1 million target, with the aim of adding another 200,000 dwellings.
Grattan’s economic policy program director Brendan Coates said if the plan was implemented in full, the 200,000 extra homes could reduce rents by 4 per cent, saving renters $8 billion by 2029. He also said that over the coming decade, the extra supply of dwellings would keep rents 8 per cent lower, which would save renters $32 billion.
There is a catch to the federal government’s funding that will dictate the location of much of any increase in housing supply produced by the plan. These new homes must be new “well-located” homes, which means “close to existing public transport connections, amenities and employment”.
As the Herald’s economist Ross Gittins describes it: “Well-located” is code for medium- and high-density housing. Most people want to live close to the centre of capital cities – or at least close to good public transport to the city – and economists now believe it’s council zoning restrictions on high-rise that’s done most to drive up home prices “where people want to live”.
But even if this means more high-rise structures close to the CBD, it might do something about the trends towards rental unaffordability in Sydney and regional capital cities. It might also encourage the premiers to reach a national agreement requiring landlords to have reasonable grounds for eviction, limiting rent increases to once a year, and phasing in minimum quality standards for rental properties.
Feeling stressed?
Kathryn Diss writing on ABC News notes that hundreds of thousands of households have already refinanced the fixed-rate home loans they acquired during the pandemic and another 450,000 of these low-interest rate loans will expire in 2024.
She tells us that Roy Morgan research found that as of July this year 1.5 million borrowers, or 29 per cent of all those with mortgages, were at risk of mortgage stress – a higher number than during the 2008 global financial crisis. The same research found that 1.5 million people, or almost a third of all mortgage holders, are spending 25 to 45 per cent of their household income on their home loan, making them considered ‘at risk’.
The number of mortgage holders now considered “extremely at risk” of mortgage stress has also increased to just over one million. That represents more than 20 per cent of all mortgage holders, significantly above the long-term average over the last 15 years of 15.4 per cent, and the highest for more than 15 years since July 2008.
To be considered “extremely at risk”, mortgage holders have to pay a certain portion of their income on interest repayments alone.
Property entrepreneur Mark Bouris leaves no doubt about his feelings toward the conditions he foresees as hundreds of thousands of households have to refinance cheap fixed-rate home loans to higher variable rates: “This means that families right across the country will see the rate on their mortgage go from around 1.9 to 2.5 per cent to between 6 and 7 per cent.
“To put that in monetary terms, the repayment on a $750,000 mortgage set at 2 per cent would balloon from $3180 a month to $4830 a month – an increase of more than 50 per cent overnight, assuming a new rate of 6 per cent,” he says.
Mr Bouris believes the consequences of the RBA’s string of interest rate hikes won’t be fully known until Christmas this year, when some homeowners are forced to sell their homes, adding more people to an already crowded rental market.
Ratings agency S&P tracks the number of households that have fallen behind in their mortgage repayments and found over the past year it has increased in every state and territory. In NSW, Sydney's south-west that extends from Greendale in the west to Liverpool in the east recorded the highest arrears rate in the state at 2.49 per cent.
Other parts of Sydney including Blacktown, the Blue Mountains, Southern Highlands and Shoalhaven were also falling behind with an arrears rate currently around 1.8 per cent.
S&P Global Ratings analyst Erin Kitson told the ABC that even when the percentage of households missing mortgage repayments is low, it is a lagging indicator: "We certainly expect arrears to continue to rise and in terms of how long and so forth, ultimately that will depend on where interest rates head and where they finally peak.
“At this point we expect arrears to continue to increase into the first half of next year, but really importantly when it comes to arrears, the employment story is key. Low unemployment is helping to temper arrears; we certainly haven't seen mortgage arrears peak yet, there are further arrears increases ahead of us."
Roy Morgan Research predicted that if the RBA increased interest rates by 0.25 per cent in September 2023, 81,000 more mortgage holders would be considered at risk. An increase in October would put another 108,000 mortgage holders at risk, up to a potential total of over 1.6 million.
The Roy Morgan CEO, Michele Levine, said the increases in mortgage stress were “substantial” and that any increases in unemployment, the largest factor in a household’s ability to pay the mortgage, would make things worse.
Five (maybe) fast-tracked suburbs
With the previous NSW government’s determination to build thousands of new homes, five suburbs were identified for fast-tracking of large developments as part of the Rezoning Pathways Pilot. The Pilot project intends to fast-track five developments and create about 5,800 new homes, with 30 per cent set aside for social and affordable housing.
Projects in Schofields and Glenmore Park are among the five selected areas. Land is also to be rezoned in Warrawong in the Illawarra, Kanwal in the Central Coast and Wagga Wagga in the Riverina. No inner-city proposals have been selected under the pilot program.
"The industry-nominated state-assessed planning proposals were selected based on strict criteria outlined at the launch of the program," a Department of Planning and Environment spokesperson said, hoping to counter attacks by local councils saying the program prioritised developer interests over their communities.
Peak industry association, Local Government NSW (LGNSW), an advocacy group representing councils, said that it hoped the state government would honour its commitments to work with its members.
"Councils have to work and want to work with the state government and developers to get these projects going," President Darriea Turley said. "But you've got to understand what the local issues are and you can't override it by playing bullying tactics."
Urban Taskforce Australia, the group advocating developer interests, described the result of the pilot program as a wasted opportunity: "We are very disappointed in the extremely small number of successful projects," chief executive Tom Forrest said." All in all, the [State Assessed Planning Proposal] pathway was an expensive waste of time which actually delayed housing supply for far more than it will deliver."
The outcomes of the Rezoning Pathways Pilot are now under consideration by the Minns government and because they don’t seem in alignment with the aims of this government to “build up, not out”, it’s questionable the Pilot’s recommendations will eventually be adopted.
Premier Minns said in early September he was open to an idea proposed by lobby group Housing Now for what is called “pattern book” housing that would allow thirty Sydney suburbs to be transformed into ‘Surry Hills-type’ suburbs by adding higher density houses and medium-rise apartment buildings.
“We’re not going to deal with the housing crisis in NSW unless we get more construction going, more completions done,” Minns said.
“And part of that means that you have to have at times difficult conversations with communities about more density.”
Sources:
‘Only five cities worldwide are more unaffordable than Sydney for housing, thinktank says,’ Tamsin Rose, The Guardian, 9 September 2023
‘Knock down a few, build one: in NSW that counts as a gain for councils’ housing targets,’ Tamsin Rose and Elias Visontay, The Guardian, 10 September
‘Australian property prices defy expectations as strong housing demand prevails and investors want out,’ Thierry Ng, The Property Tribune, 6 September 2023
‘Australian households on six-figure incomes can now only afford 13% of homes,’ Graham Readfearn, The Guardian, 2 September 2023
‘Australian rents are rising at the fastest rate since the GFC – and from a higher base,’ Josh Nicholas, The Guardian, 2 September 2023
‘NSW premier open to ‘pattern-book’ housing across Sydney as solution for crisis,’ Catie McLeod, The Guardian, 5 September 2023
‘The RBA’s interest rate-rising looks done – and a soft landing for the economy could be on,’ Peter Hannam, The Guardian, 6 September 2023
‘Housing affordability at lowest level in 30 years, data shows,’ Isabella Podwinski, ABC News online, 2 September 2023
‘House price recovery picks up speed with sixth straight monthly increase, as property shortage continues to squeeze market,’ Kate Ainsworth, ABC News online, 2 September 2023
‘We shouldn’t wait any longer’: Why Sydneysiders are selling their homes now,’ Kate Burke, Domain, 2 September 2023
‘Australian house prices reaccelerate in August,’ Leith van Onselen, Macrobusiness, 31 August 2023
‘A new way to avoid being the Bank of Mum and Dad? Sounds great in theory,’ Melissa Heagney-Bayliss, Domain, 31 August 2023
‘Which suburbs are recovering fastest from the downturn?,’ Maria Gil, Domain, 18 August 2023
‘Hot Sydney suburbs where home buyers can get in for less - with one compromise,’ Kate Burke, Domain, 19 August 2023
‘A disaster’: Unit rents rising more than seven times as fast as wages,’ Jim Malo, Domain, 24 August 2023
‘Why Albanese’s housing solution will help, but only a bit,’ Ross Gittins, Sydney Morning Herald, 22 August 2023
‘Record number of Australians at risk of mortgage stress as RBA interest rate rises bite,’ Mostafa Rachwani, The Guardian, 29 August 2023
‘Labor’s shared equity scheme aims to get eligible people approved for a home loan faster than they might have been without the government’s help,’ Amy Remeikis, The Guardian, 20 August 2023
‘How will the federal government's Help to Buy scheme work for people struggling to buy a house?,’Lexy Hamilton-Smith, ABC News online, 18 August 2023
‘Where landlords are selling up - and why,’ Lisa Calautti, realestate.com.au, 18 August 2023
‘Why property investors are selling up,’ Leith van Onselen, Macrobusiness, 28 August 2023
‘Housing plan will save renters $32 billion over a decade: Grattan,’ Shane Wright, Sydney Morning Herald, 18 August 2023
‘First home deposit sizes soar as more parents step up,’ John Collett, Sydney Morning Herald, 30 August 2023
‘Banks’ background moves reveal when rates will really fall,’ Nicole Pedersen-McKinnon, Herald Money, 19 August 2023
‘Growing number of Australians in mortgage stress amid rise in home loan defaults,’ Kathryn Diss, ABC News online, 28 August 2023
‘Mark Bouris warns families will be ‘forced to sell their homes’ within months as mortgage cliff erupts,’ Mark Bouris, News.com.au, 18 August 2023
‘Essential workers, including health staff, unable to afford basics like rent, data shows,’ Isabel McMillan, News.com.au, 14 August 2023
‘NSW government reveals five suburbs where thousands of homes will be fast-tracked,’ Tony Ibrahim, ABC News online, 16 July 2023
Waving Not Drowning
Mon, 21 Aug 2023Population, property prices grow faster than house numbers
Sydney’s winter may deliver cooler evenings, but in the light of day the heated property market continues to bring price increases that Domain calls ‘hyper-growth’. Nationally, home values have shot upwards at the fastest rate since 2021, and in Sydney the median house price rose $500 a day during the first six months of 2023.
The Reserve Bank eased fiscal tensions at its August meeting by once again leaving the cash rate at a reasonable 4.1 per cent for the second consecutive month. It’s looking like the outgoing Governor, Dr Philip Lowe, will depart his post on a positive note as far as homeowners with mortgages and those hoping to acquire property are concerned.
Nicola Powell, Domain’s head of research, noted that Sydney’s house price growth of 5.3 per cent in the June quarter was “reminiscent of the boom times”. To be more specific, at the end of the June quarter the median house in Sydney cost $1.538m which was about the same as twelve months earlier. Prices are now just below their peak in February 2022.
Ms Powell did note that Sydney’s quarterly increase was not far short of twice the average historical advance of 2.8 per cent, but further rises would start to test affordability limits. “One of the key things underpinning this price recovery has been the lack of supply [and] that dynamic is starting to change.”
Another problem for would-be first-home buyers is that it now takes up to $100,000 more than it did four years ago just to come up with a 20 per cent deposit on a median-price Sydney house. The size of a deposit has jumped from $206,964 in June 2019 to $307,603 today.
One interesting fact revealed by digital settlement firm Pexa is that more than one in four transactions for dwellings or land in NSW, Victoria and Queenland were made for cash – that is, without a mortgage. This is attributed in part to retirees downsizing, but it’s not exactly a new phenomenon; the share of cash purchasers in the eastern states has held steady around 25 per cent for the past five years and that means they’re pretty much immune to rises in interest rates.
The latest Domain House Price Report shows that Bellevue Hill headed the list for house price growth over the year to June, with its median sale price rising 18.4 per cent. Bronte and Cronulla were also among the top-growth suburbs, as were Merrylands West, Auburn and Box Hill, all with a rise of more than five per cent.
The report also found that Milsons Point had the most unit price growth, up 25 per cent, while Wahroonga, Elizabeth Bay, Schofields, Meadowbank and Rockdale also had solid gains.
One of the Big Four banks, NAB, is now predicting that Sydney property prices will rise by 6.9 per cent by the end of 2023 with a further rise of 4.9 per cent in 2024 – that’s a massive gain of almost 12 per cent, clearly showing the bank’s expectation that the imbalance between supply and demand will outweigh the affordability issues generated by interest rate increases.
“We have revised up our expectation for dwelling prices based on the recent resilience and outlook for strong housing demand in the near term, while supply growth continues to be challenged by higher rates and supply side pressures,” NAB’s group chief economist Alan Oster said in its latest residential property survey.
“That said, we see the pace of price growth slowing in (the second half of 2023), with (capital city average) prices remaining broadly flat but ending the year around 4.7 per cent higher based on price gains in the year to date.”
CoreLogic’s research director, Tim Lawless, said that Sydney leads the field in home value growth:
“Sydney home values increased another 1.7 per cent in June, taking the cumulative recovery since January through to 6.7 per cent," he told ABC News. "In dollar terms, Sydney’s median housing values are rising by roughly $4,262 a week."
Mr Lawless said that interest rates will continue to be a big factor in the housing market’s performance: “Forecasts on where the cash rate will land and how long it will stay elevated vary, but it’s likely there is at least one more rate hike to come, potentially more.
"It’s hard to imagine the recent pace of growth in housing values being sustained while sentiment is close to recessionary lows and the full complement of borrowers are yet to experience the rate hiking cycle in full,” he said.
Mr Lawless credits the ongoing lack of supply for keeping upward pressure on house prices: “Through June, the flow of new capital city listings was nearly -10 per cent below the previous five-year average and total inventory levels are more than a quarter below average. Simultaneously, our June quarter estimate of capital city sales has increased to be 2.1 per cent above the previous five-year average.”
Speed limits
In the meantime. Leichhardt is still the fastest-selling suburb in Australia where houses spend an average of just 34 days on the market – about half Sydney’s average. It must be noted that houses in Leichhardt are taking six days more to sell this year than they were a year ago.
Arthur Barrett of The Agency Inner West says buyers are less committed to buying as quickly as they did last year: “The reason [Leichhardt] sells so quickly is because it has a lot of smaller homes with more affordable price points of $1 million to $1.5 million,” Barrett says. “Most of what we see are two-bedrooms, semis and townhouses that attract a wide range of buyers, from downsizers to investors, first-time home buyers and empty nesters.”
Sydney buyers’ agent Dan Sofo, founder of Unicorn Buyers Agents, said that the segment of the market comprising inexperienced buyers and vendors, particularly, has been beset by FOMM (Fear of Making Mistakes): “Those buyers who are Baby Boomers and who have bought and sold in a number of markets in different cycles are more confident to act, but all others are being numbed into indecision” he said.
“If you’re only buying your first or second house, or selling for the first or second time, we’re finding a lot of people are just bewildered at the moment by what’s happening in the market,” he said. “The buyers are saying, ‘What happens if I make a mistake and pay too much?’ The vendors are worrying that they won’t find anywhere else to buy when they sell their homes. So, we’re all doing a lot of appraisals at the moment, but people are just not acting on them.”
Some properties changing hands in “lifestyle” pockets on the fringes of Sydney have traded for below the list price as sellers’ often overoptimistic expectations aren’t being realised.
PropTrack data shows that the Southern Highlands and Shoalhaven regions had a high proportion of properties sold below list price in June at nearly 76 per cent, with 23 per cent trading at the asking price and only 1.4 per cent selling for over.
In the Hunter Valley the proportion sold below asking price was 57 per cent, while in Sydney’s St George and Canterbury-Bankstown region it was 54 per cent. The Illawarra, where there was another boom market during the pandemic, saw 46 per cent of sales come in below the list price, PropTrack reported.
The bedroom crisis
As Australia’s population grows, so does our rate of population growth, spurred on largely by the number of migrants entering the country. Former RBA governor Philip Lowe warned just before it was announced he was leaving the Bank that the rate of rental price growth would remain high “for a long time” and said our high population growth was a major factor: “The population is increasing by 2 per cent this year, are there 2 per cent more houses? No,” Lowe said.
Unlike the previous period of high population growth in 2008-2009, reflecting a high rate of births in Australia, the current increase in population is driven largely by the immigration of adults. This creates a significantly greater demand for additional housing than if the growth was in children that would be joining existing households.
As property agency CEO John McGrath explains: “Migration will be a key factor driving growth in Australian property in FY24. International students are returning and importantly we’re opening the doors to more skilled migrants in order to close a very big gap in our labour market.”
The latest census data found there are more than 28 million bedrooms across Australia, not counting those in dwellings that were unoccupied on census night. A survey by the Australian Bureau of Statistics concluded that around 46 per cent of these, or 13 million bedrooms, were empty during 2019-20, largely in households occupied by couples without children or in single person households.
So, what might convince those who are the current owners of these homes with surplus bedrooms to downsize and free up some of these unoccupied bedrooms? It’s not simple, partly because the gap between the price of the family home and smaller, downsizing alternatives isn’t very great after transaction costs including relocating. It’s also to do with the potential impact on pensions and the shortage of potential housing into which downsizers can move.
The Baby Boomer generation is important in this issue. In 2005, 17.5 per cent of households were headed by someone 60 years of age or over, but in 2023, that proportion has risen to 22.9 per cent. Rates of housing turnover have slowed as a result, and this has also led to a slowly diminishing supply of stock coming to market.
Demographers tell us the Australian population will continue to age and unless there’s some new ways to incentivise the ‘Boomers’ to downsize, the impact of this issue will grow and in time become a political issue. The federal government’s downsizer contribution arrangements that let eligible homeowners contribute up to $300,000 from the proceeds of the sale ($600,000 for couples) of their home into their superannuation fund is a good beginning.
Mortgage stress may be rising
Domain’s Kate Burke says that distressed property listings in Sydney’s western and south-west suburbs, and also in some inner pockets, have increased year-on-year, Domain figures show, as the fall-out from 12 cash rate hikes hits borrowers: “Although the share of urgent listings remains low overall, they more than tripled year-on-year in the Bringelly-Green Valley region, covering suburbs such as Austral and Leppington, to 7.3 per cent”, she said.
“Listings more than doubled in Penrith and Camden, but to lower rates of 3.3 and 2.4 per cent. They also climbed to 8.8 per cent in the Blacktown region, and increased in the Liverpool, Carlingford, Bankstown, Campbelltown and Botany areas, making up between 4.5 and 5.5 per cent of listings.”
Another possible indication of mortgage stress is seen in CoreLogic data prepared for the ABC showing that the percentage of properties being sold after being owned for less than two years is at a nine-year high.
"We've seen these short-term loss-making resales of two years or less go from 3.4 per cent of loss-making resales in the March quarter of 2022 to over 12 per cent in the March quarter of 2023," said CoreLogic’s head of research Eliza Owen, "so a lot more short-term sellers are willing to sell at a loss at the moment."
Yellow Brick Road Home Loans Executive Chairman Mark Bouris worked out the details of how increased rates have hit some borrowers: “If you took on a $500,000 loan in say, late 2020, your average monthly repayment would be about $1850.
“Fast-forward two years later, when your rate goes from 2 per cent to 6.5 per cent, your monthly repayment would rise to more than $3000. That’s a 50 to 70 per cent increase in monthly repayments, depending on the exact nature of their loans.”
AMP’s chief economist Shane Oliver said he had expected a greater increase in distressed selling by now, but households had been supported by saving buffers, mortgage pre-payments and the strong jobs market. He did say there has been an increase in urgent sales, as household budgets are affected by rising mortgage repayments and many households that had been on low fixed-rate loans had to refinance at much higher rates
“The problem is that all of those supports are coming to an end. The saving buffers built up in the pandemic are getting run down ... and of course we’ve got this fixed rate reset getting under way,” he said.
Roy Morgan research says that more than 1.4 million borrowers are considered at risk of mortgage stress, the highest level since May 2008 just before the global financial crisis struck the world’s finances. That is 539,000 more households than were thought to be at risk before the RBA started its string of interest rate rises in May last year.
Roy Morgan estimates the number at risk will pass 1.5 million, to hit 30 per cent of mortgage borrowers, if the Reserve Bank raises interest rates again and takes the cash rate to 4.35 per cent.
The company's chief executive, Michele Levine, also said that number would increase if unemployment also jumps.
"If there is a sharp rise in unemployment, mortgage stress is set to increase towards the record high of 35.6 per cent of mortgage holders considered 'at risk' in May 2008 during the global financial crisis," she told ABC News, saying she is even more worried about the rise in households that are seen as "extremely at risk", because just the interest component of their mortgage exceeds an affordable proportion of their income.
Erin Kitson from ratings agency S&P Global said her firm has noticed arrears have been edging higher, but this was from a very low base during the pandemic period: "Mortgage arrears have been increasing for a number of months now, and that's not surprising given the rapid rise in interest rates that we have seen," she said.
Ms Kitson agrees that arrears will rise as more borrowers refinance their cheap fixed loans onto much higher variable rates: "I think that arrears certainly haven't peaked yet," she said.
"I think that further arrears increases are ahead of us, particularly because the cash rate, we don't think it has peaked yet.
"In terms of when we think arrears are probably more likely to peak, I think we're more likely to see that towards the end of the first-half of next year," she said, but feels arrears and defaults will not rise to dangerous levels: "Because unemployment is still quite low and is forecast to remain relatively low," she explained. "That is certainly going to help keep mortgage defaults at not particularly high levels, and certainly not levels where we're concerned about high levels of distressed selling."
Investor uncertainty
Economic uncertainties are often reflected in the opinions of property investors. Some recent comments from a survey commissioned by taxation software developer TaxTank show that investors have a few interesting areas of concern. In the survey, more than 600 Australian property investors were asked questions about how the changes to conditions in the property marketplace were affecting their feelings as the end of the financial and taxation year was getting close and how they felt about their ability to manage their finances.
Eighty per cent of property investors told the survey they believed interest rates will continue to rise. More than half of respondents said they’d already taken action to manage their loan repayments, including increasing rents. One third said they’d already raised the rents on their properties, another fifteen per cent said they’d begun efforts to raise their rental incomes, and seven per cent said they were going to sell their properties.
TaxTank founder Nicole Kelly told realestate.com.au: “This is putting many taxpayers in difficult situations, where they need to simultaneously weigh up the pros and cons of managing a property with the realities of needing to pay larger monthly bills amid an uncertain economic backdrop,” Ms Kelly said.
But our current situation makes it hard to predict what will happen next. AMP chief economist Shane Oliver says he’s never seen property prices react to a rate hiking cycle the way they are now in his decades-long career: “It’s not just the ’90s rate hiking cycle which makes this one stand out,” he said. “The normal relationship is rates go up for a while, then you get a weaker jobs market and the impact of rates start to lag and then prices come down. Then it’s only after interest rates fall, prices start to bottom out.
“This time it’s all back to front. Earlier this year [prices] bottomed out and then started rising when rates hadn’t stopped rising.”
Supporting the idea that some investors might be selling out, short-term property resales are on the rise, and experts say some owners could be choosing to get ahead of the debt collector and sell before being forced, while others are just cashing in their investments.
CoreLogic data show the percentage of property resales that happen within two years has risen across the country, to 8.3 per cent in April from 6.3 per cent a year earlier. CoreLogic head of Australian research Eliza Owen said it was significant because short-term resales typically increased when house prices were strong.
She said that a rising trend of flips outside a boom market could indicate property owners were choosing to sell rather than being forced – such as in Melbourne and Sydney, where prices have been growing but not soaring.
Westpac senior economist Matthew Hassan said he thought the short-term resellers were most likely to be investors: “The pinch is harder for investment properties, they have higher rates typically and notwithstanding the rise in rents they wouldn’t have kept up with mortgage increases,” he said. “They may well be reconsidering, and think, ‘It may be time to offload and meet my mortgage payments on my principal place of residence’.
New RBA governor and house prices
The current RBA deputy governor Dr Michele Bullock has been appointed the next governor of Australia's central bank. She has worked at the Bank for almost 40 years including the past 13 in senior executive positions and is the Bank’s first female governor in its more-than 60 year history.
Federal Treasurer Jim Chalmers had earlier ordered a review of the RBA’s performance under the leadership of Dr Bullock’s predecessor. The review’s findings, released in late March, were critical of Dr Lowe and of the Bank’s proclamation that rates would stay down for three years – a proclamation that had encouraged around 1.2 million first-home buyers to purchase homes by borrowing with the expectation that their repayments wouldn’t skyrocket as they did when rates were raised again and again from May 2022.
Yes, the RBA will have a new governor but it’s not likely to change the Bank’s positions on things like the rate of inflation, unemployment, or even the all-important cash rate. In August 2022, Dr Bullock said that Australian households were in a “fairly good position” to cope with further rate hikes.
Before that, in March 2019, she said the substantial increase in apartment construction since the start of the decade could potentially be "sowing the seeds of a decline" when prices had started falling in both Sydney and Melbourne.
And in March 2017 she was quoted as saying: "There are indicators that, in the event of a downturn, there might be systemic issues for the banking system. It is about whether or not they are adequately provisioned, whether their lending standards are adequate, and if there is an oversupply and falling prices, whether they end up underwater or wearing larger losses than they expected because they hadn't anticipated this”.
Ian Verrender from the ABC says we can expect to see a lot more of Michele than we have in the past after the Treasurer’s review came down so hard on Dr Lowe: “The review has demanded more transparency and accountability from our central bank, so you can expect to see and hear a great deal more from Michele Bullock about the decisions being made and the direction the RBA is attempting to forge.”
Although just like her predecessor, we may see the new RBA governor at dinners, forums and conferences, it’s not likely that the latest change at the top of the RBA is going to mean any automatic relief for borrowers, at least in the short term.
Finance journalist Alan Kohler expects the RBA under Michele Bullock to get inflation down from above seven per cent without delivering a recession, not an easy thing to do. Peter Martin from ABC News writes that this would be a world first: “There was a recession when the bank tried to get inflation down below 7 per cent in the mid-1970s, in the early 1980s, and in the early 1990s.
"That we might be able to pull off yet another first ought no longer to surprise us, after all of the firsts during COVID. Enduring Australia's (brief) 2020 recession without unemployment climbing above 7 per cent was also a first. The minutes of the Reserve Bank's June board meeting …show it is prepared to countenance such a first.”
Sources:
‘National Cabinet is turning its attention to Australia's housing crisis — and an important shift could be coming,’ Laura Tingle, ABC News online, 12 August 2023
‘Aussie homeowners are now sitting on staggering amounts of wealth despite rate rises,’ Aidan Devine, News.com.au, 12 August 2023
‘Moving goalposts? The next hurdle for hopeful home buyers,’ Melissa Heagney-Bayliss, Domain, 9 August 2023
'Premature' house price rebound raises risks of double-dip downturn despite RBA interest rate pause,’ Michael Janda and Stephanie Chalmers, ABC News online, 2 August 2023
‘Rate rise burnout: Have interest rates finally peaked in Australia?,’ Sue Williams, Domain, 4 August 2023
‘Investment properties offloaded as landlords indicate they’re ‘over it’, Brooke Rolfe, News.com.au, 5 August 2023
‘Jump in quick home resales blamed on rising mortgage stress by analysts, real estate agents,’ Michael Janda and Rachel Pupazzoni, ABC News online, 31 July 2023
‘Properties worth more than $25bn were bought with cash in Australia’s three biggest states in early 2023,’ Peter Hannam, The Guardian, 30 July 2023
‘Australian boom-town suburbs at risk from underdevelopment,’ Nathan Schmidt, News.com.au, 31 July 2023
‘The sought-after Sydney suburbs where property prices soared most,’ Kate Burke and Jim Malo, Sydney Morning Herald, 30 July 2023
‘Property prices continue to rise, several suburbs are experiencing a boom,’ David Taylor, ABC News online, 29 July 2023
‘Housing market FOMO has been replaced by FOMM the Fear of Making a Mistake,’ Sue Williams, Domain, 25 July 2023
‘John McGrath – EOFY Market Wrap & What’s In Store For FY24,’ 28 July, 2023
‘Aussie house prices losing momentum,’ Leith van Onselen, Macrobusiness, 21 July 2023
‘Australia is on the brink of ending RBA rate hikes and an economic first: beating inflation without a recession,’ Peter Martin, ABC News online, 19 July 2023
‘NSW government reveals five suburbs where thousands of homes will be fast-tracked,’ Tony Ibrahim, ABC News online, 16 July 2023
‘Capital city housing values are still rising but at a slower pace. Here's how things are looking where you are,’ ABC News online, 21 July 2023
‘Australia's fastest selling suburbs are slowing down and homes are taking longer to sell,’ Maria Gil, Domain, 20 July 2023
‘How much house prices will rise in your city,’ Steve Zemek, News.com.au, 24 July 2023 ‘Sydney leads Australia’s house price rebound with $500 a day ‘hyper-growth,’ Peter Hannam, The Guardian, 27 July 2023
‘The parts of Sydney where distressed property sales are on the rise,’ Kate Burke, Sydney Morning Herald, 24 July 2023
‘Little incentive’: Frustrating factor adding to Australia’s grim housing crisis revealed,’ Tarric Brooker, News.com.au, 15 July 2023
‘Is Michele Bullock the right choice as RBA governor? The experts are divided,’ Michael Janda, ABC News online, 15 July 2023
‘Mortgage arrears rising as 'at risk' borrowers hit pre-GFC peaks,’ Michael Janda and Kirsten Aiken, ABC News online, 26 July 2023
‘Morrison government HomeBuilder scheme 'overheated' construction, blindsided states and lacked controls,’ Daniel Ziffer, 28 June 2023
SUPPLY DROUGHT
Wed, 19 Jul 2023Low supply and big demand, plus no prime rate increase, but for how long?
June was yet another good month in the Sydney property market as figures from CoreLogic show. Sydney house prices rose 1.7 per cent in the month which takes the cumulative recovery to 6.7 per cent since January this year. This translates into a weekly hike of around $4,262, or something like a gain of $600 each day for the average Sydney home. (PropTrack’s Home Price index shows a weekly rise of just $2,100 per week in the past three months, but you get the idea.)
This unprecedented price growth prompted The Guardian’s Greg Jericho to say: “We really need to update the old adage. No longer is nothing more certain than death and taxes; it’s now death, taxes and rising house prices.”
Any lingering doubts about the strength of the property price recovery over the past six months can be dispelled by looking at the Sydney suburbs where home prices have doubled in that time. 2022 was a bad year for the housing market, but growing demand and limited supply have seen prices soar since then, as shown by the latest PropTrack figures that follow.
Nirimba Fields, near Blacktown in Sydney’s northwest, recorded a 109 per cent increase, from a median price of $541,000 two years ago to $1.1 million now. Two other suburbs near Blacktown, Melonba and Grantham Farm doubled their median prices, with Box Hill near Baulkham Hills and Vineyard in the Hawkesbury also rising by 100 per cent.
You don’t even have to go too far from the CBD to see the same kind of price appreciation. Units in Dawes Point and Millers Point doubled in value in three years and five years respectively, aided by the construction of high-quality apartments intended to provide comfortable living for residents instead of simply profits for developers.
It’s a real bonanza for sales of what are termed ‘trophy homes’ at the top end of the Sydney market. There have been more than thirty sales of properties for $20 million or more since the start of 2023, and this trend shows no signs of slowing.
The Agency’s Ben Collier gave his reasons for this boom at the top: “Sydney’s top-end market is one of too many cashed-up buyers and too few suitable homes, and that is unquestionably driving these sorts of results, and has been for more than a year now,” Collier told Domain. “But there does seem to be generational change at play as well whereby homes that have not been available for decades have come to market.”
But will it last?
Figures that indicate continuing high weekly auction clearance rates and a home value growth rate of more than four per cent are telling us this is the strongest market we’ve seen for some time and there aren’t any detectable signs of its slowing. But as to whether the boom will last, there’s little agreement between property analysts and other market watchers.
The question of ‘How long will Sydney’s housing price boom last?’ is being asked almost daily in the media. Continuing high auction clearance rates are a good indicator that demand isn’t being matched by supply.
The last weekend in June was also the last opportunity for first-home buyers to acquire a property under $1.5 million without paying stamp duty up front, which no doubt could have had an impact on sales volumes and clearance rates, but since that time the weekly clearance rate has remained above the 70 per cent figure, and selling prices haven’t faltered.
The Herald’s Kate Burke summarised the bright side of the picture: “Sydney had an auction clearance rate of 74.3 per cent last month, Domain data shows, the first time above 70 per cent since October 2021. It was higher still in pockets, reaching an exuberant 80.9 per cent in the Ryde region and upwards of 75 per cent in the city and inner south, inner west, north shore and eastern suburbs.
“The median home value has rebounded 4.8 per cent to about $1,052,800, as of May, on CoreLogic data that combines houses and units, its highest level in eight months. On CoreLogic’s calculations the weekly clearance rate topped 70 per cent for the past five weeks, also the strongest run since October 2021,” she wrote.
Ms Burke also pointed out there are some losers in the Sydney property market, many of them who’ve sold within two years of their purchase and have been impacted by rising mortgage rates: “CoreLogic’s latest Pain and Gain report shows…Sydneysiders made a loss on 10.7 per cent of property deals, the highest rate since 2009.”
She also said that apartment owners were more likely to sell at a loss, and 17.5 per cent of units in Sydney were resold at a loss compared to just 2.3 per cent of houses. The highest proportion of loss-making sales were in areas known for their concentrations of units and investors were more willing to accept a loss as that could be carried over to their next property and offset future capital gains.
Louis Christopher, head of SQM research, said he is yet to see any signs of panic selling: "We look very closely at distressed selling activity, and we're not really seeing a material rise there," he said.
"So it's people who are calmly selling but, yes, there has been a pick-up of people selling within two years of buying."
Domain forecasts that Sydney will see housing price gains of from six to nine per cent by June 2024, lifting the median house price to a record of just over $1.6 million. Their calculations are based on high levels of net overseas migration, a tight rental market, and a reduced supply of new housing with rising costs of construction. Domain also predicts a two to five per cent rise for units.
Domain’s head of research and economics Dr Nicola Powell said there were economic factors that would outweigh the downwards pressure from declining borrowing capacity, potential distressed sales, rising unemployment and sluggish real wages growth: “We’ve seen this happen before. The thing that’s underpinned growth has been the lack of supply,” she said, “…and it’s going to get worse.”
Westpac recently described the current house price rebound as ‘highly unusual’, noting it’s happened despite the series of interest rate hikes from the RBA. In Westpac’s own words: “Housing recoveries typically only emerge once the RBA is actively cutting rates or is very clearly poised to do so. Price gains also tend to follow a sustained lift in turnover, not vice-versa”.
Rates eased at last
Everyone with a mortgage or loan of any sort breathed easier after July 4 when the RBA announced there would be no increase in the prime rate this month and it would stay at 4.1 per cent. No guarantees that rates wouldn’t go up again in the coming months, but in his statement released after the Bank’s July meeting, outgoing Governor Philip Lowe said that, while inflation was still too high and would remain so for some time yet, it had "passed its peak".
The ABC’s David Taylor had a try at naming the five factors that will determine when the RBA will finally end all interest rate increases and begin easing its monetary policy. First, he mentions that slower economic growth as shown by a reduction in consumer spending would confirm to the Bank that its policies are having the desired effect.
The next crucial factor, he says, is rising unemployment. Not likely at present as there is a growing demand for both full-time and part-time employees, but this can easily and quickly be affected by changes to the economic climate, possibly causing layoffs and cutbacks.
Mr Taylor then cites rising wage increases and higher productivity as being among his five factors, primarily because the RBA sees our current wages growth rate just under four per cent as being within its allowable range; productivity, however, is either static or decreasing and this could lead to higher prices for consumers.
The fourth factor is corporate profits. As long as employment growth is steady and wages continue to rise, workers will be able to meet higher prices and inflation will remain elevated. In other words, businesses can get away with charging more for what they produce because consumers will be able to meet these increased prices, thereby contributing to inflation.
And finally, the fifth factor is the rate of inflation as measured by the consumer price index, or CPI. The RBA’s target is for this figure to be between two and three per cent, and at the present rate just below six per cent we’re not close to meeting the RBA’s aims.
However, the RBA has always said it takes at least a year for the impacts of an interest rate increase to be felt throughout the economy. The monthly inflation figures released by the Bureau of Statistics in June shows the annual rate of inflation falling from 6.8 per cent to 5.6 per cent – twelve months since it was this low.
Admittedly, this is a composite figure and prices in some sectors of the economy, including bread, dairy products and rent, are still rising well above 5.6 per cent. But the costs associated with new homes have dropped by half over this time with housing purchase costs rising by 8.3 per cent this year – considerably better than last year’s 20 per cent. Prices are coming down as the RBA intended, and this was a good time for a pause to interest rate increases.
Thousands of missing homes
David Taylor from ABC’s ‘The Drum’ writes that there are thousands of ‘missing homes’ that could push Australia’s property prices even higher: “The bottom line is this: we are not building enough homes to meet the growing demand for housing. That will put upward pressure on property prices this year – despite soaring inflation and rising interest rates.”
He says that JPMorgan Research has uncovered tens of thousands of missing homes that were approved by authorities to commence construction, and should have been completed by now, but have not yet been built. An estimated 50,000 to 60,000 homes have been delayed by everything from labour shortages, materials shortages, or just by building firms failing financially.
Louis Christopher, head of SQM Research, says Australia is well behind where we need to be after completing around 180,000 dwellings last year: "This year SQM predicts that number will fall to about 165,000," Christopher says. "The fall is due to the increase in cancellations for which we are in agreement with JP [Morgan]."
Mr Christopher says that 240,000 dwellings were in the pipeline for this year, needed largely due to the massively increased number of migrants arriving in 2023-24, and that this has already contributed to the rise in dwelling prices for the first half of 2023.
"We've definitely had a significant increase in underlying demand, with the population growth right now running at about 2.3 per cent per annum," he said in an ABC interview.
Eliza Bavin from Yahoo Finance has no doubts that Sydney’s house prices will be at a new record high by the end of the next financial year. She sees the pressure from population increases as the key driver in creating a stronger demand for housing as something like 130,000 new dwellings will be needed to house the flood of immigrants from overseas heading our way.
She also factors in the problems in the construction industry and the ongoing weakness in property listings as contributors to the anticipated record price growth over the next twelve months.
NAB chief economist Alan Oster said price the current price growth had been fuelled by strong migration, low listing volumes, and expectations the cash rate was at or close to a peak. He expects the cash rate will peak at 4.6 per cent, then start to drop in mid-2023.
“[An important factor] in the changing dynamic of the market … was people thinking the RBA is nearly done and the RBA is trying to say, ‘hey we’re not done yet’.”
One who foresees a slowing in housing price gains is Yellow Brick Road chairman, Mark Bouris, who says he does not expect Australian house prices to continue increasing in the face of rising mortgage rates. Bouris thinks that housing supply will surge in the spring as households are fully impacted by the RBA’s interest rate increases.
Mr Bouris told Sky News: “first and foremost the thing that creates increases in prices is when either one or two things occurs. First, if demand outstrips supply. In other words, we get an increase in demand and usually increase in demand is caused by more affordability and more affordability is created when interest rates fall.
“The second thing that can create house price increases at the same rate that we had in the last six months is if all of a sudden, supply – if supply stays the same, in other words stays very low”.
He concluded by saying that affordability won’t improve because interest rates won’t fall, nor will supply increase because there’s been such a low supply of housing over the last six months. This means that in the next few months more people will have to sell and they’ll be selling into a market with increasing supply.
Build up, not out
There’s little doubt that Sydney faces a serious housing shortage over the next few years, but no easy way to find a solution to this vexing problem. Geoff Roberts, the outgoing head of the Greater Cities Commission, told the Herald that parts of Sydney will need to double or even triple the number of homes they deliver in coming years to resolve the city’s “serious housing crisis.”
“We’re going to need to double, and in some cases triple, the number of houses,” he told the Herald in an exit interview. “We have to double – at least – the number of housing completions. That’s easy to say, much more difficult to deliver.
“We need to stop greenfields development,” Roberts said, referring to new housing in previously undeveloped areas which are often on the city fringe. There was a notable exception for the new metro line between St Marys and Western Sydney Airport. “That’s classically greenfields” said Roberts “but it’s going to have a railway line in three years’ time. Surely we should be optimising the housing and jobs around those stations,” he said.
“We only build airports in cities once in 100 years. You can’t waste [that],” Roberts said. “We still don’t have enough jobs west of the Parramatta River.
He added that areas for more housing should include Bella Vista, Cherrybrook and Castle Hill, the Sydenham to Bankstown line which is being converted to metro, the Metro West line, Olympic Park and The Bays precinct.
“That doesn’t mean we’re all in high-rise apartment buildings,” he said. “We need to grade out from the railway stations back to semi-detached and detached dwellings further away. But quite close to railway stations, we need more people.”
On June 27 the Premier announced that the Greater Cities Commission was being abolished, saying the move would reduce overlap and duplication of finite public resources and help achieve his goal of more housing supply. “There’s no point having housing targets if you can’t deliver the housing,” Minns said. “This is about ensuring we have the right team in place to deliver the housing and infrastructure we so critically need in this state.”
The Minns NSW government had previously instructed the Commission to “rebalance” the targets closer to transport infrastructure and the city centre, with the north shore, eastern suburbs and inner west expected to get increases. At a speech in western Sydney, the premier, Chris Minns, said this state needs 314,000 new dwellings in the next five years but will only complete about 180,000 at the current rate of construction.
Mooted planning changes for NSW include giving any housing development valued at more than $75 million and with 15 per cent of its space used for affordable housing access to a “state significant development” pathway that would fast-track approvals. Developers proposing such projects will be able to also add 30 per cent to the ‘floor space ratio’ and build 30 per cent higher than the local environment plans allow.
In a related move, the NSW government is aiming for higher, denser residential developments. Premier Chris Minns said he wanted to see an increase in apartment builds, saying the focus should be on building up, not out, to reduce urban sprawl.
The biggest obstacle in this quest appears to be that developers have few incentives to build 3-bedroom apartments and most residential units now being constructed are not suitable for families. Census data shows that two-bedroom units made up 60 per cent of apartment supply in Greater Sydney in 2021, and fewer than one in six apartments (15.8 per cent) had three bedrooms or more.
A study of new residential buildings in Liverpool led by University of Wollongong urban geographer Nicole Cook found that families preferred large, centrally located apartments over detached, car-dependent dwellings. She said developers are building the wrong types of apartments to house families because they make more money from smaller apartments.
“Our data suggests it is not only about the number of bedrooms but includes storage space (in the apartment and in common areas), bedroom size and sound insulation,” she told the Herald. “If the Minns government is serious about expanding high-density housing they need to do their homework … by knowing what type of families live in what type of apartments and at what proportions.”
What about ‘Mortgage Stress’ and ‘the Cliff’?
The term ‘Mortgage Stress’ is becoming increasingly common in articles that highlight the squeeze on household budgets created by rising interest rates and their consequent need for ever-greater mortgage repayments. Also having a run in the press is the term ‘Mortgage Cliff’, describing those borrowers who earlier locked in very low fixed rates now facing a big increase in debt repayments once their deals expire. This will affect about 880,000 borrowers throughout 2023 followed by another 450,000 in 2024.
However, so far this year there haven’t been many forced sales of Sydney properties resulting from mortgage stress or the mortgage cliff, and as far as the RBA’s concerned the majority of Australian households will be able to cope with the need for a greater share of their incomes to be diverted to mortgage repayments.
The RBA has already said that it expects debt repayments as a share of households’ disposable income to rise to about 10 per cent by the end of 2024 but commented that so far personal insolvencies remain at low levels.
The Bank estimated that in early 2023 more than 60 per cent of all home loans “had balances in offset and redraw accounts equivalent to more than three months of their scheduled payments” and noted that almost half of all mortgage holders had financial buffers equivalent to more than a year.
However, the Bank also expects 15 per cent of borrowers to experience negative cash flows in the coming months — a way of saying their incomings won't match their outgoings and they'll have to dig into their savings and tighten their belts.
CoreLogic’s Eliza Owen says there are a few ‘red flags’ showing up that could indicate areas of market stress in Sydney: ““When you look at some of the areas like the…Blacktown north market for Sydney, this is where we see a slightly worrying trend of listing volumes rising,” she said, although property prices have edged up in Blacktown.
“Why are new listings rising…? Usually, this time of year it’s winter and listings should be going down, not up. New listings continue to rise, which is pretty curious. Maybe there are some people who feel they need to sell their property,” she noted.
Nicola Powell, head of Domain’s research and economics, said that indications of distress included terms such as ‘mortgage repossessed’, ‘urgent sale and ‘price reduced’ that turn up in property descriptions.
Domain data shows that there could be some pockets of forced sales in the greater Sydney area, naming the Blacktown area with 9.2 per cent of new listings in May designated as distressed, up from a rate of 5.2 per cent a year earlier. In Sydney’s south-west, another area of rapid population growth, the share of distressed sales among new listings had jumped from 4 per cent in May 2022 to 9.8 per cent in May this year.
Quantify Strategic Insights head of data and insights Angie Zigomanis told Domain it wasn’t surprising some of the areas with the highest rates of mortgages were also recording spikes in listings but drops in prices.
“Those housing areas on the fringe typically bear the brunt. There’s a high percentage of first home buyers in these areas, they won’t have a lot of equity, they have a high loan-to-income ratio and they aren’t in the highest income brackets either. The moment those mortgage rates rise they put pressure on the borrower.
Sydney has recently seen an uptick in new listings that’s ten per cent above the five-year average, although Domain’s Elizabeth Redman points out it’s mainly been in areas where a particularly large number of investors are selling up: “Sydney’s inner city had the largest jump in new listings, followed by mortgaged western suburbs around Parramatta, Auburn, Penrith and Blacktown,” she said.
Westpac senior economist Matthew Hassan said he thought the CoreLogic analysis was valuable, but unseasonable rises in listings don’t necessarily mean that mortgage holders were distressed: “With respect to listings, one of the things we’ve come across recently, it does seem to relate to the differential between prices in the market,” he said.
“A changeover buyer is also a seller. If there’s a big stretch involved to go from the current home to the new home that’s an affordability factor that’s not captured in other measures. We may be seeing listings improve because the gap between tiers has narrowed in the last few months.
“Mortgage arrears to March are still relatively low,” he said. “They’ve lifted a little off a very low starting point, but they haven’t shown a wave of people who are selling because they’re stressed.”
The Herald’s Matt Wade also sees reassuring signs that mortgage stress isn’t causing much trouble: “The Australian Prudential Regulation Authority, which supervises banks, said in June the proportion of non-performing home loans ‘remained well below’ pre-pandemic levels at 0.72 per cent of outstanding residential mortgages. A modest rise in non-performing loans in the March quarter followed seven consecutive quarters of declines.
“A separate report by S&P Global Ratings said while the number of home borrowers behind on loan repayments had crept up, the overall share of mortgage arrears was “still below long-term averages”.
Sources:
‘This year’s house price rise was a shock. But history left some clues behind,’ Jim Malo, Domain, 13 July 2023
‘The graph that shows stressed property owners may be starting to crack,’ Elizbeth Redman, Domain, 12 July 2023
‘Too much for me’: Sydney unit rents soar $145 a week in a year,’ Kate Burke, Elizabeth Redman and Jim Malo, Domain, 6 July 2023
‘The RBA has kept interest rates on hold. Here's why it'll be cautious from here on,’ Peter Martin, ABC News online, 5 July 2023
‘Own a home? You probably got richer during the pandemic,’ John Collett, Sydney Morning Herald, 4 July 2023
‘New data reveals where house prices are rising $2100 every week,’ Brooke Rolfe, News.com.au, 3 July 2023
‘Sydney leads another house price rise,’ Josh Taylor, The Guardian, 3 July 2023
‘Perfect for us’: The Sydney suburbs no-one wants to leave,’ Kate Burke, Sydney Morning Herald, 2 July 2023
‘More recent buyers are reselling their homes, and that may be an early sign of mortgage troubles,’ Michael Janda, ABC News online, 30 June 2023
‘It takes a year for a rate rise to take effect – it may be time to halt the hikes,’ Shane Wright, Sydney Morning Herald, 29 June 2023
‘More Australian homeowners offloading properties at loss as interest rate rises take toll, new data shows,’ Peter Hannam, The Guardian, 28 June 2023
‘Morrison government HomeBuilder scheme 'overheated' construction, blindsided states and lacked controls,’ Daniel Ziffer, 28 June 2023 ‘Minns abolishes Sydney planning agency to bring control back in-house,’ Michael Koziol and Michael McGowan, Sydney Morning Herald, 27 June 2023
‘Home buyers refuse to surrender to RBA,’ Leith van Onselen, Macrobusiness, 26 June 2023
‘Clearance rates strong as first home buyers rush to avoid stamp duty,’ Bonnie Campbell, Australian Financial Review, 26 June 2023
‘Can big apartments solve Sydney’s housing crisis?,’ Andrew Taylor, Sydney Morning Herald, 25 June 2023
‘Developers ‘laughing’ about windfall under NSW government’s planning changes, mayor warns,’ Mostafa, Rachwani, The Guardian, 16 June 2023
‘Forced property sales on the rise in outer Sydney as interest rate hikes start to bite,’ Peter Hannam and Nick Evershed, The Guardian, 24 June 2023
‘Forget death and taxes, the real certainty in Australia is rising house prices,’ Greg Jericho, The Guardian, 15 Jun 2023
‘House prices were set to fall 20 per cent. Now there’s talk of record highs,’ Jim Malo, Domain, 22 June 2023
‘House prices will keep rising into next year, says Domain, as immigration boosts demand,’ Peter Hannam, The Guardian, 22 June 2023
‘Housing market braces for wave of forced selling,’ Leith van Onselen, Macrobusiness, 16 June 2023
‘How tens of thousands of 'missing' homes could push Australia's property prices even higher,’ David Taylor, ABC News online, 24 June 2023
‘Mortgage stress yet to bite, but 1.3 million on borrowed time,’ Matt Wade, Sydney Morning Herald, 24 June 2023
‘Property prices are about to skyrocket: Here’s why,’ Eliza Bavin, Yahoo Finance, 23 June 2023
‘Sydney’s property market is the best since the boom. But will it last?,’ Kate Burke, Domain, 18 June 2023
‘The five factors that will determine when the interest rate pain for households will end,’ The Drum, David Taylor, ABC News online, 18 June 2023
‘The suburbs where mortgage stress carries an extra risk,’, Jim Malo, Domain, 21 June 2023
‘Top tax tips to make the most of your investment property,’ Elizabeth Tilley, realestate.com.au, 18 June 2023
‘Paddington apartment sold for $20 million amid trophy home market bonanza,’ Lucy Macken, Domain, 17 June 2023
‘Where Sydney, NSW home prices have doubled in just two years,’ Fiona Killman, realestate.com.au, 22 June 2023
UP SHE GOES
Thu, 22 Jun 2023More gains likely for Sydney house prices and rentals
Sydney housing prices are proving to be incredibly resilient, despite an economic slowdown and twelve interest rate increases in a little more than a year. Of all Australian capital cities, Sydney has continued to produce the largest price gains, with home values rising by 1.8 per cent in May – the fastest monthly increase since September 2021. In the past three months alone, Sydney’s values rose by 4.5 per cent.
Sellers had pulled out of the market after seeing falls earlier in the year, while the number of people seeking to buy property in the NSW capital has surged with a huge rise in immigration. As the ABC’s Ian Verrender put it: “At the moment, more than 1,000 people are entering the country every single day.
“They're arriving at a time when there isn't enough housing to accommodate those already here. And we are certainly not completing anywhere near the necessary 300 to 500 new residences a day. In fact, we are still completing roughly the same number of new dwellings as in 1995.”
In the greater Sydney area, Domain figures show that Lakemba was the winner in house value growth with a 13 per cent rise over the three months to May to a median of about $1,133,000. It was closely followed by Hurlstone Park, Earlwood and Bayview - all where values rose more than 12 per cent, then by Canterbury, Clontarf and Waverley, all of which were up more than 11 per cent.
It’s not entirely surprising that PropTrack’s latest Home Price Index for May has shown the rise in prices that started in Sydney early in 2023 has broadened and accelerated across national markets. According to the PropTrack figures, national home prices rose for a fifth consecutive month in May, increasing 0.33 per cent, bringing prices up 1.55 per cent from their low point in December last year.
The favourable market conditions described by PropTrack senior economist Elanor Cragh are a good summary of just why Sydney’s prices are likely to continue their upwards trajectory: “Supply constraints have eased slightly with respect to total stock for sale, but the flow of new listings remains soft.
“This is keeping a floor under prices, with sellers benefitting from less competition with other vendors. Auction activity has improved and clearance rates remain firm after rising above levels seen in the second half of 2022,” she said.
David Walker, Ray White Upper North Shore principal, told Realestate.com.au that stock levels were back to historical lows, sitting at 20 per cent less [listed] for sale: "The lack of choice has meant that clearance rates remain high and the numbers of buyers coming through open homes are high,” he said.
“Prices seem to have stabilised and we are seeing homes that have sold 12-18 months ago being sold at similar, or higher levels than when they last transacted. Buyers are still active, cautious but active. People now are understanding they need to factor in interest rate rises so maybe not borrowing their maximum capacity but the activity level and buyers willing to transact has not ceased at all.”
There’s also been a recent price growth in some ‘commutable’ regional areas, said CoreLogic’s Tim Lawless: "In amongst those regions there's quite a bit of variability as well, the past three months has really started to see the stronger growth conditions emerging from your more commutable regional markets.
"Areas like the Illawarra has seen a 2.7 per cent rise in the past three months and the Newcastle region has seen housing values rise by 1.8 per cent."
Will prices go into reverse?
The unexpected rebound in Sydney’s housing prices has accelerated in recent months, causing many economists to question how long it can last. Despite twelve interest rate increases which have seen official rates rise by nearly four per cent over the last year, property prices stopped falling and are once again on the rise.
Writing in his ‘Property Update’, author and property developer Michael Yardney says that it now seems clear that our property markets have bottomed out and we are moving into the next phase of the property cycle: “Lower listing volumes (fewer properties for sale) are helping protect the market from further downward pressure.
“While many are concerned about a ‘fixed rate cliff’ ahead, RBA data indicates the majority of mortgage debt is on variable terms. Many people have also been overpaying on their mortgages during the low interest rate cycle, while many others have already refinanced.
“There may be more rate hikes ahead, but our analysis suggests there is light at the end of the tunnel and once interest rates peak (and that may not be that far off), and now that inflation has peaked, consumer confidence will return and the market will reset as a new property cycle begins.”
He then cautioned that we shouldn’t expect the price recovery to be rapid and the next phase will be one of stabilisation.
TCorp chief economist Brian Redican told the Financial Review that property prices could go into reverse in the next six months unless interest rates begin to fall.
Mr Redican said the property market is being driven by sentiment and a belief that the RBA is near the end of its rate hiking process and a rate cut is coming: “Potential sellers aren’t selling because they think prices are too low, so they’re prepared to wait out for prices to rebound,” he said.
“We haven’t really seen an improvement on those hard-edge fundamentals that support a rebound in house prices this year,” he said. “Wages growth hasn’t picked up materially. In fact, real wages are still falling because they’re not matching the inflation, in terms of the ability to take out a large mortgage.
“We’re still seeing the flow-on impacts of the Reserve Bank’s rate hikes. The rate increases…are still running through the system. So people will be facing higher mortgage rates over the next couple of months, including those who are coming off their fixed rate loans.”
SQM Research’s managing director Louis Christopher warned his subscribers to expect “distressed activity to rise based on a new round of forced and panicky selling starting sometime the second half of this year”.
Christopher said that the market should “be prepared for a new round of housing price falls starting in the second half of 2023”.
However, HSBC chief economist Paul Bloxham told the Australian Financial Review that further interest rate rises might have an effect on property sales but would “not likely be enough to stall this housing market momentum we’re seeing”.
“I think the housing market has built enough strength because of strong population growth and limited housing supply. You’d need a very substantial rise in interest rates from here to slow the housing demand enough to bring it back in line with housing supply. But that would do a lot of damage to the economy,” he said.
CoreLogic research director Tim Lawless said that higher rates would probably reduce some of the renewed strength evident in the housing sector, but that the imbalance between supply and demand was likely to persist.
“Whether this is enough to keep upwards pressure on housing values remains highly uncertain, but at the very least I would expect growth to moderate back to levels that are more sustainable,” he said, adding that persistently low levels of available stock and a growing urgency among buyers would support the renewed strength in prices.
A surprising rate increase
The decision by the Reserve Bank of Australia on Tuesday 6 June to hike the prime rate by 0.25 of a percentage point to an eleven-year high of 4.1 per cent came as a surprise to many financial analysts. The financial markets had only priced in a 35 per cent chance of a rate rise in June, and there was an expectation the RBA would give its May increase more time to have the desired effects.
Domain’s Melissa Heagney-Bayliss says that pe0ple looking for a house in Sydney now need to earn more than $250,000 per annum to be able to borrow enough to purchase a typical home. She adds that the amount needed to obtain and service such a loan is largely the result of the RBA’s twelve cash rate rises since May 2022 that have reduced buyers’ ability to borrow faster than other factors such as property price increases and rising mortgage costs.
Recent Canstar modelling shows that a Sydney buyer who purchased a house for the March quarter median price of $1.46 million would need a gross annual income of $255,600 before tax to have enough borrowing capacity to make their purchase after paying a 20 per cent deposit. This is an income $50,700 more than twelve months before and more than triple the $78,800 median pay of full time employees in 2022.
Canstar’s modelling was based on the interest rates prevailing in March this year when the prime rate was 3.6 per cent and assumed the rate on a variable mortgage was 6.13 per cent. Both will have risen again as the result of the May and June increases by the Reserve Bank. Canstar Group executive Steve Mickenbecker related this situation to first-home buyers, saying: “For single first home buyers, 99 per cent of them are going to be excluded from buying a house at the median price, but when you think about couples, it’s not as big of a stretch.”
More modelling by the ANU’s Centre for Social Research and Methods showed that the average homeowners will have to allow up a quarter of their take-home pay towards their repayments, which means they are now paying fifty per cent more than before the pandemic.
ANU associate professor Ben Phillips told news.com.au that while mortgage holders are coming off “a few years of very low interest rates, mortgage costs as a share of income are at their highest since 1984. There has been a very sharp increase in the last two years, obviously related to sharp increases in interest rates, but also higher average debt levels,” he said.
AMP Capital chief economist Dr Shane Oliver agreed that first home buyers would find it almost impossible to purchase a house at the median house price, even with a 20 per cent deposit: “Tax data shows that only 1 per cent or 2 per cent of Australians earn above $180,000 a year, so you’d have to be relying on having two high-income earners, or alternatively, relying on the Bank of Mum and Dad to be able to buy,” he said.
The latest interest rate rises have had an immediate, if short-term impact on property auction results, says the Daily Telegraph’s Aidan Devine: “Interest rate rises announced this week have spurred a flurry of activity at Sydney auctions as home seekers try to secure properties before banks void their loan approval,” he wrote.
“There were more than 400 properties scheduled for auction this week (10 June), a decline in volume due to the long weekend, but preliminary indicators showed most auctions were successful. Auctions for properties considered ‘entry level’ in their suburbs were the most competitive, but there was also strong demand for premium properties.”
Why the latest hike?
The Reserve Bank’s main concern is that it’s taking too long for Australia’s rate of inflation to come down. Figures from the Australia Bureau of Statistics show that prices rose 6.8 per cent over the year to April, causing RBA governor Philip Lowe to issue a warning against the rising cost of services which are labour intensive and can reflect rising wages, although the Bank says wages growth remains consistent with its inflation targets providing productivity improves.
Governor Lowe said: "Recent data indicate that the upside risks to the inflation outlook have increased and the board has responded to this," he noted in his post-meeting statement. "While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued."
He warned that the rate of public sector wages growth is expected to increase, noting that the increase in award wages was higher in 2023 than in the previous year, and didn’t rule out another rate increase: "Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will depend upon how the economy and inflation evolve," he said after the Bank’s June meeting.
RBC Capital Markets chief economist Su-Lin Ong told ABC TV's The Business program that the recent 5.75 per cent increase in award wages was likely add to inflation, as Governor Lowe has stated.
"That is not consistent with the inflation target," she said. "While it is very understandable from a fairness, equity perspective that the lowest paid in Australia should receive an increase, there are potentially some consequences of such a large increase for wages and inflation more broadly."
Ms Ong said the RBA would also be concerned by the recent recovery in housing prices that began in Sydney and is now spreading across Australia: "While it may not have been the key driver of today's decision, I think it's one of a number of factors that support policy moving to more restrictive territory," she commented.
Federal Treasurer Jim Chalmers argued that neither the recent budget nor the 5.75 per cent rise in award wages were the causes for the RBA’s latest rate hike: "This rate rise today is not because of the budget, and it is not because people on the minimum wage are being paid too much, and we should be really clear about that," he said.
"The Reserve Bank's job is to squash inflation without crunching the economy, and they will have lots of opportunities to explain and defend the decision they have taken today," he told reporters at the conference after the June monthly meeting.
Some economists already believe the RBA’s cash rate will increase to at least 4.35 per cent. Angus Coote, executive director of Jamieson Coote Bonds, is concerned the Bank may raise interest rates too far and risk putting Australia into recession: "Clearly central banks are going to continue to hike, but I think this could be a policy error in the making — just the same way cutting rates to zero and flooding the place with money in 2020 was.”
Housing shortages a factor
In 2022 there was a response to the RBA’s rate hikes that put a stop to price increases that had seen Sydney housing hit peak levels across the city. The current 2023 recovery will be influenced, in part, by a shortage of available homes that’s due to a number of factors including a rebound in immigration, a shortage of rental properties, and owners holding back on listing their properties in expectations of more price rises once interest rates stabilise.
The construction industry would usually be in a position to take advantage of this situation by increasing the supply of housing but this is currently challenged by a combination of high and rising costs, a shortage of skilled labour, and supply chain issues the industry fears won’t be settled in the near future.
According to building approval figures from the Australian Bureau of Statistics, approvals for new houses as well as apartments and townhouses are at their lowest levels in more than a decade and private house approvals have fallen by 23 per cent in NSW.
Treasury secretary Steven Kennedy told parliament the downturn in building approvals is expected to continue until 2025, with investment in new dwellings likely to contract by 2.5 per cent this year and a further 3.5 per cent in 2023?24 and 1.5 per cent in 2024?25.
Housing Industry Association senior economist Tom Devitt told ABC News that the present situation leaves both the residential construction industry and those relying on it to increase housing supply with a dire outlook: "On a quarterly basis, this leaves detached house approvals 15.4 per cent lower than the same time the previous year, and multi-units down by 38.9 per cent. This continues the long-lagged response of Australian homebuyers to the RBA's interest rate hiking cycle, with further declines expected in the coming months.
"The combination of construction cost blowouts, labour uncertainties, increased compliance costs and taxes on investors has seen approvals for multi-units fall. These disappointing approvals numbers are occurring as population growth surges with the return of overseas migrants, students and tourists.
Phil Dwyer, president of the Builders Collective of Australia and a builder with 40 years' experience, says the crisis in the construction industry is a "nationwide problem" and that there has been “a great escalation in insolvencies” among construction companies. He blames the current insolvency crisis on the effects of the HomeBuilder grant, which was introduced by the Morrison government in June 2020 as part of its economic response to the pandemic.
Mr Dwyer says that introducing the HomeBuilder scheme into an already "heated industry" created a massive volume of work that has overwhelmed the nation's builders. Two years of supply chain issues and inflation caused by factors such as the pandemic, the Russian invasion of Ukraine as well as labour shortages have created a crisis.
Builders operating on fixed-price contracts who are unable to pass on their increased costs to customers have been the hardest hit. The prices of raw materials such as steel and timber increased between 40 and 50 per cent during the pandemic and many builders ran out of the money they needed to finish projects.
Renters feel the pain
CoreLogic says that units are now the only option for many tenants but the limited supply has forced up rents to the point there renting a house in Australia costs just $39 more a week than renting a unit compared to a difference of $64 a year ago.
In April, rents for units across capital cities rose on average by 1.6 per cent, significantly outpacing the 0.9 per cent rise for houses, CoreLogic figures show. The rise in rents was strongest in Sydney, where unit rents rose by 1.9 per cent in April. This is part of a record annual increase of 19.1 per cent which equates to an extra $106 a week.
CoreLogic also says the supply of advertised rentals is now 40 per cent below the five-year average.
Eliza Owen, CoreLogic Australia’s head of research, said the makeup of dwellings had “a significant” impact on the rental market – with people moving during the pandemic creating the need for an extra 120,000 homes.
Owen said recent data showed there was a “slight” move towards share housing but it was nowhere near pre-Covid levels: We’ve gone through the pandemic, a lot of incomes have also gone up and that’s allowed a lot of people to actually hold on to their larger rental properties,” she said. “But we’d expect more share houses to now reform to try and deal with the increases in rental costs.”
Reserve Bank governor Philip Lowe recently triggered a wave of controversy when he suggested “we need more people on average to live in each dwelling.”
Speaking in Senate estimates, Lowe warned that not enough dwellings were being built to keep up with a growing demand: “Higher prices do lead people to economise on housing. Kids don’t move out of home because the rents are too expensive or you decide to get a flatmate,” he said. “That’s the price mechanism at work.”
Lowe said an increase in migrant workers and international students meant the population would rise another two per cent and the only way to ease the pressure in the longer term was more supply.
“We’ve got a lot of people coming into the country, people wanting to live alone or move out of home. The way that this ends up fixing itself is, unfortunately, through higher housing prices and higher rents.”
Dr Lowe said the RBA is forecasting rents, the single largest component of the consumer price index, to grow about 10 per cent. This would be the biggest annual rise in rents since the 1980s.
“It’s very tough,” he said.
He’s certainly right about the rental situation being ‘tough.’ Treasury secretary Steven Kennedy told a Senate committee that the rental market was very tight, with advertised rents growing 10.1 per cent in the year to April. He said those advertised rents would eventually feed into average rental costs as new lease agreements are signed.
According to Kennedy, one pressure point on the rental market has been people moving out of home. He said about 130,000 extra households had been created, compared to the pre-pandemic period, because of this phenomenon.
“This is partly a result of local residents choosing to live in smaller households, for example, adult children moving out of their parents’ home,” he said.
Writing in Michael Yardney’s ‘Property Update’, National Director of Property Management at Metropole Leanne Jopson says it’s likely Sydney's rental market will continue to be competitive, with rents likely to increase in the short term: “This is due to the limited supply of rental properties and the ongoing high demand for rental housing, particularly in popular suburbs close to the city centre and public transportation.
“The dearth of new apartment developments, a slow property market, the arrival of overseas migrants, and the return of international students will see rental demand remain elevated, further worsening conditions for tenants in Sydney.”
In short, her conclusion is that we will most likely see lower vacancy rates and even higher rents in Sydney in the coming months.
Sources:
‘The Sydney suburbs leading the property market rebound,’ Tawar Razaghi and Melissa Heagney-Bayliss, Domain, 12 June 2023
‘Sydney auctions: Interest rate rises fire up bidder activity,’ Aidan Devine, Daily Telegraph, 10 June 2023
‘Sell while you can’, Leith van Onselen, Macrobusiness, 14 June 2023
‘Inflation is high but is the Reserve Bank raising interest rates into a recession?,’ David Taylor, ABC News online, 12 June 2023
‘Defies logic’: How much income buyers need to purchase a typical house,’ Melissa Heagney-Bayliss, Domain, 5 June 2023
‘I’m obviously not first choice’: rental crisis forcing older Australians back into share houses,’ Cait Kelly, The Guardian, 1 June 2023
‘The solutions to Australia’s housing crisis are actually quite obvious,’ Greg Jericho, The Guardian, 1 June 2023
‘Home prices rise for fifth consecutive month as rebound gathers speed,’ Lisa Calautti, Realestate.com.au, 1 June 2023
‘House values in regional NSW record sharpest drop since before the COVID-19 pandemic,’ Ainslie Drewitt-Smith and Kenji Sato, ABC News online, 10 June 2023
‘Rental units only $39 cheaper than houses per week as demand soars for affordable options,’ Jordyn Beazley, The Guardian, 31 May 2023
‘The housing crisis threatens to unleash Australia’s darker angels. Peter Dutton is intent on exploiting it,’ Peter Lewis, 31 May 2023
‘Collapse in new home approvals tipped to worsen housing affordability crisis,’ Shane Wright, Sydney Morning Herald, 30 May 2023
‘The home hunters racing to buy at auction before costs go up,’ Melissa Heagney-Bayliss, Domain, 31 May 2023
‘RBA boss gives depressing solution to Australian rent price surge,’ Courtney Gould, News.com.au, 31 May 2023
‘Why Australian households are divided when it comes to financial pressure, and economists are divided on the outlook,’ Stephanie Chalmers, ABC News online, 31 May 2023
‘Building slump 'will see the affordability and rental crisis deteriorate further' warns HIA,’ Michael Janda, ABC News online, 31 May 2023
‘Sydney suburbs where first home buyers could save on stamp duty,’ Kate Burke, Sydney Morning Herald, 28 May 2023
‘Guardian Essential poll: majority of Australians support rent freezes and migration cap amid housing crisis,’ Paul Karp, The Guardian, 30 May 2023
‘Sydney house prices are up 4.5pc since summer,’ Nila Sweeney, Australian Financial Review, 1 June 2023
‘Struggling renters should get flatmates or move home, RBA boss says,’ Adam Vidler, 9News, 1 June 2023
‘National property price rebound gathering pace despite interest rate rises, with Sydney leading the recovery,’ Stephanie Chambers, ABC News online, 1 June 2023
‘Thinking of building a home? Here's what you need to know about the crisis in construction,’ Emma Machan, ABC News online, 1 June 2023
‘I’m obviously not first choice’: rental crisis forcing older Australians back into share houses,’ Cait Kelly, The Guardian, 1 June 2023
‘Home prices rise for fifth consecutive month as rebound gathers speed,’ Lisa Calautti, Realestate.com.au, 1 June 2023
‘Federal budget 2023: 'More work to be done' to solve supply crisis, experts say,’ Lisa Calautti, Realestate.com.au, 11 May 2023
‘Latest property price forecasts for 2023 revealed. What’s ahead in our housing markets in the next year or two?,’ Michael Yardney, Property Update, 30 May 2023
TIME TO SMILE
Wed, 19 Apr 2023A pause in rate rises and signs of a price recovery
The Reserve Bank’s decision in April to leave interest rates where they are brought a sigh of relief from almost everyone connected to the property market. It was a welcome break from the string of ten consecutive monthly rises in 2022 and 2023 that have impacted property prices across Australia.
However, despite many doom and gloom articles in the media, the Sydney property market has been doing reasonably well, particularly in some suburbs that have outperformed other sections of the greater Sydney area.
Economist Chris Richardson, writing in the Sydney Morning Herald, compared the housing market to the latest John Wick movie: “Despite being shot, stabbed and punched, house prices are already rising again; sales volumes are well up on pre-Covid levels [and] auction clearance rates are the highest in a year.”
In February, the Sydney auction clearance rate hit 69 per cent, which was the highest rate since October 2021. Some sections recorded clearance rates between 70 and 80 per cent, according to Domain data.
Sydney’s city and inner south region were the standouts, recording a clearance rate of 79.7 per cent which was up nine percentage points from February 2022. There were outstanding results in Blacktown (76.3 per cent), the eastern suburbs (74.8 per cent) and in the inner west (73.3 per cent).
Sydney housing values rose by 1.5 per cent in March, according to CoreLogic figures that show the price of the average Sydney property is now $1,230,581. March even saw prices grow a bit higher as strong buyer demand was met with low stock levels.
In Sydney, the average number of active bidders per auction lifted to 3.4 in March, after lingering below 3 during the spring selling season last year, figures from real estate agency Ray White show.
Much of the March rise was the result of changes to support for first-home buyers including changes to stamp duty, according to BresicWhitney chief executive and director of sales Thomas McGlynn: “If you were to pinpoint one change that has occurred that has given a lot of confidence to others was the first-home buyer stamp duty change.
“It has definitely given a lot more confidence to that demographic of buyers, which has given confidence to other demographics,” McGlynn said, noting that since January 16, first-home buyers have up to an extra $66,000 to spend at auction if they opt in to paying annual land tax, driving competition on homes worth up to $1.5 million.
Foreign buyers are also returning to the Australian market. Daniel Ho, MD of Chinese real estate portal Juwai IQI, says that Australia has now become the most popular country for Chinese homebuyers according to enquiries to the website.
This is supported by Fiona Yang, executive partner at Plus Agency, who says: “The pandemic-related uncertainty is passed. The closed borders are open, rents are hot, and these buyers are fed up with three years of lockdown. They are committed to Australia. They are ready to make quick decisions on real estate”.
[N.B. Treasury says it is expecting 350,000 new migrants to move to Australia in 2022-23 followed by another 300,000 in 2023-24 - adding up to 650,000 people over two financial years.
Australia's net annual immigration in the year up to September 2022 stood at 303,700 people - a 15-year high.]
Ray White NSW chief auctioneer Alex Pattaro said that even if more supply were to come onto the Sydney market, there were plenty of buyers waiting to acquire property: “The buyer pool is enormous. In the last 30 days, we’ve had the highest number of registered bidders in 12 months,” Pattaro said. “Even if there was an influx of stock we are confident the buyers will keep up with the volume.”
Mosman and Hunters Hill have the distinction of being two local government areas where every homeowner that resold made a profit last quarter despite a slowing market, CoreLogic figures show. The typical home sold in Mosman last quarter was owned for just under 11 years and made a profit of $436,000, median data shows.
The Northern Beaches area was not far behind, with almost 99 per cent of sellers making a profit.
Northern beaches homeowners sold after 10 years and netted a median profit of $527,500.
In fact, the vast majority of Sydney sellers – more than 91 per cent – were still making gains on sales of their homes.
Michael Yardney, in his Property Update for 25 March, says the Sydney market’s long term fundamentals are strong: “Sure, the value of many Sydney properties fell in 2022, but this is after recording a 27.7 per cent rise in housing values between October 2020 and January 2022, and now Sydney home values are down 11.4 per cent since peaking, taking roughly $132,000 off the median value of a dwelling.
“While Sydney property values may still fall a little further - it's a little too early to call the bottom of the market - buyers are back and the market is definitely "looking for a floor" and the Sydney property market is going to reset in 2023.
“And while prices have since cooled from their peak across the city, Sydney’s property market continues to fetch impressive prices, particularly in some of the most sought-after areas. After all, some of the city’s suburbs are so tightly held that an available property for sale comes around once in a blue moon with homeowners holding onto their houses for as long as 20 years,” he said.
Some Sydney suburbs have still managed to record loss-making sales in the last quarter, mostly in the apartment market where investors were more likely to lose money than owner-occupiers. Around one in 12 property sales were made at a loss, as shown in CoreLogic’s Pain & Gain report. This was the highest proportion of loss-making sales since mid-2019, when 9.3 per cent of homes sold at a loss and is up from 7.8 per cent the previous quarter.
Report author Eliza Owen confirmed losses were heavily skewed towards the apartment market, where 14.8 per cent of resales incurred a nominal loss compared to just 2.1 per cent of houses: “Sydney and Melbourne accounted for more than half of unit losses [nationwide]. There are particular pockets of risk and stagnant [price] growth that contribute to loss-making sales all the time, but in periods of a downturn those numbers become a bit extreme,” Owen said.
Botany Bay and surrounding suburbs such as Mascot and Pagewood had the highest rate of loss-making sales at 26.7 per cent, followed by the Parramatta (23.5 per cent), Ryde (23.2 per cent) and Strathfield (22.2 per cent) regions.
A four per cent tipping point?
There are concerns expressed by some financial journalists that a 4 per cent or higher cash rate could set off a flood of distressed property sales. The cause would be the inability of borrowers to make repayments on their loans because they weren’t adequately stress tested when they organised their financial arrangements.
Home buyers who acquired mortgages in the past two years were assessed on their ability to repay their loans if there were a 2.5 or 3.0 per cent increase in their interest rate; these levels have already been exceeded by the RBA’s recent hikes that have taken the cash rate to 3.6 per cent with no guarantee there aren’t more increases on the way.
SQM Research founder Louis Christopher says there is a real chance of seeing distressed property sales in the near future: “Obviously, it’s a matter of probability, and we think the probabilities would start rising north of 50 per cent of a hard landing in the economy and a double dip downturn in the housing market,” he told the Herald. “If we go over 4 per cent … [they] are very concerned, and they believe many of their borrowers will be forced to sell.”
AMP Capital chief economist Shane Oliver says we should wait until the effects of the recent rate hikes are fully known, and that this would take a while: “My inclination would be to think if you get above 4 per cent, that would create distressed selling,” he said. “But it hasn’t happened yet and that has given some confidence to some of us. If we keep going higher, every time we see an interest rate hike from the RBA it adds to the risk. There’s also the continuing unknowns from the flow-on effects of the hikes.”
PRD chief economist Dr Diaswati Mardiasmo felt a peak above 4 per cent was sure to happen: “A lot of us have prepared for a 4 per cent rate. It’s been on a lot of people’s minds that the peak is around four, so it’s more if it’s a slow or fast climb,” she said. “In terms of how it’s going to affect the whole market we aren’t going to see a massive crash because of it, but in certain pockets there will be a bigger problem, particularly places with house and land packages where there are lots of first home buyers.”
News.com.au’s Tarric Brooker has a more optimistic outlook: “According to an analysis by the RBA, 14.6 per cent of mortgage holders would find themselves with negative levels of spare cashflow after paying their loans based on a 3.6 per cent cash rate. At the time, a 3.6 per cent cash rate was a hypothetical benchmark under which the expected stress of mortgage holders could be gauged. But today it’s a reality.”
Mr Brooker says that faith in the property market and government intervention to keep prices high appears to be quite broadbased: “With faith for many that prices will bounce back and eventually soar to new heights, the recent drops in prices are seen as an opportunity to ‘buy the dip’ before the next property boom sends prices to even greater heights.
“One could also argue that faith in a property price recovery is depressing new listing volumes. December last year saw new listings nationally drop to the lowest level since at least 2008, a time when there were almost five million fewer Australians,” he said.
CoreLogic’s head of Australian residential research Eliza Owen said lenders would most likely help homeowners continue to pay their mortgages, rather than trigger a wave of distressed selloffs:
“They have a stake in the assets [i.e. mortgaged homes], so to have excessive levels of distressed selling would lower the value of these assets over time,” she said.
One option some borrowers have considered is switching to an interest-only loan but Ms Owen said few would actually need the support: “We haven’t seen that much stress evident from the high-level metrics,” she said.
“I don’t see this being a very widespread option; my guess is people will avoid it if they can because of the additional cost over the life of the loan, but it’s kind of reassuring that that kind of flexibility is available.”
Fixed rate mortgages a concern
There’s going to be a delay in the impacts felt by borrowers from the RBA’s interest rate increases because the million or so borrowers on fixed-rate mortgages will see their original loan terms expire sometime during the full year of 2023 and even into 2024. When this happens, the average mortgage of $604,000 will see monthly payments increased by more than $1100.
RBA assistant governor Chris Kent says ordinarily interest rates would feed quicker into the economy: “The lagged effect of the cash flow channel of monetary policy is likely to be somewhat elongated currently due to the high proportion of fixed-rate loans and sizeable buffers held by many borrowers,” he said.
“This means that it’s likely to take longer than usual to see the full effect of higher interest rates on household cash flows and household spending.”
Kent said the increase in interest rates through 2022 had lifted by about 1.1 percentage points of total household disposable income. He said by 2024, there would be a further lift of 1.5 percentage points in the impacts on household income from higher rates requiring adjustments to consumers’ spending and savings patterns.
Chris Joye, the co-founder and portfolio manager of fund manager Coolabah Capital, says as many as 15 per cent of borrowers could be at risk of default before Christmas. He warned that Australians should prepare for more discomfort as one in four Aussie home loans may switch from 2 per cent fixed rates to 6 per cent variable rates in 2023.
Mr Joye also believes that as interest rates rise and borrowers struggle to meet their mortgage repayments, many Australians will have to sell their homes in the second half of 2023. He advises hopeful first home buyers to start planning now and to look for properties that will become available once the market clears.
There’s also a problem for those trying to refinance fixed-rate mortgages who have become what are called ‘mortgage prisoners’. These are people trapped by mortgages they’re unable to renegotiate because they no longer meet the standards for loans set by lenders.
“There is without a doubt a big challenge for new mortgage holders over the past three years,” the executive director and head of research at K2 Asset Management, George Boubouras, told The Guardian. “Many are mortgage prisoners and a mortgage prisoner is unable to refinance because of the serviceability buffers.”
A serviceability buffer, used to help determine an applicant’s borrowing capacity, is the rate at which a lender assesses a customer’s ability to meet repayments. Home loans written between 2019 and 2021, when rates were at historic lows, were tested on an applicant’s ability to make repayments at 2.5 percentage points above the lending rate. That buffer was then increased to 3 percentage points.
But mortgage rates have risen by about 3.5 percentage points since May last year, in line with the rate increases of the Reserve Bank. This means many pandemic-era borrowers do not meet today’s lending standards, which in turn prevents them from getting a better deal from a rival lender.
First-home buyers get help
Figures from Domain show that the average first home buyer couple in Sydney would need to put half of their income towards mortgage repayments on an entry-level home, up from less than a third of their income two years ago.
Modelling from the 2023 Domain First Home Buyer Report found that a young Sydney couple on the average income would need to put 50.9 per cent of their earnings towards initial mortgage repayments if they purchased at Sydney’s entry-level house price of $851,500. That’s up from 31.5 per cent of income in 2021.
Unit buyers are only slightly better off. They can expect to see 34.2 per cent of their income chewed up by repayments on a $571,500 entry-level apartment, up from 25.5 per cent in 2021.
The only positives for first-home buyers come from declining property prices reducing the time it takes the average couple save a 20 per cent deposit for an entry-level home. They would have to save for six years and eight months for a house deposit, down 13 months year-on-year, and for four years and seven months for a unit, a drop of eight months year-on-year.
The modelling assumes a couple earning a combined post-tax income of $115,204 – the average for 25 to 34-year-olds in Sydney – and saved 20 per cent of their income.
Research author and University of Sydney Senior Lecturer in Urbanism Dr Laurence Troy said first home buyers, particularly in Sydney, wouldn’t be able to afford the costs of buying a home unless they were on fairly high wages: “Saving up and living frugally won’t work to get you over the line.”
Dr Troy said many first-home buyers rely on family help to get into the housing market, including the family’s paying a deposit or allowing family members to live at home rent-free: “If you’re living in Sydney and trying to buy into Sydney, the only way you can do it is through family support in a fairly significant way,” he said.
Commonwealth Bank’s head of Australian economics Gareth Aird has seen a decline in home buyer demand since the Reserve Bank first hiked rates in May last year: “Even though prices have fallen, the reduction in borrowing capacity has been greater. It’s actually become a lot worse for first home buyers because the rise in serviceability makes it harder to get into the market in the first place.
“The only thing that’s gotten better is that the deposit required is a little bit less because house prices are down, but they still have more money going out each month on rent when they’re trying to save.”
Politics and Land Tax
For the first time in twelve years NSW has a Labor government, and like all governments, this one has policies that will affect the Sydney property market. Housing is, and should be, a major concern for the incoming administration.
The Herald’s Michael Koziol summarised the present state of play: “The new Labor government will inherit a shrinking pipeline of new housing across Greater Sydney, with dwelling approvals running more than 15 per cent below the five-year average, threatening to exacerbate the housing and rental affordability crisis gripping the city.
“The latest available figures from the Australian Bureau of Statistics show dwelling approvals in 2022-23 are tracking even lower than the previous financial year - 20,559 at the end of January compared to 22,239 in 2021-22. House and apartment approvals were both down.
“Similarly, the NSW government’s Urban Development Program dashboard showed that in the 12 months to September, new dwelling completions in Greater Sydney totalled 23,350 - 32 per cent lower than the five-year average. Greater Sydney includes the Central Coast and Blue Mountains.
“Those figures lead the planning department to predict another 151,000 homes will be supplied in Sydney over the next five years in a medium-growth scenario - a decrease of 16.4 per cent on the preceding five years,” he wrote.
For those now looking to enter the housing market, the new Labor government will spend $722 million on a first-home buyers scheme axing stamp duty for properties up to $800,000 and discounting it on dwellings up to $1 million.
These measures will replace the Coalition's stamp duty reforms which were passed by State Parliament last year. Until July 1 first-home buyers will be able to opt-in for land tax instead of paying stamp duty on their purchase, saving them an estimated $66,000 on the transaction. After that date the Labor government’s stamp duty exemption begins.
Under the current policy, introduced by the Coalition on January 16 this year, first home buyers can choose to pay an annual property tax on homes valued up to $1.5 million. They do not have to pay stamp duty of up to $66,000, which they can use as part of their home deposit instead.
About 2330 first home buyers have already opted for paying the annual property tax, according to figures released by the former government. The tax option was available to first home buyers who had purchased since November 11 last year.
After July 1 the property tax option will be scrapped and first-home buyers who purchase properties in NSW up to $850,000 will be exempt from paying stamp duty, with concessional rates of stamp duty on properties up to $1 million.
Dr Peter Tulip, chief economist at the Centre for Independent Studies, said while both the Coalition and Labor had policies to reduce stamp duty, Labor’s policy was more generous for those purchasing up to $850,000. Because of this, some first home buyers would wait to purchase under the increased price caps.
“The Labor Party’s policy is more generous for most home buyers because Perrottet’s reduction in stamp duty was offset by an increase in annual land tax,” he said. “The different policies benefit different groups of buyers and so some of them are going to want to get in before July and others will wait until after July,” he said, noting he expected those who rush to use the property tax would have a minimal impact on prices.
McGrath Parramatta’s Amit Nayak said those looking to buy detached houses in the region may rush to use the property tax option, but that other first home buyers will delay purchasing until Labor’s policy is introduced: “I would say they will wait because the apartment buyers will have the appetite to buy the villas or townhouses [priced above the current cut-off for an exemption],” he said.
A key housing reform policy of the incoming federal Labor government – the Housing Australia Future Fund - has met opposition in Parliament and is now being negotiated with the crossbench. The government’s plans for a $10 billion Housing Australia Future Fund won’t be implemented without support from the Greens who want to include an additional $5 billion a year for social and affordable housing, and a national agreement to cap rent increases for two years. This effectively puts the deal on hold until after the May federal budget.
Renters still have problems
The chronic shortage of rental properties continues to worsen. Australia’s national vacancy rate sits at 1.47 per cent. CoreLogic’s data shows that unit rents are still rising in Sydney, up 18.1 per cent in the past year in what Domain has dubbed a ‘landlords’ market’.
CoreLogic’s senior analyst, Tim Lawless, says renters face a serious lack of available properties: "We saw the vacancy rate drop to a new record low in March, at just 0.9 per cent across the combined capital cities. "I think any tenant is probably looking to stay in their lease for longer rather than brave the very tight rental market conditions," he said.
Mr Lawless says he does see some signs that rental growth is starting to ease: "I think this probably reflects simply the fact that renters are approaching a ceiling and what they're willing or able to pay, rather than any rebalancing in the supply demand equation for rental markets."
Tenants’ groups have suggested a cap on rent increases, but this has been ruled out by new Labor premier Chris Minns who said: “We believe that would have an impact on supply, and we need to get supply going. The vast majority of rental market and new supply in the NSW marketplace has got to be provided by the private sector.”
The latest PropTrack figures show that the beachside suburb of Clovelly in Sydney’s eastern suburbs tops the list of the 10 Australian suburbs that saw the largest dollar increase in median weekly rents year-on-year in February for both houses and units, with a current median weekly rent of $1995 – and a change in median rental price of $633.
And the trend isn’t only in the wealthy beachside suburbs. Several ordinary inner Sydney areas made the list, including Balmain East, where rents have risen by $375, Eveleigh, where they have jumped by $208, and Zetland, where the current median weekly rent is $780, representing an increase of $150.
PropTrack senior economist Eleanor Creagh told news.com.au’s Alexis Carey it was a “critical issue” affecting regions across the country: “There’s a lack of rentals and very strong demand, which is outstripping supply, driving weekly rents higher and vacancy rates lower,” she explained.
“Since the pandemic, vacancy rates have plunged by half, which illustrates just how tight rental conditions are.”
She said that during the pandemic, rental households got smaller, with the share of people living alone increasing. At the same time, many investors also sold off their properties, and few were buying, which kept supplies constrained.
Doug Driscoll, chief executive of real estate firm Starr Partners, told news.com.au this is part of a familiar pattern: “It starts at the very top at the salubrious suburbs, with people no longer able to live there either because they can’t afford it, or because there are so few properties available, which means there is so much demand,” he explained.
“They then move to other suburbs and it keeps trickling all the way down. It starts in metropolitan Sydney, with people going from the inner ring to more of an outer ring … and then more and more west. Then they start going out of the metropolitan areas altogether because they can’t afford even the outer ring, so they move to regional towns, and that causes real issues.”
The National Housing Finance and Investment Corporation (NHFIC) estimates that around 331,000 households are already in rental stress, and around 46,500 households are experiencing homelessness.
It estimates that 190,000 more households will form between 2023 and 2033, and its modelling shows that not enough properties will be built to catch up to this demand, with a total deficit of around 106,300 dwellings to be expected over the five years to 2027.
NHFIC believes just 148,500 new dwellings will be added to the national housing stock this financial year, and that total will drop to 127,500 in 2024-25.
The corporation predicts the biggest drop will be in apartments and multi-density dwellings. It expects a net 57,000 homes a year to be built over the next five years, 40 per cent down on levels experienced in the late 2010s.
“The rapid return of overseas migration — together with a supply pipeline constrained by decade-high construction costs and significant increases in interest rates — is exacerbating an already tight rental market," NHFIC chief executive Nathan Dal Bon told ABC News.
"NHFIC analysis shows housing affordability and supply are likely to remain challenging for some time, underscoring the need for a holistic approach to mitigate the housing pressures Australians are facing.”
The 32,000 renters who’ve benefited from the National Affordability Rental Scheme (NRAS), a program that paid property owners a subsidy in exchange for them keeping rents on new homes below the market rate for a decade, are especially concerned now that the program has is winding up.
The scheme was scrapped by the Abbot government in 2014 but homes already participating were grandfathered and no new ones could join. Many NRAS properties have already exited the plan and all subsidies will have expired by 2026.
Sources:
‘Foreign buyers rush back into Aussie property,’ Leith van Onselen, Macrobusiness, 17 April 2023
‘Property market is strongest for one type of home,’ Melissa Heagney-Bayliss and Tawar Razaghi, Domain 13 April 2023
‘The best house price forecast is the latest John Wick film,’ Chris Richardson, Sydney Morning Herald, 13 April 2023
‘We can’t produce miracles’: Minns rules out rent cap, promises supply drive,’ Michael Koziol, The Sydney Morning Herald, 6 April 2023
‘It's touted as one solution to Australia's housing crisis, but what is build-to-rent? And can it live up to the hype?,’ Dinah Lewis Boucher and Velvet Winter, ABC News online, 7 April 2023
‘Worse before it gets worse: The A to Zetland of Sydney’s rental crisis,” Michael Koziol, Sydney Morning Herald, 9 April 2023
‘Landlords’ market’: The Sydney suburbs with the steepest rent hikes,’ Kate Burke and Jim Malo, Domain, 9 April 2023
‘Harrowing figures show reality of Australians’ mortgage status,” Holly Hales, News.com.au, 9 April 2023
‘Rental stress a concern for RBA on inflation watch,’ Rachel Clun and Shane Wright, the Sydney Morning Herald, 5 April 2023
‘Whiplash’: Rental crisis deepens as Sydney unit rents jump $120 a week in a year,’ Tawar Razaghi and Melissa Heagney-Bayliss, Domain, 6 April 2023
‘Cost of renting in Australia soars to new highs as prices rise even further in 2023,’ Sue Williams, Domain, 6 April 2023
‘Builders counting the cost of a stimulus-fuelled boom that was too hot to handle,’ Simon Johanson and Sarah Danckert, Sydney Morning Herald, 6 April 2024
‘All quiet on the rental front: the great undiscussed policy challenge,’ Herald Editorial, 6 April 2023
‘Reserve Bank boss sounds alarm on housing supply amid surge in population,’ Courtney Gould, News.com.au, 6 April 2023
‘Rents are at a record high across Australia, according to a new report,’ The Drum / David Taylor, ABC News online, 5 April 2023
‘Australian house prices rise again amid shortage of new homes and tight rental market,’ AAP, The Guardian, 4 April 2023
‘Boom-time conditions’: Why some auctions are so hot in a property downturn,’ Jim Malo and Tawar Razaghi, Domain, 4 April 2023
‘The real reasons why house prices are climbing again despite interest rates rising for 10 straight months and with another coming in weeks,’ Stephen Johnson, Daily Mail Australia, 4 April 2023
‘Labor inherits dismal housing supply outlook for Sydney and state,’ Michael Koziol, Sydney Morning Herald, 28 March 2023
‘Australian Property Market: High Cost Of Entry-Level Homes,’ Sophie Venz, Jason Murphy, Forbes Advisor, 21 March 2023
‘Sydney property market forecast for 2023,’ Michael Yardney, Property Update, 25 March 2023
‘High rates and crippling costs are making the housing shortage worse,’ Elizabeth Knight, Sydney Morning Herald, 23 March 2023
‘Sydney rental crisis: Over 100 people crowd to view two bedroom Surry Hills apartment, Jessica Wang, News.com.au, 23 March 2023
‘Australian renters face surging costs after end of national affordability scheme,’ Stephanie Convery, The Guardian, 31 March 2023
‘CoreLogic's data shows property prices rise for the first time in 10 months in March, while chronic rental shortage continues,’ Emilia Terzon, ABC News online, 3 April 2023
‘Labor forced to renegotiate with crossbench over housing reform,’ Rachel Clun, Sydney Morning Herald, 29 March 2023
‘NSW has a new government — here are five things Labor has promised to do,’ Maryanne Taouk, ABC News online, 27 March 2023
‘First home buyers have three months until they face a $66,000 budget cut,’ Tawar Razaghi and Kate Burke, Domain, 31 March 2023
‘The Sydney suburbs where every property seller is making a profit,’ Kate Burke and Lucy Macken, Domain, 29 March 2023
‘The Sydney suburbs where properties are selling at a loss,’ Kate Burke and Jim Malo, Domain, 23 March 2023
‘Hot Sydney suburbs where property market is picking up,’ Tawar Razaghi and Melissa Heagney-Bayliss, Domain, 16 March 2023
‘As interest rates rise, a last-resort plan to slash home-loan costs,’ Jim Malo, Domain, 22 March 2023
‘Living frugally won’t work’: Bleak outlook for Sydney home buyers,’ Kate Burke and Melissa Heagney-Bayliss, Domain, 21 March 2023
‘Households with fixed rate mortgages yet to feel pain of higher interest rates - and that could mean bad news for the rest of us,’ Shane Wright, The Sydney Morning Herald, 20 March 2023
‘Have faith’: The factors that could see the Australian property market crash – or not,’ Tarric Brooker, News.com.au, 19 March 2023
‘When the property market could reach a tipping point,’ Jim Malo, The Sydney Morning Herald, 15 March 2023
DOWN BUT NOT OUT
Tue, 21 Mar 2023Sydney property looks forward to halt in interest rate rises
With Australian property prices having fallen nationwide, largely as a result of the RBA’s interest rate increases that have made it harder for borrowers to acquire funds for housing, there is naturally a mounting wave of speculation about when the price falls will stop and a cyclical upswing will get underway. Domain’s chief of economics and research Dr Nicola Powell identified some of the trends to watch for in the 2023 property market.
Dr Powell says there’s a widely held view that Australian property prices go through boom and bust phases when in fact it’s less dramatic than that, with ups and downs that indicate a healthy property market just like the expansion and contraction of an entire economy.
“In reality, what you tend to find is that prices, particularly in our big capital cities, go through substantial periods of an upswing, when we see rapid gains in property prices, and then they move into a contraction phase of the market,” she says.
“And what you tend to find is the contraction phase or when we see prices decline, it’s normally shorter and less severe than the upswing that preceded.”
Dr Powell said that the premium suburbs in Sydney with the most expensive homes are often the first to move. Price changes then flow outward, first to less expensive Sydney suburbs and then to other capital cities and regional areas in what’s known as the ripple effect.
“In the suburbs where you see those more premium inner areas you start to see softness first, and it kind of ripples out to the outer areas and you tend to find those more affordable outer areas see less of a declining price compared to those inner premium areas.”
CoreLogic figures show that Sydney property values are still 7.7 per cent higher than they were in March 2020, so although the current contraction seems pretty severe it still hasn’t taken away all the gains of the past three years. However, analysts are in general agreement that there’s further falls to come before the market stabilises.
As we look forward to an end to falling house prices, we see Sydney home sellers discounting their properties by the largest amount in years. The average discount for Sydney houses has increased every month since its low of 4.9 per cent in the three months to July 2021.
New data from Domain shows that Sydney houses were discounted by an average of 7.9 per cent in the three months to January this year, the largest discount since the three months to July 2019, when the property market was emerging from its last downturn.
Sydney units were discounted by an average of 7 per cent, the largest price drop since the three months to September 2019. (The average is for properties sold via private treaty, and is based on the difference between the advertised price and the sale price.)
Dr Powell said the increase in the level of discounting pointed to a still declining market:
“[Discounting levels] have gone back to the previous downturn. When discounting is rising it means overall prices are falling. Historically, you do tend to find that higher priced areas see greater rates of discounting,” she said.
The largest discount was in the eastern suburbs, where houses sold for an average of 11.8 per cent below their advertised price, up from 5 per cent the previous year. That would equate to an almost $370,000 discount for a house first advertised at the region’s median house price of $3.13 million.
Clearances high
The Sydney auction market has shown some strength with a steady clearance rate above 60 per cent most weeks – in fact, the rate for the month of February was 69 per cent. Interestingly, there’s a general belief that a clearance rate of 60 per cent reflects stable house prices while a clearance rate of 70 per cent indicates rising prices.
Domain chief of research and economics Dr Nicola Powell expressed caution on expecting too much from the recent high clearance rates: “Clearance rates are pretty high, but one of the reasons for this is the seasonal impact.
“We always see a bounce in the new calendar year … no matter what’s happening in the market, buyers will come back because they missed out at the end of the year before,” she said, adding that the number of homes for sale at auctions was low and many home sellers were waiting out the downturn before listing their properties.
Another caution was issued by AMP Capital’s Dr Shane Oliver who said he expects further price falls: “Over the next few months, the clearance [rate] will start to head back down again … by the June quarter we will start to see renewed weakness in clearance rates and the same in property price data,” Oliver told Domain.
“People can’t borrow as much as they once could, and there is this risk if rates keep going up that we will end up with more distressed selling.”
On a more positive note, real estate veteran John McGrath says the housing price slump is nearing its end: “If you went to any of our auctions or opens on the weekend you would have seen there is no problem with this market,” said McGrath.
“There is a shortage of stock ... which means people feel we are getting closer to the top of the interest rate cycle, and they are factoring in one or two more rises, they are doing their sums on that and buying because they are getting a discount to what they would have paid 18 months ago.”
Mr McGrath based his predictions on historical evidence that cycles in “downward legs” last for about 18 months: “We’ve been in this [cycle] now for 15 to 16 months and I think, on average, they last six to seven downward legs and have historically been down 8 to 9 per cent,” he said.
He told the Herald’s Carolyn Cummins that selling prices in most markets have corrected by between 10 per cent and 15 per cent from their peak in late 2021 and volumes were at least 20 per cent lower in the spring selling season, compared with the corresponding spring in 2021.
“So looking at historical data it would suggest we should be at, or near, the end of the downward cycle, and if you look at what’s happening in the street at the moment, there is plenty of demand,” he said.
That stock shortage referenced by John McGrath is reflected in the dramatic decline in new home listings on the Sydney market, outpacing even the scale of declines during the pandemic lockdowns. Domain’s figures show that the declines during the December quarter even eclipsed pullbacks recorded during the banking royal commission during 2018, roughly double the market average.
CoreLogic figures also show the decline in the number of new listings, down 22 per cent on the five-year average, while in 2022 Sydney prices for houses and apartments were down 12.1 per cent – more than double the 5.3 per cent national average drop.
The chief executive of the Domain Group, Jason Pellegrino, said he was confident that demand would return: “It’s only a matter of time for confidence to recover and support the inevitable bounce back in market listings.”
Interest rate peak?
The RBA’s tenth consecutive interest rate rise in March lifted the cash rate by 25 basis points to 3.6 per cent – the highest cash rate since June 2012. Analysts from the big four banks had earlier forecast the cash rate to reach its peak somewhere between 3.85 per cent and 4.1 per cent, probably by May this year.
PropTrack Senior Economist Eleanor Creagh told News.com.au’s Jessica Wang that she believed interest rates were now ‘closer to the peak’: “If the Reserve Bank hits pause on its tightening cycle later this year, home prices will likely begin to stabilise as some of the uncertainty buyers have experienced with respect to borrowing capacities and mortgage servicing costs reduces,” she said.
Asia-Pacific economist with jobs website Indeed, Callam Pickering, said the RBA had little option to more rate increases: “As painful as higher mortgage rates might be, a persistent period of high inflation will inevitably be more dangerous for jobs and incomes and the overall Australian economy,” he said.
“The market anticipates that the cash rate will peak at around 4.1 per cent this year – implying an additional two 25 basis point hikes. For that to occur, we’d need to see inflation show meaningful signs of improvement in April and then July – the next two quarterly inflation releases – along with some softer results from the monthly inflation measure.”
The ABC’s Peter Martin did have some hopeful news from the details in the RBA’s March statement that could indicate an end to the rate rises as early as mid-September this year: “The best guide to what the Reserve Bank has in mind is usually the first few words of the final paragraph of its statement.
“Last time, in February, those words referred to further interest rate "increases", making it clear the bank expected more than one. This time, there's no plural. The sentence refers merely to ‘further tightening’, which could mean as little as one more increase, and not necessarily next month”, he said.
He also noted that RBA Governor Philip Lowe’s term expires on September 17 and that he would no doubt like to hand over the Bank in good order to his successor. Tying up loose ends, like the conclusion of interest rate rises, might well be an element of his plans.
Lower affordability
Moody’s Investors Services analyst Si Chen says that housing affordability is expected to remain poor over 2023, and Sydney’s shown itself to be the least affordable city in Australia: "In February, new home loan borrowers needed an average 30.9 per cent of monthly income to meet monthly mortgage repayments, up from 26.4 per cent in May 2022 [when interest rates began to increase]”.
In a nutshell, wages increased 2.7 per cent between March 2022 and December 2022 while monthly mortgage repayments increased 42.2 per cent over the same period. This has meant a rise of $1051 in monthly repayments on a $500,000 mortgage according to Canstar editor-at-large Effie Zahos: “When it comes to rate hikes, wages are not keeping up. It doesn’t put homeowners in a good position when you look at the proportion of their income required to service a debt.”
Zahos said the rate hikes were also bad news for those hoping to buy a property, noting that a single income earner on the average net wage of $71,000 could no longer afford a $500,000 loan:
“They would be paying 52 per cent of their income to service that loan,” she said.
More figures from Moody’s Investor Services showed that an average Australian household with two income earners would need to put 30.9 per cent of their income towards repayments on new home loans in February, up from 26.4 per cent in May last year.
ABC News’ Peter Martin did his own calculations that showed a borrower with a $600,000 variable mortgage has needed to find an extra $1,080 to their monthly repayments since the RBA’s interest rate rises began earlier this year.
Alison Pennington from the ABC’s ‘The Conversation’ says that over 60 per cent of people aged under 30 are now renting, and renting permanently is the reality for a growing number of low-income people: “After momentarily cooling with reduced demand in the pandemic lull, and various short-term measures introduced by state governments to relieve renters — including moratoriums on evictions and prohibitions on rent increases — rental prices have since surged.
“In the 12 months to September 2022, rental prices grew nationally by 15 per cent, and vacancy rates fell to their lowest level since 2006 at less than 1 per cent, with ongoing floods in New South Wales and Victoria placing greater strain on already-slim housing stocks in regional areas.”
Fixed-rate cliff
An estimated 800,000 homeowners with fixed-rate mortgages averaging $600,000 face a massive repayment cliff according to KPMG, as people who took advantage of record-low fixed interest rates in 2020 and 2021 will this year take a financial hit when they refinance and their repayments rise by an estimated $16,500 over a twelve-month period.
KPMG Australia chief economist Brendan Rynne said the RBA’s tightening of monetary policy was now working on a “two-stage” basis, as variable-rate mortgage holders were about to be joined by those with fixed-rate loans.
“The first stage gradually hitting variable mortgage holders, as the cash rate increases are passed on (relatively quickly) by their banks, and the second stage hitting fixed-rate mortgage holders in a shock-fashion as they move from their very low fixed rate to the current market variable rate,” he said.
AMP Capital chief economist Shane Oliver expressed the concerns of many in the Australian finance sector when he said he was increasingly concerned the RBA was lifting interest rates too far and not paying enough attention to the lagged way in which higher rates were affecting the economy.
“This is increasing the risk of a recession that we don’t have to have and with that, a bigger rise in unemployment and a bigger fall in home prices,” Oliver said.
Dr Oliver told the ABC he estimates about 1 million households, about a third of the 3.3 million with a mortgage, will need to make significant spending cuts to keep up with minimum repayments.
"That's a high number — that's 10 per cent of Australian households that are actually quite vulnerable; that impacts everything, whether it's retailers, service providers, tourist operators, and so on, will see less demand over the course of the next 12 months."
"We've seen several more interest rate hikes since [October], the Reserve Bank is flagging more to come, and so you'd have to say that that risk has gone up from whatever the Reserve Bank was assessing it to be back in October last year," Dr Oliver said.
Build-to-Rent news
In 2018 we covered developments in a relatively new area of the Sydney housing market – the Build-to-Rent (BTR) sector. At that time, Mirvac was interested in getting this type of housing underway as a serious option for renters but was having some problems negotiating taxation matters with the federal government.
Build-to-rent is seen as a means of overcoming many housing unaffordability issues. It is often called multi-family housing in overseas markets and enables developers to build rental properties for which they retain ownership and get a return on their investments from long-term rentals.
Tenants have greater security of tenure in these properties without the possibility of their dwellings being ‘flipped’ or sold to new owners as is often the case with rental apartments. The developers become landlords and benefit from more stable tenancies and fewer vacancies than owners usually experience.
Mirvac’s chief executive Susan Lloyd-Hurwitz said in 2018 that renting has become a lifestyle choice for a much wider group of people who want to be closer to work and other lifestyle services and amenity: "We believe build-to-rent can provide renters with better choice, better quality and better security of tenure,” she said.
In 2020, writing in the Sydney Morning Herald, Rob Stokes said build-to-rent produces a number of benefits: “Developers can ignore the short-term bumps in property prices and build a constant supply of homes – regulating housing supply and affordability and generating a more sustainable construction industry.
“Investors looking for a stable yield will now have a residential product in which to invest. Renters can rely on greater security with longer tenancies so that a rental property can become a long-term home. And developers have an incentive to ensure high-building quality, since they will retain ownership for decades,” he concluded.
In 2023 build-to-rent developments are now being seen as attractive options for retirees as well as for those seeking affordable housing. Writing in the Herald, Rachel Lane says it’s the latest housing trend for retirees and should be considered for those who want to downsize: “Build-to-rent developments offer many of the amenities that you would find in a retirement village such as dog parks, BBQ areas, communal gardens, swimming pools, cinemas and gyms.
“The fact that the entire development is owned and managed by the developer means that you can have greater flexibility through longer lease terms, lower or no bond, permission to have pets and decorate the home, and the ability to move between homes when your circumstances change.”
Rachel Lane, who is author of ‘Downsizing Made Simple’, says that across the eastern states governments are now providing incentives so that some or all of the homes in a build-to-rent development can be provided at lower cost.
“However, that doesn’t mean they are all cheap. In some developments, the rent is higher than the private rental market because the development has numerous amenities or services,” she says.
Build-to-rent housing was incorporated into the NSW planning system in February 2021. Eligible Build-to-Rent properties receive a 50 per cent reduction in land value for land tax purposes. BTR developments will also receive an exemption from foreign investor duty and land tax surcharges (or a refund of surcharges paid).
Build-to-Rent hasn’t yet received a lot of media attention but the benefits it offers tenants and the opportunities for investors make it likely that it will be a growth element in our housing mix. We’ll continue to monitor developments in BTR and report them to you.
Sources:
‘Property prices higher since COVID-19 start, but experts unsure what looms,’ Elizabeth Redman, Domain, 14 March 2023
‘Real estate veteran predicts bottom is nearing for house price falls,’ Carolyn Cummins, Sydney Morning Herald, 20 February 2023
‘Fall in house prices stalls but reprieve may be short-lived,’ Rachel Clun and Shane Wright, Sydney Morning Herald, 1 March 2023
‘Where Sydney home sellers are dropping price expectations most,’ Tawar Razaghi and Kate Burke, Domain, 25 February 2023
‘Is the auction market causing a false dawn for property prices?,’ Melissa Heagney-Bayliss and Elizabeth Redman, Domain, 7 March 2023
‘RBA lifts rates to 11-year high of 3.6 per cent,’ Shane Wright, The Sydney Morning Herald, 7 March 2023
‘RBA interest rates: Cash rate hits 3.6 per cent in 10th consecutive rate rise,’ Jessica Wang, News.com.au, 8 March 2023
‘Why RBA interest rate hikes could end by September – but brace for at least one more,’ Peter Martin, ABC News online, 8 March 2023
‘Household budgets squeezed as increased mortgage costs soar above wages growth,’ Jim Malo, Sydney Morning Herald, 9 March 2023
‘The cost-of-living crisis has roots in property but whether you rent or pay a mortgage, there's a dark tunnel ahead,’ David Taylor, ABC News, 11 March 2023
‘Million households 'vulnerable' to rising interest rates, and their cuts could cause recession,’ Stephanie Chalmers, ABC News online, 17 February 2023
‘Collapse in new home listings in Sydney and Melbourne hits real estate company profits,’ Jonathan Barrett, The Guardian, 16 February 2023
‘How the property cycle works and how to use it to your advantage,’ Kate Farrelly, Domain, 16 February 2023
‘Fixed-rate mortgages will tip over a $16,500 cliff,’ Shane Wright, Sydney Morning Herald, 14 February 2023
‘Why the RBA is firing all the wrong ammunition in all the wrong places,’ Ian Verrender, ABC News online, 7 March 2023
‘Albanese government to introduce $10b housing fund to target homelessness,’ Ellen Ransley, News.com.au, 9 February 2023
‘Housing policies favour the rich and leave first home buyers out of the market. How did it come to this?,’ Alison Pennington, The Conversation, ABC News, 7 March 2023
Market Comment : BUY BUY BABY
Tue, 21 Feb 2023A buyer’s market as price declines start to slow
The most recent peak in Australia’s house prices was in May 2022, and since then they’ve fallen by 8.4 per cent. Median values dropped in more than 2400 house and unit markets nationally in 2022, CoreLogic’s Mapping the Market Report shows, with the downturn spreading to 51.7 per cent of analysed suburbs. Declines were far more widespread in Sydney where house values fell in 98.7 per cent of suburbs over the year, while unit values dropped in more than 95 per cent of Sydney suburbs.
The report also shows that Sydney was the first market to peak, back in January 2022, and its values fell 12.1 per cent last year, leaving medians in very few suburbs untouched. Domain’s Kate Burke and Melissa Heagney-Bayliss say this is the steepest annual fall on record with Sydney’s median house price falling by more than $170,000 to $1,413,658. Sydney units fell to a median $748,422.
However, there are a couple of positives in the latest statistics; the pace of declines slowed in the December quarter, and house prices are still 24.2 per cent higher than when the market bottomed in mid-2020. History shows us there will be a turning point in housing prices at some time in the future and it could lead to gains in some parts of Sydney before the end of 2023.
Lloyd Edge, the managing director of Sydney buyers’ agency Aus Property Professionals, says it’s still going to be a buyers’ market for the next six to 12 months: “We’re seeing interest rates starting to stabilise and there might be only one or two more rate rises which’ll be a good thing,” he said.
“Vendors are being a bit more realistic in their expectations, prices will still be down a bit and there’ll be more choice and less competition. In addition, rents are really high so they’ll encourage first home buyers into action.”
Some of Sydney’s premium areas have even avoided the falls and have instead risen in value. These include Cronulla (up 18.8 per cent), Putney (up 13.8 per cent), Vaucluse (up 12.9 per cent) and Lindfield (up 9.4 per cent). Across Australia the top performing region for house prices was Dural-Wisemans Ferry in Sydney, where values went up by 8.5 per cent over the December quarter.
The market is now favouring larger homes, and while the median price for two-bedroom homes in Sydney fell 10.5 per cent last year, four-bedroom homes dropped just 3.3 per cent. This could mean that a broad recovery will begin in the middle and outer-ring suburbs where there are more properties which appeal to upsizers, unlike the more expensive inner-city areas with generally smaller homes.
Domain chief of research and economics Dr Nicola Powell says during downturns more expensive properties tend to fall in value first and by a greater amount, meaning upsizing and upgrading owners would have just a relatively small window to take advantage of the narrowing gap before the next phase of the property cycle: “If you can hit that sweet spot, it means your leap to the next price bracket can reduce,” she says.
Shane Oliver, AMP Capital’s chief economist, says that 2023 is likely to be another tough year, but it could also be the year that the housing market begins its recovery once the Reserve Bank stops its rate rises.
“If the RBA were to hold [rates] below 4 per cent, given the surge in the economy that accelerated wage increases, I believe that will create grounds for a housing market recovery, albeit a soft one where we would see some single-digit house price rises occur in 2023, or at the very least, a situation where the housing market would stop falling,” Dr Oliver said in an Australian Financial Review article.
Rates still unstable
But interest rates aren’t yet stabilised. The RBA raised the official cash rate to a new 10-year high of 3.35 per cent when it upped it by 0.25 per cent at the Bank’s February meeting. This is the ninth consecutive increase since the rises began in May last year, and Bank Governor Philip Lowe indicated there would be further rates in future which he said would be needed to fight inflation.
A number of economists have expressed concerns about what seems an intention by the RBA to continue raising interest rates based solely on inflationary factors. Australia’s economy is essentially healthy with regards to employment and wages growth. Much of the ‘surplus’ accrued by households during the pandemic has been expended, and households with mortgages are repaying more each year instead of spending it elsewhere. The jobless rate is at its lowest level in half a century and our trade surplus is growing.
KPMG Australia chief economist Brendan Rynne said if the RBA continues with three more interest rate rises over the next six months, households – which account for about 60 per cent of all economic activity – would spend $20 billion less this year, and this would wipe a full percentage point from economic growth.
Like Shane Oliver, CBA’s head of Australian Economics, Gareth Aird also believes that once the RBA starts cutting the cash rate in later 2023, this could lead to a recovery in house prices: “RBA policy decisions from here will drive the demand for credit, which in turn will influence home price outcomes. Dwelling prices will continue to slide in the short run, but if the RBA takes the cash rate lower in late 2023 as per our forecast then home prices are likely to rise.”
Kent Lardner, founder of Suburbtrends, says a 10 per cent price gain could occur in select areas in 2023, and once interest rates start to fall gains will be driven by the chronic undersupply of new housing stock and growth in population: “If the gains between 2023 and 2024 match the losses of the last 12 months the average market could see prices improve by 17 per cent,” he said.
The ‘undersupply’ Mr Lardner mentions is showing up in a shortage of new listings. Data from CoreLogic shows that over the year to 8 January, new listings were down 27.6 per cent across the combined capital cities, while total listings were down 6.7 per cent year-on-year. The number of new listings fell by more than 22 per cent in Sydney during the four weeks to 8 January.
Tim Lawless of CoreLogic said the below-average flow of new listings indicates that prospective vendors are waiting for the housing market downturn to end, and the low level of listings could help to offset the impact of interest rate rises on house prices: “Such low advertised supply levels are unusual through a downswing”, Lawless said.
“With the flow of new listings holding well below average across most regions, distressed or motivated sellers remain at relatively low levels in the housing market. The lower inventory levels could provide some support for housing prices, especially if demand drops further as interest rates trend higher”, Lawless said.
Ray White chief economist Nerida Conisbee told the Herald she believes the peak of interest rates will happen early in 2023 and says this will combine population growth and the continuing housing shortage to create favourable conditions for property investors: “We still have one or two interest rate increases to come but, once they cap out, we’ll see price growth start again which will bring investors back to the market,” she said.
“We tend to weather recessions better than the rest of the world, and we have strong employment and growth, as well as a rising population and a shortage of homes. So, we see good opportunities for investors in 2023.”
As for new homes coming onto the market, data from the Australian Bureau of Statistics shows
there was a 5.2 per cent drop in the construction of new homes over the September quarter — down 21.2 per cent since September 2021. New construction won’t ease the housing shortage in the near future, but ABS figures show building approvals rose 18.5 per cent in December which was a significant rebound.
In 2022 the home-building industry experienced a supply chain crisis, skyrocketing materials costs and a severe labour shortage. The materials shortages are now beginning to ease as supply chains normalise. Master Builders Australia chief economist Shane Garrett sees the costs of building materials receding: “The product building material supply situation will probably be a little bit more favourable in that prices are likely to slow down,” he said. “The exciting part will be when interest rates start going down again, probably in 2024.”
Mortgage cliff looms
There is a ‘known unknown’ pending and that’s going to be created by mortgage borrowers refinancing some $188 billion in low-interest loans acquired at the time of the RBA’s fiscal stimulus in response to the pandemic’s economic threat. During COVID many borrowers took up the opportunity to fix their interest rate between 1.75 and 2.25 per cent. However, these were only for two or three-year periods and most are expected to expire this year and will need to be renewed at significantly higher interest rates than when they were first taken out.
The head of the RBA’s economic analysis department, Marion Kohler, said it was hard to establish the number of loans this refinancing would affect: “"Around one third of the outstanding housing credit is fixed rate," she said. "We think about half of that is due to roll off in the coming year."
News.com’s Tarric Brooker writes about the ‘fixed rate mortgage cliff’ – a term that’s used to describe the situation faced by holders of fixed rate mortgages seeing their terms expire and the low fixed rates rolling off into higher variable rates: “According to figures provided by the RBA, the average owner-occupier fixed rate loan with a term of three years or under, written between the onset of pandemic to the end of 2021, had an interest rate of 2.14 per cent,” he writes.
“Once November and December’s rate rises have been fully priced into the average variable rate owner-occupier mortgage, the rate payable will be about 5.6 per cent. According to an analysis by the RBA, over 50 per cent of households with a fixed-rate mortgage expiring in 2023 face an increase in mortgage repayments of 40 per cent or more, with rates as they stand today.”
Morningstar head of equities research Peter Warnes said $370 billion in fixed rate mortgages had started to roll off and the refinancing process would continue to accelerate: “Most refinancing will see repayments increase significantly, absorbing over 40 per cent of household disposable income. That will alter household consumption patterns meaningfully,” he said.
The rush to refinance has already begun as a record $13.4 billion worth of mortgages held by owner-occupiers was refinanced in November. In total $19.5 billion worth of mortgages was refinanced that month, up 20.4 per cent from a year ago. At the same time, the value of new home loans being approved fell 3.7 per cent to $953 million.
RateCity research director Sally Tindall said the statistics showed borrowers were acting to combat rising interest rates: “Australians are being anything but complacent when it comes to their home loans. They’re switching in droves and that’s fantastic to see,” said Tindall.
Anna Bligh from the Australian Banking Association says the banks are aware that some customers will find it difficult to make higher payments: “They’re in many cases already in discussions with those customers about how they can help – how they can maybe restructure or refinance to make those payments a little easier to make.”
“But for those people who find it really tough, banks are not going to be sitting there watching people fall off the cliff,” she said.
The Reserve Bank has done its own analysis of the impacts on borrowers the ‘fixed rate mortgage cliff’ will create. On the positive side, the Bank believes that 6.5 per cent of borrowers would be completely unaffected by a 3.6 per cent rate, and a further 41.1 per cent would see their household spare cash drop by an affordable 20 per cent.
About these borrowers the RBA says: "Most borrowers will likely be able to manage for at least two years by reducing their non-essential spending, reducing their saving flows and/or drawing down on their accumulated prepayment buffers."
By RBA estimates, 11 per cent of households with fixed-rate mortgages expiring in 2023 will see their repayments rise by more than 60 per cent. At a 3.6 per cent cash rate (two 0.25 per cent increases to the current rate) 14.6 per cent of mortgage holders will have negative levels of household cashflow, leaving them at risk of default. A further 8.1 per cent will see the level of spare cash in their household budget decline by 60-100 per cent.
The RBA has concluded: "This latter group of (typically low-income, highly indebted) households would likely be forced to draw down on their stocks of saving in order to continue to meet their loan payments and essential living expenses."
However, it admits that "Some may have a limited ability to do this, given that low-income and highly indebted households typically have lower savings buffers." It is highly likely that the RBA will need to work with banks and other lenders to shift these borrowers to more affordable loans and avoid defaults wherever possible.
Rents up, vacancies down
A new report from PropTrack found that demand for rentals has intensified in the capital cities, with enquiries per listing up 31.1 per cent, while the supply of properties becoming available for rent remains historically low. New rental property listings on realestate.com.au were down 29.2 per cent month-on-month in December, 6.6 per cent lower than they were a year earlier.
Economics researcher Cameron Kusher, who compiled the PropTrack report, says that many people who left the Sydney and Melbourne markets during the pandemic have returned: "Now they're coming back and also a lot of people that migrate to Australia from overseas are coming into those cities and exacerbating the shortage of supply," he said.
"I think in 2023 we're going to see an ongoing slowdown and an easing of rental market conditions in regional areas of the country, but I think in the major capital cities…we're going to see rental conditions tightened even further as more people come back to those cities and rental demand escalates. And this could even carry on into 2024."
Student housing is a special area of concern. More than 40,000 Chinese students will return to Australia after the Chinese Ministry for Education announced it would no longer recognise qualifications of students who studied remotely. The Herald’s Christopher Harris says that at Sydney University Village there is a waitlist for a one-bedroom apartment that costs $903.50 per week if occupied by two people, and studio apartments on Broadway, priced at $799 per week are sold out, as are five- and six-bedroom share units.
To put it mildly, all rents became less affordable over 2022, rising nationally to a median of $519, and across Sydney to a median of $679 per week. Domain’s chief of research and economics, Nicola Powell said asking rents are at historic highs: “Rents are rising at the fastest annual pace ever seen across the combined capitals, and the number of vacant rental properties is at an all-time low for the month of December,” Dr Powell said.
Sydney’s rental vacancy rate hit an all-time low of 1.1 per cent in September 2022, improving fractionally to 1.3 per cent in December. Parts of Sydney were especially hard-hit by increasing rents - median asking rents in Zetland, Chippendale, Ultimo and Mascot jumped by 20 per cent or more during 2022, with tenants in Zetland seeing their rents shoot up 23 per cent, a rise of $140 per week. Sydney-wide, unit rents rose a record 18.6 per cent, climbing to a median of $575 per week.
Dr Powell said the early stages of the pandemic hit the inner-city apartment market hard, but this had now been more than offset by returning international students, migrants, local tenants looking for more affordable housing, and ‘treechangers’ returning to the city after periods of working from home in the regions: “The rental crisis ... hasn’t happened overnight. We have not been building enough supply and we have not built enough social housing.”
And it’s not just apartment dwellers feeling the pinch. Substantial rents hikes were also recorded for houses, but gains weren’t just in areas close to the city. Rose Bay had the biggest increase at 33.4 per cent, followed by Fairlight, Merrylands West and Brighton-Le-Sands which were all up more than 28 per cent.
Cameron Kusher said that the shortage of rental properties coupled with an increase in the number of tenants seeking a home will drive up prices, and that isn't good news for renters.
"Addressing the demand and supply dynamic will take some time, which means that supply is likely to remain tight and the cost of renting will increase," Mr Kusher explained. "Although many homes are under construction and build-to-rent is rising in prevalence as an asset class, it seems unlikely those additions to the housing stock will be enough to create an equilibrium between supply and demand.”
Housing helps the rich get richer
Calculations compiled by the Grattan Institute’s Brendan Coates and Joey Moloney show that, while average full-time earnings have doubled over the past half-century, home prices have quadrupled. This has made more Australians millionaires. In 2019-20, one-quarter of homeowning households had a net wealth exceeding $1 million, while the median net wealth for non-homeowning households was just $60,000.
CoreLogic estimates that 57 per cent of Australians’ household wealth is held in housing, and that our housing market is currently worth something like $9.3 trillion. That’s around three times bigger than our accumulated superannuation funds and it comprises 62 per cent of the balance sheets of all banks and other authorised deposit-taking institutions.
Between 2003-04 and 2019-20 the real incomes for the highest fifth of households increased by 47 per cent. After adjusting for inflation caused by the rise in housing costs the figure was still almost 43 per cent. Over the same period the inflation-adjusted incomes for the lowest fifth of households increased by about 26 per cent but more than half of this was chewed up by the rise in housing costs, with post-housing incomes climbing only 12 per cent.
Coates and Moloney concluded that since 2003-04, the wealth of high-income households has grown by more than 50 per cent, much of that due to increasing property values. By contrast, the wealth of low-income households — mostly non-homeowners — has grown by less than 10 per cent.
More calculations by economists Josh Ryan-Collins and Cameron Murray found that up until June 2019, in more than half of the previous 30 quarters, the median Sydney home earned more than the median full-time worker. To put it another way, an investment in Sydney property that was a relatively low-risk proposition generated greater returns than would be produced by a year of full-time work.
Will it always be this good for those who own property? Eiza Owen, CoreLogic’s head of research, points out that the Reserve Bank’s raising the cash rate has raised the ratio of household debt to income to a record 146 per cent, and house prices have fallen by a record-breaking 8.4 per cent nationally.
“It’s very uncertain what the next growth cycle will look like, though we expect it will be a much more muted upswing than what we’ve seen through to 2010s and early 2020s,” Owen says.
“The last time Australia’s cash rate was over 3 per cent, national home values did experience a trough-to-peak upswing of around 16 per cent over 2009-10, but other factors such as strong overseas migration aided this, as did the dwelling market coming off a lower base and being more affordable.”
Stamp duty saga continues
Almost nobody is a fan of stamp duty, especially those that have to pay it on the purchase of a property. It’s a bad tax because it taxes homeowners every time they move, whether it’s for a better job or to downsize or upsize due to lifestyle changes. It hits couples divorcing when each partner acquires a new residence, and it’s especially hard on younger households that are more likely to move around, unlike older residents who tend to stay at the same address for much longer periods.
The only positive side of stamp duty is that it enables states and territories to raise significant amounts of money without which they’d be unable to provide their residents with essential services, like hospitals and schools unless a replacement source of funds can be found. NSW Treasury took in $14.5 billion in FY 2021-22, for example. The latest NSW half-yearly budget forecasts a $1.7 billion downturn this year because of falls in the number of sales and lower house prices.
Now on the table as an alternative source of funds is a broad-based land tax on all property, levied every year on all owners of land and based on an assessed value that could be varied as the need for funds increased.
The NSW Coalition government has already legislated to give first home buyers the option of paying an annual land tax rather than stamp duty if they buy a property worth up to $1.5m. The Herald’s Michael Janda says the government’s plan could mean savings for first-home buyers: “Relatively few first home buyers end up living in their property for more than a decade, and 10 years of land tax on a million-dollar home where half the value is the land will likely be a tad over $22,000, or close to half the cost of stamp duty.
“If that million-dollar home was an apartment, the savings would be much bigger still because, unlike stamp duty, the land tax is levied only on the land value, not including anything built on it. With apartments, the land value is split among many individual units,” said Mr Janda.
However, levying such a ‘forever tax’ like land tax on residents – voters most especially, would be a red rag to a bull at any forthcoming election that could see a government bold enough to do this tossed out on its ear. When NSW Premier Perrottet announced his plan to remove stamp duty on housing purchases by first-home buyers if they opted to pay an annual land tax he was tempting fate.
But now the Labor party’s Chris Minns has just announced a similar proposal that will also exempt first-home buyers from the onerous stamp duty if they are purchasing properties valued at up to $800,000 and give a stamp duty discount for more expensive properties worth up to $1 million, but with no obligation for a land tax tradeoff.
As Mr Minns said when announcing his new plan: “I understand the stress of trying to purchase your first home. I want more singles, couples and families realising this dream. What I will not do is saddle first home buyers with a new, yearly tax bill that increases every year.” So, now it’s game on for these political opponents, Perrottet and Minns, to put their ‘toes in the water’ in front of voters and see how the public responds at the March election.
As to which option will be the more appealing to the targeted first-home buyers, Angus Moore from realestate.com.au tells us: “The short answer is some first-time buyers – something like a quarter – will be better off (under the Labor plan) but many – as much as 30 per cent – will end up worse off. The longer answer is that it depends on how expensive the home you buy is, and how long you want to stay in it.”
The Herald’s Jessica Irvine adds some additional details: “As a rough rule of thumb, the Coalition’s land tax regime is best suited to unit buyers and those who intend to upgrade their properties within a decade or so. For those who intend to buy a freestanding home or live in their home for a long period of time, the land tax regime becomes less attractive (although not worse in every case).”
Sources:
‘Fixed-rate mortgages will tip over a $16,500 cliff,’ Shane Wright, Sydney Morning Herald, 14 February 2023
‘NSW half-yearly budget predicts $1.7 billion downturn in stamp duty revenue this year,’ Ashleigh Raper, ABC News online, 8 February 2023
‘Banks won’t let people fall off mortgage cliff: Bligh,’ Angus Thompson, Sydney Morning Herald, 8 February 2023
‘After a tough year, there are growing signs Australia's construction sector is on the road to recovery,’ Brett Thomas, Realestate.com.au, 8 February 2023
‘What experts think of the RBA’s interest rate rises – and what they say is coming next,’ Peter Hannam, The Guardian, 10 February 2023
‘Why it makes sense to upsize in a downturn,’ Daniel Butkovich, Domain, 6 February 2023 ‘Property prices are falling. Don't freak out, or get excited,’ Daniel Ziffer, ABC News online, 1 February 2023
‘It’s the deepest property downturn ever, but how long will it last?,’ Jim Malo, Domain, 6 February 2023
‘Reserve Bank expecting up to 800,000 fixed home loan contracts will end this year,’ Stephanie Borys, ABC News online, 2 February 2023
‘Pretty bleak for tenants’: Rental vacancy rate at record low,’ Jim Malo and Tawar Razaghi, Domain, 3 February 2023
‘What to expect from the February 2023 RBA meeting,’ Mark Bristow, Rate City, 4 February 2023
‘Supreme Court judge predicts property repossessions to increase significantly as interest rates rise,’ Alex Turner-Cohen, News.com.au, 5 February 2023
‘Australia's property downturn is slowing – are prices still falling where you live?.’ Ellen Lutton, Domain, 25 January 2023
‘Rental crisis fears for international students as they return to Sydney,’ Christopher Harris, The Sydney Morning Herald, 30 January 2023
‘Living in mortgage hell’: tens of thousands of borrowers on the brink,’ Jessica Irvine, Sydney Morning Herald, 31 January 2023
‘One fifth of mortgage holders bracing for interest rate pain,’ Courtney Gould, News.com.au, 31 January 2023
‘Which Sydney homes have had the smallest – and largest – price falls?,’ Kate Burke and Melissa Heagney-Bayliss, Domain, 5 February 2023
‘Sydney house prices post steepest annual fall on record,’ Kate Burke and Melissa Heagney-Bayliss, Domain, 25 January 2023
‘Property prices falling in over half of suburbs nationwide as the downturn deepens,’ Kate Burke, Domain, 18 January 2023
‘New report reveals what's ahead for Aussie rental markets this year - and it's not pretty,’ Emily Hutchinson, realestate.com.au, 21 January 2023
‘Australia's rental market will only get tighter in 2023. Could more property investors be the answer?,’ Emily Sakzewski, ABC News online, 21 January 2023
‘Huge mortgage change about to strike thousands of Aussie homeowners,’ Tarric Brooker, News.com.au, 23 January 2023
‘‘Refinancing hits record high in November as homeowners shop around,’ Simone Fox Koob, Sydney Morning Herald, 13 January 2023
Collapse in listings puts floor under house prices,’ Leith Van Onselen, Macrobusiness, 13 January 2023
‘Australia’s $9.3 trillion housing question,’ Nila Sweeny, Australian Financial Review, 15 January 2023
‘Stamp duty could change in a big way in NSW for first-home buyers. Is that a good or a bad thing?,’ Angus Moore, realestate.com.au, 14 January 2023
‘NSW Labor to abolish stamp duty for first home buyers,’ Alexandra Smith, Sydney Morning Herald, 9 January 2023
‘NSW Labor counters Perrottet’s land tax with vow to scrap stamp duty for some first home buyers,’ Stephanie Convery, The Guardian, 9 January 2023
‘Stamp duty is a bad tax. So why can’t Australia agree on what should replace it?,’ Joey Moloney and Brendan Coates, The Guardian, 14 January 2023
‘The Sydney suburbs where rents have soared most,’ Kate Burke, Domain, 14 January 2023
‘National rents soared by 10.2pc last year. Here’s how much rent costs in Australia’s most expensive and affordable suburbs,’ ABC News online, 14 January 2023
‘How housing made rich Australians 50 per cent richer, leaving renters and the young behind — and how to fix it,’ Brendan Coates and Joey Moloney, ABC News online, 9 January 2023
Hurry Up and Slow Down
Wed, 18 Jan 2023A new year and maybe one with a recovery in sight ....
Housing prices around the world fell in 2022. In Sweden housing prices finished the year down 15 per cent. In America, Seattle housing prices fell 9.5 per cent and San Francisco prices lost 11.6 per cent in just the last five months. Canadian housing prices are down 10 per cent from their peak in February.
2022 began with lingering concerns worldwide about Covid-19. Then in February came Russia’s invasion of Ukraine, followed by a jump in inflation that triggered a series of interest rate increases by central banks. These increases meant access to ‘cheap money’ for property purchases had come to an end with banks increasing scrutiny on loan applications while requiring larger deposits from borrowers.
The Australian property market has experienced its deepest downturn on record, according to CoreLogic figures that show national home values down 8.4 per cent from their peak in May last year. Sydney’s property values, by way of comparison, are now down 12.7 per cent from their peak in January 2022 after dropping 1.4 per cent in December. CoreLogic’s daily dwelling values index, which tracks Australia’s capital city price changes, shows Sydney houses down 13.2 per cent and units down 9.2 per cent.
The estimated total value of Australia’s residential real estate fell from $9.6 trillion in December 2021 to $9.4 trillion in November 2022, while the estimated number of annual sales fell 13.3 per cent, compared to the year before, with around 535,000 homes sold across Australia.
In the three months to November 2021 the median amount of time a listing was on the market before selling was 20 days; this figure is now up to 35 days for the three months to November 2022. And SQM Research figures show that there were 47 per cent more homes that have been for sale for more than 180 days on the market in Sydney in December than a year earlier.
However, we can’t overlook the lingering positive effects of the massive surge in prices after the pandemic hit Australia in March 2020. ABC News tells us that Australian dwelling values remain 11.7 per cent above where they were before the Covid-19 pandemic struck.
Sydney led the charge in post-pandemic price rises, as demonstrated by CoreLogic figures that show a rise of 27.7 per cent during the pandemic-inspired property boom and led to massive rises in capital growth in some suburbs - Austral (up 52.9 per cent) and Leppington (up 48.8 per cent) for example.
These unprecedented increases built a solid base of profits into the Sydney property market that have been realised in sales that have continued into the months of downturns since the first RBA rate increase. The percentage of property owners selling their homes for a profit in Australia remains at heights not seen in more than 12 years, with the recent falls in prices mostly affecting investors offloading high-density apartments.
In the three months to September, the rate of profitability in residential real estate was 93.3 per cent, down slightly from 93.9 per cent in the previous quarter, according to Corelogic’s Pain and Gain report which analysed the 83,000 residential properties resold in the quarter. The September figure is within one per cent of the 94.2 per cent recorded for the three months to May, which marked a record for profitability not seen since July 2010.
The falls of ‘22
So where did Sydney house prices drop the most in 2022? Domain’s Kate Burke crunched some numbers and came up with some interesting findings. First, she tells us that inner-city and coastal Sydney suburbs had the largest house price drops this year, with Narrabeen having the largest price fall with a 26.8 per cent decline in the median house value to $2,593,000. It’s just one of many Sydney suburbs that experienced price falls greater than 20 per cent over the past year.
Sales agent Joshua Perry of Belle Property Dee Why told Domain that Narrabeen’s median house value had been lowered by fewer high-end sales. Prices were down 15-20 per cent, but that followed a 40 per cent increase in the boom: “It’s natural to have a correction after such a steep climb,” he said.
Price growth in nearby Newport, North Narrabeen and Avalon Beach was up more than 50 per cent during the boom. House values in these suburbs have since fallen at least 20 per cent but are still well up on pre-pandemic levels.
Another interesting statistic is that the ten largest house value drops across Australia were all in Sydney. Falls of around 25 per cent were seen in Surry Hills and Redfern with declines of more than 20 per cent in nearby Darlington, Camperdown and Newtown. Birchgrove and Waverley also lost more than a fifth of their peak values.
Eliza Owen, CoreLogic Australia’s head of research, noted that more expensive markets tended to have sharper declines: “More expensive housing markets tend to be associated with higher levels of debt to income, so that’s why Sydney in particular may have been more sensitive to the rising rate environment,” she said.
She also said that prices in Sydney’s inner-city suburbs tended to be more volatile due to higher concentrations of investment activity. Speculative buying could lead to more extreme value changes, she noted, adding many of the areas with larger price declines had experienced strong uplifts during the boom.
CoreLogic’s Tim Lawless says that price falls in the top end of the Sydney market are slowing: “Upper quartile house values actually fell at a slower pace than values across the lower quartile and broad middle of the market through the final quarter of the year,” Lawless said. “It’s a pretty good hint that more broadly, the market will follow up.”
And just for a bit of statistical variety, economist Jason Murphy from News.com.au analysed the price of houses in terms of a slab of beer (24 cans or bottles of VB in this calculation) and reached some meaningful conclusions. In the 1980s a house cost the same as 6,000 slabs of VB. That seems like a lot of beer, but these days a house costs the same as 16,000 slabs of beer. And yes, the price of beer has gone up quite a bit since the 1980s, but houses have gone up a lot more – about 2.5 times faster than beer, in fact.
Even though house prices have recently weakened and the cost of a beer has gone in the other direction, what Jason Murphy calls the ‘lager to land’ ratio is still very much in favour of housing and not slabs of VB.
Interest rates
The December meeting of the Reserve Bank was the last time the cash rate would rise in 2022, but what about 2023? As we mentioned in last month’s article, there’s no RBA meeting in January so it’s unlikely there will be another increase until February, and maybe not even then.
The RBA board acknowledged in December that the constant increase in the cash rate was beginning to hit mortgage holders, with those holding a loan in for more pain during 2023: “Members noted the share of household income being spent on required mortgage payments would reach around its previous highest level in late 2023,” the minutes read.
Also in its December statement, the Bank said it is “not on a pre-set course” with its interest rate adjustments, and by the time the next board meeting on February 7 arrives the wise men of our financial system may have decided eight rate increases were enough to dampen demand and slow inflation. This would be headline news for all those households with mortgages, especially those who’ve had to refinance their fixed-rate loans at much higher interest rates than their original loans demanded.
How far prices will fall in 2023 depends largely on how high interest rates go and when they peak. Currently, the RBA has the cash rate set at 3.10 per cent, which is a long way up from the emergency-level 0.1 per cent rate borrowers enjoyed until May 2022. The big four banks' cash rate forecasts for 2023 (and when it will be reached) are:
Westpac 3.85 per cent (Mar 2023)
NAB 3.60 per cent (Mar 2023)
ANZ 3.10 per cent (Dec 2022)
CBA 3.85 per cent (May 2023)
ABC News’ Rhiana Whitson used a typical young couple as an example of how rate rises can impact borrowers. As Covid hit and the RBA cut interest rates to record low levels, Aaron and Saori took out an $850,000 loan to buy their first home. Most of this amount was fixed at a 2.2 per cent interest rate for two years. Later this year they’ll have to refinance at interest rates of around 6 per cent - well above the 2.5 per cent buffer which was used in the calculations when their loan was made, and their monthly payments will increase by around $1500.
PRD Real Estate chief economist Dr Diaswati Mardiasmo said that although the emergency-low cash rate after Covid struck was only a temporary measure and fixed mortgage rates were starting to rise, the sharp jump in inflation that prompted back-to-back 50 basis point cash rate rises was unexpected.
“In 2023 we are going to see a three-speed economy,” she said. “We’re going to see the people who can hold on and ride this, and those are the people who have jobs, who have savings. We’re going to see the people who are just barely holding on … and we’re going to see the people who can’t hold on.”
Loans shrink
Domain’s Elizabeth Redman says that after rising interest rates have made it harder to borrow large sums relative to income, the number of risky loans has fallen. She estimates that during the property boom, almost a quarter of new home borrowers were taking on debts of six times their incomes or more, but now figures from the Australian Prudential Regulation Authority (APRA) show that the share of new lending at high debt-to-income ratios has fallen 7.2 percentage points from its peak in the December quarter of 2021, to 17.1 per cent in the September quarter of 2022.
Cameron Kusher, director of economic research at Realestate.com.au, says many purchasers no longer have the capacity to pay the prices they were able to pay before interest rates started to increase. As a result of the rise in interest rates, borrowing capacities have reduced by around 25 per cent. This means a lender will allow you to borrow 25 per cent less than they would have before the interest rate rises began.
Shore Financial chief executive Theo Chambers says many home buyers are still trying to borrow to their limit, but banks are not lending large amounts as easily as they were a year ago: “People are still borrowing six times their incomes, they’re still trying to squeeze every possible mechanism to get the bank to lend.”
Mr Chambers says that some banks have adjusted how they factor in the rising cost of living, or how they assess income received in the form of bonuses: “Of course, the banks make you jump through hoops and especially at the moment, more than ever.”
Chris Foster-Ramsay, principal broker at Foster Ramsay Finance, agrees that it has become less common for borrowers to take out large loans compared to their incomes, after APRA put pressure on lenders. He says that rising interest rates have reduced borrowing capacity, which helps to solve the problem of large loan sizes: “Rates go up, borrowing capacity goes down, by default debt-to-income remains, in most cases, not an issue,” he said.
Renters depart the regions
There was a pandemic-inspired tree change that began in 2020 and saw many workers desert their domiciles in the cities and head for the regions where they could work from home and enjoy lower rental costs. But this trend has now reversed and once again rental prices in cities are going up while regional rental rates are decreasing.
Analysis by the National Housing Finance and Investment Corporation shows that growth in advertised rent in the regions, which had gone up about 30 per cent in some areas, has now slowed. Rental growth has reduced in the regions from 10.5 per cent to 7.1 per cent but has now lifted significantly across the capital cities, rising from zero per cent in 2021 to 8.9 per cent in the eleven months to November 2022.
Meanwhile, recently advertised rents in Sydney’s inner-city Local Government Areas have risen considerably. For example, rents are up by about 20 per cent in Burwood and Strathfield where vacancy rates are around 1.2 per cent. (In a typical year, rents will rise from two to five per cent across the Greater Sydney area.)
Realestate.com.au records show that although property prices have taken a hit over the past year, the rental market continues to see rents climb. Over the 2021 calendar year, national rents rose 4.7 per cent. Over the 2022 calendar year, according to CoreLogic’s Tim Lawless, they’ve increased by 10.2 per cent. At the same time, Sydney unit rents have rocketed upwards by 18.6 per cent reaching a record high of $575 while Sydney house rents rose 12.1 per cent to a record $650.
Lawless told The Guardian that any slowdown in rent increases is likely to be a sign of “renters hitting an affordability ceiling and desperately looking ways for ways to minimise their rents”, either by shifting from houses to units, or by adding more tenants to the same address.
Rental vacancy rates are at historic lows, as are new and total rental listings and also the number of days a rental property is listed on realestate.com.au before it is leased. At the same time, demand for rental accommodation is at record highs in capital cities.
Nationally, Australia’s rental vacancy rate remains at a record low 0.8 per cent. In Perth, Adelaide and Hobart, vacancy rates were below 0.5 per cent for November, while in Sydney and Melbourne the vacancy rates were 1.1 per cent.
Higher interest rates are contributing to fewer first-home buyer and investor purchases, while re-opened international borders are further adding to rental demand. As a result, demand for rentals is heightened – and escalating while supply remains constrained. This combination is pushing rents higher.
Increased rental demand at a time of very low vacancy rates will ensure that Sydney rentals will continue to rise through 2023. This trend will be supported by the reopening of our international borders and the return of foreign students.
Where to next in 2023?
Economists at the NAB issued their latest Sydney house price forecast for the year ahead, expecting Harbour City dwellings to lose a further -9.4 per cent in 2023: “We expect that house prices will continue to decline well into 2023, with further rate rises likely and as the economy slows. From their 2022 peak, we expect prices will fall by around 20 per cent,” they said.
Westpac's Sydney real estate forecast is similar, expecting another -8 per cent correction in 2023, while the Commonwealth Bank sees Sydney prices holding flat for the year. In summary, the Big four banks' Sydney home price forecasts for 2023 are:
Westpac -8 per cent
NAB -9.4 per cent
ANZ -6 per cent
CBA 0 per cent
It must be noted that the big banks' forecasts are usually conservative and not always accurate. The last time they predicted declines of these magnitudes was in the early days of the pandemic in April 2020, just a couple of months before the last boom got underway.
The International Monetary Fund (IMF) says that property prices in Australia may be as much as fifty per cent above what an average household can afford as the RBA pushes interest rates upwards in its battle to fight inflation. It offered a number of suggestions for the creation of policies that would make housing more affordable.
Richard Denniss, economist and executive director of the Australia Institute, says that the policies proposed by the IMF to lower the costs of housing in Australia have no chance of becoming law anytime soon: “As it’s impossible to simultaneously please the third of the population which does not own a home and the two-thirds that does, the default politician response is to avoid this simple question with a complicated answer about “housing affordability”, a concept that owes everything to politics and nothing to economics”, he wrote in the Herald.
“If house prices fell sharply tomorrow”, he added, “it’s a safe bet our governments would find ways to push them back up. In the 12 months to September 2022, the capital gain on Australia’s housing stock was more than $240 billion, the equivalent of 10 years’ worth of stage three tax cuts.”
As the Herald’s Jessica Irvine puts it: “From federal politicians to central bankers, to prudential regulators, right down to state and local governments – there are just so many fingers in the pie. And while you might think they’re always working to make homes more affordable, history, sadly, suggests otherwise.”
In early December the Westpac-Melbourne Institute Index of Consumer Sentiment fell by 6.9 per cent to 78.0. The bank’s chief economist, Bill Evans, said that confidence had “buckled under the pressure of rising inflation and interest rates”. The gloom coincided with the latest hike in the cash rate by the Reserve Bank of Australia (RBA) by a modest 0.25 basis points.
The Index of Consumer Sentiment has now fallen below its previous low point during the global financial crisis and, as Evans explains, “you have to go all the way back to the deep recession of the late 80s/early 90s to get consistent reads below that 78 level”.
“Certainly, more consumers expect substantial follow-on rate rises,” Evans added. “Amongst those surveyed after the RBA decision, nearly 60 per cent expect rates to increase by 1 percentage point or more over the next year, up on 54 per cent in the October survey.”
AMP's chief economist, Shane Oliver, says he expects an overall 15–20 per cent top-to-bottom fall in average home prices because the amount a new buyer on average full-time earnings with a 20 per cent deposit can pay for a home will have fallen 27 per cent from what it was in April 2022. "So, the downwards pressure on property prices will continue for some time yet, even if the RBA soon pauses the cash rate," Mr Oliver told ABC News.
CoreLogic’s head of research, Eliza Owen, says we may have already moved past the peak of home value declines: “As we move into 2023, there continues to be a mix of headwinds and tailwinds for housing market performance,” Owen said.
“With expectations that the bulk of the rate-tightening cycle occurred in 2022, housing value declines could find a floor in the new year. However, the extent of the floor in values could be further weighed down by mortgage serviceability risks, particularly for those rolling out of record-low fixed mortgage rates through the second half of the year.”
The ABC’s Gareth Hutchens took on the challenge of asking experts to predict which suburbs are most likely to weather the property prices downturns that have ended 2022. His group of experts considered a range of mid- and long-term drivers of growth, including affordability, location, gentrification, amenities, and demographic change.
New South Wales accounted for 24 spots on the final list which was compiled and published by Realestate.com.au. The Greater Sydney suburbs that made the list were, in alphabetical order: Alexandria, Arncliffe, Ashfield, Frenchs Forest, Glenmore Park, Hurlstone Park, Kingsford, Kingswood, Marrickville, Matraville, Mona Vale, Paddington, Prestons, Quakers Hill, South Penrith, St Clair and Turramurra.
Looking towards the year ahead, journalist Ev Foley, writing in Australian Property Investor, has her own list of favourite suburbs for investors to consider in 2023. She notes that apartments (units) are experiencing strong buyer demand, largely because their median prices are around half that of those for free-standing houses. She nominates units in Campsie, Liverpool, Marrickville and Westmead as being ‘particularly strong’ in this regard.
Another view for 2023 comes from Real Estate Institute of NSW (REINSW) CEO Tim McKibbon who said he welcomes news of strength and market positivity but warns investors that 2023 may not be pain free.
“At the end of the day, there’s two things that really drive the market, which is supply and people’s ability to access and service debt. I think with the increase in interest rates, you’re going to see a subdued market,” Mr McKibbon told API Magazine.
“It’s safe to say there will be more interest rate rises, and in addition to that, the costs of non-discretionary spends like food and fuel are also rising. That’s putting a lot of pressure on the family budget and the market is going to have to deal with that.
“Having said that though, we are seeing buyers coming back in and vendors accepting the market for what it is. We recently had an auction clearance rate that went through 60 per cent to 64 per cent, and that’s the first time for quite a while it’s gone through 60 per cent; it’s like there’s been a psychological barrier in the market, so there’s still transactions happening.”
Property Update podcaster Michael Yardney says we're in the adjustment phase of the property cycle and overall [across Australia] property values are just six percent lower than their peak: “That's not a property market crash - is it? It's an orderly correction that had to occur after house prices all around Australia got ahead of themselves.”
And to give us all a more positive outlook for the year ahead, Mr Yardney lists a number of fundamentals underpinning our housing markets including that there is a shortage of good properties for sale and virtually no properties to rent, and that our economy is still growing with unemployment at historically low levels meaning anyone who wants a job can get a job.
New schemes help some buyers
The Shared Equity Home Buyer Helper will launch on 23 January. This new scheme will see the state government contribute up to 40 per cent of the purchase price for a new home or up to 30 per cent for an existing home for buyers that meet the eligibility criteria.
This is intended to help essential workers such as paramedics, police officers, nurses and midwives, teachers and early childhood educators and some single parents to purchase a home in NSW that is near their places of work. It applies to properties purchased for up to $950,000 in Sydney and regional centres, and up to $600,000 elsewhere in NSW.
The program has 3,000 spots available annually for the next two years – 2023 and 2024 and is capped for singles at a maximum gross income of $90,000 and for couples with a maximum gross income of $120,000.
Participants must be 18 years or over, be an Australian or New Zealand citizen, or a permanent Australian resident, have a minimum deposit of 2 per cent of the purchase price, occupy the property as their principal place of residence, and not currently own any land or property
The NSW government says that as long as a participant remains eligible for the initiative, no repayments of the government’s contribution are required, and no rent or interest will be charged. Participants can also make voluntary payments to progressively increase their ownership share in the property.
To maintain eligibility, participants’ ongoing obligations include paying for property costs, maintaining the property, and complying with a periodic review of ongoing eligibility. A participant may be required to begin repayment of the government’s share in the property in certain situations, including where they no longer meet certain ongoing eligibility criteria.
And many first-home buyers in NSW seem certain to win an exemption from stamp duty regardless of who wins the March state election. Labor’s Chris Minns has joined the current Liberal premier in a promise to abolish stamp duty for first-home buyers on properties within certain price limits if elected. The main difference between the two parties is that Liberals will offer a land tax option whereas the Labor scheme does not.
2022 was good at the top
What is called Sydney’s ‘Trophy Home Market’ by some – those homes with starting prices of around $20 million or more, has fared pretty well throughout 2022, downturns included. There were 50 sales for more than $20 million recorded across Sydney, with the top twenty house and apartment sales alone totalling around $760 million.
2021 had just one sale in the top 20 outside the eastern suburbs, in Palm Beach. In 2022 there were six: two in Mosman, two in Palm Beach, and two in Barangaroo. The suburb with the highest total value of house sales among the capital cities was Mosman, where $1.55 billion was spent across 238 sales in the 12 months to September.
“The reality is that the rest of Sydney has been undervalued for years compared to the eastern suburbs, and from an international perspective, that has made no sense,” said Ken Jacobs from Forbes Global Properties. “But that looks to be changing as these satellite prestige areas north of Harbour Bridge and on the CBD foreshore become trophy markets in their own right.”
Jacobs said the thing that differentiated this year from recent years was that half of the top sales took place off-market, and therefore no public marketing had been required: “That’s because there are so many more capable buyers than properties to sell,” Jacobs said. “So when a property is listed, the buyer for it is already known.”
Brad Pillinger, who transacted this year’s top property sale price of $62.75 million for Vaucluse mansion ‘Ganeden’, said that limited supply and strong demand drove this segment of the housing market, not relatively minor issues such as eight consecutive interest rate rises: “No matter what happens to the economy, there’s still only about 200 houses on the waterfront between the city and Watsons Bay, and only ever a few that are genuinely for sale at any given time,” he said.
“As more buyers enter the market, those houses only become more expensive.”
However, the Agency’s Ben Collier said there is a ripple effect the downturn is having on lesser properties in the prestige mix: “We’re seeing a significant correction in those second- and third-tier properties of up to $15 million that last year were selling for top prices but are no longer achieving those sorts of outcomes.”
Mr Collier said there was an oversupply of buyers that were being forced to circle back to grand estates in Bellevue Hill that had been trading in the $20 million range a few years ago and had since doubled in price. He gave the example of the Bellevue Hill property ‘Belhaven’, previously purchased by recently retired ASX chief Dominic Stevens in 2017 for more than $21 million. It was resold last month for about $50 million, showing just how profitable it can be at the top of the Sydney property market.
Sources:
‘Permanent state of crisis’: Sydney rents hit fresh records,’ Tawar Razaghi and Jim Malo, Domain, 12 January 2023
‘Australian property values notch deepest falls on record: CoreLogic,’ Elizabeth Redman and Jim Malo, Domain, 9 January 2023
‘Property values plunge in 2022, further falls likely: CoreLogic,’ Elizabeth Redman, Domain, 3 January 2023
‘Rental market at ‘fever pitch’ as 6600 homes exit affordability scheme.’ Rachel Clun, The Sydney Morning Herald, 9 January 2023
‘Stale property listings languish on the market as the downturn deepens,’ Elizabeth Redman, Domain, 6 January 2023
‘Why home prices are falling and won’t rebound in a hurry,’ Jessica Irvine, The Sydney Morning Herald, 5 January 2023
‘A 30 per cent house price fall 'unlikely' with RBA tipped to cut interest rates in late 2023,’ Nassim Khadem, ABC News online, 4 January 2023
‘Will house prices rise or fall in 2023 across Australia?,’ Sarah Sharples, News.com.au, 3 January 2023
‘Record falls for Sydney and Melbourne housing in 2022 – but prices remain above pre-Covid levels, Peter Hannam, The Guardian 3 January 2023
‘Australian housing values were down 5.3 per cent in 2022. Here's what's happening in your area,’ Shiloh Payne, ABC News online, 3 January 2021
‘Australian Property Market: More Price Falls Predicted in 2023,’ Jason Murphy, Sophie Venz, Forbes Advisor, December 2022
‘After a wild year in real estate, this is what's likely to happen next,’ Cameron Kusher, realestate.com.au, 31 December 2022
‘Australian Property Market: More Price Falls Predicted in 2023,’ Jason Murphy, Sophie Venz, Forbes Advisor, December 2022
‘Sydney property market news,’ OpenAgent, December 2022
Property prices set to climb again in 2023,’ Eliza Bavin, Yahoo Finance, 13 December 2022
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‘Where Sydney property investors should be looking in 2023,’ Ev Foley, Australian Property Investor, December 2022
‘Sydney real estate: Six reasons why house prices could rise again in 2023,’ Kate McIntyre, Daily Telegraph, 22 December 2022
‘We know how to lower home prices, but our political leaders won’t have it,’ Richard, Denniss, Sydney Morning Herald, 28 December 2022
‘Why nobody expected the sharpest property price falls in decades,’ Elizabeth Redman, Domain, 29 December 2022
‘What Australia's housing market has been doing over the past year,’ ABC News online, 29 December 2022
‘Why nobody expected the sharpest property price falls in decades,’ Elizabeth Redman, Domain, 29 December 2022
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‘Popular suburbs where property buyers splashed the most cash in 2022,’ Tawar Razaghi, Domain, 27 December 2022
‘Australia’s ‘misaligned’ housing market at risk of major crash as rates rise: IMF,’ Shane Wright, Sydney Morning Herald, 27 December 2022
‘Sign that Australian house prices will drop even further in 2023,’ Tarric Brooker, News.com.au, 26 December 2022
‘How many slabs of VB it takes to buy a house,’ Jason Murphy, News.com.au, 24 December 2022
re are they now? Property prices drop in Sydney’s boomtime suburbs,’ Kate Burke, The Sydney Morning Herald, 23 December 2022 ‘The number of Australians making a profit from property sales at 12-year high, research shows,’
Elias Visontay, The Guardian, 22 December 2022
‘The neighbourhoods where properties are selling at a loss,’ Elizabeth Redman, Domain, 22 December 2022
‘RBA defends rate rise as mortgage holders tipped for more pain in 2023,’ Ellen Ransley, NCA NewsWire, 21 December 2022
‘What downturn? Sydney’s trophy market hits peak performance,’ Lucy Macken, Domain, 18 December 2022
‘Paramedics and early childhood educators get support to buy homes,’ Madeleine Achenza, News.com.au, 17 December 2022
‘Forced home sales set to rise as borrowers struggle with surging interest rates and mortgage repayments,’ Rhiana Whitson, ABC News online, 17 December 2022
‘Experts reveal their top 100 suburbs tipped to best weather the property downturn,’ Gareth Hutchens, ABC News online, 16 December 2022
‘The suburbs where house prices dropped most in 2022,’ Kate Burke, Domain, 13 December 2022
‘The latest increase in RBA interest rates might be the last for some time and that's good news for your mortgage,’ Peter Martin, The Conversation, ABC News online, 7 December 2022
Rental market returning to a pre-COVID normal, Rachel Clun, The Sydney Morning Herald, 9 December 2022
‘Australia’s house price crash reaccelerates,’ Leith van Onselen, Macrobusiness, 10 December 2022
‘The looming home loan risk keeping property experts up at night,’ Elizabeth Redman, Domain, 16 December 2022
UNANSWERED QUESTIONS - THEY JUST KEEP COMING
Wed, 14 Dec 2022UNANSWERED QUESTIONS.... THEY JUST KEEP COMING !
In November, Australian home values lost slightly more than one per cent based on CoreLogic's 5 capital city index, bringing the cumulative fall to 7.7 per cent since the market's May 2022 peak. Sydney prices have fallen by 11.4 per cent from their highest point.
CoreLogic’s data gives a capsule image of the Sydney market that shows housing values were falling at the monthly rate of 2.3 per cent three months ago, according to CoreLogic research director Tim Lawless, but now the monthly rate of decline has fallen to 1.3 per cent in November. This could mean buyers are adjusting to increased interest rates as well as the market experiencing lower stock levels, with both leading to smaller value declines.
CoreLogic head of Australian research Eliza Owen said that the pace of the housing market’s decline has been slowing overall: “The high-end markets of Sydney and Melbourne, even though they’ve had the most deceleration in the pace of falls, they’ve still had the biggest falls overall,” she said.
“Maybe because price falls occurred earlier and were more intense, that’s where we’re starting to see maybe a little bit of a correction in that trend now.”
BresicWhitney chief executive Thomas McGlynn says there has been a stabilisation in inner-city suburbs within 10km of the Sydney CBD. He says this is shown by improving clearance rates across the eastern suburbs, inner west and lower north shore. He also said buyers can have more comfort in terms of their mortgage repayments to think that the end of the interest rate tightening cycle is in sight, making it easier to buy and sell in the same market.
But the market recovery is yet to happen. AMP Chief Economist Shane Oliver says property prices will fall further in the second half of 2023: “Rising mortgage rates are the main driver of the slump and there is likely more to go,” Mr Oliver said.
“Since April a buyer on average full-time earnings with a 20 per cent deposit has seen a 25 per cent decline in their home buying power. We continue to expect a 15-20 per cent top to bottom fall in home prices out to the September quarter next year, followed by a gradual recovery,” he said.
Economists from the ANZ Bank think that Sydney prices are likely to fall a total of 12 per cent this year and another 8 per cent in 2023. ANZ economists Felicity Emmett and Adelaide Timbrell said interest rates are now weighing down a property market that experienced the biggest price rise in prices in a generation during the COVID-19 pandemic.
“With our expectation that the cash rate will peak in May next year, we think that most of the impact on prices will be fully reflected by the end of 2023,” they told the Herald’s Shane Wright.
“In 2024, as policy stabilises and then eases late in the year, we expect to see a modest recovery begin to emerge in house prices and look for gains of around 5 per cent by end-2024.”
Nila Sweeney, writing in the Australian Financial Review, says that the recent interest rate rises have already generated a drop in house prices across 98.3 per cent or 534 out of 543 Sydney suburbs, led by the northern beaches and eastern suburbs. Her analysis found that house prices across Balgowlah, Bayview, Seaforth, and Avalon Beach on the northern beaches have dropped by 11.4 per cent, 11.1 per cent, 10.6 per cent and 10.5 per cent respectively, while in Sydney’s eastern suburbs Bronte house prices fell by 11.3 per cent and Bellevue Hill by 10.3 per cent during the same period.
Housing prices in some Sydney suburbs have already fallen to levels below where they were in March 2020 when the pandemic first hit. These include the inner-city suburbs of Darlinghurst (-3.7 per cent), Surry Hills (-12.8 per cent), Forest Lodge (-9.7 per cent) and Redfern (-9.7 per cent), all of which recorded the sharpest falls in median house values since the pandemic hit, CoreLogic figures show.
No early ending
The property market got an unwanted early Christmas gift when, on December 6, the Reserve Bank took the official cash rate to its highest level in 10 years, raising interest rates by a quarter of a percentage point to 3.1 per cent in its attempts to bring inflation under control. This was the eighth consecutive monthly rise, but as there is no RBA meeting in January that’s most likely to be the cash rate in place until at least February 2023.
RBA Governor Philip Lowe explained the board’s reasoning: “Inflation in Australia is too high, at 6.9 per cent over the year to October. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role.”
The Sydney Morning Herald estimates that, if the banks pass the RBA’s increase on in full, the average discounted mortgage rate will rise to 6.45 per cent. With each rise in interest rates, mortgage repayments have risen and the amounts borrowed have been reduced accordingly.
If you’re wondering how high the RBA’s prime interest rates will go, bank economists’ forecasts generally range from a peak of 3.35 per cent (CBA) to 3.85 per cent (Westpac). This is an important figure for all potential borrowers as it will determine the amount of the monthly repayments on their loans, and we’re already at the peak rate forecast by the CBA.
The AMP’s Shane Oliver did offer a glimmer of hope by telling News.com’s Sarah Sharples that he believes the cash rate has now peaked — but with a high risk of one final 0.25 per cent hike to 3.35 per cent in February. By the end of 2023 or early 2024 he expects the RBA to start cutting rates.
“Our base case is that we are now at the peak, albeit with the high risk of one final 0.25 per cent hike to 3.35 per cent early next year,” he said.
What might happen once interest rate rises slow down or even come to a halt? Alex Turner-Cohen from News.com foresees ‘a massive change on the horizon, with prices possibly set to skyrocket’. He says Sydney will lead the recovery and the NSW capital will experience the largest gains of up to 12 per cent in its property sphere. But there is a proviso.
He says his predicted skyrocket could happen because “of the rise in overseas arrivals, the return to the office, the existing shortage of rental accommodation, the new stamp duty/land tax changes and the expected ongoing strength of the Sydney economy.” All this is based on Louis Christopher’s ‘Housing Boom and Bust report for 2023’ which is highly optimistic to say the very least.
Louis Christopher is the Managing Director of Sydney-based SQM Research. He says that “No doubt it will be a very challenging year for the RBA to walk their tightrope and pull off a soft landing for the Australian economy. However, contrary to current popular opinion, I believe they will manage to do just that.”
SQM’s Housing Boom and Bust Report forecasts capital city house prices will rise between 3 and 7 per cent once interest rates stop rising. The report's "base case" hinges on the RBA not raising the cash rate above 4 per cent, inflation dropping to 5 per cent, and unemployment staying below 5 per cent.
"If the [cash rate] target rate stays below 4 per cent, then it is unlikely we will have a flood of forced sales in the housing market," Mr Christopher said. He also forecast Sydney will see the biggest lift in property values of between 5 and 9 per cent. “There is, of course, a risk the RBA may need to go further. If they do, then the risks of a hard landing in the economy do substantially rise and, thus, a hard landing in the housing market would also occur."
Opinion from data compiler PropTrack provides some details about our current situation. Data compiled exclusively compiled for news.com.au, found that 144 suburbs in Australia have lost their places in the million-dollar property club since interest rates began rising in May, and of those NSW had the most suburbs that suffered from median price plunges that cost them their million-dollar status. In all, 63 suburbs in the state dropped out of the seven-figure threshold.
Matthew Hassan, senior economist at Westpac, says: “The downturn has become more firmly entrenched in most markets, while price-driven improvements in affordability are being negated by rising interest rates and deteriorating expectations for prices and labour markets.
"Overall, it looks to us like we’ve got another 12 months of price declines ahead, but they’re likely to be at a milder pace than we’ve seen through 2022," Mr Hassan said.
The other three of Australia’s Big Four banks also see falls into 2023. NAB expects combined capital city prices to decline 7.3 per cent this year and 11.4 per cent in 2023. ANZ says it too expects house prices to fall next year. While the Commonwealth Bank (CBA) has the most positive outlook saying it expects house prices to continue to fall 15 per cent from the April peak to the trough in the middle of 2023.
Affordability decreasing
Figures from the Australian Bureau of Statistics (ABS) show that property values across Australia rose 66.6 per cent during the past decade while wages were up by only 25.2 per cent. In NSW home values rose three times faster than wages.
CoreLogic agrees that growth in wages has been completely outstripped by property price growth over the past decade. Their findings show that home values have climbed at more than twice the rate of wages, making it increasingly difficult for homebuyers to enter the Sydney property market.
CoreLogic’s Eliza Owen says that despite recent growth in wages there’s been very little improvement in affordability for homebuyers, especially for those wanting to buy their first home: “The cost of debt has risen substantially as [interest rates rise] so it doesn’t necessarily mean a vast improvement in affordability, but it does give people a chance to catch up in their savings,” she said, adding that home values nationally would need to fall 20 per cent just to offset the effects of rising interest rates.
Moody’s Investors Service confirms that housing affordability is deteriorating despite property price declines. It says that by October new borrowers needed 31.6 per cent of average household income to meet monthly mortgage repayments, compared to 25.8 per cent in January: “While house prices are declining, rising interest rates over 2022 and any further rate rises in 2023 mean affordability for new borrowers is poor and will remain so over the next year,” it said.
Modelling by BetaShares, an Australian fund manager specialising in exchange traded funds, found that the national mortgage repayments ratio is currently 42.8 per cent of incomes — the highest level since the September quarter of 1990 when it was 45.5 per cent. This means that the repayment burden is the worst since the 1990s, despite double-digit mortgage rates then, because the national house price is now 6.2 times the average after-tax annual household income.
BetaShares also found that the mortgage repayment ratio in Sydney reached 57.8 per cent in the current quarter, worse than the GFC peak of 47.2 per cent. The company’s chief economist David Bassanese said home buyers are facing the worst mortgage affordability since the 1990s. He also said that mortgage affordability levels could be even worse than the 1990s if the RBA increases rates by about another percentage point, which many financial analysts have already predicted.
Mortgage holders are classified as being ‘at risk’ if from 25 to 45 per cent of their after-tax household income is spent on their home loans, depending on income and spending. This stress is expected to impact one in four mortgage holders by the end of January 2023.
Roy Morgan research figures show that mortgage stress has already increased to its highest level since April 2018 with more than one out of five mortgage holders considered ‘at risk’.
Refinancing growing
New home loan commitments fell by 2.7 per cent in October. A fall in borrowing by first-home buyers has been especially noticeable because their loan commitments fell by 3.2 per cent as interest rates have taken their toll. The number of first home buyers entering the market is 47 per cent below the January 2021 peak of 16,187.
But refinancing of existing loans is at record highs, according to the ABS Head of Finance and Wealth, Katherine Keenan: “Monthly owner-occupier refinancing between lenders has remained above $12 billion since June 2022, well above pre-pandemic values,” Ms Keenan said. “Investor refinancing activity has also remained high.
"Almost half of loans taken out in the middle of 2021 were taken out on a fixed-rate basis, which is unusually high for Australia," CEDA economist Andrew Barker told ABC’s Emily Stewart. He said that, while homeowners with variable interest mortgages have been dealing with regular increases as the cash rate goes up, fixed-rate borrowers face a massive jump in their repayment ‘overnight’.
"[It is] particularly those who bought at the peak of house prices during the pandemic who may have more problems — and they're the ones that the banks really need to monitor," Mr Barker warns. He says that the rise in interest rates for many of these recent buyers is likely to be made even tougher on borrowers by uncompetitive variable rates that some on fixed-rate loans will have to roll on to.
The ABC’s Peter Martin says about two-thirds of the fixed-rate mortgages will expire in 2023: “Many were taken out at fixed rates of around 2 per cent. Depending on how high the Reserve Bank pushes things, those borrowers will suddenly find themselves paying 6-7 per cent.”
Both owner-occupiers and investors are still refinancing their home loans at “extremely elevated levels”, according to RateCity research director Sally Tindall: “Refinancing might have dropped again this month but it’s still at near record highs, with over $17 billion worth of loans refinanced in just one month,” Ms Tindall said.
“While banks are scratching around for brand new borrowers, they’re busy poaching existing ones from their competitors. Banks are throwing everything but the kitchen sink at customers willing to move their mortgage on to their books, with rate discounts and cashbacks at the ready to woo new business” she said.
Sarah Sharples of news.com.au tells us that RBA data from October shows there’s a 0.51 per cent difference between the interest rates existing borrowers are paying compared with new customers responding to special offers: “New borrowers are securing an average variable rate of 4.58 per cent compared to the much higher rate of 5.09 per cent afforded to existing borrowers,” she wrote.
And while we’re talking about borrowers, over the last decade one relatively new lender has become the tenth biggest lender in Australia, according to data from research firm Digital Finance Analytics (DFA). It tells us that back in 2010 the ‘Bank of Mum and Dad’ helped only about three per cent of first-home buyers. Now, DFA calculates that 45.8 per cent of first-home buyers sought assistance from their parents to buy a property during the September quarter, and the average level of help was over $107,000.
Housing construction slows
Housing construction is an important sector of our economy that has seemed somewhat immune to the impacts of our current economic conditions, although lending for the construction or purchase of new homes fell 0.9 per cent in October, its lowest level in more than three years.
However, Housing Industry Association (HIA) Economist Tom Devitt said the RBA’s rate hikes haven’t yet had their full impacts on the construction industry: “Building approvals have been sustained in recent months by the record number of home sales prior to the first increase in the cash rate that still haven’t been approved, much less commenced construction,” he said.
“The full impact of the rate rise will not be observed in approvals data until 2023 when the pool of earlier sales is exhausted.”
Nathan Mawby from Realestate.com.au writes that Australia’s home building boom is ‘all but over’. He says that housing construction is expected to plunge to a decade low in 2024, and it could take action by the federal government to reverse the decline.
Mr Mawby refers to a new HIA report that surveyed the nation’s biggest home builders and concluded the speed of the boom’s decline is accelerating after a 22.8 per cent slump in the number of new detached house starts in October was even more severe than the 15.8 per cent drop recorded in the three months between June and September.
HIA now anticipates that, after starting a record 150,000 new houses in 2021 nationwide, there will be just 101,000 commenced in 2024. HIA chief economist Tim Reardon warned it would still take years for the Reserve Bank of Australia’s seven increases to the cash rate to be fully felt due to a significant pipeline of approved new builds.
“But it is very clear, even before the October and November increase in the cash rate start to impact on sales, that this building boom is coming to an end,” Mr Reardon told realestate.com.au.
Landlords and tenants
Rents, already high and still rising, are expected to continue their upwards momentum. Nationally, rental rates have risen by a record 10 per cent over the past year while the number of available properties remains critically low by historical standards. ANZ Bank said in the month to November 13, the number of properties available for rent per week was just 96,000, down 36 per cent on the five-year average and down 46.6 per cent compared to the same period a year earlier.
In November the number of vacant properties rose slightly – up 3.1 per cent from October, but Domain chief of research and economics Dr Nicola Powell said this was a seasonal rise as the rental market moved into the busy change-over period and would do little to improve the situation for renters.
SQM Research figures show that between March 2020 and January 2022, national asking dwelling rents rose by 14.3 per cent. Many families that once might have been able to buy their first home are now taking longer to save a deposit; this is reflected in surveys that now show the median age of first home buyers is now closer to 40 than 30.
To buy a median unit in Sydney, a 20 per cent deposit would be over $150,000 and it’s hard to save up that much while paying high rents each month. The SGS Economics’ rental affordability index shows falls in affordability of up to 14 per cent in some parts of the country over the past 12 months.
The SGS index also shows that in Sydney, the least affordable areas for renters are around the north shore suburbs of Balgowlah, Seaforth, and Manly. The eastern suburbs and an area around Mascot and Sydenham are also relatively unaffordable. The most affordable places in Sydney are across the western and south-western suburbs including Whalan, Blacktown, Cabramatta and Bankstown.
In Sydney, on the supply side, Domain figures show the lowest vacancy rates were in middle and outer areas such as Penrith, Camden, Campbelltown, Bankstown and Sutherland, which all recorded a rate of 0.5 per cent.
Greg Taylor, director of Stanton & Taylor Real Estate in Penrith, said rental demand in in his area had jumped at the start of the pandemic, and had continued since, as more people moved to the area for better affordability. At the same time, rental supply had reduced, as some landlords cashed out of the market, while other potential investors sat on the sidelines as property prices soared.
SkyNews recently carried a story based on statistics from estate agents trade body Propertymark that the number of landlords selling up has risen by 13 per cent in the four months from July to October. They point out that this exodus by landlords could lead to an even bigger shortage of rental properties, saying: “We are seeing different ‘groups’ of people converging, and all competing for the same space within the rental sector.
“A lack of affordable housing is, at the same time, exerting pressure from another direction. Despite a housing market dip with property prices falling, many households aspiring to own their own property are unable to save up.”
The majority of the properties now being offered for sale are owned by landlords whose primary goals are for rental incomes and capital gains. Dr Chris Martin, Senior Research Fellow in the City Futures Research Centre at UNSW, says half of the investors in a recent survey said they’d sold their investment properties to realise capital gains. 47 per cent said they wanted money for another investment, 36 per cent said the rental income was insufficient and only 14 per cent said there was another reason for their decision to sell.
“The point we’re making, and the evidence shows, is landlords are disinvesting all the way to the bank all the time. They are selling properties because it suits them and plenty of them get back into property again also because it suits them too,” Dr Martin told Domain’s Tawar Razaghi.
Fertile fields
An interesting story about the effects of housing conditions on Sydney’s population statistics comes from Terry Rawnsley, a KPMG demographer and urban economist, who authored a report showing that fertility rates in the inner suburbs of our two biggest cities have fallen to very low levels.
Mr Rawnsley has concluded the cost of housing in Sydney and Melbourne is having a major effect on fertility patterns, pointing to huge differences in fertility rates between wealthy inner-urban suburbs and outer suburbs where rates were relatively healthy: “When you’re living in a two-bedroom inner-city apartment, having two or three children is challenging,” Rawnsley says. “Areas with larger and more affordable housing tend to have higher fertility rates.”
In a separate but related study, Macquarie University demographer Professor Nick Parr concluded that childbearing is being “compressed into the later part of the reproductive age period” across much of Sydney. Professor Parr analysed birth rates across the city’s suburbs between 2011 and 2015 and found that, in virtually every neighbourhood to the city’s north, east and inner south, more than 70 per cent of births were to women aged over 30. Each one of those districts has very high property prices.
The latest Commonwealth census shows that Sydney has a “ring” of suburbs surrounding Sydney Harbour where numbers fell in the five years to 2021. For example, the population of Sydney’s eastern suburbs contracted by 2.1 per cent between 2016 and 2021. Meanwhile, suburbs on the outskirts of the city, despite inferior transport and other services, have experienced massive growth.
Sources:
‘The latest increase in RBA interest rates might be the last for some time and that's good news for your mortgage,’ Peter Martin, The Conversation, ABC News online, 7 December 2022
‘RBA interest rates: Further 0.25 per cent hike in December,’ Sarah Sharples, News.com.au, 7 December 2022
‘Australia’s house price crash reaccelerates,’ Leith van Onselen, Macrobusiness, 10 December 2022
‘$900 more a month: When experts say RBA rate hikes will end,’ , Eliza Bavin, Yahoo!Finance, 6 December 2022
‘First-time buyers squeezing Boomer parents for cash as house prices drop,’ Tarric Brooker, News.com.au, 10 December 2022
‘House prices drop in nearly all Sydney and Melbourne suburbs,’ Nila Sweeney, Australian Financial Review, 4 December 2022
‘Fixed-rate borrowers brace for jump in repayments as cheap home loans end,’ Emily Stewart, ABC News online, 5 December 2022
‘Jump in homelessness as Australia’s rental crisis pushes ‘overwhelmed system to breaking point,’
Caitlin Cassidy, The Guardian, 6 December 2022
‘A landlord’s market’: Little relief for renters amid tight vacancy rate,’ Kate Burke, Domain, 5 December 2022
‘Australia’s home building boom is all but over, could impact key federal budget pledge,’ Nathan Mawby, Realestate.com.au, 14 November 2022
‘Renovated properties attract premium despite Sydney’s housing downturn,’ Tawar Razaghi, Domain, 27 November 2022
‘The rental squeeze is tightening across the country and more and more Australians are trapped,’ Nick Sas, ABC News online, 29 November 2022
‘Will house prices go up in 2023? The answer largely depends on interest rates,’ Rhiana Whitson, ABC News online, 29 November 2022
‘Brisbane, Hobart and Sydney become least affordable cities for renters as regional centres also suffer,’ Caitlin Cassidy, The Guardian, 29 November 2022
‘Properties could rise as much as 12 per cent if interest rates start to slow down,’ Alex Turner-Cohen, News.com.au, 29 November 2022
‘Number of landlords selling up rises by nearly 13% in four months,” Adele Robinson, SkyNews, 3 December 2022
‘Baby boom goes bust after Sydney and Melbourne’s property compromise,’ Matt Wade, The Sydney Morning Herald, 30 November 2022
‘Worst of both worlds’: Mortgage affordability toughest since 1990s,’ Tawar Rasaghi, Domain, 30 November 2022
‘Landlords sell to reap capital gains, not avoid rental reforms: study,’ Tawar Razaghi, Domain, 28 November 2022
‘Here’s how Australian house and unit prices are looking in each capital city,’ ABC News online, 2 December 2022
‘Housing loan commitments weaken even further,’ Hanan Dervisevic, Savings.com.au, 3 December 2022
‘Worrying new home loan statistic as new lending falls by $5 billion in a year,’ Eli Green, News.com.au, 3 December 2022
‘Aussie house prices fall another >1% in November,’ Christopher Joye, Livewire Markets, 30 November 2022
‘One graph shows why it’s so hard to buy a house, even in a downturn,’ Kate Burke, Domain, 2 December 2022
‘House prices tipped to fall further, rents to climb higher as rate rises bite,’ Shane Wright, The Sydney Morning Herald, 29 November 2022
‘Why it’s about to get even harder finding a place to rent in Australia,’ Tarric Brooker, News.com.au, 14 November 2022
‘What type of property can you buy for the median house price?,’ Melissa Heagney. Domain, 25 November 2022
‘Very onerous’: The huge hurdle facing first home buyers,’ Elizabeth Redman, Domain, 14 November 2022
‘The insider trick for home buyers trying to plan for higher interest rates,’ Elizabeth Redman, Domain, 22 November 2022
‘Suburbs where homebuyers now have more power,’ Megan Lieu, Realestate.com.au, 18 November 2022
‘Reserve Bank forecasts see-sawing interest rates as economy worsens,’ Shane Wright, Sydney Morning Herald, 22 November 2022
‘RBA signals it may pause further interest rate rises,’ AAP, Peter Hannam, The Guardian, 16 November 2022
‘More pain to come’: Most expensive properties record deepest price falls,’ Elizabeth Redman, Sydney Morning Herald, 16 November 2022
I'VE GOT MONEY IN MY POCKET
Thu, 24 Nov 2022Interest rate rises make this a buyer’s market for those with finance
With property prices falling, many sellers are becoming more receptive to the offers they receive. There are some two dozen Sydney postcodes where property values have retraced to pre-pandemic levels: Suburbs like Darlinghurst, where CoreLogic figures show house values are down 13.7 per cent from their March 2020 level, Surry Hills – down 12.8 per cent, and Redfern – down 9.7 per cent, are at the top of the list but the falls are spread across the greater Sydney area.
Units have also been hit by the price drops. Epping experienced the largest fall for units- down 11.5 per cent, followed by a number of high-density postcodes including Macquarie Park - down 7.9 per cent, St Leonards - down 7.2 per cent, and Parramatta -down 5.3 per cent.
CoreLogic head of research Tim Lawless said many of the suburbs where house prices have fallen below pre-pandemic levels were also ones that led the latest property prices boom: “These areas are quite often a bellwether; they lead the upswings and lead the downturns as well,” he said.
“If there is one encouraging sign it’s also that upper quartile, that seems to be losing momentum in the downturn now. These are the suburbs that stabilise early and attract buyers to capitalise on that. They’re representing better value now than they might have been a couple of years ago.”
The vendors Domain has designated ‘motivated sellers’ are becoming more important in these testing conditions. These sellers want to get the sale over with before the end of the year. They expect more interest rate hikes to come and know that this could reduce the amount they receive for their property. Few if any expect the strong prices of earlier in the year, but they want the sale because they’re downsizing, moving to a new city or wish to sell for other personal reasons.
Buyers’ agent Peter Kelaher, of PK Property says the main sellers now are deceased estates, downsizers, marital separations and people who’ve bought elsewhere and need to sell: “The people that do need to sell are meeting the market, and they’re setting realistic reserves, and they’re either meeting the reserve, getting a little bit over, a little bit under.”
Auctions have rebounded and clearance rates have risen above the 60 per cent mark most weeks. The October auction clearance rate recovered to 61 per cent, the highest level since March, after hitting a low of 49.7 per cent in July. Auction volumes were also up for a third month, although the total number was down by 33 per cent over last year.
Wendy Chamberlain, of Chamberlain Property Advocates, says that some sellers are concerned about potential buyers having pre-approved mortgages that expire, meaning what might have been an offer of $1 million could now be reduced to $920,000.
“Vendors have basically seen six months of interest rate rises and how that has affected buyers and buyer sentiment in the market and realise they’re going to have to be realistic about where the property prices sit. You’ll still get one or two that go, ‘no, we want our price’, and those properties tend to sit on the market,” she told Domain’s Tawar Razaghi.
Of course, there are some sales where owners are willing to take a loss as the impacts of seven straight interest rate hikes are felt. Many homebuyers and investors overpaid for properties in boom market conditions last year – believing interest rates would stay low until 2024 – and are now feeling the pinch of skyrocketing mortgages.
SQM Research says that in October distressed listings, where the seller makes a loss or accepts a lower price than they usually would, jumped by 5.7 per cent nationally, with an increase of 7.8 per cent in New South Wales.
There are signs that buyers’ interest may be on the increase. The average number of buyers attending each open property jumped 12.6 per cent in October from the month before, and data from Ray White shows that there were an average of 3.7 bidders at auctions by the end of October, the highest number in the past year.
St George Bank chief economist Besa Deda has also seen a pick-up in buyer demand but cautioned that budgets were constrained: “Demand is sluggish, but it is starting to perk up a little, but it doesn’t necessarily mean they’re willing to pay higher prices in an environment where the central bank is going to raise rates further,” Deda said.
“Deals are still going through, but it is a case of lowering [seller] expectations and bringing the buyer to the party.”
Of course, there are other vendors that are holding their properties off the market as they wait for better prices in the months – and maybe the year, ahead. AMP Capital chief economist Dr Shane Oliver said that many owners are hesitant to list which means there are not many homes to choose from, and this is helping to moderate price falls: “There was a feeling through the spring selling season you’d see a rise in listings, but we haven’t seen that. That has contributed to the ease in the rate of decline,” Oliver said.
“This property market downturn will wax and wane until we get to the bottom. We’re still at relatively early days of it because we’re yet to see the full impact of higher interest rates. There is still a fair way to go.”
Is the only way up?
Domain data shows that Sydney’s median house price dropped almost $80,000 over the September quarter - a 5.2 per cent drop, with the largest declines among houses in the northern beaches and eastern suburbs, down by $344,000 and $260,000 respectively. Unit prices held up a bit better but the median fell by 5.7 per cent to $755,000 – a decline of about $24,000, over the past three months.
The largest quarterly fall was in the northern beaches where the median house price there dropped 13.2 per cent and fell 18 per cent year-on-year. The median price in the eastern suburbs fell 7.7 per cent or $260,000. Six-figure declines were also seen in the city, inner south, north shore, inner west, Ryde and inner south-west regions.
These are the steepest quarterly house price falls since 1993 and median prices across Sydney are 8.3 per cent down from their peak in the March quarter. It does take house prices back to mid-2021 levels, so there are still gains from the last boom remaining in many suburbs, but with more rate hikes expected prices aren’t going to surge upwards for a while.
Figures from CoreLogic indicate that Sydney’s prices rose 27.9 per cent from the Covid trough to the peak, adding about $252,900 to the average dwelling value. These figures also showed that the declines from the February peak represent a fall of about $116,500 for the average home and it would take a further drop of 11.4 per cent before reaching pre-pandemic levels.
McGrath chief executive John McGrath said that Sydney prices had become unrealistic during the boom: “People started to panic and pay … very unrealistic prices,” he said. “The last 5 to 10 per cent of market growth was unjustifiable, so it had to come back.” He added that he thinks the market may be nearing its low point and if interest rates stabilised it would generate greater confidence among both buyers and sellers.
Gareth Aird, head of Australian economics at Commonwealth Bank, expects Sydney to show an 18 per cent peak-to-trough decline, although he cautions that falls could be greater than this if the RBA’s cash rate goes above the forecast 3.1 per cent.
Interest-ing times
In the first week of November the RBA revised upwards its forecast for peak inflation to 8 per cent this year. It also predicted high prices would linger for longer, with CPI inflation still at 4.7 per cent over 2023 and remaining above 3 per cent into 2025. This means that economists expect prices to continue rising and hopes of an early cessation of rate rises have dimmed.
The November cash rate rise from 2.6 per cent to 2.85 per cent means a borrower owing $750,000 on a 25-year mortgage will need to pay an extra $112 a month once the rate rise is passed on by the banks, according to RateCity figures. This typical borrower is now dealing with an increase of $1,140 in their monthly repayments since rates started rising in May.
Marcel Thieliant from Capital Economics believes that the RBA still has another four 0.25-percentage-point rises ahead over the next six months or so. However, he also believes inflation will slow much faster next year than the RBA is forecasting.
"The upshot is that we still see a good chance that policy will be loosened before the end of next year," he says. "We have pencilled in a total of 75 basis points of rate cuts by mid-2024, taking the cash rate to 3.1 per cent.
The RBA’s governor, Philip Lowe, says the bank’s board believes interest rates will need to go higher to bring inflation under control: “We are not on a pre-set path,” he added. “If we need to step up to larger increases again to secure the return of inflation to target, we will do that. Similarly, if the situation requires us to hold steady for a while, we will.”
NAB’s London-based director of economics, David de Garis, said Dr Lowe had a choice: “Go too hard and risk smashing households and plunging the country into a recession; go too soft and risk embedding high inflation, necessitating higher interest rates and plunging the country into a recession.”
So, interest rates and what the RBA does about them are likely to remain a serious topic of discussion and debate for some time to come, and that means our property prices aren’t about to rebound until at least when interest rate rises have ceased. Dwelling prices alone accounted for a quarter of the 7.3 per cent rise in inflation over the past year, but just because property prices are now falling doesn’t tell us inflation’s getting under control.
In its latest statement of monetary policy the RBA said demand for housing finance had eased as the market cooled, while housing credit growth was slowing. “Some factors that have boosted inflation over the past year are reversing, though it will take some time before the effects flow through to prices paid by consumers,” the RBA said.
The decline in prices as interest rates rise should not cause a great deal of anxiety for homeowners, UTS Professor of Finance Professor Harry Scheule told Eli Green at News.com.au. “The trend can continue; you can expect further interest rate increases but no one expects interest rate increases to continue forever - it will lower at some point.
“Currently the Australian economy is strong, we’ve got a historically low unemployment rate and what’s going on with interest rates and house prices is being offset with a strong economy. Definitely expect declines in 2023, but the expectation is that it will stabilise in 2024,” he said.
Borrowers’ capacity tested
APRA, Australia’s banking regulator, isn’t exactly there for the borrowers. Wayne Byers, the outgoing chair of APRA, says the organisation’s role is to “protect banks from collapse and not borrowers from default”. Since APRA’s rules govern the manner in which borrowers are assessed when they apply for a mortgage, it’s an important element in our housing system.
After removing a seven per cent floor on the interest rate to be used when banks assess prospective borrowers in 2019, APRA ruled that borrowers could be assessed on whether they could afford repayments if interest rates rose 2.5 percentage points above their initial interest rate. In late 2021 APRA lifted the buffer amount to 3 percentage points, but by that time housing prices had skyrocketed about 30 per cent nationwide while interest rates were still at historic lows.
This has meant around 300,000 borrowers who took out housing loans during the pandemic are now expected to make higher repayments than they were tested for when they took out their loans. Mr Byers said some of them would find it hard to manage their situation: “Borrowers with only a small equity buffer and/or high levels of leverage relative to their income will be particularly challenged; borrowers currently on very low fixed rates face a significant repayment shock in the future."
He did opine that the existence of some borrowers in difficulty didn’t reflect weak lending standards: “After all, a bank that does not make a bad loan will be a bank that denies credit to many good customers. In Australia, the banking system is in good shape to weather the adjustment, and — notwithstanding there will be pockets of stress within loan books — there is no sense it will threaten the soundness or stability of the system," he said.
Data from the Australian Bureau of Statistics shows that the value of new owner-occupier loans fell by 9.3 per cent in September, to $25.1 billion, while new investor loans also fell by 6 per cent. The number of first home buyer owner-occupier loans also fell by 8.3 per cent in September, after rising by 10.4 per cent in August.
Vacancies shrink
Australia’s rental vacancy rate has plummeted from 1.9 per cent in October last year to 0.8 per cent twelve months later. Sydney has now seen its fourth consecutive monthly vacancy rate fall, and the number of available rentals across Sydney has dropped by 53 per cent.
Domain data shows that Sydney house rents rose by 4.8 per cent or $30 per week to a $650 median in the September quarter. There is a bit of hope for tenants in statistics that show national record rental rates have begun to ease; CoreLogic’s latest quarterly rental review showed an increase of just 0.6 per cent in September, but this came amid an annual growth trend of 10 per cent.
The September slowdown in rental growth may suggest that an increasing number of prospective tenants are starting to come up against affordability constraints. Everybody’s Home CEO Kate Colvin said Australia says some locations have hit an “affordability ceiling”.
“There’s only so much people can pay,” she said. “Someone who’s bought an investment property will pass the cost of interest rates on if they can, but if they can’t find a tenant willing to pay more, they have to offer the property at maximum people can afford.”
The chair of the Property Investment Professionals of Australia (PIPA), Nicola McDougall, said the sharp rate hikes would dissuade investors from purchasing rental properties: “Vacancy rates are at record lows,” she said. “While opportunities clearly exist for investors in the current market, if they’re unable to secure finance then we’re likely to see … sustained downward pressure on vacancy rates for some time yet.”
Supply and prices
The recent federal budget incorporated the government’s plan to create another one million houses over the next five years. This might sound impressive, but over the past five years we’ve built nearly that many - 974,732 according to economist Peter Tulip, chief economist at the Centre for Independent Studies, so a million’s no big improvement on our current position.
The million new homes promised include 60,000 built with government subsidies. These are targeted at lower income families but won’t do much to alleviate the shortage of affordable housing across Australia. What we really need is enough new homes to reduce the overall demand for housing and that’s more than any government can afford.
Mr Tulip tells us that every increase of one per cent in the housing stock reduces the cost of housing by 2.5 per cent. There are ten million homes now in Australia, so if those promised one million houses were additional to those already likely to be built we’d have a theoretical two million new homes over the next five years and the costs both of new homes and rentals would decrease substantially. But that’s not likely to happen.
The Commonwealth government will spend $350 million over five years (commencing in 2024) for the first 10,000 homes while the states and territories will chip in to support another 10,000 bringing us to 20,000 homes in total. Treasurer Jim Chalmers said that while some funds had already signed up to participate in this plan, there was still more work to do.
"There's a heap of activity in the sector [now] … we need to deal with the skills and labour shortages, we need to deal with the supply shortages," Mr Chalmers said.
Stamp duty reforms
The NSW government has released some calculations to show us how beneficial their stamp duty reforms will be for first-home buyers. According to a NSW Treasury analysis, a first home buyer who opts to pay property tax instead of stamp duty would be ahead financially for 60 years.
Under the plan outlined by the Perrottet government, first-home buyers who opt into the government’s property tax reform would pay an annual levy of $400 plus a 0.3 per cent tax on the value of their land. Property tax rates would be indexed so that the average annual property tax payment grows at the same rate as gross state product (GSP) per capita. Importantly, annual increases will be capped at 4 per cent if the plan goes ahead as outlined.
Treasury estimates that half of all owner-occupiers sell their properties within 10.5 years while two-thirds of owner-occupiers sell their properties within 20 years. NSW Treasurer Matt Kean says his government’s policy will help younger buyers get into the property market: “Most people purchase a home more than once during their lives, so it will make sense for many first home buyers to choose a smaller annual fee for that limited period, rather than stamp duty paid upfront in a lump sum,” Kean said.
Back in 2019 the Grattan Institute told the NSW government that stamp duties are among the most inefficient and inequitable taxes available to the states and territories. It said that property taxes – which are levied on the value of property holdings – are the most efficient taxes available to the states and territories.
The Institute calculated that a low-rate, broad-based land tax in NSW using the council rates base could raise $9 billion a year through an annual levy of $5 for every $1000 of unimproved land value, which would be enough to fund the abolition of stamp duties.
It acknowledged that existing homeowners, especially those who are retired or otherwise on fixed incomes may find it hard to adjust to an annual tax on their houses: “Allowing some homeowners to defer payment until they sell their house would also ensure asset-rich but income-poor households could stay in their homes,” the Institute said.
The ABC did some calculations and found that for a $1.5 million property in Penrith stamp duty would cost almost $67,000 while land tax would be $2,500 each year.
Concerns have been expressed by the Combined Pensioners and Superannuants Association (CPSA) that the policy ‘may be about the introduction of a universal property tax in NSW by stealth and small beginnings’.
“Economists dream of replacing a one-off stamp duty on real estate transactions with an annual land tax,” said the CPSA in a media release. “They claim it is a more efficient tax. Rightly so because everyone owning property would pay it every year.
“Replacing stamp duty with a land tax can work for people with plenty of money coming in. But for people on low incomes, it is unaffordable. That includes many pensioners. Just imagine if you had to pay double the council rates you pay now. That would be the simple reality of land tax.”
NSW opposition leader Chris Minns has said Labor will scrap Mr Perrottet’s stamp duty reforms if his party wins the March 2023 elections: “Our concern is that future governments will jack up the land tax rate.
“If you’re already on that merry-go-round, you have to trust this premier, and all future premiers, not to up the land tax rate on your family home,” he said. “The last thing anyone in NSW needs is a tax on their home forever - we'll stop it.”
Sources:
‘The Sydney suburbs where property values have dropped to pre-pandemic levels,’ Tawar Razaghi, Domain, 13 November 2022
‘Stamp duty legislation passes NSW parliament despite opposition from Labor and Greens,’ Paige Cockburn, ABC News online, 11 November 2022
‘Land tax bill passes in NSW parliament, homebuyers can pick stamp duty or ongoing payment,’ Eli Green, News.com.au, 11 November 2022
‘NSW paves way to end stamp duty with new first home buyer choice,’ Samantha Hutchinson, The Australian Financial Review, 11 November 2022
‘Perrottet’s stamp duty overhaul faces roadblock until after election,’ Alexandra Smith and Natassia Chrysanthos, Sydney Morning Herald, 8 November 2022
‘Property sellers cut their price hopes to meet budget-conscious buyers,’ Melissa Heagney, Domain, 7 November 2022
‘Key detail to remember as house prices continue to fall,’ Eli Green, News.com.au, 1 November 2022
‘Land tax dead, stamp duty lives,’ Media release, Combined Pensioners & Superannuants Association, 22 June 2022
‘Distressed housing sales rise as owners succumb to Australia’s rising interest rates,’ Caitlin Cassidy, The Guardian, 5 November 2022
‘Reserve Bank sticks to smaller interest rate hike despite inflation shock,’ Michael Janda, ABC News online, 1 November 2022
‘Rental price growth slows from unprecedented highs as tenants hit ‘affordability ceiling’, Caitlin Cassidy, The Guardian, 5 November 2022
‘It’s going to get worse’: Larger rental crisis looms as vacancies hit record lows,’ Melissa Heagney, Domain, 4 November 2022
‘Narrow path’: Big issue facing Reserve Bank of Australia boss,’ Angie Raphael, News.com.au, 5 November 2022
‘Now that Australia’s house prices are falling, does the RBA really need to raise rates yet again?,’ , Greg Jericho, The Guardian, 4 November 2022
‘Why the RBA’s inflation problem just got trickier,’ Ronald Mizen, Australian Financial Review, 6 November 2022
‘Sydney’s plunging property prices leave potential sellers spooked,’ Tawar Razaghi, Domain, 5 November 2022
‘Sydney house prices falling at fastest pace on record,’ Kate Burke, Domain, 27 October 2022
‘Auctions are in a downward cycle, pushing property prices lower,’ Elizabeth Redman, Domain, 24 October 2022
‘Minns vows to scrap Perrottet’s stamp duty reforms if elected,’ Tom Rabe, Sydney Morning Herald, 31 October 2022
‘First home owners would save money for 60 years with property tax, says NSW government,’ Alexandra Smith, Sydney Morning Herald, 1 November 2022
'Aspirational' target of 1 million affordable rental homes unveiled in federal budget. Here's what the plan looks like,’ Peta Fuller, ABC News online, 26 October 2022
‘APRA chair Wayne Byres says falling house prices are 'no bad thing', Michael Janda, ABC News online, 21 October 2022
‘A million extra homes won’t fix affordability headache,’ Peter Tulip, Sydney Morning Herald, 27 October 2022
WILL THEY PUSH THE BUTTON ?
Thu, 20 Oct 2022Rates rise and prices fall while sellers retreat and buyers wait
It’s easy to see the effects of rising interest rates on housing prices. Property values were still showing modest monthly increases of around 0.3 per cent in the first months of 2022, CoreLogic’s home value index showed, but those rises came to a sudden stop after the first rate increase in May.
Values quickly went into reverse and slipped into negative territory. After more interest rate increases with no indications from the Reserve Bank as to just how high they might go, CoreLogic’s figures now show Sydney’s house values have fallen 9.2 per cent since January. Sydney was the capital city with the biggest drop in September, losing 1.8 per cent in the month.
CoreLogic’s research director, Tim Lawless, told Domain that interest rate rises have been the main driver of falling house values: “It looks like the market was quite sensitive to the interest rate rises … Sydney and Melbourne’s markets were already slowing, but there was an inflection point after a couple of weeks in May,” Lawless told Domain’s Melissa Heagney.
The Reserve Bank’s October raising of the cash rate by 0.25 per cent to 2.6 per cent means that homeowners with a $750,000 home loan – about the size of the current average housing loan in NSW, will now pay $1030 a month more off their mortgage than they were paying in May. That’s an additional $12,360 a year that has to be found, so it’s not surprising that the latest ABS lending data showed a one-month 3.4 per cent fall in the value of home loans and a 15.1 per cent fall from 12 months earlier.
The latest ANZ/CoreLogic Housing Affordability Report found that Australian households now spend 44 per cent of their income on repaying a new home loan. This is the highest level since June 2011 and up from 40.4 per cent in the previous quarter.
However, Mr Lawless says there are some signs the rate of price falls is slowing: “We have seen the decline accelerating, but it appears the rises in August and September have not had as much of an impact as at the start.”
In another welcome bit of good news, the latest PropTrack Home Price Index Report, released in early October, also shows that the rate of property price falls in September has slowed.
From their highs earlier this year, Australia’s dwelling prices were down about 3.5 per cent as of August 31. This isn’t bad news for all homebuyers, of course. CoreLogic’s head of Australian research, Eliza Owen, said that although there’s a trade-off between falling property prices and rising interest rates, some home hunters in the current market will still benefit.
“There is a trade-off in the places where the deposit hurdle has come down in the face of higher mortgage costs and higher rents. If you had a 20 per cent saving levels before prices started to decline it might mean you [now] have more of a deposit,” she said.
Those with strong savings and high household incomes who want to buy homes in some of the most desirable parts of Sydney might be the biggest winners from the downturn, according to Domain’s Tawar Razaghi. He points out that 2.5 years have been shaved off the time it takes to save a deposit to acquire a house in the statistical regions of Manly and Pittwater as home values dropped $264,013 and $204,484 respectively in those areas in the June quarter.
Keep in mind that the most recent Australian housing boom was so powerful that it made headlines around the world. In fact, for a time it made Australians the wealthiest people on earth in 2021 by raising the median wealth of the average Australian adult by $43,655 to a net worth of $420,403, according to Credit Suisse’s annual global wealth report.
Massive price growth and an influx of high-end vendors significantly increased the number of luxury home sales in the past three years. A Ray White analysis of national sales showed there were 561 houses that sold for more than $10 million last financial year, up from 449 the previous year and 193 sales in the 2019-20 financial year.
The analysis also showed that the median price for the top 1 per cent of the Australian property market leapt 9.9 per cent over the year to June to $4.4 million, compared to annual growth of 17.5 per cent the previous financial year.
What hasn’t gone up as much as housing prices is the average household’s disposable income. In June 2020 the average dwelling price in Australia was $689,400, about 13.4 times the average household disposable income of $51,487. In June this year the average dwelling price was 16.4 times the average income of $56,129; to get back to the same ratio as it was in 2020 would require another 18 per cent cut in dwelling prices and that’s probably not going to happen.
Auction clearances stable
It might seem that falling property prices would have severe impacts on the auction market, but Sydney’s auction clearance rates have stabilised at a respectable level, hitting the low 60 percentile most weeks according to CoreLogic figures.
Banks have restructured their lending policies to comply with legislative changes in a way that enables them to retain their share of the lucrative home mortgage market. Major financial institutions are now aggressively chasing customers for housing loans and credit is said to be easier for potential buyers to obtain now than it was during the last downturn in 2018, although the amount they can borrow has declined in recent months.
Ray White chief economist Nerida Conisbee said banks become more profitable in higher interest rate environments, meaning it is in their interests to encourage people to borrow money: “We see fewer auctions take place in a down market, so people will hold back and do private sales and decide not to sell, or only the best properties will go to market,” she said.
Another important factor is that vendors have adjusted their expectations and are accepting offers from bidders that are realistic rather than ‘underbidding’. AuctionWorks chief auctioneer Jesse Davidson said there has been a shift in sentiment from vendors as they adjust their expectations and become more willing to make a deal rather than holding out for high prices.
“The massive sale that happened at the neighbour’s house in November last year isn’t happening [now],” he said. “We are getting more realistic owners. In any cycle, up or down, the buyer is ahead of the vendor.”
Buyers’ agent Peter Kelaher, managing director of PK Property, says that buyers face a scarcity of properties this year: “A lot of [homeowners] are sitting on the fence ... and people are struggling to find a property to buy,” he said, adding that reduced supply could further deter activity as those wanting to move decided to wait until there was more choice.
Although spring usually brings a boost in sellers, the opposite occurred in September, Domain data shows that the number of homes listed for sale dropped 13 per cent from August. The biggest drops in listings were in the city’s more expensive markets; new listings fell at least 30 per cent year-on-year in the northern beaches, eastern suburbs and on the north shore, and fell more than a quarter in the Sutherland Shire and city and inner south.
Real Estate Institute of New South Wales chief executive Tim McKibbin said market activity in the Sydney housing market was still tracking well: “Clearance rates continue to hover around the solid 60 per cent mark. Strong results are being achieved as vendors are increasingly switched on to the new market in which buyers’ budgets are more constrained,” Mr McKibbin told realestate.com.au.
Forecasts vary
There’s no uniformity about where house prices are going in recent forecasts from the financial community, other than that further falls are expected. PropTrack’s latest Home Price Index from August tells us that our national home prices have fallen 2.7 per cent from their peak and that this has already cost all the gains from early 2022.
“Regional areas have recorded their largest quarterly price falls in a decade, but we continue to see the biggest price falls in Sydney and Melbourne, with Sydney prices now below their level a year ago,” the PropTrack report said. “All capitals are now below their price peaks, with Adelaide recording its first monthly price fall this year.”
Yet property market activity picked up in August, just ahead of the Spring selling season. PropTrack economist Angus Moore explained why this is happening: “While market conditions have changed, the fundamental drivers of demand remain strong, with unemployment very low, wages growth expected to pick up over this year, and international migration increasing.”
Financial services company Morgan Stanley has revised its forecast for Australia’s property prices, saying it now expects a nett fall of twenty per cent after previously forecasting a 15 per cent drop. It noted that this would make it the largest price decline in at least the last half-century, more than twice the previous largest correction which was 10 per cent in 2017-19.
The Commonwealth Bank’s head of Australian economics, Gareth Aird, says more property price falls can be expected as interest rates continued to rise: “House prices will keep falling until rates stop rising,” he said, predicting prices across the country will fall 15 per cent peak to trough during the downturn,
“That’s conditional on rates going up another 50 basis points; if it goes up higher it could change predictions – no one knows how high they’ll take the cash rate, including the RBA themselves, that will determine how far house prices will fall.”
Domain chief of research and economics Dr Nicola Powell said she still expects to see the seasonal lift in buyer demand that comes with spring, but felt interest would be on the ‘soft’ side: “The opportunities are there, we have overall stock rising, greater choice on the market, and days on market are lengthening out, which means buyers can come to the market knowing they have greater time to contemplate their purchases and make the right decision,” Dr Powell said.
“For sellers, it’s a timely reminder that the market has moved and pricing your property right is important, if they want to secure a quick sale.”
AMP Capital chief economist Dr Shane Oliver forecasts that interest rates will fall in the second half of 2023, and property prices will recover, but he also said interest rates may end up higher than their pre-pandemic levels.
St George Bank chief economist Besa Deda said that rapid price growth in the first half of 2021 had stretched affordability, then that slowdown was accelerated by growing expectations for cash rate hikes earlier this year and by the rate hikes that followed. She expects demand will continue to weaken as rates climb: “Whilst you have that tightening [rate] cycle continuing, dwelling prices are going to soften, as will demand from buyers, because affordability is being impacted by higher mortgage rates,” she said.
The National Australia Bank says in its NAB Residential Property Survey Q3-2022 that dwelling prices are expected to decline by around 20 per cent across the capital cities from the peak in mid-2022. Its somewhat pessimistic report tells us that Sydney prices will fall 12.9 per cent this year, to be followed by another 9.4 per cent drop in 2023.
Even Dr Philip Lowe, the Governor of the Reserve Bank of Australia (RBA) has offered his own opinion of where the property market’s going, saying he “wouldn’t be surprised” if Australian house prices fall by an average 10 per cent.
Regarding the possibility of further rate hikes, Governor Lowe said in a statement attached to the RBA’s October meeting results: ““The board expects to increase interest rates further over the period ahead. It is closely monitoring the global economy, household spending and wage and price-setting behaviour.
“The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.”
Rents a big issue
There’s been a recent media focus on the high costs of renting as a growing number of tenants are finding it hard to keep up with increases in rental costs. Research from the parliamentary library commissioned by The Greens found that the average renter now has to pay an extra $62 a week more than they did a year ago – an increase of more than $3000 annually.
The research looked at 2.2 million rental properties nationally and found landlords had received an extra $7.1 billion in rental income between June 2021 and June 2022 with rents up from an average of $448 a week in June 2021 to $510 a year later, for households managed by a real estate agent. This equated to an average 13.8 per cent hike for the average renter.
As expected, Sydney leads the way in rental costs. Figures from a recent PropTrack report show that the median rental cost in Sydney is $640 per week for a home and $520 for a unit. This means that in just a year the cost of renting a home has risen by 12.3 per cent, with the cost of renting a unit rising by 8.3 per cent.
The latest ANZ/CoreLogic Housing Affordability Report says that affordability has worsened for the typical tenant who spent 30.9 per cent of their income on rent in the June quarter, up from 30.3 per cent in the previous quarter.
Data supplied by Domain to the ABC shows that advertised house rents have hit record highs this year in 85 per cent of suburbs with reliable data. This is the highest figure in two decades of data collection and a big jump from 2020 when median rents reached record highs in just 51 per cent of suburbs.
The principal agent of Laing and Simmons Merrylands, George Lattouf said although house prices are falling in some parts of Parramatta, rents are on the rise: “The market has dropped slightly in the Parramatta district, but rents are soaring. Landlords are saying now we can increase the rent after two years of COVID,” he said.
Nicola Powell, chief of research and economics at Domain, says the current rental market conditions are extraordinary: “In the June quarter, the combined capital cities recorded the longest stretch of continuous rental growth on record and the biggest yearly jump in rent since 2007,” Dr Powell says.
“We saw house rents across the combined capitals notch a fifth consecutive quarter of increasing rents. For units, it was the fourth consecutive quarter.”
Total rental listings are roughly a third lower than pre-pandemic levels, and data from PropTrack shows that rental properties Australia-wide are being leased faster than ever before. The number of days for a rental property to be leased after it was listed on realestate.com.au in July hit a low of 19 days across Australia.
According to a recent report from real estate agency McGrath, many cities and regional areas of Australia are facing a rental crisis: “A long-running downturn in investment activity has contributed to a shortage of rental stock, as has higher demand from overseas migration, which is expected to keep upwards pressure on rents.
“Property professionals who took part in a NAB Residential Property Survey expect rents across the country to grow well above average levels in 2022-23, and with average growth in rents over this period set to outpace house price growth” the McGrath report said.
CoreLogic's data shows that nationally, rents rose 0.6 per cent in September - the smallest monthly increase in rents since December 2021, according to CoreLogic's Tim Lawless: "A gradual slowdown in rental growth in the face of such low vacancy rates could be an early sign that renters are reaching an affordability ceiling," he said.
Land tax on its way?
NSW premier Dominic Perrottet has introduced legislation to Parliament as a first step in the package of reforms that would do away with stamp duty on property transfers while imposing a new broad-based land tax on all properties in NSW. Now also included in the plan is a legislated cap on yearly increases to land tax to protect first homebuyers from unexpected bill spikes.
The government budgeted in June for first-home buyers to have a choice between paying a once-off stamp duty on homes worth up to $1.5 million or choosing an annual tax instead. If the legislation passes both houses of Parliament before the end of the year, first home buyers who opt-in to the plan that starts next January 16 would pay an annual levy of $400 and a 0.3 per cent tax on the value of their land. Treasury officials estimate 6500 first-home buyers a year would take up the option of paying an annual tax instead of stamp duty.
In an interesting departure from Mr Perrottet’s original plans, the property would not be locked into the tax scheme once it is sold. Any future owners of one of these properties, if not first home buyers, would still have to pay stamp duty. If they too were first home buyers, they could opt for either the land tax or stamp duty.
But do the government’s proposed land tax arrangements really create savings for first-home buyers? The Guardian’s Michael McGowan did the calculations on a three-bedroom house in Fairfield, western Sydney with a selling price of $975,000. The one-off stamp duty would be $38,907 on the transaction, but the land tax in year one would be just $2,209.
So yes, there are savings – for a while. It would be 15 years until the total land tax paid would exceed the stamp duty amount. However, the total land tax bill if the property is sold after 25 years would be a massive $85,337. That’s a bonus of $46,430 for the state government.
The government’s intention is to eventually collect a tax each year from every property in the state, meaning a homeowner in Sydney would pay thousands of dollars in land tax on top of rates and other charges every year. The amount of tax paid would rise with any increases in the rate of tax or in the value attributed to the property by the Valuer-general.
The Labor party has already rejected introduction of any legislation that would do away with stamp duty and bring in a broad-based land tax before the March 2023 election. Its position is that stamp duty reform should be taken to the election, and it’s unlikely that the complex legislation and political negotiations required could be successfully undertaken by the government prior to next year.
“Mr Perrottet does not have a mandate to introduce a forever tax on people’s homes and NSW Labor will not support it,” opposition treasury spokesman Daniel Mookhey said.
The shift from stamp duty to land tax has already begun in the ACT where ten years ago the Labor government began to phase out stamp duty and gradually bring in a broad-based land tax on property owners over a 20 year period. However, property tax bills on landowners, collected by rates on principal places of residence and an additional land tax on investors, have significantly escalated while funds from stamp duty have still continued to grow.
John Kehoe writing in the Australian Financial Review says it’s unlikely stamp duty in the ACT will ever be abolished: “The problem is that stamp duty ‘bracket creep’ has gone through the roof. The modest reductions in stamp duty rates and adjustment in thresholds have failed to keep pace with house prices. Stamp duty payable on the Canberra median house price has increased by almost $16,000 in a decade, when stamp duty was meant to be phased down,” he said.
Sources:
‘Stupidly expensive’: Sydney rents hit record highs,’ Kate Burke, Domain, 13 October 2022
‘House prices in ’fastest decline on record’ as they drop across all major cities,’ Leith van Onselen, News.com.au, 13 October 2022
‘Perrottet proposes cap on annual land tax increases as part of stamp duty overhaul,’ Alexandra Smith and Lucy Cormack, Sydney Morning Herald, 11 October 2022
‘The Sydney regions where the number of home sellers has plummeted,’ Kate Burke, Domain, 10 October 2022
‘Perrottet’s bid for end-of-year lift with stamp duty reform,’ Lucy Cormack, The Sydney Morning Herald, 10 October 2022
‘House prices to plummet by as much as 22.3 per cent by 2023: NAB,’ Sarah Sharples, News.com.au, 8 October 2022
‘Yes, the heat is coming off the housing market. But it wasn’t just on fire last year - it was burning uncontrolled,’ Greg Jericho, The Guardian, 6 October 2022
‘Rising rates mean homebuyers ‘can’t go to the edge,’ Melissa Heagney, Domain, 6 October 2022
‘Grim warning to Aussie renters as record rise set to increase,’ Eli Green, News.com.au, 6 October 2022
‘What the Reserve Bank's unexpected interest rate move means for housing markets,’ Shannon Molloy, realestate.com.au, 5 October 2022
‘Where to find Sydney’s best and worst property prices,’ Kate Burke, Domain, 5 October 2022
‘Property prices drop nationally again, with Sydney diving 6pc annually and regional Australia following suit,’ Emilia Terzon, ABC News online, 3 October 2022
‘Avoiding the recession we don’t have to have,’ Craig Emerson, Australian Financial Review, 26 September 2022
‘Australia news live: home values fall a fifth consecutive month amid recession fears as RBA tipped to hike rates again,’ Natasha May, The Guardian, 3 October 2022
‘Australia’s runaway rents,’ Inga Ting, Katia Shatoba, and Alex Palmer, ABC News online, 29 September 2022
‘Why house prices fell so fast, and when the falls could stop,’ Melissa Heagney, Domain, 15 September 2022
‘Is Queensland scrapping its new land tax rules?,’ Gerv Tacadema, Your Investment Property, 30 September 2022
‘The property tax debacle unfolding in Canberra,’ John Kehoe, Australian Financial Review, 29 September 2022
‘Average Australian renter paid $3,000 more last year, research finds,’ Sarah Martin, The Guardian, 29 September 2022
‘Perrottet’s stamp duty reform dream may be gazumped,’ Alexandra Smith. Sydney Morning Herald, 15 September 2022
‘Residential rental listings plunge as landlords sell up,’ Nila Sweeney, Australian Financial Review, 25 September 2022
‘Out of control’: Australians paid extra $7.1b in rent in the past year,’ Sarah Sharples, News.com.au, 30 September 2022
‘Morgan Stanley forecasts Aussie house prices to plummet 20 per cent,’ Chantelle Francis, News.com.au, 29 September 2022
‘House prices are falling, so why isn’t the auction market worse?,’ Elizabeth Redman, Domain, 19 September 2022
‘Australians the world’s richest people as property prices supercharge wealth,’ John Collett, Sydney Morning Herald, 21 September 2022
‘Yes, Australian house prices are dropping, but from staggering heights,’ Greg Jericho, The Guardian, 15 September 2022
‘Home buyers’ budgets slashed by hundreds of thousands, pushing property prices down,’ Melissa Heagney, Domain, 26 September 2022
‘The auction clearance rate just stopped falling. Will property prices follow?,’ Elizabeth Redman, Domain, 6 September 2022
‘Buying a house is not that much more affordable – except in a few affluent pockets,’ Tawar Razaghi, Domain 31 August 2022
Market Comment : Spring Selling Season Has Begun
Wed, 14 Sep 2022Spring zelling season begins as the Sydney property market settles
As we enter the spring selling season there are signs that buyers are reducing their budgets and sellers are revising down their expectations from the highs of 2021 to meet the market. More new homes are being listed for sale and listings are 26.4 per cent higher than the same period last year, when Sydney was in lockdown.
Sydney’s auction clearance rate has also improved for the fourth week in a row, reaching above 60 per cent for the first time since April. Domain estimates that about one-third of properties that fail to sell at auctions are now exchanging in the eight weeks that follow, some at prices higher than the best offers received at the auctions.
The Reserve Bank’s clear focus on reducing inflation mean that both buyers and vendors have to adapt to the consequences of the RBA’s record burst of interest rate increases. These consequences include the steepest monthly prices drop in 39 years in August, when home values across Australia fell 1.6 per cent with Sydney down 2.3 per cent according to CoreLogic’s figures.
This was the fifth consecutive monthly fall for the Sydney market, reducing the median value by $114,000 to $1.3 million. "It's just a sign of how extraordinary the increases in interest rates have been, as well as buyers being dissuaded because of higher cost of living and lower consumer sentiment," CoreLogic's Eliza Owen told The Business on ABC-TV.
The ABC’s Ian Verrender says the RBA is likely to start scaling back both the rate and size of interest rate increases: “The RBA now is at the point where it needs to exercise caution. If it continues to slam mortgage holders and business owners with rapid fire rate hikes, it may find by Christmas that it has overstepped the mark and may need to reverse course,” he said.
“Whether [the current] trend can be maintained is highly uncertain as the intent behind rapid rate hikes is to throttle growth and wind back demand, which then impacts jobs. The economy already is slowing rapidly. Housing prices are dropping at a rate of knots, particularly across the eastern states, which will lead to what's known as a ‘negative wealth effect’. If everyone feels poorer, they'll spend less.”
BresicWhitney director Shannan Whitney said both buyers and sellers have adjusted to the downturn since the market turned earlier this year, prompting more new listings and improved clearance rates: “We’re in for an uncertain spring. It’s driven by a little bit of uncertainty in where we are in the rates cycle – the uncertainty on lending rates, on buyers’ decision-making, which flows through to confidence around values,” Whitney said.
It’s interesting to note that in Sydney, dwelling values for the top quarter of the market – properties priced above about $1,637,000 – dropped 6.3 per cent over the three months to July. The middle of the market fell 3.6 per cent, by comparison, while values at the lowest quarter dropped 1.7 per cent, according to figures from Domain.
These figures also showed that Sydney houses sold for an average discount of 6.7 per cent to their original asking price over the three months to July, data for private treaty sales shows. That equates to a discount of almost $104,000 for a house first advertised at the city’s median price of about $1.55 million.
Apartments sold for an average of 6.4 per cent less than they were initially advertised for, which was the largest discount since the pandemic-affected June quarter of 2020. On a unit first priced at the median of about $791,000, that is a price cut of more than $50,000.
Good profits are still being realised for some lucky sellers, as indicated by PropTrack results. They show that sellers in Seaforth netted a median profit of $1.54 million, closely followed by Double Bay where the median profit was $1.495 million, Hunters Hill with a median profit of $1.39 million, West Pennant Hills with $1.33 million, Pymble with a median profit of $1.26 million, Woollahra and North Bondi with $1.233 million and $1.224 million, and Avalon Beach and Belrose with median profits of $1.13 million and $1.1 million respectively.
PropTrack senior economist Paul Ryan told news.com.au the reasons for these substantial gains: “The first and most obvious reason is that price growth has been really strong over the last two years, that has fuelled a lot of profits. But also, recent sellers have held their properties for longer than is typical. It isn’t the case that people who bought during the pandemic are reassessing their lifestyle sea- or tree-change.”
Overall, PropTrack’s Home Price Index shows a national decline of 1.66 per cent in prices since March, with some regions having much sharper falls than others.
“As repayments become more expensive with rising interest rates, housing affordability will decline, pushing prices further down,” PropTrack senior economist Eleanor Creagh said. “We are perhaps reaching a point where vendor price expectations have lowered after several months of price falls in some parts of the country, so more properties are clearing at auction.”
Domain CEO Jason Pellegrino told the ABC’s The Business program that there has been "a tempering of the overall heat" in the market: "Prices have started to decline, listing activity has started to temper as well," he said. "We are looking at a return to more seasonal patterns and more average listing volumes and market activity over the course of the next 12 months."
Mr Pellegrino said the recent downturn indicated the market was stabilising and returning to normal. "We are moving back towards average market conditions where there is a good balance between demand and supply," he said.
"Over the last six months, we have seen an increase in demand for apartments, for example, over houses, and apartment pricing has outperformed housing." he said. "That is reducing what a year ago was the largest gap between house and apartment pricing."
Sydney auctioneer Tom Panos said that there had been a “settling in the market” and people are accepting the new values: “The market has already been repositioned in most areas by 10 per cent, even 15 per cent, some markets even 20 per cent. But realistically, we’re probably going to see another softening of around five, 10 per cent. We’re close to the bottom I think.”
First-home buyers are the most noticeable casualties of rising interest rates despite the falling prices of housing stock. Figures from the Australian Bureau of Statistics show that the number of first home loans was down 10.7 per cent in July and down almost 36 per cent from a year ago.
The number of first-home buyers is now about where it was in mid-2019 and is expected to fall further as rises in the costs of servicing a loan outweigh the falls in housing prices.
However, social researcher Geoff Brailey from McCrindle Research sees some bright possibilities for population growth in the near future, based on the Labor Government’s intention to raise the level of skilled immigration with a forecast target of between 180,000 to 200,000 new arrivals per year.
He said many migrants would be looking for affordability in family-friendly areas with good schools in the middle rings and outer suburbs of our major cities: “Having a prestigious property with a big backyard is not just a traditional Australian dream, it’s a global dream to have that aspirational lifestyle,” he said.
“People want to have that quality lifestyle. They might start in an apartment for the first couple of years, but then look for that prestigious property.”
Martin North of Digital Finance Analytics also sees the possibilities to come from the government’s drive to overcome skills shortages: “People who come with greater skills also sometimes tend to come with more ability to purchase a home.
“Some of those people do think about buying quite quickly, and they tend to gravitate towards off-the-plan or new developments in outer suburbs. The majority of people coming from overseas are looking at big houses, substantial houses with lots of land.”
Market movements
Domain has analysed the past three decades of data and found that in previous property booms house prices on average rose 32.7 per cent across the combined capital cities while the upturn on average lasted 33 months. Our recent pandemic boom lasted 21 months and prices rose 33.6 per cent from trough to peak. Looking back a bit further, the boom in the early 2000s lasted 42 months and prices went up 76.4 per cent.
Domain’s chief of research and economics Dr Nicola Powell said the upswings have been longer than the downturns, while the downturns have been shorter and smaller: “Australians have this view that property prices go through these wild upswings and downturns when actually when you put it into perspective of historical performance … capital cities go through periods of strong growth and quite often prices surge but when we get to the downturn, it’s minor in comparison,” she said.
There have only been four periods where house prices across the combined capitals declined annually since the early 1990s, and all downturns stopped at less than 10 per cent before rising again. However, Christopher Joye of Sydney-based Coolabah Capital says this time the fall is more dramatic: “In Sydney, house prices are falling at a 19-20 per cent annualised rate based on the last three months' of data. Nationally, dwelling values are shrinking at a circa 12.4 per cent annual rate, although this has accelerated in more recent times.”
The big four banks all have their own perspective on where interest rates will go and how housing prices will react to the rises. ANZ's economists say the RBA will raise its cash rate target to 3.35 per cent before end of 2022, which would drive typical variable mortgage interest rates up to around 6 per cent.
"We expect capital city prices to fall 18 per cent over the balance of 2022 and 2023, before a 5 per cent gain in 2024 as mortgage rates fall; the biggest factor driving prices lower is reduced borrowing capacity, not a rise in forced sales" said ANZ senior economists Felicity Emmett and Adelaide Timbrell.
The Commonwealth Bank's economists are expecting a decline of at least 15 per cent in housing prices, even if the RBA cash rate only reaches CBA's forecast of 2.6 per cent.
Westpac senior economist Matthew Hassan has forecast an 18 per cent downturn for Sydney by the end of 2023: “The housing downturn that began at the start of the year has accelerated and broadened over the last three months,” he said.
Shane Oliver, AMP Capital chief economist, says there will be steeper declines in house values in the next six to nine months than we’ve already seen: “Our base case is for prices to fall 20 per cent top to bottom, assuming the interest rate will peak at 2.6 per cent, but there is a risk that it could go up to 3 per cent and above, which will trigger sharper price declines,” Dr Oliver said
His timeframe for these declines has now been shortened: “We’ll probably see the worst of the price declines later this year or early next year, and for values to bottom out probably around the September quarter next year, so price falls would be deeper, but we may get to the bottom faster. I was originally thinking the top to bottom falls could drag out into 2024, but it now looks like it could be as short as 12 months.”
He also sees a slower recovery than those seen in earlier market falls: “We’re unlikely to go back to record low interest rates and therefore the recovery may be a more gradual one compared to, say, the last 30 or 40 years, and may take longer than 20 months before prices reach a new high. I think we’ll probably go through a couple of years where prices rise between 5 and 10 per cent,” he said.
CoreLogics’ daily home value index (HVI) shows that Sydney housing values peaked in mid-February, then have fallen by 5.9 per cent. This is a much faster rate of decline than in the 2017-2019 downturn when, after the same number of days since the market peak in 2017 housing values were down just 2.9 per cent.
“Looking at the decline phases historically using monthly data, this is the fastest rate of decline over the first six months of a downturn since at least the early 1980s when CoreLogic’s HVI commenced,” Tim Lawless, CoreLogic’s research director told the Australian Financial Review.
“Sydney’s decline trend started off fairly mild. However, the May rate hike was a clear inflection point in the market, causing the pace of decline across Sydney home values to noticeably steepen and diverge from earlier decline trends.”
Exceptional prices
As always, there are some exceptions to cyclical price trends and waterfront homes are selling for ever-increasing premiums. Waterfront properties now cost more than twice the price of their landlocked counterparts and in the last quarter Sydney’s waterfront homes reached a premium level of 121 per cent, up from 95 per cent in 2019.
Some eye-watering prices for Sydney waterfront homes achieved recently as quoted in Domain are: In Point Piper, a waterfront five-bedroom house with a boathouse and deepwater berth sold for $45 million this year, in Watsons Bay, a doer-upper on the beachfront sold for $27 million in November, a three-bedroom waterfront home in Birchgrove, with a private jetty, sold for $8,115,000 in April, and another Birchgrove home with a mooring and Harbour Bridge views recently sold for $9.75 million, up about 60 per cent from its 2018 sale price..
Nationally, waterfront homes sold for a premium of 81 per cent, with harbour-front homes having the highest premium at 116 per cent, topping coastal homes without beach access (89 per cent), riverfront (68 per cent), and beach homes (65 per cent) when compared with properties 1.6 kilometres away from the nearest body of water.
There have however been falls recorded in some popular coastal regions, including Byron Bay and the Sunshine and Gold Coasts. House and unit values in some of these expensive sea- and tree-change areas have fallen by as much as 4.5 per cent over the past three months, as shown by new data from CoreLogic.
CoreLogic’s latest Regional Market Update shows that regional values overall recorded their first quarterly fall since August 2020, as NSW and Queensland were at the top of regional property downturns. House values in the Richmond-Tweed region of NSW that includes Byron Bay slipped 4.5 per cent while unit values were down 3.8 per cent in the three months to July.
CoreLogic economist Kaitlyn Ezzy said regional areas were showing a drop in values similar to what has already happened in the capital cities: “The regional areas are now showing a similar pattern to what was happening in the capitals a couple of months ago, especially in the more expensive regional areas [which normally lead a downturn].”
She said interest rate rises had made people rethink their decisions to buy: “The pandemic really pushed people’s decisions about making a tree- or sea-change forward, but now sales in general are falling because a lot of buyers are hesitant to buy,” she said.
Renters hit by rises
A shortage of properties available for rental is causing soaring rents and crowded inspections for those hoping to find an affordable rental property in a location that meets their needs. Figures from PropTrack from the June quarter found that the number of renters per property listed on realestate.com.au had risen 28 per cent year-on-year, while the number of new rental listings was 13.8 per cent below the decade average.
Rental prices in Sydney where the rental listings fell 21 per cent in the past year showed an annual increase of six per cent; the median weekly rental price for a Sydney house is now $620 and for a unit it’s $500. Higher interest rates and increases in other charges such as land tax will put pressure on owners to raise rents further as existing tenancies expire.
Regional Australia Institute chief economist Dr Kim Houghton said short-term letting changes would acutely affect small and undersupplied regional rental markets that were sensitive to shifts in the number of rentals on offer.
“Partly it’s about scale,” Houghton told Domain. “There has been an undersupply in building approvals in the last five to 10 years. We were coming off a period of general underinvestment; that’s partly why the rental market tightened so fast – there wasn’t huge supply to begin with.”
He said converting long-term rentals into short-term leases would worsen an already tight rental market, leaving many regional areas unable to attract essential workers in industries such as hospitality and aged care because they could not house them.
Research conducted by Impact Economics and Policy, a group of expert economists and policy specialists with experience working for government, non-for-profits and big four consulting firms, found the surge in prices and rents is making it much more difficult for regional areas to attract workers.
The research concluded: “A lack of affordable and secure housing options limits the ability of workers to easily move between regions and undermines the efficiency of the labour market. The crisis in our rental market is not only producing large rent increases in regional areas, but it is also impacting labour mobility.”
Impact Economics and Policy economist Dr Angela Jackson told Domain that although landlords may use the excuse of higher mortgage rates as the reason for raising rents, the availability of rental properties is the real driver: “Higher interest rates might be used as an excuse, but that’s not the reason driving higher rents.
“The reality is the market has tightened significantly, and they can increase their rents, so they do.You would think there would be this relationship between house prices and rents but that just doesn’t hold – it’s about the supply of rental housing,” she said.
Domain uses a calculation of the “vacancy rate” to show the proportion of estimated rental stock that is vacant over a month. A vacant rental property is one that’s on the market for longer than 21 days. The Domain Rental Report shows that the number of rental listings has fallen dramatically over the past twelve months once Covid restrictions were lifted and the international border was reopened, and is now at 0.9 per cent, its lowest point on record.
Not helping the situation is that some landlords have shifted their properties from the long-term rental market into the short-stay market as the economy reopened and tourism returned. A new term has entered the property market that describes these properties that are occupied for only a part of the time - ‘Zombie homes’ is a new term for holiday houses or investment properties such as those listed on Airbnb that can earn big profits for their owners without being available for full-time rental.
Zombie homes were identified by the 2021 census that revealed over one million ‘unoccupied’ properties across Australia. Census night was on August 10, 2021 – a Tuesday, which meant many properties that were available for weekend rentals and had been occupied a few days before that night showed up as ‘unoccupied’.
First National Real Estate CEO Ray Ellis outlined the benefits for owners of this type of home using a property in an area popular with holidaymakers as an example: “It’s a lot easier to take your investment property out of the full-time rental mix and put it into the short-term rental mix which is basically Airbnb or weekend accommodation.
“If you could get $800 a week by having someone there full-time but you can get $1000 for a Saturday and Sunday, and don’t have to go through all the extra legislation requirements, you’ll do it, because you’re making the same return,” he said.
In a recent report from the Australia Institute, Professor Andrew Scott from Deakin University says Australia has a clear shortage of housing for people on low incomes: "The number of low-income private renter households in rental stress — paying more than 30 per cent of their income on rent — has doubled since the mid-1990s to now exceed 700,000 households."
Stamp duty revisited
High property prices mean higher stamp duty costs are applied to purchases, and with growing restrictions on the amount homebuyers can borrow, there’s a renewed focus on the possibility of doing away with stamp duty and trading it for some other source of government income – usually envisaged as a broad-based land tax on all properties, beginning January next year.
In the New South Wales Budget handed down on 21 June 2022, the State Government announced plans to make stamp duty optional for eligible first-home buyers from January 2023. This is consistent with its policy for the abolition of stamp duty introduced in its 2020 Consultation Paper which recommended a broad-based land tax to be phased in as a replacement.
The term “broad-based” means it is applied to all land, whether it’s the land under a family home or the land under an income-producing apartment block. It could well be a deductible item against income when calculating the federal income tax, but for the state government it’s a source of income that’s inescapable.
The Henry Tax Review and the federal Productivity Commission are just two of the many proponents of a land tax, so how might this work? It already applies to some landowners in every state where a tax based on the value of the land, not including any structures built on it, is calculated according to a set formula and paid to the state government. But these are not broad-based taxes and are applied only on property that is above the land tax threshold. All principal places of residence are exempt, and other exemptions and concessions may apply.
Replacing an unpopular stamp duty with a tax spread across all property in the state might be a good idea from the government’s revenue-raising viewpoint, but there’s one huge problem preventing a shift from stamp duty to a land tax: introducing it would generate an immediate forceful and negative response from existing homeowners who would react harshly against the demand for payment of a new and expensive annual tax on their properties.
NSW premier, Dominic Perrottet, who continues to advocate for a land tax, has estimated that up to 50 per cent of NSW properties will be paying an annual property tax within approximately 20 years and that stamp duty will be completely phased out by approximately 2050. His initial scale of land tax was a base of $400 plus 0.3 per cent of the unimproved land value, making a new annual impost of $3,400 on a property valued at $1 million.
Just imagine how that would be received by the owners of just over 3 million occupied private dwellings across NSW identified in the 2021 census. No politician appreciates a harsh reception to its policies from taxpayers and this is guaranteed for any government courageous enough to introduce a new annual tax across the state. We’ll continue to monitor this subject as it’s definitely not going away, and it looks like the process is about to begin, albeit in a small way, in January 2023.
Sources:
‘Another double rate hike coming but the Reserve Bank may soon slam brakes on again,’ Ian Verrender, ABC News online, 5 September 2022
‘Overpriced or underappreciated? The haggling for Sydney’s failed auctions,’ Kate Burke, Domain, 4 September 2022
‘Australians abandon buying first home as loan costs outweigh property price drops,’ Peter Hannam and Cait Kelly, The Guardian, 2 September 2022
‘Aussie housing crash is going to get worse,’ Christopher Joye, Australian Financial Review, 3 September 2022
‘Far fewer first home buyers this winter: ABS,’ Shane Wright Sydney Morning Herald online, 1 September 2022
‘House values falling nearly $1000 a day as RBA warns of ‘uncertainty’ ahead,’ Shane Wright and Rachel Clun, Domain, 1 September 2022
‘House price plunge spreads with biggest monthly decline in 39 years,’ Michael Janda and Rhiana Whitson, ABC News online, 2 September 2022
‘Prices won’t stop the RBA from raising rates,’ Cecile Lefort, Australian Financial Review, 2 September 2022
‘Far fewer first home buyers this winter: ABS,’ Shane Wright Sydney Morning Herald online, 1 September 2022
‘House values falling nearly $1000 a day as RBA warns of ‘uncertainty’ ahead,’ Shane Wright and Rachel Clun, Domain, 1 September 2022
‘Areas where homebuyer demand is set to surge on the back of a 'perfect storm' of market factors,’ Brett Thomas, realestate.com.au, 29 August 2022
‘As Sydney’s spring selling season begins, will property prices reverse?,’ Tawar Razaghi, Domain, 27 August 2022
‘Soaring rents adding to job vacancies in major regions,’, Shane Wright, Sydney Morning Herald, 24 August 2022
‘Will this property price downturn be different to the last?,’ Tawar Razaghi, Domain, 24 August 2022
‘Bank’s ‘bleak’ prediction that house prices will fall 18 per cent,’ Alex Turner-Cohen, News.com.au, 24 August 2022
‘Stamp duty or land tax? Economists say the one that makes the most sense is politically toxic,’ Laura Beavis, ABC News online, 28 August 2022
‘Aussie suburbs where homeowners are making millions cashing out as rates rise,’ Frank Chung, News.com.au, 20 August 2022
‘If property prices are going down, why are rents going up?,’ Tawar Razaghi, Domain, 19 August 2022
‘Domain boss says the housing market is 'tempering', not crashing, as property downturn ,’ Samuel Yang, ABC News online, 19 August 2022
‘Investors brace for years of slow housing market recovery,’ Nila Sweeney, Australian Financial Review
‘Premium real estate leads regional house price fall as ANZ tips 18pc nationwide property slump,’ Michael Janda, ABC News online, 17 August 2022
‘Pretty insane’: Why bank term deposit rates remain unusually low,’ Clancy Yeates, Sydney Morning Herald, 17 August 2022
‘The towns where the sea-change dream just got more affordable,’ Melissa Heagney, Domain, 16 August 2022
‘Dead duck’: Rate hikes hurting auctions as buyers shun fixer-uppers,’ Frank Chung, Sky News, 9 August 2022
‘Zombie’ homes are fuelling Australia’s rental crisis, experts say,’ Matthew Karstune, News.com.au, 9 August 2022
‘The housing crisis continues, and there's nothing renters can do about it,’ Gareth Hutchens, ABC News online, 9 August 2022
DON'T WORRY .... BE HAPPY
Tue, 16 Aug 2022Rates rise again, Reserve Bank isn’t worried
At its August meeting the Reserve Bank increased the cash rate by 50 basis points, to 1.85 per cent. This will further reduce the amount the average family can borrow to purchase a home, and some analysts have forecast the RBA will raise the cash rate by another two full percentage points before December.
The Sydney Morning Herald calculated what the latest rate rise means for borrowers: “On an $800,000 mortgage, the cumulative increase in monthly repayments since the RBA started tightening monetary policy is now $770. Analysts expect the big four to pass on the full 0.5 percentage point rise to home loan customers.”
Modelling by RateCity calculates that the average Australian family of four has already seen their maximum borrowing power reduced by $106,600 after the first three consecutive rate hikes. This reduced the amount they can borrow from $871,400 to $764,800, which is a 12.2 per cent drop.
More rate rises are on the way. RBA governor Philip Lowe said the latest rate rise was unlikely to be the last this year: "The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path," he said.
"The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time."
It must be noted that the speed of any house price falls caused by interest rate increases isn’t seen as a problem by the Reserve Bank. It shows their strategy to reduce inflation is working and delivering the economic outcomes the RBA desires: “Employment is growing strongly, consumer spending has been resilient and an upswing in business investment is under way,” the RBA said while announcing the latest rate rise.
The Herald’s Elizabeth Knight explains: “In previous rising interest rate cycles or when introducing changes to macroprudential measures, the RBA was alive to the desire to manage the impact on house prices. But this time around, it is more prepared to risk housing price deflation.”
The RBA’s deputy governor, Michelle Bullock says that Australian households are in a “fairly good position” to cope with further rate hikes. The Bank’s analysis, based on a realistic assumption interest rates will rise by 3 per cent, found that just under 30 per cent of owners might find it hard to make repayments and could face increases of more than 40 per cent of their current amount.
“Borrowers with fixed-rate loans that are due to expire by the end of 2023 would experience a median increase of around $650 (or 45 per cent) in their monthly repayments,” Ms Bullock said, adding that half of owner-occupier mortgage holders on variable contracts were two years ahead on repayments.
The RBA’s forecast that 30 per cent of mortgage holders could find it hard to meet repayments was echoed in the results of a NAB Australian wellbeing survey covering three months to June this year that found about three in ten respondents said they would experience “high stress levels” over their home loan.
Those most affected by the RBA’s rate increases yet to come will be borrowers seeking a home loan. “Borrowers need to brace for more rate pain with several substantial rises still to come,” Rate City research director Sally Tindall told The Guardian.
“If [the 3.35 per cent cash rate] happens, the average existing variable rate customer could be paying 6.11 per cent on their mortgage by early next year. Borrowers need to prepare for this new norm, rather than see it as an anomaly,” she said.
Borrowers stress tested
The Australian Prudential Regulation Authority (APRA) has already required banks from last November to stress test people applying for new loans by adding 3 per cent to the current interest rate when evaluating their ability to make repayments. However, rates above 6 per cent would be well above the test for millions who had taken out a mortgage when rates were abnormally low.
Sydney mortgage broker Anthony Landahl, managing director of Equilibria Finance, said the increased cost of living is also affecting how much money home buyers could borrow: “We’re seeing an increase in the cost of living, and we’re seeing that flow through to some of the serviceability calculators of the providers,” he said.
“The impression we’re getting from conversations with assessors … is there’s a keener eye on making sure expenses all make sense and reflect cost-of-living pressures – particularly around some of those inflationary pressure areas like transport, food and groceries.”
The Guardian’s Pete Hannam says that commercial lending rates have been increasing for almost a year as the economy began to emerge from its Covid-induced depression: “An additional drag on the market could come when many of those who took out fixed-rate loans when rates were low have to refinance; these peaked at almost half of new mortgages in July and August [2021], with borrowers facing much higher repayment rates when they refinance after two years or so.”
Both NAB and Westpac have said they expect the RBA to raise the official cash rate to its highest level in nine years by December. Westpac chief economist Bill Evans said he now believes the cash rate will reach 3.1 per cent by December, then rise to 3.35 per cent by February 2023. The last time official interest rates were at 3 per cent or more was a decade ago in 2013, a year of rapid growth in Sydney property prices that followed several rate cuts in 2012.
Swiss investment bank UBS has done its own calculations, saying that if interest rates were to rise to 3.5 per cent – its prediction for March 2023, it would see the average variable mortgage rate hit 6 per cent: “Interest payments across the economy next year for the household sector will [be] close to double from now,” George Tharenou, chief economist at UBS said. “We have never seen such a sharp increase in repayments. That really crushes household cashflow next year when you have cost-of-living issues,” he added.
Mr Tharenou believes the RBA will cut interest rates in the second half of 2023 to prevent Australia falling into recession: “The house price outlook is at least 10 per cent down over the next year, but to stop a larger fall will require the RBA to shift their policy direction and start cutting next year,” he said.
The Australian Financial Review’s annual survey of 31 economists produced a median forecast for the official cash rate of 2.85 per cent by the middle of next year. If this happens, Australia’s official cash rate would rise another 1.5 per cent from its current level.
Leith van Onselen, chief economist at the MB Fund and MB Super, says that this could cause a peak-to-trough fall of house prices in the vicinity of 20 per cent: “Mortgage-holders in our two largest cities better hope neither the economists nor the market is correct, and that the RBA stops well short in its monetary tightening.”
Buyers’ pullback
It’s generally accepted by financial analysts that the current transition from a rising housing market to a falling one is mostly due to rising interest rates. The resulting higher costs of borrowing money as well as tighter lending conditions have significantly dampened buyers’ enthusiasm. The high rate of inflation – now just above six per cent, is another negative factor.
Centre for Independent Studies chief economist Peter Tulip has researched the relationship between cash rate changes and property prices. He says faster changes in interest rates lead to a faster response in prices, but he does not expect it to make a noticeable difference to overall declines.
“As a rough rule of thumb, a 1 per cent increase in the cash rate means an 8 per cent decline in house prices,” he said, noting it could take about two years for the impact of rates to flow through the market, and part of the price weaknesses now is a response to fixed mortgage rates that started to increase a year or more ago.
Sydney property prices have had their biggest fall in three years after the median house price declined 2.7 per cent to $1,552,015 in the June quarter. Sydney house prices fell 1.9 per cent just over the month of June, the market’s fastest rate of decline in 40 years, then the median price fell again in July by 2.2 per cent.
At least the median Sydney house price is still higher than the median price of a year ago as the 28.6 per cent gains from mid-2020 to April 2022 to their peak in early 2022 are still a factor in the calculations.
The current downturn has so far been felt hardest in Sydney’s pricier suburbs, but it’s now radiating outwards into Sutherland, Parramatta and Blacktown. Data from Domain shows that house prices have now pulled back by more than $100,000 in Sydney’s inner west, northern beaches and north shore.
The downturn’s rate of decline is faster than the fall in prices during the Global Financial Crisis (GFC) of 2008, and it’s expected to accelerate even more as interest rates increase.
CoreLogic data shows that Sydney’s house prices fell more than four times faster than unit prices in the June quarter, although unit prices had their second quarterly decline, dropping 0.6 per cent to a new median of $790,983.
Sydney’s eastern suburbs and the Baulkham Hills and Hawkesbury region led unit declines in dollar terms, down $90,000 and $55,000 respectively. Units have been protected to some degree by their lower price points compared to houses, but their annual rate of growth nationally is now a meagre 0.4 per cent.
New Sydney house and unit listings in the month of June fell 8.4 per cent from May and were down 2 per cent year-on-year, although total listings were up 13.1 per cent as unsold homes were staying on the market longer. “The latest results continue to highlight tougher selling conditions as interest rates rise and consumer sentiment remains low,” CoreLogic research director Tim Lawless said.
Taken nationally the story told by sales figures is much the same. Australia’s median house price has fallen for the first time in two years. The median house price across Australia is now $1.065 million; this is around $10,000 less than it was in March this year, but still $100,000 above the median house price this time last year.
CoreLogic analysed 3085 property markets across Australia and found that home values declined in 41.9 per cent of all house and unit markets over the June quarter, compared to declines across 23.6 per cent of markets in the March quarter.
Looking closer at the numbers, these figures result primarily from housing price falls in Sydney and Melbourne. The latest data on home values showed prices in the two biggest Australian cities are now close to where they were a year earlier.
Before the end of June, housing in the rest of Australia, including the other capital cities, was still increasing in price, although at a much slower rate than twelve months before when the boom was gathering strength. This June, Brisbane and Adelaide reached record highs in both house and unit prices.
Price expectations
History shows us that housing prices are cyclical. Until the interest rate increases began, Sydney houses had experienced a substantial increase in prices, but now they’re contracting. History also shows us that there will be a recovery in housing prices and that the eventual result will be a higher pricing level than in the previous upturn. It just doesn’t tell us when the next upturn will begin.
This doesn’t stop members of the property industry from making predictions about the duration and the degree of the present fall in prices. AMP Capital chief economist Dr Shane Oliver has predicted that house prices will drop by 15 to 20 per cent nationally peak to trough, with prices in Sydney falling closer to 20 per cent: “The main driver of the weakness is the rise in interest rates, and we do have further to go,” he said.
Mr Oliver did, however, acknowledge that the fall in prices was still within the bounds of the usual cyclical nature of the housing market, “albeit a bit more rapid”.
Domain’s chief of research and economics, Dr Nicola Powell thinks that Sydney will experience the worst of the downturns: “I’m certainly of the view that Sydney will see the strongest declines of anywhere,” she said. “It may feel like this has happened quite quickly but it hasn’t at all. We already had issues with affordability during those escalating prices, then we had a build-up of listings … add into that aggressive interest rate rises and here we are.”
The PropTrack Property Market Outlook July 2022 Report forecasts housing prices to shrink between seven and 10 per cent in 2023, with the report noting this would “potentially bring prices down 15 per cent from current levels”.
John McGrath, founder of McGrath Real Estate and a veteran of the Sydney market’s fluctuations, says prices have pulled back 10 to 15 per cent but quality properties were holding their value well. He expects the correction to last another 12 to 18 months with prices declining another 5 per cent, then plateauing for “a few years”.
The Commonwealth Bank announced in June that house prices in Sydney were set to fall by 18 per cent by the end of 2023 as a result of interest rate rises. The bank also forecast an 11 per cent house price drop in Sydney by the end of 2022.
David Plank, the head of Australian economics at ANZ, says that the faster move to a restrictive rate setting will bring forward the slowing of the domestic economy: "It also suggests house prices will fall by more than the 15 per cent, or so, we currently anticipate to the end of 2023.
"But it doesn't necessarily mean a hard landing for the economy. A cash rate of 3.35 per cent implies that household interest payments as a percentage of household income peak below the level reached in 2008," he told ABC News.
Barrenjoey senior economist Johnathan McMenamin said the price falls would be sharpest in the coming months and were unlikely to halt until early 2024 – following an expected cash rate cut in late 2023. He also said that the top quarter of the market should have sharper declines, although a pick-up in investor activity combined with a pull-back in sellers amid lower prices could moderate declines.
Auctions affected
The consequences of buyers’ reduction in borrowing power have been demonstrated in the outcomes of Australia’s property auctions. Although the number of properties offered in Australia-wide auctions totalled 31,439, the second highest June quarter on record, the clearance rate fell from the previous year to 60.8 per cent which was about 20 per cent lower than the June quarter in 2021. It was also the lowest success rate since the September quarter in 2020.
Sydney auctioneer Jesse Davidson, the director of AuctionWorks, said that consecutive cash rate rises by the Reserve Bank had affected buyer borrowing power and sentiment. This and a fear of overpaying were leading some buyers to ditch plans of purchasing at the last minute: “The most common feedback is that their finance conditions have changed,” Davidson said. “The banks are calling clients and saying that the approval we gave you is no longer valid, and they have to redo the process again. The second thing is the fear of overpaying that has entered the market.”
Sydney sellers this year were more likely to pull their properties off market before auctions than a year ago with the withdrawal rate rising from 12.9 per cent in the March quarter to 19.4 per cent in the June quarter while the success rate of Sydney auctions fell to 57.2 per cent. The clearance rate in July has stabilised in the mid-50s where it’s likely to stay as vendors accept the need to set realistic prices for their properties.
About 25 per cent of scheduled auctions were withdrawn in May and June, Domain data shows.
This is the highest monthly withdrawal rate since the start of the pandemic, when more than half of auctions were pulled after a ban on public auctions. The proportion of withdrawn auctions peaked at almost 30 per cent in December 2018 during the last market downturn.
There are some pockets of Sydney where cooling buyer demand has once again seen up to half of all properties offered at auction failing to sell. In the Sutherland Shire, Baulkham Hills, Hawkesbury, Blue Mountains and outer west regions there have been weeks where clearance rates were below 50 per cent.
Building costs rising
In these inflationary times it will come as no surprise that the costs of building a home are rising. Every element of a home’s construction, from the glass in the windows to the timber in the frames has increased in cost and contributes to the overall price of a new house or unit. Steel products are up in cost by 42 per cent compared to last year, and timber’s up in cost by at least 20 per cent with similar hikes in the price of things like plumbing fixtures and kitchen appliances all making an expensive contribution to the cost structure.
The Housing Industry Association’s chief economist Tim Reardon told Domain the rise of construction costs is the result of an increase in the demand for houses in speed and volume, as well as constraints on supply and labour that failed to meet the unprecedented demand.
HIA figures show that pre-covid the construction of freestanding houses was slowing, with about 105,000 being built before the pandemic struck. However, by the end of 2021, that had increased by almost 50 per cent, and there are now 80 per cent more homes under construction than before the pandemic
“We have seen a 19 per cent increase in the value of the average home approved in Australia over the past 12 months to May,” Reardon says.
There could be some relief in sight, according to a new forecast from global construction and property consultancy firm Rider Levett Bucknall (RLB). They say Australia’s construction industry is “in a positive phase” based on the current volumes of work in 2022 and increasing values of work yet to be done and commencements in the majority of states.
RLB’s Oceania Director, Research and Development, Domenic Schiafone writes, “RLB is seeing significant construction activity in road, rail, health, and social and affordable housing projects, aided by significant investment by all state governments,” and forecasts a slowing of cost inflation in Sydney from 6.9 per cent to 3.9 per cent in 2023.
All this is in contrast to the current fall in the prices of Sydney housing. In part, it’s the result of homeowners deciding to renovate their properties after they’d spent so much time in them during lockdowns and other covid-inspired restrictions on movement.
Australians typically spend $55 billion each year travelling overseas. Covid kept them in Australia so they tapped into their savings and spent up big on their homes. There was also government support for income and jobs that helped to pay for some of the renovation expenses.
“It’s been a rollercoaster … two years ago, contracts were being terminated because everybody thought they would lose their job. All of a sudden, JobKeeper and HomeBuilder came along and people weren’t travelling, the building industry went from no work to too much work,” says Denita Wawn, chief executive of Master Builders Australia.
Ms Wawn says that ‘resolving the people shortage’ in the construction industry is the main concern at the moment. ‘We need to resolve those skills shortages.’
Jon Stoddart who is managing director of Stoddart group, Australia’s leading supplier and installer of residential building products said the sector has been impacted at every stage of the building process: “It’s not just one thing that’s occurred, it’s a multitude of things that have occurred.
“First there was the home stimulus grant. We sold a bucketload of houses then freight got dearer, then worldwide timber took off. To top that off, a lot of the timber that comes out of Russia was banned, that limited that supply. I don’t think anybody has done well out of this, whether it’s the builder, homeowner, supplier or the contractor,” Stoddart said.
Empty houses
In our last article we covered the surprising outcome of the 2021 census that showed just over a million dwellings were vacant on census night. This revelation has stimulated much discussion in the press about why and how so many properties could be standing empty at a time when there’s a shortage of rental accommodation across the country.
Some of these unoccupied dwellings are genuine ‘holiday homes’ that have been acquired solely for the purpose of allowing city dwellers to escape to the country on weekends or whenever they have some free time from their jobs. It may seem hard to believe now, but fifty years ago this wasn’t at all uncommon, and many of these properties are still in the same baby boomers’ hands as they were in the 1970s and ‘80s.
Other vacant properties are the result of a taxation system that favours investments in property and that have been acquired primarily for the purpose of generating capital gains. They might be available for short-term holiday rentals but not for longer periods as the owners wish to retain flexibility about a time when they might want to sell them.
There are empty homes in country towns whose populations are shrinking and there’s literally no demand for property in those areas, either for rental or for acquisition. There are also properties that are empty in agricultural areas at times of the year when there’s no activity needing accommodation for seasonal labour. The 2021 census night was in August which is midwinter and there’s no harvesting.
And finally, Covid too may have played a small part in the numbers gathered on census night. The statistics showed a slight increase in the population of coastal towns, especially in southern Victoria. It’s thought that these increases are the result of a census having been conducted at a time of lockdowns, showing that people had moved from their homes in the major cities into their holiday homes along the coast to escape lockdowns and other restrictions that had been applied in metropolitan areas.
Sources:
‘Borrowers to feel the heat as RBA raises rates again, but new customers get cheaper deals,’ Gareth Hutchens and Sue Lannin, ABC News online, 3 August 2022
‘Dead duck’: Rate hikes hurting auctions as buyers shun fixer-uppers,’ Frank Chung, Sky News, 9 August 2022
‘Why buyers are dropping out of the running before auction day,’ Kate Burke, Domain, 4 August 2022
‘Reserve Bank lifts rates as it forecasts slower economic growth and higher unemployment,’ Shane Wright, Rachel Clun and Clancy Yeates, Sydney Morning Herald, 2 August 2022
‘Neighbourhoods where house prices have fallen by six figures as interest rates rise,’ Kate Burke, Domain, 3 August 2022
‘Reserve Bank raises interest rates for fourth-straight month,’ Michael Janda and Rhiana Whitson, and Matthew Doran, ABC News online, 2 August 2022
‘So much for the soft landing for house prices. It’s now a painful thud,’ Elizabeth Knight, Sydney Morning Herald, 2 August 2022
‘Worse before it gets better’: Sydney, Melbourne house price plunge likely to accelerate,’ Dominic Powell, Sydney Morning Herald, 3 August 2022
‘Australian property prices tumble at rates not seen since GFC,’ Peter Hannam, The Guardian, 1 August 2022
‘Experts forecast when surging construction cost inflation will ease,’ Chantelle Francis, News.com.au, 1 August 2022
‘Australian house prices fall at 'fastest rate' since 2008 financial crisis,’ David Chau, ABC News online, 1 August 2022
‘Cashed up and employed: RBA says households can withstand higher rates,’ Shane Wright and Rachel Clun, Sydney Morning Herald, 19 July 2022
‘Mortgages in retirement triple, outright ownership halves for most age groups,’ Rachel Clun, Sydney Morning Herald, 17 July 2022
‘RBA says borrowers can handle interest rate rises, but experts warn mortgage repayments will surge,’ Gareth Hutchens, ABC News online, 20 July 2022
‘RBA gives warning of further rate hikes to curb inflation,’ Courtney Gould, News.com.au, 20 July 2022
‘A new squeeze looms for home buyers despite property price falls,’ Melissa Heagney and Kate Burke, Sydney Morning Herald, 25 July 2022
‘Why Sydney and Melbourne are up for a record house price correction,’ Leith van Onselen, News.com.au, 18 July 2022
‘Worrying RBA analysis shows some mortgages increase by 60 per cent,’ Tarric Brooker, News.com.au, 23 July 2022
‘Bank warns too many interest rate rises could ‘crash’ Aussie housing market,’ Sarah Sharples, News.com.au, 15 July 2022
‘The perks of doing a property deal in winter, when your neighbours aren’t,’ Kate Burke, Domain, 24 July 2022
‘Are older people hoarding all the houses?,’ National Seniors Australia, 25 July 2022
‘Why are one in four Sydney homes being pulled from auction?,’ Kate Burke and Elizabeth Redman, Domain, 21 July 2022
‘Auction clearance rates tumble as rising interest rates sap Australian homebuyers’ appetite,’ Peter Hannam, The Guardian, 26 July 2022
‘House prices are falling, so which buyers can get a better deal?,’ Kate Burke, Domain, 20 July 2022
‘The house prices that are still rising: How inflation is blowing out building costs,’ Tawar Razaghi, Domain, 19 July 2022
‘Harbour City house prices fall by fastest rate in 40 years,’ ABC News online, 27 July 2022
‘Australia’s median house price falls for the first time in two years – how much is your suburb worth?,’ Ellen Lutton, Domain, 28 July 2022
‘Scared of overpaying’: Sydney house prices have their steepest fall in three years,’ Tawar Razaghi, Domain, 28 July 2022
‘The Sydney regions where auction clearance rates have been hammered,’ Kate Burke, Domain, 10 June 2022
‘A million homes sit empty, so where are they and can they help ease the housing crisis?,’ Erin Parke, ABC News online, 21 July 2022
‘House prices to drop by as much as 15% in next 18 months,’ Alex Turner-Cohen, News.com.au, 28 July 2022
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Tue, 26 Jul 2022test
THE ONLY WAY IS UP .......
Wed, 20 Jul 2022Rising interest rates drive big changes in the property market
Over the past year, at its peak the property boom had created 450 suburbs across Australia with a median house value exceeding $1 million. Sydney had the greatest number of suburbs joining the million-dollar club with 128 suburbs making the list. These included suburbs from the south-west (30 suburbs), outer south-west (15 suburbs) and the Central Coast (20 suburbs).
CoreLogic’s Kaytlin Ezzy tells us that in the year to March 2022 a record 23.8 per cent of all homes that were sold traded for more than $1 million: “Sydney’s million-dollar markets are fairly widespread, with more than half (51.9 per cent) of all Sydney sales over the 12 months to May transacting at or above $1 million,” Ms Ezzy said.
She also added a cautionary statement: “The value growth we have seen over the past couple of years has been quite dramatic, but it’s important to remember we are now in the downward phase of the cycle.”
Some areas are still showing gains but nothing like the massive increases of twelve months ago. CoreLogic figures show that home values are still higher than a year ago in some of the more affordable outer suburbs of Sydney despite the recent market slowdown. In Sydney, the biggest growth over the past year has been in parts of the Hills District, South-west, Central Coast and the Blue Mountains, CoreLogic’s latest Home Value Index found.
CoreLogic’s Tim Lawless says Sydney property prices overall are down 3 per cent from their peak in February this year: “In June alone, prices in Sydney were down about 1.4 per cent from May. We’re seeing the rate of decline in housing values gathering very clear momentum; The trajectory is already much sharper than in the previous decline in 2017.
“There’s still probably another potentially twelve months ahead of us in this downturn,” he said, adding that the market is in the “fairly early stages” of a decline, with the extent of falls contingent in part on how rapidly the Reserve Bank lifts its interest rate to counter inflation.
Mr Lawless told The Guardian that during the 2017-19 slump, the average house went from 24 days on the market to as many as 69 at the cycle’s lowest point. During their shortest time to sell last October, the average house was only 20 days on the market, but this has now risen to 29 days.
“It’s a fairly gradual trend upwards, but it’s also a very clear trend,” Lawless said. “As homes take longer to sell, you see discounting rates start to become larger as vendors need to negotiate more. That will also be reflected in lower auction clearance rates as well.”
CoreLogic has calculated that the nation’s housing sales were $8 billion less profitable in the three months to March than in the December quarter when nominal profits of $38 billion were generated. The data collector says that falling volumes and declining prices demonstrate a weakness that is likely to continue in the established homes market, meaning the number of loss-making sales is likely to increase.
Market watchers are already making estimates of how long the prices downturn will last. Prop Track's Paul Ryan said the RBA’s rate rise in June and expectations of higher rates later in the year have already slowed property markets: "Conditions in the housing market have slowed rapidly, marking the sharpest slowdown in prices in more than 30 years.
"We expect continued price falls across the country until the uncertainty about the extent of interest rate increases is resolved — likely extending beyond 2022," he said.
Domain chief of research and economics, Dr Nicola Powell says the Sydney property market is becoming less competitive: “You’re getting a slowdown in the number of buyers, there are fewer buyers than there were, and the turnover isn’t as high. The supply also builds because the properties for sale sit on the market for longer. They’re taking longer to sell.”
A new term – FOOP, has come into our terminology, knocking FOMO out of the ring. It stands for ‘Fear of Overpaying’ and is used to explain buyers’ hesitancy in the current market. To avoid paying too much for a property they’re sitting on their funds and waiting to see which way the market goes.
Market activity levels are showing a fall of 44 per cent in property search volumes in NSW with a 38 per cent drop nationwide. Property listings are up, although not by a large amount. Domain’s figures show that Sydney listings are up 5.6 per cent while the average number of days a property stays on the market is going up.
Sydney’s auction clearance rate has fallen below 60 per cent in the past month – its lowest level in years but not as bad as its most recent low point in April 2020 when only 36.1 per cent of properties on offer were sold as public auctions were banned at the start of the coronavirus epidemic.
Commonwealth Bank head of Australian economics Gareth Aird believes the floor for clearance rates is not far off: “Generally, they will hit a floor. A lot of people that are selling will see the market is falling and accept a price they may not have otherwise to get the job done,” he told Domain.
Robert Bagala of First National Real Estate Hunters Hill, Gladesville and Ryde says that history reveals a pattern that may now be repeating itself: “The time when a purchaser will stall in making a decision to purchase will be at the early part of the interest rate rise cycle. Historically speaking, there’s always an element of adjustment immediately after,” he says.
“But I’m a big believer that this lull in the market represents a huge opportunity to purchase without that massive competition. Reflecting on similar occasions in history, we all agree those who purchase in these volatile or uncertain periods come out with far larger gains as opposed to those who wait or get caught up in the frenzy.”
He has a good point. Previous price downturns have often been less than half the duration of the preceding upswing. There has also traditionally been a greater percentage increase in price than the subsequent decline. Domain’s NSW Spotlight Report details how Sydney house prices rose 62.2 per cent from 2012 to 2015, dipped 2.7 per cent that year, then added another 18 per cent to the 2017 peak, and then fell 13.8 per cent in the next two years, according to Domain data.
Rates not going down soon
At its monthly meeting on 5 July the RBA raised its official interest rate by 0.5 per cent to a new rate of 1.35 per cent. This was the third month in a row that the rate has been increased, and there is a probability of further increases to come as inflation is expected to reach 7 per cent by the end of 2022.
The most recent official rate increase if it is passed on in full to mortgage borrowers by lenders will add another $140 a month in repayments on a $500,000 mortgage over 30 years, according to calculations from financial comparison website Canstar. When this is combined with the two earlier rate increases in May and June, monthly payments on a mortgage that size have grown by more than $350, or another $4200 a year.
RBA governor Philip Lowe, speaking to the American Chamber of Commerce in Australia at a function in Sydney, said higher interest rates were necessary to slow spending that is adding to inflationary pressures: “As we chart our way back to 2 to 3 per cent inflation, Australians should be prepared for more interest rate increases,” he said. “The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation.”
He does say our current economy is “fundamentally sound” thanks to low unemployment and strong household spending and he doesn’t believe Australia will have a recession in the near future: “I don’t see a recession on the horizon here,” he said, but he indicated the Bank would continue increasing its rate as necessary to combat inflation.
“The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market,” he said in his July statement.
Rising interest rates will reduce the amount homebuyers can borrow to finance the purchase of a property. Modeling by RateCity shows that the average family of four, with one full-time working parent and a part-time working parent, would have had a maximum borrowing capacity of $871,400 in April, but could borrow only $805,900 after the May and June rate increases, even less now after the July increase.
Westpac bank has calculated that, if the cash rate reaches 2.25 per cent as the bank is predicting, the same family’s borrowing power would be cut by $144,900 and reduced to just $661,000.
Like the RBA governor, federal Treasurer Jim Chalmers insists that there’s no recession on its way: “We’re not working on the expectation at this point of that risk occurring or eventuating. I’ve said a number of times, we have reason to be cautiously optimistic about the future of our economy, but first we have to navigate these difficulties which are right ahead of us,” he said.
CoreLogic research director Tim Lawless told News.com’s Frank Chung that he sees higher mortgage repayments combining with rising costs of living to form what he calls a ‘double whammy for indebted households’: “With underlying inflation moving sharply higher to be up 3.5 per cent over the year, the RBA’s heavy lifting on the cash rate still has some way to go, with interest rates likely to consistently rise through the second half of the year and into 2023.
“Higher costs for food, fuel and finance are likely to see household savings continue to taper as families funnel more of their income towards servicing their mortgage and funding essential costs of living,” he said.
Stamp duty still with us
Historically, stamp duty has always been unpopular. It was first introduced in 1865 when NSW ‘revenue stamps’ were applied by the government to anything dutiable - kegs, casks and crates as well as property. The rate of taxation was 0.5 per cent of the value of the property sold, but since then the average rate of stamp duty has grown incrementally to 5 per cent, sapping the economy and making home ownership more difficult.
For example, over the past twenty years Sydney’s median house price has risen 280 per cent, from about $418,000 to about $1.59 million. In that same time, the cost of stamp duty on that median-priced house has jumped 406 per cent, from about $14,300 to almost $72,400. This amount is usually financed as part of the funds borrowed by purchasers acquiring a property.
Premier Perrottet had hoped to do away with stamp duty entirely, trading it for a broad-based land tax, but then he realised that losing stamp duty revenues would for a while at least be a serious hit to his state budget, while there was also a rumbling among property owners that a land tax might not be as limited as had first been mooted.
The original plan for a land tax was for there to be an annual tax of $400 plus 0.3 per cent of the unimproved land value for homeowners, with investors paying a higher annual rate of $500 plus 1.1 per cent of the unimproved land value. Based on a property valued at $1.5 million, an owner-occupier would pay property tax for 13 years before it matched the upfront cost of stamp duty, and it would take six years for investors to match the stamp duty amount they’d escaped.
According to the most recent update to the proposed reforms before the state’s budget was announced, the top 20 per cent of NSW residential property prices wouldn’t have been eligible to opt in for land tax and would have continued to pay stamp duty, helping to reduce the anticipated decline in the government’s revenue.
NSW Treasury estimated that an optional annual tax would collect about 20 per cent less revenue than is now received from stamp duty. This would have equated to a projected shortfall of about $2.5 billion a year. Economic and political realities combined to reduce Mr Perrottet’s efforts to simply doing away with stamp duty for first-home buyers, and even then, with a series of preconditions for both purchasers and properties.
The government’s First Home Buyer Choice scheme enables eligible first-home buyers who sign a contract to purchase a property in NSW on or after 16 January 2023 to opt in to paying the property tax instead of paying stamp duty. This will lower their upfront costs when buying a home and could reduce the time it takes for them to enter the market. The scheme is expected to commence on 16 January 2023.
Independent economist Saul Eslake said the consequences of the moderated stamp duty change would be minimal because many first home buyers would be purchasing under the $800,000 threshold which is the starting point for a stamp duty concession or exemption: “Any movement in that direction is progress, but it is a tiny step; a bigger step may have had a much bigger revenue cost than previously thought.”
Grattan Institute economic policy program director Brendan Coates commented: “It looks less like a tax reform and more like just another support for first home buyers, because it doesn’t actually really start the transition,” Coates told Domain. “The big economic costs of stamp duty are about whether you go and buy again and move again. That’s the point at which people’s housing choices are constrained because they don’t want to pay stamp duty on the second property,” he said.
Home ownership declines
The Australian Bureau of Statistics (ABS) has just released its findings from the 2021 national census, counting 10,852,208 private dwellings - well up on the 950,712 it counted in 2016. It was a bit of a surprise to discover that 1,043,776 of these dwellings were unoccupied, either holiday homes or investment properties.
Australian National University demographer, Dr Liz Allen said this number was higher than expected: “There are a number of reasons for that vacancy rate, but a lot of that is because people have multiple homes. And [some of] these are holiday homes in areas where people are living in caravans because bushfire and flooding has sent them out of their homes.
“We generally have high rates of vacant homes, census to census, but this is the highest we’ve seen. Home ownership is declining. This gives us a full grasp of the situation, particularly from a generational side of things,” Dr Allen said.
The ABS found that the share of Sydneysiders who own their own home outright has fallen from 39 per cent to 27.8 per cent since 2001. 61.1 per cent of homes in Sydney in 2021 were owned outright or with a mortgage, down 1.1 percentage points since 2016.
Grattan Institute economist Brendan Coates said that Sydney’s home ownership rate had declined despite favourable conditions for home buyers, including historically low interest rates and various government support programs: “Housing is just so expensive that an increasing number of young Sydneysiders can’t afford to buy a home in their own city,” he said.
“Home ownership will continue to fall unless we fix the underlying drivers for why housing is so expensive in the first place. That means fixing land use planning laws and scaling back some [housing-related] tax breaks.”
Mortgage stress is on the increase too, according to another finding from the census. Those experiencing mortgage stress are defined as those who spend more than 30 per cent of household income to service a home loan – now one in five Sydney home borrowers, compared to about one in twelve borrowers in 2016.
It’s not surprising that Sydney, with its market-topping property values, also has some king-sized mortgages with accompanying monthly repayments. The census found that the Sydney region’s median monthly mortgage repayment was almost $3,000 – that’s $1,100 more than the typical Australian mortgage. In many areas including Hunters Hill-Woolwich and Castle Cove-Northbridge, monthly mortgage repayments came to a median $4,333, or $52,000 a year, and that was before this year’s interest rate rises.
Results from the 2021 census have also shown just how variable in income levels Sydney’s suburbs can be. For example, the median family income in the Blacktown district was $2,252 a week, just a little higher than the national figure of $2,120. On the other hand, in Castle Cove-Northbridge and Greenwich-Riverview the median family income hit $241,000 a year while the suburbs of Balgowlah-Clontarf-Seaforth, Hunters Hill-Woolwich and Bellevue Hill were not far behind.
There’s also the matter of rental stress – experienced by tenants who spend more than 30 per cent of their income on rent. 41 per cent of people living in inner Sydney are tenants, well above the national share of 31 per cent.
Domain’s latest Rent Report tells us that the median weekly rent for houses has risen by $20 a week, or 3.3 per cent to a record $620 in the June quarter, while units had an increase of $25 a week or 5 per cent in the same period, rising to $525 a week: “House and unit rents have jumped by more than 11 per cent each in the year to June, outpacing annual wage growth almost five times, in one of the biggest cost of living pressures to households already facing the high cost of petrol prices and other essentials,” he said.
The census found that a third of those tenants in Sydney are under financial pressure due to rental costs, compared to just half that number in the previous census five years ago. Almost half of all renter households in Fairfield Council are paying more than 30 per cent of household income to pay the rent, while that share is above 40 per cent in Canterbury-Bankstown and Liverpool council areas. CoreLogic figures show that capital city rents rose 9.1 per cent in the year ending June, so tenants’ stress levels won’t be reducing in the near future.
A Sydney Morning Herald editorial on 5 July summed up our present housing policy shortcomings: “Both major parties, at the state and federal levels, acknowledge housing affordability is a major problem. But this must now result in bold policies that deliver tangible improvements. Recent proposals to make housing more affordable have been far too timid.”
Developing trends
All the factors that are now active in the property market – from sky high property prices and rapidly rising rentals to a shortage of affordable housing, have combined to inspire a new set of trends that may well become important elements of Sydney’s future housing mix.
The first is the rise in the numbers of new duplexes and other forms of semi-detached dwellings. Approvals for duplexes, townhouses and terraces have increased by 24 per cent in NSW in the year to April, comparing to just a 5.4 per cent increase in house approvals in the same period.
Figures from Domain show that the outer southwest region, incorporating Camden, Campbelltown and Wollondilly councils, topped the approvals list with a 204.5 per cent increase in semi-detached building approvals in the year to March. This region was followed by Baulkham Hills and Hawkesbury - up 155.4 per cent, the Central Coast - up 86.5 per cent, and North Sydney and Hornsby -up 57.9 per cent.
Housing Industry Association economist Thomas Devitt said the increase was driven by a number of factors, including affordability issues and the rental crisis: “Medium-density approvals will be supported by affordability challenges in the detached market and acute rental shortages,” he said.
The simple economics of duplexes were explained by Cooley Auctions auctioneer Michael Garofolo: “The builders have made the decision that if we carve this block into two, our profit margin is better. The popularity is being delivered by the people who are creating them,” Garofolo said.
“[For buyers] it’s an in-betweener, between a unit and a house. It feels like you’ve got your own block of dirt and your own home, which you do in essence. It satisfies the bedroom and bathroom requirements of a growing family,” he said.
Benjamin Mulae, a partner at McGrath Hunters Hill, said that the trigger for the duplex rising in popularity with builders and buyers was the introduction in 2018 of planning laws designed to fast-track medium density housing in NSW: “There were thousands of properties that were suitable for duplexes overnight. There was always demand for it, but it was hard to find sites that were suitable,” Mulae said. “The demand has been so high that people are getting just the approval through before building and reselling.”
The next developing trend to mention is build-to-rent, or BTR as it’s often called. It’s a market that’s expected to grow significantly with 40 projects now under construction with a worth estimated at $9.6 billion.
In the BTR model, the developer maintains ownership of the project once construction is complete. This typically involves large-scale apartment complexes owned by major investors with all the apartments rented out. According to research conducted by Cushman & Wakefield, there are currently 1859 apartments operating across six BTR projects in Victoria, New South Wales, Queensland, and Western Australia.
Cushman & Wakefield's director of metropolitan markets, Marcus Neill says the BTR sector in Australia has reached a turning point: "The number of constructed units is set to double each year to 2025 and grow nearly tenfold over the next five years.”
His company’s research found that 12,848 units are being built this year, as 14 major institutional investors including Mirvac develop 40 BTR projects. It said that the number of completed BTR apartments is expected to reach 15,977 by 2027, based on existing projects alone.
PropTrack economist Anne Flaherty said Australia has been slow to adopt the BTR model, which is already well established in the United States and Europe. She believes BTR could be the key to increasing rental supply: "There is a current undersupply of rental properties in Australia, and a growing recognition by government that more needs to be done.
"Australia's population is forecast to grow by 3.5 million over the next 10 years, and a growing proportion of the population are renters. Boosting the supply of rental accommodation is essential and removing barriers to entry for BTR developers could be part of the solution," she said.
Both the NSW and Victorian governments have introduced 50 per cent land tax reductions for the BTR sector to help establish these projects in those states, while the Queensland government has established a BTR program in partnership with that state’s construction industry.
The third developing trend is the ‘Essential Workers Homebuyer’ scheme that is targeted for trial in NSW. This is a plan to help such essential categories of workers as teachers, nurses and police officers, as well as single parents, buy homes in partnership with the NSW government. This kind of shared equity scheme is becoming popular with governments worldwide, including in the United Kingdom, where it is seen as less expensive in the long term than providing subsidies
The scheme involves the government taking a maximum equity contribution of 40 per cent for a new home, and 30 per cent for an established home. The maximum cost of the property has been set at $950,000 in Sydney and regional centres, and $600,000 in other parts of NSW. Applicants must have a minimum deposit of 2 per cent and be earning up to $90,000 for singles and $120,000 for couples. The trial will have seed funding of $740 million.
Independent economist Saul Eslake said the scheme was similar to the shared equity proposal that federal Labor took to the election, limited to 10,000 places: “In NSW there’s a particular problem with essential workers not being able to afford to live close to the communities they serve and often having to commute long distances every day, so this will address that need.
“[The scheme] does represent an attempt to solve that problem. But participants need to be aware they’re sharing any capital gain with the government or, if interest rates continue to rise, any capital loss. But it is a way, too, for government to get some return on their investment, unlike with most of the first home buyer grants,” Mr Eslake said.
And finally, John McGrath of McGrath Real Estate has described what he terms the ‘co-primary home’ concept wherein homeowners who have moved away from the city during the pandemic to live in regional areas return partially to the city, purchasing a smaller property in town while they retain their regional property as well.
Naturally, most Australian homeowners can’t afford such second homes so the co-primary housing trend isn’t numerically a large segment of the market, but for those with the money the "pied-Ã -terre" (from the French "foot to the ground") which in the 1800s described an Englishman’s home away from home, seems to be enjoying renewed popularity. It could also help explain why the 2021 census found over a million unoccupied dwellings across Australia on census night.
Sources:
‘Extremely challenging’: Sydney house rents jump 19 per cent since pandemic began,’ Tawar Razaghi, Domain, 14 July 2022
‘Sydney real estate: why home prices won’t crash,’ Jonathan Chancellor, The Daily Telegraph, 8 July 2022
‘Buyers and sellers buckle up for the biggest correction in 40 years,’ Nick Lenaghan and Michael Bleby, Australian Financial Review, 8 July 2022
‘The Emergence of The Co-Primary Residences for Commuters,’ John McGrath, McGrath Real Estate, 8 July 2022
‘Very much a landlords’ market’: Renters face tough conditions with vacancy rate at record low,’ Tawar Razaghi, Domain, 6 July 2022
‘Buyer’s market? Sydney auctions drop to weakest level since pandemic began,’ Kate Burke and Melissa Heagney, Domain, 9 July 2022
‘Interest rates are rising: Is the RBA at fault for allowing Australians to take on too much debt?,’ Nassim Khadem, ABC News online, 6 July 2022
‘The affordable neighbourhoods starting to shine in the property market downturn,’ Elizabeth Redman, Domain, 4 July 2022
‘Sydney’s census lesson: Bold action needed to tackle housing affordability,’ The Herald's View, Sydney Morning Herald, 4 July 2022
‘Homeowners warned to expect at least two further rate hikes as repayments soar,’ Paul Karp and Rafqa Touma, The Guardian, 5 July 2022
‘Interest rates pushed up as Reserve Bank targets high inflation,’ Shane Wright and Rachel Clun, The Sydney Morning Herald, 5 July 2022
‘The average Sydney family can borrow $65,500 less than two months ago to bid at auction,’ Tawar Razaghi and Melissa Heagney, Domain, 2 July 2022
‘NSW property tax: A guide to the First Home Buyer Choice scheme,’ Domain, 3 July 2022
‘Census and the city: Inner Sydney’s wealth is wildly outside the Australian norm,’ Matt Wade, The Sydney Morning Herald, 3 July 2022
‘Home prices drop for the second month in a row as Reserve Bank's aggressive interest rate rises hit hard,’ Sue Lannin and Rhiana Whitson, ABC News online, 1 July 2022
‘Essential workers’ home buyer scheme welcomed amid wider crisis,’ Sue Williams, Sydney Morning Herald, 20 June 2022
‘Home values drop as interest rates, costs of living squeeze buyers,’ Rachel Clun, Domain, 1 July 2022
‘Sharpest slowdown in more than 30 years,’ Frank Chung, News.com.au, 1 July 2022
‘Where home prices are slipping the most – and where they’re still going strong,’ Paul Ewart, Realestate.com.au, 1 July 2022
‘Australia's $9.6 billion build-to-rent market poised for rapid growth,’ Megan Neil, Realestate.com.au, 15 June 2022
‘First home buyers given land tax option in Perrottet’s stamp duty overhaul.’ Alexandra Smith, Sydney Morning Herald, 21 June 2022
‘Big blunt tax not fit for purpose’: time to bring stamp duty into the 21st century,’ Luke Achterstraat, NSW executive director, Property Council of Australia, 20 June 2022
‘Home ownership falls, mortgage stress rises in Sydney, census reveals,’ Matt Wade, Sydney Morning Herald, 28 June 2022
‘Sydney and Melbourne set to lead property price tumble, with other cities to follow,’ Peter Hannam, The Guardian, 28 June 2022
‘Property prices are falling: should you wait for prices to fall further, or buy now?,’ Ellen Luton, Domain, 20 June 2022
‘Home buyers warned by RBA to expect more interest rate pain,’ Shane Wright, Sydney Morning Herald, 21 June 2022
‘Home buyers warned by RBA to expect more interest rate pain,’ Shane Wright, Sydney Morning Herald, 21 June 2022
‘Stamp duty catch: what happens when it’s time to sell?,’ Elizabeth Redman, Domain, 22 June 2022
‘Almost one-in-10 Australian homes were ‘vacant’ on Census night,’ Rohan Smith, News.com.au, 29 June 2022
‘NSW to phase out stamp duty, introduce land tax,’ Alexandra Smith, Sydney Morning Herald, 13 June 2022
Forecasting The Future
Tue, 14 Jun 2022Prices ease, buyers back in the driver’s seat, and forecasts for the future
This time a year ago, property prices were rising fast and first-home buyers were in hot competition with investors to acquire properties across Sydney. Now, prices are easing as interest rates go up and the property market is returning to conditions that were considered ‘normal’ until the pandemic-inspired boom took off.
At the first auctions after the federal election, 472 Sydney properties were sold with a clearance rate of 58 per cent and a median price of $1.545,000. The clearance rate for the whole month of May was 55.9 per cent which was the lowest point in the past 12 months; the North Sydney and Hornsby regions were the only areas with a clearance rate above 60 per cent.
Domain’s Melissa Heagney explains why the clearance rate is important: “Clearance rates are an indicator of whether the property market is rising, falling or remaining steady, with rates above 70 per cent pointing to an annual house price rise of at least 10 per cent. Anything below 60 per cent broadly points to a fall in prices and a weakening market.”
So, FOMO (Fear of Missing Out) is gone, and buyers are getting more selective about the property they want to acquire, and with the advertised listings up 5.1 per cent higher than a year ago there’s a good range of properties on offer.
CoreLogic figures show Sydney dwelling prices fell 0.5 per cent for the three months to April, followed by a 1 per cent fall in May. However, prices were 14.7 per cent higher in Sydney for the 12 months to April so there’s still a way to go before prices get into negative territory relative to their gains in the past year.
CoreLogic's research director Tim Lawless said several factors had affected national housing prices since the rate of price growth peaked in May 2021: "Since then, housing has been getting more unaffordable, households have become increasingly sensitive to higher interest rates as debt levels increased, savings have reduced and lending conditions have tightened," he noted.
"Now we are also seeing high inflation and a higher cost of debt flowing through to less housing demand,” he said, adding: “With stock levels now higher than normal across Australia’s two largest cities, buyers are back in the driver’s seat.”
However, not all would-be buyers have a lot of firepower in their pay-packets. Figures from the Australian Bureau of Statistics show that wages rose by 2.4 per cent over the year to March, while the latest property data from CoreLogic shows Australian dwelling values rose 16.7 per cent over the year to April — nearly seven times as fast as wages. Until this situation reverses, and wages begin to rise at least at the same rate as house prices, there’s no broad-based support for wage increases restarting the housing boom we saw in 2021.
And even if wages do rise a bit faster, it might not help much to reduce growing unaffordability according to NAB senior economist Gareth Spence, who says: “We have [forecast] housing prices slowing this year as interest rates and expectations strengthen, and then declining next year, but after that, we think they normalise to around wage growth…we have wages growth getting to about 3.5 per cent eventually.”
He said that price falls would improve housing affordability in one way, but this would be offset by higher interest rates on mortgage repayments: “What you’re losing on the price you’re gaining on servicing the mortgage anyway, so in net terms are you that much different? Not too much,” he told the Herald’s Elizabeth Redman.
Profits for most sales
Smaller houses have taken the biggest hit to property prices in the cooling Sydney market, with buyers less willing to compromise on the size or quality of their next home. Two-bedroom houses have seen the sharpest pull back in prices. In the past quarter the two-bedroom median fell 5.2 per cent, or $51,500, to $940,000, with smaller declines recorded for three-bedroom (-2.7 per cent) and four-bedroom (-2.9 per cent) houses, which also recorded stronger annual growth.
However, PropTrack economic research director Cameron Kusher said he expects a turnaround in demand for smaller houses in coming months: “I think six to nine months down the track, we’ll see the smaller houses – because they are more affordable – they’ll be outperforming and showing better growth than four- to five-bedroom properties,” he said.
CommSec chief economist Craig James said CBA expected house prices to flatten this year, then fall by 8 per cent, noting that this fall could be greater if the Reserve Bank takes a more aggressive approach to its rate increases: “Growth of home prices has been slowing for a number of months. Arguably, speculation of higher interest rates has been a key factor driving the slowdown, together with concerns about weakening housing affordability,” he said.
It must be remembered when we’re talking about the recent massive gains in housing prices, much of this was the result of actions taken by the federal government and states to counter the Covid pandemic which at the onset was expected to hit our economy so badly that house prices would fall from 10 to 20 per cent.
Instead, in the two years following the arrival of the pandemic Australia’s house prices shot up 31 per cent. Also, in just the six months between February and September in 2021, the median new mortgage increased by $80,000 which was more than one-and-a-half times the average annual income.
But not every property being sold lately has delivered some lucky owner a profit. Figures from Domain show that more than one in ten Sydney homes sold in the December quarter made no paper profit or even a loss. 13.3 per cent of sales in Parramatta were loss-making in this time, followed by Strathfield (13.1 per cent) and Ryde (11.6 per cent).
What these areas have in common is that they are apartment-heavy and have recently had a lot of new supply at a time when international borders were closed. Domain also tells us that across Australia 93.8 per cent of resales in the December quarter made a paper profit and houses were more likely to turn a profit than apartments.
As for upsizers wishing to move out of their apartment and purchase a free-standing house, they’re now facing a record gap between the prices of units and houses because the median Sydney house price is double that of the median unit price, according to Domain data.
This data shows that more than $794,000 now separates Sydney’s median house price of almost $1,591,000 and the city’s median unit price of about $796,500. This has happened quickly with the gap climbing from 54 per cent in late 2019 to just below 100 per cent in the last quarter. Despite Sydney’s cooling property market – with house price growth flatlining and unit prices down 1.2 per cent last quarter – the record price difference remains.
House prices have grown six times faster than unit prices over the past two years, although at present house price growth has flatlined while unit prices slipped 1.2 per cent last quarter. However, the gap is anything but uniform, and the reason is geographic.
A closer look shows the premium paid for houses varies greatly across Sydney with the smallest difference found in the more affordable outer suburbs and the Central Coast; the greatest difference is found in the city’s east, north shore and inner west. For example, median house prices in Vaucluse are more than five times higher than unit prices, while house prices are at least four times higher in Bellevue Hill, Mosman and Strathfield.
Interest rates and mortgages
As the Reserve Bank starts a series of interest rate increases, the cash rate is still just under 3 percentage points below underlying inflation, an indication that the RBA’s monetary policy remains expansionary. In its June meeting the RBA surprised financial markets with the biggest one-month increase in official interest rates in more than two decades – a new cash rate of 0.85 per cent, an increase of half a percentage point,
The Herald’s Shane Wright says the average new mortgage in NSW is now $800,000 with monthly repayments about $3257 after the RBA’s first rate increase: “A full percentage point increase would take the average repayment to $3592. Financial markets believe the RBA could have the official cash rate at 2.5 per cent by year’s end, which would translate into a monthly repayment on an $800,000 mortgage of $4295.”
Moody’s Investors Services vice-president Alena Chen outlined how the RBA’s forthcoming series of increases will affect the housing market: “Interest rate rises will pose the most risk for mortgages with high balances and for those whose repayment amounts are close to borrowers’ maximum repayment capacity.
“Rate rises will also weigh on house prices, adding to risks of home loan delinquencies and defaults as borrowers in financial trouble find it harder to sell their properties at high enough prices to repay their debt,” she said.
ANZ senior economists Felicity Emmett and Adelaide Timbrell say the cash rate will lift to 2.35 per cent by the middle of next year – lower than the market consensus figure of 3.25 per cent – and that this will limit borrowing and spending capacity.
“While fixed rates have already risen sharply, the steep increases in the cash rate will flow through to variable mortgage rates, lifting minimum repayments significantly and reducing borrowing power. Macroprudential tightening, solid supply and constrained affordability will also be headwinds for house prices,” they wrote.
With a recognition that a number of price increases expected in almost every household’s regular purchases will increase the costs of living for most Australians, NAB’s chief executive Ross McEwan said homeowners are more vulnerable to price rises than businesses: “Pretty much everything they touch has got more expensive; That does hurt household income, they’re less flexible about what they can do,” he said.
Another consequence of rising house prices will be the rising cost of rentals. First, because landlords with mortgages will pass on their higher monthly repayments to tenants, and also because of the growing shortage of rental accommodation available. Would-be first-home buyers will also have a reduced chance of obtaining a housing loan and many will be back in the rental queue instead of trying to buy a property.
Nationally, CoreLogic’s Hedonic Rental Index increased 1.0 per cent in May, taking the quarterly rate of growth to 3.0 per cent, up 60 basis points on a year ago. The annual change in rents is now 8.8 per cent across the combined capital cities and 10.8 per cent across the combined regions.
Affordability concerns
A report released by think tank Per Capita found the rate of home ownership is declining rapidly, particularly among those under 40. It estimates that fewer than 55 per cent of people born after 1990 who are now in their 20s and 30s will own a house by the age of 40, compared to a historical high of 72 per cent.
The Per Capita report said that the proportion of people who own their homes without a mortgage has shrunk by a quarter in the 20 years between 1997-98 and 2017-18, from about 40 per cent of the population to now just under 30 per cent. The report also noted that out of 10.5 million dwellings in Australia, about 37 per cent of Australians are owner-occupiers with a mortgage, about 29.5 per cent own their home outright, 27 per cent rent from a private landlord, and 3 per cent rent from state or territory housing.
More figures showing the gap between homebuyers and investors come from the Herald’s John Collett who tells us: “The number of first home buyers has been falling since early last year in the face of rising prices, with new lending in March down about 25 per cent on a year earlier, figures from the Australian Bureau of Statistics show.
“However, the value of new loan commitments to investors was almost 50 per cent higher over the same period, as those buyers see better yields as rents rise. Some properties that were negatively geared may generate real income if rents continue their current trajectory.”
Executive director of Per Capita, Emma Dawson, says that social and affordable housing construction has declined over the past 30 years: "We're simply not building enough public housing and community housing to meet the needs of the nation," she argues.
There’s a growing gap between those who own a home and those who wish they could, and the recent election brought a seriously political tone to the housing affordability debate. The simple fact that high housing prices are so well-liked by homeowners has influenced Labor to reject the set of policies it took to the last election – which it lost. Instead, they went into the 2022 election with a vastly different approach and won.
A Labor spokesperson outlined the government’s new policy settings: “Through our National Housing Affordability and Supply Council and National Housing and Homelessness plan, an Albanese Labor government will look to work with all levels of government and other stakeholders to make it easier for more people to buy a home.”
The new Prime Minister, Anthony Albanese has positioned the federal government as an investor in housing with its ‘Help to Buy’ policy. Labor will, in one way or another, contribute to the purchase of new and existing homes for 10,000 people each year. The party has also promised to increase the supply of social and affordable housing by funding the construction of 30,000 homes over the next three years.
Centre for Independent Studies chief economist Peter Tulip said that the federal government could do more to help with housing affordability but wasn’t doing enough: “It’s woefully inadequate,” he said. “Several hundred thousand people buy a new house every year. There are several million families renting. The policies of the two major parties do nothing for almost any of them.”
He says planning restrictions have reduced housing supply and raised prices, further dividing the haves and have-nots: "Housing policies ensure continual wealth gains for current homeowners while leaving renters and potential buyers locked out of the market; for both equity and efficiency reasons, we should be encouraging higher-density housing instead of stopping it."
There’s an often-repeated justification for existing negative gearing and other taxation benefits – namely that they encourage the building of new properties and help to generate new housing supply. However, a recent analysis by the Parliamentary Budget Office found that 57 per cent of negative gearing deductions go to the top 20 per cent of income earners, and the top 10 per cent of earners claim more in capital gains tax deductions than the remaining 90 per cent in total.
The analysis also found that across Australia 638,000 people own two or more investment properties, accounting for 1.7 million homes, while a bit further up the wealth ladder 11,200 individuals own seven or more investment properties. The government’s taxation benefits are most certainly used to increase wealth and property sales, but do little to stimulate new construction.
Grattan Institute economic policy program director Brendan Coates said the capital gains tax breaks have been a “free kick” to investors and have ultimately driven housing inequality: “Negative gearing and capital gains tax definitely contributed to the growing divide between the housing haves and have-nots. You’re talking about $63 billion a decade that is flowing to the richest Australians, which are the ones who own multiple investment properties.”
One thing the federal government could do to possibly lower the cost of buying a home is to financially encourage the state and territory governments to do away with stamp duties on property transactions and replace the lost revenue by imposing a broad-based land tax that would apply across Australia. In theory, this would have the effect of saving homebuyers in NSW around $60,000 on their housing purchase, although it’s doubtful this ‘savings’ would actually eventuate.
On June 12, NSW Premier Dominic Perrottet announced his intention to do away with stamp duty and introduce a new broad-based land tax in his last budget before the March 2023 election, but details are yet to be outlined. Of course, this would mean all existing homeowners affected will face a new and not inexpensive annual tax on their own property which would make it a hard ‘sell’ for any government – state, territory or federal, to impose such an impost without suffering political damage. We’ve covered this issue since it first arose four years ago and will continue to monitor and report on developments as they happen.
Forecasters’ updates
There’s a surge of new commentary and forecasts about the property market from the banks and the property industry, taking the latest market conditions into account.
With a just-elected federal government, interest rate rises and with major international developments all having their impacts, what do those closest to the action have to say? Domain’s Melissa Heagney surveyed the experts and here’s what she found.
CBA senior economist Gareth Aird said the policies of the new government won’t be enough to soften the impact of rising interest rates and the rising cost of living on Australian households: “Regardless of who won the election, rising interest rates will be the one thing that shapes economic outcomes and the future of the housing market,” Aird said, reminding us that CBA economists have predicted an 11 per cent fall in Sydney house prices this year, followed by a further 7 per cent drop next year.
AMP Capital chief economist Shane Oliver said his firm has updated its predictions to incorporate the latest house price data and now expects a 10 to 15 per cent drop in house prices over the next 18 months, rather than 2 years.
Westpac senior economist Matthew Hassan said his bank has forecast a price fall of 2 per cent across the country by the end of the year, and a further 8 per cent in 2023: “Our recently revised forecasts have the cash rate rising to a peak of 2.25 per cent by May 2023 and holding at this level through 2024. This, in turn, is expected to see an earlier and sharper correction for dwelling prices.”
ANZ senior economist Felicity Emmett said her bank’s forecast has been updated to house prices falling nationally by 3 per cent by the end of the year and 8 per cent next year: “Higher interest rates are going to be the biggest challenge for the market but record-low unemployment and the reopening of international borders – these things will help to provide some support over the next couple of years.”
NAB chief economist Alan Oster said his bank’s forecast was for a housing price rise of 2 per cent this year, followed by a fall of ten per cent next year: “Affordability, interest rates and people getting worried about interest rates will have an impact,” he said.
Brett Thomas at News.com also looked at the market. He spoke with Real Estate Institute of Australia president Hayden Groves who said the market “can carry on” but there may well be a price retracement because of multiple potential interest rate rises over the course of the year.
“But if prices do fall back, I don’t think it will be as substantial as some commentators are expecting,” Mr Groves said.
Housing Industry Association economist Tim Reardon agreed, saying: “As interest rates increase, the high growth cycle will stall and we’ll enter a different cycle where prices will decline but it’s difficult to see house prices falling significantly while we still have a shortage of supply,” Mr Reardon said.
PropTrack economist Angus Moore said the momentum has gone out of prices, but it was too early to put a percentage figure on the expected decline: "If the RBA has to raise rates quicker than we're expecting in order to tame inflation, we could see reasonably large falls in prices – a double-digit decline is not implausible,” he said.
Independent economist Saul Eslake said he did not expect to see a large decline in prices. He said he would be surprised if the market dropped more than 10 per cent as rates rose, also noting that forced selling was unlikely. Instead, he said he expects the number of homes for sale to fall quite a lot as vendors become reluctant to sell in a cooling market. This would reduce supply and limit price declines.
The property market is returning to conditions more like those that were considered ‘normal’ before the pandemic-inspired boom, before the war in Ukraine, before energy costs skyrocketed, before interest rates began to rise, and before the spectre of higher inflation returned.
There’s general agreement that interest rates will rise and housing prices will fall, but how high rates will go and what the amount of the price falls will be depend on so many variables that at this point in time even the industry and financial experts can’t predict just what’s going to happen next.
Sources:
‘Aussie home values are about to tumble. We should let them,’ Jessica Irvine, Sydney Morning Herald, 14 June 2022
‘NSW to phase out stamp duty, introduce land tax,’ Alexandra Smith, Sydney Morning Herald, 13 June 2022
‘House prices to drop by 15 per cent in Australia, according to CBA,’ Sarah Sharples, News.com.au, 12 June 2022
‘The Sydney regions where auction clearance rates have been hammered,’ Kate Burke, Domain, 11 June 2022
‘Why property prices could fall faster than first expected,’ Kate Burke, Sydney Morning Herald, 9 June 2022
‘A very clear jolt’: Why house prices are tipped to fall even further,’ Melissa Heagney, Domain, 7 June 2022
‘Home buyers brace for financial pain as economy sits on knife-edge,’ Shane Wright, Sydney Morning Herald, 4 June 2022
‘How rising interest rates could affect first home buyers,’ Chloe Breitkreuz, Domain, 27 May 2022
‘Housing market in correction mode as rate hikes kick in ,’ Matthew Hassan, Westpac Wire, 20 May 2022
‘CoreLogic Home Value Index records first national fall since September 2020, as declines accelerate across Sydney and Melbourne in May,’ CoreLogic Research News, 1 June 2022
‘Market correction expected as interest rates rise,’ Brett Thomas, realestate.com.au, 28 May 2022
‘Reserve Bank says property market buoyed as households downsized,’ Shane Wright, Sydney Morning Herald, 25 May 2022
‘There’s a new government, so what’s next for house prices?,’ Melissa Heagney, Domain, 24 May 2022
‘Property prices have risen seven times faster than wages in a year. Can it continue?,’ Elizabeth Redman, The Sydney Morning Herald, 20 May 2022
‘The homes with the largest price drops in the cooling market,’ Kate Burke, Domain, 19 May 2022
‘ANZ predicts a worse housing market slowdown,’ Michael Bleby, Australian Financial Review, 18 May 2022
‘The other housing tax no one’s talking about this election,’ Elizabeth Redman, Domain, 18 May 2022
‘Sydney upsizers face record gap between unit and house prices,’ Kate Burke, Domain, 15 May 2022
‘Why falling property prices are actually bad news for first home buyers,’ John Collett, Sydney Morning Herald, 11 May 2022
‘More interest rate hikes are coming, and housing affordability is about to get crunched,’ Greg Jericho, The Guardian, 6 May 2022
‘Negative gearing and capital gains tax breaks go to top income earners and men,’ Tawar Razaghi, Domain, 5 May 2022
‘Where homes sold for a loss despite the property boom,’ Elizabeth Redman, Sydney Morning Herald, 6 May 2022
‘‘How will renters like Cameron be impacted by interest rates rising?,’ The Drum, David Taylor and Karen Tong, 6 May 2022
To make housing affordable, property prices need to fall, hurting many Australians with big debts,’ Nassim Khadem, ABC News online, 6 May 2022
‘Higher rates to hit house prices and home buyers, Moody’s warns,’ Shane Wright and Rachel Clun, 5 May 2022
‘Housing affordability challenge requires leadership and vision,’ The Herald's View, 4 May 2022
BACK TO THE FUTURE
Thu, 19 May 2022Back to reality and rising interest rates
What has been called ‘Sydney’s pandemic property boom’ is starting to fade as prices reach levels many buyers deem unaffordable and interest rate rises increase the costs of borrowing.
The median value of a property in Sydney in April was down 0.5 per cent from January to $1,127,723 and the number of properties on offer was up to somewhere around the five-year average. However, the combined median price of both freestanding houses and apartments is still far higher – up about 14.7 per cent, than it was a year ago.
The slippage in prices varies from one part of Sydney to another. According to CoreLogic, dwelling values fell in around two in five Sydney suburbs during the first three months of 2022. Of the 917 Sydney suburbs analysed, 354 experienced a fall in median dwelling values. House prices in 189 Sydney suburbs declined, while 165 unit markets weakened during the same period.
Eliza Owen, CoreLogic’s head of research, said the largest price decreases were found in some of Sydney’s more expensive suburbs: “Inner Sydney suburbs Beaconsfield, Newtown and Camperdown notched up some of the sharpest house price falls of 7.2 per cent, 5.8 per cent and 5.7 per cent respectively,” she said.
“It is likely that slightly tighter lending conditions and higher average fixed rates are hitting the very top of housing markets first. These same areas are seeing some of the bigger jumps in advertised stock levels too, so as we see new demand for housing in these areas decline, buyers have more choice, more time for decision-making, and more power at the negotiating table.”
However, at the luxury end of the Sydney market, values of prestige properties are skyrocketing. Vaucluse, with a 42.8 per cent jump in price just in the 12 months to March, doubled the 21 per cent price growth of broader Sydney. Dover Heights was up 40.3 per cent, Rose Bay was up 40.1 per cent, and Woollahra climbed 39.8 per cent.
It’s definitely a different world at the pointy end where there aren’t that many palaces on offer. Atlas Property Group’s Michael Coombs says there are lots of unsatisfied buyers at the highest levels: “There are plenty of buyers in that $20 million to $30 million level, but no one is selling,” Coombs said. “Who knows what next year will bring?”
The Reserve Bank of Australia has increased the official interest rate for the first time in more than a decade. This is discussed in greater detail elsewhere in this article, but it’s going to have an impact on property prices once the rise has been passed on to borrowers, both those who are present mortgage holders and those seeking a loan.
Even before the rate increase, the Sydney auction clearance rate had slumped to 62.9 per cent in April, down 12.5 percentage points from the same month last year. And despite having had the highest number of auction listings in April since Domain began keeping records, in the first weekend of May there were just 559 homes up for auction which was down 41.9 per cent year-on-year.
CoreLogic research director Tim Lawless said a lift in interest rates would likely lead to a weaker overall property market: “Interest rate increases generally have a downward impact on house prices and they are likely to also put downward pressure on consumer sentiment which feeds into the market. They are also likely to affect peoples’ ability to borrow, making it more challenging to get into the market.”
CommSec chief economist Craig James said the bank expected house prices to flatten this year, followed by a fall of 8 per cent next year. He cautioned that prices could fall further than this if the RBA took a more aggressive approach to raising rates.
“Growth of home prices has been slowing for a number of months. Arguably, speculation of higher interest rates has been a key factor driving the slowdown, together with concerns about weakening housing affordability,” he said.
But we’re not heading for a crash as Eastern Suburbs agent Broderick Wright told The Guardian’s Brigid Delaney: “Whenever we see a slight change in the market [such as a rate rise] we find properties that have challenges are the first to feel the pinch”.
“Yes, some mortgage holders will be affected if they are already stretched to the limit, but if anything we’ll see a slight softening. We won’t see it fall off a cliff.”
Up go interest rates
At its monthly meeting on May 3 the board of the Reserve Bank of Australia (RBA) decided to lift the official cash rate from 0.1 per cent to 0.35 per cent. This is the first increase to the cash rate since November 2010, as well as being the first RBA alteration to its rate during an election campaign since 2007.
It’s also expected to be the first rate rise in a series, with more to come in the near future. In the bank’s official statement following the meeting, Governor Philip Lowe said the rise was the beginning of a process: “The board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic.
“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”
The bank’s decision came after the headline rate of inflation in the year to the end of the March quarter was unexpectedly high at 5.1 per cent, well above the bank’s target range of 2 to 3 per cent. The RBA said it expects further rises of the inflation rate in the near term to around 4.75 per cent but expected it will moderate to around 3 per cent by mid-2024.
Diaswati Mardiasmo, PRD Real Estate’s chief economist, said although banks and other lenders have no direct obligation to adjust their loan interest rates in line with the RBA’s hike, it’s predicted they’ll follow the RBA’s trend upwards: “History tells us they move very, very quickly,” she says. “I would say changes can happen within the next 30 days or so.”
Dr Mardiasmo said that buyers are likely to find their borrowing power reduced, depending on their circumstances and the lender, and the reduction may not be much to begin with: “It could be that instead of being able to borrow $400,000, for example, they are only approved for $380,000 or $370,000.”
Over the last week of March, the ANZ-Roy Morgan weekly measure of consumer sentiment fell 6 per cent to its lowest level since 2010. David Plank, ANZ’s head of Australian economics, attributed the fall in confidence to the high rate of inflation which increased the prospect of further interest rate hikes.
“This is supported by the fact confidence dropped by 9.6 per cent among people paying off their home loan, while for people who already own their home or are renting confidence dropped by 4.7 per cent and 4.2 per cent respectively,” he said.
About one-third of Australian households have mortgages. The other two thirds are about evenly split between rent-paying tenants and homeowners who have paid off their mortgages.
Financial markets anticipate the next rate rise to come as early as June of at least another 0.25 per cent, with further increases to follow. Westpac has forecast a ‘terminal’ cash rate of 2 per cent in 2023, while ANZ has gone even higher with a forecast of more than 3 per cent.
Rents soaring
A shortage of available rental properties has caused residential rents to rise by 11.8 per cent in capital cities over the past twelve months, figures from SQM Research show. Asking rents went up by 2.2 per cent just in the month to April 12; rents in Sydney’s CBD rose 5.5 per cent in just the past thirty days.
Capital city house asking rents went up by 14.7 per cent while unit rents rose 11.2 per cent, in a massive reversal of the fall in rents when Covid-19 restrictions stopped migration into Australia while many city dwellers could work from home and chose to move away to less expensive housing in regional areas.
"The reality on the ground will be that many families, many young people will not be able to find the home that they actually require," Louis Christopher, managing director of SQM Research, told ABC News. "We have a real issue on our hands - the biggest issue I've seen in the housing market since I commenced my career back in 2000."
Tenants paying rent in Sydney are paying $50 a week more for a house and $30 more for a unit than they were a year ago, according to Domain’s latest Rent Report. The median weekly house rental cost in Sydney is a record $600, while unit rentals are up to a median $500.
Domain’s chief of research and economics, Dr Nicola Powell, said the recovery of rental prices in Sydney had come once domestic and international borders had reopened: “We may also be seeing the homecoming of city escapees from lifestyle and coastal locations, further driving demand,” she said.
The vacancy rate across Australia dropped to just one per cent in March as rental stock has been reduced by owners selling investment properties and by properties returning to the short-term holiday market now that tourism is back in business. This has contributed to house rents hitting record highs in Sydney’s northern beaches, the outer west, the Blue Mountains, Baulkham Hills and Hawkesbury regions.
However, Dr Powell thinks there could be a limit to these recent peaks in rental costs: “We talk about that ceiling price in the sales market … and I think a similar thing may be happening in the rental market. Budgets can only stretch so far; people will compromise on property type and then compromise on location.”
Independent economist Saul Eslake disagrees, saying those hoping the slowing of property prices will filter down into rental rates will be disappointed: “There is not much connection in my view between property prices and rents. If you look back at late 2017 to mid-2019, prices went down in Sydney and Melbourne but that had no impact because there were no falls in rents during that period.”
His view is that rents will rise when demand is high and supply is low. These are the conditions in today’s market and rents across Sydney are showing few signs of slowing. Economic program policy director at the Grattan Institute Brendan Coates said this is the perfect recipe for continuing rent rises.
“Rents are rising pretty sharply and [affordability] is absolutely a problem,” Coates said. “We saw some respite in rents in Melbourne and Sydney during COVID but now migrants are starting to return and the population growth is starting to turn around.”
RMIT senior lecturer Leonora Risse points out that higher interest rates will also make borrowing harder for more first home buyers, which will increase demand for rental properties and push up rents: "For prospective home buyers trying to get into the housing market, a rate hike could make it tougher for them and they'll have to keep renting for longer," she said on ABC’s The Drum.
"This means they will continue to add to demand for rental properties, keeping rental rates high."
Foreign investment tumbles
Foreign investment in Australian residential real estate has fallen to its lowest level in more than 15 years, as shown by the relatively small number of just 4384 approvals in the twelve months to June 2021. The total value of these transactions was $10.4 billion - a drop of $6.7 billion on the previous twelve month period.
The number of foreigners buying established dwellings also fell sharply, down to just 661 from the total of 1101 in the previous year.
The last time Australia’s residential market fell to such a low number of approvals was in the 2005-06 financial year when the Foreign Investment Review Board (FIRB) annual report showed just 4648 approvals totalling $11.6 billion. For comparison, the highest dollar volume of foreign investment in residential real estate came in 2016-17 when $30 billion worth of property purchases was approved.
Dr Shane Oliver, AMP’s chief economist, attributed the decline in foreign investment to the travel restrictions imposed as a result of Covid-19: “Closed borders would have disproportionately impacted residential investment because those buyers like to come and look,” Dr Oliver said. “And with foreign students shut out of the country, that was another reason potential buyers couldn’t come here.”
However, the drop in residential investment was offset by an increase of more than 100 per cent in investments in Australian commercial property by overseas buyers, up from $38.8 billion in 2019-20 to $82 billion in 2020-21.
“Commercial property investors often have local branches operating here, so that market wouldn’t have been as disrupted as the residential market,” Dr Oliver explained.
Investors from the United States dominated the combined commercial and residential sectors with more than $20.8 billion worth of investments. Investment from Singapore was second with $13.8 billion, followed by Germany with $7.5 billion, Canada with $7.3 billion and China finishing in fifth place with investments worth $6.3 billion.
Houses over units
Figures from the March quarter show that Sydney’s property buyers have a preference for houses over units. The price growth gap between houses and units in some parts of Sydney is more than 15 percentage points over the past year, and the difference tends to be the widest between houses and high-rise apartments.
Eleanor Creagh, senior economist at realestate.com.au, says the impact of the pandemic on housing preferences has played a key part in creating this gap: “Lifestyle has become a greater priority, with proximity to the CBD less so. The experience of lockdowns also made apartment living relatively less attractive, with many desiring more space and larger homes.
“For many, the pivot toward remote work and more time spent at home has made larger dwellings a more attractive proposition. As a result, the premium people have paid for houses greatly accelerated in 2021.”
Sydney unit prices fell 1.2 per cent to a median of $796,524 in the March quarter, the latest Domain House Price Report shows, while house prices rose a marginal 0.2 per cent to a median of almost $1,591,000.
Overall, house prices were up 21 per cent for the year, although the rate of growth hit a 12-month low. There were also quarterly house price declines in six regions, including in the eastern suburbs and Sutherland Shire, where the median fell more than 5 per cent.
Sydney’s unit prices either fell or just held steady over the quarter in most regions. Prices were down annually in half a dozen areas, although the unit median was still up 4.8 per cent year on year.
More than one in 10 homes sold in Sydney are now changing hands at a loss in some neighbourhoods despite the recent pandemic property boom. The losses have been concentrated in apartment-heavy areas where new supply in recent years has been met with falling demand while international borders were closed.
Independent analyst Angie Zigomanis says the property boom was mostly about detached houses: “Markets that have been most exposed to overseas migration, and the drop in overseas migration, have struggled the most in tenant occupancy, rental growth and therefore pricing.”
Although the drop in rents affected how much unit buyers would pay, as rents start to pick up values we are likely to see some recovery, Zigomanis told the Herald’s Elizabeth Redman, adding that apartments designed for owner-occupiers are likely to perform better than those intended for investors.
While Sydney’s unit median had fallen first, houses were expected to eventually follow, with Domain noting the momentum of the housing market, which had far greater growth throughout the pandemic, would take longer to slow.
Eliza Owen, head of research at CoreLogic, agrees with other analysts that one of the reasons for the relative recent poor price performance of unit markets is COVID-19 related travel restrictions, including the closure of Australia’s international borders.
She says demand for investment units in urbanised centres fell because of their high exposure to migrants and international students. But now the re-opening of international borders is seeing arrivals from overseas rising quickly, which should help to support the prices of units in Sydney.
Nicola Powell, Domain’s chief of research and economics, says while there are currently a number of market metrics showing a slowdown in Sydney’s housing market, some areas have recently seen an increase in average open home check-ins. Dr Powell also said the biggest weekly lift in new listings was for units, rather than houses: “This is good for affordability and will help to service the rising investor demand,” she said.
Sources:
‘Why falling property prices are actually bad news for first home buyers,’ John Collett, Sydney Morning Herald, 11 May 2022
‘Has the interest rate rise broken Australia’s housing market fever?,’ Brigid Delaney, The Guardian, 10 May 2022
‘Downturn? What downturn? Rich get richer from soaring trophy home values,’ Lucy Macken, Domain, 10 May 2022
‘Where to for units now that cities are springing back to life, explained in thirteen charts,’ Eleanor Creagh, News.com.au, 6 May 2022
‘Sydney buyers sniff opportunity with interest rate rise,’ Tawar Razaghi, Domain, 7 May 2022
‘Where to for units now that cities are springing back to life, explained in thirteen charts,’ Eleanor Creagh, News.com.au, 6 May 2022
‘Where homes sold for a loss despite the property boom,’ Elizabeth Redman, Sydney Morning Herald, 6 May 2022
‘How will renters like Cameron be impacted by interest rates rising?,’ The Drum, David Taylor and Karen Tong, 6 May 2022
‘Higher rates to hit house prices and home buyers, Moody’s warns,’ Shane Wright and Rachel Clun, 5 May 2022
‘Apartment price falls signal end to Sydney’s pandemic property boom,’ Kate Burke and Elizabeth Redman, Domain, 28 April 2022
‘Houses still in high demand, apartment prices lag,’ John Collett, Sydney Morning Herald, 24 April 2022
‘The RBA has lifted the cash rate to 0.35 per cent. Here’s what it means for home buyers and owners,’ Chloe Breitkreuz, Domain, 5 May 2022
‘Hunger Games situation’: Rental vacancies at record lows as tenants do it tough,’ Melissa Heagney, Sydney Morning Herald, 5 May 2022
‘Boxed in: Sydneysiders hit with fastest-growing house rents in 13 years,’ Kate Burke and Melissa Heagney, Domain, 5 May 2022
‘Rents 'explode' across the country, as house prices fall in many Melbourne, Sydney suburbs,’ Rhiana Whitson, ABC News online, 5 May 2022
‘Sydney House Prices Slide Further in April as Rate Rise Looms,’ Sati Pandey, Bloomberg, 2 May 2022
‘Property prices fall in Sydney and Hobart as national boom slows,’ Ewan Black, AAP, 2 May 2022
‘The interest rate rise we had to have and how it will help,’ Jessica Irvine, Sydney Morning Herald, 3 May 2022
‘Reserve Bank opts for standard 25-basis-point interest rate hike as first in likely string of rises,’ Michael Janda and Emilia Terzon, ABC News online, 3 May 2022
‘RBA lifts rates just weeks out from election, flags more to come,’ Shane Wright and Rachel Clun, Sydney Morning Herald, 3 May 2022
‘Foreign investment in Australian homes falls to 15-year low,’ Lucy Macken, Sydney Morning Herald, 8 April 2022
‘The interest rate rise we had to have and how it will help,’ Jessica Irvine, Sydney Morning Herald, 3 May 2022
SYDNEY MARKET STABILISES
Wed, 27 Apr 2022SYDNEY MARKET STABILISES - MORE HELP FOR FIRST HOME BUYERS.
As we’ve seen, 2021 was quite a year for Australian house prices. The Australian Bureau of Statistics (ABS) released its year end residential property prices report which shows that Australia’s residential property prices surged 23.7 per cent and the total value of Australia’s 10.8 million homes grew by $2 trillion to $9.9 trillion last year.
The report also shows that Sydney house prices were up by an amazing 32.9 per cent and Sydney unit prices up by 15.5 per cent over the calendar year, and the price rise in just the last quarter of 2021 for a home in New South Wales was $47,700.
At the peak of the pandemic-inspired property boom, most Sydney homes were selling at auction for prices well above their reserves. Buyers were plentiful and stock on offer was limited. But now we’re seeing clearance rates at lower figures and prices aren’t rising skywards as they were six months ago.
The property market views a clearance rate of 70 per cent as an indication of a balance between buyers and sellers. Recent weeks have seen clearance rates fall into the 60’s and stay there, so on that measure the latest boom is well and truly over and buyers are back in the competition.
Nicola Powell, Domain’s chief of research and economics, said that these declines in clearance rates show the market is returning to normal: “Clearance rates are definitely showing we’re edging into a normal or more even playing ground when you pair that with an influx of listings. The market is normalising from those crazy conditions of last year,” Dr Powell told Domain.
Damien Cooley, auctioneer and managing director of Cooley Auctions, says that more homes are selling prior to auction, and the average price achieved in March is now $60,000 over reserve: “That’s an indication that vendors are a little bit more realistic about their reserves and are willing to meet the market,” Mr Cooley said.
“In February, the average price over reserve was $23,000. That tells me more properties were selling under reserves, vendors’ expectations were high and buyers weren’t willing to pay those expectations.”
Another trend showing up in market statistics is that the median time on market for houses is up more than two thirds year-on-year in many parts of Sydney, although apartments in most regions are now selling faster year-on-year as investor activity rises and those who’ve been priced out of the detached housing market seek better value.
Sydney wide, houses took a median of 30 days to sell over summer, up from 26 days the previous year, while apartments sold in 35 days, ten days faster than a year earlier, data from property analysts CoreLogic shows.
Another sign that Australia’s property boom is ending comes from a slight fall in Sydney house values for the second consecutive month detected by CoreLogic whose March home value index shows that prices in Sydney fell by 0.2 per cent after a 0.1 per cent drop in February, and the growth rates for Sydney and Melbourne in the March quarter were lagging behind the other capital cities.
"It does look like the boom is over in both of those cities," CoreLogic’s research director, Tim Lawless, told the ABC. “In fact, we are now seeing those markets either right at the top of their cycle and about to start to move into a consistent downturn, or potentially already moving into a downturn.
"We are seeing less demand in the market but, of course, there [are] other factors around rising interest rates. Affordability is still very challenging in both of those cities as well."
Commonwealth Bank head of Australian economics Gareth Aird said prices had simply reached a point to where buyer’s budgets couldn’t stretch: “The evidence is pretty clear. Prices have peaked in the two biggest capital cities. Affordability has become stretched because prices have gone up so much. There is a limit to how high they can go,” he said.
“You can’t continue to grow indefinitely and that affordability picture has kicked in earlier in Sydney and Melbourne.”
Domain data shows that more than one in ten homes in the NSW capital have been sold at a discounted price because of changes in the property market that have made it a more level playing field. Figures from Domain released in late March shows the average proportion of listings where sellers discounted the price in Sydney jumped from 5.9 per cent in July, during the city’s second major lock down, to 10.5 per cent in February once the property market returned to normal operation.
Predictions for the future
The Nobel-prizewinning Danish physicist, Niels Bohr, gave us one of the most meaningful statements ever made about predictions: “Prediction is very difficult, especially if it’s about the future.” Predicting the Sydney property market is always difficult, proving Dr Bohr’s point, but we still give it a try and sometimes even get it right.
So, let’s look at a few predictions from market-watchers who can reflect on the recent property boom and tell us what they think will happen in the coming years. First, we hear from one of our favourite economists, Shane Oliver, Chief Economist at AMP Capital who says that the sharp rises in house prices in the past two years combined with higher interest rates will make it difficult for values to double again within the next decade.
“If you’ve bought in the midst of the pandemic, or in 2017 after the market peaked, you’ve already seen a sharp rise in prices, so even if they come back by 10 per cent during this downturn, there’s a greater chance you’ll see a doubling in value within a 10-year horizon,” Dr Oliver told the Australian Financial Review’s Nila Sweeny.
“But if you bought just recently, it’s going to be a bit harder because you’re starting from a much higher level with prices being up by 25 per cent compared to the pandemic low point. When you buy high, it takes longer to get a doubling in prices.”
Nerida Conisbee, Ray White chief economist, said current Sydney buyers in particular were unlikely to see a doubling in value over the next decade because of slower growth: “We know that we are in for probably at least 12 months of fairly flat price growth, so it is perhaps less likely to double your money now than if you bought in April 2020, so timing is a big factor,” she said.
Tim Lawless, CoreLogic’s research director, shares this opinion and says: “During the previous growth cycle that ran between early 2012 and mid-2017, Sydney housing values increased by roughly 75 per cent, but it was not until August last year that Sydney housing values had recorded growth of at least 100 per cent,” he said.
“In other words, it took approximately 9.6 years across two growth cycles for Sydney housing values to double. Arguably, achieving a doubling of housing values in already expensive markets like Sydney will take a longer time than the average historically.”
Data scientist Kent Lardner, director of NSW-based research firm Suburbtrends, says affordability is the key driver for a large sector of the housing market: “With interest rate rises expected in the coming months, it is hard to see double-digit annual growth being the norm in the coming years,” he said.
“Select markets will still have solid growth, but higher interest rates may drive a ‘soft landing’ for most markets with flat or marginal growth rates in the coming years.”
Westpac senior economist Matthew Hassan said the fall in values in Sydney and Melbourne indicated these markets were responding to changed lending conditions, vendors’ high price expectations, and an increase in the number of properties on offer: “The wider housing market will move into a correction phase later this year,” Mr Hassan said.
“The correction will continue in 2023 and 2024,” he added, saying the drop in values will spread to other capital cities once they also become too expensive for buyers.
And for a recent forecast that makes a prediction about the rest of 2022, CoreLogic's head of Australian research Eliza Owen says it is likely property prices will start to decline later this year: "Arguably, there are more headwinds than tailwinds now stacked against continued growth in the property market, with the potential for sooner-than-expected cash rate increases, affordability constraints and weakening consumer sentiment slowing demand," she told Gareth Hutchens of ABC News.
"While some structural shifts through the pandemic, such as remote work, may sustain demand in regional Australia long term, it is likely that housing values will start to decline on a fairly broad basis later this year."
Even the RBA is getting into the act with a somewhat surprising forecast of its own. The Bank said in April that, if there were no major economic shocks, a 2 percentage point increase in interest rates could lower real housing prices by 15 per cent over a two-year period.
Help for first-home buyers
About one-third of all households in NSW are occupied by tenants who rent the property in which they live. With rents rising at nearly ten per cent annually, and with house prices slowing from their previous frenetic pace, first-home buyers are once again thinking about purchasing a home rather than renting one.
But it has become extremely challenging for first-home buyers to save a deposit in the rising market, according to Domain’s chief of research and economics Nicola Powell: “First-home buyers are facing a growing financial hurdle when it comes to saving a deposit, and this is becoming more daunting in the context of rising living costs, low wage growth, weak saving rates and the rapid rise in property prices,” Dr Powell said.
ANZ senior economist Felicity Emmett says that, with home values rising almost ten times faster than wages last year, there has been a material lift in the time taken to save for a deposit: “[Dwelling] prices have gone up so much it would take a really significant decline in prices or an enormous increase in incomes to bring those sorts of ratios, in terms of deposit affordability, back to something close to the long-run average,” she said.
Both the NSW and federal governments have introduced schemes intended to help first-home buyers fulfil their dreams of home ownership. There’s the First Home Loan Deposit Scheme (FHLDS) that allows first-time buyers to put down a deposit of just 5 per cent which still has places available if applied for before 30 June.
There’s also the Family Home Guarantee (FHG) that has already helped more than 2300 single parents to buy a home. Under the FHG, the government acts as guarantor for the mortgage, with a limit of $800,000 on the cost of the home. This means that buyers only need a deposit of 5 per cent instead of the usual 20 per cent required to avoid expensive lenders’ mortgage insurance. 5,000 FHG places per year will allow eligible single parents to put down a deposit of just two per cent.
Then there’s the First Home Super Saver Scheme (FHSS) that permits first-home buyers to save money for a deposit via their superannuation. From July 1, the amount that can be held inside super for a home purchase under the FHSS will rise to $50,000, from $30,000, on the proviso that the amount of super contributions that can be applied to a home deposit is capped at $15,000 per annum.
And there’s the New Home Guarantee (NHG), which was allocated 10,000 places for use before June 30. It was designed to stimulate housing construction and allows first-home buyers to secure a mortgage with a deposit of 5 per cent, providing they are buying a newly built dwelling.
Finally, the federal government has included in its 2022-23 budget a new scheme to be established called the Regional Home Guarantee (RHG) that will encourage more construction outside of capital cities. It will be available to first home buyers, to people who have not owned a property in the past five years, and who are permanent residents, which the government intends will encourage migrants to settle in regional areas. Applicants must either build or purchase a newly built home and there will be 10,000 places per year available from October 1.
Michelle May, of Michelle May Buyers Agents, said that in these times it’s not unusual for first-home buyers to get help when they finally make their purchase: “The increase in pay is lagging far behind the increase in house prices, you can’t make that kind of money at the rate at which house prices have gone up,” Ms May said.
She told the Herald’s Kate Burke that compromising on their desired property type or location, or sometimes both, was the key for first-home buyers, and many first-home buyers relied on financial support from their parents.
“About 30 to 40 per cent [of my first-home buyer clients] get help in some capacity, whether that is cash money or via a guarantor loan … or where my services have been paid for by the bank of mum and dad,” she said.
What affordability?
Not long ago, in June 2020, first-home buyer activity began to surge following the introduction of the federal government's HomeBuilder scheme, as well as with various state-based grants and stamp duty concessions. However, after peaking in January 2021 first-home buyer activity quickly diminished. This fall in activity was a reflection of high barriers to entry as skyrocketing house prices substantially outpaced incomes.
Demographia World Urban Areas is the only regularly published worldwide compendium of urban population, land area and density data of urban areas with populations of 500,000 or more. The 2022 edition of Demographia’s ‘International Housing Affordability’ report revealed that Sydney was the second least affordable city in the world in which to buy a house, with the median price 15 times more than the average household income in 2021.
Data from Domain confirms that incomes have not kept pace with house price rises. Domain’s figures show that Sydney has seen its median house price jump by 33.1 per cent over 2021. More significant is that even if house prices were to fall by ten to fifteen per cent over the next 18 months they would still be at historically high levels.
A recent federal government inquiry into housing affordability and supply in Australia, chaired by Liberal MP for Mackellar Jason Falinski, has recommended increasing the supply of new homes to improve housing affordability. The inquiry’s findings included that a young couple on the average income who could save 20 per cent of their after-tax earnings towards an entry-level house in Sydney would need to save for more than eight years just to accumulate a deposit.
Another finding was that falling rates of home ownership risk deepening divisions in our society and could increase the burden on taxpayers to support retired renters who cash out their super, buy a modest home, then draw the age pension.
Grattan Institute economic policy program director Brendan Coates backed the supply side recommendations, saying that that building an extra 50,000 homes a year for a decade could result in house prices and rents being up to 20 per cent lower than they would have been otherwise: “The work showing supply is a problem is pretty robust,” he said. “It’s arguably the biggest constraint on housing affordability.”
But not everyone agrees with the inquiry’s conclusions. “While there are things that can usefully be done in that area, trying to solve the housing affordability problem solely from the supply side is like being in a boxing match with one hand tied behind your back,” Saul Eslake, the principal of Corinna Economic Advisory said.
“Government policies which have served to inflate demand have also contributed to the deterioration in housing affordability [by stimulating prices] and the decline in home ownership.”
The Australia Institute’s senior economist, Matt Grudnoff, says there are two ways to make housing more affordable: “You can decrease demand or increase supply. Giving more money to first-home buyers increases demand, meaning they can borrow more, they will show up to the auction with more money and the price goes higher. It shuffles around who gets to buy a house but ultimately increases the price of housing.”
Developers have their own ideas about how to solve the problems of home affordability. Property Council of Australia president David Harrison said there was a perception higher density was driven by “greedy developers” but “more and more, both sides of politics are understanding that we are in tune with voters”.
Mr Harrison, who is also chief executive of property investment group Charter Hall, said the “bloody simple” thing governments could do to improve housing affordability was to boost supply by rezoning more land for residential development: “Governments also need to get fair dinkum about where our people want to live. They’re not all wanting to live in the outer suburbs ... so we are going to need more medium density,” he said.
Mr Harrison told the Herald that the younger “device generation” wanted medium density, inner-city living, as did most migrants who would soon start arriving in Australia again now that borders have reopened.
Interest rates – latest
Inflation is a global problem. The central banks of most of the world’s economies have responded to inflationary surges by raising their prime interest rates. The US Federal Reserve has announced that it will raise interest rates by 25 basis points, with fixed mortgaged costs in the US now exceeding four per cent. The Bank of England, anticipating inflation of ten per cent this year, has raised rates to 0.75 per cent. These rates seem miniscule when compared to Turkey’s interest rate of 14 per cent and Brazil’s 10.75 per cent.
Crikey’s columnist Adam Schwab writes that our own Reserve Bank of Australia (RBA) hasn’t yet responded to the inflationary forces within Australia, keeping interest rates at an all-time low of 0.10 per cent at its April meeting: “This is despite near record-low unemployment levels and the inflation genie being well out the bottle, given existing demand-side pressures coupled with supply shortages caused by Russia’s invasion of Ukraine.”
After eleven years without an interest rate rise, an increase in Australia’s prime rate is certainly on the cards. In his statement after the bank’s April meeting, RBA governor Philip Lowe said the bank would now focus on new data on inflation and labour costs that would provide “important additional evidence” to the board over the coming months.
“Higher prices for petrol and other commodities will result in a further lift in inflation over coming quarters, with an updated set of forecasts to be published in May,” Dr Lowe said.
Any major moves by the RBA aren’t likely to be made just before the upcoming May 21 federal election, so it looks as if June will be the month when around one million mortgage holders who’ve never experienced a rate rise will start looking for some extra funds as they deal with higher repayments. Fixed-rate mortgage interest rates have already been rising since November and both NAB and ANZ raised their fixed rates by 0.4 percentage points at the end of March.
Brodie Haupt, co-founder and chief executive of digital lending and payments provider WLTH, predicts that the first rate increase will see the cash rate go up from 0.10 per cent to 0.25 per cent and then to a maximum of 1.25 per cent by mid-2023: “We’re seeing wages rising in construction and the tech sector because of shortages of skills, and then those will spread slowly to the rest of the economy,” he told Domain’s Sue Williams.
Westpac’s chief economist Bill Evans has his own schedule for five rate rises before the end of 2022: "Now we expect a much shorter tightening cycle with consecutive rate hikes in June (15 basis points); July (25bps); and August (25bps). Further hikes are now expected in October (25bps) and November (25bps) reaching 1.25 per cent by year's end."
In October 2009, when the RBA raised the cash rate from 3 to 3.25 per cent, the average owner-occupier mortgage in Sydney wase $359,000 in Sydney. In February this year the average home loan for all borrowers in NSW is $804,675.
There’s no agreement among economists in Australia’s major banking institutions about just how high the cash rate will go before it tops out. The Commonwealth Bank and UBS think the cash rate will stop rising when it gets to around 1.25 or 1.5 per cent; ANZ's economists, see the cash rate going to 2 per cent by the end of 2023, possibly above 3 per cent sometime thereafter; and Westpac expects the cash rate to peak around 2 per cent before the end of 2023.
Australia’s financial markets are currently pricing in a cash rate of 1.75 per cent by the end of this year, and a rate of 3 per cent by August next year. A rise in the RBA’s prime rate of 1.75 per cent would increase the repayments on a current $800,000 mortgage by almost $1400 a month, or $16,800 a year.
While a year ago you could get a three-year fixed rate loan at about 2 per cent, now it’s more like 3.7 per cent. Perhaps not surprisingly, the total borrowed by owner-occupiers for home loans eased in February to $32.3 billion, down from January’s record high of $33.5 billion, according to ABS figures.
In the RBA’s April statement, RBA governor Philip Lowe issued a note of caution for borrowers: "With interest rates at historically low levels, it is important that lending standards are maintained and that borrowers have adequate buffers." The first experience of a rate rise for millions of Australians is most likely on its way.
Sources:
‘The difference a year makes: Last year’s property market versus this year’s market,’ Ellen Lutton, Domain, 12 April 2022
‘Rate rise could wipe 15 per cent from home prices: RBA,’ Shane Wright, Sydney Morning Herald, 10 April 2022
‘Foreign investment in Australian homes falls to 15-year low,’ Lucy Macken, Sydney Morning Herald, 8 April 2022
‘When will interest rates rise and how high will they go? Westpac the latest bank to tip June lift-off,’ Michael Janda, ABC News online, 8 April 2022
‘Reserve bank rate hike will hit recent home buyers, hospitality industry,’ Rachel Clun, Sydney Morning Herald, 6 April 2022
‘Patient wait is over: RBA prepares for a June rate rise,’ Shane Wright and Rachel Clun, Sydney Morning Herald, 5 April 2022
‘April interest rate announcement: RBA holds rates as experts predict post election hike,’ Sue Williams, Domain, 5 April 2022
‘With inflation back, the rest of the world is hiking up interest rates. Why not Australia?,’ Adam Schwab, Crikey, 4 April 2022
‘Why are property prices falling sooner than expected?,’ Tawar Razaghi, Domain, 4 April 2022
‘Sydney entry-level house prices soar, widening the deposit gap,’ Tawar Razaghi, Domain, 3 April 2022
‘Rising mortgage interest rates, cost of living pressure will flatten home prices: economists,’ Rachel Clun, Sydney Morning Herald, 2 April 2022
‘Perfect storm’ for apartments as vacancies plummet and borders reopen, Michael Koziol, Sydney Morning Herald, 1 April 2022
‘Soft auction clearance rates offer homebuyer relief,’ Sarah Webb, Domain, 29 March 2022
‘First home buyers to receive help in federal budget, more money for roads and car parks to be announced,’ Stephanie Borys, ABC News online, 28 March 2022
‘One in 10 Sydney homes for sale in February were discounts,’ Tawar Razaghi, Domain, 21 March 2022
‘Property market continues to cool as clearance rates soften,’ Sarah Webb, Sydney Morning Herald, 21 March 2022
‘Massive sign that property market is finally slowing down,’ Alex Turner-Cohen, News.com.au, 22 March 2022
‘Sydney first-home buyers need more than eight years to save a house deposit,’ Kate Burke and Elizabeth Redman, Domain, 23 March 2022
‘Act urgently now’: Why sky-high house prices are a problem for everyone,’ Elizabeth Redman, Domain, 26 March 2022
‘Here's how Australia's housing market was reshaped by the pandemic,’ Gareth Hutchens, ABC News online, 25 March 2022
‘Sydney, Melbourne among top five least affordable cities to buy a home,’ Melissa Heagney, Domain, 17 March 2022
‘Interest rate rise threatens Australia’s booming housing market,’ Nick Fildes, Australian Financial Review, 25 March 2022
‘Property boom over in Sydney and Melbourne — but prices still rising elsewhere,’ Emilia Terzon and Samuel Yang, ABC News online, 1 April 2022
‘House values unlikely to double in the next 10 years,’ Nila Sweeny, Australian Financial Review, 17 March 2022
‘Still plenty of incentives to become a first-home buyer,’ John Collett, Sydney Morning Herald, 15 March 2022
‘Australia records strongest yearly growth in home prices,’ Rachel Clun, Sydney Morning Herald, 15 March 2022
‘Property prices heading for ‘break even’ point as clearance rates fall,’ Tawar Razaghi, Domain, 15 March 2022
HURRY UP AND SLOW DOWN
Tue, 22 Mar 2022The boom loses some momentum, but with gains still in sight
The house price boom of 2021 has been unlike almost anything the Sydney market has ever seen. We say ‘almost’ because there have been two other periods when house prices in Australia have risen more than they did last year and both were caused by factors that were one-offs and not likely to ever be repeated.
Economist Nigel Stapledon concluded that our first – and biggest, house price boom came in 1950 when wartime price controls were removed and prices shot up by 111 per cent in that year. The second biggest boom was between June 1985 and June 1989 when median house prices in Sydney grew by 127 per cent after a number of regulations in the finance industry were removed and it became much easier for people to access loans.
Both these previous booms proved unsustainable and price growth eventually dropped back to a more normal rate. In fact, the boom of the 1980s was followed by a recession, the one PM Paul Keating said was “the recession we had to have”.
Sydney was the undoubted winner of the property boom of 2021 with the average Sydney home hitting a record price of $1.6 million, up from a median of $1.2 million in 2020. Greater Sydney house prices rose by 33.1 per cent, equivalent to almost $400,000 of the median home’s value.
(Let’s not forget that this was entirely the opposite of forecasts from most economists who, considering the possible effects of the pandemic on Australia’s economy, in March 2020 were predicting a deep recession and housing price falls of up to twenty per cent.)
By the last quarter of 2021, 26 per cent of Sydney suburbs had a typical house price of more than $2 million, concentrated mostly on the north shore, northern beaches, the city, eastern suburbs and inner west.
And there are now many suburbs with median prices greater than $3 million, including Birchgrove in the inner west, North Balgowlah and Avalon Beach on the northern beaches and Camerray and Chatswood on the north shore. But it doesn’t even stop there. Clovelly, North Bondi and Woollahra are now members of the $4 million median price club.
Sydney has even created Australia’s first ‘Billion dollar suburbs’ in which the value of property sold during 2021 was more than a billion dollars. Mosman in the lower north shore topped the charts with $1.82 billion in property sales, with Castle Hill in second place, scoring $1.06 billion worth of sales for the year.
Signs of slowing
But there are signs that the momentum of the Sydney market is slowing. Sydney home values slipped by a miniscule 0.1 per cent in February, but that was the first monthly fall in 17 months so it did garner a bit of media attention.
CBA’s head of Australian economics, Gareth Aird, thinks it indicates the market has neared its peak: “The context of what’s happened last year with this phenomenon of surging prices meant prices had to top out,” he said. “With talk about rates rising, and the Reserve Bank raising interest rates, that’s going to affect what people are willing to pay for a home.”
It’s unfortunate that Australia’s property price boom has pushed around 70 per cent of homes out of reach of first home buyers on middle incomes. It’s estimated that almost two-thirds of first home buyers in Sydney can afford only one of any ten homes on offer.
Saving enough for a deposit is challenging. A report by the National Housing Finance and Investment Corp (NHFIC) on the state of the nation’s housing sector said the surge in prices meant the average Australian first home buyer needs to save for an extra year to accumulate a 20 per cent deposit of about $130,000.
Across Australia, first-time buyers now need nine years to save a deposit, compared to about four years in the early 1990s. With a median price of $1.6 million, first-home buyers in Sydney need a daunting 16.6 years to save a 20 per cent deposit, then need to spend 60.4 per cent of their household income to repay their mortgage.
The Westpac-Melbourne Institute Index of Consumer Sentiment asks whether it’s a good time to buy a dwelling, offering an insight into owner-occupiers’ thoughts on affordability. Westpac senior economist Matthew Hassan says it shows many people now doubt this is a good time to buy property.
“It turned down pretty sharply over the last year, albeit from quite a high starting point,” Mr Hassan said. “It’s pointing to a downturn over the next six months or so,” adding that investor demand is showing more strength than owner-occupiers and the demand for investor loans is up more sharply than for owner-occupier loans.
“Over the longer run the more usual cycle for dwelling prices is to have a steep rise followed by a long period of flat, perhaps slightly declining prices,” Mr Hassan said. “It’s more usual to reach a new plateau and have a period of relative stability. It’s not a pendulum that we swing automatically into a correction phase.”
Lately, Sydney has seen a rush of homeowners putting their properties on the market with new listings up around seven per cent on this time last year. This is good news for intending home buyers, and Domain’s figures show buyer demand up nine per cent with auction clearance rates in the high 60s or 70s most weeks.
Ryan Felsman, senior CommSec economist, says that conditions are turning in buyers’ favour as the market returns to more normal levels: “More available homes for sale means there is less urgency for buyers, giving them more power at the negotiating table for the [first] time in at least 18 months,” Mr Felsman said.
“Home prices are slowing after soaring during the pandemic, with the run-up in prices crimping affordability. Also, rising fixed mortgage rates and expectations that variable mortgages will lift have also weighed on prices.”
Sydney prices, however, can still make headlines. A one-bedroom apartment in Birchgrove that was listed for $800,000 sold for $1.532 million in late February. It last sold for $600,000 in 2014. On the same weekend an inner-west home in Strathfield sold for $1.25 million above its reserve price when 17 registered bidders drove the price upwards from $2.3 million to an eye-watering $3.55 million.
Leading greenfield housing market analyst Colin Keane told the Australian Financial Review that moderation of demand will be the “saving grace” for Sydney’s housing sector after land sales surged 33 per cent last year thanks to HomeBuilder and other stimulus measures.
He notes that in Sydney, where future supply is a big issue after the number of active housing estates halved to 75 in 2021 and average project sizes fell to just 75 lots, median lot prices climbed 14 per cent to $544,000 last year. This was despite 9200 lots sold over the year, 17 per cent higher than the seven-year average.
“Sydney has a huge volume of unmet demand [for land]. There’s eight months of demand still on the table,” Mr Keane said.
Now that we’re reopening our borders and overseas buyers will once more have access to Sydney’s property market, what suburbs are the most searched online by foreign buyers? The answer to this question can be found in research done by Domain, and it’s worth noting that blue-chip suburbs near schools, the city or surf were the most sought-after locations.
The city of Sydney topped the list of overseas searches, while popular suburbs included Mosman, Middle Harbour and Chatswood, based on Domain listing data from January 2021 to February 2022. A number of eastern suburbs also made the top 10 most sought-after locations by foreign buyers, including Bellevue Hill, Paddington and Darlinghurst.
Banks forecast market outcomes
The Big Four banks continue to predict rising housing prices in Australia through 2022 with a decrease to come in 2023. The details of their forecasts vary but taken together they indicate a price rise of something from two to eight per cent this year, followed by a fall of around six to ten per cent next year. Westpac foresees the lowest increase in 2022 of just two per cent, with a fall in 2023 of seven per cent.
The banks’ predictions for Sydney aren’t quite as uniform, nor as positive when it comes to rises and falls. ANZ sees a rise of five per cent this year, followed by a fall of 11.4 per cent next year. NAB expects a 1.2 per cent rise in 2022 and a six per cent fall in 2023.
Felicity Emmett, senior economist at ANZ, says we shouldn’t be too concerned about her bank’s expectations of a national fall in property prices if it happens in 2023: “From late 2020 to the end of 2022, people will have seen an average gain in house prices around 30 per cent. So when you think about our forecast of a six per cent decline in 2023, it’s really just a modest correction in that context. I think people will still feel very wealthy, given the earlier rise in prices.”
Another ANZ economist, Richard Yetsenga told the Sydney Morning Herald that property values look “poised for a soft landing, even as the RBA starts hiking rates”.
He said the ANZ bank expects the RBA to increase rates in the third quarter of 2022 but there are ‘buffers’ in place to cushion the impacts of the increases: “High household savings buffers, low unemployment and the return of immigration will all help, as will stronger wages growth,” he said.
Another expert in the Sydney market who agrees with this conclusion is Louis Christopher, founder of SQM Research, who also says property prices in Sydney appear heading for a “soft landing.”
He does not see a crash in prices and expects prices in our two biggest cities to be fairly flat for the remainder of the year: “This would have to be one of the softest landings I’ve seen in the housing market”, Mr Christopher says.
Units answer demand
During the phenomenal growth in property prices over the past 18 months, units have finished a distant second to houses. However, this disparity is likely to change before midyear after our international borders reopen and overseas buyers can once again visit Australia for the purpose of acquiring properties.
More units than houses were sold at property auctions in almost all major cities in February, and clearance rates were higher for units than houses at recent Sydney auctions. Units are picking up in popularity due to runaway house price growth and the return of investors as the rental market tightens and rents rise in several parts of the greater Sydney area.
Homebuyers too have started to look at apartments, having accepted that they can’t afford a house when high prices and rising interest rates are such important considerations.
AMP Capital chief economist Shane Oliver said property prices could peak by mid-year, but the recent rapid price gains had already made it harder for lower income earners to buy, with the problem compounded by city dwellers moving to more affordable regional and outer markets where incomes were lower.
Dr Oliver added that record high house prices could force more people into the apartment market in months to come, which could then lead to unit price growth rising above median incomes in more suburbs.
In Sydney, where the gap between auction house prices and auction unit prices was $870,850, buyers have been driven towards the most affordable option.
“The housing market has risen so unbelievably the apartment market hasn’t caught up,” Damien Cooley, director and auctioneer of Cooley Auctions, said. “That’s why we’ll see apartments do better because, from an affordability point of view, people are looking for value and what they can afford.”
It was interesting to note that when property prices in the CBD and inner south dropped by an average of 1 per cent in February and 2.3 per cent over the past three months, houses in the region copped most of the decline falling by 2.4 per cent in February and by 3.8 per cent over the quarter.
The median unit price had a more modest monthly decline of 0.2 per cent and a quarterly drop of 1.5 per cent following 10 per cent growth over the year.
Domain’s chief of research and economics Nicola Powell said we are seeing a turning point in the Sydney property market: “Not only have we got higher levels of homes, so much more choice for buyers and better buying conditions, we are also seeing softening of clearance rates, particularly we’ve got a turning point in units outperforming houses.”
Cameron Porter, principal buyer’s agent at Porters House in Sydney, says that apartments are now a buyer’s market: “It’s always been a buyer’s market on sub-par properties or where there is a high supply of properties such as apartments. That’s when buyers have more power.”
RBA and interest rates
At its March meeting the board of the Reserve Bank of Australia (RBA) maintained the cash rate target at ten basis points and the interest rate on Exchange Settlement balances at zero per cent. In other words, for this month at least the Bank is content to leave monetary conditions as they are, noting that inflation had picked up more quickly than the RBA had expected but was still lower than in many other countries.
In the words of RBA governor Philip Lowe: “Financial conditions in Australia continue to be highly accommodative. Interest rates remain at a very low level, although some fixed rates have risen recently. The Australian dollar exchange rate is around its lows of the past year or so. Housing prices have risen strongly, although the rate of increase has eased in some cities. With interest rates at historically low levels, it is important that lending standards are maintained and that borrowers have adequate buffers.”
Regardless of this apparent satisfaction with how things are, others watching the housing market foresee that a rise in interest rates is imminent. Gareth Aird, the Commonwealth Bank’s head of Australian economics, said he expects the cash rate to be at 1 per cent by the end of the year, then rise to 1.25 per cent early next year. This would mean an average variable mortgage rate of around 4.5 per cent.
AMP chief economist Shane Oliver thinks the RBA will raise the cash rate in August, but also says this could occur as early as June given stronger inflation data, sound employment outcomes and early signs of growth in wages. He also sees the interest rate peaking between 1.5 per cent and 2.0 per cent within the next two years.
“This would add a similar amount to variable mortgage rates,” Dr Oliver said. “It will take household debt interest payments relative to income back to around 2018 levels.”
NAB chief executive Ross McEwan told the ABC’s Close of Business program that his impression was that the Reserve Bank is in no rush to put interest rates up: "Our view is [it will] probably [be] the latter half of this year that the Reserve Bank will start moving," he said. "I think it's probably going to be about 50 basis points up."
Mr McEwan said there was an inbuilt cap on interest rate rises: "You actually run up against customers who can't afford to pay the mortgages on these, so it starts to put a ceiling in place. We see this year probably a rise in house prices of about 5 or 6 per cent, and let's wait to see what happens in 2023."
CommSec chief economist Craig James expects the first rise from the RBA in more than a decade will occur in June: “Further increases are expected over the second half of 2022,” Mr James said. “While higher interest rates reduce pressure on interest margins for banks, Bendigo Bank noted fierce competition across most lending categories and the continued strong consumer preferences for fixed rate loans.”
The ABC’s Tom Lowrey says that the winner of the next federal election, expected to take place in May, will inherit the political dangers associated with interest rate increases because life will become more expensive for millions of their constituents.
“At the start of 2020, interest rates were already very low. The Reserve Bank had the cash rate target at 0.75 per cent. By late March 2020, as the pandemic was unfolding within Australia and across the globe, it had been slashed to 0.25 per cent, and by late 2020 it was at 0.1 per cent.
“A lot of people saved a lot of money, as their mortgage repayments shrunk. But historic lows can't last.”
Mr Lowrey says that financial markets are expecting up to five small interest rate hikes that will start in June and rise to 1.25 per cent by the end of the year. This will, he calculates, add $300 per month to the costs of servicing a $500K mortgage and nobody will appreciate the government under which such an increase occurs.
“Rising rates can also be a sign of a healthy economy. As Stephen Kennedy said, the economic recovery is an opportunity to ‘normalise’ interest rates. But it might be a hard message to sell to Australians digging deeper in their pocket for their mortgage repayments every fortnight,” he said.
Affordability gap grows
Figures from Domain show that house price growth in four out of five Sydney suburbs outperformed household incomes in 2021. The growth of unit prices in about 25 per cent of suburbs also exceeded household incomes. Domain’s chief of research and economics said this naturally made it very difficult for first-home buyers to maintain a foothold in the overheated market.
“This makes it tremendously hard for people to gain access to the market, for houses in particular, and shows what it can do to your financial position once you’re in,” Dr Powell said, adding that increased demand for homes and holiday properties in lifestyle locations from out-of-area buyers on higher wages, off the back of the rise of remote working and closed international borders, had contributed to the large gaps in some markets.
ANZ senior economist Felicity Emmett told Domain that the sharp acceleration in property prices, propelled by record low interest rates at a time of relatively low wages growth, made it very difficult for aspiring homeowners to save a deposit and contributed to society’s growing intergenerational wealth inequality.
“[The] two-thirds of Australian households who own their own home, they are getting the benefit of those much higher asset prices and a significant increase in wealth, whereas the third of households that don’t own their own home have been excluded from that increase,” Ms Emmett said.
Negative gearing out of favour?
Vacancy rates across Sydney have fallen to their lowest level since November 2017, according to Domain’s Tawar Razaghi: “Freshly opened international borders have heaped further pressure on an already strained rental market, where the vacancy rate fell to 1.7 per cent in February (down from 1.9 per cent in January), according to Domain’s latest Rental Vacancy Rate Report.
“Within Sydney, the tightest rental markets were dominated by far-flung areas due to a combination of factors, including city renters looking for more space and the shortage of rental properties as investors cash in on the property boom, according to experts.”
Changing economic conditions might make investors reconsider negatively gearing their rental properties, even if the federal government makes no changes to current taxation arrangements.
[Negative gearing is defined by the Australian Tax Office as making an investment that produces a loss, where the income or profit is less than the expenses after the interest on the loan to buy is included in the calculations.]
Negative gearing is popular because when a property is put out for rental, any losses are tax deductible and can also be offset against other income. It works well when the value of the property increases over time. However, a slowing rate of capital gains together with higher interest rates could lead to owners’ income decreasing and even facing losses if prices fall.
Robert Kiyosaki, who owns an amazing 8,000 properties worldwide, says he’s never negatively geared a purchase: “It just doesn’t make any sense to do so. Negative gearing only works as long as the price of property continues to go up and when it slumps, like we saw in the crash of 2008, it’s a terrible strategy.”
Sources:
‘Are Sydney’s work-from-home lifestyle suburbs losing their lustre?,’ Tawar Razaghi, Domain, 12 March 2022
‘Housing lot sales to plummet 43pc in 2022, but prices will rise,’ Larry Schlesinger, Australian Financial Review, 10 March 2022
‘More than a quarter of Sydney suburbs have a median house price of $2m,’ Kate Burke, Domain, 7 March 2022
‘The latest sign the housing boom is losing steam,’ Tawar Razaghi, Domain, 8 March 2022
‘How will Australia's property markets be impacted by the return of overseas arrivals?,’ Gareth Hutchens, ABC News online, 25 February 2022
‘The Sydney suburbs foreign buyers searched most during the pandemic,’ Tawar Razaghi and Melissa Heagney, Domain, 4 March 2022
‘CoreLogic report finds first sign of housing market taking a dive,’ Alex Turner-Cohen, News.com.au, 1 March 2022
‘The Sydney suburbs where property prices are falling the most,’ Kate McIntyre, The Daily Telegraph, 4 March 2022
‘Relief for home buyers: Price boom may be over,’ John Collett, Sydney Morning Herald, 26 February 2022
‘Chronic failure’: Sydney’s rental market approaching crisis level,’ Tawar Razaghi, Domain, 4 March 2022
‘There will be another shock’: RBA warns about big mortgages as rates rise,’ Shane Wright and Jennifer Duke, Sydney Morning Herald, 21 February 2022
‘Growing number of sales prior to auction a sign Sydney market is slowing,’ Melissa Heagney, Domain, 24 February 2022
‘What are the signs that a property market has peaked?,’ Elizabeth Redman, Domain, 3 March 2022
‘Interest rate rise time bomb waiting for whoever wins next federal election,’ Tom Lowrey, ABC News online, 22 February 2022
‘Outrage after one-bedroom Sydney apartment sells $700k higher than expected,’ Alex Turner-Cohen, News.com.au, 19 February 2022
‘Australian house prices predicted to decrease dramatically,’ Sarah Sharples, News.com.au, 23 February 2022
‘Median home prices in Sydney could drop below $1m by the end of next year, new modelling suggests,’ Tory Shepherd, The Guardian, 4 March 2022
‘Does your house make more money than you?,’ Kate Burke, Domain, 19 February 2022
‘Sydney home buyers face a record 16 years to save a deposit,’ Nila Sweeney, Australian Financial Review, 21 November 2021.
‘Interest rates are already rising but borrowers can cope, says NAB boss Ross McEwan,’ Rachel Pupazzoni and Michael Janda, ABC News online, 19 February 2022
Statement by Philip Lowe, Governor: Monetary Policy Decision, Number 2022-05, 1 March 2022
‘Interest rate rises expected in June with mortgage repayments to rise,’ Shane Wright and Jennifer Duke, Domain, 15 February 2022
‘What we can learn from previous house price booms in Australia,’ Charis Chang, News.com.au, 18 February 2022
‘Investor with 8000 homes calls for negative gearing to be axed,’ Sue Williams, Domain, 16 February 2022
‘Unit price growth tipped to outperform houses when Australian international border reopens,’ Kate McIntyre, The Daily Telegraph, 13 February 2022
Climb Every Mountain
Mon, 14 Feb 2022The Peak Is Near As Rate Rise Forecast
The values of Sydney properties have continued to rise in 2022, although not at the dizzying rates seen in 2021. The Agency chief executive Matt Lahood described the gains seen last year as a “once in a lifetime” event: “It had to come back at some stage, I think this will be the year of levelling off,” Mr Lahood said.
In fact, Sydney house prices have shot upwards more than 55 per cent in just the last three years, with Domain figures showing the typical house now costs around $570,000 more than it would have in early 2019. This incredible rate of growth is certainly impressive, but also unsustainable as the market’s slowing indicates.
One of the most important factors in the slowing market since October last year has been the four major banks as well as many of the second-tier financial institutions increasing their rates on fixed-interest loans.
Realestate.com.au executive manager economic research Cameron Kusher told News.com.au that market conditions had already led to a slowdown in buyer activity: “Prices are still rising but the rate of growth has slowed, and our forecast is, even without an interest rate hike, we will continue to see price growth slow in 2022,” Mr Kusher said.
“When interest rates go up that will contribute to a slowing of the rate of growth in prices in the Sydney and national housing market,” he said. This will especially impact first-home buyers who are already struggling with high prices, higher deposit requirements and increased monthly mortgage payments.
Yet, every month, Australians are borrowing over $32 billion to spend on housing, basically double the $16 billion per month we were borrowing in 2018. This is largely because investors are back in the market with a vengeance, borrowing far more money than ever before.
And, as Knight Frank chief economist Ben Burston told the Herald’s Jennifer Duke, institutional investors and commercial real estate buyers were unlikely to be deterred by rate rises: “It’s bringing forward something investors were expecting to happen [earlier than the RBA was saying] anyway,” he said.
“Well-located property offering a strong level of income returns is still very attractive. Real interest rates are not only very low but still negative and individuals, as well as investor groups, will be aware that just holding money offers [little returns] to the extent that there’s uncertainty around inflation.”
Alex Veljancevski, CEO of mortgage and home loan brokers Eventus Financial, says even if interest rates will still remain at historically low levels: “We’re still talking about low interest rates and lots of areas that offer investors opportunity,” he says.
“And for those investors who’ve already bought, they’re seeing so much growth in the price of their properties that many are using the equity created to invest further.”
Hopeful buyers can expect to have more choice this year as the number of listings increase. In fact, the number of new homes on the market at the end of 2021 was the highest since 2015, and Sydney recorded a 10.5 per cent increase in new listings in the four weeks to January 23.
Auction Action
Vendors aren’t wasting any time placing their properties in front of potential buyers at Australian auctions. CoreLogic figures show that listings were up 30 per cent year-on-year in the last week of January despite the Australia Day holiday period and the traditional slow restart to the property auction activity.
Ray White NSW chief auctioneer Alex Pattaro said auction volumes were noticeably up compared to previous years, with sellers deciding to take advantage of lower stock levels and less competition. There were early indications of strong buyer inquiry, with open for inspections drawing more people than they did in late 2021.
Domain’s Elizabeth Redman said hopeful buyers at auctions should once again be wary of the ‘wounded underbidder’ we mentioned last February – those who’ve missed out at earlier auctions and have returned to the market with bigger budgets and a serious intention to buy.
Wakelin Property Advisory director Jarrod McCabe has seen buyers returning to auctions after they’ve taken a break to recharge at the end of a long year: “It’s not uncommon to see people go away and look at other areas, or even [who] have been able to secure extra funds and come back ready to go,” he said.
“They’re not sure around whether or not all of the reports and discussion prior to Christmas about the market softening, whether that will continue in the new year or whether it was a bit of a flash in the pan and the market will recover pretty quickly.”
Buyers are once again looking to the suburbs after emerging from lockdowns, according to a National Australia Bank survey that shows the tree-and sea changers are losing their zeal for a place outside the metropolitan area.
The bank surveyed 370 property professionals including investors, real estate agents and developers.
Andy Kerr, the NAB’s executive of home ownership, said buyer sentiment had dramatically shifted as the pandemic entered a new phase, with dynamics relatively “more normalised”.
“We know that lockdowns have reshaped how we live, with many at home for longer periods; the trade-off between affordability and lifestyle has changed markedly throughout the pandemic, with choices around CBD proximity, additional space and price fluctuating over the last two years,” Mr Kerr said.
“What we are now seeing is little green shoots of people returning to inner-city suburbs, looking for the balance of lifestyle and value as cities like Melbourne and Sydney have opened up. This has been aided by more subdued price growth in these areas.”
A new source of housing for hopeful buyers is developing in the Hills District, where hundreds of new units will go onto the market after years of planning and construction around new Sydney Northwest metro stations.
“There is going to be an unlocking of sub-million [dollar] properties in the Hills District, which is highly sought after and seldom found,” said Stu Benson of Castle Hill-based Benson Auctions.
“It’s going to be a litmus test. We need a couple of weeks of results under our belt until we gauge what the 2022 market is going to look like.”
A Peek At The Peak
It seems like every month since the start of 2021 we’ve been asking whether the market has reached its peak, whether property prices will fall, or whether the rises of 2021 will continue into 2022 – and if they do, how high can they go?
Figures from CoreLogic outline just how fast and how strong the property market has been since the boilers were lit in 2021. It notes that the typical Australian homeowner has become $131,236 richer on paper over the past year.
Domain’s Quarterly House Price Report released January 27 shows that prices in every Sydney suburb recorded annual growth last year, going up by as much as $745,409. The housing boom was so strong that even the bottom 20 suburbs in the city posted growth in the 12 months to December 2021.
Although the biggest part of Sydney’s massive price increase occurred in the first part of 2021, the last quarter of the year wasn’t exactly quiet, Greater Sydney house prices went up by six per cent in the final quarter alone, to a median of $1,601,467.
CoreLogic’s Research director Tim Lawless is one of those trying to pick the peak, and he sees some key signs that the peak is near: “Yet as the rate of dwelling value appreciation slows, capital city and broad ‘rest of state’ markets are yet to peak, causing plenty of speculation about whether this will occur in 2022 and mark the start of a downturn,” he wrote.
Nerida Conisbee, Ray White’s chief economist, says even if the peak is yet to come in many markets, the period of rapid growth is most likely behind us: “What’s certain is it’s unlikely we will see price growth anywhere near what we saw in 2021. Price growth or declines, however, will be highly variable depending on where you are,” she explained.
“Even with the best information, it’s difficult to time a peak and trough. Having said that, buying at the peak generally leads to price growth over a longer time period – even if prices stabilise or decline immediately following the peak,” she said.
Domain’s chief of research and economics Dr Nicola Powell says the Sydney market has already signalled a slowdown, with the total number of homes for sale rising and prices at the top end of the market pulling back slightly. She notes that the eastern suburbs median was down 0.6 per cent over the last quarter to $3.6 million, while the northern beaches had the second lowest quarterly growth at 2.6 per cent.
Weaker growth across the two regions, which had been standout performers during the pandemic, showed conditions were easing, Dr Powell said.
AMP Capital’s chief economist Shane Oliver said an earlier-than-expected rate increase would bring forward the peak in property prices.
“I was thinking prices would have peaked nationally probably September, October and then start to decline into next year, whereas if we start getting rate hikes in August or earlier, that peak could come around the middle of the year, in prices, or a little bit earlier,” he said.
“For the last four months or so we could actually be looking at price declines… For next year I was forecasting a decline of 5 to 10 per cent, it just brings forward the timing of that decline.”
Commonwealth Bank senior economist Kristina Clifton said that since November some lenders had been hiking their fixed interest rates and new limits had been applied by the prudential regulator to reduce the size of the average new loan.
“Trends in new lending are a good leading indicator of dwelling prices. While November showed a bounce, new lending is below its recent peak,” she said. “We expect affordability constraints, slow population growth and higher lending rates will see a much softer housing market in 2022 compared to 2021.”
The latest forecast from the National Australia Bank (NAB) is unequivocal about the end of the boom. It says Sydney house prices will end this year “roughly flat” before dropping 11 per cent or more in 2023.
NAB chief economist Alan Oster sees Sydney house prices ending 2022 up about 1.9 per cent higher, then tumbling 11.4 per cent in 2023.
“In terms of forecasts, we have brought forward the timing of the correction we expect in house prices to late 2022 as affordability constraints begin to bite and rising mortgage rates place downward pressure on prices,” he said.
Interesting Forecasts
Westpac, one of our ‘big four’ banks, has made a detailed prediction of when and by how much the Reserve Bank of Australia (RBA) will raise its prime interest rate, starting this year with rises continuing into 2024. Bill Evans, the bank’s chief economist, acknowledges that he’d previously predicted the first hike in February 2023, but “developments since then have now prompted us to bring forward that tightening date to the [RBA’s] meeting on August 2, 2022”.
Westpac expects that meeting will raise the rate by 15 basis points, followed by a further hike of 25 basis points in October. While the RBA forecasts underlying inflation will reach 2.25 per cent by the end of 2022 and 2.5 per cent by the end of 2023, and wages growth will reach 2.5 per cent in 2022 and 3 per cent in 2023, Westpac sees a much faster lift in inflation and wages growth.
Westpac anticipates that underlying inflation will reach 2.6 per cent in March 2022 and 2.9 per cent in June 2022. It also believes that unemployment will fall to 3.8 per cent by the end of this year –the lowest rate of unemployment since 1974 and a callout to the RBA that the nation can afford an increase in interest rates.
Gareth Aird, head of Australian economics at CBA, another of our ‘big four’ banks, also expects the RBA to raise its rates in 2022: "An underlying inflation outcome in line with our forecast would be a big upside surprise compared to the RBA's central scenario for the inflation outlook," he noted.
He said it was the bank’s expectation that the RBA would end purchases under the bond purchase program, which it did at the February 1 board meeting: “It should also lay the groundwork for a rate hike in late 2022."
The ABC’s Michael Janda says there’s both good news and bad news in these rate rise speculations:
“The good news, if you have a mortgage, is that high debt levels in Australia, the US and most parts of the developed world mean this rate rise cycle is likely to be limited — Westpac expects it to top out here at 1.75 per cent.
“Meanwhile, the bad news? On RateCity's calculations, a household with a $500,000 mortgage will need to find more than a $100 a week in their budget by March 2024 to meet those extra repayments, and that's assuming commercial banks don't raise rates by more than the RBA,” he said.
But many borrowers have bigger mortgages, and by the end of October this year those with a $750,000 mortgage would see their repayments increase by $154, and those with a $1 million mortgage would see an increase of $204 per month. And By March 2024, the repayments on the $500,000 mortgage would be $427 per month higher than today, $641 higher for the $750,000 mortgage, and $854 higher for the $1 million mortgage.
Other nations have already seen rate increases from their central banks. The Bank of England raised its rate in December, and then recorded 5.4 per cent inflation for that month, which it felt justified the move. The Bank of Korea has raised interest rates three times — to 1.25 per cent — while the Reserve Bank of New Zealand has already lifted its official interest rate twice, to 0.75 per cent.
John Kehoe, economics editor at the Financial Review, says that the RBA will soon be forced to acknowledge that rates could rise this year: “Stronger and broader-than-anticipated inflation pressures across the board revealed in the 3.5 per cent headline consumer price index…is further evidence that the world has changed palpably since November.
“The RBA’s earlier forward guidance that interest rates would first rise in late 2023 or early 2024 no longer looks realistic,” he commented. “The RBA won’t be raising rates before the May election, but the second half of this year will be a fascinating time for monetary policy.”
While fixed-interest rates have been going up, banks have cut their variable rate on loans to both owner-occupiers and investors. This has led to an increase in banking customers choosing variable rate mortgages, although the reduction in variable rates may prove short-lived.
Units More Affordable
Sydney’s record median house price of $1,601,467 is now twice that of units at $802,255, according to Domain data. This price gap between houses and units has more than tripled in the past 30 years and is still accelerating.
A good example can be found in Sydney’s northern beaches where the median unit growth shot up 32.5 per cent during 2021, not far behind the gain of its housing counterpart at 36.9 per cent. But based on median prices in the area, there is still a price gap of $1.56 million.
Domain’s chief of research and economics Nicola Powell says there are a number of market conditions that should push unit prices up in 2022: “They’ve seen less growth than house prices, we’ve seen rising investment activity, we’ve got tight rental markets and the sheer inability for buyers to buy a house,” Dr Powell said.
“The dream of a first home has absolutely moved away from that quarter-acre block, the single detached house, it’s just not achievable when prices are exorbitant,” Dr Powell said.
“We’re likely to see unit prices grow. There is much more value and affordability in a unit.
Eleanor Creagh, Senior Economist at PropTrack agrees, saying although the latest PropTrack report showed houses remained the dominant property type searched for online, interest in units was the highest it’s been in two years at 31.4 per cent of searches.
“The premium of house prices over unit prices has reached record highs, with the pandemic driving one of the biggest shifts we’ve ever seen when it comes to housing preferences. But with credit conditions tightening and a normalisation of migration placing renewed pressure on inner city rental markets, demand for units could rise as buyers look for affordable options,” Ms Creagh said.
Those unit owners wanting to upgrade to a free-standing house or even a more desirable unit are also feeling the pain, as outlined by Romeo Raad, a senior broker with Aussie Home Loans: “A lot of people who bought a unit, their borrowing capacity was a lot stronger than what it is now.
“A person on the same income could have borrowed $100,000 or $200,000 more than now due to tightening of restrictions,” Mr Raad said, adding that house prices have soared in the meantime.
Edwin Almeida of Ribbon Property Consultants says that the Omicron variant has caused a ‘seismic shift’ in the market, saying: “…it has really created two very different property markets and has completely flipped sentiment from where it was when the auction season ended last year,” Mr Almeida.
“On one hand the owners of freestanding homes are increasingly concerned about letting people into their homes for inspections and are holding off listing their properties. At the same time the effects of the pandemic continue to drive strong demand for houses.
“Apartments are another matter entirely. Listing volumes continue to remain strong and overall, this subset of the market may face a much more difficult time,” he told News.com’s Tarric Brooker.
BresicWhitney’s director Shannan Whitney is also not convinced units will rise significantly in either popularity or price: “Affordability on housing can be a factor but I also think the last cycle has been largely driven by owner-occupiers, and investors play a big role in the unit category,” Mr Whitney told Domain.
Unless the investment landscape was more attractive, a major driver of apartment market growth, units would not increase in price, he stated.
Remember November?
It was an entirely different property market before Omicron when, in November last year, the housing market was heated up by competition between investors and first-home buyers. Figures from the Australian Bureau of Statistics (ABS) show that investor lending hit a new high of $10.1 billion in that month while first-home buyer activity increased 1.9 per cent, reversing a downward trend that began in January 2021.
Katherine Keenan, ABS head of finance and wealth, said that the overall value of new loan commitments for housing increased 7.6 per cent nationally last November, while home buyer loan commitments in NSW rose 9.6 per cent.
“Investor lending has grown for the past 13 months and accounted for around one third of the value of new housing loan commitments in November 2021. The previous investor lending peak in April 2015 accounted for 46 per cent of new housing loan commitments.”
The leadup to November had already pointed to a good ending to the year. CoreLogic’s latest Pain and Gain Report tells us that vendors made paper gains of an incredible $270,000 when they sold their properties during the September quarter of 2021. Of all the homes that sold in this quarter, 92.4 per cent were sold for a paper gain, up from 91.9 per cent in the June quarter.
CoreLogic’s head of research Eliza Owen said the report covered about 99,000 sales in the quarter. “The increase in the rate of profit-making sales is a reflection of strong capital growth across Australian dwelling markets despite COVID-induced disruptions to transaction activity.
“The three months to September was the fifth consecutive quarter in which the rate of profit-making sales across Australia increased.”
Sources:
‘It’s crazy’: Sydney house prices surge 55 per cent in less than three years,’ Kate Burke, Domain, 12 February 2022
‘Sharpened buyer intent shows signs of significant housing market shift,’ Kirsten Craze, News.com.au, 9 February 2022
‘The ‘biggest challenge’ facing property investors this year,’ Sue Williams, The Sydney Morning Herald, 8 February 2022
‘The ‘biggest challenge’ facing property investors this year,’ Sue Williams, The Sydney Morning Herald, 8 February 2022
‘Second step on Sydney’s property ladder, from unit to house, is now a giant leap,’ Tawar Razaghi, Domain, 6 February 2022
‘House prices to fall 11pc in Sydney, Melbourne in 2023: NAB,’ Nick Lenaghan, Australian Financial Review, 4 February 2022
‘Homebuyer desire for sea and tree change weakens, renewed focus on suburbs after lockdowns end,’ Rebecca Le May, Domain, 4 February 2022
‘Regulator will ‘sit tight’ on further property lending limits: Economists,’ Jennifer Duke, Sydney Morning Herald, 28 January 2022
‘House prices in every Sydney suburb have risen, one by more than 50 per cent.’ Tawar Razaghi, Domain, 29 January 2022
‘Rate rises may slow housing market but no affordability improvement in sight,’ Jennifer Duke, Sydney Morning Herald, 27 January 2022
‘Why fear of missing out in the property market should ease this year,’ Tawar Razaghi, Domain, 26 January 2022
‘Inflation to force RBA interest rate pivot,’ John Kehoe, Financial Review, 26 January 2022
‘Starting a house hunt? Beware the ‘wounded under-bidder’, Elizabeth Redman, Domain, 26 January 2022
‘Auction market off to early start as listings spike,’ Kate Burke, Domain, 25 January 2022
‘With house prices through the roof, is it time for Plan B?,’ Tawar Razaghi, Domain, 24 January 2022
‘The pitfalls of trying to pick when the property market has peaked,’ Elizabeth Redman, Domain, 4 February 2022
‘House price surge continuing in 2022, CoreLogic's January housing figures reveal,’ Michael Janda and Rachel Pupazzoni, ABC News online, 1 February 2022
‘Has the housing market peaked? How to read the rollercoaster Australian property boom in 2022,’ Kirsten Craze, realestate.com.au, 23 January 2022
‘Omicron effect’ sees Aussie house prices face seismic shift,’ Tarric Brooker, News.com.au, 23 January 2022
‘Westpac predicts six interest rate rises by March 2024,’ Frank Chung, News.com.au, 22 January 2022
‘Profit making resales continue to rise despite widespread lockdowns impacting transaction volumes,’ Eliza Owen, CoreLogic, 19 January 2022
‘How do you make a $270,000 profit? Sell your property during lockdown,’ Elizabeth Redman, Sydney Morning Herald, 18 January 2022
‘Property investors, first-home buyers jumped back into the market pre-Omicron,’ Jennifer Duke, Sydney Morning Herald, 14 January 2022
Rate rise in 2022: buyers warned to prepare for higher borrowing costs,’ Kate McIntyre, News.com.au, 14 January 2022
A LOT CAN HAPPEN IN A YEAR
Thu, 13 Jan 2022How could 2022 hope to equal the year we’ve just had?
This is that time of year when we look back at the year that was and start planning for the year ahead.
2021 was a bumper year for Sydney property when it comes to price growth, up an astonishing 25.8 per cent in just twelve months – the highest growth rate since 1989.
The year began well with buyers competing aggressively at auctions. Clearance rates in February and March hit their highest monthly level since 2015, with eight weeks in a row at 80 per cent plus.
This competition, driven by record-low interest rates and an improving economic and health outlook, generated rapid price rises that saw properties routinely outstrip advertised guides and sellers’ reserve prices.
After February and March, monthly auction clearance rates settled back into the 70s as more homes were offered at auction, but prices continued to climb with the city’s median auction price for houses reaching $1,766,000 in May.
Pandemic-inspired restrictions brought a sharp pull back in the number of homes being listed, leading to increased buyer competition and soaring prices. The median price for houses sold at auction topped the $2 million mark by October, and the clearance rate climbed back into the high 70s.
By the year’s end, bidder competition had eased, and more properties were being offered, while evidence of buyer fatigue could be seen. Sydney’s clearance rate fell back to the low 70s in November and the median house price dropped slightly to $1.95 million – but still up nearly 22 per cent year-on-year.
December saw Sydney’s home values increase by a miniscule 0.4 per cent over the month, while apartment values declined 0.2 per cent. This prompted Deloitte Access Economics partner Chris Richardson to say: “The heat is already out of the market. You might see prices increase a little [over 2022], but you won’t see them increase much.”
At the same time, CoreLogic’s figures also show that nationally, Australian housing values were 1.0 per cent higher in December, slowing from a 1.3 per cent rise in November. This continued a trend in the national monthly growth rate that has been evident since the index moved through a cyclical high of a 2.8 per cent growth rate in March 2021.
Throughout the year, 2021 was an especially good year at the top of the Sydney market. Domain’s Lucy Macken worked out that the top 20 property sales in Sydney this past year totalled a record $691.5 million and concluded there were more than 45 sales in the $20 million-plus range.
Brad Pillinger, owner of a Double Bay estate agency, said it had been a truly remarkable year: “This year’s figures are incomparable to any market previously,” he said.
“There’s been an absolute reset in prices across the top-end market, and the number of highly wealthy people now calling Sydney home is unparalleled.”
The year’s top sales result was in the Sydney CBD. It was the $60 million sale of developer John Boyd’s penthouse in the ANZ Tower to Ellie Malouf, daughter of multimillionaire Ian Malouf. The top price paid for a free-standing house was $45 million paid by financier Andrew Griffin for the historic ‘Rosemont’ mansion in Woollahra.
The trophy home boom wasn’t restricted to just the harbourside suburbs. There were nine sales for about $25 million that set records in suburbs that included Palm Beach, Abbotsford, Bronte and Tamarama.
A really new year
So, that was the year that was. But what lies ahead in this New Year of 2022? EY Oceania’s senior economist Jonathan McMenamin told Domain’s Tawar Razaghi that the end of 2021 brought with it a number of signs that the property market’s momentum would slow in 2022.
“What we’re looking for is a situation where the increasing rate of house prices closely match the things that first-home buyers have in their control, such as income growth, looking at getting it below that 10 per cent annualised growth.
“We are starting to see a tightening in the labour market and, I suppose, the lowest unemployment rates across all the states, and that should put upward pressure on wages growth,” Mr McMenamin said.
Ray White NSW chief auctioneer Alex Pattaro said 2021 had been the best year for auctions in his career, but that now “it’s a more balanced market … sellers are still going to get good prices, competition is still there but buyers won’t be stupid about [what they are willing to spend],” he said.
Buyer’s agent Michelle May told News.com’s Sarah Sharples that Fear of Missing Out (FOMO) will be banished in 2022 because people won’t be pressured to race into making hasty property-buying decisions.
“Further increase in supply will thin out the buyer pool. As vendors will look to capitalise on the huge amount of growth over the last 18 months, more listings will mean more choice for buyers and a relatively slower incline in further price rises,” she said.
“Buyers will be able to be much more discerning, and not jump into the wrong property too quickly without doing their due diligence.”
Most analysts agree that price rises will continue into this year, although there’s a mixed bag of forecasts for what happens after that in 2023. Let’s look at how Australia’s ‘Big Four’ banks see things developing:
The ANZ Bank sees a six per cent rise in 2022, followed by a four per cent fall in 2023;
The Commonwealth Bank expects a seven per cent rise in 2022, followed by a ten per cent drop in 2023;
The National Australia Bank anticipates a 4.9 per cent rise this year, followed by a ten per cent drop in 2023; and
Westpac sees an eight per cent rise in 2022, followed by a four per cent fall in 2023.
These are figures applicable to Australia as a whole, and Sydney property’s often proven to be a pretty independent statistical entity. However, the national trend is becoming clear as year-end statistics are distilled and Sydney’s now following that trend.
“If you’re expecting housing values to rise by a similar amount [in 2022] as they did this [past] year, I think you’re going to be disappointed,” Tim Lawless, CoreLogic research director, told the Australian Financial Review’s Nila Sweeny.
“I think the growth rate next year will be remarkably low – somewhere between 5 per cent and 7 per cent nationally, maybe even less than that because I think the market will slow down so sharply.”
AMP Capital’s Shane Oliver is firm on his forecast of a smallish five per cent price rise in 2022, to be followed by a weaker time in 2023.
“Australian home price gains are likely to slow, with prices falling later in the year as poor affordability, rising fixed rates, higher interest rate serviceability buffers, reduced home buyer incentives and rising listings impact,” Dr Oliver told Michael Pascoe.
Real Estate Buyer’s Agents Association president Rich Harvey said a correction in prices was unlikely, but there would more opportunities for buyers to get quality homes due to the listings increase.
“Peak price growth is now well behind us and the frenetic intensity that we saw last year should dissipate as the year progress,” he said.
Interest rate hikes to come
The frenzied upwards thrust of property prices has been largely driven by record low interest rates, and it’s generally the case that house prices will go down once interest rates begin to go up. The Reserve Bank has consistently said that it won’t raise the cash rate until inflation reaches its target range of 2 to 3 per cent, and it expects that will happen in 2024.
However, many financial analysts believe the rate hikes will begin in 2023 or possibly even earlier, and banks have already started increasing their fixed rates while they cut variable rates in efforts to attract new customers, especially those investors who can afford sizeable deposits.
Sally Tindall, director of research at financial comparison website RateCity, believes buyers should anticipate rate rises in 2022: "The cash rate is at an emergency setting level, it is only going to go up from this point unless there's a significant bump in the road.
"Banks are focused on gradually nudging up rates, and so borrowers need to be prepared to pay more for money that they take out," she says.
ANZ senior economist Felicity Emmett said higher mortgage rates would be the biggest drag on prices in the next 12 months.
“I think the prospect of higher mortgage rates is probably playing into some people’s thinking around the housing market,” she said.
“That’s going to take some steam out of the housing market, along with the macro prudential tightening from APRA. But I think the interest rate story is the strongest one at the moment.”
Gareth Aird, the Commonwealth Bank’s head of Australian economics, said he expects the cash rate to start rising at the end of 2022, then increase gradually to 1.25 per cent by the September quarter of 2023.
“There are a lot of households carrying a lot of debt,” he told Domain. “The RBA should get a fair bit of mileage out of the hikes.”
Mortgage Choice Blaxland, Penrith and Glenmore Park principal Rob Lees told Domain that taking out a home loan in 2022 would be a lot harder than it was in early 2021: “High levels of borrowing can be an issue there and that is quite different to the beginning of the year,”
“[The lending landscape] is changing quite rapidly and, for my team, we’ve been caught out a few times and we can’t make assumptions anymore. It’s probably reasonable, so people aren’t overextending themselves,” Mr Lees said.
“Banks are honouring the pre-approvals but once it expires that will have an impact, and it may very well be that their maximum borrowing will be less.”
The Commonwealth Bank recently sent a note to clients that said: “Interest rates become a headwind on property prices if they are rising. That is the place we believe we are moving towards over the next two years.
“We expect a cooling feedback loop to intensify whereby subduing buyer expectations coupled with general fatigue and a growing anticipation of RBA rate hikes sees prices peak in [July, August, September of] 2022.”
Grattan Institute economic policy program director Brendan Coates told the Herald’s Jennifer Duke that prices would fall slightly when rates increase: “That’ll unwind some of the gains they have made over the last 18 to 24 months,” he said.
“It is my experience that when forecasters start forecasting falls in 18 months’ time, pretty quickly they start to occur in six months’ time ... I suspect that is what we will see again today.”
However, SQM Research founder Louis Christopher thinks that concerns about a resurgent Covid could put a hold on interest rate rises: "The Reserve Bank of Australia would hold fire on any planned interest rate rises, and potentially the financial regulator APRA would also hold fire on any additional intervention to restrict credit in the housing market," he said.
First-home buyers lose
First-home buyers are likely to be the immediate casualties of any increases in interest rates. Figures from the Australian Bureau of Statistics show that the number of new loans taken out by first-home buyers has fallen by eleven per cent, although the amount borrowed has risen slightly because house prices are going up.
CoreLogic’s Eliza Owen cautions that a growing disparity between the values of houses and units – almost 38 per cent, is forcing first-home buyers into high-density living: "As affordability constraints start to weigh on demand, we could see a bit more of that demand pivoting into the unit sector in the year ahead," Ms Owen says.
Domain’s Sue Williams says people have re-evaluated what they want in their homes and a quest for more space has been an important factor in the price growth of houses over apartments.
“As first-home buyers flooded back into the market in 2020, they were suddenly washed back out again by the pricing tsunami, with investors diving in to take their place”, she writes.
“The record-low interest rates announced in 2020 continued to shape the property market this year.”
Domain’s chief of research and economics Dr. Nicola Powell said investors will continue to be a growing market segment.
“It remains a landlords’ market across the most major cities and into regional Australia,” she said. “Investors have had the benefit of rising rents and equity growth, with prices set to continue to rise, albeit at a slower pace than 2021, investors will continue to chase it.”
Stamp duty debate goes on
A report by consulting firm PwC titled ‘Why NSW’s proposed property tax reform is as safe as houses’ found that almost three in four NSW residents would not favour paying an annual land tax instead of stamp duty because they are worried a future government might increase the tax rate.
PwC surveyed more than 800 residents across NSW and found 73 per cent would be reluctant to pay land tax instead of stamp duty because they feared being locked into paying an annual tax that could increase over time.
PwC Australia tax partner Cherie Mulyono told the Australian Financial Review that fear of the unknown meant people were wary of tax reform, even when that proposed reform was an opt-in scheme: “Given the hesitancy that our survey has uncovered, and given the opt-in nature of the reforms, educating the electorate is key.
“For the reform to work, the government needs to clearly demonstrate those solutions where choosing the property tax would be to a buyer’s advantage. They must also give a firm commitment on tax rate caps. Ultimately, the government must create a compelling narrative,” she said.
But rate caps aren’t a solution to some of the problems they could create. A cap on annual land value increases means that a long-term owner would have a reduced incentive to sell their property which is contrary to one of the supposed benefits of the reform.
An owner might well hesitate to purchase a new property that is burdened with a property tax based on the new property’s market value if they can continue to enjoy the benefit of the reduced property tax that applies to their existing long-held property.
It’s ancient history now, but we should remember the recommendations made by the commission of audit conducted when the Coalition won government back in 2011.
The audit, by former NSW treasury secretary Michael Lambert, said stamp duty is the "most inefficient of NSW state taxes”. It recommended a ‘Stamp Duty Replacement Tax’ be phased in to replace all property transfer duties.
The proposed replacement tax would have been based on land values rather than market values of properties and would be payable annually instead of when properties change hands. The report said that change would deliver an annual welfare gain to the state of $2.3 billion.
That was a decade ago, but to show that governments never stop thinking about ways to potentially increase revenues, two years ago then-treasurer Dominic Perrottet resurrected the idea of replacing stamp duty with an annual land tax. He labelled it the most significant reform to the stamp duty system “in a generation” and said it would “deliver a fairer, more efficient tax structure”.
The proposed reform would impact on every property owner in NSW, and not always in a positive way. However, the political concerns raised by the prospect of an annual land tax are undoubtably the biggest roadblock to such a change and it’s not likely to see the light of day again, at least until after the next state election.
Sources:
‘Rise in property listings and lower demand to swing Sydney housing market in buyers’ favour in 2022,’ Aidan Devine, News.com.au, 8 January 2022
‘Storm clouds gathering’ for Sydney and Melbourne property markets,’ Jennifer Duke, Sydney Morning Herald, 4 January 2022
‘Housing values end the year 22.1% higher with the pace of gains continuing to soften as multi-speed conditions emerge,’ Tim Lawless, CoreLogic News, 5 January 2022
‘What will happen to house prices in 2022?,’ Sarah Sharples, News.com.au, 3 January 2022
‘Will interest rates rise in 2022?,’ Elizabeth Redman and Kate Burke, Domain, 6 January 2022
‘Inevitable’: Where house prices are heading in 2022,’ Kate Burke and Elizabeth Redman, Domain, January 3 2022
‘NSW’s proposed property tax is even worse than stamp duty,’ Matthew Cridland, Financial Review, 5 January 2022
‘Glimmer of hope for first-home buyers in 2022,’ Tawar Razaghi, Domain, 4 January 2022
‘End of the Sydney and Melbourne property boom? Experts tip slow growth in 2022,’ Jennifer Duke, Sydney Morning Herald, 2 January 2022
‘Australian house prices: Bank economists predict small rise in house prices before dramatic fall in 2023,’ News Corp Network, 30 December 2021
‘Gavel-lanche: The year Sydney’s auction market went crazy,’ Kate Burke, Domain, 21 December 2021
‘Michael Pascoe: For whom the housing market bell tolls,’ Pascoe housing, The New Daily, 18 December 2021
‘NAB targets 1-hour loan approvals in big four mortgage processing war,’ Charlotte Grieve, Sydney Morning Herald, 18 December 2021
‘Nearly three in four NSW residents wary of scrapping stamp duty,’ Michael Read, Australian Financial Review, 30 December 2021
‘Total reset’: Top 20 Sydney house sales for 2021 tally almost $700m,’ Lucy Macken, Domain, 19 December 2021
‘What the housing market could look like in 2022,’ Nila Sweeny, Australian Financial Review, 31 December 2021
‘Why this year’s Sydney property market is one for the record books,’ Sue Williams, Domain, 29 December 2021
‘Why won’t governments fix housing affordability?,’ By Kate Burke, Domain, 23 December 2021
‘Will the housing boom be over in 2022? We ask the experts,’ The Business, Rhiana Whitson, ABC News online, 31 December 2021
Sydney Market Ends Year On A High
Mon, 20 Dec 2021The closing months of 2021 have seen the anticipated slowing of the Sydney housing market after prices raced upwards to record highs earlier this year. One in four Australian houses is now worth more than $1 million, and CoreLogic figures show that 52 per cent of homes in greater Sydney are worth seven figures, while about 16 per cent are now worth $2 million or more.
Want some more eye-watering statistics? Australian Bureau of Statistics figures show that the value of the nation’s residential properties rose 21.7 per cent over the past twelve months to a total of $9.3 trillion. It increased by $487 billion in the September quarter alone. The NSW property market accounted for 40 per cent of Australia’s national rise, with values in the state soaring by $800 billion in the past year to a total of $3.7 trillion.
These amazing numbers reflect a decade-long trend. A Ray White analysis of Core Logic data concluded that Sydney house prices have more than doubled in the past ten years, rising 146.4 per cent in the 10 years to October 2021. Housing continues to be a great long-term investment.
This also means Sydney property prices have reached new levels of unaffordability, locking many buyers out of the market at a time when various stimulus payments from state and federal governments have either been whittled back or expired completely.
On the positive side, new sellers have emerged after previously undreamed-of profits were dangled in front of their eyes, and there’s a growing supply of housing stock on offer. Investors are active and banks are adjusting their lending policies so there’s still finance obtainable at favourable interest rates.
Figures from CoreLogic show that Capital city houses are now 37.9 per cent more expensive than capital city units, which is the largest difference on record. In Sydney, where the gap between house and unit values is the widest, a house costs $523,000 more on average than a unit – the biggest dollar difference yet seen.
“With such a large value gap between the broad housing types, it’s no wonder we are seeing demand gradually transition towards higher density housing options simply because they are substantially more affordable than buying a house,” said CoreLogic’s research director Tim Lawless.
We’ll look at all these issues in more detail elsewhere in this article, but for now it must be stressed that there are no indications that prices will reverse their upwards trajectory. We’re only seeing a slowdown, not a change of direction.
An indication of this can be seen in the national house price rise of 1.49 per cent in October, compared to 2.8 per cent in March earlier this year. This slowed to a rise of 1.3 per cent in November, which was the slowest rate of rise since January, but still following an upwards trend.
However, there is a feeling that buyers’ FOMO (Fear of Missing Out) is starting to ease. Spring is our traditional property selling season and this year, thanks to an increase in listings towards the season’s end, there’s been more stock to provide choice for buyers, although bargains are still hard to find.
Felicity Emmett and Adelaide Timbrell from the ANZ Bank's economics team are forecasting that this year's nationwide price gains of 20 per cent-plus will slow to 6 per cent next year: "Affordability constraints are biting, new listings have lifted strongly, and macroprudential tightening and higher mortgage rates are set to constrain lending over the coming year," they wrote.
"New lending finance to owner-occupiers has peaked: first home buyer finance has been trending down since the top in January, finance to other owner-occupiers has fallen 10 per cent over the past two months," they noted.
Buyers’ agent Henny Stier from OH Property says she’s seeing some shifts in the market: “People’s salaries haven’t gone up 25 per cent or 30 per cent in a year. The market has, but people’s salaries haven’t,” she said.
Another buyers’ agent, Michelle May, said she’s still seeing big results for homes in the market’s upper levels: “The craziness has been dampened down somewhat because there is more stock,” she noted.
“Obviously, the buyer pool gets a little bit shallower [before Christmas] which is great; instead of 17 registered bidders you have five. With five it’s still going to be a strong auction, but the craziness is not going to take hold as much.”
Real Estate Buyers Agents Association of Australia president Cate Bakos cautioned any hopeful buyers against waiting for a fall in prices: “I’ve watched people sitting on the sidelines for 18 months waiting for that fall,” she said, noting that a small dip when JobKeeper ended had quickly turned back into strong gains.
“If the market did move up, and you could have afforded to buy, you’d feel really silly.”
Immigration to restart
There’s one element of rising housing prices that’s been missing for the past couple of years but is likely to return soon, and that’s immigration. According to ABC News online, economists say about one extra home is needed for every three migrants. Once Covid-19 is sufficiently controlled, Australia’s annual migrant intake could reach as high as 250,000 people by the end of 2023.
AMP Capital chief economist Shane Oliver predicts house prices and rents will rise in 2023 as a result of rapidly rising migration, although much will depend on other variables such as interest rates and the possibility of further restrictions on borrowing.
If the scenario of 250,000 migrants by 2023 does eventuate – and given recent calls from LNP political leaders for a "Big Australia" fuelled by immigration, that flood of immigrants is possible — he says house prices would jump about five per cent by 2023 and rents would lift about seven per cent.
"If immigration were to come back rapidly, we would see significant upward pressure on rents and significant upward pressure on house prices," said Dr Oliver.
Another market analyst who foresees potential for price growth resulting from immigration is Louis Christopher, managing director of SQM Research. In his opinion, the return of international migration, coupled with relative affordability and supply compared to houses, would translate to more significant price growth of units and apartments in Sydney and Melbourne.
“While there will be negligible increases in underlying demand in Victoria and New South Wales, there will be a pick-up from an increase in net overseas migration, which typically goes to Sydney and Melbourne first,” Mr Christopher said.
More choice at auctions
The end-of-year auctions are driving the Sydney market to a very successful finish, as shown by the numbers from 13 December where 1320 properties were scheduled for auction – the busiest day since Domain began keeping records in 1995. 868 sales were reported for a clearance rate of 63 per cent.
The median sale price for houses over the month of October was $2.04 million while units showed a median sale price of $1.15 million. Data from Domain shows that Sydney’s median auction price for houses fell 3.6 per cent in November to $1.95 million, but this is still 21.9 per cent higher than a year ago.
A seasonal pre-Christmas slowdown is taking place, with more properties on offer easing competition. Data from property marketing firm Ray White shows that their Sydney auctions attracted an average of 6.5 bidders in November, and only 3.3 buyers made offers at that month’s auctions – the lowest number since November 2020, and down from a peak in July, when the city was in lockdown.
“There’s no question that the big glut of stock on the market has moderated the amount of competition we’re seeing at auctions,” Sydney-based independent auctioneer Clarence White said.
“More reserve prices are being adjusted in order to get properties sold at auction, competition is certainly a bit less robust than it has been.”
The monthly clearance rates have slipped from their highs of 80 per cent and now seem to be stabilised between the low-70s to high 60s as more homes go on the market, which is good news for buyers who have been starved for choice for most of 2021.
Auctioneer Damien Cooley, of Cooley Auctions, said the increase in homes on the market has given buyers more choice and reduced the level of competition – with their recent auctions drawing an average of 4.4 bidders, compared to 10 in lockdown.
“The buyer pool is still coping well … one thing that we’re not seeing as much of though is those run-away results, they’re happening, but not as much,” he said.
Nicola Powell, Domain’s chief of research and economics told Domain: “It’s probably the outcome that many buyers have been wanting for a long time.
“As long as we see listings track strongly, we could see the market tip towards buyers. It’s a good sign for buyers, particularly those who have missed out. It was ferocious at the beginning of the year. We’re not there yet but what we’re seeing is conditions are easing.”
Ray White NSW chief auctioneer Alex Pattaro told Domain’s Kate Burke that A-grade properties were still delivering standout auction results, but buyers had become cautious of overpaying, and vendors with inflated price expectations were seeing properties passed in.
“Buyers don’t have the FOMO anymore … because there are more properties to choose from. That’s taken away that edge, but the market is still performing very well,” he said.
Banks adapt their lending policies
Our ‘big four’ banks have figured out a way to counter effects of an earlier-than-expected interest rate rise. In fact, 25 of this country’s biggest lenders have been able to cut their basic variable home loan rate for owner-occupiers paying principal and interest, offering discounts to customers with substantial deposits of 30 per cent or more as a counteroffer against riskier home loan lending.
Canstar finance expert Steve Mickenbecker said this indicates the banks are forecasting the RBA will hike up interest rates earlier than the previously indicated timeframe of 2024: "ANZ's cut in variable home loan interest rates sends a very clear message that the bank is expecting the Reserve Bank to cut the Cash Rate late next year or early in 2023," Mr Mickenbecker told 9News.
"The big banks are still offering short-term fixed rates below their variable rates, but borrowers can expect to see them continue to rise. The fixed rate bargains are not going to get any sharper than they are now,” he said.
"The banks are chasing new business hard while the market is strong but are insuring their portfolio against a possible fall of house prices from their now lofty heights," Mr Mickenbecker commented.
‘New business’ means lending to the investors that are rushing back into the market as first-home buyers drop out. Figures from the Australian Bureau of Statistics showed that in October there was a fall in home loan demand overall, but property investor loan commitments rose 1.1 per cent.
The total value of new investor loans approved in October was 90 per cent higher than it was in 2020; the head of finance and wealth at the ABS, Katherine Keenan, told the ABC it was now close to record levels: "The value of new loan commitments for investor housing has grown for 12 consecutive months, reaching $9.7 billion in October 2021," she said. "This was the highest level since the all-time high in April 2015."
Director of research at RateCity, Sally Tindall, cites official figures showing that 1 million home loan applications were settled in the last year, which was up 30 per cent from the previous year, and says this is putting a strain on many banks’ processing systems.
“Home loan turnaround times can be critical when buying a property because the last thing buyers want is for their bank to drag its heels when there’s a deadline looming,” Tindall says.
"While proportionally first home buyers are being wedged out, over 140,000 owner-occupier first home buyer loans have been approved so far this year — that's over 4,000 more loans than in 2020, with two months of data still to come."
While some banks have earned criticism for their slowness in processing loan applications, the two banks getting the highest marks from investors for their mortgage processing in recent times have been Macquarie Group and the Commonwealth Bank. Both of these banks attribute their success to investments in technology and systems that have allowed them to produce faster turnaround times.
Interest rates tweaked
In early 2021 two-year fixed mortgage rates were below two per cent and five-year loans were under 2.25 per cent. Now, without any changes to the RBA’s prime rate, all major banks as well as many other Australian lenders have increased their fixed lending rates in recent weeks.
Canstar finance expert Steve Mickenbecker said fixed rates were not going down again: “The increase of the past few weeks means that the horse has bolted on the absolute sweet spot for fixed rates, but this week’s rate increases should nonetheless jolt some borrowers into action,” he told the Sydney Morning Herald.
“Inflation is up in Australia and rocketing up in the US, meaning that there can be only one direction for interest rates, and that is up.”
Reserve Bank governor Philip Lowe said in late November that he would hope to get official interest rates, now at 0.1 per cent, back to a “neutral rate” of at least 2.5 per cent, if not 3.5 per cent, adding that he still thought such a rise wouldn’t come until 2024.
“We’re trying to get interest rates up over time. If we’re successful, interest rates will go up. People borrowing today need to remember that” he said.
ANZ economists Emmett and Timbrell said in their forecast for the coming year that the double-digit gains in house prices over the past year won’t be repeated in 2022, and interest rates will be the key to what transpires in Sydney property. They reject the view held by many that the Reserve Bank of Australia may bump up the official cash rate next year as inflation rises faster than expected, which the central bank has also attempted to hose down.
“Affordability constraints are biting, new listings have lifted strongly, and macroprudential tightening and higher mortgage rates are set to constrain lending over the coming year,” they wrote.
“We see the RBA on hold until the first half of 2023, but fixed mortgage rates are already rising,” Ms Emmett and Ms Timbrell wrote.
Recent research from the Reserve Bank found that most households will be able to weather a rate hike cycle, according to researchers Gianni La Cava and Lydia Wang. They say it is entirely possible that a rate hike won’t be too painful a shock overall, but there will be some borrowers that will experience more stress than others.
They said those most at risk are in higher priced areas who’ve borrowed at the top of their range but failed to factor in significant interest rate rises into their home-owning budget. They also named first-time buyers in pricey property markets such as Sydney who are most likely to feel the pain of a rate hike.
Affordability concerns
Since September, figures from CoreLogic show that new sales listings Australia-wide have surged by 47 per cent from their September low point. In that same time, housing prices outpaced wages by a factor approximately 12 to 1.
This wage-price disparity isn’t new. The price of the average Sydney house has multiplied by a factor of 17 times over the past forty years while wages are now about five times what they were in 1981 when the median house price was $78,900 and average annual earnings were $15,800.
Sydney is now the nation’s most expensive property market, with a median house price of almost $1.5 million. It naturally follows that Australian Bureau of Statistics data for October 2021 shows the average mortgage size for a new home loan in NSW is also the highest in Australia at $770,868.
Saving for a deposit is increasingly painful, even for many two-income couples who want to acquire a home before starting a family. The 2021 ANZ CoreLogic Housing Affordability report found that the time it takes to save a 20 per cent deposit at the median property price has doubled since 2001.
In Sydney, anyone looking to buy a house at the median price of $1,499,126, based on Domain data, would need $299,825 for a 20 per cent deposit. That’s more than triple the average yearly wage of $91,743.60 for full-time workers, according to the latest Australian Bureau of Statistics figures.
No surprise, then that 60 per cent of first-home buyers in Sydney can afford less than 10 per cent of properties in this city. It’s not much better in regional NSW, where first-home buyers with earnings in the bottom half of incomes can only buy 20 per cent of properties.
Domain chief of economics and research Nicola Powell said that an examination of the difference in wages growth and house prices would be a “heart-stopping” moment for first-home buyers.
“It pushes saving for a deposit out of reach even further,” Dr Powell said.
Westpac is still predicting rises in house prices and in interest rates over the next two years.
The bank’s senior economist Matthew Hassan said house prices would again rise faster than wages. An eight per cent rise in house prices was predicted for 2022, while wage growth would be three per cent.
“It’s a difficult position to be in, particularly with the pressure being added to the markets in regional centres … It puts would-be buyers in an even trickier situation,” Mr Hassan said.
“As we head into next year, the housing market is going to be responding to very different factors to the wider economy, particularly the deteriorating affordability,” he noted. “Next year is when the economy catches up.”
Sources:
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‘Australian housing market set to peak in early 2022 before prices fall,’ James Robinson , Domain, 25 November 2021
‘Homeowners will need to dig deep to keep a roof over their head,’ Jennifer Duke, Domain, 22 November 2021
‘How much does a house deposit cost compared to the average wage?,’ Melissa Heagney, Domain, 22 November 2021
‘NAB upgrades 2022 housing price predictions, ANZ predicts fall in 2023,’ Rebecca Le May, News.com.au, 21 November 2021
‘Millionaire nation: One in four Australian homes now worth more than $1m,’ Jennifer Duke, Sydney Morning Herald, 20 November 2021
‘House prices set to rise faster than wages next year even as property market slows and incomes pick up,’ Melissa Heagney, Domain, 19 November 2021
‘Australian house prices 'rolling over' as rising interest rates, affordability bite, warns ANZ,’ Michael Janda, ABC News online, 19 November 2021
‘Housing is expensive now, imagine a market with more migrants,’ Nassim Khadem, ABC News Online, 17 November 2021
‘Homeowners on notice higher rates on cards as economy mends,’ Shane Wright and Jennifer Duke, Sydney Morning Herald, 17 November 2021
‘Cost-of-living election awaits as fixed mortgages start to climb,’ Shane Wright, Sydney Morning Herald, 13 November 2021
‘Property buyer FOMO eases as lockdowns end, more listings hit the market,’ Elizabeth Redman, Domain, 11 November 2021
‘A good sign for buyers’: Clearance rates drop as more homes hit the market,’ Tawar Razaghi, Domain, 10 November 2021
‘Don’t fall for rate-raising banks pretending they are doing it tough,’ Greg Jericho, The Guardian, 9 November 2021
‘ANZ cuts variable home loan rates as RBA interest rate hike looms ahead of 2024,’ Stuart Marsh, 9News, 9 November 2021
‘Buyers keen to purchase a home before Christmas keep Australian auction markets on the boil,’ Sarah Webb, Domain, 8 November 2021
‘House price growth three times faster than wages over four decades,’ Caitlin Fitzsimmons, Sydney Morning Herald, 7 November 2021
‘Three reasons house prices will flatten after a period of skyrocketing growth,’ Katie McLeod, News.com.au, 7 November 2021
Homeowners rejoice, borrowers push limits, and investors cash in
Tue, 16 Nov 2021Sydney property prices are in the news almost every day. The reasons for this intense coverage range from simply discussing how much housing in this city costs to the impacts of such high prices on affordability and the domestic economy. Earlier declarations of price ‘ceilings’ or of the end of the boom have regularly become outdated as the rises continue, month after month.
In Sydney the median house price rose by an astonishing $1200 a day in the June quarter, while house values increased by 1.6 per cent or around $24,000 in just the month of October. The median house price in Sydney is now around $1.5 million. That’s quite a bit of money, but it’s also a lot less than you’d have to pay to live anywhere close to the CBD or in any of the more desirable suburbs.
And, speaking of those desirable suburbs, Domain’s compiled a list of dozens of Sydney suburbs where house prices have gone up by more than $500,000 in the past twelve months, with beachside suburbs like Bronte and Palm Beach and what it calls “lifestyle locations” like Killara leading the rates of growth.
Even the CEO of ANZ Bank, Shayne Elliott, has expressed surprise at Sydney’s high property costs, saying: “I think it is a time to be a little bit prudent and a little bit cautious about lending, I mean look at Sydney, house prices up 30 per cent in a year. That says to me it’s a time for prudent and reasonable risk assessment at a time of such extraordinary price changes.”
Domain figures confirm that Sydney houses are up 30.4 per cent in the year to September, with units up 13.6 per cent in the same period. Graham Cooke, head of consumer research at Finder, said the current house price surge was being driven by both owner-occupiers and local investors.
“The opening of international borders, and the return of potential overseas investors, may well re-fuel the market even further,” he told News.com’s Sarah Sharples. He said the average homeowner in Sydney is due to make an incredible $342,306 in property value gains over 2021 and 2022: “Sydney homeowners stand to make an eye-watering 3.5 times the average household salary of $97,211 just on their property,” he explained.
For some time, the long-term trend has been for the gap between house and unit prices to widen, as Eliza Owen, CoreLogic’s head of research, explains: “Looking at the change in unit values as a portion of housing over time shows apartment owners in the current market would be able to put less towards a house than they could five years ago,” she says.
CoreLogic’s research director Tim Lawless explains that units are simply more affordable than a free-standing house: “As housing becomes less affordable, we expect to see more demand deflected towards the higher density sectors of the market, especially in Sydney where the gap between the median house and unit value is now close to $500,000,” Mr Lawless said.
Another reason for houses outpacing units is the rate and the speed with which houses appreciate. “There has been a shift by investors from units to free-standing houses,” says Doron Peleg, founder of RiskWise Property Research. “They are attracted to houses because of the potential for [greater] capital gains.”
Figures compiled by Domain also show that concerns about there being a shortage of stock available at the start of the spring period were largely unfounded with the number of listings at Sydney auctions up dramatically showing an increase of 31.8 per cent to mid-October, and that trend is continuing into November.
Domain’s Elizabeth Redman summed up the current situation in a Herald article: “The frenzied bidding seen in autumn is largely over, but don’t expect to get a bargain – property prices look set to edge even higher from here,” and she added “…with more buyers than sellers, expect prices to keep going up for now, just not at the same breakneck pace and not for every home.”
Westpac says the staggering rate of growth in the first quarter of this year would have been impossible to sustain, but the rises aren’t finished yet. Consumer sentiment surveys conducted by the bank show no drop in housing price expectations, and recent auction clearance rates are still running just below 80 per cent.
Correction coming?
Westpac's Chief Economist Bill Evans predicts that the property market will enter a ‘correction phase’ in 2023, but the market is still expected to post gains through all of next year: "We expect price growth to slow to 8 per cent in 2022, up from our previous forecast of 5 per cent), with most of that increase loaded into the first half of the year.”
NAB chief economist Alan Oster thinks the rate of growth has peaked but wouldn’t say the boom was over. He says prices growth will continue into early next year, before plateauing, driven by affordability constraints and rising fixed-term interest rates: “House price growth has slowed recently though it remains strong, activity has slowed with time on market increasing and new listings normalising, and approvals for both construction and lending finance pulling back.”
So, in the view of these experts, Sydney’s astronomically high property prices seem to have peaked, for now at least. But the rises will still go on. Global investment bank UBS has released its latest Real Estate Bubble Index, and that comes with a warning that “As long as financing costs trend toward zero, property prices, incomes, and rents can continue to decouple. But ever-higher prices and leverage imply ever-higher risks, a spiralling path that will likely prove a dead end in the long term.”
In other words, if interest rates rise again property prices will cease their seemingly unstoppable growth. But what happens then? Economist Jason Murphy thinks buyers will still be looking for Sydney property to acquire: “The risk of a correction in property prices is always real, but as UBS says, bubbles are funny things, you can only say they existed once they’ve popped, and spotting one getting bigger is a lot easier than picking the moment when they are going to pop.”
It sounds paradoxical, but even if Sydney property is overvalued, this doesn’t mean buyers will stop wanting to purchase properties. AMP Capital’s chief economist, Shane Oliver, says he thinks Sydney house prices are about 39 per cent above what he considers ‘fair value’ but all that’s likely to happen is a moderation of price growth up to and including 2022.
“The fact that housing is poorly affordable is a sign of overvaluation, but it hasn’t stopped housing in Sydney or elsewhere in Australia getting more expensive,” he said. “I wouldn’t be saying, just because it’s overvalued it’s about to fall.”
And in some ways, as ABC’s Ian Verrender points out, that’s a good thing: “Real estate is the single biggest asset for a huge portion of Australian households,” he said.
“When prices are rising, we feel wealthier and spend more. When they're in decline, the reverse psychology kicks in. People spend less, and construction slows, creating a huge handbrake on the economy. When real estate slumps, that's when problems really become acute.”
Rate rise?
The Reserve Bank of Australia (RBA) has until now steadfastly maintained it would retain the current record low prime rate of interest until 2024, but inflation, both locally and globally, is rearing its ugly head and rising faster than most economists had expected.
At its November meeting, the Reserve Bank’s Governor, Philip Lowe, indicated a rate rise in 2023 was “entirely plausible” after rejecting suggestions it could raise rates early in 2022: “I think that’s a complete overreaction to the recent inflation data. I still struggle with the scenario that rates have to rise next year,” he said. “The latest data and forecasts do not warrant an increase in the cash rate in 2022.”
The Guardian’s Greg Jericho says the banks might have some justification for increasing their fixed home loan rates, but they aren’t being forced into doing so: “Their funding costs remain at historic lows and there is zero justification for them to begin increasing variable mortgage rates before the Reserve Bank does.”
This doesn’t mean that our commercial banks are going to wait for a rise in the prime rate to hike their own interest rates. NAB, Westpac and the CBA have all raised their home loan interest rates after the RBA’s November meeting.
AMP Capital’s Shane Oliver says that mentions of earlier-than-expected rate rises signal “the beginning of the end” of the boom: “It is a beginning of the end, you can always debate what tips the beginning of the end … it’s often interest rate changes that signal the beginning of the end. It’s usually interest rate hikes that kill off the housing boom,” he told Domain.
Dr Oliver said inflation was just one of the indicators that influences a cash rate hike, but the RBA would prefer the unemployment rate of 4.6 per cent to be closer to 4 per cent, stronger wage growth, and a broader recovery in the economy as pandemic-induced lockdowns lift: “Today’s inflation numbers in Australia suggests we might be getting close to the conditions for a rate hike and it may come in a year’s time,” he said.
“But there’s still a fair way to go yet, and in the interim, the RBA would probably do other things to remove the extraordinary stimulus it has provided such as further tapering off its bond buying.”
The central banks of other countries are bringing their programs of quantitative easing to early conclusions and starting moves to bring their interest rates back to more normal settings. Rising prices for most categories of consumer goods are becoming obvious in all developed countries, and higher costs for businesses are also causing concerns for those who can remember the economic damages wrought by runaway inflation a couple of decades ago.
CommSec senior economist Ryan Felsman told the Sydney Morning Herald that the 4.1 per cent rise in the cost of imported consumer goods was being felt by purchasers of textiles, clothing and footwear, as well as food and drinks, household electrical items, toys and books.
“The lift in the prices of imported consumer and industrial-related goods could pressure profit margins for Aussie companies, with rising supplier costs potentially being passed on to consumers in the form of higher prices,” Mr Felsman said.
Housing construction is another area that’s feeling the pain of higher costs. CoreLogic reports that the latest Cordell Housing Index Price (CHIP) shows an annual growth rate of 3.9 per cent and the largest quarterly change since the third quarter of 2014, when residential construction costs increased 1.5 per cent.
“Widespread demand across the residential construction sector and a shortage of materials such as timber, PVC piping and fittings have contributed to the rise in costs with no sign of easing in the short-term”, it says in the CHIP analysis.
The Commonwealth Bank recently said it believes interest rates will rise next year due to an economy that is likely to expand by 4.4 per cent in 2022. The bank’s head of Australian economics, Gareth Aird, said this expansion was due to the faster than expected take-up of coronavirus vaccinations and the consequent earlier re-opening of state economies.
“We now expect the RBA to commence normalising the cash rate in November 2022, with a 15-basis point rise followed by a 25-basis point hike in December 2022. By the third quarter of 2024, the bank expects the cash rate to reach 1.25 per cent,” he said.
The Australian financial markets are a fairly accurate guide in matters relating to interest rates, and it’s interesting to see that in late October they were pricing in a 75 per cent chance of a rate hike in February 2022. But not everyone agreed on this.
BIS Oxford Economics’ Sarah Hunter told News.com’s James Hall that the current rate of inflation would provide little indication for a rate hike: “The transitory headwinds from higher commodity prices particularly petrol and global supply chain disruptions will continue, which will keep headline inflation at or even above 3 per cent in the near term.
“But as these factors are external, they are very unlikely to push the RBA into pulling forward the first cash rate rise, and their impact will fade over time as conditions normalise through increased supply and/or moderating demand as spending patterns shift away from goods,” she said.
Housing affordability
There’s no doubt that housing affordability across Sydney has fallen to its lowest level in at least a decade. The benefits of record low interest rates have been defeated by record high property prices and low wages growth.
Everybody’s Home, a campaign established in 2018 by a coalition of welfare bodies, says Australia is now the third least affordable housing market in the world where only 45 per cent of people aged under 35 own their own home and one in three houses are investment properties.
CoreLogic’s research director Tim Lawless says fundamentals such as income growth and supply are starting to catch up with the entire market: “Housing prices continue to outpace wages by a ratio of about 12 to one. This is one of the reasons why first home buyers are becoming a progressively smaller component of housing demand,” he said.
The average mortgage in NSW for an existing dwelling reached a record-high of $772,000 in September - an increase of nearly $140,000 over the past 12 months. Australian Bureau of Statistics data show a 5.6 per cent drop in loans to first home buyers in September. First home buyer mortgage loans have fallen by 27 per cent since peaking in January.
Unprecedented price growth and five years of weak income growth have massively driven up the cost of an average first home deposit. On average, according the ‘The Conversation’ on ABC-TV, it now takes a 24-35 year-old nine years of squirreling away a fifth of their income each year to save for a typical Sydney housing deposit, up from five to six years a decade ago.
Moody’s Investors Service calculated that the rise in Sydney’s median house price to its present $1.5 million, means a household with an annual income of $135,000 will need more than 45 per cent of that to service their mortgage. Not all that long ago, in February, they would have needed just 36 per cent of their income.
Moody’s analysts Pratik Joshi and Ilya Serov concluded housing affordability across the country has deteriorated over the past year, and Sydney buyers have been among the hardest hit: “Australian housing affordability, which deteriorated over the seven months to September 2021, will continue to worsen over the rest of the year and into early 2022 because of ongoing property price rises,” they said.
Moody’s noted that household incomes have been stagnant for the past year, although the economic recovery after pandemic restrictions ease should be positive for wages growth: “All up, we do not expect income growth to materially offset housing price gains over the rest of this year and into 2022.”
Domain chief of research and economics Nicola Powell says, although it’s still a sellers’ market, the peak rate of price growth has passed: “A big element of this is affordability, that is feeding into this pace of growth,” Dr Powell said. “First-home buyers are facing such headwinds in terms of getting into the market. For some buyers, the leap to upsizing has just become too great.”
Foreign buyers
Figures from CoreLogic show that across Australia dwelling values rose 20.3 per cent over the year which was the highest annual rise since June 1989. This came at a time when pandemic-created border closures severely restricted the activities of international buyers, suggesting that overseas purchasers aren’t the underlying cause of our inflated housing costs.
In fact, the latest survey conducted by the Foreign Investment Review Board shows that overseas buyers' purchasing activity has hit record lows, with residential real estate approvals for foreigners plummeting from 40,141 in 2015-16 to just 7,056 this year.
This doesn’t mean all overseas buyers have deserted Australia. According to a new report by Juawai IQI, Singaporean investors have acquired $19.3 billion in Australian real estate over the past two years. This puts them several billion dollars ahead of Chinese buyers, who accounted for just $13.2 billion of investment over the same period.
“Most big Chinese corporate investors have pulled back from Australia, while those from Singapore have doubled down on the lucky country,” said Juwai IQ’s executive chairman Georg Chmiel.
“Just like many Australian businesses consider Asia to be a natural market for their products, many Asians consider Australian real estate the natural destinations for their money,” he said.
Real estate agent Jeremy Tran, who specialises in selling Australian real estate to South-East Asian buyers, tells us that there are many advantages in dealing with overseas clients:
"The majority of my foreign clients are high-end and high-profile people, including leading business owners and sometimes serving government officials. Their finances are firm and solid, and they are willing to buy and make quick decisions.”
"Many overseas buyers deal in cash and cash buyers usually attract agents due to prompt exchanges and ease of settlements."
But at least for now, foreign buyers comprise a significantly smaller portion of residential housing demand than in previous years, according to CoreLogic’s Tim Lawless: "This group is now virtually immaterial as a contributor to demand for Australian housing," he says.
Stamp duty update
Now that the state’s former Treasurer is our new Premier, we could be forgiven for thinking Mr Perrottet’s enthusiasm for replacing stamp duty with a land tax would stimulate an immediate push for the introduction of this new source of revenue for NSW.
But apparently it isn’t so. Newly appointed Treasurer Matt Kean has told the budget estimates hearing that switching from stamp duty to a broad-based land tax “could be one option” but said that there was “a range of options” he would consider.
Both Perrottet and Kean say housing affordability is the government’s priority. But there are lingering questions about how effective removing stamp duty would be in the quest for lower property prices.
“There are other ways to improving housing affordability and this may be one lever which we could consider,” Mr Kean said, adding that axing stamp duty was “Premier Perrottet’s preferred method”.
Kean said it would be “very expensive in the early years” to replace stamp duty with a broad-based land tax and the Commonwealth would need to invest in the reform before it could be achieved.
He said it would be in the interest of the Commonwealth to support the NSW tax reforms because it would “grow the overall economy and that helps the federal budget by generating higher revenues”.
When he was asked about the Treasurer’s comments, Mr Perrottet said: “Housing affordability is one of the key issues in NSW, and our government will continue to look at reforms to the system which could make it easier for people, especially first home buyers, to get a foot on the property ladder.”
“The last 12 months we have seen the property prices here in Sydney increase by 25 per cent, we have seen the average stamp duty bill increase by $10,000. Stamp duty continues to grow and be an impediment to people getting into the property market,” Mr Perrottet said.
NSW Treasury secretary Michael Pratt later told the budget estimates hearing that his department had undertaken what he called “one of the longest consultations in its history” into stamp duty reform and received a “huge amount of extensive feedback.” The comments he has received will be incorporated into the government’s considerations.
No doubt the issue will continue to be discussed and debated at length in government circles, recognising that the introduction of a new and costly tax on every residential property in NSW would be a major reform of this state’s taxation system and a potential political nightmare for any government that tries to introduce it.
And so…
It’s always easy to make predictions about property prices. The hardest part is to ensure those predictions are accurate and will be fulfilled by what actually happens.
We can say that Sydney prices are now high and to even say ‘overvalued’ is probably justified in terms of affordability. But that doesn’t mean they’re going to fall. Concerns about the availability of housing stock seem to have been somewhat overblown with sufficient stock on the market to meet the demands of this year’s traditional spring selling season.
The incredible rate of recent property price rises will moderate as a result of action by APRA and the RBA, but the rises will continue throughout the final quarter of 2021 and calendar 2022.
The RBA itself will do its best to keep the prime rate where it is through 2022, but bank loan interest rates will rise by an amount that will make mortgage loans harder to service but not unobtainable. Affordability will continue to suffer and a growing number of first home buyers will find themselves literally priced out of the market.
However, the loss of those potential buyers will likely be offset by investors seeking capital gains, by a return of overseas immigration, and by a resurgence of buyers from other countries that are now recovering from the economic effects of the pandemic.
Sources:
‘A good sign for buyers’: Clearance rates drop as more homes hit the market,’ Tawar Razaghi, Domain, 10 November 2021
‘Three reasons house prices will flatten after a period of skyrocketing growth,’ Katie McLeod, News.com.au, 7 November 2021
‘Don’t fall for rate-raising banks pretending they are doing it tough,’ Greg Jericho, The Guardian, 9 November 2021
‘Australian banks lift fixed interest home loan rates despite RBA keeping official rate at record low,’ Ben Butler, The Guardian, 6 November 2021
‘The Sydney suburbs with the strongest house and unit price growth,’ Kate Burke, Domain, 6 November 2021
‘NSW overhaul of stamp duty needs federal support: Kean,’ Alexandra Smith and Matt Wade, Sydney Morning Herald, 5 November 2021
‘Premier should not be deterred from bold move on tax reform,’ The Herald's View 4 November 2021
‘RBA flags earlier interest rates rise as economy bounces back from Covid lockdowns,’ Peter Hannam, The Guardian, 3 November 2021
‘Some households will need $22,458 extra a year to avoid mortgage stress if rates rise by 1 percentage point,’ Tawar Razaghi, Domain, 3 November 2021
‘RBA holds rates at ultra-low levels in bid to drive up wages,’ Shane Wright, Sydney Morning Herald, 2 November 2021
‘Likely to lose momentum’: Australia’s dwelling values continue to grow, though the pace is slowing,’ Melissa Heagney, Domain, 1 November 2021
‘Sydney house prices predicted to rise by $102k in 2022,’ Sarah Sharples, News.com.au, 2 November 2021
‘Australian property market slowly loses momentum as growth rate eases to 1.49pc, CoreLogic finds,’ Samuel Yang, ABC News online, 1 November 2021
‘Reserve Bank poised to ease debt-buying as economy rebounds.’ Shane Wright, Sydney Morning Herald, 1 November 2021
‘How the RBA allowed Australia to become a servant to property prices in a $9 trillion market,’ Ian Verrender, ABC News online, 1 November 2021
‘Extraordinary price changes’ in the housing market warrant ‘prudent’ lending,’ SkyNews, 1 November 2021
‘Sydney house price overvalued and on brink of bubble territory,’ Jason Murphy, News.com.au, 26 October 2021
‘Now it’s Liberals telling us we are going to have to cut the capital gains tax concession,’ The Conversation, ABC News online, 27 October 2021
‘Vested interest: How the home-ownership game is rigged,’ Ross Gittins, Sydney Morning Herald, 27 October 2021
Home loans: Soaring inflation data sparks fears of interest rate hike,’ James Hall, News.com.au, 28 October 2021
‘House prices are not a bubble, says Chris Richardson,’ Ronald Mizen, Australian Financial Review, 12 October 2021
‘Australia's property market forecast to dip in 2023 following an interest rate rise,’ Stuart Marsh, 9News, 21 October 2021
‘Sydney house prices hit record high, with median climbing to almost $1.5 million,’ Kate Burke, Domain, 28 October 2021
‘How high can house prices rise, with Australia’s combined capital median already near $1 million?’, Elizabeth Redman, Domain, 28 October 2021
‘Inflation in Australia might be on the rise, but it’s hardly running wild,’ Greg Jericho, The Guardian, 28 October 2021
‘Property market update: What buyers can expect this spring and summer’, Jessica Wang, News.com.au, 18 October 2021
‘Bond markets push the RBA close to capitulation,’ Cecile Lefort and Ronald Mizen, Australian Financial Review, 28 October 2021
‘Era of low interest rates is over’: Rate rises expected ahead of federal election,’ Shane Wright and Jennifer Duke, Sydney Morning Herald, 28 October 2021
‘Housing affordability collapses despite record low interest rates,’ Shane Wright, Sydney Morning Herald, 25 October 2021
‘Cashed-up foreign buyers still seek Australian property, but are they really to blame for price rises?,’ Michael Luu, ABC Radio Sydney, 26 October 20221
‘Australian house prices to rise 22% this year and then ease off, economists say,’ AAP, The Guardian, 16 October 2021
Sydney market steadies, APRA acts on mortgage loans
Sun, 17 Oct 2021Australia’s property prices have recorded their strongest ever quarterly growth since the Australian Bureau of Statistics (ABS) began keeping their residential property price index in September 2003. The index showed that the mean price of a dwelling across Australia is now $835,700, up from $678,500 one year ago according to the ABS.
Sydney’s new median price of $1.19m dwarfs the national figure. Even more impressive is the news that Sydney’s median auction house price has rocketed upwards to just over $2 million, meaning prices have gone up by more than 30 per cent in the just the past year.
Sydney homebuyers spent a median $2,000,500 at auctions in September, recording a solid clearance rate of 78.1 per cent according to the latest Domain Auction Report Card. Domain’s chief of research and economics, Nicola Powell, said these amazing numbers reflected the underlying strength of Sydney’s housing market throughout the lockdown.
“Clearance rates have risen on higher volumes. What it shows is that buyer competition is still there, still intense, but I think as we see restrictions ease further, we’re likely to see listings continue to rise. Once we start to see a real jump … that’s when it will be a real test on clearance rates,” Dr Powell said.
Knight Frank’s Global House Price Index for the second quarter of 2021 showed that Australia ranked seventh out of 55 countries for annual price growth, at 16.4 per cent for the full year ending June.
Knight Frank head of residential research Michelle Ciesielski said there were more buyers than there were homes, driving up the housing market in Australia: “Scarcity remains the key driver for the significant growth in residential values across Australia, with pent-up demand from those engaging in an incredibly low interest-rate environment,” Ms Ciesielski said.
The Reserve Bank of Australia (RBA), however, has warned that the nationwide surge in house prices and expectations of even higher prices could lead to “over-exuberance” in the property market.
In is six-monthly review of the stability of the financial sector, the RBA cautioned that while high house price growth over the past 12 months had improved the resilience of existing mortgage holders, it had also increased the risks associated with soaring indebtedness.
The Guardian’s Greg Jericho used a pregnancy to illustrate how the rapidity of Australia’s house price increases could affect a Sydney couple starting a family: “The latest figures from the Bureau of Statistics show that [if you] got pregnant last September, by the time you gave birth the median price of a house in Sydney had risen by almost $240,000.”
The number of home sales this year has been the highest since 2004 with nearly 598,000 houses and apartments sold across the country over the year to August 2021. This is 42 per cent greater than the previous 12 months, and 31 per cent above the average for the decade.
“It’s a real story of extremes, with record-low levels of listings this year and record levels of demand leading to a huge number of sales and the biggest price growth since 1989,” said CoreLogic research director Tim Lawless.
The new CoreLogic research shows that housing turnover (home sales as a percentage of the total number of homes) has reached 5.6 per cent which is the highest rate since December 2009. It’s interesting to note that just two years ago, it had dropped to a record low of 3.7 per cent as a result of tighter credit conditions, difficulties with housing affordability and the high costs including stamp duty associated with buying a home.
Mr Lawless did say that housing turnover will probably continue to increase in the short term as more listings come onto the market, but he expected that turnover would peak early next year, then begin to fall away.
APRA cracks down on loans
The Federal Treasury has grown increasingly concerned about the indebtedness of Australian households because, it says. the house-price-to-income ratio has risen from 2.5 in the early 1990s to over six in 2021, and people under 40 are now less likely to own a home than any other time since 1947.
Another statistic that has given rise to Treasury’s concerns is that over the past twelve months the average Australian owner-occupier home loan grew by 15 per cent to $564,900. NSW hit the top of the table with an increase since February this year of $112,000, bringing the average loan to a record high of $732,000.
At a time when more than one in five home buyers is borrowing more than six times their annual income, Treasurer Josh Frydenberg met with financial regulators in late September and encouraged them to consider ways to reduce high-debt home loans so as to minimise risks caused by low interest rates and soaring property prices.
The Treasurer left no doubts about what he felt should be done to achieve this result: “We must be mindful of the balance between credit and income growth to prevent the build-up of future risks in the financial system.
“Carefully targeted and timely adjustments are sometimes necessary. There are a range of tools available to the Australian Prudential Regulation Authority (APRA) to deliver this outcome.”
The Australian Prudential Regulation Authority (APRA) responded by reducing the maximum amount that households can borrow to buy a property, making it harder for some borrowers to get a mortgage.
APRA chairman Wayne Byres said the decision to reduce the maximum borrowing capacity was made to head off growing risks from an increasing number of very large mortgages.
"While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building," he said.
The financial regulator has decreed that, from 1 November, banks will have to be able to demonstrate that new borrowers are capable of making repayments on their mortgage if home loan interest rates rose three percentage points above their current level. (Until APRA changed the rules for borrowers the minimum buffer on home loan applications was 2.5 percentage points.)
APRA estimates this rule change will reduce a household’s maximum borrowing capacity by around five per cent. This means that households that could previously borrow a maximum of $500,000 would now be able to borrow no more than $475,000. When we consider that the average mortgage in NSW to buy an established home is already at an all-time high of $755,000, that five per cent becomes a fairly sizeable amount.
RateCity.com.au research director Sally Tindall said this will impact those who are in the process of purchasing a property and could make it impossible for them to acquire the property they want: “These changes will clip the wings of people borrowing at their capacity.
"Many Australians looking to buy will be scrambling to find out how much their bank will now lend them and whether they can still afford to buy the property they want. The changes are designed to protect people from taking on risky levels of debt, however, it will hurt first home buyers who typically have smaller incomes and deposits," she said.
However, Adrian Kelly, president of the Real Estate Institute of Australia (REIA), said that most borrowers don’t take out loans at their maximum capacity and the changes would have only a modest effect.
"REIA has always wanted responsible lending practices because the last thing we want to see in our industry is people biting off more than they can chew," he told ABC News.
"We would all like to see a return to a more balanced market with some longevity to it, and one way to return to that is by addressing supply which should kick in as lockdowns end and more properties come to the market."
RBA says look elsewhere
The Reserve Bank announced in its October statement that, despite the continued rapid rise in house prices, the cash rate will stay at the record low of 0.10 per cent for the eleventh month in a row.
The RBA responded to concerns about the economic impact of high housing prices by urging governments to deal with tax and social security policies to bring surging house prices under control after new figures confirmed that we’re experiencing the biggest jump in nationwide property values on record.
In his statement outlining the latest monetary policy decision, RBA governor Philip Lowe said housing credit growth had picked up due to stronger demand for credit by both owner-occupiers and investors.
"Given the environment of rising housing prices and low interest rates, the bank is monitoring trends in housing borrowing carefully and it is important that lending standards are maintained," he said.
The RBA said it didn’t expect ‘instant results’ from APRA’s tightening of home loan application tests. In its latest Financial Stability Review (FSR), the Bank said it would take a few weeks for the changes to filter down to many home loan applicants.
"The maximum impact of this policy change could take several months to be realised," it cautioned. “Indirect effects may take even longer than the direct effects, although changes in potential buyers' expectations could bring forward the impact of the policy change."
However, the Bank noted that the effect could be greater for some groups of borrowers than others: "For a given income and initial net income surplus, the effect on borrowers with existing mortgage debts (such as investors) would be larger, as the increase in the serviceability assessment rate also applies to a borrower's existing debts," the FSR noted.
The RBA governor said an increase in interest rates to deal with soaring house prices was not on the RBA’s agenda because it would “mean fewer jobs and lower wages growth”. He said he felt this issue could be best addressed by dealing with the ‘structural factors’ that push up the value of land.
“The factors include the design of our taxation and social security systems; planning and zoning restrictions; the type of dwellings that are built; and the nature of our transportation networks,” he said, noting that these are outside the RBA’s ambit.
And once again, he confirmed that based on current levels of inflation and wages growth the RBA is unlikely to lift interest rates until 2024.
More advice came from RBA assistant governor Luci Ellis who warned against housing affordability policies that gave buyers more to spend, stating that “all that does is bid up prices”, and noted that access to superannuation was one such policy that would result in people spending more on housing.
The EU-based Organisation for Economic Cooperation and Development (OECD) has expressed feelings similar to the RBA’s, arguing in its recent survey of the Australian economy that Australia’s taxation policies had encouraged household funds to be invested into residential property.
“Tackling structural factors that might skew Australian household balance sheets towards residential property investment could reduce vulnerabilities and improve household wellbeing,” it said.
Demand slows a bit
Looking not too far back to early 2020 when the pandemic first pushed Australia into lockdown, it was then expected that demand for property would quickly and significantly fall. Each of the big four banks had its own opinions, but their economists forecast falls up to 32 per cent in housing prices.
However, for a number of reasons including record low interest rates and financial stimulation from various government programs, demand for property has raced upwards to new highs. One of the biggest factors has been a reduction in the supply of houses on markets across Australia.
Data from property analytics firm CoreLogic shows that, in August 2018 there were 153,803 houses for sale nationally; as of late August this year there were just 88,872 houses on the market, a drop of more than 42 per cent.
New listing volumes were down substantially during 2020 and early 2021. As a result, we have experienced a housing price boom like never before, especially with an unmet demand for free-standing homes.
But Crystal Ossolinki, the director of demand in the economic group of the Australian Treasury’s social policy division, said at the housing affordability enquiry that “demand factors are tapering off” because there would be no more interest rate cuts, and that population growth had stalled while migration had been paused by the pandemic.
Ray White NSW chief auctioneer Alex Pattaro said that he expected to see an ‘avalanche’ of listings hit the market after lockdowns end, but properties would still be passed in if vendors have inflated price expectations.
“Buyers are there to do a deal, but they’re not going to go crazy and really stretch themselves if they don’t think the property is worth it,” Mr Pattaro told Domain. “There are buyers now that are fearful of overpaying … they’ve already stretched themselves so much.”
Westpac senior economist Matthew Hassan said that APRA’s recent changes to lending rules was a “de facto rate hike” for the housing market. He said the changes would contribute to a slowing in property price momentum.
“It’s about as close as you get to an actual interest rate increase without having a cash rate move. We’ll see a moderation, most likely to single-digit price growth over the course of the next six to 12 months,” he said.
Belle Property Lane Cove agent James Bennett said the volume of stock for sale felt like half of what there would be in a regular spring market: “There was a couple of weeks where there were eight new listings a week but now it’s one or two,” he said.
“Demand from buyers is really good; there’s really good depth, there are a lot of buyers in certain price brackets. I think in a month we’ll really know whether there are a few vendors that are holding back.”
After stamp duty, what?
The resignation of Gladys Berejiklian from the NSW Premier’s role and the subsequent elevation of former treasurer, Dominic Perrottet to that position has given increasing emphasis to the government’s stated desire to scrap stamp duty on property purchases and introduce an annual property tax payment instead.
Under our present system, stamp duty of $40,207 is paid on a $1 million property purchase in New South Wales, and a $2 million property attracts stamp duty of $94,567. It’s quite a successful revenue raiser for the state, and to replace it with another source of funds would require finding around $9 billion each year.
Mr Perrottet has long been this state’s champion for the introduction of a land tax to replace stamp duty, and he’s recently been supported by numerous submissions to the recent federal enquiry into housing affordability from groups such as the Housing Industry Association (HIA), Urban Development Institute of Australia (UDIA), University of Canberra, Domain and the Urban Taskforce identifying these lucrative duties as factors that help drive inequality among generations.
The HIA said that stamp duty was inequitable and inefficient but acknowledged that reforming it was not simple as it could influence how GST revenue was distributed: “In order to facilitate progress on this reform, it may be beneficial for the Australian government to commit to a dialogue through the national cabinet to investigate measures that would support state and territory governments to remove stamp duty.”
The Urban Taskforce, a lobby group for builders and developers, recommended the federal government “take the lead in discussions with the states to abolish stamp duty and replace it with a broad-based tax”.
The University of Canberra said a move away from stamp duties would boost efficiency and economic growth, lifting federal income and company tax collections. “There would therefore be an argument for the federal government to make incentive payments to the states to encourage them to undertake this reform.”
Property listings website Domain, whose market analyses are often quoted in these ‘Market Comment’ articles, said that a change to land taxes would ‘dramatically’ reduce the upfront cost of buying a house but also noted this raised the risk of creating a two-tier property market if buyers were offered a choice between stamp duties and land taxes.
Liberal MP Jason Falinski, who is leading the inquiry, said that state and local governments had hampered federal government efforts to increase housing supply: “The benefits of replacing transaction taxes such as stamp duties with broad-based land taxes is well known. What is not understood is why state governments are so resistant to making a change that benefits everyone, especially those people trying to get a foothold in the housing market.”
What Mr Falinski seems to have overlooked is the fact that his fellow politicians in all states and territories are naturally hesitant to introduce a new form of taxation that would impose a new and inescapable tax on every homeowner in Australia.
With something like 3.3 million dwellings in NSW, to raise the $9 billion now collected in stamp duties would cost the average household almost $2700 each year – not something any sane politician would want to bring to their electorate or take to an election.
Sources:
‘House prices are not a bubble, says Chris Richardson,’ Ronald Mizen, Australian Financial Review, 12 October 2021
‘How do you raise mortgage rates without actually raising them?,’ Greg Jericho, The Guardian, 12 October 2021
‘October interest rate announcement: RBA keeps cash rate at record low despite calls for regulator intervention,’ Sue Williams, Domain, 5 October 2021
‘Home loan crackdown likely to prompt slower house price growth, not price falls yet: economists,’ Elizabeth Redman, Domain, 6 October 2021
‘Stamp duty crimps property listings, pushing up prices,’ John Collett, Sydney Morning Herald, 6 October 2021
‘Sydney’s median auction price for houses passes $2m, reaches record highs in other cities,’ Kate Burke, Domain, 8 October 2021
‘RBA warns of property price falls with sharp rate rises,’, Ronald Mizen, Australian Financial Review, 9 October 2021
‘Reserve Bank warns home loan restrictions 'may be adjusted' if housing market doesn't cool,’ Gareth Hutchens and Michael Janda, ABC News online, 9 October 2021
‘APRA tightens home loan rules on the same day New Zealand's Reserve Bank lifts interest rates,’ Michael Janda, Gareth Hutchens, and Samuel Yang, ABC News online, 6 October 2021
‘APRA takes modest step into housing ... with political echoes of 1961,’ Shane Wright, Sydney Morning Herald, 7 October 2021
‘APRA's mortgage crackdown catches out hopeful home buyers,’ Gareth Hutchens and Daniel Ziffer, ABC News online, 7 October 2021
‘Real estate: Signs point to slowdown in runaway home prices,’ Kirsten Craze, News.com.au, 18 September 2021
‘Australia’s housing market boom ranked seventh in the world: Knight Frank report,’ Tawar Razaghi, Domain, 16 September 2021
‘Federal government urged to intervene with states on stamp duty,’ Jennifer Duke, Sydney Morning Herald, 18 September 2021
‘Housing turnover reaches its highest level in nearly 12 years: Core Logic,’ Sue Williams, Domain, 17 September 2021
‘Australia’s house prices are disconnected from reality – and the RBA wants you to know it isn’t to blame,’ Greg Jericho, The Guardian, 16 September 2021
‘We’re back to record property price growth, so what’s being done about it?,’ David Taylor, ABC News online, 16 September 2021
‘Why Australian house prices are still rising despite Covid,’ Tarric Brooker, News.com.au, 16 September 2021
‘Australian house prices could be about to flatten out after rising 16.8% in last year,’ Paul Karp and Amy Remeikis, The Guardian, 15 September 2021
‘Aussie property prices record biggest three-month jump on record,’ Stuart Marsh, 9News, 14 September 2021
‘RBA says surging house prices are a government problem,’ Shane Wright, Sydney Morning Herald, 15 September 2021
Everything’s still heading upwards except interest rates
Wed, 15 Sep 2021Despite the restrictions imposed by states and territories in response to Covid-19, the value of Australia’s residential property market should pass $9 trillion later this year, according to CoreLogic.
The global property data and analytics company says the total value of Australian homes reached $8 trillion in March this year and should reach its next trillion dollars by the end of 2021: “It won’t be too long before it breaks the $9 trillion mark,” said Tim Lawless, CoreLogic’s research director. “We’re going through a construction boom, and housing values are rising very swiftly.”
Swiftly, indeed. Sydney’s median auction house price shot upwards by a massive 32.3 per cent over the year and 11.8 per cent in just one month to a new record of $1.92 million in August. The median auction price for units hit $1,113,000 which was also a record high.
Another growing statistic is the number of properties sold prior to auction. Offers too good to refuse have encouraged 46.5 per cent of sellers to accept an offer prior to their scheduled auction day - an all-time high since Domain began keeping records back in 1995.
Earlier this year Australia’s property prices rose seven per cent in the three months to May, while their increase in the next quarter in the three months to July was slightly lower at 5.9 per cent. And for Sydney, dwelling values jumped 7.7 per cent in that same quarter, placing it just behind Hobart in the race for national honours.
Traditionally, the Sydney property market hesitates in winter, then bursts out strongly at the start of spring. This year, however, lockdowns have wiped away the focus on spring, according to ASX-listed e-conveyancing firm PEXA.
“It has fundamentally changed,” said PEXA chief executive Glenn King. “Before it was far more seasonal. Now we are seeing record volumes coming in when we would not normally have expected them.”
Even after twelve weeks of COVID-19 restrictions, Sydney house prices have continued to climb. Auction clearance rates in Sydney have stayed near their long-term averages as buyers transitioned to online bidding.
Cooley Auctions’ Damien Cooley has seen a rise in the number of participants at his auctions, to an average of 8.5 bidders in this new financial year, compared to an average of 6.5 for the year to June. He said the average price achieved is now nine per cent over a vendor’s reserve compared to six per cent in the previous financial year.
“Our market’s got stronger, no doubt,” he said. “We’re definitely seeing a lot of owner-occupier activity right now, not so much investor activity.”
It does appear, however, that affordability is catching up with prices in Sydney’s most sought-after neighbourhoods, according to Domain chief of research and economics Nicola Powell: “Affordability [is an issue] for all buyers, not just first-home buyers but all buyers, because we’ve seen such significant jumps over the year to date.”
She said that buyer demand in Sydney’s eastern suburbs and northern beaches is down 14 per cent compared to the average for this time of year, as buyers are confronted with price growth that has sent prices in those two areas up 26.4 per cent and 38.7 per cent respectively in the past twelve months.
“We’ve seen some extraordinary rates of growth in our premium areas,” Dr Powell said. “That becomes a hurdle – it’s a financial impact.”
And CoreLogic’s Tim Lawless also expects the market’s extreme rate of price growth to slow down as demand from priced-out buyers eases and an increasing number of sellers list their properties on the market once pandemic-inspired restrictions ease: “If those two things happen or even if we do see supply rising, that should help rebalance the market towards buyers and dampen this rapid price growth further.”
It should be noted that there are some warnings being issued about the economic impacts of having so much capital directed into ever-increasing housing prices. The Herald’s economics correspondent, Shane Wright says that economists are concerned future wage increases will be lower because so much money goes into housing that there’s less investment in businesses or possible advances in technology.
“The big run-up in prices has resulted in the nation’s banks now holding a record $1.9 trillion in mortgages to owner-occupiers and investors. Loans to owner-occupiers have lifted by $145 billion in just two years.
“It’s that leap in mortgages, being funnelled into the property market, that has economists worried,” he said.
‘Elements of Optimism’
Dr Shane Oliver, chief economist for AMP Capital, said there’s an element of optimism in the market from the low interest rate, and the fear of missing out (FOMO) is still driving both owner-occupiers and investors to acquire property for good capital growth: “But we’re scraping the bottom of the barrel of low interest rates and, if they do go up, then that’s when we’ll become more dependent on wages growth and our income to sustain price growth,” he told Domain’s Sue Williams.
Westpac economist Matthew Hassan says that a Westpac-Melbourne Institute report this month found consumer sentiment has fallen a “significant” 4.4 per cent from July to August to its lowest point in a year: “But, for sure, we’re not in negative territory, so that’s not impacting the housing market.
“During last year’s COVID shock, sentiment plunged to the low 80s because we didn’t know how it was going to play out. But one of the keys now is the availability of the vaccines, and that’s making us feel a lot more confident long-term,” he said.
Angus Raine, executive chairman of sales agents Raine & Horne, says that the market’s price rises are being further strengthened by a continuing low supply of stock combined with high demand.
“At the moment, only one person can buy a property compared to the six to 12 people who actually want it,” he said. “That’s strong demand and it will last a long time, with the historically low supply volume underpinning it.
“Then, when the COVID restrictions finally lift, we’re expecting 50,000 extra people per annum coming into Sydney alone, looking for housing, so this boom is going to have a very long tail, despite what wages do,” Mr Raine said.
Commonwealth Bank of Australia’s head of Australian economics, Gareth Aird, says that the support of banks and governments has given consumers confidence throughout the latest pandemic outbreak: “There’s a collective recognition that the lockdown doesn’t go on forever, and [that] the vaccination rate going up will re-open the economy,” Mr Aird said.
Paul Bloxham, HSBC’s chief economist, says that 2021 is very different from the experience Australia had when Covid-19 first struck in 2020: “When households or businesses look forward, you see a pathway out and that involves a vaccine rolling out and the eventual reopening of the economy.
“Overall, the housing market is well supported pretty much across the country. The major factor there is that interest rates are going to stay for a long time. People willing to buy and sell houses is a sign of some confidence … they’ve all weakened but they’re in a lot better shape than the initial shock in 2020.”
The ANZ Bank is certainly optimistic about Sydney property prices, saying it expects a rise of 23 per cent by the end of this year with further growth to come in 2022.
ANZ senior economist Felicity Emmett said lockdowns were unlikely to derail the strength of the housing market: “We’ve updated our forecasts because of how strong prices have been; that includes through the lockdown period.
“We did think by this time of the year that the momentum in prices would have pulled back [but] when you look at some of the leading indicators, auction clearance rates, sales to listing ratios, you can see the market is still very tight and there hasn’t been much of a drop-off in demand or interest in the face of these quite heavy lockdowns,” Ms Emmett said.
NAB chief economist Alan Oster said the Sydney property market is probably past its peak in terms of price growth, but that he still expects Sydney prices will continue to rise and predicts growth of two to five per cent next year.
Interest-ing rates
Interest rates remain newsworthy with the latest expectations that an increase in the prime rate won’t happen until 2023 at the earliest. The Guardian’s Greg Jericho says it’s now been 130 months since the RBA last raised the cash rate: “When the reserve bank last raised rates, the record length of time a major central bank had gone without a raise was the Japan central bank, when it went 119 months through the entire 1990s.
“The RBA broke that record back in November last year, although the Bank of England had in that time set a new record of 123 months. But no matter, the RBA broke that new record too, in March; the reserve bank has now gone a full six years longer than the previous longest stretch it went without raising rates.”
Recent research indicates that, with interest rates where they are, even a slump in wages won’t be enough to dampen the willingness of property buyers to keep bidding up market prices for their homes.
The Melbourne Institute’s Consumer Inflationary and Wage Expectations found that nearly 70 per cent of people are suffering a fall in pay, or no change. The Institute’s research economist, Dr Sam Tsiaplias, said that he would usually expect to see a link between house prices and income, but record low interest rates has weakened that link.
“As long as interest rates remain low, we won’t need high wages growth to sustain house price appreciation. But when mortgage repayments increase, and they’re harder to pay, then that’s when we’ll see wages become much more important.”
A Reuters article reported that, with the RBA saying interest rates are unlikely to rise until 2024, home prices are now forecast to surge 17 per cent this year and 6.2 per cent next year by a poll of 12 property market analysts conducted by Reuters.
Those median forecasts were significant upgrades from a survey Reuters conducted in May that forecast rises of 10.5 per cent this year and 5.0 per cent next year, despite virtually no immigration this year - a linchpin of the economy.
"A very low interest rate and other forms of monetary policy support have certainly driven down mortgage rates since the start of the pandemic. That has made housing more affordable for some buyers who are certainly taking advantage of it," said Sarah Hunter, chief Australia economist for BIS Oxford Economics.
In Sydney, Hamada Alameddine, an advocate from buyers’ agency BuyerX, told Domain the appetite from buyers was stronger than ever, with many buyers keen to inspect a property one-on-one and buy while they could.
“I thought it would have slowed because of the lockdown, but it hasn’t at all,” Mr Alameddine said. “It really is insatiable at the moment because of the cheap money [low interest rates] and the RBA saying it won’t touch interest rates for now.”
Listings and lockdowns
Unlike our experience in 2020, lockdowns are beginning to impact on listings with the latest REA Insights report in August showing a decline of 27.3 per cent in new listings in Sydney. The report’s author, Cameron Kusher, who is REA’s director of economic research, says this statistic is a bit surprising.
“I guess it shows that while the market is really strong, there’s a little bit of caution around at the moment. As soon as people feel like it’s going to be more difficult to sell their property, they’re going to be less inclined to put it on the market.” he said.
“Vendors are seemingly quite reluctant to list their properties, but we still know that demand is very high, so, if someone is willing to bite the bullet and put their property on the market, they might actually find it’s quite successful just because there’s not much stock on the market.”
Mr Kusher told News.com.au’s Kirsten Craze that he didn’t expect to see much of an increase in Sydney listings until lockdowns are over: “As we have seen over the past 18 months, the property market responds to restrictions being eased almost immediately.
“Based on the market behaviour following previous lockdowns, we would expect once current lockdown restrictions end, there should be a rapid rebound in the volume of new listings coming to market,” Mr Kusher said.
Real Estate Buyers Agents Association president Cate Bakos said buyers who could afford to wait should consider delaying their plans until after lockdown restrictions were scaled back.
“There will be more listings once restrictions ease and it make it easier,” she told News.com.au’s Aidan Devine. “At the moment, many of the buyers you’re up against are the ones who’ve missed out again and again. They’re frustrated and will often pay more.”
Westpac’s Quarterly Housing Pulse, released in August, showed its “time to buy a dwelling index”, which reveals people’s intentions to buy a home and whether they think this is the best time to buy – reached its second-lowest point since 2010.
But lockdowns aren’t to blame for the drop in intentions, the Westpac report found. It’s surging prices and stretched affordability that were far more important than to buyers than COVID restrictions.
“On balance, we expect the situation to see a temporary loss of momentum rather than a correction – even in the most heavily impacted areas – and a rapid snap-back once restrictions ease,” the Westpac report stated.
Building costs rise
Tim Reardon, the Housing Industry Association's chief economist, told AAP that the cost of building a home is going to rise because a shortage of labour and materials has pushed costs higher. This is happening while the time it takes to complete a stand-alone dwelling has blown out from six to nine months to about a year.
He said that shortages in timber, steel, PVC pipes, fittings, electrical equipment and tiles are the result of factors that include a global shortage of shipping containers and domestic production of structural timber nearing capacity.
"It will be well into 2022 before the industry starts to return to more normal conditions," he said.
Tim Lawless from CoreLogic said there has been a surge in demand from the success of the federal government's HomeBuilder scheme, with more than 120,000 building projects eligible for the HomeBuilder grant before the program ended in April.
"Everybody knew it was going to drive a building boom," Mr Lawless told AAP. This was supported by CoreLogic’s CHIP Index, which measures the relative cost of building stand-alone houses, that shows construction costs rose 1.4 per cent in the three months to June, equating to an annual increase of about four per cent.
The Morrison government’s HomeBuilder program, which initially provided a $25,000 grant and later a $15,000 one for everyone building a home, used the private housing market to encourage construction work and thereby stimulate the economy.
After the first three months of the program, home construction rose strongly by the last quarter of 2020. New private-sector housing construction increased 3.4 per cent in the 2020 December quarter – the best for more than two years.
Then, in the first three months of 2021 it surged another 12.3 per cent which was the biggest jump since September 2001, subsiding to an increase of just 0.1 per cent in the June quarter, but by then the scheme’s impacts were being felt in the costs of housing construction.
Another reason homes are costing more to build, according to Herald economist Shane Wright, is developer fees that can add up to $85,000 for every block that’s put on the market.
“As housing affordability tumbles due to soaring prices across the nation’s major cities and regional areas, analysis from the National Housing Finance and Investment Corp suggests councils in NSW and Victoria are being so financially squeezed they are using developer contributions to protect their budgets.
“The NHFIC found developer contributions in NSW were the highest in the country, ranging between $25,000 and $85,000 per dwelling. In Victoria, they varied from $37,000 to $77,000 while in Queensland they were between $29,000 and $42,000.”
The NSW government requires developers to make contributions to “social infrastructure” around new housing developments, with roads, playgrounds, water, sewerage and drainage all partly paid for by these fees. The NHFIC research found that the fees are driving up property prices and in some cases aren’t being used to develop local infrastructure for new homeowners as intended.
Sources:
‘Sydney house values climb $850 a day amid fears of living standard hit,’ Shane Wright, Sydney Morning Herald, 11 September 2021
‘Reserve Bank keeps Australia’s official cash rate at historic low, saying Delta ‘setback’ delaying not derailing economic recovery,’ Rebecca Le May, News.com.au, 8 September 2021
‘First-home buyers struggle as prices continue to rise,’ John Collett, Sydney Morning Herald, 5 September 2021
‘Median auction price for a Sydney house hits record $1.92 million in August,’ Ellen Lutton, Domain, 7 September 2021
‘The RBA has not raised interest rates for 130 months – and history suggests low rates are here to stay,’ Greg Jericho, The Guardian, 7 September 2021
‘Will Sydney’s property market keep rising in spring? Early signs sellers are coming back to market,’ Kate Burke, Domain, 4 September 2021
‘Property boom: Sydney home prices jump another $20,000 in a month amid listings slump,’ Aidan Devine, News.com.au, 2 September 2021
‘Australia's red-hot housing to get hotter, affordability to worsen,’ Vivek Mishra, Reuters, 1 September 2021
‘Housing boom slowed in August but lockdowns could push prices higher,’ Jennifer Duke, Sydney Morning Herald, 1 September 2021
‘Lockdowns hit property auction clearance rates,’ John Collett, Sydney Morning Herald, 1 September 2021
‘Developer fees adding up to $85,000 a block, driving up housing prices,’ Shane Wright, Sydney Morning Herald, 31 August 2021
‘Housing market in ‘tricky territory’, warns Westpac,’ Eliza Bavin, Yahoo News, 31 August 2021
‘Australia’s homebuilder scheme may have just been a sugar hit in the pandemic recovery,’
Greg Jericho, The Guardian, 27 August 2021
‘House prices to jump over 20 per cent, with further growth next year: ANZ,’ Kate Burke, Domain, 26 August 2021
‘Buyer demand for property eases from its peak as affordability constraints bite: Domain research,’ Elizabeth Redman, Domain, 26 August 2021
‘Australia’s preliminary clearance rates drops to lowest level since July 2020: CoreLogic,’ Tawar Razaghi, Domain, 25 August 2021
‘McGrath bounces back to black as housing market improves,’ Carolyn Cummins, Sydney Morning Herald, 26 August 2021
‘Spring home sales wilt as post-lockdown blooms,’ Simon Johanson, Sydney Morning Herald, 25 August 2021
‘Australian housing market entering ‘tricky territory’ as affordability starts to bite,’ Melissa Heagney, Domain, 25 August 2021
‘Why lockdowns aren’t suppressing house prices,’ Clancy Yeates, Sydney Morning Herald, 25 August 2021
‘Aust home building costs through the roof,’ Liz Hobday, AAP 22 August, 2021
‘Opportunity knocks for bold homeowners as house listings tumble in July,’ Kirsten Craze, News.com.au, 22 August 2021
‘Under pressure: First-home buyers vulnerable to higher rates,’ John Collett, Sydney Morning Herald, 10 August 2021
‘Home buyers bid up property prices despite lacklustre outlook for wages growth,’ Sue Williams, Domain 16 August 2021
‘Why the housing market and household finances are still in good shape, despite lockdowns,’ Tawar Razaghi, Domain, 19 August 2021
‘Australia’s property market tipped to reach $9 trillion later this year: CoreLogic,’ Tawar Razaghi, Domain, 11 August 2021
Sydney property boom’s immunity continues
Sun, 15 Aug 2021The Australian property market has continued to soar into uncharted territory as record-low interest rates fuel an increase in demand that the current volume of homes on offer can’t meet. Sydney house prices repeatedly break records, surging to $1,410,133 and going up by more than $1200 a day in the second quarter of 2021.
As it was outlined by Domain: “The median house price jumped 8.2 per cent in just the three months to June, according to the latest Domain House Price Report. Over the past year, median house prices have shot up by a staggering 24 per cent – or $272,887 – the fastest annual growth since Domain records began in 1993.”
The Baulkham Hills and Hawkesbury region had the year’s fastest growing house prices. The median price here grew 20 per cent in the three months to June 2021 to $1.62 million, and over the year it rose 32.8 per cent.
Unit prices also increased across Sydney, rising 3.2 per cent in the second quarter to a median of $786,175 - now just half a per cent below the previous record high in June 2017.
In some neighbourhoods, median unit prices are at record highs with prices on the northern beaches jumping $141,000 to almost $1.16 million over the June quarter and the eastern suburbs lifting $100,000 to a median of almost $1.29 million in the same period.
The surge in prices this autumn has once again invited the question of whether banks were making risky loans and whether the bank regulator APRA should intervene and make it harder to borrow money, although financial organisations were quick to point out that prices were only back to where they were before the pandemic struck.
Westpac chief economist Bill Evans said he expected some sort of government regulation would be forthcoming: “Deteriorating affordability is likely to weigh on owner-occupier demand, and a tightening in macro–prudential policy settings will restrain the supply of credit,” he told the Financial Review.
“We expect housing credit growth to exceed 7 per cent by the first half of 2022, triggering a likely policy intervention. The precise response will depend on the composition of lending over the next year.”
However, CoreLogic research director Tim Lawless doesn’t see a problem with the current prices: “We are seeing that monthly rate of growth starting to ease off and I think we can put that down to worsening affordability in a market that is rising so much faster than household incomes,” Mr Lawless said.
“I would expect values to continue to ease in the second half of this year and into 2022. We will still see values rise but not as quickly.”
Easing values? Perhaps, but the expectations are for continuing growth regardless. NAB has upped its growth forecast for Sydney home prices by more than seven percentage points to 21.6 per cent for this full year, but the bank cut the predicted gains in 2022 by about half, as affordability is expected to worsen and the boost from lower interest rates starts to fade.
The bank’s team of economists, led by Alan Oster, say that the impact of low interest rates and strong income support that has driven strong price growth in 2021 will start to fade next year.
“NAB has revised up its forecast for house prices in 2021 based on the faster-than-expected growth in prices over recent months. From here we see the monthly pace of growth slowing but continuing at a solid rate. Affordability constraints will likely begin to bind over the year and see a slowing in price growth as the impact of lower rates fade.”
The Reserve Bank of Australia said in its August report that the economic outlook for the coming months was uncertain, so it kept the cash rate at a record low 0.10 per cent.
“The economic recovery in Australia has been stronger than was earlier expected,” the reserve bank governor, Phillip Lowe, said in a statement. “The recent outbreaks of the virus are, however, interrupting the recovery and GDP is expected to decline in the September quarter.”
Dr Lowe remained optimistic about the longer term, saying: “The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly. Prior to the current virus outbreaks, the Australian economy had considerable momentum and it is still expected to grow strongly again next year.”
Interestingly, CoreLogic’s auction market review for the June quarter recorded the busiest period for sales since 2017, with more than 30,000 homes on offer. However, the clearance rate has eased since the beginning of the year to about 76 per cent of homes selling compared to above 80 per cent in the March quarter.
CoreLogic head of research Eliza Owen noted there had been a particular slowdown in Sydney where the clearance rate is down about 6 percentage points over the last three months: “This reflects a broader loss of momentum in the Australian housing market, as affordability constraints set in, and March looks to [have been] a peak period of growth for the current cycle,” she said.
There are other indications of a slowing of Australia’s phenomenal rate of growth. Australian Bureau of Statistics data shows the value of new home loans fell 1.6 per cent in June to $32.1bn. For owner-occupiers, loans fell by 2.5 per cent to $22.9bn. The number of home building approvals also fell 6.7 per cent to 18,911 in June, including an 11.8 per cent fall in private sector houses to 12,037.
Lockdown effects sidelined
Lockdowns are back and Sydney has returned to online auctions for the first time since last year, with public auctions not allowed under COVID-19 lockdown rules. Raine & Horne Leichhardt selling agent Morris Toscano said: “We have done online auctions before in the last lockdown, so it is second nature because we’ve done it before.
“I would still prefer a live auction because it can get a little bit awkward when you’re trying to help bidders [with a personal chat] and you’re saying it to everyone at the same time. Hopefully, we don’t have to get used to it,” Mr Toscano said.
CoreLogic's head of Australian research Eliza Owen says that short lockdowns will not hold back Sydney’s booming property market: "Throughout lockdowns in the past 15 months, basically what CoreLogic data has shown is that you get a drop off in demand, you get a drop off in sales, but you also get a drop off in supply, because people know it's not an ideal time to sell.
"So generally, we see lower volumes, and because of that drop in demand and supply, the net effect on prices really isn't much at all, especially when it comes to circuit breaker lockdowns," she observed.
Michael Yardney of Metropole Property Strategists agreed, saying: “If lockdowns are extensive our property market will go into hibernation for a while and then come out stronger than ever, just like they did last year.”
The number of homes scheduled for auction in Sydney is now at its lowest level in six months, but agents report strong competition for most properties on offer across the city. In an interesting turnaround, more than 20 per cent of properties listed in one recent Saturday auction had been sold by Thursday morning.
Nicola Powell, Domain’s chief of research and economics, described our present auction conditions under the latest lockdown: “Withdrawal rates have been much lower compared to anything we saw in the early lockdown stages in Sydney or Melbourne last year,” Dr Powell said. “What that tells me is vendors are a bit more confident [as] we’ve seen [how] our markets react to lockdowns, and what was really interesting for Sydney sellers is that there has been a big shift to selling prior.”
Dr Powell noted that overall, the number of homes listed across Greater Sydney over the four weeks to August 1 was down 19.9 per cent, from the previous four-week period, but new listings were holding steady week-on-week.
“The pullback in new listings over the four-week period was greater for houses (21.1 per cent) than apartments (17.9 per cent), and total stock levels were also down – 14.7 per cent for houses and 9.7 per cent for units month-on-month,” she said.
It’s interesting to read about a new report from KPMG Economics that concludes Covid-19 has actually been a positive factor for Sydney property prices. The report – ‘The Impact of COVID on Australia’s Residential Property Market,’ found that nationwide, house prices were now between 4 to 12 per cent higher and units up to 13 per cent higher than they would have been if the world had stayed “normal”.
KPMG’s modelling shows that without the pandemic, house prices in Sydney would have risen 13 per cent to hit $1,119,000 by December 2023. Now, because of pandemic policy responses, such as pushing the cash rate down to 0.1 per cent and introducing the HomeBuilder program, they’ll rise 26 per cent to $1,244,000.
Brendan Rynne, KPMG chief economist, told Domain that the initial uncertainty caused by the pandemic and consequent economic downturn caused a 3 per cent fall in prices in the June 2020 quarter, but it didn’t last long.
“Once market participants became confident that the pandemic would not result in a free-fall of home values, a combination of monetary and fiscal policies quickly began to push things the other way,” Dr Rynne said.
“The material decline in mortgage interest rates; extra savings from not spending on holidays and leisure; and generous income support from government and housing market support specifically, has seen property prices rise dramatically in the past six to nine months, past the point where they would have risen under a no-COVID scenario.”
It must be noted that the KPMG Economics report was compiled prior to the pandemic’s resurgence that has had its greatest effects so far on NSW, although other states have also been affected. The responses of governments, both state and federal, will play a part in determining the next set of impacts Covid-19 has on Sydney property and we’ll report them as they happen.
A comment regarding where we might go from our present situation came from the president of the Real Estate Buyers Agents Association of Australia, Cate Bakos, who believes the economy could rebound strongly after this latest scare: “The market will continue to move at pace, and the RBA will be using more macro-prudential changes to regulate it, looking at debt-to-earnings ratios and the loan-to-value ratio caps,” she said. “We’ll be in a low interest environment for several years yet.”
How long will it last?
One question that won’t go away, and the answers are many but varied, is: “How long will the Sydney property boom last?” The Daily Telegraph’s Aidan Devine had a try at answering this question and came up with several lines of thought on this topic.
He first pointed out that Sydney’s price growth is at a 30-year high. This has prompted a number of experts to forecast an ending in the final quarter of this year, with others saying that 2022 will be the year it ends. A common belief of most experts is that housing is becoming unaffordable.
The Herald’s John Collett says property price growth is slowing as more people who would like to buy are priced out of the market: “If the trend continues, price growth could continue to slide and may even start to fall by 2023.
“CoreLogic figures show that price growth, nationally, during July was 1.6 per cent. To put that into context, growth during this extraordinary surge in prices peaked at 2.8 per cent in March. House price growth is slowing as more home buyers get priced out of the market,” he concludes.
Stagnant wages growth at a time of rising housing prices is another reason many feel prices will peak soon. This will make our current levels of growth unsustainable and bring an end to the boom before long. Also cited is ‘buyer fatigue’, with buyers dropping out due to lack of supply and constantly rising prices.
The final causative factor will be, according to many market watchers, the inevitable rise in interest rates that will come sooner than expected. CoreLogic said there is already evidence of this in financial markets: “There have been early signs of more conservative home loan assessments; any reduction in credit availability is likely to contribute to a downside shift in market conditions.”
But what if interest rates don’t go up? The chief economist for the Centre for Independent Studies Peter Tulip said he expected house prices to rise by 25 per cent by 2023 if interest rates and inflation remain low.
“The main downside risk to the house price outlook is if we were to get surprisingly high numbers on inflation and wages and another big surprisingly low number on employment. We would expect a quicker rise in interest rates, and that would make buying less attractive,” Mr Tulip told Domain.
Investors recapture lost ground
For a brief spell at the end of 2020, investors pulled back and young people in Australia’s capital cities were able to get a foot in the property door, but that door has slammed shut as investors have once again taken over the positions of power in property markets. The reason is simple: Investors want the capital appreciation, so they are attracted to markets with rising prices.
“Investors are very much driven by expectations of capital growth, and those expectations are often formed by what’s happened over the last year,” AMP Capital chief economist Shane Oliver told Domain.
“As we’ve seen property prices surge over the last 12 months, that’s popped up on investors’ radars and they’ve thought, ‘Maybe we should get in here again.’”
Jo Masters, EY Oceania’s chief economist, commented on the other factor that’s crucial for investors: “The past year has shown how important interest rates are in influencing the housing market.”
She said while the forecast depended on whether consumers believe the interest rate cut would be permanent, rising fixed rates and an improving economy would suggest to households the next rate move was “up not down”. This means that any further growth would come from investors, not first-home buyers, Ms Masters said.
Data from the Australian Prudential Regulation Authority (APRA) confirms that the portion of new housing loans going to investors is once again rising. The portion of new mortgages lent on interest-only terms has also gone up from pre-pandemic levels to 19.3 per cent in the March quarter.
Buyer’s agent Wendy Chamberlain said it was now easier for investors to get home loans compared to the lending crackdown in 2018 and 2019 sparked by worries about high levels of speculative buying and interest-only loans.
“Banks have become a little more lenient,” she said. “They have recently changed those policies so investors are starting to get back into the market because they’re able to get loans again.”
Economist Saul Eslake, who has long argued against Australia's existing housing tax breaks, says they cause people to speculate and push house prices to unstainable levels: "It does now seem that investors, combined with second-time buyers who are seeking to upgrade their homes, are once again squeezing would-be first home buyers out of the market," he said.
A July poll of 1015 respondents by comparison site Finder.com.au found that close to one in seven Australians is considering a property purchase within the next six months, and many of them are buying property as an investment.
Residents in NSW, where prices have ballooned the most over the past year, were the most likely to be considering a purchase: close to one in five (19 per cent) planned to buy in the next six months. More than half of the prospective NSW buyers said they wanted an to buy an investment, not a property they would live in.
Rates must rise someday
When interest rates go up, mortgage repayments will also go up, and those who are benefiting now will feel the pain once our current record-low interest rates return to higher levels. Who can forget that in the years between 1970 and 1990 interest rate rises were a serious threat to household budgets, and that mortgage rates almost tripled from around six per cent to a high of more than 17 per cent in 1990?
Then came three decades during which the Reserve Bank repeatedly cut interest rates to the almost zero level where they are today. The current generation of mortgage holders has no lived experience of worrying about rising interest rates, but as rates are now so low they can’t realistically go lower, interest rates will inevitably rise – someday, and probably someday soon.
Low rates were intended to stimulate the economy, and indeed they have. Banks could lend money to businesses for expansion, and to homebuyers for their mortgages. Throw in some extras, like capital gains tax discounts on property investments and a system of negative gearing for those same investors, and the property market’s been thriving on mostly borrowed money.
News.com’s Tarric Brooker did the sums: “If 1.5 per cent worth of interest rate hikes was to be priced into the current average variable rate, the average interest rate on a variable rate mortgage would rise to 4.6 per cent per annum.
“For an average buyer who recently purchased a home with the average mortgage of $504,000 who got a good deal of two per cent rate on a fixed term mortgage, the reversion to a variable rate loan amid rising interest rates could mean interest repayments more than double in an instant. As a result, monthly repayments would rise by $722 per month (38.6 per cent),” Mr Brooker calculated.
He added that, while it could be years before rates rise and impact the market, it’s also possible for rising rates that once kept a generation of Australians awake at night to return sooner that we think, and we may be find ourselves going back to the future.
Good news for overseas buyers
International buyers are still keen to move to Australia and, despite our closed borders, are making plans to purchase property and relocate here. Domain senior research analyst Nicola Powell said the latest rise in international investment was due in part to Australia’s booming house prices and being seen as relatively safe from the coronavirus pandemic.
“That rise in foreign investment spending was likely due to some extraordinary growth in prices compared to 2018-2019 when the property market was in a downturn. But also the types of houses being purchased by foreign buyers are bigger and more elite,” Dr Powell said.
Australia’s housing market continues to receive favourable reviews in international publications. Global ratings agency Fitch has forecast a further rise of 16 per cent this year for our housing markets, saying lockdown savings, income support and low interest rates are pushing prices higher than if Covid had not happened.
“Low interest rates in Australia have also started to encourage housing investors into the market, potentially replacing demand from first-time buyers as they start to be priced out,” Fitch said, voicing an opinion that will no doubt be of interest to overseas property investors.
Another international report sure to catch their attention is the Knight Frank 2021 prime forecast report, which ranks Sydney as the world’s leading city in luxury homes and says it expects our prices to rise 10 per cent over the coming year.
It places Sydney at the top of the list in forecast price growth, above Miami and Los Angeles in the United States. The report also predicts Sydney will continue its reign in the top spot in 2022, when, together with London, both cities are forecast to see prime prices accelerate 7 per cent year-on-year.
There was no disagreement from global data giant Equifax whose general manager for advisory and solutions, Kevin James, said Australia’s economic numbers point to a positive outlook for the nation, despite some pockets of concern: “Business confidence seems very high, and better than what it was in 2019 and 2020 – which will also fuel employment.
“The recovery looks strong, the economic buy-in from SMEs and consumers looks very strong, mortgage markets are strong, delinquencies are lower than they have been. As long as these factors remain in place, I think the recovery is on a pretty good trajectory,” James said.
Stamp Duty a sticky issue
The Stamp Duty debate has continued into this year’s second half, despite other topics grabbing the property market headlines. At this point in time, the changes are still in the ‘proposed’ category while the NSW government assesses the feedback it’s received.
We’ve covered this issue in these articles since 2018 so this is just an update. The outcomes will mean major changes to the Sydney property market and to the finances of the NSW government, so it’s worth keeping an eye on developments as they happen.
It’s argued that the high cost of stamp duty prevents people from being able to move home as frequently as they would like, keeps housing turnover low and discourages homeowners from upgrading, downsizing, or relocating to a home that better suits their lifestyle.
Broadly, under the NSW government’s latest proposal, stamp duty won’t be abolished, but buyers of property in this state will be given the choice between paying stamp duty upfront, or an annual property tax.
Domain explains: “Should the proposal go ahead, buyers who purchase a home between the announcement of the changes and the commencement date would be able to retrospectively opt in to the new property tax and have their stamp duty refunded. Buyers would need to opt in within six months of the commencement date.
“Existing homeowners would not be affected. Owners who purchased their property prior to the announcement date and paid stamp duty wouldn’t need to pay property tax for that property and wouldn’t be able to have their stamp duty refunded.”
Sources:
‘Sydney apartment prices gaining momentum as affordability bites,’ Kate Burket, Domain, 8 August 2021
‘Australian house prices to fizzle as property market loses steam,’ Leith van Onselen, News.com.au, 4 August 2021
‘Property investors return to the market despite price growth outpacing rents, data shows,’
Elizabeth Redman, Domain, 6 August 2021
‘New listings in Sydney drop by 20 per cent, but supply ‘obliterated’ in some pockets,’
Kate Burke, Domain, 5 August 2021
‘August interest rate announcement: RBA keeps cash rate steady as lockdowns hinder recovery,’ Sue Williams, Domain, 3 August 2021
‘House prices take a breath as affordability crunch bites,’ John Collett, Sydney Morning Herald, 4 August 2021
‘Australia house prices soar at 'unsustainable' rate,’ BBC News, 30 July 2021
‘Investors helped by housing tax breaks pile into property market as prices rise,’ Nassim Khadem, ABC News online, 2 August 2021
‘Reserve Bank keeps rates on hold as COVID lockdowns hit economy,’ Megan Neil, News.com.au, 3 August 2021
‘Scene set for APRA housing market intervention: Westpac,’ Ronald Mizen, Australian Financial Review, 28 July 2021
‘Signs Australian housing boom may be cooling as mortgage demand suffers biggest fall in a year,’ AAP, 3 August 2021
‘Scene set for APRA housing market intervention: Westpac,’ Ronald Mizen, Australian Financial Review, 28 July 2021
‘Sydney, Melbourne home prices tipped to rise more than 20 per cent,’ Jennifer Duke, Sydney Morning Herald, 27 July 2021
‘Sydney house prices to soar 21pc: NAB,’ Nila Sweeney, Australian Financial Review, 27 July 2021
‘Sydney online auctions: Volumes down, but competition remains strong,’ Kate Burke, Domain, 24 July 2021
‘The market is insane’: Many voters fear home ownership is out of reach for young Australians,’ David Crowe, Sydney Morning Herald, 24 July 2021
‘One in seven Aussies considering a property purchase within the next six months: Finder,’
Aidan Devine, Daily Telegraph, 22 July 2021
‘Sydney luxury home prices set to eclipse the world,’ Carolyn Cummins, Sydney Morning Herald, 21 July 2021
‘Scrapping stamp duty would help home buyers and state economies, report finds,’ Jennifer Duke and Shane Wright, Sydney Morning Herald, 20 July 2021
‘Australian house prices to soar by up to 16% in 2021, ratings agency says,’ Ben Butler, The Guardian, 17 July 2021
‘How much would Australia’s house prices have risen without COVID-19?,’ Ellen Lutton, Domain, 13 July 2021
‘House prices keep surging, real estate likely to shrug off short COVID lockdowns, CoreLogic says,’ Michael Janda, ABC News online, 1 July 2021
‘When, not if, will Australia’s sizzling housing market cool?,’ John Kidman, AAP, 10 July 2021
‘The NSW government has proposed giving property buyers a choice between paying stamp duty upfront or paying a smaller property tax annually,’ Domain, 8 July 2021
‘Forecast of 30 per cent housing price growth could be largely realised: economists,’ Tawar Razaghi, Domain, 7 July 2021
‘End of the property boom: most housing experts polled say market will soon peak in NSW,’
Aidan Devine, The Daily Telegraph, 6 July 2021
‘Australia’s first home buyers squeezed out of property market by investors,’ Jason Murphy, News.com.au, 6 July 2021
‘Sydney home sells for $2.67 million as auctions move online during lockdown,’ Melissa Heagney, Domain, 5 July 2021
‘Interest rates rise will trigger skyrocketing mortgages in Australia,’ Tarric Brooker, News.com.au, 4 July 2021
‘Uncharted territory: Australian property market soars above pre-COVID peaks,’ Rachel Wells, Domain, 3 July 2021
Sydney property completes a great 2020-21 financial year
Wed, 14 Jul 2021Dwelling prices rose 1.9 per cent nationally over June, meaning that housing values rose a total of 13.5 per cent over the financial year just ended. CoreLogic's monthly home price index rose 1.9 per cent in June, led by 2.6 per cent growth in Sydney.
Sydney has been the fastest-growing major market in the 2021 calendar year, with growth of 8.2 per cent in just the last quarter. The median value of a Sydney home is now more than $1.2 million, its value having increased by $38,000 across just the 30 days of June.
Lockdowns have become an unwelcome but not insurmountable element of the Sydney property market in recent times. Typically, in a lockdown in-person auctions and open for inspections are banned, but a person may show a single person a premises after an appointment has been made for that purpose.
Ray White NSW chief auctioneer Alex Pattaro told Domain that the industry’s experiences in last year’s lockdown meant everyone was well prepared for online auctions: “The good thing is we’ve done this all before. We’ve dealt with snap lockdowns before. This time around, auctioneers and agents have all the resources at the push of the button to cater to buyers and sellers.”
Most sellers have gone ahead with online auctions despite lockdowns, and clearance rates on those weekends compare favourably with those of unaffected times. June was a busy month for auctions, with Sydney’s clearance rate for houses and units at 72.7 per cent.
However, Domain senior research analyst Nicola Powell said fewer homes had gone to auction in June compared with May, thanks to extra activity in May due to April’s public holidays.
“Despite the monthly drop in auction volumes, it was the busiest June on record for Sydney’s auction market,” Dr Powell said. “A huge milestone, almost double the decade average for the month of June.”
While the market remains strong, CoreLogic's head of Australian research Eliza Owen said the June quarter had seen a slowing rate of property price growth for the most expensive quarter of the capital city markets: "This easing in the pace of growth at the top end of the market is another clear sign of a shift in momentum," she told ABC News.
"The rest of the market tends to follow movements at the high end, and this is the first time in nine months that the high-tier growth rate has not accelerated. We've seen the sales of some very top-end, high-profile sellers, so, if very high-profile sellers are calling the peak of the market and thinking it's a good time to sell, I think that's pretty telling as well."
Some parts of the city, as always, fare better than others when sales volumes slow, according to The Daily Telegraph’s Matt Bell, who says property has delivered up to $100,000 a year in increased wealth for the average homeowner in Sydney’s lower north shore.
“In Mosman, homeowners who sold during this period made $775,000 more on average than what they originally paid. Those in the North Sydney local government area netted on average $515,000 in profit. Both LGAs outperformed Greater Sydney in the first three months of 2021,” he wrote.
Beyond the fundamentals
An interesting study by Shuping Shi, a professor of economics at Macquarie Business School, concluded that property prices in Sydney have outstripped the growth that would normally be expected from a combination of fundamental factors like rents, interest rates, incomes and housing supply.
“While the interest rate is at its historical low and housing supply has dropped substantially in some cities, they cannot fully explain the fast-rising house prices in some cities,” said Professor Shi, adding that she does not expect property prices to fall substantially, although they might level off or fall slightly in future.
She believes the current increase in demand is being driven by some buyers purchasing out of fear that they will be priced out of the market entirely if values keep climbing at the current rate, and by investors counting on rapid gains to make a large profit.
HSBC Australia chief economist Paul Bloxham agrees that the growth in property prices seems to have run ahead of what the usual fundamentals would dictate for Australia: “We expect that the housing market is going to cool over the coming quarters and running into 2022,” he said.
“The more investors pile in, the more it’s concerning that it might start to become a bit more of a speculatively driven market [but] we’re not expecting that there will be a need for prudential tightening. What we’ve observed is that lending standards … have all been fairly strict, and we think the housing market fundamentals themselves and, in particular, the closed border will be the main factors that will see the market cool.”
The Daily Telegraph’s Aidan Devine reports that nearly 60 per cent of the real estate market experts and economists in a recent survey by comparison site Finder.com.au said the market would peak before the end of this year.
“Eleven of the 28 experts polled by Finder said the market would peak in the final quarter of the year, while eight said the peak would come in the next three months. The remaining nine experts said the peak would likely occur in 2022.”
Loan commitments for new housing are always a good guide to future price movements, and the latest figures from the Australian Bureau of Statistics (ABS) show that there was a 4.9 per cent increase in loan commitments in May compared to April. This means another $32.6 billion of new debt will add fuel to an already scorching hot market.
But who’s borrowing the big money? ABS head of finance and wealth, Katherine Keenan, told News.com that May’s surge was driven by growth in new investor loans: “The value of new loan commitments for investor housing rose 13.3 per cent to $9.1 billion in May 2021, which was the highest level since June 2015.
“Investor loans equated to 28 per cent of the total value of housing loan commitments in May 2021, compared to 46 per cent in 2015,” Ms Keenan said, adding that investor loans growth in NSW was 12.1 per cent, while loans to owner-occupiers remained relatively steady.
News.com’s Jason Murphy says investors usually have the biggest share of new home lending: “It was only for a short period there at the end of 2020 that investors got nervous enough to disappear for a moment, and the way was made clear for young families to finally buy their own home. (We saw a similar brief swap back in the global financial crisis of 2008-09).”
The NSW government’s economic outlook as expressed in the recent state budget is that house prices are expected to peak later this year as more sellers are encouraged to list their homes and buyers are priced out of the market, thereby limiting house price growth.
“Annual house price growth is expected to peak around late-2021,” the budget stated. “As higher prices encourage more owners to sell, this will work to limit house price growth over time. In addition, higher prices are expected to price out more potential buyers, weighing on demand.”
Listings slow
The number of new listings dropped slightly in June, quite possibly because vendors fear they’ll sell their property but then won’t be able to find anything to buy.
Nick Boyd, head of growth at Belle Property Australasia, says this is giving vendors second thoughts about listing their property while strong demand outweighs stock shortages: “There’s so much pent-up demand out there but while vendors are all thinking it’s a good time to sell, they know it isn’t a good time to buy.
“Sellers know they’ll get a fantastic price as we’ve seen stunning price growth over the last nine months, but that can equally put a hesitation into the sellers’ minds knowing there might not be much out there for them.”
Domain senior research analyst Nicola Powell agrees that the market is proving too daunting for many potential sellers who think they’ll have difficulty finding their next home once they’ve sold: “And, even if they do find something they like after a couple of months of looking, they know the price might have gone up in that time because of the general upswing in the market.
“So, I think some people do their sums, realise they mightn’t have enough to buy the house they really want to upgrade into, and then decide to stay and renovate their existing home instead,” Dr Powell said.
Louis Christopher, managing director of SQM Research, has also seen a fall in listings, but says the number of listings regularly drops in winter. His company’s figures showed a 9.1 per cent fall in new Sydney listings in June compared with May, while nationally new listings also fell 9.1 per cent.
“But then we had falls in May and in April as well, so this is yet another fall. There hasn’t been any bounce back from those. It’s definitely a sign that sellers are holding off a bit, particularly if they’re upgraders. If they’re downsizers, they don’t have such difficulty as there’s more stock on the unit market.”
Overseas buyers return
Chinese buyers have been noticeably absent over the past year while Australia’s borders have been closed due to pandemic restrictions. Political tensions between China and Australia have also been felt in property sales with Chinese investments declining from their peak of $32 billion in 2015-16 to $7.1 billion in 2019-20. This was, however, up $1 billion (17 per cent) on the $6.071 billion recorded in the 2018-19 financial year.
China-centric real estate portal Juwai IQI has calculated Chinese investors spent almost $124 billion on Australian property in the past decade: “When it comes to cross-border real estate buyers, Australia is now more attractive than ever,” Juwai co-founder Georg Chmiel said.
“Only the closed borders and the inability of foreign students to attend [classes] in Australia in person is holding foreign residential investment back today.”
Chinese buyers of Australian real estate are now ranked behind buyers from the United States ($13.1 billion) and Singapore ($9.5 billion), but still ahead of those from Germany ($3.7 billion) and Canada ($3.3 billion).
Foreign buyers are still an important factor in Australian property. The Foreign Investment Review Board’s (FIRB) latest annual report shows that offshore buyers were approved to invest $17.1 billion on residential real estate in 2019-20 – up $2.3 billion from $14.8 billion in 2018-19.
Demand for established housing increased sharply, according to the FIRB annual report. Established housing had $4.5 billion worth of approvals, up from $1.7 billion, but demand for new dwellings remained fairly static at $4.9 billion worth of investment, up from $4.8 billion the year before.
Commercial real estate investment, on the other hand, fell from $73 billion to $38.8 billion, which continues along the trend in recent years.
Another interesting finding from the FIRB report is that the number of foreign-owned houses left empty for more than 183 days of the year rose sharply to 231 from 118 in the 2018-19 financial year when the federal government introduced a vacancy fee on foreign-owned houses.
“A lot of these homes that are vacant were purchased before COVID-19 hit and before we closed the borders,” Belle Property Balwyn director and auctioneer Robert Ding said. “They’re now caught overseas and can’t get back so there’s little they can do.”
Some buyers were looking to get around such fees, by gaining their permanent residency before buying in Australia. Many of these had been renting for four to five years, gaining their permanent residency and then buying a property without the need for FIRB approval, Mr Ding said.
“Lots of new migrants will rent first and then buy once they have their permanent residency because they save on additional stamp duty,” he said.
Buyers want houses
CoreLogic data shows that over the year to June houses have been more popular with buyers, rising more than 15 per cent compared to units, which increased by 6.8 per cent.
In Sydney a typical house now costs $1.3 million and a typical apartment about $750,000, so in simple terms units cost less than houses and they’re theoretically more affordable. However, a recent report from the University of NSW found that home ownership is now out of reach for most people under the age of 35.
Peter Tulip, the chief economist of the Centre for Independent Studies, believes the biggest cause of housing unaffordability is that developers are not allowed to build high-rise apartments in most areas: “The main reason we have these planning restrictions is because local neighbours insist on preserving neighbourhood character and these arguments ignore the interest of people not involved in the decision – potential buyers,” he says.
Mr Tulip also says he expects house prices to rise by 25 per cent by 2023 if interest rates and inflation remain low: “The main downside risk to the house price outlook is if we were to get surprisingly high numbers on inflation and wages and another big surprisingly low number on employment. We would expect a quicker rise in interest rates, and that would make buying less attractive,” he said.
But if a house is out of the question for many buyers, a unit may be the answer. Domain’s Tawar Razaghi did the numbers and concluded that it now takes first-home buyers a record seven years and one month to enter the Sydney market, according to new research.
This is six months longer than it did last year for a couple to save a 20 per cent deposit on an entry-priced house of $770,000
However, for first-time buyers looking to buy a unit, the time it takes to save is substantially less than takes for a house and it’s even getting faster. The data showed that, for an entry-level unit of $590,000, it takes five years and five months; this is four months less than it took a year ago.
Interest-ing possibilities
CoreLogic research director Tim Lawless says that it’s record-low interest rates that are fuelling the increase in buyer demand that’s not being sufficiently met, and that this is pushing up home values: “Record low mortgage rates … are the foundation for stimulating demand for housing,” he says.
There’s no doubt that one of the most important drivers of property price rises is the prevailing rate of interest as expressed by the Reserve Bank’s prime rate. It’s now at its lowest-ever level and the financial experts agree this is the absolute bottom; from here it’s going to rise, and this will impact everyone who borrows money, naturally including those who want to purchase a property.
Two big questions arise: when will the rises begin and what will be the new rates of interest? There are a number of opinions currently being expressed in the financial media and not all of them agree on the answers.
The ABC’s Ian Verrender says there’s a good chance that rate hikes will come “sooner than we have been led to believe”. He feels the economic recovery of most financial markets around the world will induce a global lift in interest rates that could start as early as next year.
This would be well in advance of the RBA’s anticipation that rates will stay down for the next three years. The Reserve Bank has kept official interest rates at 0.1 per cent since November last year and said it does not expect wages growth and inflation will be high enough for it to lift rates until 2024 “at the earliest”.
Another financial expert with a sharp eye on our financial markets, Westpac chief economist Bill Evans, has said that, with the jobs market improving rapidly, he believes the Reserve Bank will start lifting interest rates in early 2023. This was accompanied by a statement that official interest rates could be at 0.75 per cent by late 2023.
The Herald’s economic team of Shane Wright and Jennifer Duke say that borrowers could face higher mortgage repayments as early as November 2022, quoting the CBA’s head of Australian economics, Gareth Aird who sees a cash rate of 0.5 per cent by the end of next year, reaching 1.25 per cent by the third quarter of 2023, as being likely.
Meanwhile, the RBA confirmed at its July meeting that it expects to maintain the cash rate at its current all-time low until the labor market returns to full employment, wage growth accelerates substantially, and actual inflation is comfortably within its 2.0–3.0 per cent target range, which it does not see happening until 2024.
RBA Governor Philip Lowe said the Bank was aware of increased borrowing by investors: “Given the environment of rising housing prices and low interest rates, the bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”
Sources
‘Forecast of 30 per cent housing price growth could be largely realised: economists,’ Tawar Razaghi, Domain, 7 July 2021
‘RBA flags changes to housing market and interest rates as economy bounces back,’ Shane Wright and Jennifer Duke, Sydney Morning Herald, 6 July 2021
‘Australia’s first home buyers squeezed out of property market by investors,’ Jason Murphy, News.com.au, 6 July 2021
‘International property buyers keen to make Australia home amid COVID-19 pandemic,’
Melissa Heagney, Domain, 4 July 2021
‘Uncharted territory: Australian property market soars above pre-COVID peaks,’ Rachel Wells, Domain, 3 July 2021
‘Sydney home sells for $2.67 million as auctions move online during lockdown,’ Melissa Heagney, Domain, 5 July 2021
‘Housing gridlock: New listings fall as property owners won’t sell if they can’t buy,’ Sue Williams, Domain, 1 July 2021
‘House prices surge to fresh record highs through June,’ Shane Wright, Sydney Morning Herald, 1 July 2021
‘House prices keep surging, real estate likely to shrug off short COVID lockdowns, CoreLogic says,’ Michael Janda, ABC News online, 1 July 2021
‘Chinese foreign investors have cooled on Australian properties, but overseas buyers are tipped to return,’ Nassim Khadem, ABC News online, 2 July 2021
‘New ABS lending data shows home loan commitments are still surging,’ Gerard Cockburn, News.com.au, 2 July 2021
‘Lower north shore homeowners making $775,000 in profit with the sale of their homes,’ Matt Bell, The Daily Telegraph, 1 July 2021
‘Australian property market showing signs of bubble risk, academic modelling finds,’ Kate Burke, Domain, 30 June 2021
‘Foreign buyers add $2bn to their spend on Aussie homes in 2019/20,’ Nathan Mawby, News.com.au, 29 June 2021
‘The top 5 reasons why house prices keep going up and up,’ Caitlin Fitzsimmons, Sydney Morning Herald, 27 June 2021
‘Australia's household wealth surged by the end of 2020 — but property owners have taken the lion's share,’ Gareth Hutchens, ABC News online, 28 June 2021 (Updated from 28 March 2021)
‘Open homes cancelled, auctions switch to online in Sydney’s lockdown areas,’ Tawar Razaghi, Domain, 26 June 2021
‘NSW Budget 2021: property prices expected to peak late-2021,’ Tawar Razaghi, Domain, 22 June 2021
‘Chances are that the timing on rate hikes will be much sooner than we have been led to believe,’ Ian Verrender, ABC News online, 22 June 2021
‘Interest rates could rise: Economists warn home owners about higher repayments in 2022,’ Shane Wright and Jennifer Duke, Sydney Morning Herald, 24 June 2021
Sydney’s property values, still growing but slowing…a little
Mon, 21 Jun 2021Figures from CoreLogic showed that in April the national home value index increased 1.8 per cent, which was historically high for the month but down from the 32-year high of 2.8 per cent rise in March. Then in May, houses once again surged with a 2.2 per cent increase across the nation.
CoreLogic’s research director Tim Lawless said that buyer behaviour was one important factor driving up prices: “The combination of improving economic conditions and low interest rates is continuing to support consumer confidence which, in turn, has created persistently strong demand for housing,” he said.
“At the same time, advertised supply remains well below average. This imbalance between demand and supply is continuing to create urgency among buyers, contributing to the upward pressure on housing prices.”
The total value of Australia’s residential real estate has now reached an estimated $8.1 trillion, give or take a few billion. “This puts Australian residential property at around four times the size of Australian GDP, and around $1 trillion more than the combined value of the ASX, superannuation and commercial real estate stock combined,” says CoreLogic head of residential research Eliza Owen.
Sydney had Australia’s second-highest capital city price rise with a 3.0 per cent increase in May, with this city’s values up 9.3 per cent in the first four months of 2021. The median price of all residential property in Sydney has reached $970,355; the average free-standing house in Sydney is now going for over $1.1 million with units at around $800,000.
Data from Domain compiled for The Sydney Morning Herald and The Age shows that 52 per cent of houses and 24 per cent of apartments sold in Sydney in May reaped in excess of $1 million.
Geography plays a big part in these numbers. More than 95 per cent of houses sold this year in five regions of Greater Sydney have achieved prices above $1 million. These include the city and east, inner west, lower north shore, northern beaches and upper north shore.
Domain figures show that prices for the most expensive houses surged 10.6 per cent over just the first three months of the year, increasing twice as fast as the middle of the market and four times as fast as the cost of the most affordable homes.
This translates into some incredible selling prices at the very top of the market, where prices climbed $350,000 in the March quarter to a peak of $3.65 million and are now up 20.5 per cent, or $620,000, in the past year.
CoreLogic’s Eliza Owen says the housing market remains strong, even if there is a slight reduction in the growth rate: “There is only so much house rates can grow even with low mortgage rates and favourable conditions,” she said. “New listings are sitting at 14 per cent above the five-year average, which may have created an easing on the side of the buyer.”
Even more statistically significant is that the value of a freestanding house in Sydney was well above the national average. It rose by 2.8 per cent to $1,147,352, which was $164,090 above the low point in September’s 2020. This represents an incredible 11.2 per cent growth since the start of this year.
Sarah Sharples from News.com says the situation in Sydney is ‘brutal’: “For people with savings of up to $100,000 who are looking to put down a deposit of 20 per cent, there are just six suburbs where they could afford to buy. All are located in the outer city and are more than 40km away from Sydney central, including Austral, Airds, Blackett, Bidwill, Box Hill and Willmont.”
Prices easing
Analysis from Capital Economics suggests that the gap between sales and new listings has reached its peak, and the Sydney property market will return to a more even balance between buyers and sellers over coming months.
"While annual price growth will continue to rise strongly in the near term thanks to the favourable base, we think monthly price gains will ease in the months ahead," Capital’s economist Ben Udy said.
"What's more, as affordability constraints bite, and housing supply expands thanks to surging construction activity, we think prices may decline a little next year."
A new survey by ME Bank found that attitudes of both buyers and sellers towards property purchases are changing and overall sentiment shows signs of decreasing as prices keep rising. The bank’s latest Quarterly Property Sentiment Report found the overall sentiment dropped seven percentage points to 42 per cent.
60 per cent of survey respondents said there was not enough choice in the current residential property market. This was a 17-percentage point increase since January. First-home buyers were especially pessimistic, recording a 3-percentage point drop in positive sentiment to just 24 per cent.
The May REA Insights Housing Market Indicators Report also tells us that, although the residential real estate market is still strong, buyers are becoming hesitant and concerns about affordability are growing.
However, Cameron Kusher, director of economic research at REA Group, said the market wasn’t falling - only slowing for the second half of 2021: “Many of the metrics remain at elevated levels compared to a year ago, albeit they have eased back from their recent historic highs,” he said.
“I think essentially what’s happened is there has been a huge wave of buyers, probably really since the middle of last year when interest rates started to get cut, and a lot of those people have now purchased.
“The next wave of buyers won’t be quite as big because we don’t have HomeBuilder. There have also been some slight increases in longer term mortgage rates and obviously prices have gone up as well, which has made it more expensive to get into the market,” Mr Kusher told News Corp.
Westpac senior economist Matthew Hassan told the Herald that he also expects price gains to moderate with a total national increase of 15 per cent for all of 2021.
“Affordability will become more of a restraint as the year progresses with macro-prudential tightening expected to see a further slowing in momentum next year,” he said.
“Price growth is expected to slow from here and there are four main reasons: sellers will return, affordability will start to bite (particularly for first homebuyers), macro prudential policies will be introduced, and oversupply may become an issue.
“Reasons one and two will see some near term slowing in the rampant price gains seen since the start of the year but are unlikely to bring an end to the boom. That is only likely to happen some time down the track once other elements comes into play: an expected lift in investor activity and a subsequent tightening in prudential policy by regulators.”
From the auctions
A new term has been added to the property market’s lexicon that reflects the frenetic pace at which prices at Sydney auctions have been racing ahead. That term is FOMOA (or ‘Fear Of Missing Out Again’).
Sydney’s auctions have become somewhat similar to the floor of a stock market when the economy is booming. Bidders who think they’ve made a winning bid suddenly find that another bidder has gone thousands of dollars higher, and their well-thought-out offer is no longer going to acquire the home of their dreams. They’ve missed out and become just another ‘wounded underbidder’.
This leads to the condition now known as FOMOA, and can in turn generate a feeling that ‘next time I’ll win regardless of what it costs’.
Domain figures show that Sydney’s auction clearance rate in April was 75.3 per cent, which was 6.1 per cent lower than the six-year high in March. The median auction price also fell back, with Sydney’s median price for houses sold at auction at $1.65 million, down from $1.755 million in March.
Auctioneer Damien Cooley, of Cooley Auctions, said the Sydney property market was still strong: “Vendors’ reserve prices have risen – rightly so, given the recent sales that have been taking place – so it’s possible that the slight reduction in clearance rates is as a result of some vendors not meeting the market at auction.”
But Ray White NSW chief auctioneer Alex Pattaro said that buyers have seen other properties sell well above reserve and have become a little cautious about paying too high a price: “There are some sellers that are prepared to meet the market,” he said. “There are some sellers that are holding out for this price, that may or may not be there after auction.”
Investors return
First-home buyers are finding conditions increasingly challenging as competition heats up for properties on offer. Residential property prices have risen to such dizzying heights that many would-be buyers of their first home are now finding their deposit is too small or their ability to borrow isn’t sufficient to acquire the property they desire.
Australian Bureau of Statistics lending indicators released in May showed the value of mortgage commitments for first home buyers dipped 1 per cent to $6.8bn in March but at the same time new home loans approved for investors jumped almost 13 per cent to $7.8bn.
“The rise in March is the largest recorded since July 2003 and was driven by increased loan commitments to investors for existing dwellings,” ABS head of finance and wealth Katherine Keenan told the NCA Newswire.
After investor credit growth actually went backwards on a month-to-month basis in 2020 due to COVID-19, it is now approaching the same levels as in 2017 when the regulator APRA intervened and tightened lending requirements.
RateCity research director Sally Tindall said speculators were racing back into the market to capitalise on predicted rising property prices and first-home buyers were the casualties in the battle: “The number of owner-occupiers looking for their first home has dropped for the second month in a row, which could be the start of a worrying trend as investors start muscling in at auctions,” Ms Tindall said.
National Australia Bank (NAB) has just announced that it was cutting its variable principal and interest rate for investors by 30 basis points to 2.79 per cent. This is the lowest variable interest rate of a loan in that category with the big four banks, and comes after NAB had the largest fall of any bank in investment loans last year.
Government help
A 40-year, million-dollar-plus mortgage is too often the only way many people can afford to purchase a house in Sydney. Governments, both state and federal, have tried to come up with ways to assist would-be homeowners and some have been more successful than others.
Saul Eslake, an independent economist who has worked in the Australian financial markets for more than 25 years, says that house prices started to run away when governments increased demand for housing at the same time as construction slowed down: “From the late 1940s until the mid-1970s, government policies generally focused on increasing the supply of housing – either by building a lot of it themselves or encouraging and facilitating the private sector to build a lot of it – and avoided artificially inflating the demand for it.
“But beginning in a small way with the introduction of the first First Home Buyers’ grant scheme in 1964, and especially from the late 1970s onwards, government policies have moved away from boosting supply (towards constraining it) and towards inflating the demand for housing.”
The Commonwealth believes that ‘empty-nester’ retirees are sitting on houses that are larger than required once the children have left home. So in 2017 it came up with a ‘downsizer’ plan that would encourage retired Australians to sell their family homes and put up to $300,000 each into their super funds at a reduced tax rate of 15 per cent. The latest version of the scheme has lowered the eligibility age from 65 to 60 years of age.
Richard Holden, professor of economics at the University of NSW, told The Guardian he didn’t think it would have much of an impact: “Topping up super makes sense for retirees and it will likely free up some housing stock, but it’s unlikely to have much of an effect on broader house prices. The demand is still there and it vastly outweighs the supply.”
The federal government has also introduced the Family Home Guarantee that will give 10,000 guarantees over four years to single parents and allow them to purchase a home with a deposit of just 2 per cent. The government will guarantee the rest of the deposit.
And, another 10,000 places will be added to an existing home loan guarantee scheme that allows people to buy their first home with a deposit of as little as 5 per cent. The government will guarantee the rest of the deposit here as well.
It should be noted that those 10,000 new places for both of these home guarantee schemes will only be available for individuals with taxable incomes of less than $125,000 and couples with taxable incomes of less than $200,000.
First-home buyers are now able to withdraw $50,000 from their superannuation balance and put it towards a deposit on a home they intend to live in. Professor Holden sees a problem here: “If everyone can take out big slabs of superannuation to buy houses, then the prices of houses will just go up more,” he said.
“This kind of subsidy just transfers the retirement savings of younger people to older people and does nothing for affordability.”
How about grants to first-home buyers? Domain’s Elizabeth Redman says they’re not much of a success: “Grants to first-time buyers tend to push up prices because buyers have more cash to spend, experts warn, helping those who are close to getting onto the property ladder while making it harder for future buyers.”
Credit concerns
In the past 12 months annual credit growth has risen by a staggering 55.3 per cent, largely driven by first-home buyers borrowing money to pay for properties that have entitled them to some form of subsidy for their purchase.
Property investors have been staying away from the Sydney market for most of the past year, recording activity levels 22.8 per cent below their peak in April 2015.
Between March 2020 and its peak in January this year, the number of first home buyers entering the market rose by 68.6 per cent but their number is now declining as investors re-enter the competition.
Several financial experts have cautioned that the government’s support for borrowers, such as the Family Home Guarantee, creates risk and may put vulnerable borrowers in a bad situation. They say there are dangers to individual borrowers, the financial system and the broader economy when people are encouraged into homeownership with wafer-thin equity.
Now, house hunters stretching their borrowings to get into the property market are being warned borrowing costs could rise sooner than expected, with some mortgage rates already going up and more hikes expected before the end of this year.
Domain’s Kate Burke points out that only a handful of lenders are still offering the ultra-low rates reached last year: “Four-year fixed term rates [for homeowners] across the big four banks are now all back above 2 per cent, with NAB lifting its rate last week, following similar moves by Westpac and NAB earlier this year. ANZ’s rate never fell below 2 per cent.
“Experts warned back in March that competitive fixed rates had probably reached their lowest point, with bank funding costs to rise after the June 30 deadline for a pandemic-era program that offers cheap three-year funding to lenders to reduce their costs, and in turn reduces interest rates for borrowers, known as the RBA’s term funding facility,” Ms Burke said.
Sally Tindall, research director at RateCity.com.au. warned that those fixing at ultra-low rates would likely face “vastly different” borrowing costs in a few years: “While the banks build in a buffer, borrowers needed to make sure they would be comfortable with increased repayments in future — particularly those already stretching themselves to keep up with rapidly rising property prices.
“Lots of people are taking on larger loans at the moment — larger amounts of debt as they’re fixing at record low rate, in two- or three-years’ time they’ll be facing revert rates that are significantly higher,” she said.
Mortgage broker Justin Doobov of Intelligent Finance says FOMO overcomes these concerns for many buyers: “They want to get into the market before it slips away from them. We’re saying they have to look at the possibility of, say, a six per cent rate in five years’ time and, while most believe rates will go up, they see prices going up much faster, so they’re willing to take that risk.”
The RBA is watching
The Reserve Bank is well aware that its record-low interest rates are making a big contribution to rising house prices, but it has warned both state and federal governments and regulatory authorities that this is their problem to solve.
RBA deputy governor Guy Debelle used a speech in May to the University of Western Australia to point out that, while high house prices have created problems, raising interest rates would hurt the jobs market and jobs are more important than dealing with high property prices.
Dr Debelle said rising house prices encouraged home building that in turn helps boost economic activity and employment: “Housing price rises can have distributional consequences. That is certainly an issue that needs to be considered and there are a number of tools that can be used to address the issue,” he said.
“But I do not think that monetary policy is one of the tools. Monetary policy is focused on supporting the economic recovery and achieving its goals in terms of employment and inflation,” he said, adding that the Bank was focused on driving down the jobless rate to increase wages growth and inflation.
Bank governor Philip Lowe recently stated that despite the economy recovering faster than expected, the RBA still believed it would not lift interest rates until inflation was within its 2-3 per cent target band.
The RBA reiterated in its May monetary policy statement that it was “monitoring trends in borrowing closely”, and noted the biggest demand was for detached houses and higher-priced properties.
“Many properties are on the market for only a short time before being sold,” the Bank said.
“In this environment of strong demand for housing, rising prices and low interest rates, it is important that lending standards are maintained.”
The RBA also noted in its latest Financial Stability Review that borrowers can create a problem for themselves without increased controls on banks: “Even if lenders do not weaken their own settings, increased risk-taking by optimistic borrowers could see a deterioration in the average quality of new lending,” it notes.
“This would weaken the resilience of businesses and households, and so the financial system, to future shocks.”
UBS economist George Tharenou said he expects the boom to last several more months, until regulators intervene.
"We expect the boom to continue until there is a policy response, which we still think is most likely to be macroprudential tightening, rather than RBA rate hikes or federal government policy/tax changes," he wrote.
As regards APRA’s timeline, Mr Tharenou said the bank regulator has signalled possible tightening measures if it sees a “substantial increase” in the pace of mortgage credit growth relative to wage growth.
UBS said it expects that condition to be met by October, based on its forecast that growth in housing credit climbs to an annualised rate of 6 per cent in the months ahead.
October also marks the next meeting of the Council of Financial Regulators (CFR), a coordinating body comprising the RBA, APRA, ASIC, and the Australian Treasury. The CFR publishes a statement at the conclusion of each of its quarterly meetings and this could be an opportunity to make a unified announcement of financial tightening.
In that context, “our view remains that macro-prudential policy tightening will likely be implemented around October”, UBS said.
Developers still active
It’s not like input into Sydney’s dwelling supply is about to stop anytime soon. NSW Department of Planning forecasters estimate between 132,800 and 171,200 new homes will be built in Sydney by 2025. The highest growth suburbs are forecast by the department to be Parramatta where 4305 homes are expected, Marsden Park (3760 new dwellings), and Rouse Hill (2965).
More than half of all the new homes forecast to be built in the next four years are projected to be built in just 41 of Sydney’s 782 suburbs.
Sydney University urban planning professor Nicole Gurran told the Sydney Morning Herald that large growth in one concentrated area is generally preferable to “scattergun growth” but insufficient infrastructure is a problem in new suburbs.
“Residents in some new-release areas continue to wait for road upgrades, access to public space, and even footpaths,” Professor Gurran said. “Infrastructure lags continue to be a problem in western Sydney, where schools are over-burdened, and communities are lucky to have access to a regular bus service.”
Professor Gurran said factors such as topography and the market value of housing in established suburbs strongly influences any potential new development or redevelopments:
“It’s likely that given the availability of other development areas, many established suburbs will not see significant change in the near future,” Prof Gurran said.
The Herald noted that in the past five years, 180,000 new homes have been built in Sydney, with 42,400 homes completed in 2018-19 – the highest number ever recorded in one year. However, in 2019-20, housing completions fell to 32,464 due to restrictions imposed by concerns about COVID-19.
The Urban Development Institute of Australia NSW said for Sydney to thrive, hundreds of thousands of new homes are needed but “the only way to achieve this” is to spread both the new housing and infrastructure across the city, not just to “selected pockets”.
“It does not make social or economic sense to build infrastructure in one place and housing in another,” a UDIA NSW spokeswoman said. “We need to integrate upgraded infrastructure with new housing, whether that be along the new Sydenham to Bankstown Metro Line or near the New Beaches Link.”
BIS Oxford Economics Sarah Hunter told the Herald’s Jennifer Duke that the supply and demand for housing was “broadly balanced”: “Dwelling approvals are expected to fall through 2021 as the stimulus from HomeBuilder to detached houses fades,” Ms Hunter said. “Price momentum is also expected to moderate, partly because of the new supply of housing and partly because of an increase in the number of sellers of established dwellings.”
Sources:
‘Property boom risks grow as buyers go all-in,’ Karen Maley, Australian Financial Review, 8 June 2021
‘Mortgage brokers’ warnings over future interest rate rises fall on deaf ears of desperate home buyers,’ Sue Williams, Domain, 9 June 2021
‘Millionaires’ woe: $1m-plus price tags on the rise for a piece of Sydney or Melbourne,’ Jennifer Duke and Shane Wright, Sydney Morning Herald, 5 June 2021
‘Looking to buy a house? Here's what the budget did to make it possible (hint: not much),’ The Conversation, Yogi Vidyattama and John Hawkins, ABC News online, 5 June 2021
‘As property booms, this could be the only thing to put a brake on house prices,’ Sam Jocobs, Stockhead News, 4 June 2021
‘House prices reach yet another record level due to ‘perfect storm’ of low interest rates, improving economy,’ Shane Wright and Jennifer Duke, Sydney Morning Herald, 2 June 2021
‘Property boom sees investors return to the market, adding to the pain of first-home buyers
The Business,’ Rhiana Whitson, ABC Business News, 2 June 2021
‘House prices jump in May, CoreLogic says, as borrowers urged to refinance loans before interest rates rise,’ Michael Janda, ABC News online, 2 June 2021
‘Australia’s national property values rose 2.2 per cent in May 2021,’ Sarah Sharples, News.com.au, 2 June 2021
‘Aussie state capital to see huge $216,000 increase in house prices,’ Sarah Sharples, News.com.au, 1 June 2021
‘Australian house prices could rise 10 times as fast as wages in 2021,’ Tawar Razaghi, Domain, 26 May 2021
‘House hunters face rising fixed mortgage rates, with further hikes expected,’ Kate Burke, Domain, 20 May 2021
‘Top end of Sydney property market growing at twice the rate of entry-level homes, data shows,’ Kate Burke, Domain, 19 May 2021
‘Aussie Home Loans Suburb Spotter Map shows truth of housing affordability in Australia,’ Sarah Sharples, News.com.au, 19 May 2021
‘Rising house prices encourage a rush of home owners to list their properties for sale in autumn,’ Tawar Razaghi, Domain, 17 May 2021
‘Sydney homes sell above $7m as buyers become cautious of overpaying,’ Melissa Heagney, Domain, 17 May 2021
‘Signs that Australia’s housing market is starting to simmer: REA Housing Marketing Indicators report reveals,’ Kirsten Craze, News.com.au, 14 May 2021
‘Housing boom ‘not expected to be sustained’ budget papers say,’ Jennifer Duke, Sydney Morning Herald, 13 May 2021
‘Home buyers lose confidence in the housing market as prices rise, affordability worsens,’
Tawar Razaghi, Domain, 13 May 2021
‘Federal budget 2021: Help for first-home owners welcome, but missed chance to do more,’ Elizabeth Redman, Domain, 12 May 2021
‘Australia’s housing crisis: it’s one of the most unaffordable in the world, so how is the Coalition going to fix it?,’ Jessica Sier, The Guardian, 11 May 2021
‘Australia experiencing unparalleled rise in housing prices,’ Tarric Brooker, News.com.au, 10 May 2021
‘There will be 150,000 new homes in Sydney in four years. More than 200 suburbs will get none of them,’ Nigel Gladstone, Sydney Morning Herald, 10 May 2021
‘Fears first home buyers will be priced out of the market as investors return in droves,’ Rebecca Le May, NCA Newswire, 10 May 2021
‘How ‘FOMOA’ is driving up house prices – and driving us all crazy,’ Stephen Corby, Sydney Morning Herald, 6 May 2021
‘First-home buyers get budget help to enter skyrocketing market,’ David Crowe, Sydney Morning Herald, 8 May 2021
‘Melbourne, Sydney auction clearance rates edge back from heights,’ Elizabeth Redman, Domain, 7 May 2021
‘Jobs our focus, not soaring house prices: RBA,’ Shane Wright, Sydney Morning Herald, 7 May 2021
‘Property boom: April home values ease over affordability concerns and increase in stock levels,’ Matt Bell, The Daily Telegraph, 4 May 2021
Sydney price surge continues, with a few signs of slowing
Fri, 14 May 2021Australian housing values are surging at their fastest rate in 32 years. Residential values rose 1.8 per cent in April across Australia. This was slightly down from the 2.8 per cent posted in March, which was the fastest rate of growth since 1988, according to data firm CoreLogic. Sydney led the race again in April with values rising 2.4 per cent over the month.
Domain Senior Research Analyst Dr Nicola Powell says the average house price in Australia is now just under $900,000 with units at just under $585,000:"This is the first time house prices have risen simultaneously for two consecutive quarters since 2009 post-GFC."
The Guardian’s economist Greg Jericho commented: “The 43 per cent annual growth in NSW housing finance would historically suggest that Sydney house prices by September will be about 20 per cent above what they were a year earlier – which, if history serves, will see the median price for a house in Sydney reach more than $1.2m.”
Statistics from Domain tell us it’s already there. The median house price across Sydney is now, according to Domain, $1,309,195 after a 12.6 per cent jump over the past year and a leap of 8.5 per cent in the first quarter of 2021.
House prices have risen by six-figure sums across more than 130 Sydney suburbs. Sydney’s median house price rose 8.5 per cent over the last quarter, the latest Domain House Price Report shows, which was the fastest quarterly growth since Domain records began in 1993.
When we compare Sydney’s most expensive 25 per cent of houses to the least expensive 25 per cent over the past three months, the top quartile's values increased by 11.4 per cent while the bottom quartile grew just 5.0 per cent.
Sydney property auctions have become a saga of heated competition and rising prices. Houses have surged more than $100,000 in just a month, and the median price paid for a house under the hammer in Sydney hit a record high of $1.755 million in March.
Units also rose with the auction price for apartments above $1 million for the first time, up to $1.03 million.
“The property market is red hot” CoreLogic Australian head of research Eliza Owen told NCA News Wire. “It is increasing in value and the rate at which it’s increasing continues to rise as well. For the stock that is coming onto the market, there’s a lot of buyers [and] properties are taking less time to sell. It’s more of a seller’s market at the moment.”
Ms Owen said speculation was growing about when a downturn might come and what could trigger it: “What might trigger a slowdown in the market would be changes to lending standards, probably something that would impact owner-occupiers as well as investors.
“The Australian Prudential and Regulation Authority has made pretty clear they’re not looking to intervene yet because the lending standards they’re looking at haven’t deteriorated.”
However, Ms Owen also believes that the housing market will lose strength even without APRA’s intervention: “I think these growth rates are going to slow down,” she said.
“People are going to come against affordability constraints, particularly first-home buyers, and there’s got to be a cap on someone’s willingness to pay, even in an environment where there is relatively little supply.”
She noted that there were more than 40,000 properties put onto the market in April – an increase of 14 per cent on the average number over the past five years.
"That is a sign that vendors are starting to respond to these swift dwelling value increases and really utilising that sellers' market," Ms Owen said.
More properties on market
There were 66 per cent more homes available in the upper north shore in April compared to the trend over the past five years, while eastern suburbs listings were up 59 per cent. The increase in the Ryde-Hunters Hill region was 48 per cent over five-year trend and within inner Sydney it was 36 per cent.
CoreLogic research director Tim Lawless told News.com’s Aidan Devine that “exuberance” in the housing market was peaking: “This isn’t to say housing values are about to reverse; a more likely scenario is the housing market is moving through a peak rate of growth,” he said.
“We are expecting housing values to continue to rise throughout 2021 and most likely throughout 2022, just not at the unsustainable pace of (recent) growth.”
Greg Jericho, in another Guardian article, commented on housing affordability and says it’s not what it seems just because interest rates are low and housing’s an attractive form of investment.
“When we compare…household income in each state with the median established house prices in the capital cities we see that in Sydney, for example, the median house price is now around 9.2 times the annual income of a median household – some 23 per cent above the 7.5 times level it was a decade ago.”
Deposit requirements too have increased: “In Sydney…based on needing a 20 per cent deposit we can estimate that the average deposit for buying a new or established home is $153,200 – some $55,000 more than a decade ago. In 2002, the average deposit for a home in Sydney was the equivalent to around 11 months’ worth of a median household’s income; now it is around 17 and half months’ worth.”
There is a notable disparity, however, between rises in the price of houses and those of units. Nationally, house prices are rising much faster than apartment prices (4.4 per cent and 1.4 per cent respectively over the past three months), and in oversupplied Sydney unit prices in many areas are going backwards.
The Telegraph’s Aidan Devine concluded: “Buying an apartment instead of a house with a backyard would save home seekers up to 80 per cent in some Sydney suburbs,” which was interesting, but it seems that buyers would generally prefer to acquire a house if they can afford it.
The Herald’s Polly Dunning summed up the reasons for this situation: “We sat in our homes last year and saw all the things we hated; all the ways it didn’t work for us and our family.
“Apartments are great when you’re out of the house at work all day and strapped for time – they’re easy to maintain and tend to be close to local amenities. But when you’re stuck in them for long periods, especially with little kids, well, frankly, they suck.”
CoreLogic figures show that in the past year, the median price of a Parramatta unit has fallen 3 per cent to $574,963. That's a significant drop when you consider Australia's median unit price rose 2.3 per cent in the last 12 months while the median house price jumped 7.4 per cent.
CoreLogic’s Eliza Owen says there are a few reasons, in general, why certain apartment suburbs fell harder than others: "The biggest trend is proximity to the CBD, as overseas arrivals are more likely to sit at big international centres."
However, CoreLogic’s statistics show that even within an under-performing apartment suburb, there are some units which manage to buck the trend and sell for a very high price. Overall, apartment prices across Sydney rose 2.2 per cent in three months even though unit rents were flat.
More auction records
A flood of cashed-up buyers has kept auction clearances at record levels, with houses hitting their strongest monthly rate since 1995 in April at 84.2 per cent, and with a rate above 80 per cent for eight consecutive Saturdays. Also impressive were the climbing volumes of properties on offer across Australia, hitting a peak of 4250 homes under the hammer.
One recent weekend, Sydney’s northern beaches recorded the strongest clearance rate at 90.2 per cent, followed by the upper north shore and the central coast, at 87.2 per cent and 85.6 per cent, respectively.
Domain figures also showed that the number of homes selling before auction reached a record high in March, with 37.3 per cent of sellers accepting a pre-auction offer. We might wonder why this is happening at a time when auctions are bringing such outstanding results.
Peyman Khezr, a lecturer in economics at RMIT University, says that sellers are the winners in these pre-auction sales because emotional and inexperienced buyers are more likely to overestimate values: “If there are a few buyers with a very high value … it’s best to not allow them to compete publicly,” Dr Khezr said.
“In a public auction, because people observe other people’s bids … if they’ve overestimated [the value] they will update it immediately and reduce what they will bid to. [But] in a silent auction [when they make early offers] they never get to see the other bids.”
McGrath’s chief auctioneer Scott Kennedy Green told Domain that he did not think the auction market would see any significant changes before mid-year: “In wintertime, we generally see auction numbers decrease … but that won’t change the way the prices are going because there will be less stock,” he said.
He said he thought buyer demand would remain strong for months to come and that he expected unsuccessful buyers to return for another round: “That does tend to get buyers down, but that’s the state of play, and you just have to keep backing up and be prepared to maybe spend a little bit more or wait for the right property and prepare yourself for a competitive auction.”
Many ‘wounded underbidders’ are apparently pulling out of the market and waiting to see whether prices will fall before diving back in. Michelle May, principal of Michelle May Buyers Agents, said some frustrated Sydney buyers are finding the market rising too fast for them and are now looking for extra help.
“We have to tell them that what you are looking for in this market is just not possible,” Ms May said. “They need to adjust their criteria or leave the market.”
Though she has heard about people walking away, she warned against it, instead encouraging buyers to persevere to get into the market: “If you’re thinking things are going to change anytime soon, that’s super risky,” Ms May said.
First-home buyers
Sydney’s first-home buyers have so far been the drivers of this amazing property market we’re seeing. First-time buyers have been racing into the market in numbers that haven’t been seen since 2009, and lending to first-home buyers has shot up by 66 per cent in the past year.
More than one in three new property loans has been taken out by first-home buyers, so no wonder the federal housing minister, Michael Sukkar, called the Morrison government ‘a government for first-time buyers’. He credits his government’s generous support schemes for the buying burst and highlights the HomeBuilder grant program for much of the favourable statistics.
However, Mr Sukkar recently told an Urban Development Institute conference that the Commonwealth had no intention of collaborating with states and territories to reduce their imposts on first-home buyers: “The much bigger issue we have here is the affordability challenges in our major cities, which is a real and present risk for all state governments,” he said.
HomeBuilder and additional building bonuses in some states and territories that enabled first-home buyers to access up to $55,000 in cash grants have already ended, and many other coronavirus support measures are scheduled to end by mid-year.
Even those who were eligible for a HomeBuilder grant and had applied before the deadline now fear they will forfeit their grant. Work has to commence on any approved project within six months of the contract being signed, and a combination of delays in approvals of development applications and overstretched builders has meant this deadline may not be met for many applicants.
Another concern for those who aspire to home ownership in NSW is that they have only until July 31 to access the extension of stamp duty exemptions which saw the price cap on new builds lift from $650,000 to $800,000.
Sydney mortgage broker Rob Lees of Mortgage Choice told Domain that he has been seeing record volumes of first-home buyers until lately and has noticed a bit of a slowdown in recent weeks.
“The big challenge at the moment is just finding property … a lot of first-home buyers are starting to feel like they’re being priced out of the market, so there is a lot of frustration and disappointment,” he said. “And a lot [of pre-approvals] are expiring because people can’t find a property in time.”
Sydney-based buyers’ agent Nick Viner, of Buyer’s Domain, said first-home buyers had well and truly burst onto the market in recent times. Rapid price gains created a fear of missing out, he said, but would likely fizzle out as more properties hit the market once homeowners were encouraged by the strong selling conditions.
He commented that, while first-home buyers have been fuelling strong competition, they will increasingly find themselves competing against investors, who are beginning to return to the unit market to take advantage of the large price gap between houses and apartments, he said.
The 12.7 per cent increase in property financing to investors in March was significantly higher than the 5.2 per cent increase in finance to owner occupiers. And the value of loan commitments to investors was up 54 per cent on March last year.
And the resurgence of housing investors has coincided with early signs of a peak in demand for finance by first home buyers whose participation in the housing market appears to be running out of steam. In March first home buyer finance fell by 3.1 per cent (seasonally adjusted), according to the ABS.
Realestate.com.au director of economic research Cameron Kusher says that as more people purchase homes, there may be a better balance between supply and demand later this year: “I expect supply to increase for the next few months and ramp up quite a bit during spring, assuming we aren’t forced back into lockdowns at some time.
“We are seeing a significant increase in the volume of sales so far this year compared to recent years and the supply of stock is increasing, albeit the rise in supply remains insufficient relative to demand,” Mr Kusher said.
Mr Kusher’s forecast is supported by the sizeable lift in fresh listings hitting the market. In the four weeks ending April 18, 26,470 new listings were added to the market – the most in a 28-day period since 2016. New listings are now sitting 17 per cent above the five-year average.
Is the end nigh?
The Herald’s Shane Wright has expressed concerns with what he calls “a situation that leaves one of the world’s most sparsely populated nations with some of the globe’s most expensive housing”.
Mr Wright says the RBA is ‘acutely aware’ of the issues surrounding high housing prices and quotes the CBA’s Gareth Aird who says that a reckoning is coming: “Every time the central bank cuts interest rates, a person walks into a bank and asks for a bigger loan to pay for a house. It happens again and again,” he says. “You get to that point where you can’t keep doing that when you have interest rates at zero. We’ve now had the last of the kicks of the can down the road.”
In early February, RBA governor Philip Lowe told the House of Representatives’ economics committee that the Bank was “closely” watching the housing market. He also stressed the Bank’s role was not to target the property market.
“The RBA does not and should not target housing prices,” he said. “Instead, our focus is on the lending that’s used to purchase housing. We want to see lending standards remain strong. At present, there are few signs of deterioration in these standards.”
In another statement, Mr Lowe affirmed: “Household and business balance sheets are in good shape and should continue to support spending,” Mr Lowe said. “Nevertheless, wage and price pressures are subdued and are expected to remain so for some years.”
Following its April board meeting, the bank updated its key economic forecasts, with GDP expected to expand by 4.75 per cent this year. In its February update, the bank had tipped growth this year of 3.5 per cent. The Bank left the official cash rate at 0.1 per cent and said it would consider extending its $200 billion quantitative easing program into 2022.
The RBA has to take a balanced approach when it comes to house prices. As Mr Lowe well knows, higher prices are associated with the so-called “wealth effect” which also lifts consumer confidence and spending. Higher housing prices make people feel better and more like spending.
If the Bank tightens lending standards it risks dampening confidence and stifling the domestic economy. Wage rises also suffer, and lower wages give rise to increased consumer debt, which is one reason Australian households are among the most indebted in the world. The present low-interest regime that facilitates borrowing, tied with low rates of wages growth, creates its own problems.
ANZ economist Daniel Gradwell believes there is a chance that regulators will have to step in at some point: "I just think that the longer Australia has these really strong price movements each month, the more likely we are to go down that macroprudential road as well," he said.
"As much as there are some benefits to rising prices at the moment, in terms of the wealth effect and the impact that has on peoples' spending patterns, I think it's also worth keeping in mind where some of the downside risks might play out over the next 12 or 18 months."
At least one market watcher has forecast the next rise in interest rates. RateCity.com.au research director Sally Tindall believes a rate hike is coming up in 2024 when many homeowners will come off three-year fixed rates: “It’s incredible to think there are over one million homeowners who have never experienced a cash rate hike,” she says.
“The concern is, some people fighting tooth and nail to get into the property market today haven’t thought about whether they can meet the repayments in three or four years’ time. When [borrowers apply] for a mortgage, banks factor in a 2.5 per cent buffer on the ongoing rate. However, people should stress-test the loan for themselves.”
Will APRA step in?
It’s interesting to note that for the age group between 30 and 34 the rate of home ownership has fallen, down from 64 per cent in 1971 to just 50 per cent in the last census data from 2016. Among those aged 35 to 44, it has fallen to 63 per cent. This is at least in part due to the growing unaffordability of Sydney housing.
As property prices go up, the first-home buyer has a big decision to make. Borrow more to keep up with rising prices, buy something much further out of town, or drop out of the market entirely. Raising the deposit is hard enough for struggling 30-plus year olds but making repayments on million-dollar mortgages isn’t any easier.
So what happens if the same kindly federal government steps in, via the Australian Prudential Regulation Authority (APRA), to hold back the banks from lending money to buyers who take the plunge and want to take their chances with a budget-blasting mortgage?
It has happened before. An investor-led boom from 2015 and 2017 led to APRA’s cutback on interest-only loans and on the number of investor home loans by the banks. Since both those control measures were removed in 2018, investor loans and interest-only loans have remained within APRA’s limits.
But if rules such as limits on big loans with small deposits are imposed, it would especially affect first-home buyers, according to Brendan Coates, household finances program director of the Grattan Institute.
“It’s fair to say that first-home buyers typically are disproportionately affected by macro-prudential rules because they tend to have smaller deposits and take out larger loans relative to their income,” Mr Coates told the Sydney Morning Herald.
APRA chairman Wayne Byres said it would be “giving careful thought to which tools might work” to control excessive risk-taking in the housing market. And the Reserve Bank said in its April monthly statement that it will be “monitoring trends in housing borrowing carefully”.
IMF foresees global bubble ‘pop’
The International Monetary Fund (IMF) has warned that rising interest rates in the US could cause overpriced assets in world markets “to unwind in a disorderly manner”. And there’s little doubt that Australian housing is overpriced.
IMF chief economist Gita Gopinath warned that the global recovery from the economic impacts of the coronavirus would be undone by a ‘divergent’ pace of recovery and rapidly rising interest rates.
“Multispeed recoveries could pose financial risks if interest rates in the United States rise further in unexpected ways,” she wrote in an IMF blog post on Tuesday to mark the release of the latest World Economic Outlook.
“This could cause inflated asset valuations to unwind in a disorderly manner, financial conditions to tighten sharply, and recovery prospects to deteriorate, especially for some highly leveraged emerging markets and developing economies.”
Offsetting this prediction for Australia is the eventual reopening of our international borders to migration and international students that’s expected to stimulate house prices to rise even further.
Property market experts say that another round of real estate price upthrusts is virtually guaranteed when the pandemic measures ease, with demand expected to intensify in a market characterised by continued short supply.
CoreLogic head of research Tim Lawless told the Courier-Mail that the next wave of demand would not be immediate but would eventually occur.
He said that temporary migrants, including international students and visitors, tend to rent while the other 40 per cent arriving in Australia with plans to stay here will rent first and then buy.
“If you open up international borders again, you get another surge in population growth,” Mr Lawless said.
“We will first see inner city apartment markets tenancy demand shore-up and stabilise and the progressively see that permanent migration trend flow through to additional purchasing demand and a second wave of price surges.”
Sources:
‘Property boom: April home values ease over affordability concerns and increase in stock levels,’ Matt Bell, The Daily Telegraph, 4 May 2021
‘The latest data reveals just how insane the Australian housing market has become,’Greg Jericho, The Guardian, 7 May 2021
‘Sydney and NSW Market Update,’ Andy Webb, Open Agent Newsletter, 9 May, 2021
‘Unit prices rise in Australia's 'international' cities, despite rental slump,’ David Chau, ABC News online, 1 May 2021
‘High house prices ‘a risk for all state governments’: Housing Minister wants premiers’ feet held to the fire,’ Angus Thompson and Jennifer Duke, Sydney Morning Herald, 1 May 2021
‘House price gains slow, but not by much, CoreLogic figures show,’ Michael Janda, ABC News online, 4 May 2021
‘The Sydney suburbs with the largest house price gains and falls,’ Kate Burke, Domain, 2 May 2021
‘Sydney housing boom set to continue but at a less frenzied pace, analysts say,’ Aidan Devine, The Daily Telegraph, 2 May 2021
‘Speculators back in the game to push up property prices,’ Elizabeth Knight, Sydney Morning Herald, 5 May 2021
‘RBA more bullish on economy as it holds rates at record low,’ Shane Wright and Jennifer Duke, Sydney Morning Herald, May 2021
‘Sydney suburbs where buying units instead of houses will save you a fortune,’ Aidan Devine, The Daily Telegraph, 6 May 2021
‘Fuelling the property fire? The stir-crazy Australians seeking better homes and gardens,’ Polly Dunning, Sydney Morning Herald, 15 April 2021
‘Yes, interest rates are low. But that doesn’t mean Australian housing is getting more affordable,’ Greg Jericho, The Guardian, 15 April 2021
‘Why a record number of homes are selling before auction, despite strong market conditions,’ Kate Burke, Domain, 19 April 2021
‘Frustrated home buyers leave the market unable to make a winning bid,’, Melissa Heagney, Domain, 21 April 2021
‘Real estate faces macroprudential risks and some analysts suggest the multi-decade housing boom could be nearing its end,’ Gareth Hutchens, ABC News online, 22 April 2021
‘Housing boom slows as wave of homes hits the market,’ Nila Sweeney, Australian Financial Review, 24 April 2021
‘Australia's house prices have seen the steepest increase in almost 18 years,’ Sarah Swain, ‘First home buyer boom masks a much bigger problem,’ Clancy Yeates, Sydney Morning Herald, 7 April 2021
‘First home buyers would be hardest hit if lending was curbed: experts,’ Tawar Razaghi, Domain, 7 April 2021
‘Sydney median auction house price jumps more than $100,000 in March alone,’ Kate Burke, Domain, 7 April 2021
‘Last kick of the can’: Property market reckoning coming,’ Shane Wright, Sydney Morning Herald, 8 April 2021
‘Warning on booming house prices,’ Angie Raphael, NCA NewsWire, 8 April 2021
‘IMF hints how Australian housing bubble could pop,’ Jessica Yun, Yahoo News, 8 April 2021
‘International border reopening to cause housing price surge,’ Darren Cartwright, The Courier-Mail, 8 April 2021
‘RBA warns against ‘over-exuberance’ as house prices rise,’ Clancy Yeates, Sydney Morning Herald, 9 April 2021
‘Clock ticking for first-home buyers turning to government incentives,’ Kate Burke, Domain, 11 April 2021
‘Mortgage rates: Have we reached the bottom?,’ Melissa Iaria, NCA NewsWire, 12 April 2021
‘Sellers soon set to return to the market,’ Lisa Hughes, Realestate.com.au, 14 April 2021
‘Australia’s house prices rising as more people want to become landlords,’ Peter Martin, News.com.au, 15 April 2021
‘Home builders nervous about $25,000 hit as government deadline looms,’ Tom Lowrey, ABC News online, 15 April 2021
‘How does Australia’s housing boom values compare with previous highs?,’ Kirsten Craze, Realestate.com.au, 15 April 2021
New records set as Sydney market’s rise is fastest in 32 years
Thu, 15 Apr 2021New records set as Sydney market’s rise is fastest in 32 years
Here’s what we said on these pages ten years ago, in a Market Comment article 26 March 2011 titled ‘Sydney property is still well-priced’: “Median prices in Sydney remain the highest in the nation; houses are selling at a median price of $588,250 and units are selling at a median price of $452,925.
“But a look at historical pricing shows that the present price levels of quality Sydney real estate represent genuine value. When demand softens, prices grow increasingly attractive, and today’s prices become tomorrow’s bargains.”
A decade later the market shows we were correct. Data from property research firm CoreLogic shows Sydney's property values have eclipsed the stratospheric heights they reached in mid-2017, and it is now more expensive to buy a home in Sydney than at any other time in history.
The median value for all dwellings in Sydney is now $895,933, and that includes units. Take units out of the calculations and the new median high for detached homes is a staggering $1,061,229. Units are yet to hit their own record highs, with the median value for a flat in Sydney now at $738,254.
The Sydney Morning Herald says that Sydney’s median house value jumped $50,000 in March, or $1600 a day. Since the start of the year, it has climbed $100,000, which, if it doesn’t slow, could see the median house price value reach $1.4 million by year’s end.
The Herald’s Matt Wade sums it all up: “Property tropes missing from the city’s narrative for years are back in the news. Dumps are selling for squillions; big crowds are showing up at auctions; reserves are being smashed.”
But are we seeing a new ‘bubble’ develop? The Guardian’s Martin Farrer doesn’t think so: “So, while a bubble might be defined as a market where rising prices are not justified by the fundamentals, the era of cheap money ushered in by the global financial crisis and sustained by Covid, has fundamentally changed those fundamentals. There is an expectation that authorities will do anything necessary to keep the party going.”
Domain’s Elizabeth Redman adds a bit more detail: “The housing market is booming off the back of ultra-low interest rates and expectations they will stay low for years, as well as a recovering economy and a shortage of homes for sale as new listings fail to keep up with strong buyer demand.”
Ian Verrender, the ABC’s resident economist, says that the frenzy that has overtaken the property sector is ‘stunning’: “The final prices routinely come in at well above the indicative range and well above buyer reserves.
“It's been a bonanza for the two-thirds of households that own a property; heartache for those desperately trying to get aboard the boom.
“Few would be surprised then that in March, Australian property prices rose at their fastest pace in 32 years,” he said.
CoreLogic's executive research director Tim Lawless said he was not surprised by home prices in Sydney reaching a new record.
"The recovery trend in Sydney following the -15.3 per cent decline from July 2017 to May 2019 was interrupted by COVID-19, with housing values falling by -3.0 per cent through the worst of the pandemic," Mr Lawless said.
"Since housing values found a floor in October last year, Sydney home values have risen 5.7 per cent to reach a new record high.”
This year, the Easter break and the onset of winter weather are unlikely to slow the incredible speed of Australia’s housing market.
We haven’t seen anything like this in recent years. The last time house prices nationally rose so much and so fast was in the late 1980s in a property boom that was ended by double-digit interest rates and the 1990-91 recession.
Although this is usually a quieter time of year for Sydney property auctions, agents are instead expecting a “second spring” and gearing up for sizeable auctions that will need to be held not just on Saturdays but on Sundays too, just to accommodate the anticipated huge numbers.
Some agents have even reported they’re booked out for auctions well into July as a surge of new listings is about to hit the market.
Domain senior research analyst Nicola Powell said the “unseasonably hot market” could continue for the next six months as a record number of new home loan commitments pointed to ongoing buyer demand across Australia.
“The most unusual thing for me about this market is that all capital cities have so much buyer demand at the same time,” Dr Powell said.
By late March Sydney’s auction market was powering ahead, recording a sky-high preliminary clearance rate of 90.5 per cent one Saturday evening. That meant the city could count seven Saturdays in a row where more than 80 per cent of homes scheduled for auction have sold under the hammer, and that’s a new record.
The last weekend in March, dubbed ‘Super Saturday’ by the media, saw more than 1000 properties go under the hammer in Sydney — the biggest auction day for the city in three years. With such a high volume of listings, 1180 for Sydney, the preliminary clearance rate of 88 per cent showed that the market’s strength was genuine.
And as historical data from Domain indicates, a high clearance rate points to strong price growth. An auction clearance rate of 70 per cent is usually correlated with an annual price growth of about 10 per cent – well within the levels of price growth forecasts from the big four banks.
ANZ economists have forecast that Australian housing prices are set to soar 17 per cent this year – with Sydney expecting a 19 per cent rise in 2021.
“What we’ve seen is a combination of quite strong demand and relatively low supply,” ANZ senior economist Felicity Emmett said.
“Clearly very low interest rates have more than offset the headwinds from higher unemployment and low population growth.
“We’ve seen housing finance really growing very strongly, very high auction clearance rates [and] very strong sentiment about house prices picking up over the next year or so, and that has really pushed demand a lot higher.”
What could all this mean for house hunters by the year’s end? Domain’s Tawar Razaghi has done some calculations: “House hunters could be forced to add hundreds of thousands of dollars to their budget by the end of the year or else make compromises, after new economist forecasts tipped home prices to reach staggering heights,” he said.
“The national median house price was $852,940 in the December quarter on Domain data, meaning if house prices did move in that order they would rise $145,000 by the end of the year to $997,940.
“Sydney is expected to jump 19 per cent in 2021, which would cost house-buyers an extra $230,183 and take the median house price to $1,441,671.”
And for all those who say housing has become a form of investment rather than a way to just put a roof over our heads, you’re absolutely right.
CoreLogic research found the proportion of properties in the December quarter that changed hands at a profit rose to 89.9 per cent, above pre-COVID levels. Only 4.4 per cent of Sydney houses sold at a loss.
Unit owners were more likely to sell at a loss than house vendors with 12.6 of Sydney units selling at a loss in the December quarter, many as a result of earlier ‘off the plan’ purchases reaching their settlement dates.
FOMO is growing
CoreLogic’s research director, Tim Lawless, had earlier predicted that price surges in Sydney would soon eclipse the record highs set in 2017, and so they have.
Mr Lawless said a primary driver of the current boom could be buyer's fear of missing out – or FOMO – combined with a relatively smaller number of properties on offer. This means more parties competing for the same properties which tends to produce bumper results at auction.
"Housing inventory is around record lows for this time of the year and buyer demand is well above average. These conditions favour sellers," Mr Lawless said.
Real estate veteran and McGrath Estate Agents founder John McGrath told The Daily Telegraph it was natural for buyers to develop a sense of FOMO when they see 10 or more bidders competing for a home at auction but cautioned buyers needed to be careful.
“You don’t want to stretch yourself,” he said. “If you can’t afford the prices anymore, you need to change location. It’s best to be flexible in this market.
“I am telling people don’t panic, but [also] don’t delay because prices are going up,” he said.
“But I think things may start to slow by the end of the year … the market won’t be moving this quickly forever.”
Real Estate Buyers Agents Association president Cate Bakos said that buyers who were repeatedly outbid, frequently the ‘wounded underbidders’ we’ve mentioned before, were often looking in areas they couldn’t afford.
Those disheartened by the strong competition should keep in mind that the best properties would attract the most interest, Ms Bakos said. “It might seem like a good idea to go for properties where there is less interest, but remember that if you buy a bargain, you will sell a bargain.”
Canstar’s group executive of financial services, Steve Mickenbecker, said it had been the perfect storm for the property market - demand is running hot and stock is being absorbed as soon as it hit the market or even before it’s advertised.
“The fear of missing out is becoming a powerful psychological driver as government incentives and low interest rates have encouraged first-home buyers and home builders into the market in a rush,” Mr Mickenbecker said.
“Owners are loath to put a house on the market even at high current prices, fearing they will miss the boat getting back in.”
Buy first or sell first?
New data from Westpac found that seller confidence is even higher now than it was prior to the pandemic. More than a third of homeowners are planning to sell their property in the next five years as record low interest rates and incredibly high buyer demand send prices rocketing upwards.
Westpac also found that one in ten homeowners are already in the process of putting their home on the market or are planning to do so in the next 12 months.
Anthony Hughes, Managing Director of Mortgages at Westpac, said the bank has seen an increasing number of buyers purchasing homes that prioritised outdoor spaces.
"Home ownership preferences have evolved since the start of the pandemic, with Australians seeking more space, peace and quiet, as well as properties which offer outdoor living like backyards and balconies," Mr Hughes told 9News.
"This is fuelling buyer demand and motivating more Australians to think about selling their current property so they can purchase a new home to better meet their future needs."
But rapidly rising property prices in Sydney and fierce competition for houses is making it harder to buy and sell in the same market. leaving homeowners with a few difficult choices to make.
Do they sell first, then risk of not finding another home before settlement? Or do they buy first, then hope they can sell their existing property quickly for a price they’re happy to accept?
“In the ideal scenario your transactions are as close as possible, but that’s not always possible,” says Domain senior research analyst Nicola Powell.
“Last year, sellers were more inclined to sell before they bought because there was so much uncertainty with prices. [But now] if you sell first before you purchase, what many may now be finding is that the market is running away from them and gaining in price.
Selling agent Catherine Murphy of The Agency North told Domain it’s now harder to sell and buy in the same market: “The old saying is that you should always buy and sell in the same market; if you don’t, sometimes you can win, sometimes you can lose,” Ms Murphy said.
“Sometimes the gap between the two is bigger. At the moment, because it is so difficult to buy a property and relatively easy to sell a property, a lot of people have decided to try and secure a property first.”
There’s also a possibility that the shortage of stock could spiral, with the lack of supply dissuading potential vendors from putting their homes on the market in case they can’t find anything to buy, further reducing the number of properties available.
What isn’t selling fast
There are not many homes being passed in at Sydney auctions, and agents report that any leftovers are usually stock-standard units or homes with unrealistic seller expectations.
Oasis Skeen Property senior buyer’s agent Paul Wilcox says that most of the time they are units: “The ones struggling are vanilla-ish, properties in high rises,” said Mr Wilcox. “The generic two-bedroom units are the ones that are copping a bit of a hit.”
Michael Yardney, a property writer and advisor, sees it this way: “While well located, family friendly apartments in Sydney’s inner suburbs are likely to perform strongly due to increasing demand from owner occupiers and investors, apartments in high-rise towers are likely to continue to languish.”
Property price data backs this up. Sydney’s worst-performing suburbs and property type, over the past five years, are almost entirely units in the western suburbs.
Architect and City of Sydney councillor Phillip Thalis, who helped develop a number of Sydney’s most important urban projects, including the Sydney Olympic Park 2025 Plan and Parramatta City Centre Plan, told Domain: “This is the most rapacious period in Sydney’s history.
“The rate and scale of change is shocking to many people. There are a lot of people building buildings who wouldn’t want to live in them themselves.”
High-rise unit prices have continued to drop in price, mostly due to the large number of apartments constructed, creating a market surplus of one type of housing.
The decline of unit prices was set in motion before the pandemic, in December 2018 when stories of defects in the Opal Tower were widely reported. That has continued to drag down prices in Sydney Olympic Park almost 20 per cent in the past five years with a 6.4 per cent decline recorded in the year ending December 2020, according to Domain data.
And when the pandemic hit, working from home became popular and units fell even further out of favour. Houses became the preferred form of accommodation and losses were further compounded.
But apartments may have their day once again, according to BresicWhitney head of sales and chief auctioneer Thomas McGlynn.
“The difference between what an apartment would sell for compared to a house has widened. The value proposition is far greater than potentially stretching to buy a home,” he said.
“The farther away house prices will get to apartments, people will turn back to apartments simply because of the value that’s on offer.”
RBA and interest rates
After the central bank kept rates at the historic low of 0.1 per cent at its monthly policy meeting in April, RBA Governor, Philip Lowe, again indicated the higher inflation needed to see a rise in rates would not return until “2024 at the earliest”.
The Governor said the outlook for the economy had improved in recent months as vaccines are rolled out and global trade has picked up while commodity prices have increased.
“While the path ahead is likely to remain bumpy and uneven, there are better prospects for a sustained recovery than there were a few months ago ... Even so, the recovery remains dependent on the health situation and on significant fiscal and monetary support,” he said.
(And just for the record, the International Monetary Fund [IMF] is forecasting Australia’s economy to grow 4.5 per cent in 2021, and unemployment to drop to six per cent – a very healthy outlook.)
Mr Lowe also noted that housing markets were strengthening: “Housing credit growth to owner-occupiers has picked up, with strong demand from first-home buyers,” he said, adding investor credit growth remains subdued.
“Given the environment of rising housing prices and low interest rates, the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”
CommSec chief economist Craig James agreed a rate hike was not imminent. “We expect no change in rates before 2024,” Mr James said.
“There will always be upside and downside risks, but there still remains significant slack in the job market.
“Unemployment would need to fall much more quickly than expected and wages lift sharply for any thought to be given to lifting rates.”
The Federal Treasury’s deputy secretary Luke Yeaman told a Senate estimates hearing that his department was watching the property market carefully, but there were no signs of a bubble forming, nor was there a decline in lending standards.
He said that higher house prices were actually boosting the overall economy: “At this stage … the support the strong housing market is providing for consumers, through to household wealth, we see as a sign of strength in the recovery,” he said.
Responsible lending laws relaxed
The federal government is looking to wind back responsible lending laws after a government report warned home loan approvals were taking too long and were too invasive.
A Senate committee argued the change would not undermine consumer protections, saying there are other protections for consumers and that the principle of responsible lending was still embedded in other bank regulations.
Federal Treasurer Josh Frydenberg has previously said that responsible lending obligations would still apply to small amount credit contracts (SACCs) below $2,000 and to consumer leases. He also said the government had introduced a number of reforms to strengthen consumer protection.
He said these reforms included handing more power to the Australian Securities and Investment Commission (ASIC), initiating a statutory obligation for mortgage brokers to act in the best interests of consumers and requiring them to prioritise consumers’ interest when providing credit assistance, increasing financial sector civil and criminal penalties, and establishing the Australian Financial Complaints Authority (AFCA).
In a Financial Review article, APRA chairman Wayne Byres queried whether there was a problem that needed to be dealt with. In 2015 and 2017, he said that APRA intervened to cool off speculative investors fuelled up on interest-only loans. This time, he says, the rising ratios of loans to value and household debt to income are just a natural result of more first-time buyers taking advantage of cheap money.
Brokers say the maximum amount people can borrow has increased due to the lower interest rates used to assess loans and a take-home income boost from recent tax cuts. But the increase has also been limited by a rise in the living expenses benchmark most banks use to assess loan applications.
Someone on a lower income of $50,000 could have upped their budget by nearly $19,000 over the past year, on the lowest variable rate, while a high-income earner on $120,000 could increase their budget by $57,500.
Other sources within the broking sector told ABC News that borrowing capacity has increased by around 7.5 per cent since July 2019 for a typical family on a $150,000 household income with two children.
For mortgage brokers, that has meant a boom in business: "General inquiry in the last six months has been busier than I've had in the past 16 years of being a mortgage broker," Sydney based mortgage broker Terri Unwin said in an interview with ABC News.
Ms Unwin said, so far, access to funding has not been made easier, but there was less paperwork being required when banks sign customers up.
"Overall borrowing capacity has remained pretty level because of the increases in living expenses that the banks are benchmarking." Ms Unwin said.
AMP Capital chief economist Shane Oliver says he is concerned that at some point in the future interest rates will rise and people will then be unable to pay their mortgages: "With the removal of responsible lending obligations and the property boom underway, the risk is that those lending standards will be eased and people who maybe shouldn't have got a loan will end up getting one."
But he added that he felt higher rates would not be on the cards for another few years: "The greater likelihood is the Reserve Bank will, with other bank regulators — particularly APRA, put pressure on the banks to slow down the pace of lending and tighten up their lending standards," Dr Oliver said.
First-home buyers
Australian Bureau of Statistics data shows first home buyers are taking out mortgages at the highest rate since 2009.
Some first home buyers are also taking advantage of the federal government's First Home Loan Deposit Scheme (FHLDS) that waives costly insurance on loans for first home buyers that do not have a 20 per cent deposit.
Places in that scheme for existing home purchases have been especially popular and there are now waiting lists at some banks to get on it.
"The scheme is cutting years off the time it takes Australians to save for a deposit, and it is working, with first home buyers now entering the market at the highest level since October, 2009," Minister for Housing Treasurer, Michael Sukkar, said.
However, Sydney mortgage broker Rob Lees says he’s seen a slowdown of first-home buyer activity in recent weeks: “The big challenge at the moment is just finding a property.
“A lot of first home buyers are starting to feel like they’re being priced out of the market, so there is a lot of frustration and disappointment,” he said. “And a lot [of pre-approvals] are expiring because people can’t find a property in time.”
While there has been an encouraging lift in borrowing by first time buyers in recent months, Grattan Institute economist Brendon Coates does not expect that to have much effect on the overall level of home ownership.
“Some first home buyers have made gains recently, but the reality is the bottom 40 per cent of income earners are priced out of most of our major cities,” he says. “I wouldn’t expect to see a big jump in home ownership rates among that lower income cohort which is the group we are more worried about.”
Coates says “we shouldn’t be surprised” house prices have surged given the drastic interest rate reductions of recent times, now down to just 0.1 per cent.
He points to Reserve Bank modelling published in 2019 which found a sustained reduction in interest rates of 1 percentage point would lift housing prices by 30 per cent over a period of three years.
More about stamp duty
For the past few years, we’ve covered the NSW government’s proposed changes to stamp duty on property transactions. Every now and then the subject surfaces in the news and little by little the perils as well as the claimed benefits are being highlighted.
Briefly, the government proposal would mean the end of stamp duty on the sale of property and replacing the lost revenues by an annual tax on all residential property in the state. So, one tax goes and another one comes in. Sounds reasonable, right? Or maybe not.
The government has claimed broad support for its proposal saying 74 per cent of respondents to an ongoing government survey said they would likely opt-in to the proposed system. Since all the details haven’t yet been revealed, the words ‘would likely’ could be replaced with ‘might’ for greater accuracy.
Johnathan Chancellor, writing on News.com, explains why he’s more than a bit concerned about the plan: “While supporting the desired outcome of encouraging greater turnover to allow more supply at key stages in people’s lives, I fear the reform will not make home ownership easier, or cheaper, but will rather introduce a lifetime long burden for owners.
“There’s an inevitability that the low start property valuation tax will always be increasing as land values rise, but also the annual tax rate will be prone to hikes whenever the state government wishes.”
Mr Chancellor’s calculations are that on a $1 million purchase, homebuyers would now pay stamp duty of $40,335, but under the reform could opt for a “perpetual obligation” property tax, which, depending on the land value and the final rate, will start at around $3000 annually.
He quotes modelling showing that after paying for 10 years, most owners keeping their homes will then see their overall costs exceed what would have been a one-off upfront stamp duty.
He also comments that instead of housing prices falling, vendors will happily hang onto the amount that would otherwise have been paid in stamp duty and property prices would stay the same.
“It already has a mooted onerous structure as once a home is put under the new system it can’t escape, no matter the next buyer’s wish. I’d anticipate that properties that still offer buyers the choice of stamp duty, and of opting into the new regime, will become more desired than those locked into the annual tax.”
Chartered Accountants Australia and New Zealand has asked NSW Treasurer Dominic Perrottet to produce modelling so stakeholders can better understand the impact of any changes on government revenues and property prices.
CA’s senior tax advocate Susan Franks said that while her group supported “moving from stamp duty to property tax”, it had concerns about the costs.
“The transitional method to opt-in is likely to be protracted and complex, with three tax regimes running in parallel for many decades,” she said in a Financial Review article.
“There is currently no modelling available to answer serious questions that range from the sustainability of NSW’s revenue model to housing impacts on retirees and first home buyers.
“Educating buyers around this tax change is going to be essential, otherwise we may end up with a dangerous mix of even higher prices for market entrants, and an ongoing property tax as well,” she said.
Carry on regardless
Top economists tell us that the property market is set to roll on despite economic support measures coming to an end in late March, rejecting long-held worries about a looming fiscal crunch.
Although economists agree there will be financial stress for those who lose government support, they believe it will have few consequences for a housing market that seems to grow stronger with every week.
EY Oceania chief economist Jo Masters told Domain the housing market absorbed changes last year when house prices accelerated and the economy continued to improve despite the economic threats posed by the pandemic.
“I actually don’t think it’s going to have a dramatic impact on house prices and the housing market. We’ve already had two step-downs in support,” Ms Masters said. “The step-down in October was bigger than the one we’re going to see at the end of this month.”
The expiry of the wage subsidy is expected to put about 110,000 jobs at risk, but that’s not going to have much effect on the overall economy, according to Commonwealth Bank’s head of Australian economics Gareth Aird.
“What does that mean for the housing market? We don’t think there will be any impact from the expiry of JobKeeper,” Mr Aird said.
“Back in September, there were a lot more people on JobKeeper and a lot fewer people employed. GDP and production are back at pre-COVID levels.”
NAB chief economist Alan Oster said some parts of the economy would feel economic headwinds, including city centres, travel destinations and the industries surrounding them, such as food and accommodation.
“It won’t change the outlook for the property market,” he said. “We don’t think house prices will keep going at the current rate, but we don’t think it’s going to crash either. It might make things a bit more moderate.
“The economy is in far better shape than any original forecast at the height of COVID last year, notwithstanding such areas as tourism, combined with many industries having a complete lack of applicants for strong employment positions,” Ray Ellis, CEO of First National, Australia’s third largest real estate agency, told News Corp.
CoreLogic head of research Eliza Owen points out: “JobKeeper has already been reduced significantly in recent months, with no dampening impact apparent on the housing market as a whole.
“Changes to JobSeeker would likely have little direct impact on housing market values,” she concluded.
Sources:
‘Clock ticking for first-home buyers turning to government incentives,’ Kate Burke, Domain, 11 April 2021
‘Why there’s not enough property for sale right now,’ Sue Williams, Domain. 6 April 2021
‘RBA holds interest rates at 0.1 per cent,’ Jennifer Duke and Shane Wright, Sydney Morning Herald, 6 April 2021
‘Bubble or boom? Why ultra-low interest rates mean house prices may never bust,’ Martin Farrer, The Guardian, 5 April 2021
‘Australian home values rise at fastest pace for 32 years: Core Logic research,’ Elizabeth Redman, Domain, 1 April 2021
‘Australian housing ‘boom’ declared as affordability fears mount,’ Rebecca LeMay, News.com.au, 2 April 2021
‘Why the RBA is reluctant to stop the housing boom,’ Ian Verrender, ABC News online, 2 April 2021
‘House prices rising at fastest pace in 32 years as listings can't keep up with demand: CoreLogic,’ Stephanie Chalmers, ABC News online, 1 April 2021
‘Accountants slam protracted NSW stamp duty reform,’ Martin Kelly, Australian Financial Review, 30 March 2021
‘How much extra will it cost to buy a house if prices rise as much as economists forecast?,’ Tawar Razaghi, Domain, 26 March 2021
‘Australian house prices forecast to see their sharpest rise since the 1980s,’ Ben Graham, News.com.au, 26 March 2021
‘House prices could rise 17 per cent this year, locking some first-home hopefuls out: ANZ,’
Elizabeth Redman, Domain, 24 March 2021
‘Real estate: end of JobKeeper and JobSeeker unlikely to force down property prices,’ James MacSmith, News Corp Australia Network, 22 March 2021
‘Housing market tipped to power on despite end of JobKeeper: economists,’ Tawar Razaghi, Domain, 22 March 2021
‘Sydney auctions: Dilapidated Glebe terrace sells for $2.99 million,’ Kate Burke, Domain, 20 March 2021
‘First home buyers urged to proceed with caution as Sydney's housing surge continues,’ Kathleen Calderwood, ABC News online, 20 March 2021
‘Will the housing market keep going up? Agents say yes, they’re booked out until July,’
Melissa Heagney Domain, 19 March 2021
‘NSW Stamp duty reform could see some homeowners worse off under the changes,’ Jonathan Chancellor, News.com.au, 17 March 2021
‘Senate committee backs plan to roll back responsible lending rules, citing home-loan approval delays,’ Elizabeth Redman, Domain, 15 March 2021
‘Fears of a debt disaster as property market runs hot and changes to safe lending laws loom’, Nassim Khadem, ABC News online, 13 March 2021
‘Sydney property prices hit all-time high on back of housing boom,’ Stuart Marsh, 9News, 12 March 2021
‘Why are developments still going up in western Sydney – and at what cost?,’ Tawar Razaghi, Domain, 9 March 2021
‘Pressure mounts on RBA to hike interest rates as property prices keep climbing,’ Rebecca LeMay, News.com.au, 10 March 2021
‘These types of Sydney properties are passing in at auction, even in a boom market,’ Tawar Razaghi, Domain, 9 March 2021
‘Real estate mogul John McGrath says home seekers should try not to ‘panic’ in boom market,’ Aidan Devine, realestate.com.au, 9 March 2021
‘More than a third of Aussie homeowners considering putting property up for sale, Stuart Marsh, 9News, 8 March 2021
‘The seller’s dilemma: Sydney homeowners caught out by market moving too fast to buy in,’
Kate Burke, Domain, 7 March 2021
‘Record low interest rates until 2024 could deepen divisions between Australia's haves and have-nots,’ Martin Farrer, The Guardian, 6 March 2021
'Buyers are confronting a sense of FOMO': Aussie property prices rise at fastest rate in 17 years’. Stuart Marsh, 9News, 1 March 2021
‘First home buyers are racing to buy — but rising prices make home ownership 'further out of reach,' Emilia Terzon, ABC News online, 2 March 2021
‘Pandemic property boom: will it get too hot to handle?,’ Matt Wade, Sydney Morning Herald, 6 March 2021
Sydney market highs prove sustainable, RBA’s not worried
Mon, 15 Mar 2021Can Sydney housing really go this much higher? The CoreLogic national home value index showed Sydney was Australia’s strongest capital city market in the month of February, rising 2.5 per cent – the largest monthly rise since 2003. The median price for a house at auction in Sydney has reached a record high of $1.68 million, and the auction clearance rate is challenging the high last seen in May 2015.
A few more statistics from CoreLogic that hit the headlines this month show that home values are at an all-time record high, soaring 5.7 per cent since October last year. This new record surpasses the property market peak that Sydney reached in July 2017, despite a global pandemic and economic recession.
Westpac has predicted a 20 per cent jump in Australian property prices between now and 2023. The bank said record-low interest rates of just 0.1 per cent would see real estate values in our nation’s capital cities rise by 10 per cent both this year and next, meaning the median price of Sydney homes would increase by around $207,000 to an amazing $1.24 million.
“The bottom line is that Australia’s housing upturn now has strong momentum that looks to be lifting further and will remain well supported by monetary conditions and an improving economic backdrop,” Westpac economists Bill Evans and Matthew Hassan said.
“Note that the vaccine developments will also influence the relative performance of different housing markets. The smaller capital cities and regions are well placed to continue to outperform in 2021 but growth will swing towards the three eastern capitals – Sydney, Melbourne, and Brisbane in 2022 as the end of the pandemic allows international borders to reopen,” Westpac said.
Evans and Hassan said Australia is clearly a “seller’s market” with buyer demand running well ahead of the number of properties up for sale: "Buyer demand has run well ahead of 'on market' supply, with sales outstripping new listings by 34 per cent over the last six months and 'stock on market' down to just 2.5 months of sales — the long-run average is 3.8," they noted.
“The upturn is being supported by record-low interest rates, the confident expectation amongst borrowers that these rates will remain low for years to come, ample credit supply and an improving economic backdrop as the rollout of vaccines promises to bring the pandemic to an end and drives a sustained lift in confidence,” they said.
The Commonwealth Bank’s economics team isn’t quite as optimistic as Westpac’s, but still predicts prices will continue to lift. It believes Sydney’s prices will climb 7.5 per cent this year and 5.8 per cent in 2022. And in a separate study, the CBA’s economic projections also showed Sydney prices could rise by 20 per cent over the next two years.
CBA’s head of Australian economics, Gareth Aird, told the Sydney Morning Herald that, with interest rates below the return on rental properties, the fundamentals for house prices were strong.
“The Australian housing market is on the cusp of a boom. The boom is being driven by record low mortgage rates coupled with a V-shaped recovery in the labour market.
“New lending has lifted sharply. Dwelling prices are rising briskly in most capital cities. And turnover is up significantly on year ago levels,” he wrote.
According to Domain, most Sydney areas are now seeing houses offered at private treaty being sold much faster than a year ago. Auction campaigns are also being shortened, from the traditional four-to-four-and-a-half weeks to three and three-and-a-half weeks.
The median price for a house at auction in Sydney has reached a record high of $1.68 million and the auction clearance rate is at its highest level since 2015.
“It’s all about big buyer demand, low interest rates, people working from home and wanting to find a place that suits them better – and the market is trending upwards,” said James Price of inner-west agency Hudson McHugh.
Houses in Sydney’s inner-city are also selling faster, down 22.6 per cent from 53 days to 41, and the volume of off-the-market sales taking place in some spots could lower that still further, suggests McGrath agent Andrew Stewart.
“There’s a distinct lack of stock in many areas around the city, which is driving days on market down, but also properties sell off-market in just a week or two,” he told Domain.
BIS Oxford Economics economist Maree Kilroy told Domain while the house price forecasts looked to be strong, it’s important to note these rises would, in part, be offset by the rock-bottom interest rates.
“It might sound strange, but housing affordability has improved. Whilst we talk about prices getting back to pre-pandemic levels, we’ve also had interest rate cuts since then,” she said.
RBA isn’t worried
The ABC’s Ian Verrender says that Australian real estate prices hit record levels in mid-February and there’s no end in sight: “With interest rates locked in at a whisker above zero — and with Reserve Bank assurances they'll stay put for the next four years — it's little wonder buyers are scrambling for a piece of the action.
“Add in the imminent removal of responsible lending laws and the stage is set for a sustained real estate boom.”
Mr Verrender says that we’d normally expect the Reserve Bank to be formulating contingency plans on how to deflate the real estate bubble without hurting the broader economy: “Instead, our monetary mandarins are doing the opposite. They're stepping aside, more than happy to let prices rip.”
He quotes RBA Governor Philip Lowe who recently said: "There's a lot of focus at the moment on the fact that housing prices are rising again, and the stock market has been strong. Well, the national house price index today is where it was four years ago … and the equity market, we're back to where we were at the beginning of last year."
Central banks, says Mr Verrender, including Australia’s have allowed the property booms created by record low interest rates to continue without restraint, trusting the markets to remain buoyant regardless of long-term consequences.
“To be fair, the RBA reckons real estate prices will have to start moderating soon for two key reasons. One is that for the past year, we've had no immigration which should have reduced demand for housing.
“And the second is that a large number of newly constructed properties have yet to come on the market.”
Reserve Bank board member Ian Harper told Bloomberg News that unemployment was too high and economic activity too low for monetary stimulus to trigger runaway house price inflation: “The tendency of this to produce an asset-price bubble is way off where we’re presently headed,” Mr Harper said, while noting rising house prices encouraged investment.
“There’s still plenty of excess capacity in the economy,” he said.
Nerida Conisbee, chief economist at global real estate company REA Group, told The Guardian’s Royce Kurmelovs that the situation is being driven by a combination of cheap money, a high savings rate among those who held onto a job through 2020, a receding pandemic and an exodus from densely populated cities into regional areas.
“You’re watching a realignment as people work out where they want to live and where they want to be employed,” Conisbee said.
“The recession we saw with the pandemic is not quite like what we’ve seen elsewhere in the GFC where it was finance-led. What that’s meant for property is there’s no shortage of money. Interest rates are at incredible lows and those who had jobs were forced to save during rounds of lockdowns.”
Martin North, the principal of Digital Finance Analytics, said the federal government is looking to pump up the market further by winding back responsible lending laws: “Scott Morrison said three years ago he wouldn’t let prices drop and that is proving to be true, but we’re building these rises off the back of massive debts.
“Banks are lending six- or seven-times average incomes. They’re doing what they were doing before the royal commission. This is an unsustainable and a highly risky extension when we should be investing in more sustainable or longer-term solutions.”
Among the economists taking part in The Sydney Morning Herald/The Age Scope survey, at least two said they believe there could be an RBA rate rise as soon as late 2022. University of Melbourne professor Neville Norman predicted an increase in the fourth quarter and Bankwest Curtin Economics Centre’s Rebecca Cassells forecasts one in the third. Another three believe rates could start to rise in 2023.
No boom lasts forever, and this month will see the ending or winding back of a number of government stimulus measures that have helped to cushion our economy from the impacts of the pandemic.
After 31 March, the end of support packages such as JobKeeper, loan relief and mortgage deferrals will have as yet unknown effects on our economy and some of them will be felt in the property sector. Treasurer Josh Frydenberg says that the next round of economic stimulus will come from the households and businesses that have put aside around $200 billion in savings since the pandemic began.
“This money will help underpin our economic recovery and avoid a fiscal cliff as some of the support measures start to taper off,” Mr Frydenberg told Sky News.
First-home buyers return
Dr Cameron Murray, a post-doctoral fellow at the Henry Halloran Trust at the University of Sydney, told The Guardian that what is happening in Australia has to be seen in a global context.
The world is experiencing a global housing boom, he says, while central banks have come to view the housing market and the associated consumer spending as a key element of their economies: “Our macro-stabilisation policy works by juicing house prices,” Murray said.
“This is a policy most central banks have adopted. Secondly, we’re just at that point in the cycle. The best parallel to the situation now is 2004. I think we’re in a very similar phase right now. Sydney boomed early, then it tapered off. Then the rest of the country shot up for four years in line with the broad global house price cycle.”
There’s general agreement that the current market is being driven by owner-occupier homebuyers, rather than the investors who largely created the property surge of the past decade. Australian Bureau of Statistics figures show new loan approvals to owner-occupiers surged 39 per cent in the year to December, while loan approvals for first-home buyers leapt by 61 per cent, boosted by government grants.
Westpac economists said that the investor segment accounted for less than 25 per cent of new home loans over the second half of 2020 but usually averages over 35 per cent and rises in periods of housing upswings: “Some tentative early evidence here is the 15 per cent increase in new lending for investors in the last two months."
CoreLogic’s Tim Lawless says at the peak in 2015, property investors made up about 46 per cent of all new mortgage lending, while today investors account for just 23 per cent.
“Weaker rental demand, especially in the investment enclaves of Melbourne and Sydney’s inner-city unit markets, is likely a significant disincentive for investors,” Lawless says.
However, there was a 9.4 per cent increase in investor lending in January, which was the strongest monthly result for this segment since September 2016, according to ANZ Bank’s analysis of ABS data.
Peter King, chief executive of Westpac, described the investor market as “relatively quiet.”
“I wouldn’t say we’ve seen [investors] come back into the market yet, but conditions are looking like that’s a possibility, I think,” King said.
Economist Saul Eslake told The Sydney Morning Herald that recent gains in the housing boom are unlikely to be undone: “Much of the demand is coming from first-time buyers, who appear to perceive an opportunity to get into the housing market without facing the competition from cashed-up immigrants or negatively geared domestic investors, which has ‘squeezed’ them out for most of the preceding 30 years.”
The Herald’s Jessica Irvine has no doubts about who’s driving the current market’s price gains: “It’s largely first-time buyers – at least the lucky ones who have savings and access to credit.
“Such buyers know they will pay absolutely no tax on any capital gains they make from their homes. In retirement, the value of their asset will be excluded from the age pension assets test. When they die, they can pass on the property tax-free to their children.
The Australian Bureau of Statistics is in full agreement that first home buyers have been a driving force behind the recent rally in prices.
ABS data shows first homebuyer loan commitments jumped 9.3 per cent in December and 56.6 per cent over the past year. The 16,664 first home buyers taking out loans in January was the highest number since May 2009.
“Federal and state government measures, such as HomeBuilder, and historically low interest rates are supporting ongoing growth in housing loan commitments.” ABS head of finance and wealth Amanda Seneviratne told News.com.
Work from home effects
For generations, Australians have wanted to live within a comfortable commute of their city’s CBD. Public transport systems and roads were in place to convey them to and from work, and it was worth paying a bit more for housing just to be closer to jobs, restaurants, theatres and the other attributes associated with our cities.
Over the past year there’s been a workplace revolution caused by Covid-19 and it’s having a noticeable effect on housing prices. Working from home used to be a scarce option for employees, but after lockdowns caused by the pandemic things have most certainly changed.
So many workers have grown accustomed to working from home that it’s showing up as a population shift from our cities into the regions, according to Morgan Stanley Research. It shows that tens of thousands of Australians exiting our cities have caused a boom in regional home prices and rental levels, while figures from CoreLogic show that regional home prices have risen by 7.9 per cent on average over the past twelve months.
To what degree this trend will become permanent is a subject of ongoing debate. A study conducted by Swinburne University for the Fair Work Commission found that only five per cent of workers sent home during the pandemic said they want to return to the office full-time once the pandemic has finally concluded. Employers too are reassessing the potential benefits to be gained by transitioning away from the traditional CBD-based commercial model.
It could be some time before we know how these issues will be resolved and how they will affect the housing market. It is certain, however, that while this work-from-home trend has developed, and while Covid-19 has impacted workplaces across Australia, the Sydney property market has continued to power its way upwards and demand has never been stronger.
Housing supply excess?
A recent report by the federal government’s National Housing Finance and Investment Corporation (NHFIC) predicts that the nationwide supply of new housing will exceed new demand by about 127,000 dwellings in 2021, and by about 68,000 dwellings in 2022. Sydney and Melbourne are naturally expected to have the largest excess supply of housing stock.
But look a bit deeper into these figures and we see the forecast oversupply will be largely limited to city-based apartments, particularly in capital cities. The biggest impact will be on rentals, with an expected softening of apartment prices in these markets. Detached housing won’t be affected, according to NHFIC’s CEO Nathan Dal Bon.
Speaking at NHFIC’s “State of the Nation’s Housing: 2021 and beyond” webinar Mr Dal Bon described the short-term oversupply of housing as “nuanced”, and said that record low interest rates and government incentives such as HomeBuilder and the First Home Owner Grant would stimulate demand in other sections of the market.
“From my perspective, there is clearly a great deal of momentum in segments of the property sector thanks to low interest rates and considerable fiscal stimulus. This has had the desired impact of stimulating demand at a time of significant uncertainty. However, this headline story is more nuanced. For example, there [are] significant differences between detached housing and apartments and across regions and metro areas,” he said.
The NHFIC’s report says beyond 2023 demand is projected to exceed supply as the construction industry begins to respond to a return of growth in demand. This will result in an undersupply of almost 14,000 dwellings in Sydney by 2024.
Sources:
‘Sydney property market recovery soars to record new high,’ Ellen Lutton, Domain, 12 March 2021
‘House prices record sharpest increase since 2003, CoreLogic says,’ Michael Janda, ABC News online, 1 March 2021
‘Surging property prices could force RBA to reassess ultra-low rates, economists warn,’ Shane Wright and Jennifer Duke, Sydney Morning Herald, 2 March 2021
‘Why the current Sydney housing boom could be unprecedented,’ Aidan Devine,
Realestate.com.au, 3 March 2021
‘Australia's house price boom,’ Alexis Carey, News.com.au, 1 March 2021
‘Australian house prices record largest monthly rise in almost two decades,’ AAP, 1 March 2021
‘Sydney median auction house price reaches a high of $1.68m during record month of clearance rates,’ Tawar Razaghi, Domain, 26 February 2021
‘Sydney median auction house price reaches a high of $1.68m during record month of clearance rates,’ Tawar Razaghi, Domain, 26 February 2021
‘Why Australia's property prices will continue to soar,’ Ian Verrender, ABC News online, 15 February 2021
‘Australians’ desire to work from home affecting house prices,’ Tarric Brooker, news.com.au, 15 February 2021
‘What happens to commercial real estate when government stimulus measures end?, Allison Worrall, Domain, 23 February 2021
‘Population shock’ to cause short-term oversupply of housing, inner-city apartments to be hardest hit,’ Rachel Wells, Sydney Morning Herald, February 17, 2021
‘What’s different about this property boom?,’ Clancy Yeates, Sydney Morning Herald, 24 February2021
‘Westpac forecasts 20 per cent jump in Australian house prices,’ Natalie Brown, News.com.au, 23 February 2021
‘The Sydney suburbs where properties are selling the fastest,’ Sue Williams, Domain, 17 February 2021
‘It’s madness, but here’s a way to stop home prices rising so fast,’ Jessica Irvine, Sydney Morning Herald, 18 February 2021
‘The Australian property market is booming but the gains are based on 'massive' debts,’ Royce Kurmelovs, The Guardian, 16 February 2021
‘Sellers’ market as Australian property prices rise and buyers line up,’ Staff writer, News.com.au, 18 February 2021
‘Seller’s market’: House prices could climb 20 per cent over next two years,’ Shane Wright, Sydney Morning Herald, 22 February 2021
‘Regulators to keep a close eye on housing market, say economists,’ Euan Black, New Daily, 14 February 2021
‘On the cusp of a boom’: Double-digit house price rise tipped as banks continue rate cuts,’ Shane Wright, Sydney Morning Herald, 16 February 2021
‘House prices to rise by 16 per cent over 2021 and 2022: CBA forecast,’ Ellen Lutton, Domain, 16 February 2021
‘What end of Centrelink JobKeeper means for Australia’s economy,’ Tarric Brooker, News.com.au, 28 February 2021
Cashed-up buyers and ‘wounded underbidders’ drive market to new highs
Mon, 15 Feb 2021The Australian property market is nothing short of bulletproof, as shown by new data from CoreLogic. Despite the country’s first recession in nearly three decades, national home values – including both houses and apartments – ended 2020 three per cent higher.
Another recent report, the Domain House Price index, showed the nation’s median detached house price hit a high of $852,940 in the December quarter. Sydney’s median house price tapped a record high mark of $1,211,488 - $50,000 above the high point pre-pandemic.
A new term – ‘wounded underbidders’, has entered the housing market’s lexicon. This is a term describing those who intended to purchase a property before last Christmas but who missed out in the end-of-year auctions. Now they’re back, attending auctions in 2021 and ready to buy with loans approved and deposits in hand.
The greatest increases in the full 2020 year came in outer Sydney areas including the Northern Beaches, where prices have risen 10.1 per cent in the past 12 months, the Blue Mountains, where prices are up 9.1 per cent, and the Central Coast which has seen an increase of 12.7 per cent, Domain said.
And in the three months to December, the northern beaches had the strongest quarterly growth with the median house price jumping $165,000 to a record $2.05 million.
It was one of six regions where house prices set a new record high price in the last quarter of the year, with house medians in the upper north shore, north-west, city’s west, Blue Mountains and the Central Coast all reaching new peaks.
The first weekend in February saw the Sydney auction market have its biggest result in 24 years, recording a preliminary clearance rate of 88.7 per cent from 408 auctions listed. Domain senior research analyst Nicola Powell said this was the highest clearance result since June 14, 1997, when the finalised clearance rate was 89 per cent after 226 auctions.
“We do expect a bounce early in the auction season because there are lower volumes of homes for sale and more home buyers on the market after the holidays,” she said. “That said, it’s a very robust result and highlights the market is in an upswing and it is a very competitive market,” she said.
The number of people attending open houses across the city in January was up by more than a third, year-on-year, data from Domain shows, as a fear of missing out (FOMO) sets in for house hunters once again.
In other times you’d expect something else to be happening with property values. After all, we’ve had the steepest decline in population growth in decades, rising joblessness, a pandemic, and the latest ‘recession we had to have’. Regardless. property values have climbed upwards unabated.
Naturally, there are reasons for this. The JobKeeper wage subsidy, tax cuts, cash payments, early access to super, historic interest-rate cuts and mass bank deferments on loan payments have all contributed to what seems an economic miracle.
Buyers advocate Cate Bakos said the market for buyers has become “ferocious” with house prices rising by thousands of dollars each week due to the competition over the supply of homes for sale. She said that even if more stock comes onto the market, there is enough demand from buyers to keep the current momentum going.
“I’ve never seen it like this before,” Ms Bakos said. “The demand for houses has gone through the roof.”
Still a modest rebound
Economist Saul Eslake says that, compared to the property boom in other countries, Australia’s rebound during the pandemic has been relatively modest: “I think it’s important to view what’s happening to Australian house prices in a global context,” he said.
“Residential property prices have been remarkably resilient in most countries thanks to record low interest rates and ample supply of credit.”
Mr Eslake told the Sydney Morning Herald that recent gains are unlikely to be undone: “I would say the rise in house prices is probably sustainable. Indeed, we could see further gains in many regional cities as people adapt to the opportunities created by the more widespread acceptance – at least for white-collar occupations – of working from home.
“Much of the demand is coming from first-time buyers, who appear to perceive an opportunity to get into the housing market without facing the competition from cashed-up immigrants or negatively geared domestic investors, which has ‘squeezed’ them out for most of the preceding 30 years.”
Westpac’s chief economist Bill Evans believes Australian housing prices will continue to rise. He says concerns about prices falling in the coming months when borrowers with deferred-payment loans have to start paying again, are baseless: “It’s our view that that risk will be well managed.”
Evans thinks record-low interest rates, combined with the LNP government’s focus on growing the economy and an often-stated desire not to over-regulate bank lending, will create a “very, very positive environment for the housing market”. He also forecasts that Sydney home values will be up 14 per cent over the two years to the end of 2022.
Louis Christopher, founder of SQM Research, believes the greatest danger to such optimistic forecasts is what will happen when the government’s multibillion-dollar JobKeeper allowance scheme ends in March: “The ending of jobkeeper payments in March is a factor that we’re watching very closely.
“We think that measure averted a crash of the housing market in 2020 so it will be interesting to see what happens when it stops in March. But if the market makes it through the end of JobKeeper then we’ll see more investment and it will see the market through 2021.”
Fast-rising property values across the nation are being closely watched by the Reserve Bank of Australia, said the Bank’s governor Philip Lowe. It’s his opinion that the coronavirus pandemic’s effects on the economy would have been much harder to deal with if home prices had fallen.
Dr Lowe told a standing committee on economics hearing that there are “many moving parts ... at present” making the economic outlook complex: “In the face of all these moving parts, the housing market has been more resilient than expected and this has been helpful in terms of the overall economy.
“The past year would have been even more complicated if there had been large and widespread falls in housing prices,” Dr Lowe said.
Construction boom?
ABS head of finance and wealth, Amanda Seneviratne, said that about 53 per cent of housing loans in the fourth quarter of 2020 were for owner-occupiers buying existing dwellings, while construction of new dwellings accounted for 32 per cent.
“The value of construction loan commitments grew 17.1 per cent in December, more than doubling since the June implementation of the HomeBuilder grant,” Ms Seneviratne said.
“Federal and state government measures, such as HomeBuilder, and historically low interest rates, are supporting ongoing growth in housing loan commitments.”
Up to the end of December, 75,143 households had applied for a $25,000 grant under the HomeBuilder scheme which was nearly double Treasury forecasts. The government had earlier predicted the program would only support the renovation or construction of 42,000 homes at a total cost of $920 million.
HomeBuilder was introduced by the federal government at the peak of the coronavirus pandemic to respond to fears the construction sector would crash. Treasury now estimates the program is supporting around $18 billion worth of residential construction projects.
The HomeBuilder program was initially due to end in December, but due to its popularity has been extended until March 31, although the size of grants has been reduced from $25,000 to $15,000.
Despite the positive results generated by HomeBuilder, the number of new homes to be built in Sydney over the next five years will be considerably fewer than had been forecast by the state government before the coronavirus pandemic.
The NSW Department of Planning in its annual housing supply forecast estimated that from 132,500 to 171,200 new homes could be built over the next five years (2020-2021 to 2024-2025). Even the higher figure is less than the 38,210 homes a year forecast in early 2020 before the pandemic hit, and well down from the more than 42,000 new homes completed in greater Sydney in both 2017-18 and 2018-19.
The Housing Industry Association (HIA) says the reduction in the number of dwellings over the next five years would put tens of thousands of jobs at risk: “That is going to be a significant shock to the building industry if it does transpire,” the association’s chief economist, Tim Reardon, told the Sydney Morning Herald.
NSW Planning and Public Spaces Minister Rob Stokes cautions against becoming complacent and accepting that the COVID-19 pandemic has only caused a temporary slowdown in Sydney’s population growth.
Mr Stokes said long-term housing and land development targets would still need to be met: “We must continue to build housing and infrastructure for a growing and ageing population,” he said. “Forecasts show last year will only be a speed bump in greater Sydney’s housing demand.”
Affordability concerns
The unprecedented rise in house prices has raised concerns about housing affordability, with experts predicting workers on moderate incomes will find it much harder to reach home ownership than in previous years.
The affordability problem has accelerated so quickly that it now affects all segments of the market, from entry level first-home buyers to current owners seeking to upgrade.
Nicole Gurran, a professor of urban planning at the University of Sydney, says the hurdles for entry level buyers are harder than ever to surmount: “…unless the first-home buyers are in a high-income bracket and so able to secure a loan — but they’ll be looking at very high repayments. If I was an essential worker trying to buy a home anywhere within striking distance of a major city, I’d be more disheartened than ever.”
Commenting on recent figures from the Sydney property market that show first-home buyers are at their highest level of activity since the GFC, Professor Gurran argues that government incentives and low interest rates have helped a limited number of buyers to acquire a property, boosting the market for the short term.
“The question is whether those first-home buyers were then already heading towards home ownership anyway. I’d question whether the first-home buyer assistance made any difference over the long term,” she said.
Another academic, UNSW professor of housing research and policy Hal Pawson, said that if house prices are rising while unemployment stays elevated, affordability for key workers and moderate-income households will be “more stretched”.
“For the last 10 or 15 years interest rates have fallen. What that’s created is a bigger and bigger deposit barrier,” he said. “Falling interest rates don’t help with the part of the price you’ve got to save.
“The way that lower interest rates are driving prices higher is pushing up the multiple of annual earnings that the typical buyer will need to save for a deposit.”
Land Tax update
The introduction of a broad-based land tax on residential property looms closer after NSW Treasurer Dominic Perrottet said that Sydney housing prices are proof that sweeping changes to the state’s property tax system have become urgent.
“We need a fairer and equitable system in place, and yes those changes can be difficult, yes they financially can cost the state but ultimately we want to make sure we give our young people every single opportunity,” Mr Perrottet said.
“When you see the time it takes for young people to save for stamp duty, to save for that property ... by the time young people have saved for that deposit they’re going backwards because the prices of the properties have increased at a much greater rate.”
A survey conducted by the Committee for Sydney in January found that Sydneysiders were optimistic about their property market and supported major reforms now under consideration including replacing stamp duty with an annual land tax.
Eamon Waterford, the deputy chief executive of the Committee for Sydney, said that about 52 per cent of respondents said they support “changing the system to allow homebuyers to choose between paying stamp duty and property tax”, with 21 per cent opposing.
Support was highest among 18 to 34-year-olds, with 58 per cent in favour and 11 per cent against, and lowest among those aged above 50, with 47 per cent in favour of the change and 29 per cent against.
Among those living in Sydney’s east, 53 per cent supported the change and 20 per cent opposed, while 50 per cent of those in the city’s west supported it and 26 per cent stood against.
A consultation paper released in November 2020 recommended that for owner-occupiers the new property tax would consist of a fixed annual rate of $500 plus 0.3 per cent of the unimproved land value. The consultation period runs until March this year, when the government will consider its responses before the next state budget.
It’s estimated that an average Sydney house owner will pay either $51,000 as a lump sum on the purchase of the property or between $2000-$3000 every year.
Because of soaring NSW property prices and rising sales numbers, economists are projecting this year's stamp duty receipts to potentially outstrip the record set in 2017.
Nine News says that some government MPs are becoming nervous about the proposal, as leaving the tax as it is while property sales are booming would significantly help the NSW budget return to surplus. But it’s likely that any changes to existing stamp duty legislation will take time to implement.
“Nine News understands it will take at least 12 months to make any changes to the state's tax system, provided it is given the green light by cabinet and the parliament”, writes Nine’s federal political reporter Chris O’Keefe.
The gap between houses and units
The gap between the rise in the median price of Sydney houses and the median price of units continues to widen, after the median price of a freestanding residence in the city rocketed upwards by $4200 a week during the last three months of 2020.
Real Estate Institute of NSW chief executive Tim McKibbin said that a large percentage of those who purchase units are investors, and they have a different mindset to other property buyers during periods of economic turbulence: “Uncertainty has a higher impact on them,” he said.
Domain figures show that the median price of a freestanding house in Sydney reached a record $1.21 million in the December quarter, making it 66 per cent higher than the median unit price.
This is the biggest percentage difference between Sydney houses and units since Domain started tracking prices in 1993. For comparison purposes, the average price gap over the past decade has been 46 per cent.
Domain’s senior research analyst, Dr Nicola Powell, said unit prices are likely to be under more pressure in 2021: “Over the past three decades it is rare that house and unit prices move in opposite directions annually. Weaker investor activity has disproportionately impacted unit prices because they tend to be the preferred property type.
“There are also particular locations with increased supply as a result of heightened development in recent years. Changed lifestyle preferences post-lockdown and the option of remote working have driven demand to outer suburban and regional locations as buyers seek affordability, liveability, space and greater value for money.”
A further sign of declining interest in purchasing a unit is the statistic from Domain that showed in the four weeks to January 31, while inspections for houses were up 36.7 per cent, year-on-year, foot traffic through units was down 12.9 per cent over the same period.
“It really speaks to that two-speed market. We are seeing house and unit prices move in different directions,” Dr Powell said.
Open Agent’s Emily Ng also feels that 2021 will be a rough year for the high-rise apartment market: “With many investors opting to put their money in regional areas and freestanding homes, inner city apartments particularly in Sydney and Melbourne have experienced weak demand and high supply due to stalled overseas migration and a lack of international student numbers.”
Martin North, Founder of Digital Finance Analytics, says the highrise sector faces a serious shortage of tenants in 2021: “Many of the inner CBD high rise apartments were let to students and we know both in Sydney and in Melbourne there are massively high vacancies because nobody wants to rent there. Also, people aren't working in the CBD area where they used to.
“It’s going to put huge downward pressure on the highrise sector that already is wrestling with remediations of poorly built properties, an oversupply of poorly built properties and the failure of a number of developers,” he said.
While Sydney’s median house price reached a record high of $1,211,488 last quarter after jumping 6.7 per cent last year, Sydney unit prices dropped and were down 0.3 per cent over the year at a median of $729,840, Domain figures show.
Sources:
‘Sydney’s auction clearance rate hits highest point in 24 years,’ Melissa Heagney, Domain, 8 February 2021
Sydney open home inspection numbers jump as FOMO sets in again, experts say,’ Tawar Razaghi, Domain, 7 February 2021
‘New homes forecast for Sydney over next five years stuck in slow lane,’ Matt O'Sullivan, Sydney Morning Herald, 6 February 2021
‘Resilient housing market ‘helpful’ for COVID-19 economic recovery: RBA,’ Jennifer Duke and Shane Wright, Sydney Morning Herald, 7 February 2021
‘Support for stamp duty reforms and shift away from coal, Sydney survey finds,’ Pallavi Singhal, Sydney Morning Herald, 8 February 2021
‘Housing affordability: Record house prices reignite worries for home buyers,’ Elizabeth Redman, Tawar Razaghi , Domain, 29 January 2021
‘Out of control? Australian property market to rise to record highs this year,’ Martin Farrer, The Guardian, 30 January 2021
‘Record price difference opens between Sydney houses and units,’ Matt Wade and Jennifer Duke, 30 January 2021
‘Why are Australian home prices rising again and can it last?,’ Jessica Irvine, Sydney Morning Herald, 28 January 2021
‘Record housing prices spur Perrottet to deliver stamp duty reform,’ Tom Rabe and Matt Wade, Sydney Morning Herald, 29 January 2021
‘House prices predicted to rise by up to 10 per cent in 2021,’ Melissa Heagney, Domain, 2 February 2021
‘Coronavirus HomeBuilder construction scheme to hit nearly $2 billion amid spike in demand,’ Nour Haydar, ABC News online, 20 January 2021
‘Australia's housing market is boosted by policies designed to ensure prices keep rising,’ Greg Jericho, The Guardian, 3 February 2021
‘Wounded under-bidders set to drive property prices as 2021 begins,’ Sue Williams, Domain, 21 January 2021
‘Losses mount for apartment sellers in Sydney’s oversupplied high-rise regions,’ Aidan Devine, The Daily Telegraph, 24 January 2021
‘7 factors driving the property market in 2021,’ Emily Ng, Open Agent, 14 January 2021
‘Sydney house prices reach record high, outstrip pre-pandemic levels,’ Kate Burke, Domain, 28 January 2021
Market Comment
Mon, 18 Jan 2021Croll comment
Thu, 17 Dec 2020Sydney property demonstrates survival of the fittest
Wed, 18 Nov 2020Stability brings optimism and buyers to the Sydney market
Thu, 15 Oct 2020The Sydney property market continues to display strength despite the pandemic’s impacts on the Australian economy. In part, this is a reflection of a national trend with the latest data from September showing a rise in new listings in all capital cities with six of the eight capitals recording increases in home values.
To quote The Guardian’s economic expert, Greg Jericho: “The Australian housing market is a peculiar beast. You would think that in the midst of a worldwide pandemic that has seen Australia’s economy crash by seven per cent, and around one in five Australians either unemployed or desiring more hours, that house prices might take a tumble. But no.”
Figures from CoreLogic show that Sydney and Melbourne experienced only modest declines in housing prices with Sydney’s falling a miniscule -.03 per cent in the month of September, the smallest decline since March. (It should be noted that in the media this figure varied from -.01 to -0.04 per cent which depended upon the source of data used; we use CoreLogic for the sake of consistency in this article.)
This stability in housing prices, together with a favourable response to the October federal budget, was mirrored in the latest Westpac consumer survey which saw the national “house price expectations” index soar upwards by 31.5 per cent to 117.3 with all states showing impressive recoveries from earlier this year. The index in NSW was particularly outstanding with an 11.3 per cent rise to 120.4.
Westpac chief economist Bill Evans said about this result: “Such a development must be attributable to the response to the October federal budget; ongoing success across the nation in containing the COVID-19 outbreak; and the expectation that the Reserve Bank board is likely to further cut interest rates at its next meeting on November 3.”
The Sydney market’s strong performance over recent months is the result of unflagging buyer demand that has stabilised prices and even produced record sales in many areas, most notably the city’s Eastern suburbs where a 3-bedroom apartment listed for the first time in 70 years recently sold for a bit more than $13 million and a house in Vaucluse smashed the Australian auction record when it sold for $24.6 million.
Rich Harvey, CEO and Founder of Propertybuyer, told the Australian Financial Review that a limited supply of luxury properties was pushing prices up in Sydney: “Without being able to travel overseas, prestige home buyers have looked to feather their own nest and create the best possible environment at home,” he said.
There were earlier concerns about the market being weakened by distressed sales due to the pandemic, but Ben Horwood from Concord’s Horwood Nolan said that there were so few homes for sale it had actually stimulated competition among buyers: “By now we would have known if there would be a flood of properties coming to market this spring,” he told Domain, adding “The avalanche of stock is not coming.”
CoreLogic’s head of research, Tim Lawless, says that the combination of low interest rates, government grants and reduced numbers of homes for sale has supported the housing market against further declines: “The aggregate effect of low mortgage rates, and the prospect that rates could fall further, low inventory levels, government incentives and improving consumer sentiment seems to be outweighing the negative economic shock brought about by the pandemic.
“The imbalance between available supply and housing demand is one of the reasons why housing values have hardly fallen through the Covid period so far, and helps to explain the recent upward trend in values across some cities,” he told Domain’s Tawar Razaghi
Bensons Auctions director and auctioneer Stu Benson said there was a stark contrast between the lockdown earlier in the year and the currently rising levels of consumer confidence that now have him auctioning properties seven days week: “Bidder numbers are increasing. At the culmination of my auctions there are three or four buyers who are barely missing out on the property. They’re falling within a per cent of the sale price. We will be making up for lost ground and transacting right through the holiday period.”
Westpac economist Matthew Hassan says that Sydney’s housing market has come out better than expected from the pandemic because it is not at the epicentre of the battered Australian economy.
“Housing is collateral damage in the Covid shock. It’s not at the centre of the shock like tourism, hospitality and travel,” he said, adding that there’s still a question over how many Australians with deferred mortgage repayments would want to sell their homes once financial support from banks and government was turned off.
Belle Property chief executive Peter Hanscomb has an answer for this, saying that travel restrictions meant buyers were saving more money now and increasing their budget when looking for a home and the proposed relaxation of lending laws would also bring more buyers into the marketplace.
“We’re going to see a very strong six months coming up and possibly well and truly beyond that,” he said. “The demand is strong. Good properties are selling so quickly.”
Writing in the Sydney Morning Herald, columnist Elizabeth Knight says that the forecasts of property prices dipping a little more this year then bouncing back next year assume that those people deferring interest payments will get back on a payment schedule when the moratorium is lifted, that renters can start paying landlords again, and that borrowers on JobKeeper or JobSeeker will resume/find employment.
“It is easy to understand why property experts and economists have been backpedalling on predictions of massive falls in house prices they made only a few months back. The fact is the sky didn’t fall in (or should I say hasn’t fallen in) and capital city dwelling prices are down a relatively modest 2.8 per cent since their April peak.”
Government steps in
So, it’s really, “so far, so good” at this point in time. The Morrison government is doing what it can to support the housing market and has announced it will scrap the responsible lending obligations contained within the National Consumer Credit Protection Act, thereby allowing banks more freedom to lend to marginal borrowers.
Despite concerns these changes, which are still subject to parliamentary approval, could stimulate risky lending, the overall response from the property sector has been optimism that the changes will increase lending and therefore raise housing prices.
Meanwhile, the recent federal budget extended the Home Builder and First Home Buyer Deposit schemes and provided additional stimulus to businesses with the intention of boosting jobs through incentives to employers, all of which could be helpful to would-be homebuyers as well as renters and those with existing mortgages.
Most importantly, price caps in The First Home Buyer Deposit Scheme will be lifted in Melbourne and Sydney to account for the higher cost of housing in these two cities.
Although not wildly successful in its first period of operation the housing industry believes that HomeBuilder will prove to be a great idea once migration starts up again. It is possible that Australia’s rate of population growth will go back to normal next year and this is a policy that has potential to increase the amount of new housing activity.
HomeBuilder was introduced in June this year as a stimulus for the economy. It offers eligible new home builders $25,000 cash grants towards the cost of construction. The grant itself is paid after construction begins, which must happen within six months of contracts being signed.
Before the announcement of the federal budget, Master Builders Australia chief executive Danita Wawn said the federal government needed HomeBuilder to drive a rebound in home building: “HomeBuilder is proving to be one of the most effective government interventions in decades and we call on the federal government to maximise its positive impact by extending the program for 12 months.”
The Reserve Bank has already set its interest rates at record lows and is expected to go even a bit further, possibly at its November meeting. Thanks to low rates, borrowers have been able to secure increasingly large loans relative to what they might have been able to negotiate a year ago.
So, who loses?
Followers of the Sydney property market will have noticed two important things: First, property is always best viewed as a long-term investment, and secondly that the price trend of Sydney property is relentlessly upwards over time. Does this mean it’s impossible to lose money in ‘The Emerald City’?
In October CoreLogic released the results of a fascinating study with the title “Pain and Gain Report” that contains a number of home truths for all property owners and investors. Its focus is on loss-making property sales in Australia, and these do happen, even in Sydney.
As noted previously, across Australia the housing market has been somewhat insulated from the effects of the pandemic by a reduction in the number of property transactions as well as the mortgage holidays offered by banks. Only 12.8 per cent of properties sold in the three months to June were sold at a loss, and in case you might think this is a pandemic-based outcome it’s only slightly higher than it was in August 2019 when there was a government clampdown on lending.
For the purposes of comparison, the five-year average figure for all loss-making sales is 9.8 per cent. Sydney fared better than this in this year’s June quarter with only 8.8 per cent of all property sales being made at a loss.
The ‘Pain and Gain Report’ contained a number of other findings including the logical one that owning a property for a longer period is generally associated with selling for a greater gain.
Apartment sellers in the June quarter were more likely to make a loss than house vendors with 20.7 per cent of unit sales at a loss compared to 10.4 per cent for houses. This was due to the high volume of new units built since 2013, according to the report. Investors were also more likely to sell at a loss (18 per cent of investors) than homeowners (11.1 per cent).
What happens next?
There are a few good reasons to be optimistic about Australian property not just surviving the pandemic but even coming out ahead sooner than we might have expected.
Mortgage approvals achieved pre-pandemic levels during July, with approved mortgages rising from 25,713 in June to 28,322 in July, one of the biggest monthly increases since the pandemic hit.
Other signs that optimism could be warranted include that activity by real estate agents has reportedly recovered to the same levels as 2019 after dropping around 60 per cent in mid-March 2020 while new listings in our capital cities are running 8.9 per cent higher than at this time in 2019.
Meanwhile, Sydney is recording its highest auction clearance rates since March, while agents report high crowd numbers, with so many attending that in some cases people had to be turned away to comply with social-distancing requirements.
“We’re seeing strong momentum throughout the entire Sydney real estate market with more agents reporting a higher number of open home attendees and registered bidders,” said Alex Pattaro, Ray White NSW chief auctioneer.
CoreLogic’s head of residential research, Eliza Owen said that improving consumer sentiment pointed to a coming rise in house prices: “Generally, we would expect that easier access to credit creates more competition, which is likely to have an inflationary impact on dwelling values,” Owen told Yahoo Finance’s Jessica Yun.
And if the RBA does cut rates again as widely forecast, even more house hunters will enter the market, she added.
“Between the potential for a further cash rate reduction, and federal government announcements to relax lending policies, we would expect to see added demand, which would have an upside impact on dwelling markets either late this year, or early next year.”
Industry Super Australia chief economist Stephen Anthony said the outlook for prices in major cities like Sydney was difficult to ascertain, given the big shifts in demand dynamics. He told Domain’s Jim Malo that it was even possible we would see prices jump post-pandemic.
“We know where we’ve come from, but we don’t know to what extent we’ll continue with temporary visa holders and the international student market,” he said. “We don’t know the extent to which people will flock to our large cities.
“We need to see what the new norm is in 2021 and beyond, regarding the previous market drivers.”
He said that because of the relatively large number of workers who had managed to keep their jobs and had been saving cash through the lockdown, prices could go the other way:
“There’s a bit of pent-up demand there as well,” he said. “There’s some issues there about the likely bounce-back in markets.”
Westpac's Chief Economist Bill Evans and the bank’s Senior Economist Matthew Hassan argue that lower interest rates, a mild recession and loan repayment holidays will all act as price superchargers to both increase property prices in growth markets and protect current values. They foresee the property market reacting to the pandemic in four distinct phases:
The first is an initial "Covid shock", in which prices fall. Both economists believe that most of the property price plunge has already taken place. The second phase is a stabilisation of the capital city markets through the December 2020 and March 2021 quarters. And the third phase is a minor softening of prices through to September 2021, followed by a fourth phase of two-year growth.
"The fourth phase will span at least two years when distressed loans from deferrals have worked through the system and prices react strongly to ongoing low rates; improved affordability; a strengthening economic recovery and policy stimulus," the economists wrote, adding they expect dwelling prices to rise by an estimated 15 per cent over this two-year period.
To finish with a concluding quote from the Guardian’s Greg Jericho: “And so even in the midst of the deepest recession in nearly 100 years the housing market continues along its merry way.
“That is of course good for the economy as a whole – a housing crash will not do anyone any good. But those hoping an economic recession might see some moderation in affordability will likely have to keep waiting.”
Sources:
‘Confidence in Australian housing market booms despite recession: Westpac,’ Tawar Razaghi, Domain, 14 October 2020
‘Australian property market update - September 2020,’ Emily Ng, Open Agent, 3 October 2020
‘Sydney’s property price falls likely to be stemmed by keen buyers and few sellers,’ Tawar Razaghi, Domain, 4 October 2020
‘Property price bulls pushing bears back into hibernation,’ Elizabeth Knight, Sydney Morning Herald, 2 October 2020
‘Melbourne, Sydney property prices fall as other capital cities rise: CoreLogic,’ Tawar Razaghi, Domain, 1 October 2020
‘Chief Economist update: Big-spending budget will mean money for housing,’ Nerida Conisbee, realestate.com.au, 6 October 2020
‘Get me an offer’: Nervous sellers ready for quick deals say agents,’ Duncan Hughes, Australian Financial Review, 3 October 2020
‘More properties likely to sell at a loss as mortgage holidays end: report,’ Elizabeth Redman, Domain, 6 October 2020
‘Melbourne and Sydney house values tumble through September,’ Shane Wright, Sydney Morning Herald, 1 October 2020
‘Mortgage deferrals are winding up, so what happens next?,’ Daniel Ziffer, ABC News online, 2 October 2020
‘Huge sign the property market is heating up again,’ Jessica Yun, Yahoo Finance, 1 October 2020
‘Sydney auction clearance rate hits highest point since before coronavirus restrictions,’ Melissa Heagney, Domain, 28 September 2020
‘Research uncovers Sydney's housing price bubbles just as they may have popped’, Nigel Gladstone, Sydney Morning Herald, 27 September 2020
‘Will property still be overpriced after house prices have fallen?,’ Jim Malo, Domain, 25 September 2020
‘Calls to extend HomeBuilder grant to save the new housing industry,’ Melissa Heagney, Domain, 23 September 2020
‘Aussie house prices tipped to surge by 15 per cent post-pandemic,’ Stuart Marsh, Senior Producer, 9News, 22 September 2020
‘Even in the midst of a recession the Australian housing market continues along its merry way,’ Greg Jericho, The Guardian, 17 September 202
Sydney housing outpaces wage rises, becomes more affordable
Tue, 22 Sep 2020Figures from Domain show that Sydney house prices finished the financial year 10.5 per cent higher than the previous year. Wages growth in the same period, however, went up by just 1.8 per cent over the same period, ABS figures show, which meant housing prices outperformed wages by 8.7 percentage points.
This has been a trend for some time. In 16 of the 29 quarters prior to June 2019, the median Sydney home earned more in price rises than the median full-time worker earned from wages.
"The modest decline in established housing prices at the national level, and the partial recovery in financial asset prices such as equities since March, mean that household wealth was broadly unchanged in the June quarter and increased a little over the past year," the RBA's August statement of monetary policy said.
Despite the pandemic’s impacts on our property values, Australia’s property market is still ranked 19th out of 56 countries and territories in Knight Frank’s global index. Our market recorded price growth of 6.1 per cent in the twelve months to June this year, even after price growth dropped by two per cent between April and June.
Knight Frank’s head of residential research in Australia, Michelle Ciesielski, said the ranking was largely because our lockdowns during the second quarter of the year weren’t as long or as severe as those in many other countries.
“It can also be attributable to the state of the housing market prior to the pandemic, with Australia’s market strong heading into 2020 with demand high and stock levels low,” she said.
“A key factor for property growth has been the strength of the market going into the pandemic, so with strong underlying fundamentals there is likely a better chance of speedier return to growth mode.”
Workers who kept their jobs through the pandemic are now in a position to take advantage of the turnaround in housing sentiment that began in March and has since pushed house prices lower. June quarter figures show a decline in Sydney prices of two per cent, especially beneficial to hopeful first-home buyers.
Deloitte economist Nicki Hutley says the pandemic has created an opportunity to save more as lockdowns force a reduction in spending: “Clearly a lot of people are out of work, but on the other hand, there are large pockets of the market that feel comfortable in their job and feel ready to make the leap into their first property,” Hutley said.
A research report compiled in June by ING found that almost half (46 per cent) of Australian Millennial home buyers say the COVID-19 pandemic has made home ownership more achievable. One-third (32 per cent) of these said they’ll buy a home in the next one to two years.
Those surveyed by ING are taking advantage of lockdowns to save even more than before the pandemic, diverting funds intended for travel into home savings accounts (59 per cent), taking on a second job (37 per cent) or moving back in with their parents (36 per cent) to save.
Head of home loans for ING Julie-Anne Bosich says the research suggests that Millennials haven’t given up on the great Australian dream of owning their own home: “It suggests many people, especially Millennials, are being savvy by taking advantage of record low interest rates, government assistance and a weakened housing market to get on the property ladder.”
Grattan Institute program director of household finances Brendan Coates told News.com.au that once government stimulus was factored in, household incomes had outperformed house prices in the last quarter, meaning some have done very well and saved, and others have suffered.
“For many Australians, they have a better bank balance than what they had going into COVID,” Mr Coates said. “They either didn’t lose their job and [they’re] spending less or they’ve had income support and had a boost to their incomes during this period.”
Spring has arrived
The first weekend of spring saw strong bidding at Sydney property auctions with a clearance rate of 62.4 per cent from 437 properties on offer. More buyers were out than the week before following a change of state government advice that meant more than 20 people could be present at an auction.
Incidentally, a Covid-19 safety plan is recommended but not mandatory for the real estate sector, according to an email from the Real Estate Institute of NSW sent to members. The email also said masks and gloves are not mandatory but should be made available, while safety marshals are a “good idea” but not mandatory.
The month of August was steady with an auction clearance rate of 59.7 per cent for the month – 11.2 percentage points lower than the same time last year due to the effects of the pandemic and restrictions on the conduct of property auctions.
SQM Research's Louis Christopher said it was clear that listing volumes were "well and truly up" in Sydney and the market in Sydney remained strong: "It's not one that is in any way showing signs of collapsing or weakening. The trend seems to be a little bit stronger," he said.
"But I fear we are still not out of the woods yet in Sydney. There are still a lot of obstacles to consider. The scaling back of JobKeeper is going to be the first big test."
BresicWhitney’s head of sales Thomas McGlynn says that this spring selling season will be different from those pre-Covid-19: “It’s definitely a lot more resilient than people were predicting,” Mr McGlynn said.
“Because travel and school holidays have been affected, seasonality hasn’t really played any part in the way the property market has ebbed and flowed over the course of winter.We were reporting near-record results of transactions through the winter months.”
OH Property Group buyers’ agency principal Henny Stier told Domain that, while the market had strong demand, buyers were acutely aware of the pandemic: “The buyers have been following a Covid season but the sellers are still following a weather season.
“We’re moving into a cycle where vendors want it done quickly and painlessly … buyers are extremely volatile, extremely picky and extremely price sensitive,” Ms Stier said.
And in the Hills district, The Agency North selling agent Sunny Gandhi said there weren’t enough homes to meet buyer demand: “We’re actually expecting a busy spring market with a lot more properties coming onto the market,” he said.
“We’ve been busy with appraisals and new listings, ready to launch for spring. A good indication is that all the auctioneers are booked all the way through October,” he said.
Selective geography
The economic effects of the pandemic are creating some interesting geographic divisions across Sydney with some areas dramatically outperforming others. Some areas that are comprised primarily of detached houses are experiencing heightened interest from families wanting better homes, while areas with heavy supplies of units are feeling a drop of interest from investors.
For example, prices in Sydney’s eastern suburbs were unchanged for the month of August, while a strong demand from upsizers has kept prices steady in the Hills district. This contrasts with areas like Parramatta and Ryde, both heavily populated with units, that fell 1.1 and 1.3 per cent respectively during the month.
Eastern suburbs agent Debbie Donnelley said she’s been kept busy meeting the needs of professionals and wealthier tradespeople: “For some of the properties we’ve had, we’ve been blown backwards with the price people have been willing to pay because of the lack of stock.
“It doesn’t stop people from having babies and needing to upgrade or if people die and their estates need to be sold.”
In Woodcroft, 42km west of the Sydney CBD, there’s been a rush for property from IT professionals, according to agent Rajesh Setia: “More than 60 per cent of people. It is a very wide-ranging industry,” he said.
“The mix of accountants and doctors and that sort of thing, that’s about 30 per cent. Their jobs have been less affected. They’re happy to take a bit of risk.”
However, apartments in the CBD and surrounds have recently been listed at several thousands of dollars below their pre-Covid asking prices with some listed as “must be sold” or “urgent sale”.
Advertised unit prices in the CBD were about 15 per cent lower than when advertised a year ago, according to SQM Research’s Asking Prices Index.
My Housing Market economist Andrew Wilson said falling rents could force investors to make further price cuts. “The inner-city unit market is Sydney’s weakest and will probably remain so until international travel restrictions are lifted,” Mr Wilson said.
Nerida Conisbee, chief economist for Realestate.com.au, noted that Sydney is usually an ‘uneven’ market but said the pandemic had made some of these differences extreme: “Not every property in every suburb is going to be affected the same; it will be easier to get a bargain on a unit than a house.
“The strength of the market will depend on how long banks keep giving support, but we are in a very different market from previous (downturns) because banks remain well capitalised,” she said.
Overseas buyers
Australia’s had a nationwide building boom since the 21st century began. More than 700,000 apartments, flats and units have been built since 2001, according to the Australian Bureau of Statistics. Demand has kept up with this ever-increasing supply as Australians from country areas have moved to the cities, while international students and migrants have arrived from abroad.
However, recently Covid-19 has slashed migration from overseas and decimated the number of foreign students studying in Australian educational institutions. Nett overseas migration is expected to show a fall of at least 30 per cent in the 2019/20 financial year and a drop of 85 per cent, from 2018/19 levels in the 2020/21 financial year. Property experts believe that will mean a fall in housing demand of around 80,000 units.
According to Georg Chmiel, executive chairman of Chinese real estate portal Juwai, Chinese interest in the Australian housing market has declined as a result of coronavirus restrictions and the deterioration of the relationship between Australia and China.
“Foreign buyers are most important when it comes to new home purchases, so they are a lifeline for developers who are having trouble selling to the local market because of Covid-19,” he said.
Mr Chmiel added that while the market had so far been fairly resilient, further declines are still expected: “Economic recovery will take time, and we may see further losses in employment before things turn around.”
Mei Hoong Lai, a registered migration agent based in Hong Kong and a former immigration officer at Australia's embassy in Beijing, told ABC News that many Hongkongers are currently considering Australia as a future home.
"We have definitely seen a spike in the number of Hong Kong residents making inquiries since the [new security laws] announcement," Ms Lai told the ABC.
She said her clients mostly consisted of skilled professionals with young families between the ages of 25 and 44, working in sectors like IT, engineering and teaching. There was also a lot of interest from investors and business owners between the ages of 35 and 60.
"Australia is an attractive destination for many Hongkongers as it offers world-class education, political and economic stability," she said.
Crown Group chief operating officer of sales Prisca Edwards told The Daily Telegraph that Asian investors are taking a long-term view and looking beyond the present conditions.
“Overseas buyers are taking advantage of the low Australian dollar to make a significant saving,” she said.
“This can be up to 14 per cent for those holding savings in Hong Kong and Singapore, or 40 per cent for those with money in the US, depending on the timing.”
Property auctioneer James Pratt said overseas investors found Australia both affordable and appealing due to the dropping value of the Australian dollar.
“Someone in China, where they are getting over the coronavirus, is going to be more likely to buy than someone here in Australia where we are just going onto high alert,” Mr Pratt told News.com.au’s Aidan Devine.
AMP Capital chief economist Shane Oliver says housing will likely be hit by the immigration intake falling to a fraction of pre-Covid levels and believes the government may find it hard to return immigration to previous levels when unemployment is so high.
"The decline in immigration, which means weak underlying demand, the loss of income in the community - which could result in increase in mortgage defaults - and then the loss of rents for investors could combine to weaken prices this year," Dr Oliver told the Australian Financial Review.
Banks look ahead
On average, most lenders still expect Sydney property price falls of about 10 per cent. In their latest results, the big four banks said they were surprised at how well housing had held up.
It’s acknowledged that some property price falls are inevitable after the economy has plunged to the depths of its sharpest recession since the 1930s, but the falls in house prices so far this year have been relatively modest.
Most agree the big test for housing is yet to come because the financial support from government and banks has so far softened the pandemic's impact.
In the latest forecasts, ANZ has projected Sydney home values will have fallen by about 13 per cent from the start of the pandemic to mid-2021. NAB’s outlook is for a 10-15 per cent drop in prices nationally.
Westpac, the country's second largest bank, is forecasting a 10 per cent fall in prices in 2020 followed by a 1 per cent gain next year.
ANZ Bank chief executive Shayne Elliott said his bank expects house price falls of at least 10 per cent due to the coronavirus crisis and that the worst of the crisis for banks was likely to occur around the middle of next year: "When do the problems start emerging, people literally finding their businesses unable to operate? We think that’s probably more like the middle of next year…" Mr Elliott said.
"We know that there will be difficult situations where we need to help customers wind up their debt. And when this happens, we will be ethical and sensitive in our actions," he said in a market briefing.
The Commonwealth Bank’s economics team initially forecast an average 10 per cent slide in property prices nationally, but in early September announced it has reduced its base-case forecast to an average capital city property price fall of just 6 per cent with a recovery in home values in the second half of 2021.
Speaking to the House of Representatives economics committee, Commonwealth Bank CEO Matt Comyn said the economy will face its biggest test next year when taxpayer-funded income support measures are removed: "One of the biggest challenges for Australia in 2021 and beyond will be how effectively we can move from the substantial and I think very effective income support that’s been in place, to one of fiscal stimulus generating aggregate demand and new jobs."
Sources:
‘Sydney house market stabilises as Melbourne freezes,’ Nick Lenaghan, Australian Financial Review, 13 September 2020
‘House prices to bounce back in 2021 after modest falls during coronavirus pandemic, CBA predicts,’ Michael Janda, ABC News online, 10 September 2020
‘When homes earn more than jobs: How we lost control of Australian house prices and how to get it back,’ The Conversation, Cameron Murray and Josh-Ryan Collins, ABC News online, 18 August 2020
‘Loss of Chinese buyers: final straw for Australia’s property market?,’ Joshua McDonald, South China Morning Post, 20 July 2020
‘Australia earns top 20 ranking in the world for house price growth, despite coronavirus crisis,’ Melissa Heagney, Domain, 8 September 2020
‘Spring selling season to be marked by ‘extreme’ differences in price changes across Sydney regions,’ Aidan Devine, Daily Telegraph, 8 September 2020
‘Australian house price growth outpaced wage growth in the last financial year, data shows,’ Tawar Razaghi, Domain, 8 September, 2020
‘ANZ Bank prepares for 'second wave' of distress in 2021,’ Clancy Yeates, Sydney Morning Herald, 8 September 2020
‘Sydney auctions Pymble home sells for $3.79m despite no registered bidder,’ Melissa Heagney, Domain, 6 September 2020
‘CBA chief Comyn says end of JobKeeper will be economy's biggest challenge,’ Clancy Yeates, Sydney Morning Herald, 5 September 2020
‘What’s in store for Sydney’s property market this spring selling season?,’ Tawar Razaghi, Domain, 4 September 2020
‘Licking their lips’: Who is still buying property in Australia’s recession?,’ Jim Malo, Domain, 4 September 2020
‘House prices prove resilient but will it last?,’ Clancy Yeates, Domain, 2 September 2020
‘Property prices yet to see full scale of COVID-19 pandemic’s impact: economists,’ Tawar Razaghi, Domain, 31 August 2020
‘Hong Kong residents are considering leaving — here's how Australia's COVID-19 hit economy could benefit,’ Bang Xiao, ABC News online, 21 July 2020
‘Inner Sydney unit prices are getting slashed as investor owners try to speed up sales,’ Aidan Devine, Realestate.com.au, 2 September 2020
‘Sydney house prices up 12pc before virus,’ Nila Sweeny, Australian Financial Review, 16 June 2020
‘Coronavirus to drive more Australian homes into foreign hands,’ Aidan Devine, News.com.au, 11 September 2020
Market Comment
Mon, 17 Aug 2020Property shortage keeps prices up with offers ‘too good to refuse’
Wed, 15 Jul 2020While 2020 is unlike any previous year we’ve experienced, properties in Australia’s capital cities are actually selling faster than at the same time in 2019. Domain data shows that it took 69 days on average to sell a Sydney house by private treaty in the June 2020 quarter, while it took 87 days on average a year earlier.
It was the same story for Sydney units that took 69 days to sell this year, well down from the 93 days it took to sell a year ago. This might seem a bit strange, until we remember that at this time last year the federal government had moved to crack down on lending while the market was going through its usual pre-election pause.
Domain economist Trent Wiltshire said last year’s market had been even softer than expected: “It shows how soft the market was in the June quarter last year during the election period … properties were taking a long time to sell.”
He said the figures for days on market could be improving this year as the lack of homes for sale sees new properties snapped up quickly. “New listings, which bottomed out in April, started to rise again in May and June. Some of those properties listed more recently have sold quite quickly.”
Ray White NSW chief auctioneer Alex Pattaro told Domain that properties within 20 kilometres of the CBD were continuing to sell extremely well: “Properties within that radius are absolutely on fire at the moment,” he said.
He added that he thought buyers were looking to make an offer “too good to refuse” before an auction for a property they were interested in was held.
As might be expected, Sydney’s auctions have been a bit quieter than usual, mostly due to a lack of stock. It’s apparent that many homeowners are reluctant to sell while COVID-19 is disrupting the marketplace.
Despite concerns about the impacts of the virus causing price falls, CoreLogic’s hedonic home value index showed that in June property values slipped by just 0.8 per cent with the median value of a freestanding house at $1.01 million and the median unit price down 0.6 per cent to $761,000.
WT Newey & Co director and auctioneer Mark Newey says he’s noticed a surge in interest for family homes and felt this was because coronavirus had resulted in more people isolating socially and working from home: “The pandemic has proved the importance of a family home, especially with a backyard.”
The most expensive homes seem to be experiencing the biggest price drops, with CoreLogic’s figures showing that the top 25 per cent of Sydney homes have slipped some 1.3 per cent in value between April and June, while the lowest 25 per cent increased by a small but notable 0.2 per cent. Despite the recent declines, Sydney home values overall still remain up 13.3 per cent over the past 12 months,
CoreLogic head of research Tim Lawless said the June fall was “mild” and much would hinge on when the federal government rolled back stimulus such as JobKeeper, he said.
“It’s encouraging to see lenders have recently hinted at an extension in their repayment leniency policies (but) government stimulus will eventually taper and banks will require borrowers to repay their loans,” he told News.com.au’s Aidan Devine.
“The longer-term outlook for the housing market is largely dependent on how well the economy is tracking when these support measures are removed.”
In another interview with the ABC, Mr Lawless said it was unclear when values would begin to rise: "We simply don't know how long the economy is going to remain repressed, or how long it'll take for housing values to start to show some level of growth again," he said.
"It will probably be a fairly gradual cycle where we do see further declines in housing values, maybe followed by some stability before we see values starting to rise."
The 0.4 per cent average fall in values over May was the first time Sydney home prices had dropped in close to a year. Home values inched up 0.4 per cent during the height of lockdown measures in April and there was also an increase in values over March.
“A variety of factors have helped to protect home values from more significant declines, including persistently low advertised stock levels. Additionally, low interest rates and forbearance policies from lenders have helped to keep urgent sales off the market, providing further insulation to housing values,” Mr Lawless said.
Realestate.com.au director of economic research Cameron Kusher said that record low interest rates had made the housing market more resilient to the economic impact of coronavirus.
“If you look at who has been adversely affected, it has predominantly been groups who are not traditionally active in the housing market such as under 30s. There are still plenty of people with steady employment … some buyers are (capitalising) on the low rates,” Mr Kusher said.
Realestate.com.au data also shows that overseas interest in Sydney housing has increased dramatically over the past financial year, due to Australia’s success in containing coronavirus and the weaker Australian dollar.
Search activity from overseas house hunters is up 20 per cent year-on-year, partly fuelled by expats in the United States and United Kingdom returning home because of COVID-19, but also because political unrest in Hong Kong has become a serious factor.
COVID-19’s side effects
An estimated ten per cent of off-the-plan apartment purchasers are believed to have defaulted on their contracts since the onset of COVID-19, and this is likely to continue for a few more months due to falling values in completed properties.
Martin North of property consulting firm Digital Finance Analytics says that off-the-plan values have dropped between 10 and 15 per cent during the past 12 months: “Today, if your lender’s valuation of the property represents a 15 per cent drop in value, walking away from a 10 per cent deposit makes some kind of economic sense. If your $800,000 unit is worth $120,000 less, then taking an $80,000 hit seems like a bargain.”
This ‘negative equity’ situation is caused by lending institutions only offering loans based on the final valuation rather than the initial purchase price, and by the purchaser winding up owing more on the property than it’s worth after settlement. For some, walking away and losing a ten per cent deposit is actually cheaper than completing the purchase.
However, this also means a number of properties will soon be coming onto the market that are genuinely priced to sell and offer opportunities for bargain hunters with access to capital and a long-term plan for property investments.
The latest National Australia Bank residential property survey found that housing market sentiment in the second quarter of 2020 has fallen to a negative 33 points, a 71-point fall compared with the first quarter that showed a positive index of 38 points.
NAB’s survey indicated that property prices in NSW could fall 10 or more per cent as a result of the effects of the pandemic, although these declines were better than initially expected.
NAB chief economist Alan Oster said in the survey report that all forecasts were ‘highly uncertain at this point in time: “While the initial COVID-19 related restrictions on housing activity have eased, the economy has undergone a very large contraction, and while we appear to have passed the trough in activity, it will take time for the recovery to unfold,” he said.
Victoria’s recent surge of COVID-19 cases has brought on a repeat of restrictions on face-to-face auctions in metropolitan Melbourne and the Mitchell Shire. In regional Victoria the situation’s a bit more relaxed with on-site auctions and inspections still being allowed for up to 20 registered buyers.
Real Estate Institute of Victoria president Leah Calnan said that most estate agents had expected the reintroduction of restrictions and were better prepared to move auctions online than last time.
“Everyone will be looking forward to warmer weather and coming out of these restrictions into what will be a strong spring market,” she said.
Rents vary
It’s interesting to note that recent figures compiled by Domain show that Sydney house rents remained unchanged over the June quarter at a median of $530 after a rebound early in the year was abruptly halted by the coronavirus pandemic.
House rents did see some falls in inner suburbs — down 5 per cent in the city and east, but the Sydney median rents held up overall thanks to stable conditions in more affordable outer areas, with rents unchanged in the west, south west and north west, and even an increase of 1.3 per cent on the upper north shore.
Domain also found that the cost of renting a Sydney unit fell 3.8 per cent in the three months to July, to a median $500 a week. This was the sharpest quarterly drop in 15 years, and 9.1 per cent below the 2017 peak, causing Domain’s senior research analyst Nicola Powell to conclude: “The rapid rise in [the number of] advertised rentals has put pressure on rents and tenants are using this as bargaining power to negotiate a deal.”
Sydney recorded a 3.6 per cent vacancy rate in June with an estimated 22,665 rental properties left empty. Domain’s analysis showed that rents had dropped on almost 30 per cent of listings, with inner-city areas having the biggest price declines as they experience increased supply at a time of weaker demand. However, Dr Powell did say that the marginal decline in new listing volumes since May, and an unchanged vacancy rate month on month suggested there was some stability ahead.
Home loan numbers drop
Figures from the Australian Bureau of Statistics (ABS) show that the number of new home loans in May, the most recent month for this important statistic, fell by 11.6 per cent nationally. The number of owner-occupier home loans fell 10.2 per cent over the month, while investor-only loan commitments fell by 15.6 per cent.
Sally Tindall, research director for mortgage comparison site RateCity estimated the value of home loans lost to the banking sector was $2.15 billion for the month: “Today’s figures show just how hard COVID-19 hit the housing market during lockdown.
“May recorded the biggest monthly drop in the value of new home loans settled, as vendors pulled the pin on listings, and on-site auctions were banned for weeks.”
Westpac chief economist Matthew Hassan said the May figures reflected the initial impact of COVID-19 on the housing finance market.
“These figures are showing a lagged impact from the April lockdown rather than anything relating to the subsequent reopening,” Mr Hassan said, indicating that forthcoming figures for June could show an improvement in the number of home loans made as the housing market adjusted to conditions imposed by the virus.
There have been concerns in recent weeks about an "economic cliff" coming in September with the end of the loan deferral period coinciding with the scheduled withdrawal of Federal Government support measures that include the JobKeeper wage subsidy and the JobSeeker coronavirus supplement.
In a bit of good news for homebuyers, more than 800,000 bank customers still battling due to COVID-19 will be given another four months to start paying back their loans. Australian Banking Association (ABA) chief executive Anna Bligh said: "Banks are announcing the next stage of this support, which will be specifically targeted to getting people back on repayments while continuing to help those hardest hit," she said.
"This new phase of support avoids a cliff which would have been a terrible outcome for customers and had a negative impact on the economy."
The Australian National University (ANU) conducted a survey in June that showed the coronavirus crisis has led to the number of Australians unable to pay their rent or mortgage on time more than doubling. It found that those who were unable to service regular housing costs surged from 6.9 per cent to 15.1 per cent from April to May, and 44 per cent of people aged 18 to 24 years were unable to pay their rent on time.
However, REA Group director of economic research Cameron Kusher told news.com.au that he was “a little surprised” with how high they’re recording mortgage stress: “There’s the concern of what will happen come the end of September when JobKeeper and JobSeeker are removed and the mortgage holidays are also eased.
“But what we’re hearing from particularly the banks is there’s going to be a fairly pragmatic approach. And the fact borrowing costs are the lowest they’ve ever been eases that risk a little; it’s not like the last recession when interest rates were 20 per cent and the banks had to shift mortgages off their books straight away.”
He added that the current record low interest rates will shield lenders from the need to call in a large number of their loans, but he believed: “We will see an increase in vacancy rates, we will see some falls in rents and I think it’s going to take some time to recover,” Mr Kusher told news.com.au.
Home ownership among younger Australians has been declining for some time. Between 1988 and 2017 the proportion of 25- to 34-year-olds who owned their home dropped from 54 per cent to 35 per cent while in 2016, 22 per cent of over 55-year-olds had a mortgage.
Stamp duty may go
The push to do away with stamp duty and replace it with a more dependable source of revenues for state and territory governments continues. Analysis from consultancy firm PwC has proposed raising the GST from 10 per cent to 12.5 per cent and extending it to include education, health and fresh food.
The intent of this is to replace the revenue lost from potentially doing away with stamp duty and payroll tax. (Let’s just remember that the original GST proposed back in 1998 and implemented in 2000 was to do away with a number of various State and Territory Government taxes, duties and levies such as banking taxes and stamp duty.)
PWC’s report states that the increased tax on goods and services would raise about $40 billion a year in a reform that would serve as a stimulus to help lift Australia’s GDP. It also broadly supports the thinking of NSW Treasurer Dominic Perrotet who wants the GST to include fresh food, education and water sewerage, and provide an option for homeowners to either pay a stamp duty or a land tax.
Stamp duty is NSW’s second-largest revenue stream, and those earnings would take a serious hit with a switch to land tax unless the government is willing to endure a great deal of political pain and ensure there’s no drop in overall revenues if stamp duty’s abandoned.
But Mr Perrottet said that could be offset by a GST increase or by broadening the tax’s base, and this would be a good time to make the change: “As we‘ve gone around and talked to various people, we’ve felt the momentum for change is strong, and it’s not just from a few individual leaders, it’s from a broad base across the sector – business, academics and in the community,” he said.
“And for the first time in many years, it appears that we have the mechanisms to deliver quite genuine reform … it is a good opportunity, and we need to grab it.”
AMP Capital’s chief economist Shane Oliver supports replacing stamp duty with a land tax but he acknowledges there would be a transitionary period where state governments would miss out on revenue. “So an increase in the GST could presumably cover that period,” he said.
It should be noted that Federal Treasurer Josh Frydenberg has previously ruled out any increase to the GST, and has said if the states wanted to initiate tax reforms they would get no financial support from the government.
From the Towers
Owners of units in Sydney's Opal Tower have commenced legal action against the NSW Government after discovering more than 500 new defects in the troubled building. The owners claim the new defects were discovered during independent building inspections.
The owners' corporation is taking legal action in the NSW Supreme Court against the Sydney Olympic Park Authority (SOPA) — a NSW Government entity, and the builder Icon
Owners' corporation chairman Shady Eskander said the owners were suing for the cost of fixing all defects in common areas, building inspections, project managers, insurance and legal fees. He also said the insurance premium for the whole building this year came to more than $1 million — up from $100,000 in 2018.
A government register indicates that more than 440 buildings in NSW are under review, being assessed or require remediation for flammable cladding. The situation is worst in the inner city where the City of Sydney has issued fire-safety notices for 130 buildings due to concerns about combustible cladding.
The NSW government has declined to help residents cover the cost of removing the defective cladding. It has, however, established a support unit to expedite the assessment of high-priority buildings.
NSW Premier Gladys Berejiklian said her Government was working to support the affected residents: "We certainly have been there doing what we can and recently not only have we appointed a building commissioner but put through new legislation to protect owners into the future so certainly we appreciate the angst they're going through and we'll continue to support them in whichever way feels appropriate," Ms Berejiklian said.
A spokeswoman for Better Regulation Minster Kevin Anderson said the government had introduced new laws to protect building owners in NSW which require anyone carrying out building work to avoid construction defects which include flammable cladding.
Sources:
‘Foreign buyers eye off Sydney CBD and Manly as overseas interest in Sydney housing surges,’ Matt Bell, The Daily Telegraph, 13 July 2020
'They should help': Sydney cladding crisis leaves big bills for owners,’ Matt O'Sullivan, Sydney Morning Herald, 13 July 2020
‘Sydney auctions: Clearance rate improves slightly but market wary of more restrictions,’ Melissa Heagney, Domain, 12 July 2020
‘How bad is COVID for house prices compared to other great crashes of history?,’ Benjamin Gubana, ABC News online, 11 July 2020
‘Banks to extend mortgage loan deferral to customers still struggling with coronavirus restrictions,’ Jade Macmillan, News.com.au, 8 July 2020
‘New home loan numbers fall off cliff,’ Gerard Cockburn, NCA NewsWire, 9 July 2020
‘Homes are selling faster than last year despite bushfires and pandemic: Domain data,’ Tawar Razaghi, Domain, 6 July 2020
‘Housing market sentiment collapses as COVID-19 continues to drag down prices,’ Gerard Cockburn, NCA NewsWire, 9 July 2020
‘Buyer opportunities in off-the-plan debacle,’ Jimmy Thomson, Australian Financial Review, 9 July 2020
‘Sydney unit rents fall, house rents hold steady amid coronavirus pandemic,’ Kate Burke, Domain, 8 July 2020
‘Coronavirus: Melbourne public auction ban returns for six weeks,’ Jack Boronovskis, realestate.com.au, 8 July 2020
‘GST hike on the cards to cover costs of stamp duty, payroll tax.’ James P Hall, News.com.au, 8 July 2020
‘NSW Treasurer plans to end stamp duty,’ Hannah Moore, News.com.au, 1 July 2020
‘Shane Oliver: Aussie property market in “precarious situation,’ Leith van Onselen in Australian Property, Macrobusiness, 7 July 2020
‘Subdued auction results in Sydney and Melbourne continue as lockdown tightens in Victoria,’ Melissa Heagney, Kate Burke, Domain, 5 July 2020
‘Home prices fall at double previous rate in Sydney amid weaker economy,’ Aidan Devine, News.com.au, 1 July 2020
‘Sydney and Melbourne home prices fall for second month in a row,’ Jennifer Duke, Sydney Morning Herald, 1 July 2020
‘Abolish stamp duty and lift the GST, says key tax reform review,’ , Alexandra Smith, Sydney Morning Herald, 1 July 2020
‘Housing market: ANU report reveals grim sign for house prices,’ James Hall, News.com.au, 1 July 2020
‘Sydney needs 1 million new homes by 2041,’ Alexandra Smith, Sydney Morning Herald, 13 ‘Opal Tower unit owners launch Supreme Court case after 500 new defects discovered,’ Kathleen Calderwood, ABC News online, 29 June 2020
'It's not fair': Sydney cladding crisis threatens to 'crush families' financially,’ Matt O'Sullivan, Sydney Morning Herald, 29 June 2020
Price falls limited as Sydney property looks for Spring resurgence
Mon, 15 Jun 2020The Sydney property market is signalling that it’s anxious to return to normal, or at least
fast forward to its ‘new normal’, whatever that turns out to be. The number of new listings at
scheduled auctions continues to increase while weekly clearance rates are holding firm in
the high 60 per cent levels.
In May, house prices fell just 0.4 per cent nationally, with Sydney falling by a similar
amount. Nicola Powell, senior research analyst for Domain, commented: “The clearance
rate is high. It’s still a robust outcome [but] we still need to put it into the context of the low
auction volumes.
“What we have seen is a bit of an improvement in sentiment because we’ve seen restrictions
relaxed,” she said. “There are lots of green shoots. Everything is improving from that really
low point in time during April, in the heart of the lockdown.”
Justin Keenan, principal at WigginsKeenan in Sydney’s northwest, says a combination of
government support mechanisms has helped avoid the damage inflicted by previous crises:
“Through a combination of wage subsidies in the form of JobKeeper payments, increased
welfare through JobSeeker payments and mortgage holidays from the banks, the housing
market has so far avoided the large scale falls seen during previous financial crises.
“The combined stimulus has resulted in a lower number of properties for sale, and those
homes selling are a case of willing buyers and sellers rather than distressed sales,” he said.
Chief auctioneer at The Agency, Thomas McGlynn said there is still a shortage of properties
on offer: “The sellers who are going to market are being fair with their pricing. The first four
weeks we were really expecting it to be a really tough three to six months … but it’s not
anywhere near the downturn we expected.”
Belle Property’s selling agent Mark Foy said many buyers now looking at open homes were
qualified and ready to respond to reasonable asking prices: “If they were seeing at least a 10
per cent discount they were happy to move forward,” he said.
It seems that many of the property market’s basic principles remain unchanged, despite the
advent of Covid-19. Back in March, before the virus had fully realised its catastrophic
potential, CoreLogic produced an article that explored the performance of property values
in troubled economic times. Among the findings were:
CoreLogic's research director Tim Lawless told the Australian Financial Review that house
prices were still on track to drop by 10 per cent from peak to trough, although home values
were only showing a mild decline.
"Our house view is unchanged, although it's fair to say a 10 per cent drop is looking
pessimistic at the moment," Mr Lawless said.
UBS has also upgraded its outlook for the housing market but says a decline of up to 10 per
cent is still on the cards.
The bank is now expecting a price decline of “between 5 per cent and 10 per cent” in the
2020 calendar year, following figures showing a stronger than expected job market and
smaller house price drops during the lockdown.
There’s a good chance this Spring will be, as always, a busy time for the property market.
Our exit from the Covid-19 restrictions will be nearly completed and a good portion of our
battered economy will be recovering, along with key metrics like unemployment and retail
sales activity.
This is due in no small part to the special place housing has in our country’s thinking.
Adrian Kelly, President of the Real Estate Institute of Australia, says we should compare our
present circumstances with the past.
“We can only look at what is happening in the marketplace at the moment as well as in
previous times of high unemployment to provide pointers to likely outcomes. Currently we
have a situation where listings are decreasing yet the enquiry level from prospective buyers
is increasing.
“It is simple economics that when supply decreases and demand remains that prices edge
upwards. They certainly don’t drop. History shows us that in the early 1990s we had a
sustained period of unemployment above 10 per cent yet median house prices remained
stable”.
First National Real Estate’s Chief Executive Ray Ellis says that Covid-19 has provided clarity
on what Australians consider to be important: “If you step back from the distraction and
noise of the predictions of economists, there are genuine factors pointing towards a strong
recovery this spring, in a market characterised by first home buyers taking advantage of the
percentage of investors who choose to exit, and families activating with long-held plans for
change.
“Australians don’t simply view their property as an ‘asset’ - they view it as a home. That has
been demonstrated strongly during these challenging times. What people have been missing
most is having friends and family over to their home. Or visiting the homes of friends and
family.”
Mortgages deferred
One of the Commonwealth government’s biggest benefits for homebuyers affected by Covid19 has been the mortgage honeymoon that expires in September. This has been a great help
for first home buyers, investors and businesses who have now been able to defer $250
billion in loans after they were financially hurt because of the Covid-19.
Melbourne University economist Dr James Brugler estimates that the withdrawal of this
support could cause a quarter of all households to see a fall in equity of 10 per cent or more:
“Most households have only a small amount of borrowings against their home and are
generally in good positions to withstand a fall in home values,’’ he said.
“However, households that have borrowed more money will feel the impact on their home
equity more.”
Labor Senator Kathy Gallagher said on Thursday it was clear some workers had been forced
to destroy their nest egg by drawing down from their superannuation funds to make
mortgage repayments: “We want the government to be proactive about making sure that we
don’t fall off a fiscal cliff in September,’’ she said.
“That means people are given notice so there’s confidence in the economy, and the Reserve
Bank governor spoke about that today, saying confidence was part of the economic
recovery. Now clearly, that confidence isn’t going to be there if everyone thinks everything is
cut off in September.”
Others with mortgages that could now become a problem are the estimated 730,000
investors, many of whom are self-funded retirees or people planning for retirement, who
have taken out interest-only bank loans to acquire properties whose values are no longer
rising.
Liberal MP Senator Dean Smith said that many of these investors had interest-only loans
that were due to reset to principal and interest this year: "If property investors are forced to
sell into a falling market, then that is a cost that every Australian property owner will have
to bear," he said.
"That will put downward pressure on an already dampened property market and that will
harm the financial wellbeing of every Australian family that owns a property, not just
property investors."
The Australian Banking Association’s chief executive Anna Bligh said in a statement the
industry had worked tirelessly since the beginning of the outbreak to help customers and
that 700,000 customers had already applied for, or been granted, support on loans totalling
more than $200 billion.
"Investors whose tenants are unable to pay rent as a result of Covid-19 are able to access a
six-month deferral to mortgage repayments, including principal and interest, to help them
get through to the other side of this crisis," she said.
"Interest-only options are still available to customers, with banks needing to assess a
request to remain on interest-only repayments on a case-by-case basis, in line with
regulators' prudential requirements and guidance."
Virus hits rents
Figures released in late May showed that rents for houses in Sydney have fallen to their
lowest point since 2013 as a result of economic standstill, lower migration and a flood of
former Airbnb lettings left empty by the shutdown of the travel industry.
It now costs on average $646 per week to rent a house in Sydney, according to the latest
figures from SQM Research. This is the cheapest level since 2013 and a 6.5 per cent drop
from a year ago. The cost of an average unit is $480 a week, the lowest figure since May
2015.
"We've never seen anything like it," Grant Ashby, the director of Sydney Cove Property, told
ABC News. "In our time, it's always been a corporate market. This is the first time we've
seen such a drop in rents."
Louis Christopher, founder of SQM, said the economic uncertainty, rising unemployment
and closure of the international border due to the pandemic would continue to put pressure
on the housing market: “It’s hard to see it coming back to normal and hard to see a full Vshaped recovery in the economy,” he said.
Martin North, director of Digital Finance Analytics, said that the number of landlords who
are liquidating their rental assets rose to 12 per cent from 8 per cent in April: “An estimated
90,830 investors dropped out of the market during the past 12 months, reducing the total to
2.34 million.”
At the market's peak in 2017 and 2018, the number of landlords rose by 8.9 per cent to 2.39
million.
As always, some parts of Sydney are affected more than others. Research from SQM showed
average advertised rents are currently more than 10 per cent cheaper than they were a year
ago in Pyrmont, Potts Point, Chippendale-Darlington and Bondi Junction.
There was a similar trend in the Sydney CBD, where units were being listed for 14 per cent
cheaper than a year ago, on average, while smaller average falls of about 8-9 per cent were
recorded in Surry Hills, Redfern and in the Waterloo-Zetland area.
The Agency’s national head of property management Maria Carlino said while renters had
the upper-hand, it should be a temporary situation: “Given the high vacancy rates, renters
do have a lot of choice and landlords need to meet the current market in order to avoid
extended days on market,” Ms Carlino said.
“Next year we see a return to a more balanced market as Australia continues to move
successfully out of the COVID-19 curve.”
There isn’t much good news in the current market for owners who’ve listed their properties
on Airbnb and could now find themselves facing cuts to their expected rental incomes.
There’s been a steep decline in weekly Airbnb revenues across all Australian locations,
according to AirDNA, a website that tracks the Airbnb economy.
Chris Pettit, a professor of urban science at UNSW's City Futures Research Centre, said
UNSW research indicated around 80 per cent of the 200,000 Australian listings were
investment properties - not traditional holiday lettings: "That is about six to eight per cent
of Australia's total investment market, which is a fairly reasonable exposure."
Push for social housing, new home-buyers’ grants
The housing sector is experiencing its second major global crisis in 12 years, with the
impacts of the Covid-19 equal to or exceeding those of the Global Financial Crisis (GFC) in
2008, according to the Herald’s Sean Macken and Tim Williams.
They argue that to recover from the Covid-19 crisis the housing industry needs to co-operate
with governments with the goal of providing the housing Australians need at prices more
people can afford to pay. Their solution: governments – state and federal – can buy new
housing stock directly from developers.
“Governments could pre-purchase property on the proviso that the developer immediately
starts construction, generating new jobs. Once built, these new homes become public assets.
“The government could then sell them in better times or rent them to provide a long-term
return to taxpayers and rebuild our public coffers. Some could also be put to providing
affordable housing, which our existing housing market sadly fails to provide.”
Social housing is also being seen as a means of economic stimulation by Master Builders
Australia and the CFMEU, the construction union. They’ve put aside their usual differences
and jointly called for the government to spend $10 billion building 30,000 new dwellings.
Peter Mares, lead moderator at the Cranlana Centre for Ethical Leadership, says that unless
we invest in social housing we will be forced to spend a lot of money in less effective ways as
a growing number of our population experience housing insecurity and rental stress.
“Large-scale programs to build social housing aren't a short-term fix to help the economy
recover from the pandemic, they are a long-term investment in a prosperous and fair
society,” he says.
“When property prices are strong, there is little commitment to address the shortage of
affordable housing — yet a stable home is the foundation of a good life and a good society.
Without a fair and efficient housing system, health, education and productivity all suffer.”
The Master Builders Association has its own ideas on how to stimulate the home building
sector – it’s suggesting a $40,000 new-home buyers grant that would avoid a serious
decline in the building industry and save hundreds of thousands of jobs.
At the start of the year about 1.2 million workers in Australia relied directly on construction
for their employment. Latest figures from the Australia Bureau of Statistics indicate that
more than 77,500 jobs nationally have been lost since the start of COVID-19.
Grant Galvin, the chief executive of Master Builders Queensland, said a new-home buyers
grant was the only thing that could rescue the sector short-term: “There is minimal
construction work set to carry on beyond August, so if the government does not act now,
this sector it is going to fall off a cliff come September when hundreds of thousands of
people find there’s no more jobs,” Mr Galvin said.
Steve Foley, the chief executive of Coral Homes, one of Australia’s biggest builders, said the
drop in sales during COVID-19 had wider-implications such as restricting the acquisition of
new land, stifling any future development.
He agreed a new-home buyer grant would greatly help to restore consumer confidence and
bring footfall back to show villages: “We can see some enormous benefits if people can get
this help. It will be a really good opportunity for people to buy a home, which I have not
seen in many years,” he said.
The sentiment has been echoed by other industry bodies such as the Property Council of
Australia and Housing Industry of Australia (HIA), which have also called for a new-home
buyer grant, although they are asking for $50,000.
HomeBuilder grants announced
In a related move, the Morrison government announced a $688 million ‘HomeBuilder’
program that aims to keep tradesmen employed and support the construction industry. In a
nutshell, it offers a $25,000 bonus to people who want to build new homes or substantially
renovate existing ones.
There are some serious catches, however. The $25,000 will only be paid on renovations that
cost between $150,000 and $750,000 and on new homes that are worth a maximum of
$750,000 including land. The $750,000 limit on the total property value means that in
Sydney it’s only going to apply home and land packages in the city’s outer suburbs.
Furthermore, to qualify for the $25,000 payment the home renovations must be made on
property worth less than $1.5 million.
Tom Forrest, chief executive of the Urban Taskforce, which represents property developers,
said the scheme would have limited use in Sydney, where fewer house and land packages
were available under $750,000: “It's a good start but it doesn't really apply for Sydney and
Sydney is the driver of the whole economy."
But Dean Boskovic, director of Bos Realty in Liverpool, 27km south-west of the CBD, told
the Sydney Morning Herald that he took 70 to 80 calls in one day after posting about the
program on Facebook.
"I'm getting so many first home buyers saying, 'Dean tell me all about it, we want to pull the
trigger on this'," he said. "There have been a lot of buyers sitting on the fence because of
Covid-19 - this is going to be the kick that puts them over the edge."
Stamp duty still targeted
There’s nothing like an economic slowdown to focus governments on finding ways to
replace shrinking streams of revenue. Serious questions are being raised about the
applicability of stamp duty to a post-Covid-19 economy.
New research by website realestate.com.au showed property transactions have dropped by
nearly a third in some areas since the Covid-19 crisis began, with stamp duty charges
deterring buyers and sellers. The survey found that nearly three in four Aussies would be
more likely to buy or sell a home if they didn’t have to pay stamp duty.
The pressing most relevant issue is that the revenue it generates depends on turnover in the
property market, while at the same time it acts as a disincentive to dispose of one property
and purchase another. This impacts both economic performance and government revenues.
“It’s Australia’s most economically destructive tax,” according to the Grattan Institute’s
Household Finances Program Director, Brendan Coates, who argues that it penalises people
who are trying to break into the market or move to homes that better suit their
circumstances.
Stamp duty has continued to be a hot topic of political conversation in recent weeks,
particularly for the NSW and Victorian governments that are promoting its abolition in a
quest to revive their states’ economies.
They look with envy to the ACT where, in 2012, the territory’s government began phasing
out stamp duty as part of a20-year plan to reform the territory’s property tax system. To
compensate for the consequent loss of revenue, the government has introduced higher land
taxes and rates for residential and commercial property owners.
In other words, stamp duty is being phased out while higher land taxes are being phased in.
The catch is that only a few homebuyers pay stamp duty in any year, but all property owners
pay land tax, so the nett result is that everybody who owns a home pays a tax that increases
each year. This year, for example, land taxes in the ACT are expected to increase by an
average of seven per cent.
Naturally, this provides a clear benefit to first-home buyers. As Bree Prince of Canberrabased Hive Property says: “Prior to the scheme coming into effect, it was very hard for firsthome buyers to get their foot into the market.
“Now we have an influx of first-home buyers who are taking advantage of not having to pay
stamp duty and having the option of buying established homes [as opposed to new builds
only as part of the previous concession], which made a huge difference for some buyers,” Ms
Prince added.
Domain economist Trent Wilshire says that a long-term tax reform would “make the tax
system more efficient, help renters, improve housing affordability slightly and make state
government budgets more robust”.
“The best approach is to phase stamp duty out and phase land tax in slowly, as the ACT
government is doing; it’s a general consensus with economists that stamp duty is not an
ideal tax.
“Abolishing stamp duty and swapping it for a broad-based, flat-rate land tax is not a bad
way to go, it won’t be popular at first because no one wants taxes to be raised, but it is
feasible and will boost the economy in the long-term.”
Sources:
'The property investment party is over', Nila Sweeny, Australian Financial Review, 13 June
2020
‘Renters gain upper hand with Sydney rental prices slashed during pandemic,’ Tawar
Razaghi, Domain, 11 June 2020
‘HomeBuilder grant: ‘Nuts’ tax on houses could get axe,’ Samantha Maiden, News.com.au, 6
June 2020
'Free money': Real estate agents flooded with calls about HomeBuilder grant,’ Jennifer
Duke and Michael Koziol, Sydney Morning Herald, 7 June 2020
‘Stimulus unlikely to stop 10pc fall in house prices,’ Nila Sweeney, Australian Financial
Review, 6 June 2020
‘Australia House Prices Fall as Shutdowns Hit Property Market,’ Emily Cadman,
Bloomberg, 1 June 2020
‘More realistic vendors come to market as Sydney auction numbers continue to rise,’ Tawar
Razaghi, Domain, 29 May 2020
‘Lack of stamp duty reform is dragging economy by reducing property sales,’ Aidan Devine,
The Daily Telegraph, 3 June 2020
‘To fix our housing industry, governments need skin in the game,’ Sean Macken and Tim
Williams, Sydney Morning Herald, 29 May 2020
‘Australian property prices: End of home mortgage honeymoon will lead to property market
reckoning,’ Samantha Maiden, News.com.au, 19 May 2020
‘May Market Update’, Justin Keenan, WigginsKeenan, 28 May 2020
‘End of COVID-19 epidemic in traditional real estate selling season of spring is set to boost
market,’ James MacSmith, realestate.com.au, 28 May 2020
‘It's finished': Coronavirus disrupts Airbnb and smashes Australian listings, Mark
Saunokonoko, Nine.com.au, 27 May 2020
‘Can Australia build its way out of the coronavirus economic slump, with public housing the
priority?’, Peter Mares, ABC Radio National, 30 May 2020
‘The Property Market In 2020: What Lies Ahead?,’ Eliza Owen, CoreLogic Quarterly
Economic Review, 26 May 2020
‘Calls for $40,000 new-home buyers grant to avoid industry ‘bloodbath’,’ Lisa Hughes, The
Courier-Mail, 25 May 2020
‘Sydney property: slowing population growth to impact housing market,’ Jonathan
Chancellor, The Daily Telegraph, 25 May 2020
‘Rents fall as landlords struggle to fill vacant properties during Australia's coronavirus
crisis,’ Martin Farrer, The Guardian, 22 May 2020
‘Rents plummet across popular inner Sydney suburbs after mass tenant exodus,’ Aidan
Devine, The Daily Telegraph, 13 May 2020
‘Stamp duty: What other states can learn from the ACT’s moves to axe it,’ Jessica Taulagat,
allhomes.com.au, 13 May 2020
‘Australian suburbs with the highest stamp duty revealed,’ Erinna Giblin, realestate.com.au,
25 May 2020
‘Coronavirus combines with end to interest-only home loans in big hit coming for investors,
experts warn’, Claire Moodie, ABC News online, 20 May 2020
Buyers return and the Sydney market shows signs of recovery Â
Wed, 13 May 2020This time last month the Coronavirus was threatening to overwhelm our health systems and our economy. It was hard to find any positive news about the property market. However, in these fast-moving times we can now see some of that hoped-for light at the end of the tunnel, although it’s going to take a while to determine what our ‘new normal’ will turn out to be.
With the easing of the COVID-19 crisis, the NSW government’s ban on on-site auctions and open homes was lifted from May 9. Social distancing rules and regulations around hand sanitising stations will still remain in place, and most auctions will only allow registered bidders to participate.
“Choosing a home is one of the biggest decisions anybody makes and easing the restrictions to ensure people can more easily inspect, buy or rent a property is an important step for NSW,” Treasurer Dominic Perrottet said.
“The real estate industry has been adaptable in transitioning to online auctions, property inspections by appointment or online, and now as we make the move back to a more normal mode of operation we must ensure safety measures such as social distancing remain a key part of the process.”
While open homes have come back into operation, social distancing could still restrict the numbers of prospects allowed through a property, but most agents say they are also ready to keep allowing potential purchasers to make private appointments. “We have one or two happier to do that than [attend] open homes,” said the Oxford Agency’s Matt Marano.
The first weekend on which on-site auctions resumed saw a flurry of activity as many agents cancelled their on-line plans and hastily moved their venue to the addresses of the properties for sale. Other agents postponed the auction dates for a couple of weeks from the online date to one that’s on-site and commenced new sales campaigns.
Having seen the number of listings fall, clearance rates slump to their lowest level in 15 years and prices drop since the changes first came in on March 25, real estate agents throughout Sydney have heralded the ease in restrictions as the start of a return to normality. Buyer interest has been strong, and discounting hasn’t been needed to make sales.
Real Estate Institute of NSW (REINSW) president Leanne Pilkington said she was thrilled with the developments and expected it would bring some confidence back to the sector: “It’s a sign things are starting to get back to a little bit of normality and we all can’t wait for that,” she said.
“This will give people optimism. Vendors were saying they wanted to sell but were waiting to see what would happen, this will give them enormous confidence to return to the market.”
Ms Pilkington said she expected open homes and on-site auctions would continue to look a little different for a while: “I don’t see us just having open homes and getting everyone to come through. The idea of still booking people in just to make sure we won’t have a glut of people will have to happen,” she said.
Domain’s senior research analyst Nicola Powell also saw things going back toward normal: “It’s quite clear that we’re seeing agents revert to the traditional on-site auction,” said “There has been a pretty swift change since the lift was announced and I think that’s going to be the way forward in the coming weeks.”
Dr Powell added that she expected Sydney auction numbers to rise in the coming weeks due to the lifting of the auction ban, but volumes would probably remain low for a while when compared to previous years.
This doesn’t mean there won’t be any on-line auctions. The Agency auctioneer Thomas McGlynn said some auctions would continue to be streamed online to help interstate or overseas buyers or for those who did not feel comfortable attending an auction.
“There are going to be owners who request differences in how things are operated, there will be some where only registered bidders are [invited to the auction] and allowed to inspect a property … in other circumstances, particularly where there is a large property that allows for appropriate social distancing, they may allow for more people to attend.”
Buyers return
Some interesting data from realestate.com.au released this month shows that buyer interest in the market is up an amazing 50 per cent on this time last year, despite the disruptions to the industry caused by Covid-19.
The property website’s research shows that year-on-year online buyer property searches are up 50 per cent nationally, with NSW showing growth of 39 per cent.
James MacSmith, writing in the Daily Telegraph, says that optimism is flooding back into the market: “The buyers are out there,” he says.
Frank Valentic of Advantage Property, who is both a buyer’s agent and vendor’s advocate, is equally positive. He says that home prices have been holding up well and that even in the present unsettled situation there are good opportunities for both buyers and sellers: “Family homes and the first-home buyer segments are pretty solid – there are opportunities if you’re buying,” he says. “If you’re selling, I’m telling my clients that it’s better to sell sooner rather than later.”
New research conducted before the Covid-19 pandemic hit by Rabobank, one of the world’s largest banks, had found that a record number of Australians had been planning to buy a new home. A staggering one-third of those surveyed had been considering upgrading, downsizing, shifting location or getting into the property market for the first time in what would have provided a massive boost for the economy.
Glenn Wealands, head of client experience at Rabobank, said the bank had been conducting its financial health barometer of the country for over a decade: “But in the poll we conducted in the first quarter of 2020, we found a record high number of Australians – 29 per cent – citing the intention to buy a new home in the next two years,” he said.
Wealands said no one yet knew how that position will have changed with the coronavirus crisis and many Australians losing their jobs: “But I think there’s definitely a lot of people exhibiting really good financial management leading into the pandemic and having a sizeable deposit saved so were aware of what they could afford.”
The Rabobank research points to several reassuring signs of good financial health within the pre-Covid-19 community. It found that 73 per cent of people believed they lived within their means, 66 per cent had a long-term financial plan and 62 per cent regularly reviewed their finances. Eighty per cent said they were financially comfortable – up slightly from 2019’s 79 per cent.
“With perceived demand having been at an all-time high, now is definitely a great time to take stock and review how circumstances currently are, and whether there are opportunities,” said Wealands. “It’s always important to be on the playing field and actively reviewing finances rather than a spectator just wondering when the pandemic will subside.”
Nerida Cole, managing director of Dixon Advisory, says with so many people previously ready to pounce on the market with deposits put away and research on what to buy completed, then there’s still room for them to act if their finances haven’t been derailed by coronavirus.
“The good thing now is that it is a buyers’ market and if vendors aren’t coming to the party on price, then they can walk away as there’ll be another property around the corner. A lot of people really want to sell now, whether investors wanting to get out of the market or people under financial pressure themselves, so there are good opportunities.”
Justin Doobov of Intelligent Finance told Domain’s Sue Williams that now is a good time to buy, and especially to upgrade to a more expensive property: “People have spent a lot of time in social isolation in their homes and are now realising the shortcomings of their homes, and want to move into something better,” he said.
“Now is a good time to be ready to buy because there’s going to be a lot of property coming onto the market that people need to sell as they’ve lost jobs or are under financial strain and will be ready to make discounts.”
Even though overseas buyers are hard to spot at present, enquiries online from overseas are strong. These enquiries reflect the perceived weakness of the Aussie dollar and the current softening of property prices in some parts of the country, but our international travel restrictions are set to stay in place for anywhere from a year to eighteen months and that’s preventing potential buyers from conducting in-person inspections.
Sydney Sotheby’s International managing director Michael Pallier summed it up: “In general, inquiries are up, but transactions are down. We just have to be patient and get through it,” Mr Pallier said.
Executive chairman of property listing portal Juwai, Georg Chmiel, said that while transactions are difficult in the current market, a surge in buyers is expected once travel restrictions are lifted.
“We still have strong demand from Chinese buyers for Australian property but getting them to the transaction is harder than normal at the moment,” he said, adding that Australia’s management of the coronavirus pandemic made it a more appealing place to buy.
“Australia was already near the top of the list for buyers from China, Singapore and Malaysia,” Mr Chmiel said. “Each of these countries has been challenged in its own way by the coronavirus pandemic, in ways that make Australia even more appealing.”
The virus and the property market
Covid-19 has affected virtually every aspect of Australia’s economy, naturally including property prices. For a time there were some expectations that it would take several years for prices to recover to anything like their pre-virus levels, but now that the country has shown it can effectively manage the impacts of the coronavirus, more optimistic forecasts have begun to appear.
The ANZ Bank expects dwelling prices to fall 10 per cent from peak to trough across all capital cities, with Sydney’s prices slipping 13 per cent before starting to recover, in part due to population growth being slowed by border closures.
Another of the ‘Big Four’ banks, NAB, said the expected sharp rise in unemployment could drive property prices down by 10 to 15 per cent over the next 12 to 18 months but sees prices flattening out from the middle of 2021.
PRDnationwide chief economist Diaswati Mardiasmo told the Sydney Morning Herald that she suspects as broader restrictions are eased and businesses recover there may be improvements across the board sooner than the banks’ forecasts,
"I wouldn't be surprised if we plateau [in the property market] in the very short term, say in the next month or so, as further easing of restrictions are introduced," she said, adding that normalisation is still several more months down the track.
New data from the Australian Bureau of Statistics (ABS) shows that Australian jobs have taken a 7.5 per cent hit resulting from the coronavirus shutdowns, with the highest percentage of job losses among people aged 20 years and under and those who are ‘twenty somethings’.
However, Domain economist Trent Wiltshire pointed out that the age bracket where people are most likely to buy a house – typically middle-aged Australians, had a less dramatic rate of job losses than the other cohorts.
“Yes, they’re less affected, so they’ll probably be more likely on the rebound to be more active in the housing market, but it’s a big rise in unemployment and it’s not finished yet,” Mr Wiltshire said.
St George Bank economics chief economist Besa Deda said while house prices still rose across Australian capital cities in April, she predicted the upcoming April Labour Force data – due to be released this month – would show the unemployment rate increase to 8.3 per cent from its March rate of 5.2 per cent.
“It does suggest that housing demand will weaken, and we will see falls in house prices,” Ms Deda said. But as we’ve seen in previous downturns, the annual average house price decline can be quite small.”
Stamp duty faces reform
There’s general agreement that the stamp duty on property transfers has outlived its usefulness. There’s also a lot of creative thinking going on about how it can be replaced by a more stable source of revenue for governments that won’t be as volatile as stamp duty when economic disruptions like Covid-19 occur.
We’ve been foreshadowing the replacement of stamp duty with the introduction of a broad-based land tax in these pages for some time. Now, the effects of Covid-19 on state and territory finances, as well as on the national treasury, have put it at the top of many government agendas as a better source of funds to replace those that are drying up.
Domain’s Sue Williams writes: “Stamp duty is back in the spotlight as the federal government draws up a raft of emergency plans and structural reforms to get the economy back on track after the devastation wrought by COVID-19.
“Many key figures are urging the government to abolish stamp tax as an unwieldy weight on both the property market and people’s flexibility, making homes unaffordable for first-time buyers, and creating barriers for those wanting to move closer to work, upsize or downsize.”
Former Federal Treasury secretary Ken Henry has said for many years that stamp duty creates "all sorts of economic and social distortions," including unfair expenses for aspiring homeowners and “disincentives for those seeking to downsize or move around for job opportunities.”
Dr Shane Oliver, AMP Capital chief economist, said in April: “Stamp duty is a terrible tax, it should be repealed, and this is the perfect time to do it.
“The problem with stamp duty is that it’s a massive impost on a single transaction which inhibits economic decision-making in a less-than-optimal way. But land tax would be levied on the value of land and applied to all landholders equally and be done in a much fairer way.”
Now Victoria and NSW are leading the other states in looking for ways, as one journalist put it, “to lift economic growth while overhauling a string of taxes critics argue are inefficient and complex.”
NSW treasurer Dominic Perrottet has narrowed down the list of targeted taxes by nominating stamp duty and payroll taxes – both big money makers for his state. Victoria’s treasurer, Tim Pallas has commenced working on a new tax package with reforms to the same two taxes, while the Queensland government has said it will consider reforms after the state election in October.
Tax expert and the head of the Australian National University's Tax and Transfer Policy Institute, Robert Breunig, said recently that stamp duty was an "obvious candidate" for reform. He particularly wants to ease the burden of post-virus economic recovery falling on younger Australians.
"Given the current spirit of bipartisanship evidenced in the passing of pandemic legislation and the formation of a cross-party, state and federal unity government, there is a golden moment to seize. If we can effectively reposition the tax and transfer systems, we will be able to restart the economic engines in a more sustainable manner," he said.
NSW’s Dominic Perrotet agrees with the timing of the move: “"There is no better time to rid the states of inefficient taxes that hold back economic growth and I am talking stamp duty and payroll taxes," Mr Perrottet said recently.
The chief executive director of policy for the Housing Industry Association (HIA), Kristin Brookfield, said there was a clear benefit to be gained by removing stamp duties: "We believe governments should consider ways to remove inefficient and inequitable taxes such as stamp duty and payroll tax on new home construction," she said.
Real Estate Institute of Victoria president Leah Calnan said a removal of stamp duty would encourage people to transact more frequently: “We already have 19 taxes that are payable through the property sector, which contribute [up to] 48 per cent of the state’s income.
“We’ve been speaking with the government for many years in regard to reducing stamp duty calculations, because Victoria has some of the highest rates across the country.”
Property Council of Australia chief executive Ken Morrison told the Herald-Sun that he welcomed possible government plans to scrap stamp duty, which he called “Australia’s least efficient and most unpopular tax”, but he also noted a shift to an annual tax could be complicated and costly for families.
“In modelling for the Property Council, Deloitte Access Economics estimated that the average ‘land value property’ would need to pay $2400 a year,” he said. “However, this is an Australian average. Different underlying land values would produce very different tax outcomes with many suburbs paying $5000 a year or more.”
Bits and pieces
An enterprising developer in Melbourne is offering a ‘try before you buy’ scheme that aims to help struggling home buyers get a foothold in the property market by letting them rent an apartment for five years before buying it at a fixed price.
A former CD and tape factory in the north-western suburb of Kensington is being demolished to make way for the sustainable two-bedroom apartments, which are aimed at low to middle income earners. The starting price of these apartments is around $500,000.
Developer Kris Daff has two ‘try before you buy’ projects underway. Under his plan, tenants are given access to a financial coach who helps them save a deposit for their eventual purchase. At the end of five years they can purchase their apartment at a fixed price, agreed at the time their residency commenced, although they are able to opt out of the purchase at that time if they wish.
Another story in the news recently concerns the NSW government’s handling – or not handling, of the flammable cladding issue we’ve mentioned here before. More than six months after receiving advice from the building commissioner that serious risks created by flammable cladding on buildings across Sydney required urgent attention, NSW Cabinet is still considering what should be done about mitigating these risks.
Building Commissioner David Chandler handed a plan to the government last August to deal with the flammable cladding crisis. The details of that plan have not yet been made public. Better Regulation Minister Kevin Anderson said the government was "carefully considering" the commissioner's plan but no action has yet been taken.
Some 444 high-risk buildings across NSW that need cladding partially or completely removed remain on a register compiled by a taskforce set up the government. The owners and tenants of these buildings haven been informed when concerns about cladding are found, but potential buyers or prospective tenants cannot yet find out whether a building is on the list.
Sources:
'Not out of the woods yet': NSW real estate restrictions lift but prices to slump,’ Jennifer Duke, Sydney Morning Herald, 11 May 2020
‘Coronavirus: Melbourne median house value tipped to fall 9.2 per cent,’ Samantha Landy, news.com.au, 11 May 2020
‘Coronavirus has turned the property market upside down in the blink of an eye,’ Kirsten Robb and Carrington Clarke, ABC News Online, 4 May 2020
‘House prices to bottom out by mid-2021: ANZ,’ Nila Sweeney, Australian Financial Review, 7 May 2020
‘Spike in buyer interest a very positive sign for Australia’s real estate market,’ James MacSmith, Daily Telegraph, 7 May 2020
‘Job losses continue to increase, signalling a hit to house prices,’ Jemimah Clegg, Domain, 5 May 2020
‘Why now could be the right time to buy a new home, according to experts,’ Sue Williams, Domain, 5 May 2020
‘Agents rush to switch Sydney auctions from online to on-site ahead of restrictions being eased,’ Sue Williams, Domain, 4 May 2020
‘Stamp duty, payroll tax in the firing line as states prepare for reform,’ Shane Wright and Noel Towell, Sydney Morning Herald, 5 May 2020
‘Perrottet's recovery plan to axe 'inefficient' stamp duty, payroll taxes,’ Alexandra Smith and Matt Wade, Sydney Morning Herald, 2 May 2020
‘Stamp duty, Victoria: Concerns over potential replacement tax,’ Jayitri Smiles, Herald Sun, 27 April 2020
‘A terrible tax’: Is it time to abolish stamp duty?,’ Sue Williams, Domain, 27 April 2020
Melbourne housing developer offering ‘try before you buy’ scheme in Kensington,’ Lucy Mae Beers, 7NEWS, 4 May 2020
'Glacial progress': Minister under fire over flammable cladding crisis,’ Matt O'Sullivan, Sydney Morning Herald, 17 March 2020
‘Overseas property market stalls as buyers refuse to purchase until the borders open,’ Melissa Heagney, Domain, 3 May 2020
‘Real estate market gears up for return of on-site auctions following easing of bans in NSW,’
Kate Burke, Domain, 8 May 2020
‘Open homes and on-site auctions no longer banned as NSW government gets ready to lift COVID-19 restrictions,’ Ellen Lutton, Domain, 3 May 2020
Sydney property catches a virus and recovery’s not yet in sight
Wed, 15 Apr 2020Was our last article really just a month ago? In our March 2020 article reasonably entitled “Recovery roars ahead”, we talked about Sydney’s ‘improved and rising market’ and how fewer than half the homes for sale in the previous month had been on the market for more than thirty days. We also noted that Sydney property prices were on track to create what CoreLogic called “the fastest market recovery in Australian history”.
The chief economist at the Australian Bureau of Statistics (ABS) Bruce Hockman said that residential property prices had risen by 2.5 per cent nationally through the year, and the total value of Australia’s 10.4 million residential buildings had jumped to $7.2 trillion after a record rise of $294.4 billion in the previous year.
"Results are consistent with other housing market indicators, including new lending commitments to households and sales transactions, which have been rising over several months," he said.
Even the proportion of homes sold at a profit rose last year, according to new figures from CoreLogic, released in late March this year. Some 88.7 per cent of homes that resold during the December quarter changed hands at a profit, up from 87.4 per cent in the September quarter, the latest CoreLogic Pain & Gain report found.
Gross profits for the industry were $22.5 billion in the quarter, up from $18.7 billion over the previous three months.
In Sydney it was good to see first-home buyers returning to the market, to enjoy auction clearance rates of 82 per cent in February’s ‘Super Saturday’, and to see Domain predicting price rises to a new median before long. Even FOMO – the ‘fear of missing out,’ had returned.
More than one-third of Sydney homes for sale were sold prior to auction. This was a clear indication that both buyers and sellers were eager to close a deal. It wasn’t all that long before then that clearance rates had hit historic lows, so it seemed the good times were back, and vendors were relieved at the prices now being achieved. Buyers too could take satisfaction in getting in before prices went up further.
However, we did incorporate a note of caution in our March article due to the new and growing concerns about the coronavirus, an epidemic that Reserve Bank of Australia (RBA) Governor Philip Lowe said, “clouded the near-term economic outlook”. We also quoted Aidan Devine from realestate.com.au who presciently observed: “coronavirus poses a major threat to the housing market and could derail sales if buyers stop going to open for inspections and auctions.”
We promised last month: “We intend to monitor the situation with regard to the Sydney property market and will provide monthly updates on this subject”. As we’re finding out, the coronavirus has had a rapid impact on Sydney property prices – and on the world, similar to and possibly greater than the GFC (Global Financial Crisis), with overtones of the 1918 Influenza Epidemic thrown in.
The coronavirus disease, COVID-19, has quickly become the principal factor affecting the Australian property industry. Its importance cannot be understated.
Writing on the wall
In early March, Matt Wade at the Sydney Morning Herald identified two separate but equally negative factors he called “Twin Shocks” that would hit the economy: “Economic growth in NSW could slump to the lowest rate since the recession of the early 1990s as key industries in the state struggle with the effects of the coronavirus outbreak and summer bushfires.”
NSW Treasurer Dominic Perrottet said there was ‘no doubt’ the coronavirus and bushfires would take a significant economic toll: “Tourism and education are on the frontline and they are feeling the pain right now - the impact will obviously flow through to retail, trade and investment the longer the situation lasts.”
While commenting on the recovery in property prices, Ingrid Fuary-Wagner, writing in the Australian Financial Review on 3 March, wrote: “Australia’s housing market faces a new balancing act, with a looming interest rate cut expected to offset threats that the coronavirus could derail reinvigorated buyer sentiment.
Domain’s Tawar Razaghi could still write on 12 March about ‘home-buying hopefuls’ asking to borrow more money to keep up with rising house prices, as figures showed the average size of new mortgages had soared. However, he did say: “The enthusiasm, particularly from first-home buyers and upgraders, defies the uncertain economic outlook as coronavirus casts a cloud over key industries.”
Serious concerns about the coronavirus and what it might do to the Sydney property market were being widely expressed by mid-March. Yahoo Finance’s Jessica Yun said: “With global stock markets swinging wildly from one extreme to the other as the coronavirus COVID-19 continues to spread, investors are feeling cold feet.”
However, she noted that “according to property experts, the tough economic climate could actually be viewed as a lucrative [buying] opportunity.”
Nerida Conisbee from realestate.com.au optimistically said that the property market is “doing well”, with clearance rates high and buyer demand up thanks to all-time-low interest rates, and another emergency RBA rate cut on the horizon…but added: “I have no doubt that once COVID-19 is contained, we are in for very strong economic growth.”
Some analysts, like University of Adelaide academic Peter Koulizos, who at the time was advising against purchasing commercial property, got even more detailed in his predictions: “Many office workers will be working from home and there will be less need for office space,” he said.
“Once life gets back to normal and assuming productivity from workers does not drop markedly, many businesses and employers might come to the conclusion that they can continue to operate with less office space, thus decreasing their costs.”
Pride of place for accurate predictions goes to economist Trent Wiltshire who said in Domain: “The coronavirus is the biggest threat to Australia’s economy since the global financial crisis, and the property industry won’t be immune from the fallout. If the virus spreads widely and the economy weakens, the property market and the construction sector will be hit hard.”
Mr Wiltshire added for good measure: “It’s becoming more likely that the coronavirus will result in a substantial and extended economic shock. If this eventuates, there will be significant impacts on the property and construction sectors. Treasury research predicted that a severe pandemic will result in housing construction declining ‘dramatically’ and that house prices will fall.”
He said that in a worst-case scenario the direct impacts on the property industry would be magnified and will last longer: “There will be a bigger drop off in open for inspection and auction attendance; potential vendors won’t list until the crisis has passed. Demand for new houses and apartments will fall, putting developers, builders and tradespeople under pressure, resulting in construction activity falling dramatically.”
And now?
So, in little more than half a year we went from bust to boom, and in little more than a month we went back to ‘bust’. There’s no putting lipstick on the pig now; it’s too early to make anything other than educated guesses about how the coronavirus will affect our lives, except to say that the effects will be widespread and largely negative. The impacts will be felt Australia-wide in a reflection of their worldwide nature.
We can expect both buyers and sellers to pull back from the housing market, and this naturally means prices will fall. But that’s not just on dwellings; the bloodbath on the Australian Securities Exchange (ASX) has diminished the wealth of many Australians and therefore they’ve lost the ability (and probably the interest) to explore deploying more of their wealth into property.
Whole clusters of potential buyers will defer their property acquisitions. These include those who are suddenly unemployed, those whose working hours have been drastically reduced, those small business owners whose turnover has shrunk or who’ve temporarily had to close their doors, and those whose positions have suddenly become uncertain. Even die-hard investors whose property portfolios have seen significant declines in their rental incomes are going to hold off their next purchase.
Sellers, of course, will be forced to accept lower values than they were previously expecting. This means that those who need to achieve the price levels they’d anticipated before the market’s decline will hold off their listings until better times.
Our daily lives haven’t been the same since the federal government announced its strict containment measures in late March, just before we headed into the pre-Easter period which has traditionally been a time when property sales begin to slow down following the spring and summer peak periods.
The government has already pumped billions of dollars into the economy in the probably forlorn hope of avoiding a recession caused by the effects of the coronavirus on virtually every aspect of Australian life. The conservative Liberal government has taken a leftwards turn and has begun to recall elements of the Rudd government’s pump-priming during the GFC.
But this time it’s a lot more than a simple handout for everybody to go spend and keep the cash registers ticking over. Now it’s a carefully crafted set of measures targeted at keeping businesses open and some sort of income-replacement payments flowing to displaced workers. The focus is on continuance and survival rather than simply priming a pump, and there’s nothing in the pipeline that’s going to stimulate property sales.
One giant change to the property industry is the federal government’s decision to ban real estate auctions from midnight Wednesday, 25 March. Real estate inspections were also banned as part of the government’s aim to combat the spread of the coronavirus. Some agents had already moved to conduct their auctions online, but the Prime Minister’s announcement forced that move to be made much more rapidly and widely than at first was anticipated.
Public auctions account for only a small proportion – around 11 per cent – of the total residential real estate listings; the great majority of properties change hands through private treaty. However, auctions are the most visible face of the market and serve as our weekly barometer on property prices and clearance rates.
Ray White managing director Dan White outlined how the real estate industry could conduct itself in this new environment: “The key message to take away is that all real estate onsite and in room auctions and open house inspections will be cancelled…but our members will still be able to host virtual property tours, private inspections and on-line/digital auctions, as we have been encouraging,” Mr White said.
Domain’s Elizabeth Redman says about the new arrangements: “Real estate agents and the public have been fast adapting to new social distancing measures that provide for private home inspections rather than open homes, and virtual auctions instead of physical auctions.”
But the market has, for now at least, slowed to a crawl. “Residential property listings are starting to increase and accumulate,” SQM Research managing director Louis Christopher said.
“I note the surge of stock that has been on the market between 30 and 60 days. This may reflect the start of a capital city housing market downturn due to the health and economic impact of COVID-19.”
Online auctions are finding some success as agents, vendors and purchasers all adapt to new ways of doing things. James Kirkland, national sales and operations director of Sydney-based Upside Realty, said his business was already using software such as Skype, Zoom and FaceTime to give would-be buyers a virtual tour of properties and paperless contracts.
“Property is stacking up well as an investment compared with shares. If it is priced well, presented well and promoted well, it will sell and we’re not seeing any change in that,” he said.
In a recent online auction about 139 viewers logged onto their devices to watch a three-bedroom house in Epping go under the virtual hammer. After a slight delay to the scheduled starting time because of late bidder registrations and a slow start to the actual bidding process, there was a strong turn out from interested buyers with 10 parties vying for the property.
McGrath Epping selling agent Betty Ockerlander said it was hard to get started but she was confident as this property had good interest: “We had 28 private inspections. The tricky thing for us is if you had a face-to-face auction you could have guided people more.”
She said her team of agents had to wait until the competition narrowed down before they were able to speak to each one over the phone: “We couldn’t do that with 10 people. We had to wait to narrow it down to the top three bidders.” Eventually the winning bidders got the property they wanted.
What comes next?
Duncan Hughes from the Australian Financial Review says there’s nothing new in our current situation: “The dire warnings are nothing new to industry veterans who have seen residential markets plunge six times in the past 33 years as a result of big overseas events.”
Brendan Coates, household finances program director for the Grattan Institute, is not in complete agreement: “This is going to be the biggest economic shock we've seen in our lifetime," he said. “The economy has in a week gone from motoring along close to 60km/h to hitting a wall; this has never happened before – even the GFC did not unfold this fast.”
He said that markets knew the GFC crisis was abating when banks stabilised and the credit squeeze eased. “We won’t see signs of recovery this time until there are signs coronavirus has stopped spreading,” says Coates.
Research firm CoreLogic says that the “extreme uncertainty and economic fragility” resulting from the coronavirus pandemic has made it difficult to expect any response from buyers and sellers to the RBA’s record low borrowing costs.
“As the coronavirus pandemic broadens, and the probability of an Australian recession increases, consumer confidence is trending lower from an already weak position,” CoreLogic said. “This will likely weigh on high-commitment consumer spending decisions, such as buying or selling a home.”
The Herald’s Elizabeth Knight says that the bottom line is that all bets are off when it comes to predicting what will happen to house values over the coming year: “Until a month ago economists were looking for gains of between 5 and 10 per cent in values this year. At best these will evaporate.”
At worst prices could fall 20 per cent, according to AMP chief economist Shane Oliver. Dr Oliver believes that a recession with something like 10 per cent unemployment could trigger the underlying vulnerability of the housing market with its high prices and high debt levels. This could see a 20 per cent fall in prices, although he also says he’s expecting a more limited downturn in which prices fall about 10 per cent.
Dr Oliver also says that Australia’s property market has traditionally done relatively well during times of global economic shocks: “Investors switched from shares to property”, he said, noting that the local market also performed strongly during the Asian financial crisis of 1998 and the ‘dot-com’ bust of 2000.
“Our base case is for a rise in unemployment to around 7 per cent which is likely to drive a 5 per cent or so dip in prices ahead of a property market recovery later this year as the economy bounces back and pent up demand is unleashed again helped by ultra-low interest rates,” he said.
Analysts at investment bank UBS, meanwhile are expecting house price falls of anywhere between 5 per cent and 20 per cent, depending on how severe the pandemic becomes.
The bank’s chief economist, George Tharenou, told the bank’s clients that the number of properties being sold will “collapse – likely more than halving near-term – as long as the ban on auctions and open home inspections remains”.
“We also revised our forecast for home prices to start falling, given the hit to demand from the looming sharp recession and spike in unemployment,” he said in a note to clients.
Damien Klassen, of Melbourne-based fund manager Nucleus Wealth, said the RBA had used up all its ammunition by cutting rates to record-low levels. Rising unemployment was, for him, the most important factor in the delicate housing market equation.
“I’m sure they’ll try to pull something out of the hat because generally the government will do everything it can to save the housing market,” he said. “But once unemployment starts going up – and I can’t see how it won’t – people will be forced to start selling and prices will fall.”
Buyer’s agent Pete Wargent also believes property transactions are going to “drop off a cliff” during the country’s lockdown period, but that there is a “best-case scenario” for housing where the government succeeds in flattening the curve of new coronavirus cases and the economy bounces back in the second half of the year, poised to take part in the resulting recovery.
CoreLogic head of Australian research Eliza Owen said rising unemployment is set to put downward pressure on property values, although many potential vendors are likely to hold off selling in the current environment. “Loss-making sales could increase proportionally as those that sell are doing so out of necessity, even if it means accepting a loss.
“As housing activity is disrupted due to weaker economic conditions and social distancing policies related to curbing the spread of coronavirus, profit-making resales could become less common in 2020. However, whatever downturn is to be endured in property over the next six months to a year, it follows a decade of strong growth rates. As with the results in the December quarter, profit-making sales are more common where hold periods are higher,” she said.
One very important question is: How long will the downturn last? ANZ Bank economists Hayden Dimes and Felicity Emmett say that ongoing unemployment will have long term consequences: "Despite enormous fiscal support, unemployment is still expected to rise sharply through this period and is unlikely to fully recover for some years."
They say major price falls will start showing up as early as this April’s sales figures, and even when social distancing measures are removed, it is unlikely prices will bounce back.
So, there we are now. In what seems like the proverbial ‘blink of an eye’ the world of
Australian property we knew and understood has been turned upside down. Experts with years of experience in the property market have no uniformity of opinion about how severe the downturn will be nor how long it will last.
There’s little doubt that we face an uncertain future until the coronavirus pandemic has been brought under control, and that could well mean until an effective vaccine against the coronavirus has been released. Until then we face an environment of higher unemployment, some forced sales at less-than-wanted prices, fewer properties on the market, fewer purchasers looking for properties to buy, and tighter controls on mortgage finance.
To quote Anthony Quinn’s character in that delightful movie ‘Zorba the Greek’, it’s “the full catastrophe”. But we must keep in mind that there will eventually be a recovery and when that comes there will be a ‘new normal’ much closer to what we’ve enjoyed until now.
As Nick Lenaghan wrote in the Australian Financial Review: “It's too early to call out silver linings in the dark clouds of COVID-19. But disruption does create opportunity. Yes, it’s getting tougher day by day. But when we get to the other side, there will be an economy and there will be a property market.”
Sources:
‘Discounting creeps into property market amid coronavirus, but some vendors hold firm,’ Elizabeth Redman, Domain, 14 April 2020
‘Property prices to plunge as auction clearance rates fall off a cliff,’ John Collett, Sydney Morning Herald, 8 April 2020
‘What will the impact of coronavirus be on Sydney’s property market?’ Lucy Macken, Domain, 4 April 2020
‘Homes still selling online but majority switched to private treaty,’ Tawar Razaghi, Domain, 5 April 2020
‘Property listings still sitting on the market after four weeks: SQM’, Elizabeth Redman, Domain, 8 April 2020
‘Profit-making property sales rose in December quarter pre-coronavirus: report,’ Elizabeth Redman, Domain, 4 April 2020
‘Ominous signs the property market is running out of steam - and fast,’ Elizabeth Knight, Sydney Morning Herald, 2 April 2020
‘Australian housing market takes a huge hit with auctions set to plummet further this weekend,’ Ben Butler, The Guardian, 3 April 2020
‘There will be a property market on the other side,’ Nick Lenaghan, Australian Financial Review, 27 March 2020
“Property guru Tom Panos’ thoughts on COVID-19’s impact on Australia’s real estate market,’, James MacSmith, news.com.au, 26 March 2020
‘Coronavirus fears to test Sydney's property market as over 900 auctions to take place,’ Antonette Collins, ABC news online, 21 March 2020
‘Property 'panic buying is happening', Nila Sweeney, Australian Financial Review, 21 March 2020
‘Real estate auctions banned from midnight Wednesday in coronavirus crackdown,’ Elizabeth Redman, Domain, 25 March 2020
‘The only thing we can say with certainty is that the fallout from coronavirus is going to be brutal,’ Greg Jericho, The Guardian, 19 March 2020
‘Why now is the right time to buy a house,’ Jessica Yun, Yahoo Finance, 19 March 2020
‘Twin shocks to hit the NSW economy hard,’ Matt Wade, Sydney Morning Herald, 2 March 2020
‘Virus poses 'rising risk' to housing market,’ Ingrid Fuary-Wagner, Australian Financial Review, 3 March 2020
‘Hopeful buyers ask to borrow more money as housing market outpaces expectations,’
Tawar Razaghi, Domain, 12 March 2020
‘How will the coronavirus affect the Australian property industry? Trent Wiltshire, Domain, 13 March 2020
‘How will coronavirus affect Australia's real estate market and house prices?’ Nigel Stapledon, The Guardian, 16 March 2020
‘One-third of Sydney properties selling before auction, new figures reveal,’ Tawar Razaghi, Domain, 14 March 2020
‘Coronavirus, bushfires and recession could have big impact on property market,’ Jonathan Chancellor, Daily Telegraph, 17 March 2020
‘Sydney, Melbourne house prices growing at fastest rate in three years before virus outbreak,’ Shane Wright, Sydney Morning Herald, 17 March 2020
‘The coronavirus crisis hasn't smashed the property market yet, but that could be about to change,’ Jack Derwin, Business Insider, 17 March 2020
‘Australian housing market will hit the wall in coronavirus recession, experts say,’ Martin Farrer, The Guardian, 20 March 2020
‘Virus will hit house prices, but history offers hope,’ Duncan Hughes, Australian Financial Review, 20 March 2020
Recovery roars ahead, new planning changes, and first-home buyers return
Mon, 16 Mar 2020It was just a year ago that price discounting in Sydney property sales was at its highest level in years, giving property buyers a rare opportunity to find a bargain in Australia’s most expensive market. Twelve months later, vendors are now selling into an improved and rising market and few houses or apartments are being discounted to stimulate sales.
Even FOMO (the ‘fear of missing out’) is back after first-home buyers have returned, aided by a variety of government programs as well as record low interest rates after the RBA cut its official rate to just 0.5 per cent at its March meeting.
Figures from the Australian Bureau of Statistics show that the number of first-home buyers is now the highest since 2012. It’s not surprising then that stamp duty exemptions and concessions for first-home buyers were also up more than 25 per cent, or that more than 6,000 Sydney first-home buyers have rushed to take up the federal First Home Loan Deposit Scheme which enables them to purchase a property with as little as a five per cent deposit.
Equally unsurprising is the fact that fewer than half of the homes for sale in the harbour city last month were on the market for more than 30 days, down from two-thirds of homes at the same time last year, according to data released by SQM Research.
This is all part of a national property price recovery. The recent property downturn saw an 8.4 per cent correction in values. In just seven months, however, this fall has largely been made up, and prices are now on track to fully recover in the next two months. Sydney house prices increased by 1.8 per cent in February, and If prices across Australia continue on their current trajectory, property research group CoreLogic tells us that 2020 will see the fastest market recovery in Australian history.
The year got off to a great start. In January median dwelling values went up 1.1 per cent in Sydney, adding to a total annual increase of 7.9 per cent year-on-year. This was followed by a huge ‘Super Saturday’ on the last day of February with Sydney having the highest number of auctions in two years and a preliminary clearance rate of 82 per cent.
This just confirms that Sydney auctions are booming. Clearance rates are near or even above 80 per cent most weeks, and few properties are being withdrawn from auction before sale. All this is especially noteworthy as it’s still early in the auction season.
Sydney auctioneer Damian Cooley says that first-home buyers are keen to get into the market before prices rise: “I think that anyone who is a first-home buyer and looking to buy, is buying to get into the market now. They’re doing everything they can to buy now rather than later in the year when things may be more expensive,” Mr Cooley said.
Domain’s Sue Williams says that Sydney’s growth is expected to be the highest in the country with both house and apartment prices predicted to go past the 2017 peak and reach record high prices by the end of this year.
“Domain’s ‘Property Price Forecasts–2020’ predicts houses in Sydney will rise by 10 per cent over 2020 to a new median of around $1.25 million, while apartments will rise by 8 per cent to a new median of $790,000 – just above the peak reached in June 2017.”
Property valuation firm Herron Todd White said it expects price growth to moderate in Sydney thanks to an increase in new listings, but “despite this we still expect to see prices increase by around 10 per cent for the year, which will mean prices should move above the previous peak in the second half of the year.”
One analyst even expects this current upwards cycle to generate capital gains of around 20 per cent before it ends. Christopher Jove, a columnist with the Australian Financial Review, wrote: “Based on the RBA’s model of housing dynamics, one should pencil in total capital gains of about 20 per cent this cycle assuming no further reductions in rates.”
He also mentioned that in a March 2019 paper published by two RBA economists it was forecast that: “a percentage point drop in the expected real mortgage rate would boost housing prices by 28 per cent in the long run,” which at the time sounded impossible but now it’s not totally out of the question.
In its latest review of the Australian economy, the International Monetary Fund issued a warning that the lift in house prices over recent months was a growing risk to the economy. But the IMF's report said there were other longer-term issues it believed need to be addressed, including broad tax reform.
The IMF also said actual house prices in Australia were 7 per cent above a debt-service-to-income ratio of 25 per cent, which is considered a reasonable level of debt.
How long will our current boomlet last? Every cycle has its limits, and Damien Klassen, writing in Microbusiness, outlines a scenario that explains why: “If house prices grow at 10 per cent p.a. for the next 20 years, and wages/rents kept going up at their historical rates then [by 2040] the median Sydney house price would be over $7 million, and this price would be 45 time higher than the median wage.
“Even if you managed to scrape together the 5 per cent deposit (only twice the median annual pre-tax salary) to qualify for one of [the federal government’s] 95 per cent mortgages, the mortgage payment would come in at almost 3 times the median pre-tax salary.”
What about affordability?
It’s not all that long ago that housing affordability was in the news. Sydney prices were already high, then kept on rising, pricing many out of the market including a growing number of first-home buyers. But then property prices fell, not unlike stones, and in theory at least, dwelling prices became more affordable.
The recent recovery of the housing market with housing prices rising almost back to their previous highs has reignited the arguments over risks of creating a separate ‘class’ of Australians who’ll never own a home of their own and will be forced to rent premises for the rest of their lives.
Deloitte Access Economics partner Nicki Hutley asks: “Are we allowing one class of Australians to build for their retirement more easily than another class of Australians? The answer to that is unequivocally yes,” she told the 7.30 Report.
“What’s happening now is real, but it’s not sustainable. We can’t keep having our house prices rise to these sorts of levels. We certainly have a housing affordability crisis in Australia,” she said.
Ms Hutley has a point. The Grattan Institute’s Household, Income and Labour Dynamics in Australia (HILDA) survey shows that in 2002, 34 per cent of 18 to 39-year-olds in Melbourne were homeowners, but that had dropped to 22 per cent by 2018.
The Grattan Institute’s household finances program director, Brendan Coates blamed worsening affordability for this trend: “It is a crisis where, over the course of the next couple of decades, we’re likely to see fewer and fewer Australians — particularly poorer Australians — own their own home, and that will have enormous consequences for all aspects of Australian life.”
But are things really so dire? Owner-occupiers are driving the market at present. Home loans in December for non-first-home owner-occupiers were 10.1 per cent above the year before, while investor finance was just 3.2 per cent above, and first-home buyer home loans were up 31.2 per cent.
The Guardian’s Greg Jericho says that first-home buyers make up a greater share of buyers than at any time since the GFC. Investors, he says, have kept away and that’s opened up the field for those who’d previously been priced out of the market.
He notes that, while total owner-occupier loans are just above where they were March 2017, investor home loans in December 2019 were still 39 per cent below that level: “What the numbers show is the big reason that allows first-home buyers get a foothold is when they don’t have to compete against investors.
“At the moment the market is being driven by owner-occupiers, and as long as that is the case housing affordability should remain relatively steady. And with that stability the RBA will be more comfortable with cutting rates again should it believe the economy needs a boost.”
Change of plans
The pattern of housing construction across Sydney is now expected to shift dramatically over the next five years, with some areas expected to boom and a slowdown expected in others. Reflecting a number of concerns about the scale of development in recent years, the NSW government's latest forecast shows that 5700 fewer homes are set to be built over the next five years than was predicted just two years ago.
The NSW government is now planning for 191,050 dwellings to be built in Sydney over the next five years, a considerable reduction from the 196,750 predicted in 2017-18. Planning Minister Rob Stokes said development was taking place at different rates than were then anticipated in response to changes in planning, infrastructure and market activity.
"In greenfield areas where we are planning for significant growth, we expect development to take place at higher rates as the planning process unfolds," he told the Sydney Morning Herald.
Bill Randolph, the director of the University of NSW's City Futures, said the change in forecasts for new homes mostly reflects a slowdown in the apartment market, but added that it will still be a challenge to deliver about 41,000 new dwellings annually in Sydney over the next five years.
Forecasts for three areas in Sydney's north – Mosman, Hunters Hill and Hornsby – have been cut by at least 40 per cent from those predicted in the 2017-18 financial year. Also, the lower total of 1950 new dwellings predicted for the northern beaches are a cut of 26 per cent on the government's target for that area in 2017.
This is in marked contrast to forecasts for Liverpool in the south-west which expects to have 12,750 dwellings built over the next five years - a massive 72 per cent rise on that which was predicted just two years ago.
And while new dwellings at Ryde are forecast to fall by 10 per cent to 8550 over the next five years, the forecasts for Liverpool, Wollondilly, Woollahra, the Blue Mountains and Fairfield have grown by at least 54 per cent.
The forecasts also show that 10 times as many homes are now expected to be built at Blacktown over the next five years than are forecast for the northern beaches. In 2016, the NSW Government estimated Blacktown’s population would jump to an eventual total of 480,000. Today Blacktown already has 350,000 residents, and by 2031 it’s now forecast to be a city of 526,000 - at least 100,000 more people than live in Canberra.
Even areas an hour’s distance from the CBD are being forecast for rapid growth. Rural Camden, in Sydney’s southwest, currently has 100,000 residents. Forecasts show that number will almost double by 2031 and reach 300,000 by 2041.
Land tax – again
Back in the news for the umpteenth time is the possible scrapping of stamp duty on property ownership transfers, which now adds about $40,000 to the costs of the average property sale in Sydney, and replacing it with a broad-based land tax (BBLT) that would be applied annually to all properties.
In simplest terms this move is intended to reduce the costs of buying property while at the same time giving the state government a more reliable source of funds than the present system that has huge fluctuations depending on the state of the property market.
An ongoing review of state and federal financing arrangements that is being conducted for the NSW government by former Telstra chief executive officer, David Thodey had this to say: “Throughout the consultation period, we consistently heard how transfer duty is a costly tax that impacts citizens’ freedom to move throughout the seasons of life.
“We also heard how it can often have the worst impact on first home buyers and seniors. By hindering mobility, we heard stories of people living in housing that doesn’t meet their current needs.”
The Property Council of Australia agreed, saying: “Stamp duty distorts business decisions, locks families out of housing choices, worsens housing affordability, suppresses economic activity and leaves governments with highly volatile revenue streams.”
So, the BBLT is a good idea, right? Adherents say it would make it easier for young people to acquire their first home and it would also make downsizing easier for older Australians, thereby freeing up dwellings that would otherwise not be on the market. The only problem really is the kickback from millions of existing homeowners who would suddenly find themselves saddled with an additional annual burden of many thousands of dollars.
A political party of any flavour would likely find it terminally challenging if it went to an election with the introduction of a BBLT in its platform. A home's a big asset for sure, but it's not income-producing unless it's rented out, and only then should it be a source of taxation revenues. More affordable housing is indeed required, but not at the expense of those who already own their own homes.
The politicians had been thrown a possible lifeline on this money-raiser with former Treasury Secretary Dr Ken Henry's statement a decade ago in his own review of taxation that "the tax switch should be phased in, so that existing property owners – who had already paid stamp duty - were exempt from paying the new land tax until their next purchase".
That's long been a potential key to getting this tax through an election without losing the votes of all existing homeowners but it would take time to ‘phase in’ and the government that went through the political pain of introducing it wouldn’t benefit much from revenues in the first few years. Governments don’t like this kind of delay.
Regardless of these drawbacks, the issue won’t go away. Dr Henry and another former federal treasury secretary, Martin Parkinson recently appeared at a conference at NSW Parliament to discuss federal and state finances as part of the Thodey review.
Dr Henry, who was an early advocate of the BBLT ten years ago, told the conference: “It’s a big obstacle for first home buyers - saving for the deposit and then saving for the stamp duty - it’s just nuts," he said. "Particularly in Sydney, it’s a massive bill they’ve got to pay.
“If stamp duty were abolished and replaced with an annual land tax, of course, over a 15-year period - or whatever it is - they’ll end up paying the same amount. But they don’t have to come up with all the cash up front.”
Dr Henry’s successor as Treasury Secretary, Martin Parkinson, also backed the call to abolish stamp duty and replace it with land tax.
The BBLT has been promoted in many forums since the whole issue was raised by the Grattan Institute some years ago, but this latest appearance would seem to bring it quite a bit closer to incorporation in future taxation arrangements. We’ll keep you informed of further developments.
Troubled towers
Following the appointment of a new state Building Commissioner, Mr David Chandler, there were some hopes there would be assistance from the NSW government for property owners adversely affected by defects in the apartments they’d purchased. However, these hopes were dashed by Mr Chandler’s recent announcement that owners of properties with defects will not be given government help.
"There isn't a glove that's going to land around them and write a cheque to rectify [the problems]," he told a parliamentary inquiry into the state's building standards. He added that in instances where there was not a building company to seek damages from, owners would "have to stump and get that work done".
Private certification was introduced in NSW in 1998. This allows a developer to pay a certifier of their choice to inspect construction work at critical stages in progress and supposedly ensure it meets all applicable legal requirements. Although certifiers carry out inspections, they do not have responsibility for supervising work throughout the period of construction and are legally entitled to rely on documentation from other building professionals.
Not all private certifiers have exercised sufficient diligence in fulfilling their roles. Some have allowed buildings to be completed with structural faults that are dangerous, and during the recent construction boom, repeat offending has soared.
The government’s Building Professionals Board regulates certifiers and maintains a public register of disciplinary actions, with the most serious cases referred to the NSW Civil and Administrative Tribunal.
The Board has an audit program that is supposed to provide an independent check of the work of accredited certifiers. However, documents sought under freedom of information by the Association of Accredited Certifiers showed that no audits were performed by the Building Professionals Board in either 2015-16 or 2016-17, and in 2017-2018 only 13 audits were begun.
In 2012 the then NSW planning minister Brad Hazzard reportedly ordered the Board to get "tougher with those small number of certifiers who play games" and "seem to be popping up regularly". Since then, the Board has handed out stiffer financial penalties but the number of certifiers having their accreditation cancelled has only risen since February last year, two months after cracking forced the evacuation of the Opal Tower at Sydney’s Olympic Park.
In a related matter, apartment owners involved in two combustible cladding class actions have been given permission by the Federal Court to expand their claims under Australian Consumer Law. Both actions are being backed by litigation funder IMF Bentham.
The expanded claims against Alucobond supplier Halifax Vogel Group and manufacturer 3A Composites as well as Vitrabond supplier Fairview Architectural have been added to the existing claims that the combustible panels failed to meet acceptable quality standards.
This means that Australia’s two biggest suppliers of flammable cladding are now involved in class action lawsuits. If they lose these cases the there’s a possibility that many millions of dollars in compensation could be paid to owners of thousands of apartments across Australia.
Viral concerns
Lurking in the background of all Australian property markets is a new factor that could have significant but as yet unknown impacts on Sydney property. Domain economist Trent Wiltshire commented on this new threat:
“The big risk is the coronavirus which could have a significant short-term impact on our tourism and education sectors and cause the economy to soften more. It’s possible the outbreak will be much more severe and cause a significant economic slowdown in China, which would have a massive impact on Australia’s economy.”
Aidan Devine from realestate.com.au adds some details to his concerns: “Coronavirus poses a major threat to the housing market and could derail sales if buyers stop going to open for inspections and auctions.
“The virus could also hit the development sector, which remains heavily exposed to offshore investment activity, particularly from mainland China, Singapore and Hong Kong. Disruptions to global supply chains – a large chunk of the country’s building supplies are imported from Asia – pose a longer-term threat to building projects.”
Announcing the RBA’s rate cut to a record low 0.5 per cent, Governor Philip Lowe said the coronavirus had clouded the near-term economic outlook: "The uncertainty that it is creating is also likely to affect domestic spending. As a result, GDP growth in the March quarter is likely to be noticeably weaker than earlier expected.”
Dr Lowe added that once the virus was contained, the economy was likely to return "to an improving trend".
CoreLogic's head of research, Tim Lawless, told the Sydney Morning Herald that the bank's move was driven by the threat posed by the coronavirus outbreak on the economy and household sentiment: "Lower interest rates would normally be a catalyst for an acceleration in housing demand and value growth, however, there is less certainty that this will add fuel to the housing market in the current economic climate," he said.
AMP Capital chief economist Shane Oliver told the Australian Financial Review that the coronavirus was a big and rising risk to the property market: "If the situation badly worsens globally and the virus takes hold in Australia then it could become a big short-term negative as the economy slows even further potentially into recession, the loss of share market wealth drags on property demand and if people put off buying property along with other activities for fear of catching the virus," Dr Oliver said.
ANZ associate director, property, Daniel Gradwell told an Urban Development Institute conference in Melbourne that his bank was expecting an up to 80 per cent reduction in visits from China, based on what happened during the 2002-2003 SARS epidemic: “You might expect that to reduce the presence or the demand from foreign buyers (of real estate) in Australia,” Mr Gradwell said.
So, it’s here and at this stage it’s too early to know the extent and impacts of this virus, but when health experts warn of a ‘global pandemic’ it’s concerning. We intend to monitor the situation with regard to the Sydney property market and will provide monthly updates on this subject.
Sources:
‘Coronavirus could hit housing hard as Australia teeters on edge of recession,’ Martin Farrer, The Guardian, 11 March 2020
‘Sydney properties spending less time up for sale, new figures show,’ Kate Burke, Domain, 4 March 2020
‘Flammable cladding class actions escalate,’ Leith van Onselen in Australian Property, Macrobusiness, 3 March 2020
‘Foxes in charge of the hen house: new building law has a fatal flaw,’ Elizabeth Farrelly, Sydney Morning Herald, 7 March 2020
‘Housing market at risk of 'renewed overheating': IMF,’ Shane Wright, Sydney Morning Herald, 7 March 2020
‘Vendors sell early in bid to get better prices at Sydney auctions,’ Melissa Heagney, Domain, 9 March 2020
‘Twin shocks to hit the NSW economy hard,’ Matt Wade, Sydney Morning Herald, 2 March 2020
‘Virus poses 'rising risk' to housing market,’ Ingrid Fuary-Wagner, Australian Financial Review, 3 March 2020
‘RBA cuts rates to new record low to shield economy from coronavirus fallout,’ Shane Wright, Sydney Morning Herald, 3 March 2020
‘Sydney's median house price back over $1 million as interest rate cut looms,’ Jennifer Duke, Sydney Morning Herald, 3 March 2020
‘Flammable cladding class actions escalate,’ Leith van Onselen in Australian Property, Macrobusiness, 3 March 2020
‘Twin shocks to hit the NSW economy hard,’ Matt Wade, Sydney Morning Herald, 2 March 2020
‘Buyers look to get into Sydney market before prices rise too high,’ Melissa Heagney, Domain, 1 March 2020
‘Clearance rates remain strong on Super Saturday of auctions,’ Melissa Heagney, Domain, 1 March 2020
‘What coronavirus means for Melbourne real estate,’ Nathan Mawby, News.com.au, 27 February 2020
‘Australia’s new boom towns: the suburbs squeezing in tens of thousands more residents,’ Benedict Brook, News.com.au, 24 February 2020
‘Slowdown in pace of housing developments unevenly spread across Sydney,’ Matt O'Sullivan and Nigel Gladstone, Sydney Morning Herald, 24 February 2020
‘Owner in tears as Sydney home with shady history sells for $2.87m,’ Anastasia Santoreneos, Yahoo Finance, 25 February 2020
‘How high can the house price boom go?.’ Damien Klassen in Australian Property, Macrobusiness, 17 February 2020
‘How much will property prices increase in Sydney this year? By a lot, new forecast says,’ Sue Williams, Domain, 12 February 2020
‘House prices to rise 20pc this cycle,’ Christopher Jove, AFR, 15 February 2020
‘Homebuyers are stampeding back into the Australian property market, leading to what could be 'the fastest market recovery on record', Jack Derwin, Business Insider Australia, 12 February 2020
‘No bailout for defective buildings,’ Just In, ABC News online, 25 February 2020
'It’s just a bad tax': former Treasury heads unite to slam stamp duty,’ Jessica Irvine, Sydney Morning Herald, 17 February 2020
‘Abolish stamp duty - impose a proper land tax instead,’ Jessica Irvine, Sydney Morning Herald, 12 February 2020
‘Affordability crisis fears as property market comes roaring back to life,’ Frank Chung, news.com.au, 11 February 2020
‘First-home buyers flex their muscles as investors lose their oomph,’ Greg Jericho, The Guardian, 18 February 2020
‘Why you can no longer expect a discount on homes in Sydney and Melbourne,’ Melissa Heagney, Domain, 18 February 2020
‘Fear of missing out’ back for Sydney first-home buyers as prices rise,’ Kate Burke, Domain, 23 February 2020
‘Auction clearance rates rise rapidly in Melbourne and Sydney,’ Kate Jones, Domain, 16 February 2020
‘Sydney and Melbourne property markets remain hot … but for how long?,’ Shannon Molloy, news.com.au, 11 February 2020
‘Building certifiers leave a trail of chaos,’ Carrie Fellner and Nigel Gladstone, Sydney Morning Herald, 3 August 2019 (Republished 27 February 2020)
Great expectations and the decade ahead
Tue, 18 Feb 2020Australians are eager to buy houses according to the latest Household Spending Intentions (HSI) survey released by the Commonwealth Bank. The HSI combines real-time spending data from CBA household transactions with search information from Google Trends, then maps the results to official data on consumer spending to provide an indication on householders’ future spending patterns.
“Home buying intentions spiked higher in December and are now running at a record rate,” Commonwealth Bank chief economist Michael Blythe wrote. “Buying intentions are at levels that are consistent with ongoing dwelling price growth…[and] are also at the point where the early signs of a positive wealth effect are starting to emerge.”
It’s not so surprising then that the latest Domain House Price Report data shows Sydney recorded its first annual price growth since the market boom ended in 2017 with house prices increasing 6.8 per cent to a median of $1,142,212, while unit prices jumped 3 per cent to a median of $735,387.
The Report also showed that the city’s median house price regained another $73,000 in the 12 months ending December 2019, while unit median prices achieved an increase of 3 per cent or $21,197.
“I don’t think we’ve really picked up where we left off [last year], I think it’s better,” auctioneer Damien Cooley, of Cooley Auctions, told Domain’s Kate Burke.
“In the very few auctions that we’ve seen already … we’re seeing buyer strategies that are seen in boom markets. Strong opening bids, confident and quick bidding … and buyers not being afraid to kick off the auction.”
Domain’s senior research analyst Dr Nicola Powell said Sydney had recorded the most robust quarterly rebound since June 2015 for both houses and units. “We’re seeing growth over the quarter that was reminiscent of the boom. If we see the pace of growth continue, it’s likely [records] will be set in the next quarter,” Dr Powell said.
She said that houses had regained almost two-thirds of the value lost during the 18-month downturn in only two quarters, while units had recovered half of the value lost. This means that house prices are now only 4.6 per cent below the mid-2017-high and unit prices are 6.2 per cent lower.
Nerida Conisbee, chief economist at realestate.com.au, noted that Sydney’s city and southern suburbs led the nation for house growth last year with an upward leap of 12.6 per cent: “That was actually the strongest market in Australia,” she said.
“There’s nothing to suggest conditions will change … buyers are very active, there are very low interest rates and access to finance is getting better,” Ms Conisbee added.
There’s a definite shortage of properties on the market relative to the healthy demand. Figures from SQM Research shows there are 24,062 properties for sale in Sydney – a 24.8 per cent slump compared to this time last year.
SQM Research managing director Louis Christopher told Domain’s Tawar Rasaghi that the midpoint for a market that’s in equilibrium is somewhere around 30,000 [listings]: “The market will still keep rising this year. There’s not an immediate rush for sellers, but sellers must recognise the market has turned in their favour and we don’t know how long that will be for. And at some point, it’ll come to an end and that may be as early as next year.”
AMP Capital chief economist Shane Oliver, who believes the RBA will take the official cash rate to 0.25 per cent by the middle of the year, told the Herald’s Shane Wright he expects a 12 per cent increase in Sydney through 2020.
"The reason is simple: the RBA is a long way from meeting its full employment and inflation objectives, the bushfires post a significant short term threat to growth and this could be accentuated if the Wuhan coronavirus significantly weighs on tourist arrivals, the RBA is likely to yet again revise down its growth forecasts leaving it no closer to its objectives," he said.
"The absence of significant fiscal stimulus for now leaves all the pressure on the RBA and this is likely to result initially in rate cuts down to 0.25 per cent."
Former Reserve Bank governor Ian Macfarlane agrees, recently telling the Herald’s Michael Janda that he sees no chance of a collapse in house prices despite their dramatic and ongoing upwards trajectory: "I think a fundamental shift in the relative price of housing has occurred over the last 30 or 40 years, I don't think it's ever going to go back to where it was.
"I think that those huge long-term structural factors are so powerful - the desire for people to compete with each other to buy houses or apartments in places where there are good jobs, which means big cities, people coming from other parts of the world to do it, people coming from the country to do it, people are already here doing it.”
He did suggest that a period of price stabilisation is likely: “"I don't think it can continue to go up as fast as it has over that period. I think we've reached the limit of the household sector's capacity to service mortgages."
Another expectation of a slowing market came from Westpac chief economist Bill Evans, who believes the RBA will slice interest rates once by June: "We expect house price increases to persist throughout 2020, boosted by rate cuts, momentum and an easing of credit conditions," he said.
"However, the pace of increase in 2020 will be below the second half of 2019 as stretched affordability, cautious investors and oversupply of high-rise weigh on the markets."
Apartments defy gravity
Sydney apartment prices continued to rise in 2019 despite several concerns about defects in newly constructed buildings. The city-wide median apartment price rose 3 per cent to $735,387 in 2019, as shown by Domain’s latest House Price Report.
That prices growth picked up speed in the last three months of the year, when prices rose 4.3 per cent in the December quarter from the September quarter. Perhaps it’s because of this that NAB economists have forecast Sydney unit prices to rise by 4.3 per cent in 2020.
Richard Matthews Real Estate selling agent Jackson Cox told Domain that the number of older apartments and the number of interested buyers were fuelling price growth: “We have more buyers focusing on older styles, the 1960s and ’70s redbricks - Not as many are focused on new units newer than 2010.”
He said that type of apartments was the most highly sought-after by investors and owner-occupiers, especially those first-home buyers that fall in the $600,000 to $700,000 price bracket.
Market economics managing director Stephen Koukoulas said apartment prices did well during last year’s downturn because of strong demand and the election result: “The election result in the middle of the year was a saviour for what was a pretty negative first part of the year … given apartments are generally more negatively geared than [detached] dwellings,” he said.
He also added that the price performance also coincided with rate cuts and credit relaxation: “We saw the apartment market get a floor under it and do surprisingly well despite the building problems and construction problems that were quite high profile.”
But not all apartments have performed well. Apartment sales in Sydney’s Olympic Park dropped last year as the Opal Tower saga continued, as shown by new data from Domain. While the legal battles continue in the Supreme Court, sales in the suburb have plummeted by a massive 75 per cent in the year ending December 2019, while the median unit price fell 9.8 per cent to $715,000.
Belle Property Sophia Zhou said the real problem with the Olympic Park suburb was that sellers who bought at the peak are trying to recover their losses since the downturn. “The problem is the price off-the-plan is higher than the current value … that’s the difficult part – [the difference between] the original price and the current market price.
“When we talk to some vendors, they don’t think it’s a good market to sell. They’re going to hold for two years and wait for the train station upgrade,” she told Domain.
Apartment buyers’ rating tool
It’s been revealed that a key part of the NSW government's developing plan to fix the state's building-standards crisis hinges on credit rating agencies developing a new risk-rating tool they will be able to sell to prospective apartment buyers. The Berejiklian government has also announced new powers for the Building Commissioner to use the proposed rating tool to select sites for audit and call a halt to apartment projects that could become future Opal Towers.
Credit rating agencies, expected to develop this risk-rating tool at no cost to the government, have expressed some concerns about the concept. Among these concerns are that the tool would be outside the industry's body of expertise, which generally focuses on credit risks, and the obvious difficulty in obtaining information about defective buildings and phoenixing developers in time to provide consumers with meaningful information.
Even if the tool can be developed by credit rating agencies, there's little hope that a fix can be found in the near future. This is shown by Building Commissioner David Chandler telling the Herald that he aims to have a "proof of concept" rating tool by July this year, with expectations the information will be available to the public by mid-2021.
However, in a recent blog post Mr Chandler said: "By 2025, it should be possible to provide a high level of compliance and resilience confidence for new buildings." That’s a long time to wait considering just how many new apartment buildings are presently under construction or in advanced stages of planning.
Mr Chandler is confident the credit rating agencies will be able to pull together enough information to give consumers an accurate picture of risky projects: "The risk-rating tool will draw from up to 100 different data points to determine whether a development displays indicators of compliance riskiness," he said.
"A project that is likely to have major issues usually shows it struggles in the running of the business and the management of the worksite, for example, the age of a company, its financial stability and means, worksite safety record or dealings with other people with poor track records."
However, Dr Laura Crommelin, who is conducting a two-year project focused on building defects in 600 high-rise developments built between 2008 and 2017 in Sydney, told the Herald that the information required is hard to obtain: "The thing we’ve found is just how difficult it is to put a clear number to this and dig out the information.
“It's all fragmented, it's held by lots of people. And it's in the interests of some people not to have it out in the public, which is understandable but tricky if you're trying to tackle and address the problem."
A Walk Score?
Most Australians haven’t heard of a ‘Walk Score’, but an estimated 30,000 real estate agents in North America and other places overseas have been using a Walk Score system of one kind or another to promote properties for several years, and it’s now gaining ground in our property markets too.
So, what is a Walk Score? It’s simply a scoring system with results from one to 100 that measures the ‘walkability’ of any address. It provides an answer to all those questions about how easy it is to walk from that address to services and other places that meet homeowners’ daily needs. These can include shops, schools, public transport, parks, libraries and even commercial centres.
If a property achieves a Walk Score of 70 it’s probably convenient to public transport and shops, meaning those living at that address could possibly get by without the expense of car ownership. Those familiar with the scoring system estimate that every point above 70 can add from $700 to $3000 to the value of a property, acknowledging that people will pay more for a location that’s more convenient to services than other addresses further away from them.
Urban planner Mike Day, co-founder and director of urban planning and design consultancy RobertsDay, is confident that the Walk Score concept will boom in 2020. He told news.com.au’s Alexis Carey that, while many inner-city areas are very walkable, the challenge is to replicate that model in newer areas further from the city centre, particularly with the aim of reducing the need for vehicle ownership.
“For Millennials or people of modest means it is becoming more difficult (to buy property), but people forget how significant the cost of a car is – it’s not so much about affordable housing but affordable living because the cost of transport in some growth areas is exceeding the cost of housing,” he said.
“Around the world, car ownership is declining and a lot of people in the younger generations are deferring getting their licence and some aren’t at all. We need to create urban environments that are more compact and that are inspired by those inner-city neighbourhoods.”
The Victorian Minister for Planning, Richard Wynne MP, launched a plan for ’20 minute-neighbourhoods’ in January 2019 which targets ‘improved liveability’ by creating a city where residents can access most of their daily needs within a 20-minute walk from their homes. The plan foresees the townhouse model becoming more prevalent as it avoids hassles with body corporates and enables better use of land than the outdated ¼ acre block.
Mr Day said some of the other biggest trends in 2020 that reflect the need to improve the Walk Score for residential properties include the creation of residences on top of retail and commercial sites, the growth of sustainable and affordable “mobility on demand” in our suburbs, more pedestrian friendliness, the separation of roads, bicycle paths and pedestrian paths and a return to smaller homes and centralised amenities for communities.
The decade ahead
As the past few years have amply demonstrated, it’s not always possible to know what’s going to happen next in the Sydney property market. Prices can tumble as fast as they’ve grown, and supply fluctuates with changes to things like rates of immigration as well as the wellness or otherwise of the local economy.
Domain recently made a brave attempt to define the major trends that will shape our property market for the next decade. The full text by Domain’s Trent Wiltshire (referenced in our Sources at the end of this article) runs for a considerable length and contains a wealth of facts and statistics that will be of interest to all those seeking to shape a long term vision of where the 2020s will take us. To give you a brief summary:
Interest rates – likely to remain at very low levels
Population growth – rapid population growth to continue
Public transport – proximity to public transport will become more important
Medium density housing – more medium-density housing will be built
Larger family-friendly apartments – more 3- and 4-bedroom apartments to be built
Detached houses – will become smaller due to land costs and smaller families
Energy efficiency – more energy-efficient houses and buildings will be constructed
Tenants – a growing number of renters will become a political constituency
Pensions – government may include value of family home in age pension assets test
Baby boomers – more aged care places will be needed, as will housing that enables seniors to live independently
Mr Wiltshire believes that, after a decade of price boom and busts, our property markets will see prices rise at a slower rate than in previous decades. He also sees that major changes will be driven by our changing demographics, especially by Australia’s continuing rapid population growth.
It will be some time before we know the accuracy of Mr Wiltshire’s prognostications. We can mention that in this column exactly ten years ago this month, on 23 February 2010, in our article entitled “Fair winds blow for Sydney property”, our panel of experts made the following observations about the year ahead:
Louis Christopher, managing director of SQM Research, said: “Our general growth forecast is between 6 percent and 8 percent.”
Mark Armstrong, a director of Property Planning Australia, was even more bullish: “Sydney prices grew by more than 12 percent last year and there’s no doubt we’re going to see the market grow by more than that this year.”
RP Data’s Cameron Cusher said that “The major influences this year will be the impact of rising interest rates and the removal of the first-home buyer grant boost. These two factors are likely to result in the Sydney market seeing lower levels of property growth than that witnessed during the past twelve months.”
BIS Shrapnel senior economist Jason Anderson said in the Australian newspaper that the lack of new building and the influx of migrants had led to a mounting housing shortage: "We estimate the national shortage will reach about 150,000 dwellings, concentrated in NSW, where there is an 84,000 shortage."
While reminiscing about the year 2010, let’s also remember Professor Steve Keen from the University of Western Sydney who that year lost his bet after confidently forecasting back in October 2008 that the value of Sydney property was going to drop 40 percent and the fall to the bottom of the trough would take 10 to 15 years to reach.
Although Professor Keen remained defiant about the logic underlying his forecast, he repaid his losing bet by walking from Parliament House to Australia’s highest mountain, Mt Kosciusko - a distance of 224km. And of course, the ‘fall’ he forecast never happened.
Sources:
‘Seller’s market for quite some time’: strong buyer demand, slow listings see price growth to continue’, Tawar Razaghi, Domain, 9 February 2020
‘Sydney auction market kicks into gear for 2020 as confident buyers push up prices and clearance rates,’ Kate Burke, Domain, 7 February 2020
‘Sydney Olympic Park sales plummet after Opal Tower defects revealed,’ Tawar Razaghi, Domain, 6 February 2020
‘Lower rates will mean higher house prices, economists say,’ Shane Wright, Sydney Morning Herald, 2 February 2020
‘Australians eager to buy houses but not much else,’ David Scutt, The Age, 21 January 2020
‘Sydney house prices record largest annual gain since 2017 peak,’ Tawar Razaghi, Domain, 23 January 2020
‘Sydney house prices jump by up to $300,000 in suburbs leading the property rebound,’
Kate Burke, Domain, 26 January 2020
‘Sydney’s city and south region is ‘strongest market in Australia’ with 12.6 per cent house price growth,’ Stephen Nicholls, Realestate.com.au, 30 January 2020
‘Australian house prices keep rising, but former RBA boss Ian Macfarlane can't see a crash coming,’ Michael Janda, ABC News Online, 20 January 2020
'Angry, depressed': Owners in dire straits years after roof ripped off,’ Matt O'Sullivan, Sydney Morning Herald, 20 January 2020
‘Sydney’s apartments are still getting more expensive, despite defect concerns,’ Tawar Razaghi, Domain, 2 February 2020
‘The seven major property market trends in the 2020s,’ Trent Wiltshire, Domain, 20 January 2020
‘Unit buyers to pay for ratings check on dodgy apartments under reforms,’ Nigel Gladstone and Carrie Fellner, Sydney Morning Herald, 23 January 2020
‘Why a ‘Walk Score’ could be the key to making a fortune on your property,’ Alexis Carey, News.com.au, 14 December 2019
A new decade with new highs in the year ahead
Wed, 15 Jan 2020Australia’s capital city property markets have enjoyed a pretty good end to 2019, with five of eight finishing the year showing price rises. Overall, national average dwelling prices rose 1.1 per cent in December and 2.3 per cent over the full year. Sydney and Melbourne were the top performers, both with annual gains of 5.3 per cent, although only Hobart and Canberra managed to rise above their previous record highs.
Tapas Strickland, director of economics and markets at National Australia Bank, told ABC News that the national gains meant prices were now 3.1 per cent below the all-time high reached in 2017, with Sydney 6.4 per cent away from its previous high: "Assuming price growth remains solid into 2020, then house prices are set to exceed their prior peaks by early to mid-2020," he said.
CoreLogic’s figures show that when the clock ticked over at midnight on New Year’s Eve and 2020 began, the typical free-standing Sydney house was worth $974,000. This is quite a drop from the peak of $1,060,000 back in July 2017, but still an uplift from the market’s bottom price of $865,000 in June 2019.
Tim Lawless, Head of Research for CoreLogic Asia Pacific, said his firm’s calculations show that Sydney dwelling prices rose 5.3 per cent in 2019 after they’d tumbled 8.9 per cent in 2018. The renewed upwards trajectory of the Sydney market’s prices strengthened at the end of 2019 with gains of 2.7 per cent in November followed by a rise of 1.5 per cent in December.
The return of Sydney freestanding house values to above the million-dollar level will happen soon, Mr Lawless predicted: "It's been quite a turnaround," he told the Sydney Morning Herald. "Prices have rebounded much faster than anyone would have expected."
He estimated that Sydney’s median house value would exceed a million dollars by February, and said his firm expected home values to increase by ten per cent in the 2020 year, propelled by renewed interest from investors.
So rapid has been the property market’s recent recovery that it’s even outstripped the NSW government’s most optimistic forecasts. Despite the drought, the Berejiklian government is now anticipating a surplus of $700 million, although some of this will no doubt be taken to cover costs related to the state’s many recent bushfires.
Admittedly, the government’s original forecast back in June 2019 was for a surplus of a little more than $1 billion, but lower than expected GST revenues have been offset to a great degree by an unexpected lift in stamp duties from property transfers: "Forward-looking indicators, such as Sydney auction clearance rates, suggest price growth will continue to strengthen in 2020," said a year-end budget review released by NSW Treasurer Dominic Perrottet.
"A rebound in house prices is expected to positively impact household consumption through positive wealth effects and will encourage a return to growth in dwelling investment from 2021-22," it said.
Ten years of growth
It’s not that these recent increases in property values are anything new. Craig James, the chief economist at Commonwealth Securities (CommSec), told ABC News that Sydney home prices were up 66.7 per cent over the decade: "Wealth is at record highs and incomes are still running faster than consumer prices," he said.
Domain’s Kate Burke, whom we’ve often quoted in these pages, took a decade’s end look at the past ten years and came up with some interesting historical details about how the Sydney property market has changed in the years since 2010.
She began with a reminder that at that time the Prime Minister was Kevin Rudd and iPads hadn’t yet been released, while Sydney’s population was just 4.58 million people and the median house price was under $650,000.
“The city recorded double-digit annual house price growth for the four quarters to September 2010 and, while prices dropped slightly the following year, it was not for long, with growth returning by September 2012,” she wrote.
“That was the beginning of sustained property price rises, which continued until the mid-2017 market peak when the median price reached about $1.2 million and the housing affordability crisis reached fever pitch.”
Ms Burke said that Sydney’s population grew by more than 650,000 people over the decade and more than 260,000 new homes were completed across Greater Sydney over the past 10 financial years: “Fast forward through the decade — 15 interest rate cuts, five prime ministers, a property market boom and a bust later — and Sydney’s median is, once again, back on the rise.”
Her colleague, Domain economist Trent Wiltshire, said there were a number of factors that drove the market over the decade, including interest rates, population growth and levels of homebuilding: “Interest rates fell, the population grew, but it took a while for construction to pick up, which it did from 2014 and 2015,” he said.
Ms Burke quoted Stephen Koukoulas, managing director of Market Economics, who agreed that it had been a “roller coaster” of a decade: “There were ups and downs, but basically the drivers have been strong population growth [and] the lowering of interest rates.
“With limited supply and growing demand …. it’s no surprise that on average the basic trend is a compound increase of 5 per cent on average, annually,” he said, commenting that regulatory changes from APRA, slow wage growth and unemployment rates had also impacted the cycle.
And what did we say ten years ago in these very pages in our ‘Market Comment’ of 25 January 2010? To quote from our article entitled “The crystal ball is crystal-clear”:
· “2010 will be an interesting year in real estate, especially in two areas – property prices and the cost of renting. What happens in the next twelve months will lay the foundation for at least the next three to five years.”
· “Indications are already clear that Sydney property prices will rise and so will weekly rental rates.”
· “A shortage of vacant land, combined with high levels of taxes and charges, ensures a continuing decline in new dwelling approvals.”
· “Unless something intervenes in the scheme of things, we can expect to see a continuation of this scenario until at least 2013, and for those who own property it’s a very positive outlook.”
The year ahead
There’s a generally optimistic view of the Sydney market for 2020 held by most property experts, although the unexpectedly rough and sudden drop that occurred after the 2017 peak has caused a kind of residual caution that impacts many forecasts.
We have just experienced the fastest turnaround in the market’s history, with prices rocketing upwards and auction clearance rates to match. It’s likely that both buyers and sellers will see these conditions continue for at least the first half of the year.
Mortgage broker Keegan Rezek from the Lending Alliance said the overall volume of home loan applications had picked up: “There is a lot of activity … a lot of the banks are vying for business and pricing across the board, that’s the main driver,” Mr Rezek told Domain, adding that the First Home Loan Deposit Scheme was fuelling interest, too.
Stephen Koukoulas, managing director of Market Economics who is quoted elsewhere in this article, believes that Sydney property prices will continue their upward trajectory, despite slow wages growth: “There’s plenty of momentum there,” he said, noting the sharp decline in building approvals may even result in a shortage of properties this time next year.
“You’ve got all systems suggesting double-digit growth [in 2020]. We’ll regain peak levels pretty soon … by March or April the market could hit fresh highs for prices and probably keep going.”
Ray White NSW chief executive Jason Andrew told Domain’s Tawar Razaghi: “We’re seeing phenomenal activity right across Sydney but even into the summer…the results are flowing on quite incredibly. We see no reason for that slowing down into the new year.”
Mr Andrew also said the high levels of activity could continue into the second half of the year if significantly more housing stock didn’t enter the market: “It might continue that momentum; then we might be in for a fabulous 2020 … [or] it might just be an okay winter and plateau towards the end of the year.”
Another possible mid-2020 moderation in market conditions was mentioned by AMP Capital’s chief economist Shane Oliver who says affordability will become an issue again after Sydney prices could hit record highs in May: “They’ll continue to grow through the year because we’ll be in the same environment of low or even lower interest rates and we’re passing the peaks in units supply.”
Frasers Property residential executive general manager Cameron Leggatt said he expected to see continued price growth in the first half of 2020: “But I think the health of the broader economy and what plays out at an international level will have an impact,” he said. “If there’s any shock to the broader economy, it’ll impact buyer confidence.”
More towering tales
Over a bit more than the past twelve months, since just before the end of 2018, defects in high-rise apartments have become an issue of major concern for developers, owners and governments. News of the cracks discovered in the Opal Tower at Olympic Park last Christmas Eve and the evacuation of the residents that followed opened a new and unwanted chapter in the history of high-rise apartments in our cities that is destined to be ongoing for years to come.
An Ipsos poll of 1000 residents, conducted for advocacy group the Committee for Sydney, found that eight in 10 Sydneysiders have safety concerns about the structural soundness of high-rise apartment buildings. The survey showed that the quality of construction and the structural integrity of towers were their biggest safety concerns, followed by fears of becoming trapped in a high-rise building by a fire.
Only recently have all the residents of Opal Tower been able to return to their homes, and this only after the builder, Icon Co. has spent more than $26.5 million on repairs and renovations, with more expenses likely. Icon has also announced that it will provide an unprecedented 20-year structural warranty on the cracked high-rise tower — 14 years longer than the standard six-year period now required for residential buildings in NSW.
Icon managing director Nicholas Brown told News.com’s Charis Chang that his company had prioritised the return of the apartments to owners and tenants and was now focused on closing out the remaining enhancement works.
“We believe Opal Tower is now the safest building in Australia when it comes to structural integrity,” he said.
Icon also said it had introduced significant changes to its construction and review processes to ensure the same problem did not happen again. These changes include mandated dual certification for all structural designs and a specific requirement for additional structural engineer inspections.
However, none of the residents of another crumbling high-rise structure, Mascot Towers have been able to return after their evacuation in June last year. The problems with these two structures have become the focus of attention for much of the property industry, and for good reason.
Developers report that potential buyers investigating purchasing a new unit have become much more discerning, asking many more questions about quality issues than ever before. Agents in general say that new home units are harder to sell, and sales in many projects have slowed to the point where developers have been forced to postpone their marketing.
It’s now obvious that for too long, the development sector successfully lobbied against regulations needed to provide adequate consumer protection. Even now, twelve months
after the issue surfaced in the media, regulation so far has fallen short of what is needed to rebuild consumer confidence.
The NSW government appointed a Building Commissioner, David Chandler, in August who has made a good start with the announcement of many positive initiatives. Work is under way to consolidate core information on the state's 80,000 strata schemes for consumers to access through an online portal.
The Commissioner is making progress on developing better information for buyers about the track record of developers, designers and builders. Plans are well advanced for an industry-based rating system to allow the public to differentiate between good and bad developers, builders and certifiers. This is expected to come online sometime in 2021.
Committee for Sydney chief executive Gabriel Metcalf said that the appointment of the Building Commissioner and proposed legislative reforms that would make it easier for purchasers of defective properties to seek damages would help to restore confidence. “However, all parties – government, industry, regulators – must work to rebuild public confidence,” he said.
Regrettably, legislators are dragging their feet and even though the Minister for Better Regulation introduced the Design and Building Practitioners Bill in October, it didn’t survive its review in the NSW Upper House.
All this means consumers still have to make important and expensive decisions about a major purchase – probably the biggest purchase in their lifetime, with only the same old inadequate resources to inform them.
Sources
‘Cracked towers spark widespread safety fears about high rises: poll,’ Matt O’Sulllivan, Sydney Morning Herald, 13 January 2020
‘Mortgage brokers inundated with home loan applications as homebuyers prepare to purchase,’ Tawar Razaghi, Domain, 13 January 2020
‘Sydney house prices set to top $1 million again,’ Jessica Irvine, Sydney Morning Herald, 2 January 2020
‘House prices finish 2019 on a high, as Sydney and Melbourne lead gains nationally,’ Nassim Khadem, ABC News online, 3 January 2020
‘Sydney house prices set to strengthen, says NSW government,’ Matt Wade, Sydney Morning Herald, 12 December 2019
‘Sydney's recovering property market boosts NSW Government, half-year review reports,’ Ashleigh Raper, ABC News online, 12 December 2019
‘Now and then: How Sydney’s property market has changed since 2010,’ Kate Burke, Domain, 29 December 2019
‘Property outlook 2020: Australia’s property market set to keep rising but will peter out mid-year, experts say,’ Tawar Razaghi, Domain, 5 January 2020
‘Lack of information on apartment defects leaves whole market on shaky footings,’ Martin Loosemore, Bill Randolph, Caitlin Buckle, Hazel Easthope, Laura Crommelin, (UNSW), Domain, 26 November 2019
‘Opal Tower evacuation has cost builder Icon Co $26 million,’ Charis Chang, News.com.au, 11 December 2019
'Six-year nightmare': Shattered investors left with no one to sue for faulty units,’ Carrie Fellner and Nigel Gladstone, Sydney Morning Herald, 16 December 2019
‘Opal Tower builder Icon Co will provide a 20-year guarantee on works,’ Chais Chang, News.com.au, 19 December 2019
‘One year after Opal Tower fiasco, buyers are wary, sales are slow and the law hits a roadblock,’ Ross Taylor, Sydney Morning Herald, 26 December 2019
More than a recovery - rates and FOMO drive a new boom
Thu, 19 Dec 2019Writing in The Guardian, Martin Farrer, the publication’s UK/US site editor recently posed a headline question: “From freefall to boom: what the hell is happening to Australia’s housing market?” That’s a very interesting question, and this month we set out to answer it for you.
Mr Farrer backed up his editorial question with a reminder of our recent past: “Earlier this year Australia’s notoriously expensive housing market was in freefall. Prices in Sydney and Melbourne had fallen by double digits from their 2017 peak and with credit being squeezed by a nervous banking sector after the royal commission, the bottom seemed nowhere in sight. Sales were at a 21-year low and there was concern that the economy could suffer serious knock-on effects.”
It's almost impossible to believe this was the state of the Sydney property market less than twelve months ago. We’ve just seen the biggest monthly increase in national house prices in 16 years thanks to record low interest rates and a shortage of supply.
According to CoreLogic, dwelling prices across the nation’s capitals shot upwards by 1.7 per cent in November – the biggest monthly gain since 2003.
The figures for Sydney were even more impressive. House values in the city increased by 3.1 per cent in November, taking the median house value to $956,249. This translates to a $37,900 increase through the month, or $1260 a day, with values now up by 4 per cent this year.
A look back in the history books shows that this was the largest monthly increase in Sydney house values since 1988, and house values are now only eight per cent away from the 2017 peak of the market. If current trends continue, we’ll see new record prices by April 2020.
Incidentally, CoreLogic also calculates a median dwelling price that combines units and houses. Sydney still tops the list across Australia with a median dwelling price of $840,072 – well ahead of second place Melbourne at $666,873 and Brisbane’s $497,491.
It should be noted that the rebound in prices is stronger in Sydney’s more expensive areas with the Hills District and the city’s inner west outperforming lower-priced suburbs. Overall, the quarterly price rise in the most valuable quarter of Sydney properties was 7.4 per cent, versus 3.8 per cent across the lower quartile.
Domain tells us that some suburbs are already back at their boomtime prices, such as North Richmond and Green Valley, while others have even increased beyond their peak – Balgowlah in the northern beaches has grown 0.38 per cent or $7500 from its 2017 peak price of $1,950,000. Avalon Beach houses recorded a 4.9 per cent increase or $90,000 since the suburb’s 2018 peak price of $1,810,000.
But will it last?
CoreLogic's head of research Tim Lawless told the Herald’s Shane Wright that property markets are responding to several positive factors including low interest rates and the end of uncertainty over tax policy in the wake of the Coalition's victory in the recent federal election.
"The synergy of a 75 basis points rate cut from the Reserve Bank, a loosening in loan serviceability policy from APRA and the removal of uncertainty around taxation reform following the federal election are central to this recovery," he said.
"Additionally, we're seeing advertised stock levels persistently low, creating a sense of urgency in the market as buyer demand picks up. There's also the prospect that interest rates are likely to fall further over the coming months and an improvement in housing affordability following the recent downturn are other factors supporting a lift in values."
Mr Lawless said he believed the current breakneck pace of price increases in Sydney was unlikely to be sustainable for long, even if interest rates fell further.
"Annualising the growth rate over the past three months implies the national index is already tracking well above double-digit annual growth (+15.3 per cent), while Sydney and Melbourne dwellings are tracking around the mid-20 per cent range for annualised capital gains based on the most recent three-month trend," he said.
"Considering wages and household income growth remains low, economic conditions are losing momentum and housing affordability is once again worsening (from an already high base in the largest cities), there are likely to be some headwinds in maintaining such a fast recovery."
The Herald’s Shane Wright, who’s covered the latest bust-to-boom turnaround for his paper in great detail since it began, agrees: “Clearly, such increases in prices cannot be sustained. Sydney is growing at an annualised rate of almost 40 per cent and Melbourne at almost 30 per cent, which – if continued – would see the median price hit $1.3 million and $1 million respectively by this time next year,” he wrote on 3 December.
However, AMP Capital's chief economist Shane Oliver noted that current auction clearance rates point to price gains of 10-15 per cent in Sydney in 2020: "The Australian property market — particularly Melbourne and Sydney — has gone from boom and FOMO in 2017 to slump and FONGO last year and now looks like its heading back to boom again with FOMO returning."
(FOMO is fear of missing out on a rising market by delaying a purchase; FONGO is fear of not getting out of a falling market by selling.)
And the always astute Louis Christopher, managing director of SQM Research switched on his crystal ball and predicted Sydney dwelling prices to rise between 10 and 14 per cent over 2020: “Recent comments by APRA are basically along the lines that they actually welcomed the price rises in Sydney and Melbourne this year because that will stabilise the risks to the economy,” he said.
“Prior to the May election, the market was pricing in, or was quite concerned about, increased property taxes through increased capital gains tax and changes to negative gearing. [Afterwards] the outlook was suddenly a lot more positive for the market … on top of that we had cuts in interest rates, and APRA loosening credit conditions.”
Clearance rates, volumes rising
A key metric in assessing the health or otherwise of the housing market is the clearance rate at the weekly property auctions. To look at Sydney’s auction clearance rate in recent weeks is a glowing picture of health with rates higher than last year, even as more houses are listed for sale each week.
AMP’s Shane Oliver told Domain the Sydney market had passed its first major test: “When the recovery started, it was on low volumes [of homes for sale]. Volumes are still well below boom-time levels, but it looks like it’s back to a more normal market.
But the present numbers of properties on offer are still low relative to those in the booming first half of 2017 and Domain chief executive Jason Pellegrino has warned an acute shortage of properties for sale has led to the toughest conditions for property since the early 1990s when Australia was last in recession.
"It's an extraordinary period," Mr Pellegrino told The Sydney Morning Herald and The Age at Domain's annual general meeting, adding that real estate agents were also facing the same pressures of fewer listings. He also noted how difficult the current market is and admitted it was "weak" on the supply side and "remains challenging” but said he had seen some improvement month-on-month from July to October.
Success brings some concerns
Tim Lawless, head of research for property data firm CoreLogic said that if property prices continue to rise at the rate they have been rising over the past three months, national dwelling values could hit new record highs within in just six months. He says Sydney’s housing market is on track to post a full recovery within six months if the current pace of growth continues.
Australia's housing market is recovering with amazing speed - loan approvals, clearance rates and prices have all rebounded strongly over the past six months. Some economists have expressed concerns after seeing the Australian Bureau of Statistics figures that showed the value of new home loan approvals rose for a fourth consecutive month in September, driven by another surge in lending to owner occupiers.
These ABS figures showed that the value of total new mortgage approvals rose 1.3 per cent to $18.93 billion (seasonally adjusted) which was the highest monthly total since August last year. Meanwhile, the value of new investor loans reversed much of a lift in September, falling 4 per cent to $4.69 billion, leaving the decline from a year earlier at 13.6 per cent.
Year-on-year, new finance rose 0.1 per cent – a small rise but the first positive annual increase since November 2017.
"Growth in new mortgage commitments has been explosive since mid-year," JP Morgan economist Ben Jarman said in a note to clients.
"The upturn in new lending commitments is pronounced enough to suggest annual housing credit growth will be rising again by early next year," he said, adding that we could see APRA impose renewed macroprudential restrictions to prevent further growth in household leverage.
"We do not think regulators have much appetite for credit growth overshooting income growth on a sustained basis," he concluded.
Interest-only legacy
One holdover from the previous property price boom – interest-only loans, have become an important factor in today’s fast-moving property market.
In the next three years something like half a trillion dollars in interest-only loans, taken out when money was easier to borrow and the banks were more flexible on deposit requirements, will need to be refinanced, or ‘reset’. This means that instead of making payments of the interest only on their loans these borrowers will need to refinance their properties and begin repaying both the interest and the principal they’ve borrowed.
At a time of rising prices this doesn’t sound too serious, However, the RBA estimates that the move from repayments of interest-only to repaying principal and interest will cost the average borrower an extra 30 to 40 per cent.
Many investors have built up sizeable portfolios of properties using interest-free loans to fund their holdings. If those with three or four properties can’t refinance their portfolios with new interest-free loans they could easily be up for repaying back several thousands of dollars every month.
This is going to cause problems for some borrowers and could compel them into a forced sale of their properties. These sales, in turn, could have an impact on property prices. Economist Saul Eslake told ABC News that so far there hasn’t been an increase in loan defaults or fire sales of investment properties, but the risk is there.
"It could be that the people for whom the transition is going to be most difficult is the cohort that is yet to make the transition, whereas those who could do it comfortably did it sooner rather than later," he told 7.30.
"Indeed, some of the Reserve Bank work suggests that a number of people have transitioned ahead of the legal requirement to do so. So, we'll have to wait and see how difficult it is for the remainder."
Incredible shrinking houses
A recently conducted study for CommSec (Commonwealth Securities) had an interesting finding, namely that there’s a trend for houses to become smaller and for units, townhouses and villas to expand in size.
Australia is still building the second-biggest homes in the world, just one position behind the market leader, the United States. The average size of all homes – houses and apartments, is 189 square meters.
According to the study, houses built in 2018 dropped to their smallest size in 17 years with an average area of 228.8 square metres, down 1.3 per cent on the previous year. Apartments, on the other hand, grew to an average 128.8 square meters, a small increase on the previous year.
Given the shortage of land available for development in Sydney, the shrinking size of houses and the growth in the number of apartments is understandable. Population’s growing and so is the desire of the city’s residents to live closer to services and amenities. Australians are willing to give up living space for better proximity to facilities like shopping centres or services such as schools.
The past points to the future
Economics and politics play a big part in our housing market and remind us of Newton’s Third Law which says that for every action there’s an opposite and equal reaction. For instance, the slowdown in house prices after the mid-2017 peak dramatically cut consumer spending which put a big hole in retailers’ turnover and eventually led to slashed expenditure on building construction and reduced building investment.
The Reserve Bank began to trumpet its own solutions to this threat, calling on the federal government to stimulate the economy with, among other things, a massive spend on infrastructure projects. RBA governor Philip Lowe made his position clear: “We need to remember that monetary policy cannot drive longer-term growth, but that there are other arms of public policy than can sustainably promote both investment and growth”.
This was at odds with the newly elected Liberal government that was targeting a budget surplus and wanted a loosening of the credit restrictions implemented as a result of the royal commission into the banks.
So, the RBA reached for the traditional stimulus trigger and delivered three interest rate cuts, all the time warning the government that making loans easier could lead to another cycle of excessive borrowing and increased consumer indebtedness. The Bank also cautioned that it was about out of ammunition for further interest rate cuts and that other economic tricks such as QE (quantitative easing) might have to be used as last-ditch tools.
Especially concerning were the latest construction figures from the Bureau of Statistics which told us that the volume of construction work in Australia has fallen for the fifth quarter in a row. The amount of engineering construction taking place in the September quarter was as low as it has been at any time in the past 12 years.
In fact, the 8.1 per cent annual fall of total construction is the biggest annual fall since the middle of 2016, making it clear that the residential building boom that began with the interest rate cuts from November 2010 is now over.
As the end of 2019 approached the government reprised its position which strongly believes in using interest rates as a stimulus and says it’s still possible to generate a surplus, and never mind a big infrastructure splurge at this time – the government’s tax cuts will be enough to get consumers to open up their pockets and start spending again.
As for the ease of borrowing funds, NAB economist Alan Oster said it was unlikely credit would become harder to access: “There’s no credit growth at the moment. You’d need a very strong pick up in prices,” Mr Oster said. “You can’t just raise it for just Sydney and Melbourne; you have to do it across Australia. It’s not going to happen in the next 12 months.”
Mr Oster told Domain that the market’s recent strength demonstrated the significant role that lending restrictions implemented by the Australian Prudential Regulation Authority played in moderating prices: “That feeds into the idea if there isn’t much of a restriction on these things then [prices] keep going up.”
The upshot of all this means our present low interest rates will stay low for the foreseeable future, contributing to increased borrowing and greater demand for Sydney property. Just like 2012, this means higher property prices are on the way.
Why 2012? Looking back to what we wrote in ‘Market Comment’ in December of that year, we can read the following: “The end of 2012 has set the stage for a buoyant year ahead with Sydney's best spring selling season since 2009.”
We reported then: “At its December meeting the Reserve Bank cut the cash rate by another quarter of a percent to three per cent - its lowest level since the global financial crisis. This was the RBA’s response to a flood of soft economic data that included growing fears of unemployment, a slowdown in mining activity, a weakening of China’s growth forecast and slow retail sales.”
If this sounds familiar, how about this from our January 2013 ‘Market Comment’: “St George Bank economist Janu Chan told Bloomberg that Sydney home prices could rise by 5 per cent to 10 per cent in 2013. This is a bit higher than analysts from ANZ and CBA who predict average gains of between 3.5 per cent and 5 per cent, but they nevertheless agree on the direction property prices will take.”
Conditions in the Sydney property market are now much the same as they were at the end of 2012: A downturn in property prices had made Sydney property more affordable, interest rates were low and getting lower, there was a shortage of stock on the market, new construction was in the doldrums and even auction clearance rates were beginning to rise after a slowdown.
We concluded in a final quote from this column in January 2013: “Forecasters - whether analysts, economists or even astrologers, broadly agree that the upswing will continue in 2013 with Sydney property prices rising somewhere from 3 per cent to 5 per cent or quite possibly even higher.”
And now, it’s on again!
Sources
‘Sydney, Melbourne house prices post fastest quarterly growth in three years, Eryk agshaw, Sydney Morning Herald, 11 December 2019
‘Further price rises’: The Sydney suburbs that have bounced back to boom-time prices,’ Tawar Razaghi, Ellen Lutton, Kate Burke, Domain, 8 December 2019
‘Sydney house market: Sydney is a sellers’ market as house prices grow at fastest rate since 1988,’ Matt Bell, news.com.au, 7 December 2019
‘Surging house prices, low rates risk tipping Sydney and Melbourne back into property frenzy: economists,’ Jim Malo, Domain, 5 December 2019
‘Dwelling prices tipped for double-digit gains in Sydney, Melbourne: report,’ Elizabeth Redman, Domain, 14 November 2019
‘From freefall to boom: what the hell is happening to Australia's housing market?’, Martin Farrer, The Guardian, 16 November 2019
‘Lack of information on apartment defects leaves whole market on shaky footings,’ Martin Loosemore, Bill Randolph, Caitlin Buckle, Hazel Easthope, Laura Crommelin, (UNSW), Domain, 26 November 2019
‘Construction figures yet more evidence that the economy needs the government to step in ,’
Greg Jericho, The Guardian, 28 November 2019
‘Australian housing values enjoy huge growth with the largest monthly gain in 16 years,’ Kirsten Craze, News.com.au, 3 December 2019
‘RBA, government walk tightrope on soaring house prices,’ Shane Wright, Sydney Morning Herald, 3 December 2019
‘Sydney and Melbourne house values surge on lower interest rates,’ Shane Wright, Sydney Morning Herald, 2 December 2019
‘Economists warn on debt risks as mortgage lending heats up,’ David Scutt, Sydney Morning Herald, 10 November 2019
'Extraordinary period': Domain boss likens tough property market to 1990s bust,’ Jennifer Duke, Sydney Morning Herald, 11 November 2019
‘These opportunities don’t come up often’: Big sales at higher end of the auction market in Sydney and Melbourne,’ Melissa Heagney, Domain, 11 November 2019
‘Houses shrinking, but apartments growing in size in Australia,,’ Ulilses Izquierdo, AAP, 11 November 2019
‘First home buyers could be forced out as housing markets enjoy uptick, banks may loosen lending,’ Ian Verrender, ABC News online, 4 November 2019
‘Interest-only loan reset hurting borrowers despite the rate cuts,’ Carrington Clarke, 7.30, ABC News online, 28 October 2019
A new year lies ahead and falling prices are left behind
Wed, 13 Nov 2019There’s no longer any doubt about whether Sydney property prices are once again enjoying the uplift from what can only be described as a ‘boom’. The market has recorded its fastest turnaround in decades, with house prices rebounding almost $50,000 last quarter, as shown by Domain’s September House Report.
This new property boom is producing strong results in Sydney’s auction markets weekend after weekend. After a two-year downturn, house prices have now regained fully one-third of the value they lost, and the city’s median house price is back up over the million-dollar mark with a rise of 4.8 per cent to $1,079,491.
Domain’s latest figures show that Sydney’s north west has had the steepest quarterly rise, up 9.7 per cent, with a new median house price of $1.25 million. The city’s south and inner west suburbs also recorded strong results, with increases of 7.1 and 6.9 per cent respectively.
Unit prices lag behind in most areas, although the northern beaches experienced a 13 per cent rise and the lower north shore saw a 5.4 per cent increase so it’s not all bad news in this sector.
The previous housing boom lasted about six years, from November 2011 to mid-2017, and Sydney was the main beneficiary with prices rising by 70 per cent, according to realestate.com.au.
Is this new boom sustainable? A couple of months ago it wouldn’t have seemed realistic to forecast continued rises into 2020, but now there’s a growing confidence that this strengthening recovery will be a feature of the new year ahead.
Domain's senior research analyst Dr Nicola Powell said a number of factors are fuelling the new price rebound: "The ability to service a mortgage has fallen, prices are still below their peak … [and] we have seen a subtle relaxation of lending," Dr Powell said.
Ramon Mitchell, director of Gault & Co Property Advisory, told news.com.au that competition has strengthened among buyers, with bigger offers being made and faster sales completions: “There’s been increased traffic through open house inspections and there seems to have been much higher conversion of these to registered bidders on auction days,” Mr Mitchell said.
“You can see how this has played out in consistent improvement in auction clearance rates including sales prior to auction. There’s no doubt this is having an effect on values; they’re increasing across most of the markets we monitor.”
AMP chief economist Shane Oliver said the market was buoyed by more buyers and fewer properties at auctions, but he also thinks the results could flatten out as more vendors returned to the market: “Sydney’s sales have picked up, but they’re still pretty subdued to what we see in a normal market,” Dr Oliver said.
Epping estate agent Justin Keenan explained the rise: “The first half of the year saw buyers out "just looking" or chasing a bargain; the last four weeks has seen those same buyers shift into buying mode and realising they are facing strong competition from buyers keen to secure a home before Christmas.”
It can also be argued there’s ample room for even more expansion as prices are still well below their 2017 peak - down 9.9 per cent for houses and 10.6 per cent for units, while population growth and therefore potential future demand shows few signs of slowing.
Bank on rising prices
NAB chief economist Alan Oster thinks it will be two years before prices return to their 2017 peak: “Anecdotal evidence suggests that [price growth] may be softening slowly,” he said. “At the end of 2021 you might be getting back to that sort of level.”
David Plank, ANZ’s head of Australian economics, is a bit less cautious, saying his bank expects annual house price growth to be at 12 per cent per annum by mid-2020: “House prices have come back strongly; the question is how much of it continues and also what happens to [government] policy?”
ANZ senior economist Felicity Emmett told the Sydney Morning Herald that the property market was recovering much faster than expected: "The change in sentiment was driven by the combination of lower rates, easier access to credit, and increased certainty around housing taxation. Together, these factors have helped to shift sentiment from one of pervasive negativity to broad optimism."
Moody’s Analytics economist Katrina Ell is another property market optimist. “Our long-held baseline forecast—that the trough in the national housing market has occurred—is evident in improving activity in the Sydney and Melbourne markets, where 60 per cent of activity takes place,” she told Jessica Yun of Yahoo Finance.
Ms Ell says house values will rise by an estimated 7.7 per cent next year and 7.6 per cent in 2021, and apartment values will jump 7.9 per cent in 2020 and even further at 8.4 per cent in 2021: “Improved auction clearance rates in these cities, alongside the return of monthly dwelling value growth, according to CoreLogic data, support the outlook for ongoing improvement.”
Supply and prices
Despite all the concerns about construction defects, Sydney unit prices actually showed an increase of 2.6 per cent in the August-October period, rising to a median price of $694,840. The Domain House Price report for the September quarter showed gains were mostly in the northern beaches, lower north shore, inner west, city and upper north shore.
Domain research analyst Eliza Owen said some of these areas have experienced a lot of new supply with higher prices than the properties that have been replaced: “[This] may be pushing up the median because you’re introducing newer, more expensive homes; as unit prices have bottomed out … people might be trading up, so medians start to reflect something, bigger, newer or nicer.”
JLL Australia’s head of residential research, Leigh Warner, said increased apartment supply putting downward pressure on prices was unlikely to last much longer: “[Supply] is probably at around the peak … and it will fall away quite sharply,” Mr Warner told Domain. “There’s residual stock to soak up around Sydney, [but] it’s not a huge oversupply in the broader perspective.”
He expressed his thoughts that a massive decline in building approvals – down 50 per cent since their peak – was due to weaker demand and funding issues for developers. Warner added that Sydney would probably experience an undersupply within two years.
Jack Derwin, writing on Business Insider, commented that today’s conditions, with demand again outstripping supply, reflected a time not so long ago: “Those same conditions led to prices running away for years, pricing many out of the market entirely. Prices in [Sydney] shot up 75 per cent between 2012 and 2017.”
He added: “The major problem with a dwindling new supply of housing is that it takes a long time to get it going again, particularly when it comes to the kind of high-density housing required in Sydney and Melbourne for example. That creates long lead times where momentum, both up and down, takes a while to build and a while to actually come to fruition.”
Construction concerns
The state of the housing construction industry is a dark cloud on Australia’s economic horizon, according to the Reserve Bank of Australia. The Bank’s deputy governor, Guy Debelle, told a Sydney audience that there was a sizeable downturn underway across the construction sector that was becoming a drag on the overall economy.
He forecast a seven per cent drop in housing investment over the next year and warned there was a “real risk” the drop could be larger, taking at least one percentage point off Australia’s total economic growth.
"The typical lags between the sale and construction of new dwellings imply that the decline in dwelling investment will continue for some time, despite the recent signs of stabilisation in the established housing market," Dr Debelle told the CFA Societies Australia conference.
He said that while residential construction had slowed, demand was still being driven by population growth and, despite some pockets of oversupply in Sydney, it will take some time for supply to catch up with demand: "The growth in demand without a meaningful supply response will lead to a larger price response," he said.
Investors, it seems, are still reluctant to borrow money to put into property. September's RBA data shows that overall lending is happening at a sluggish pace, with annual credit growth of 2.7 per cent the lowest since 2011.
ANZ chief executive Shayne Elliott said his bank was looking at ‘lowering its hurdles’ for investors in a bid to stimulate more borrowing. He cautioned that the current global trend to lower – sometimes even negative, interest rates carries risks: "Credit conditions are benign, but will inevitably turn at some point," he said.
JP Morgan's Ben Jarman said he thought it was unlikely the slowdown in building construction had bottomed out: "Building approvals have been very weak lately, with the annual rate at -19 per cent over the year, and levels down 39 per cent from the peak of the cycle around two years ago," he said.
"The lags from better price outcomes, the weakness of bank lending for new build, and the significant pipeline of homes still to be completed and sold suggest that the turning point in the home construction cycle is still some way off," Mr Jarman said.
Troubled towers
An ABC report on the 7.30 program told viewers it was mostly bad news for off-the-plan apartment buyers from the boom times of 2016 and 2017. Using CoreLogic’s August data, reporters Tracy Bowden and Kirsten Robb found that 60 per cent of the newly constructed apartments purchased off-the-plan in Sydney were worth less at completion than their original purchase price.
CoreLogic's head of research, Tim Lawless, said when many of these apartments were sold off the plan the market was very different: "We were seeing values rising at about 15 to 20 per cent per annum. Now cast your mind forward to 2019 and we've seen prices come down in Sydney by 15 per cent.”
He said there were two main reasons for the price falls. The first was a ‘significant oversupply’ in the high-rise sector; the second was concerns around construction quality, remediation costs and flammable cladding.
Propertyology, a company that researches property markets for investors, found that, while house prices in Sydney grew by 100 per cent over the 10 years to May 31 this year, the prices of apartments in suburbs dominated by high-rise properties have risen by less than half those of houses in many suburbs.
Propertyology’s managing director and head of market research Simon Pressley told The Age’s John Collett that a huge number of "Lego" high-rise apartments had been built over the past 20 years: "This poor performance has nothing to do with the structural and cladding problems that are coming to light, but that is likely to compound the underperformance even further," he said.
A survey by Property Investment Professionals of Australia (PIPA) found that just five per cent of property investors intended to buy off-the-plan units or house and land packages. In 2018 the figure was 6.4 per cent. PIPA’s chairman Peter Koulizos said that investors understand there can be an oversupply of apartments, but publicity on construction defects in some high-rise apartment blocks had slowed demand.
Meanwhile, the NSW Government is working on a Design and Building Practitioners bill that NSW Better Regulation Minister Kevin Anderson calls a “monumental step in the reform of the building and construction industry".
"People should feel confident they can enter the housing market in NSW knowing their home has been designed and built in accordance with the Building Code of Australia,” the minister said.
However, the bill is not destined to provide an immediate boost in building market confidence because it will only begin to apply to new buildings after about 2022 and will have zero impact on existing housing stock.
The University of NSW’s Geoff Hanmer, writing in the Sydney Morning Herald, said the bill’s approach is the wrong way around: “Ensuring that buildings are built correctly in the first place is more cost effective and less disruptive than fixing them up afterwards, particularly where the provision of access to upper floors of tall buildings can be so expensive; a $2 flashing failure repeated over 30 floors can become a $2 million rectification project.”
Good news for tenants and first home-buyers
As property prices began to fall, and a clutch of new apartment buildings hit the market, the cost of renting a house or unit in Sydney also started slipping. The latest Domain Rental Report shows that tenants are enjoying the benefits from the city’s investment driven property boom which has resulted in an oversupply of rental properties.
The Report found that house rents are lower than they were five years ago in 55 suburbs, and about 70 per cent of suburbs had unit price falls, but there’s a catch. “It’s the strongest annual decline in about 15 years,” said Domain analyst Eliza Owen, agreeing that the 2013-2017 investment boom had put downward pressure on the cost of renting.
“[However] I think we’re at point where rents may start to go back up. [There’s] stronger email inquiry for rental properties, the vacancy rate has trended down … and purchase prices are starting to rise, so landlords might seek stronger returns.”
The Coalition has finally come out with some details of the first-homebuyer deposit scheme it promised at the last election that will let up to 10,000 eligible buyers enter the property market with a five per cent deposit - with a $700,000 cap on houses in Sydney. This plan intends to spare buyers the economic pain of having to come up with the standard 20 per cent deposit as the federal government will guarantee the difference.
The scheme will begin in January next year, when eligible buyers will be able to apply the government’s specified lenders. Even though details are still sketchy, the ALP has made a commitment to match the scheme’s benefits, so even if the government changes hands the fundamentals will remain in place.
Ken Morrison, CEO of the Property Council of Australia, said it’s important that the elements of the scheme are appropriate for off-the-plan apartments and house-and-land packages: “The scheme comes at a time of declining construction levels for new housing which has an impact on jobs, housing affordability and supply,” he said in a statement.
RateCity’s research director Sally Tindall was also cautious about the effects of the scheme, telling The Guardian that a 30-year mortgage with a “wafer-thin deposit” is a recipe to pay “thousands more in interest to the bank over the life of the loan”.
RateCity’s calculations show that buying a $500,000 property with a five per cent deposit instead of 20 per cent will cost an extra $58,774 over the life of a 30-year loan: “APRA [the Australian Prudential Regulation Authority] has spent the last four years telling the banks to be cautious of lending to Australians with low deposits,” Ms Tindall said. “Now the major political parties are actively encouraging it.”
Sources:
‘Investors still baulking at property market, with more apartments in the pipeline,’ Stephen Letts, ABC News online, 1 November 2019
‘Australian property: New record housing boom for most capital cities ‘just months away’, industry data reveals,’ Kirsten Craze, news.com.au, 9 November 2019
‘Economists warn on debt risks as mortgage lending heats up,’ David Scutt, Sydney Morning Herald, 10 November 2019
‘Buyers more confident,’ Justin Keenan, Wiggins Keenan Investor newsletter, 28 October 2019
‘The 17 Sydney suburbs bucking the trend with rising unit prices,’ Kate Burke, Domain, 26 October 2019
‘Sydney suburb rents drop by up to one-quarter as prices continue to fall,’ Kate Burke, Domain, 12 October 2019
‘New property boom looks imminent with a range of indicators pointing to price growth,’ Shannon Molloy, News.com.au, 31 October 2019
‘Australia’s house prices have rebounded by up to $3000 a week,’ Charis Chang, News.com.au, 14 October 2019
‘Knowing who to blame is cold comfort to owners of defective apartments,’ Geoff Hanmer, Sydney Morning Herald, 29 October 2019
'No-go' lending zones: Development defaults rise in Sydney and Melbourne,’ Carolyn Cummins, Sydney Morning Herald, 23 October 2019
‘The ‘investor markets’ seeing big price falls in Sydney’s west,’ Kate Burke, Domain, 16 October 2019
‘Here’s where Australian property prices are going in 2020,’ Jessica Yun, Yahoo Finance, 30 October 2019
‘Sydney and Melbourne house prices will soon be growing at double-digit rates,’ Shane Wright, Sydney Morning Herald, 18 October 2019
‘Sydney property market records fastest rebound in decades,’ Kate Burke, Domain, 24 October 2019
‘Government announces price caps for first-homebuyer deposit scheme,’ Australian Associated Press, The Guardian, 28 October 2019
‘Strong results could flatten out as more homes head to auction in Sydney,’ Melissa Heagney, Domain, 21 October 2019
‘The RBA is anticipating a housing shortage and another crazy price boom in markets that really don't need it,’ Jack Derwin, Business Insider, 18 October 2019
‘Sydney high-rise apartment prices lag houses by 50pc in some suburbs,’ John Collett, The Age, 13 October 2019
‘Sizeable downturn': RBA warns housing will weigh on economy for another year,’ Shane Wright, Sydney Morning Herald, 17 October 2019
‘Majority of off-the-plan apartments worth less than purchase price, data shows,’ Tracy Bowden and Kirsten Robb, 7.30 Report, ABC News online, 21 October 2019
Boom or bubble: what are we seeing?
Sat, 19 Oct 2019Are we really seeing the start of another sustained property market boom? It’s too early to say, although rising Sydney housing prices have certainly been in the news of late. Auction clearance rates have stayed above 70 per cent and house values in Sydney jumped by 1.9 per cent in September. And just to add fuel to the fire under prices, at its October meeting the Reserve Bank cut its prime rate to just three-quarters of a per cent – a new record low.
If the RBA rate cut of just 25 basis points (0.25 per cent) doesn’t sound like much, News.com.au’s Aidan Devine commented: “Even though the major banks have only passed on about half of the Reserve Bank's latest cut (owner-occupied mortgage rates have been cut by 13-15 basis points), that's enough to give a household with income of $150,000 about another $12,000 to $14,000 in borrowing power.”
As CoreLogic calculates it, the median Sydney house value is now back over $900,000, rising by a healthy $23,000 just in September and finishing up $34,000 above its most recent low point in May. Sounds great, and this means that Sydney house prices have risen by 3.6 per cent since June, although it should also be noted that values are still down by just under one per cent this year.
Some parts of Sydney are clearly outperforming others. CoreLogic’s latest hedonic home value index showed prices in the inner west rose 5.2 per cent over the past three months, going up by 2.8 per cent growth in September alone. Prices in the Ryde region increased by an average 2.9 per cent in that month and by 4.1 per cent for the quarter, while there was growth of just over 4 per cent for the last quarter in the north shore, eastern suburbs, Sutherland Shire and the area surrounding the CBD.
A new Domain analysis found that vendors and agents are holding firm on asking prices. The median discount on a house across the city in August was $30,000, well down on $140,000 in August last year. There is a similar trend for unit sellers, with a median price cut of $25,000, well down on the $100,000 discount the previous year.
But it must be remembered that historically one key driver of rising prices has been a shortage of supply. The number of properties on the market is at least ten per cent lower than a year ago. Fresh listings are down fifteen per cent which is an even more significant statistic.
CoreLogic’s Asia Pacific research director Tim Lawless said the period of improved housing affordability created by the fall in property prices was coming to an end: "If you look at the numbers … we are going to be facing a situation with an undersupply of housing - we are already seeing housing prices rise," he said.
Domain’s research analyst Eliza Owen says that house prices are likely to keep going up because developers started work on fewer dwellings during the recent downturn: "By the time they get their developments approved and commenced and completed there will be strong demand while we wait for that new supply," Ms Owen said.
According to Louis Christopher, property analyst from SQM Research, the property boom is back: “September’s decline in listings was an abnormal result. Listings normally rise for the first month of the spring selling season. New listings did rise. It’s just that older listings recorded a large decline. It suggests stock is being absorbed at a quicker rate.
“The evidence, by way of the fall in listings, the rise in auction clearance rates and the accelerated rise in asking prices, all suggest that the city has indeed entered into a new housing boom. I think we can expect to record rapid rises in dwelling prices for our two largest cities at least in the December quarter and likely beyond.”
The Spring factor
The first big weekend of the spring selling season attracted a high number of properties on offer as well as achieving a high clearance rate, prompting Domain economist Trent Wilshire to predict clearance rates would be staying strong: “This aligns with recent Domain research that found clearance rates are a good indicator of market conditions regardless of the number of auctions,” he said.
“The clearance rate remained very strong despite more auction activity. Even if the number of auctions continues to rise, clearance rates will likely remain at around 70 per cent this spring.”
The Herald’s Elizabeth Knight says that FOMO (Fear of Missing Out) seems to be a factor in determining the current price rises: “The price rises are being amplified by a lack of supply. Volumes remain relatively low - with fresh listings 15 percent lower than they were a year ago. This can create a sense of urgency among some buyers to get a foothold in the market.”
She sees October as a crucial month for the Sydney market: “In August the property market prices were also strong but came with warnings that this may be the market’s dead cat bounce. The even stronger September rise suggests the bounce may be more sustainable. The high auction clearance rates we are currently experiencing are generally correlated to a rising property market.”
Ms Knight did her calculations and says that if August and September's house price growth rate in Sydney is maintained for the next year, the markets will have risen by a staggering 19.2 per cent, which will be a recovery from all the falls it experienced over the past two years.
This outcome would be quite a bit higher than the kind of growth expected by economic and property forecaster BIS Oxford Economics. The firm’s executive chairman, Robert Mellor, doesn't believe first-time home buyers, who were locked out during the last boom, have anything to worry about: "Some people are saying prices could get back to 10 per cent growth [annually] but I don’t think that’s likely. We are likely looking at only modest rises for Sydney and Melbourne."
Doron Peleg, founder of property researcher RiskWise, expects price rises of between four per cent and eight per cent in Sydney next year and says double-digit growth looks unlikely: "However, in a couple of months, if we see auction clearance rates into the 80 per cent range on increased volumes, that would be an indicator that [double-digit growth] may be possible," Mr Peleg said.
Asset Managers UBS believe the current housing price boom triggered by two RBA rate cuts will run out of steam. UBS economists George Tharenou, Carlos Cacho and Jim Xu said in a note that weak credit growth, little pick-up in new housing development and very low levels of homes listed for sale in Sydney suggest there may not be enough fuel to sustain a lasting boom like the one in 2012-2017.
UBS says that unlike the previous boom, the current uptick in the cycle hasn't seen the same new housing supply surge that normally follows price increases, indicating it's likely to be short-lived or weaker than previously. More broadly, UBS expects the kind of "multiplier effect" from a "real boom" such as the one in 2012-2017 will be muted, given low sales listings and a record low turnover in renovations and other housing-related spending.
Lendlease's chief executive for property in Australia, Kylie Rampa says the residential recovery will unfold over years, not in the next few months. “We think it will flow through over a period of time - we're not expecting a full recovery in a quarter.
"You start to get some price growth then you get some more activity, it all starts building. It will take time. Over the next two to three years we think the market will continue to strengthen.
"We always say 'you go up by the stairs and down by the elevator'," she said.
Speculation dangers?
Domain’s latest figures show that in the three months to August the number of property sales in Sydney is around 17 per cent higher than a year ago. This means that, in seasonally adjusted terms, Sydney property sales have increased by an estimated 40 per cent since the bottom was reached in the three months to February this year. Admittedly, it’s an uptick from a low base, but the increase in sales is encouraging vendors to return to the market.
So buoyant is this market that many property market players are already talking about the possibility of a price ‘bubble’ developing. In its latest quarterly update on systemic issues facing the financial system, the Council of Financial Regulators (COFR) relaxed its concerns about the availability of credit. Despite house prices recovering in recent months, the COFR described conditions in the mortgage market as "subdued," noting that the big four banks had been expanding more slowly than other lenders, and that there had been a soft growth in property investor loans.
"The potential for risks to financial stability from falling housing prices in Sydney and Melbourne has abated somewhat, with prices rising in the past few months," the COFR said in a record of its latest meeting.
Regardless, Wayne Byres, chairman of banking regulator APRA issued a warning to banks that a fresh resurgence of property speculation would be “unhelpful” and urged them to not lower their lending standards to try and generate growth in their loan books: "The downward adjustment in [property] prices has occurred in an orderly fashion and been positive for stability.
“However, it is worth remembering that the original risks we were concerned about in 2014 – high prices, high debt, low interest rates and subdued income growth – have not gone away, and in some cases increased," Mr Byres said in a speech in Melbourne which reflected the squeeze on bank profits from low interest rates that have caused lenders to struggle trying to offset the decline in their lending rates.
Stephen Koukoulas, managing director of Market Economics, expects prices to keep going up due to pent-up demand from first-home buyers and investors. However, he doesn’t think Sydney will find itself at risk of a ‘bubble’ developing in the coming years: “Yes, Sydney houses are expensive … [but] if people are willing to pay the prices – and they have for many, many decades and prices continually surprise everybody – it’s clearly not a bubble because [they] end with a catastrophic fallout.”
Apartments’ appeal slipping
The recovery in property prices has been uneven with unit prices lagging behind house prices. Concerns over problems including structural cracks and combustible cladding in high-rise buildings have dampened buyer interest, as well as have the effects of a citywide oversupply of new properties.
Agents across Sydney are seeing increased interest in older apartments with growing popularity for buildings from the 1960s and ‘70s, especially those within 10 kilometres of the CBD. Drummoyne real estate agent Craig Stokes says ‘recent concerns’ are behind this renewed popularity: “I think people prefer the older style, with all the negativity around the high rises,” he said. “Certainly, people would prefer to buy old and do it up,” he said. “Also, they’re smaller blocks,”
The market’s downturn and falling prices has squeezed the budgets of many developers with some closing their doors in mid-project. One such developer, Ralan Group, went under owing $277 million to its creditors. Another group that stands to lose from the company’s failures is the Chinese investors who bought off-the-plan units in the firm’s projects.
Some parts of Sydney, most notably those with large numbers of newly built apartment buildings, have been virtually ‘blacklisted’ by lenders who have tightened their mortgage restrictions and stipulated higher deposits on unit purchases, especially for off-the-plan purchases in some suburbs.
Arun Maharaj, CEO of mortgage comparison website HashChing, told the Sydney Morning Herald that he had seen lending restrictions tighten in some high-density areas this year: "In Sydney, the list of postcodes that have these restrictions is growing ... making loan approvals extremely difficult in high-density areas such as Wolli Creek, Parramatta and Oran Park," Mr Maharaj said.
The lenders’ original concerns were based on a feared oversupply of apartments in those areas, but now a new worry has emerged about construction defects and the possible use of combustible cladding in projects recently completed or still under construction.
Robert Mellor, executive chairman of economic and property forecaster BIS Oxford Economics, says the ability to sell apartments could be one of the factors that keep a lid on the recovery in property price rises: "Developers could struggle to offload some of this completed stock that has not been pre-sold because of [buyer] fears," he said.
Peter White, managing director of the Finance Brokers Association of Australia, said lenders are "quite nervous" and are seeking to reduce their exposure to buildings with known defects: "Lenders run hot and cold all the time in different areas. They’re constantly running their risk ratings. It would be most unlikely if lenders were bullish on these apartments that have had publicised issues - they’ll naturally want to steer clear because of the risk,” he told the Herald’s Josh Dye.
Another issue is the ‘financial health’ of a building’s strata scheme. Intending purchasers of existing properties should always obtain a strata report (or strata search) before signing anything. These reports usually cost a few hundred dollars but can turn up potential problems including inadequate maintenance funds and evidence of building defects.
Forgoing a strata report can be risky, because vendors may not be forthcoming with vital information, according to Strata Reports Victoria director Jane Giacobbe: “The vendor might not disclose to you there’s been a whole lot of water penetration issues or essential services issues they’re trying to get on top of,” she says. “Essential services and water penetration are as high up there as the cladding issue.”
Chinese buyers are back
Tourists from mainland China are in Sydney to shop for more than souvenirs, according to a new survey of Chinese consumers. Property portal Juwai’s survey found that 27 per cent of Chinese tourists intend to look at property during their travels, and Sydney is one of their top choices for a holiday destination.
Some other survey findings that could indicate positive outcomes for the Sydney property market are that 49 per cent of Chinese tourists intend to travel in their July and August holidays and 42 per cent are looking at traveling during the New Year Golden Week in February. And even though in 2017 and 2018 it looked like the numbers of Chinese buyers coming to Australia were on their way down, the latest figures show that visitor numbers have stabilised and are even showing signs of trending upwards.
(Previous research conducted for Juwai showed a 50 per cent increase in the number of inquiries from Chinese buyers looking for retirement properties in the first half of 2019 compared to 2018.)
Juwai spokesperson Dave Platter said that these ‘tourist buyers’ were especially interested in new developments, partly because of the Foreign Investment Review Board’s guidelines affecting non-residents buying properties here. He added that concerns about the build quality of off-the-plan purchases didn’t seem to be a big deterrent for them, and some of the biggest developers in Australia had origins in China and were well-known there.
Chinese buyers from Hong Kong have also been active in the Sydney property market as a result of the chaotic democracy protests in their city. Research from realestate.com.au shows that Hong Kong-based searches for Australian properties have risen by 37 per cent since June this year, not surprising since Australia is seen as a safe haven for investments in case the security situation in Hong Kong deteriorates further.
Realestate.com.au says that interest from Hong Kong buyers looking at property in Sydney is concentrated in the Sydney CBD and surrounding suburbs - Haymarket, The Rocks, Millers Point and Barangaroo. Outside the CBD, Hong Kong searches showed interest in Chatswood, Epping, Lindfield and Castle Hill.
Sources:
‘Sydney suburb rents drop by up to one-quarter as prices continue to fall,’ Kate Burke, Domain, 12 October 2019
‘They know they’re a good quality build’: Why older units are popular with Sydney buyers,’ Nicole Frost, Domain, 9 October 2019
‘The RBA's cut to interest rates will boost house prices, but that's not the only effect,’ The Conversation, Richard Holden, ABC news online, 6 October 2019
‘Sydney property is booming again as spring listing numbers tank,’ Aidan Devine, News.com.au, 7 October 2019
‘Bubble risk: UBS names cities around the world where property is most overvalued,’ Kate Burke, Domain, 3 October 2019
‘SQM Research: “a new housing boom” is upon us,’ By Unconventional Economist in Australian Property, Macrobusiness, 2 October 2019
“Property price recovery to take years not months: Lend Lease's Kylie Rampa,” Property Observer, 27 September 2018
‘Mini housing boom will run out of steam: UBS,’ Su-Lin Tan, Australian Financial Review, 16 September 2019
‘Chinese buyers in Australia: Here for holidays and here to buy property,’ Nicole Frost, Domain, 19 September 2019
‘Hong Kong interest in Aussie real estate surges amid pro-democracy protests,’ Aidan Devine, Daily Telegraph, 14 September 2019
‘Return of housing speculation would be 'unhelpful', warns APRA chief,’ Clancy Yeates, The Age, 14 September 2019
‘Over-supply, shoddy building work and fears of combustible cladding have put a dampener on the unit market,’ Martin Farrer, The Guardian, 14 September 2019
‘Apartment oversupply and construction defects give lenders pause for thought,’ Josh Dye, Sydney Morning Herald, 22 September 2019
‘How to tell whether an apartment building is financially healthy before you buy in,’
Daniel Butkovich, Domain, 27 September 2019
‘Sydney's property market is set for a new boom,’ Nick Bonyhady and Jessica Irvine, Sydney Morning Herald, 28 September 2019
‘House values jump 1.9 per cent in a month in Sydney and Melbourne,’ Shane Wright, Sydney Morning Herald, 1 October 2019
‘Clearance rates up as more homes hit the market in big Sydney auction weekend,’ Melissa Heagney, Domain, 29 September 2019
‘Sydney's property market is set for a new boom,’ Nick Bonyhady and Jessica Irvine, Sydney Morning Herald, 28 September 2019
‘Bubble fears are back: Property prices threatening to get out of control,’ Elizabeth Knight, Sydney Morning Herald, 2 October 2019
‘Housing risks have 'abated' as prices bounce back, say top regulators,’ Clancy Yeates, Sydney Morning Herald, 23 September 2019
‘Property prices on the rise but return to boom times unlikely,’ John Collett, Sydney Morning Herald, 15 September 2019
‘Sydney home owners’ asking prices on the increase, new data shows, as discounting dips,’ Kate Burke, Domain, 21 September 2019
‘NSW tells councils to cite terrorism to keep flammable cladding locations secret,’ Christopher Knaus, The Guardian, 16 September 2019
‘If incomes don’t keep up with property prices, we’re in danger of another housing bubble ,’
Greg Jericho, The Guardian, 19 September 2019
The recovery begins, but how far and how fast will it go?
Mon, 16 Sep 2019There’s general agreement among analysts that the Sydney property market has hit its bottom point and is now on the road to recovery. But there are many differing views about where we go from this point onwards. The August property sales results have provided some encouraging signs of recovery that offer a guide to what the future holds.
CoreLogic figures show that house values in Sydney rose by 1.5 per cent last month, bringing the total rise since June to 1.6 per cent. Unit values also rose in the last month, up by 1.8 per cent. The strong growth figures even surprised Core Logic’s head of research, Tim Lawless, who told ABC News: "The August figures really have taken quite a [steep] change upwards, which is a much stronger rate of growth than what we would have expected. It does look like a growth trajectory is very much on the cards."
Double Bay estate agent Paul Biller said that sellers who had held back in recent months were returning to the market: “Since the election, there's certainly a lot more confidence and there are more homes hitting the market. Still [it's] not as many as we'd like, particularly for the time of the year — however, whatever is on the market is selling very well," he said.
Nila Sweeny, at the Australian Financial Review, says that some parts of Sydney are already ‘bolting ahead’: “In Sydney, unit prices in the Northern Beaches and Botany Bay have grown strongly over the past year, defying the 6.9 per cent drop in the Sydney market over the same period.
“Eastgardens units in Botany Bay racked up a 14.3 per cent median price growth to $906,882 over the year to July while Newport, Northern Beaches climbed by 11.6 per cent to $929,568. Since the boom ended in July 2017, prices for units in…Newport rose by 6.9 per cent according to Corelogic.”
Keiran Whaley, director at Jellis Craig Ivanhoe, said the property market was at an “interesting point” right now: “From a buyer’s perspective, there is no better time to buy, because prices are still 10 to 15 per cent off their peak. The bounce back has been amazing, and I’d say very similar to what happened after the GFC, in that it [the market] was off one week, and on the next,” he told Domain.
Inner west estate agent Jackie Williams said vendors that had earlier been hesitant are now starting to put their properties on the market: "Vendors are finding confidence that now is the time to move. Prices aren't falling as we felt they were for the last 12 months, so they've got the confidence that when they put their property on the market, they'll achieve a certain level; if anything, there's a lot more demand than there is supply."
The Herald’s Elizabeth Knight was quick to remind us that the upward price trend, clear as it is as present, is based on a small sample as recent sales volumes have been relatively small. She says it won’t be until the spring season gets underway that we’ll have more detailed statistics based on additional sales across the Sydney area.
“To be sure auction clearance rates have also picked up significantly relative to a year ago. But this can also reflect the fall in inventory of house stock on the market,” she said. “And secondly, homeowner credit growth remains weak – albeit picking up slightly. In the latest July figures there was a 0.5 per cent improvement in owner occupier credit growth but a 0.1 per cent decline in home investor credit.”
Angela Ashton from Evergreen Consultants offered her thoughts: “We think that the housing market has bottomed, and we see modest improvements in residential housing over the next twelve months…But we expect to ultimately see 2019 ending on a higher note as improved demand dynamics and looser credit supply conditions continue to emerge,” she said.
Louis Christopher of SQM Research, an often-quoted property analyst, agrees the market has hit bottom, but said that Sydney has bottomed out at an overvalued price: “The data suggests the Sydney housing market remains 21 per cent overvalued despite the two-year correction,” he said.
“For reference, the average overvaluation (since 1986) in Sydney is 19 per cent with a low point of 5.9 per cent ‘undervalued’ in June 1987 and a high point of 55.5 per cent overvalued in December 2003. The most recent overvalued point was 51.6 per cent in the June Quarter 2017. The most recent undervalued point was 1.6 per cent undervalued in September 2012.”
Mr Christopher also added that he believes that historically, the Sydney housing market has rarely been undervalued, and said there has nearly always been some sort of premium attached.
So, there you have it. Yes, the property market has hit bottom after a 14 to 16 per cent fall in prices across the city, with some parts of the greater Sydney area dropping up to 18 per cent. And as always in such cases, some more desirable parts of town have not only retained their values but grown as much as six per cent, like Neutral Bay and Mosman.
And now a Sydney property price recovery is underway, as shown by the August sales results. However, it’s acknowledged that these results are based on relatively small volumes and the strength of the recovery may well slow down once more properties come onto the market.
There are now a number of conflicting factors at work which will help determine the future of Sydney property prices, among them the availability of credit, low interest rates, global instabilities and an unwillingness of vendors to put their properties on the market. The overall impression is that the market is very much in a “wait and see mode” that will keep prices stable, or at best showing moderate gains, at least until the end of 2019.
If borrowers, both homeowners and investors, are able to acquire the funds they need to purchase property, and if vendors that have been holding off until the price downturn is over finally emerge to put their properties on the market, this Spring could once again see the kind of selling season that Sydney’s been waiting for.
Hong Kongers move to Sydney
Recent unrest in Hong Kong has caused many of that city’s residents to consider their futures with the current ‘one country, two systems’ under threat. The NSW Department of Industry has commented that there’s been a significant increase in applications for business and investor visas over the past few months.
Georg Chmiel, executive chairman of Juwai.com, the platform that markets overseas property to the Chinese market, said: “Over the next two to five years, there could be a substantial impact on the property market as these individuals look to settle down and purchase but, for now, it is too early for that”, he said.
“Expect to see wealthy Hong Kongers first renting in Sydney or at least waiting until they have obtained their visa before they purchase. That way, they can avoid the foreign buyer tax.”
Monika Tu, director of real estate agency Black Diamondz Group International, told Domain’s Sue Williams that she’s already seeing groups of buyers visiting from Hong Kong to check out property: “These are all people from Hong Kong of Chinese origin who are successful, established businesspeople; a few already have Australian residency, or their children do, but now they’re all seriously looking.”
The Guardian’s Ben Doherty said that Australia was the top destination for Hong Kong emigrants in 2018 – nearly a third (2,400) of the 7,600 Hong Kongers who left last year went to Australia.
He quoted Hong Kong migration agent John Hu who said the political climate in that city is not easy at this time: “When protests start to bring unrest to Hong Kong, and as these protests have gone on for a long time, we have people ringing us up, they are becoming more and more determined to get a visa for what we call a ‘plan B’. Over the last few months, there has been a very large increase in people inquiring about Australia. If we were getting 10 to 15 applications every month before, now it’s 20 to 30,” he said.
Building approvals fall
The residential construction sector is feeling the effects of the weakening housing market. The Australian Bureau of Statistics has reported a 1.2 per cent drop in building approvals across the country in June. Importantly, it was led by a 5.4 per cent fall in NSW. More ABS figures showed a small uptick in approvals for houses which were up by 0.4 per cent in June, but down 14.8 per cent over the past 12 months.
Meanwhile, approvals of units and apartments slumped 6.5 per cent in the month. Approvals in the apartment sector have now fallen by 39.3 per cent over the past year with the worst June performance since 2013. Some of the biggest drops have been among unit blocks four storeys or taller, with approvals of these in NSW down 50 per cent over the past two years.
More statistics from the Housing Industry Association also show that there are problems in the property market. In the last financial year there were 56,357 house sales across the country which was the lowest annual number since the 1991 recession. The sales figure in NSW was 10,220 house sales, a 15 per cent decline from the previous financial year as well as being a record low.
UBS senior economist George Tharenou told the Herald’s Shane Wright that residential construction was set to continue contracting, and that up to 100,000 jobs could be lost from the construction sector as approvals continue to drop. He also said investment across the sector would drop by 10 per cent: "Our tracking of construction job ads is consistent with 100,000 job losses ahead," he said.
BIS Oxford economist Maree Kilroy also expects a further drop-off in residential construction: "Despite recent stimulus measures, the downwards trend in houses is set to continue over the remainder of 2019 given the weakness in land sales and the lag to the approval stage. Risk to the downside for the apartment market remains with apartment pre-sales remaining weak and build quality concerns escalating," she said.
More forecasts of a construction downturn came from Ben Jarman, senior analyst with JPMorgan, who said it appeared real residential investment had fallen by almost two per cent over the past quarter: "The trajectory of the approvals data into [the] third quarter suggest a similar drag for that quarter, though with dwelling prices doing a little better lately there could still be some moderation in the pace of decline for approvals in coming months."
Recessionary concerns
Fears about a possible recession have been in the news lately, stirred primarily by the trade war now being waged by American president Trump against China. It is worth noting here that both countries are major trading partners with Australia, with China and the United States ranked first and fifth respectively. Their country’s economic health has a direct relationship with Australia’s.
Naturally, with two of our important trading partners feuding with each other, there are possible impacts on our own economy, most of them not very beneficial. And at this point in time there’s a general slowdown in economic activity, both in Australia and worldwide.
Herald journalists Eryk Bagshaw and Shane Wright said Australia’s economy looks set to record its worst annual result in two decades: “Markets believe there are downside risks to the average forecast growth rate of 0.6 per cent, leaving policy makers facing the worst result since 2000, when the global economy was hit by the collapse in technology stocks.”
So, nothing dramatic just yet, but what if a full-scale recession should happen in 2020 or 2021, and how will it affect the Sydney property market? Yahoo Finance property expert Michael Yardney says that house values aren’t destined to fall even if our economic growth slips.
“While we may have a ‘technical recession’ – a period of temporary economic decline with a fall in GDP in two successive quarters – it is unlikely to lead to significant falls in our property markets; the concern for our property markets would be if people lost their jobs and couldn’t repay their mortgages, but this is unlikely to be an issue.”
Realestate.com.au chief economist Nerida Conisbee, agreed that job losses would be the main issue as it could cause mortgage holders to go into arrears: “It is a little early to say what will happen this time around,” Conisbee told Yahoo Finance.
“Melbourne and Sydney are more sensitive to multinationals cutting jobs and may be hit harder. “If this is the case, it could look like a post GFC-type impact.”
Ultimately there may well be no global recession, as is now being discussed. The USA and China may sort out their differences, and other factors – like Brexit, may happen without causing negative economic ripples around the world. However, a general slowdown in economic activity, both in Australia and overseas, is likely after so many years of steady upwards growth.
Regulatory failures
By now, everybody should be familiar with the failure of the NSW government and local authorities to regulate the building industry. Over the past nine months at least five apartment buildings have been declared ‘uninhabitable’ and more than 600 other high-rise structures have been identified with combustible cladding.
How could this happen? A growing population, fuelled largely by immigration over the past two decades, created a demand for housing in Australia’s capital cities, most notably Sydney and Melbourne. Pressure was on put on state and territory governments by the federal government to free up land and get sufficient housing built, so when developers called for a ‘reduction in red tape’ through cuts to regulation our elected members reacted in what seemed an appropriate manner.
Building certification, formerly conducted by local councils, was handed over to private certifiers, whose frequent lack of experience or qualifications have resulted in some buildings being constructed with faulty materials, shoddy workmanship and faults that include dangerous water penetration and unmet fire safety standards.
The Australian Bureau of Statistics tells us that there have been 259,580 new apartments built in NSW since 2000. A study by Deakin and Griffith universities surveyed buildings constructed after 2003 in Australia’s east coast states, finding more than 97 per cent of buildings in New South Wales surveyed had at least one defect in multiple locations.
Shocked by these and other related findings, Australian state and federal governments commissioned a report on the building industry by lawyer Bronwyn Weir and former senior public servant Peter Shergold. Their report’s 24 recommendations included a crackdown on private certification, and registration of all those involved in the building process. At a meeting in July, building ministers made a commitment to implementation of these reforms.
That takes care of future construction, we can hope, but what about those existing residential apartment buildings with structural defects, including dangerous combustible cladding? The Construction, Forestry, Maritime, Mining and Energy union (CFMEU) has released a report - ‘Shaky Foundations: The National Construction Crisis’, which states: “the cost to building owners and state, territory and federal governments of addressing the structural and safety defects in [affected] buildings will approximate $6.2 billion".
Buildings with structural defects will be an issue well into the future and could impact the housing recovery now underway. Digital Finance Analytics' Martin North says that we’ll see a significant loss of demand in the high-rise sector: “"We know that more people are now not wanting to 'complete' on high rise buildings that they actually committed to buy off-the-plan.
"Those rates of default have doubled compared to where they were … in some [areas] property values in the unit sector are down 30 per cent now from where they were, and we know there's more ahead. I think this is going to be one of the biggest most critical issues for the economy over the next couple years. The high-rise sector is in for a very bumpy ride for a long period of time," he told ABC News.
Options for the Berejiklian government in NSW to address these structural problems include providing support and funding either to individual owners’ corporations or to Sydney councils confronted with buildings with major construction defects. The NSW Building Commissioner David Chandler has said he would possibly recommend low-interest government loans for apartment owners facing significant defects or cladding that needed to be removed, but the government is still formulating its response to the dilemma. We will keep readers advised of developments.
Broad-based land tax - again
Like a bad cold, some taxation proposals just won’t go away. We’ve mentioned in previous articles that there’s a push among state and federal governments to implement a broad-based land tax (BBLT) and do away with stamp duties on housing. The latest push has come from the Housing Industry Association that argues this transfer of tax targets would remove a significant barrier to home ownership and ‘level the playing field’.
HIA economist Angela Lillicrap stated: “Instead of the taxation revenue being paid by just the people who are buying a property in the market, it’s being replaced by everyone who owns property…if you replace stamp duty with an alternative broad-based tax, it would provide a consistent, reliable revenue stream.”
She was speaking about the ACT which is in the middle of a 20-year tax reform which will eventually abolish stamp duty on property transfers and replace the lost revenue with money from a BBLT. As the property boom fades and other state governments lose stamp duty revenues, you can see why the idea appeals to the NSW government which now gets about one-fifth of its taxation income from stamp duty.
The Grattan Institute estimates that a Sydneysider pays $41,789, or 4.1 per cent, in stamp duty at Sydney’s median house price of $1,027,042. Grattan Institute program director of household finances Brendan Coates said stamp duty was an easy, silent tax for governments to apply: “You can ratchet up the rate, you only pay once and you don’t notice it in the same way as a personal income tax,” he said.
Some additional supposed benefits of introducing a BBLT have been outlined by The Guardian’s Ben Oquist: “Long a favourite among economists, the swap is expected to lead to more efficient use of land as it makes it easier for people and businesses to move as their needs change. It also captures some of the improved value of land from public works, so the households that benefit from, for example, the new [ACT] light rail end up paying higher land tax.”
Even Westpac is getting into the act. In late July, Westpac chief executive Brian Hartzer said governments should consider a major overhaul of housing taxation, replacing stamp duty with a BBLT. "The big upfront cost of buying a home – particularly stamp duty – is both a barrier for buyers and a disincentive for people to sell a home that’s bigger than they need (since they would then incur their own stamp duty when they move)," he said.
It’s acknowledged by most players in the property industry that it would be politically difficult to introduce the BBLT, but it’s an issue that has surfaced and resurfaced since it was first proposed ten years ago by former Treasury Secretary Ken Henry in the 2009 review of taxation that he led. We publish updates on the BBLT because it’s likely to become an election issue at some time in our futures – and because it shows no signs of going away.
Wait for the federal Treasury’s next Intergenerational Report, due out in 2020. It’s a forward look at how changes to Australia’s population size and age profile may impact on economic growth, workforce and public finances over the next 40 years. If implementation of the BBLT isn’t put forth as a solution to shortfalls in public funding at state levels it will be a surprise.
As a postscript, we should also mention that the Independent Pricing and Regulatory Tribunal, which sets rates on property, has proposed a shift in the way rates are assessed. This would take the focus away from the present "unimproved value" of a property to the "capital improved value" which takes into account the value of the actual property including the land value and the improvements made to it.
On top of this, some Sydney councils are pushing for owners of expensive properties to pay $500 a year more in rates under a proposal to change the way levies are calculated that is now before the NSW government.
Just like the BBLT, these proposals are politically sensitive and will be given a great deal of consideration before they ever see the light of day. But once they get ‘on the table’ they’re not likely to go away as long as governments at all levels continue to seek new ways to raise revenues.
Sources:
‘Suburbs that have quietly bolted,’ Nila Sweeny, Australian Financial Review, 12 September 2019
‘Now’s the time to buy’: Demand for lending bounces back as market recovers,’ Ellen Lutton, Domain, 9 September 2019
‘To buy or not to buy? Australian housing prices set to shift,’ Jason Murphy, News.com.au, 8 September 2019
‘Apartments could be the crack in the housing market recovery,’ Daniel Ziffer, ABC News online, 5 September 2019
‘Dead cat bounce? Why we shouldn't read too much into house price boom,’ Elizabeth Knight, Sydney Morning Herald, 3 September 2019
‘Economy facing toughest time since tech-wreck downturn,’ Eryk Bagshaw and Shane Wright, Sydney Morning Herald, 2 September 2019
‘Sydney house sales resurge as political stability returns confidence in property market,’ Kevin Nguyen and Nicole Chettle, ABC News Online, 3 September 2019
‘House price surge in Sydney and Melbourne drags national index higher,’ Michael Janda, ABC News Online, 2 September 2019
‘Sydney and Melbourne house values rocket on lower rates,’ Shane Wright and Eryk Bagshaw, Sydney Morning Herald, 2 September 2019
‘Sydney housing market has bottomed out’, Louis Christopher, Property Observer, 28 August 2019
‘More Hongkongers look to move to Australia amid growing political unrest,’ Ben Doherty, The Guardian, 26 August 2019
‘Flood of wealthy Hong Kong residents hopeful of buying Australian property,’ Sue Williams, Domain, 21August 2019
‘Sydney councils push to make expensive property owners pay higher rates,’ , Jacob Saulwick, Sydney Morning Herald, 9 August 2019
‘What happens to the property market in a recession?,’ Jessica Yun, Yahoo Finance, 19 August 2019
‘Pressure grows on NSW government to act on reform of building industry,’ Jacob Saulwick, Megan Gorrey and Carolyn Cummins, Sydney Morning Herald, 9 August 2019
‘Australia's building crisis fix will cost $6.2 billion: report,’ Megan Gorrey and Jacob Saulwick, Sydney Morning Herald, 19 August 2019
‘Stalemate leaving fire-prone ticking time bombs around Australia,’ Phoebe Loomes, News.com.au, 13 August 2019
‘A legacy of defects,’ Sean Nicholls, Sharon O’Neill and Naomi Selvaratnam, ABC News online, 18 August 2019
‘Has the housing market bottomed?,’ Patrick Poke, Livewire, 16 August 2019
‘Westpac chief urges governments to dump stamp duty to help housing,’ Clancy Yeates, Sydney Morning Herald, 30 July 2019
‘Canberrans and Brisbanites pay lowest stamp duty in Australia, new analysis shows,’ Tawar Razaghi, Domain 8 July 2019
‘Sydney's stupidest building boom was born in a bonfire of regulation,’ Elizabeth Farrelly, Sydney Morning Herald, 26 July 2019
‘Canberra has the answers – just not where you might expect them,’ Ben Oquist, The Guardian, 14 July 2019
‘Property sales tumble leading to prediction of '100,000 job losses',’ Shane Wright, Sydney Morning Herald, 2 August 2019
‘House price falls may be ending, but do not expect another boom,’ Michael Janda, ABC News online, 19 July 2019
We’ve seen the bottom and now await further developments
Wed, 14 Aug 2019The media have given a great deal of coverage recently to Sydney property prices appearing to have found the bottom of the slump and even offered opinions about price rises in the very near future. When it comes to the housing market downturn, the ABC’s Michael Janda says it’s over…at least for now.
“Don't take my word for it. A veritable army of tipsters have called the bottom over recent weeks. They include property analysis firms SQM Research, Domain and CoreLogic, AMP Capital chief economist Shane Oliver — who was one of the first to tip the big downturn — BIS Oxford Economics, ANZ, and even the Reserve Bank.”
It's therefore not a surprise that Australians across the country are feeling more positive about house prices with 38 per cent expecting them to rise over the next 12 months, according to a survey by ME Bank. The survey involved 1000 people from across the country – 500 owner-occupiers, 300 investment property owners and 200 first-home buyers.
In NSW however, there was a bit of caution. Many respondents still believed the value of their property would drop over the next 12 months compared to other states and territories; 41 per cent of people surveyed believed prices would continue to fall across the state, while only 26 per cent thought prices would rise.
Overall, the property market’s news lately has been pretty good. Domain’s June House Price Report shows that Sydney’s median house price is likely to stay about $1 million, using their methods of calculation, having dropped back to early 2016 levels at $1,032,338, while the city’s median unit price has fallen to mid-2015 levels at $688,652.
We have been through the biggest downturn in property prices since the 1980s; house prices have now fallen 14 per cent citywide. There are a number of reasons why things have stabilised, among them the federal election results, the end of threats to negative gearing and favourable capital gains tax treatment, two interest rate cuts by the RBA, and changes to lending rules by APRA that have eased restrictions on bank lending.
Auction clearance rates are now at their highest level in two years, seemingly confirming a turning point in the market. Clearance rates in Sydney are about 45 per cent stronger compared to last year, an improvement AMP chief economist Shane Oliver said would usually suggest prices could rise up to 10 per cent in 12 months.
“Historically, once clearances move higher [and] volumes eventually start to pick up again, more property comes to the market and eventually that results in higher prices. Once we start to see more supply coming into the auctions, then the clearances will probably come down a bit,” he said.
“It’s hard to believe things are this strong, it’s improved but it’s debatable as to [what] the raw clearance figures would suggest.”
However, at present there’s a shortage of vendors willing to put their properties on the market at a time when prices are low, and those selling are likely to be doing so only because they have to. Raine & Horne Newtown director Duncan Gordon told Domain’s Tawar Razaghi that there is a real shortage of supply: “Sellers won’t react as quickly as buyers, there will be a lag – sellers want more confidence.”
He said that properties had sold at auction between $200,000 and $500,000 above reserve in the past few months: “In the height of the market in 2017, we wouldn’t have thought we would get that. It absolutely defied all odds. Demand is strong and supply is low. That’s what’s caused this volatile activity in the marketplace. Until that [supply] level is up then these results will continue to happen.”
Advantage Property Styling managing director Dan Gerber told Domain that he has seen an uptick in business, judging activity by the amount of homes his company styles: “We did see a consistent and gradual uplift in the second half of July and August, which has been good. It’s not the kind of frenzy of activity we saw in 2017,” Mr Gerber said, adding that it was too early to predict what would unfold in spring.
A shortage of investors has been noticed by analysts in the financial sector. Australian Bureau of Statistics figures show the value of lending to investors was down 45.4 per cent in April this year from its peak in April 2015. Four years ago, investors were borrowing $12.5 billion; in the 2018-19 financial year this fell back to $6.8 billion.
Realestate.com.au chief economist Nerida Conisbee said we are looking at a very different property market to what it was during the boom: “Buyers from Asia, a key market for new development, have dropped dramatically; over the past 12 months alone, property seekers from China have dropped by over 60 per cent to the lowest level we have ever recorded. And confidence in the new apartment sector is low following some high-profile structural issues.”
CoreLogic head of research Cameron Kusher said that investors in recent times have been more focused on capital gains from property rather than rental income: “There’s also been a large volume of new stock in the apartment segment hitting the market at a time when values have started to fall and it highlights that a lot of investors chase the capital growth not necessarily the rental return,” he told news.com.au.
“Once values started to fall, there was less inclination from an investor to purchase a property because the value wasn’t increasing.”
Increasing buyer caution
Domain’s Tawar Razaghi says prospective apartment buyers are showing increasing caution due to what he calls a ‘crisis of confidence’ in the city’s buildings. He quoted Double Bay estate agent Wayne Ihaka who said: “They’re having a closer look at pre-built buildings and looking at the strata reports … they’re doing more due diligence into what the building was constructed of. They’re more cautious, there are no two ways about that.
During July, alarm bells started ringing when the collapse of two high-rise apartment developers made the headlines. The Sydney-based Ralan Group and Melbourne's Stellar Group ceased trading, fuelling the property industry's worst fears: that large numbers of would-be buyers either are unable or unwilling to settle on pre-sold apartments.
It used to be so easy; there were good profits to be made in a booming market. Anticipating a quick capital gain, property investors bought units off the plan, often with a small deposit and sometimes a non-binding assurance from a financier. Off-the-plan buyers, however, have a legal obligation to take the unit when building is completed. They must pay the full, final payment or face default, which means losing their deposit and being potentially exposed to legal action by the developer to recover the full amount.
The property downturn in the past two years has seen sharp falls in apartment prices – falls that have left many investors underwater, committed to pay boomtime prices that are usually well above the current market rate by the time of completion. Property research group CoreLogic reported in April that about one in five units bought off-the-plan were now valued at 10 per cent less than the agreed purchase price.
Addressing concerns
News that the Australian Building Ministers Forum is now responding to the recommendations of the Shergold-Weir report into building defects is an indication that at long last the failings of the development industry to control building quality are finally being taken seriously by legislators.
The lord mayor of the City of Sydney, Clover Moore, criticised the state government's regulation of the building industry, saying that to date it had been "breathtakingly irresponsible", and said that a lack of independent certification had paved the way for buildings that were "unfit for occupation".
Cr Moore called for independent onsite construction inspectors and said that engineers and building professionals working on those sites should be adequately qualified and registered. In addition, she said all buildings should be assessed by independent, third-party inspectors.
"This would ensure proper checks and balances that protect the environment and amenity, and address the conflict of interest inherent when private certifiers and inspectors are paid by the building contractor," she told the Herald’s Megan Gorrey.
It is to be hoped that real progress can be made by the NSW Government with the proposals it outlined in its Building Stronger Foundations discussion paper, although fixing the numerous faults in the industry will undoubtably be a long and complex process.
NSW Premier Gladys Berejiklian says the present system of regulation in the building industry is not working, but she wanted to assure the community that [the government] knows there's a problem: "We know there's a gap in legislation; we allowed the industry to self-regulate and it hasn't worked. There are too many challenges, too many problems, and that's why the government's willing to legislate."
Minister for Better Regulation and Innovation Kevin Anderson told the Herald that the industry was undergoing major reform to improve the transparency, accountability and quality: “With the appointment of David Chandler OAM, as the first ever NSW Building Commissioner, we are now moving into the next phase of the reform process,” Mr Anderson said.
Deferred projects
The Herald’s data journalist, Nigel Gladstone, says that the number of deferred and abandoned multi-unit projects in Sydney rose last year with the Urban Development Institute of Australia (UDIA) reporting a total of 29,030 multi-units were dropped in Sydney.
Because finance for developers has become much tighter, most projects take longer to get the required pre-sale levels to proceed to construction, property market consultants Urbis reported this month. Only about 4 per cent of new flats were sold at several sites in the March 2019 quarter; this was down from sales of 13 per cent in the September 2018 quarter, according to Urbis' quarterly surveys.
Urbis also expects "a significant drop" in sales of completed new apartments in 2020. “We’re seeing a cautious market as buyers and investors anticipate a drop in apartment prices," Associate Director at Urbis Alex Stuart told the Herald.
Job advertisement data indicates the outcomes of the banking royal commission and recent declines in house price falls may already have curtailed career opportunities in several industry sectors. Investment bank UBS say the recent slide in construction job advertisements is consistent with its forecasts for job losses before the end of this year. Economists at the bank expect construction jobs to fall by around 100,000 from the peak of the building boom.
There's also a ‘ripple effect’ across the building supply industry. In early August cement group Adelaide Brighton downgraded its earnings forecast for the second time in three months and announced it wouldn’t pay a dividend.
The Reserve Bank is well aware that the housing market is still facing challenges due to a drop in development activity. It recently said in its July meeting minutes: "While the pipeline of construction work yet to be done in New South Wales and Victoria remained high, liaison contacts expected housing construction could drop off more sharply because pre-sales activity had been so weak."
Rentals retreat
Sydney’s tenants are seeing the largest annual fall in rents in the last fifteen years for two big reasons: First, because of the ongoing housing market correction that has significantly reduced property values, and secondly because of the recent building boom that has nearly doubled the size of the Sydney apartment rental market. 30,880 multi-unit dwellings were built just in the past year, and there were 16 multi-unit projects finished in the first three months of 2019 which added another 1948 units.
The latest Domain Rental Report shows that median unit rents fell by 4.5 per cent in the year to June, while at the same time the median house rent dropped by 3.6 per cent. This means that median rents are down to 2016 levels, at $530 per week for houses and $525 for units.
Domain economist Trent Wiltshire says that despite the retreat in rental rates, our city is still the most expensive capital in which to rent a property: “Record rates of construction have been flowing through to rents for a while and you can see that through the vacancy rate.”
Mr Wiltshire noted that Sydney’s vacancy rate is 3.2 per cent, compared to 2.4 per cent a year ago: “It’s a bit of a win for tenants. But Sydney is still very expensive compared to other capitals,” he said.
Location plays a big part in how well a property’s rent levels are retained. Figures show that the largest drop in unit rents was on the upper north shore, closely followed by the south-west, with a 5.3 per cent decline. House rents fell most in Canterbury Bankstown, sliding 5.5 per cent over the year. The number of flats listed for rent on popular real estate websites has more than tripled in 15 postcodes, particularly around Gordon, Miranda, Botany, Sutherland and Homebush.
Dick Crampton, director at Shead Property in Chatswood, a company that manages more than 1000 rental properties, told the Sydney Morning Herald that the supply of north shore rentals is at an all-time high: "When properties were totally selling out off the plan about two or three years ago I suspect that probably 80 per cent of them were sold to investors. So I suspect it's either developers or investors leasing [those] properties now."
Battered household budgets
There’s little expectation of a return to boomtime conditions in the near future. ABC’s The Conversation's 2019-20 forecasting panel of 20 leading economists from 12 universities across six states predicts a weak economic growth rate and depressed consumer spending, with no improvement in unemployment or wage growth, and an increased chance of recession.
The panel expects continued wage growth of only 2.2 per cent in 2019-20, which, if that average forecast is right, would be the seventh consecutive year in which wage growth has fallen short of the Budget forecast. Even that unusually low rate of wage growth would be well above the rate of inflation, which is expected to be only 1.5 per cent, or 1.4 per cent on the so-called "underlying" basis watched closely by the Reserve Bank.
Economists who took part in the Scope survey for the Sydney Morning Herald and The Age concluded that the days of strong increases in both housing prices and household spending are a long way off. Victoria University economist Janine Dixon told Scope that, although a rise in prices would deliver a wealth effect to owners and investors, prospective buyers will have to face affordability issues.
"This may in fact have a negative impact on household consumption overall. Asset-rich homeowners might not increase consumption if they don't feel that their regular income has increased, while prospective new home buyers will feel the pinch when the dream of home ownership again slips away," she said.
Ratings agency Moody's has issued a warning that mortgage-backed securities are experiencing growing delinquencies. Moody's senior analyst Alena Chen said with household debt at almost 200 per cent of annual disposable income, a large number of homeowners have become financially exposed.
"The increase will be because of record-high household debt levels, the conversion of a large number of interest-only mortgages to principal and interest loans and falling house prices," she told the Herald’s Shane Wright.
Two other interesting indicators of financial stress – falling car sales and decreasing passenger numbers flying between Melbourne and Sydney, have also shown up in recent year-on-year figures and indicate a weakening economy.
ANZ senior economist Felicity Emmett said the bank believed credit would continue to be strained: “Our view has been that the major driver of the weakness in housing has been about credit supply,” Ms Emmett said. “Also, households are full up on debt after a long period of low wage growth. Households are feeling uncomfortable with the levels of debt and so it’s unlikely they want to pile more on.”
And the RBA’s minutes from its August meeting include some figures that tell us the central bank is keeping a close eye on the housing market: "Growth in housing credit remains low. Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality," the minutes read.
In summary, we have seen the bottom of the Sydney property market and that’s a good thing. But the next significant uplift is in all probability going to take some time - and more than a bit of good fortune, before it begins.
Sources:
‘The early indicators that show vendors are gearing up for the spring selling season,’ Tawar Razaghi, Domain, 11 August 2019
‘Buyers brave winter chill as property market warms,’ Nick Lenaghan, Australian Financial Review, 12 August 2019
‘Building certifiers leave a trail of chaos,’ Carrie Fellner and Nigel Gladstone, Sydney Morning Herald, 3 August 2019
'Higher value houses leading property recovery,' AAP on 9news.com, 11 August 2019
‘Fears of 'dead cat bounce' for house prices as economists warn of retail troubles,’ Shane Wright and Eryk Bagshaw, Sydney Morning Herald, 3 August 2019
‘Return of investors points to much-improved Sydney auction market,’ Melissa Heagney, Domain, 28 July 2019
‘Sydney auctions: Clearance rate at two-year high but numbers well down year on year,’ Melissa Heagney, Domain, 22 July 2019
‘Sydney house price falls slow as property market downturn nears its end: new report,’Tawar Razaghi, Domain, 24 July 2019
‘Australians positive about house price growth but worry about affordability, survey finds,’ Melissa Heagney, Domain, 23 July 2019
‘Construction industry cracks showing as Ralan Group goes under,’ Ian Verrender, ABC News online, 3 August 2019
‘Those left to pick up the bill shut out of building crisis debate,’ Bill Randolph, Sydney Morning Herald, 24 July 2019
‘Sydney apartment buyers more cautious, agents say, as it’s revealed a fourth building has been abandoned,’ Tawar Razaghi, Domain, 20 July 2019
'It hasn't worked': Premier admits Sydney's building industry is failing,’ Jacob Saulwick, Megan Gorrey and Lisa Visentin, Sydney Morning Herald, 11 July 2019
'Breathtakingly irresponsible': Sydney mayors lash building controls,’ Megan Gorrey, Sydney Morning Herald, 23 July 2019
‘Sydney rents record biggest annual fall in 15 years in good news for tenants,’ Tawar Razaghi, Domain, 10 July 2019
‘Sydney's stupidest building boom was born in a bonfire of regulation,’ Elizabeth Farrelly, Sydney Morning Herald, 26 July 2019
‘Apartment oversupply puts squeeze on rents,’ Nigel Gladstone, Sydney Morning Herald, 14 July 2019
‘The economy is weak and heading downward,’ The Conversation, Peter Martin, ABC News online, 1 July 2019
‘More homeowners falling behind on mortgage as debt climbs,’ Shane Wright, Sydney Morning Herald, 17 June 2019
‘RBA leaves door open to more interest rate cuts,’ Shane Wright and Eryk Bagshaw, The Age, 17 July 2019
‘Housing market: Low numbers of investors in Australia dragging on the property market,’ James Hall, News.com.au, 11 July 2019
Sydney property reaches its turning point as APRA acts and rates cut again
Tue, 16 Jul 2019There’s been a recent ‘bounceback’ in Sydney’s house prices, albeit a rather small one. But first, look back at the first three months of this year that saw prices fall by 3.9 per cent. Prices in March were nearly 13 per cent below the peak of June 2017, so the market was searching for a bottom. There are signs that at last it’s finally found one.
The drop in house prices in Sydney has been the necessary deflating of a bubble that was in danger of bursting. We had to face the reality that demand for buying houses at ever-increasing prices cannot last in an economy like Australia’s with weak household income growth. Median house prices in Sydney have now fallen from the overheated levels they reached in 2017, when the median price was more than $1 million, to the more realistic levels of early 2016.
In June property values across Sydney lifted for the first time since 2017. The re-election of the Morrison government and cuts to official interest rates have boosted confidence in the housing sector. The size of the lift wasn’t dramatic - 0.1 per cent, but it was the first increase in two years and surprisingly came mostly from rising prices in the apartment sector.
CoreLogic's Tim Lawless told the Herald’s Shane Wright the increase was due to several factors, including continued population growth in Sydney: "Stability within the federal government, along with the removal of uncertainty surrounding changes to negative gearing and capital gains tax discounts, has brought about increased certainty and boosted confidence in the housing market," he said.
"Aided by the housing downturn, we have also seen an improvement around housing affordability, although dwelling values remain high relative to household incomes in Sydney and Melbourne; add to this lower mortgage rates and the high likelihood that interest rate serviceability tests are set to improve."
David Hill of Raine & Horne HM Group told Domain that the election result and lower interest rates had brought buyers back into the market: “Prior to the election, we were seeing between zero and two registered bidders,” Mr Hill said. “After the election and the cuts, we’ve seen open for inspection numbers double and similarly we’ve had between four and eight registered bidders on the day.”
The much-awaited end of the property slump can also be attributed in part to the approaching end of the oversupply of housing - as supply and demand is predicted to come back into balance toward the end of the year. By that time most of the anticipated 54,000 new apartments will have hit the market and new construction will have been significantly reduced.
AMP chief economist Shane Oliver says that, while home prices may now be close to or even at the bottom, they are likely to remain constrained: "The situation today is very different to 2011 when the RBA first started to cut rates in this interest rate cutting cycle which in turn helped unleash booming conditions in the NSW and Victorian economies,” Mr Oliver told the Herald’s Elizabeth Knight.
"By contrast today, household debt to income ratios are much higher, bank lending standards are much tighter such that a return to rapid growth in interest only and investor loans is most unlikely, the supply of units has surged pushing Sydney’s rental vacancy rate well above normal levels and unemployment is likely to drift up as overall economic growth remains weak. So, while capital city average prices are likely to bottom by year end, we don’t see a return to boom time conditions but rather expect broadly flat home prices through 2020.”
A more optimistic outlook comes from Capital Economics, one of the leading independent economic research companies in the world. It has a positive view of Sydney’s housing market and is predicting a three per cent improvement in dwelling prices over 2020 and a five per cent gain the following year.
Better still is Domain Group's latest property price forecast which says the residential property market will start to recover in the second half of this year with house prices in Sydney to grow two per cent by Christmas followed by up to five per cent growth in 2020.
Domain’s property price forecast for June 2019 expects median house prices in Sydney to bottom out at just about $1 million and median unit prices to dip just below $700,000 in spring.
Domain economist Trent Wiltshire said the three big changes of the past month that should see the market bottom out are the Reserve Bank cutting interest rates, the Coalition's win, so no changes to negative gearing, which is having an impact already; and APRA's changes to mortgage serviceability tests.
"I do note there is some potential for further tightening of bank lending, but I think the net effect will be more of a boost to lending and a very modest turnaround in new home loan growth," he added.
Ray White joint chairman Brian White told News.com.au there has been a wave of activity in the market recently: “We’ve already seen a noticeable change in the atmosphere in the last few weeks with increased inspection numbers and people more willing to raise their hand at auctions again,” Mr White said.
The flattening of prices is a key indicator to investors to jump back into the market, he said, which was being fuelled by the rate cut and the positive election result for the sector.
“The message that the market has bottomed is just so clear,” Mr White said. “There’s just so much better news than people were probably anticipating.
RBA and APRA act
At its July meeting The Reserve Bank of Australia cut official interest rates to 1 per cent, the lowest level ever. Its aim is to boost the economy enough to drive down unemployment and lift wages. RBA governor Philip Lowe announced after the meeting that the bank would slice the cash rate by 0.25 percentage points for a second consecutive month.
Dr Lowe said the economy had grown below trend over the past year, with household consumption "weighed down by a protracted period of low income growth and declining housing prices".
He said that, while employment growth had been strong, there have been few inroads made into the economy's spare capacity, which meant overall wages growth remains low: "A further gradual lift in wages growth is still expected and this would be a welcome development," he said.
Economists from CBA, ANZ and NAB forecast a cash rate of 0.75 per cent by August with NAB expecting quantitative easing (QE) to follow next year, although Mr Lowe said it was 'quite unlikely' the central bank would need to start quantitative easing [where it buys government securities to increase the money supply]. Dr Lowe has said that QE was "not something that we would do lightly".
ANZ suggested the RBA may be forced to lower the cash rate below the 0.50–0.75 per cent level which most analysts assume is the bottom of the rate cutting cycle, beyond which quantitative easing would need to be used.
"Most analysts, ourselves included, say that after getting to that point the RBA will reach for the ‘unconventional’ policy tool kit," ANZ's David Plank said.
The banking regulator APRA has given homeowners and property investors even more good news that will help Australian house prices to head higher in 2019. It has scrapped its rule that lenders must assess home loan applications on the basis that the borrower is able to pay back the loan at an interest rate of seven per cent.
This rule had previously prevented major lenders such as CBA, Westpac and NAB from extending as much credit to property buyers as they would have liked. Now APRA has stipulated the banks must use an interest rate buffer of at least 2.5 per cent over the loan’s rate to help avoid mortgagor’s defaulting.
Ray White NSW chief auctioneer Alex Pattaro said APRA’s moves would encourage investors to apply for higher mortgage amounts: “Buyers are slowly starting to realise the market might spike on the back of the new APRA determination,” Mr Pattaro said. “I think [buyers are] aware it might give everything a kick because lending capacity and spending limits are about to increase.”
RateCity research director Sally Tindall said that many Australians may suddenly find they can now get their hoped-for home loan approved: "APRA has eased off the brakes slightly, but that doesn't mean it will be a complete field day for borrowers. There are still a number of checks and balances in place to make sure people aren't jumping into home loans they can't afford to repay."
Corelogic research analyst Cameron Kusher told news.com.au lower rates in isolation won’t have a dramatic impact on prices, but the combination of the removal by APRA of the seven per cent serviceability buffer and lower interest rates will likely mean more activity in the housing market.
“We don’t think it’s going to be a rapid rebound in the housing market, we think it’s still going to be a ‘slowly, slowly’ increase in the market. The main reason for that is it’s still a lot harder to get a mortgage than it has been in the past, even if those serviceability buffers are reduced. There’s still going to be a lot of scrutiny on credit worthiness of borrowers.”
Discounts – sort of
At this point in time a number of new apartments are being completed and joining others competing for buyers in a slowing Sydney market. A simplistic application of the laws regarding supply and demand would tell us that apartment prices would come down, but reducing prices is the last thing developers want to do.
Property analysts say the Sydney market has become oversupplied, with 54,000 new apartments built in during 2018 and 2019 expected to be marketed by the end of the year. Prices are already slipping - Sydney's median unit price in May was $678,199, with prices falling about 6 per cent over the past 12 months.
Sales have also been affected by quality concerns raised by issues with the Opal Tower and the Mascot Towers discussed elsewhere in this article. REA chief economist Nerida Conisbee said the apartment quality crisis had come just as values were slipping due to the large number of properties coming onto the market.
“There’s been concerns about oversupply for five years and it’s been difficult to get funding (to build or buy),” she said. “A big problem for people buying off the plan is they’ve put a deposit on, but when it comes to settlement, they have problems getting finance.”
Property analyst Martin North from Digital Finance Analytics said the real estate sector is getting what he calls a hard dose of reality: “From the data I'm seeing, investors are not interested in coming on board and the demand is not coming through."
He added that, although average unit prices have fallen only six per cent, there were pockets of Sydney, such as Hurtsville and Ryde, where the falls had been severe. "In Ryde, unit prices have dropped more than 30 per cent, essentially something that developers can't cover," he told Nick Sas from the Herald.
Cutting the offered price on unsold apartments would effectively devalue the worth of apartments already sold in the block. It would also lessen the developer’s return on investment as it would be difficult or impossible to raise prices once cut. So special deals are on offer that give buyers a ‘bonus’ for making a purchase at the original prices.
St Trinity Property Group is advertising 12 months mortgage free on its apartments in Blakehurst, 20 kilometres south west of the CBD. Arden Group will pay the stamp duty for buyers of its ‘Elora The Hills’ development, in Sydney’s north west. Belle Property International is offering a $15,000 Freedom Furniture voucher for its apartments, and Frasers Property is advertising a $50,000 bonus on its apartments at Tailor's Walk in Botany.
Mothballed sites
There is a growing number of ‘mothballed’ apartment development sites across Sydney that show just how quickly developers can respond to a slowing market. Steve Mann, the Urban Institute of Australia’s chief executive, says the number of "deferred and abandoned" apartment projects in Sydney has increased 110 per cent in the past year – that’s a total of 40,000 to 50,000 apartments on hold.
"The market is very challenging for new developments," Mr Mann told ABC News. "We've also seen nearly two years now of price declines - record price declines, and that's very challenging in terms of jobs and supply of new construction."
At the high point of the last property boom, in the twelve months leading up to April 2017, 44,762 units were approved for construction in NSW. Compare this to the 28,618 units approved for construction in NSW in the twelve months leading up to April this year and you’ll find a drop of more than 36 per cent.
Small wonder that several builders whose trade is constructing residential apartments have been laying off staff and are calling a halt to new developments; some have shifted into building commercial properties instead of apartments. One of these is developer Phillip George, the founder of Potter George Group, who has around $1 billion worth of projects in the pipeline.
Potter George Group is involved in both residential and commercial real estate. Five years ago, 50 per cent of its projects were residential, but now it's only a third. "You've got to fish where the fish are," Mr George said.
"Our rate of sales for residential is not where we want it to be, so we moved away to [focus on] commercial. It's all about making money at the end of the day, we've all got bills to pay, and right now commercial is a far more viable option."
Vacancies grow
A record 3.4 per cent of Sydney rentals were sitting empty in April. This is the highest since records began in 2005, and there are concerns the figure may hit four per cent by the end of the year as new apartments continue to be released into a saturated market. When you look at the 1.7 per cent vacancy rate of just two years ago you can see why these concerns exist.
Another factor that’s gone mostly overlooked until now is that some of the new apartments have been built in areas such as the Hills District where families traditionally go to find more housing space rather than a small unit. Just because the new Sydney Metro goes out that way doesn’t mean instant tenants for landlords; SQM Research recently found that the vacancy rate of the Hills District is currently 5.6 per cent, and the vacancy rate of the Rouse Hill-Kellyville postcode is nearly eight per cent.
SQM Research director Louis Christopher is one of those who thinks the Sydney-wide vacancy rate could rise to four per cent by end of 2019. He says that projects started two to three years ago, during the height of the market boom, still need to be completed.
“These projects were based on decisions developers made years ago so they can’t stop releasing them,” Mr Christopher said, adding that he thought some developers should have given more thought to their projects in the outer suburbs.
Towering troubles
The crumbling beams in the Opal Tower at Sydney’s Olympic Park last Christmas were bad enough, but a smaller structure in Mascot has also been evacuated due to structural faults and added to the growing pressure for the NSW government to quickly introduce a much better regulatory framework for new strata developments. This is becoming critical as statistics emerge that something like 80 per cent of all new residential strata buildings are built with defects.
Stephen Goddard, the chair of Owners Corporation Network, says the most common defects are those that allow water penetration and the absence of fire safety requirements (structural elements intended to prevent spread of fire). A surprising third place was building facades falling off.
Building defects can take years to be identified by which time the statutory warranty period has expired. Enforcing the warranty can also be a problem; Even if the fault is discovered within the warranty period, the builder/developer can be hard to sue as they often fold up their companies and walk away once the project has been sold.
Meanwhile, tower residents and tenants can be tossed out of their homes with no idea when they’ll be allowed to return. Owners find their purchases are significantly devalued, and in many cases have to cough up thousands of dollars from their own pockets to cover the costs of remediation.
Christoph Reithmeier, Director and owner of Dapcor, a remedial building company, told David Ross of News.com.au that fixing non-compliant buildings can be incredibly expensive: “Generally most defects in new buildings are more related to superficial cracking and noncompliance; the biggest cost to unit owners for defects is waterproofing.”
“When a building is in the construction phase, the waterproofing component is approximately 2 per cent of construction cost,” he said. “When you have people living in there then you have a number of other issues to get through, that goes for all the other defects.”
UNSW City Futures director Bill Randolph said the time has come that the interests of the developer and builder are secondary to those of owners: “Everybody is looking at these towers and thinking ‘My God, is that going to fall down? Is that going to cost me $50,000 to $60,000 to fix?'”
Buying a strata property ‘off the plan’ has quickly become problematic which is showing up in recent unit sales figures. Restoring public confidence in residential strata buildings requires urgent and decisive action from both government and developers or, as Mr Randolph says: “Sooner or later, people will say ‘I don’t want to buy that stuff’. If people are very wary of buying a unit off the plan in a block of flats that hasn’t even been built because of the problems occurring, the developers won’t have anybody to sell it to.”
The NSW Premier, Gladys Berejiklian, said this week that self-regulation in the industry had not worked. Her government is consulting until the end of the month on a “Building Stronger Foundations” reform package, which includes the creation of a building commissioner, and the registration of more participants in the construction process.
Homeowners and subsequent purchasers of apartments would be owed a duty of care by builders and other participants in the property industry, under proposed reforms outlined by the state government.
The four main components of that proposal are: that designers of buildings must declare they are compliant with the Building Code of Australia; that designers be registered; that an industry-wide duty of care be legislated; and that a building commissioner be appointed to act as a consolidated regulator.
The commissioner will be appointed soon, and the government hopes to table legislation to implement the schemes by the end of the year. The discussion paper said that "it is envisaged that owners should have clear rights to pursue compensation where a building practitioner has been negligent, and it cannot be absolved through purchasing contracts.”
Sources:
‘Immediate reforms: Triguboff's Meriton wants building industry change,’ Jacob Saulwick and Tom Rabe, Sydney Morning Herald, 13 July 2019
‘We have spirited bidding again’: Signs Sydney prices are stabilising as market bounces back over the weekend,’ Kirsten Robb, Domain, 7 July 2019
‘Sydney and Melbourne property values lift for first time since 2017,’ Shane Wright, Sydney Morning Herald, 1 July 2019
‘After two years of pain, the property slump looks to be over,’ Elizabeth Knight, Sydney Morning Herald, 2 July 2019
‘Sydney house prices to grow 7pc by end of 2020,’ Ingrid Fuary-Wagner, Australian Financial Review, 27 June 2019
‘Sydney faces apartment construction slowdown as developers hit the brakes,’ Nick Sas and Liv Casben, ABC News online, 17 June 2019
‘Apartment vacancies surge to record levels as developers continue to release new housing,’ Aidan Devine, Realestate.com.au, 17 June 2019
‘Sydney's dirty strata secrets emerge through cracks in Mascot Towers,’ Stephen Goddard, The Age, 18 June 2019
‘Sydney apartments in spotlight as developers ramp up incentives to clear oversupply of stock,’ Nick Sas, Sydney Morning Herald, 18 June 2019
‘Mascot Towers: NSW government urged to move on building reform to restore confidence in sector,’ Tawar Razaghi, Domain, 17 June 2019
‘They may never recover’: Non-compliant buildings creating generation of ‘mortgage prisoners,’ David Ross, News.com.au, 20 June 2019
‘House prices bouncing back? Don't hold your breath,’ Greg Jericho, The Guardian, 20 June 2019
‘Interest rates slashed to record low 1 per cent,’ Shane Wright and Eryk Bagshaw, Sydney Morning Herald, 2 July 2019
‘Banks see RBA at 0.75pc by November,’ Matthew Cranston, Australian Financial Review, 21 June, 2019
‘RBA rate cut: What the Reserve Bank decision means for housing market,’ James Hall, News.com.au, 3 July 2019
‘APRA just moved to put a rocket under Australian house prices in 2019,’ Tom Richardson, Motely Fool, 5 July 2019
‘Berejiklian government reveals plan for post-Mascot Towers crackdown,’ Jacob Saulwick and Laura Chung, Sydney Morning Herald, 27 June 2019
An election, a rate cut – and a bottom in sight
Mon, 17 Jun 2019The Sydney property market has been given some much-needed encouragement by the recent federal election result and by the Reserve Bank’s cut to its cash rate. For such an important economic sector that has most recently been best known for a record price fall, this couldn’t have come at a better time.
At its June meeting the RBA did what it’s been putting off doing for almost three years, and that’s to make a small but important cut of 25 basis points in its cash rate, to a new record low of 1.25 per cent. “The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities,” Governor Philip Lowe wrote in his statement that accompanied the announcement of the cut.
“Conditions remain soft, although in some markets the rate of price decline has slowed and auction clearance rates have increased. Growth in housing credit has also stabilised recently,” Governor Lowe said in the statement.
Professor Richard Holden of UNSW’s School of Economics said the rate cut would be welcomed by existing mortgage holders. “For people who haven’t seen their take-home pay increase a lot, have seen various parts of their cost of living get more expensive, and are struggling, very heavily indebted, have big mortgage repayments to make – a little breathing room is good,” he said.
Another key element in the mix is the Australian Prudential Regulatory Authorities' indication that it would remove a requirement for banks to assess a borrowers' ability to repay a loan if interest rates rose to 7 per cent. Property Developer Nigel Satterley told the Sydney Morning Herald why he welcomed APRA's action: "Banks are telling us they are in a strong position to lend to creditworthy customers; early modelling is indicating people can borrow $40,000 to $50,000 more."
Stockland managing director Mark Steinert said that over the last 18 months it has become increasingly hard to access credit for everyday Australians: "This announcement provides a much needed boost for the housing market and the broader economy, and gives more people the opportunity to realise the dream of home ownership."
The unexpected Coalition victory in the May election also means that the Coalition's new First Home Buyer Deposit Scheme will come into effect. The Scheme will be available to eligible first home buyers who have been able to save for a deposit of at least 5 per cent up to 20 per cent, and will enable eligible first homeowners to purchase their own home years earlier than they would normally be able to do. Also, they would not be required to purchase lenders mortgage insurance which could save them approximately $10,000.
The government has said it will also establish a National Housing Finance and Investment Corporation (NHFIC) with a dedicated team looking at ways to improve housing affordability.
But perhaps the most important benefit conferred to the housing market by the Coalition’s re-election is that it removes the threat posed by Labor’s plan to restrict negative gearing and raise the amount of capital gains tax. David Walker, portfolio manager at Clime Asset Management, told the Herald’s Clancy Yeates that the property market could reach its bottom sooner as a result of the election result: "If you take that policy change away, it's a boost to sentiment in the housing market," Mr Walker said.
The head of banking research at Morningstar, David Ellis, said that investor sentiment in the housing market could improve based on the election result: "The rate of decline in house prices has been slowing, and this might just slow that down even further, where it might stabilise for a while," he said.
HSBC’s chief economist, Paul Bloxham, told The Guardian Australia that the housing market had been showing signs of improvement before the election: “We’re of the view the housing market will stabilise in the second half of this year,” he said.
Is this the bottom?
Australia’s housing prices have been dropping since August/September 2017, losing a cumulative 7.9 per cent in the process. Sydney’s prices have plummeted even further, varying from suburb to suburb but hitting a record fall of 15 per cent across the city by most estimates. Now the question is: is this the bottom we’re seeing?
Some clues are outlined by The Guardian’s Greg Jericho, who said: “The latest housing finance figures, released…by the Australian Bureau of Statistics, show that the value of housing finance commitments in April was 19 per cent below what they were a year earlier.
“The big driver of the falls remains investment, which is 27 per cent down over the year. But it does at least not appear to be getting worse,” he said.
For New South Wales, Mr Jericho says the value of finance commitments in April was 5.7 per cent down on what they were in December, 23 per cent below April last year and a massive 45 per cent below the peak month of February 2017. This means that we won’t see an upward surge for at least the next six months, but the falls are certainly slowing.
Sydney’s auction clearance rates have recently shown a marked improvement, rising close to the 70 per cent mark on at least one weekend. Also worth noting is the increase in the rising number of properties offered for sale. “What happens is people wait for the market to bottom, and all of a sudden they have fear they’ve missed the bottom so they quickly rush out,” Tom Panos, auctioneer and founder of Real Estate Gym, told Realestate.com.au.
Director of Suburbanite, Anna Porter, told the New Daily that she expects to see the Sydney market level out faster than the rest of the capital cities: “Sydney will hit the bottom towards the back of this year and Melbourne will follow next year. For Sydney, I’m expecting one to two years of soft conditions with no real growth for five years.”
Pete Wargent. founding director and buyer's agent of the AllenWargent Sydney office, says we’ll see the bottom of the market a bit later this year: “It’s already turning but again it’s dependent on sub-region,” he told the New Daily
“Some parts of Sydney, like western Sydney, there’s a big pile of unsold stock that needs to be chewed through, but lower north shore stock levels are already low so those markets will likely turn quickly. I don’t think prices will be as volatile in the immediate future because I think there’s less appetite from a regulatory perspective.”
Jeremy Sheppard, head of research at Sell or Hold, agrees on the timing: “We’re likely to see the trough sometime in the next six months and I would be predicting pretty much zero growth in Sydney for the next three years.”
The Daily Telegraph’s Aidan Devine says there’s now a ‘window of opportunity’ for property buyers, but the window could be closing due to recent market changes including the RBA’s rate cut and the banks’ easing up on mortgage requirements. “Increased demand would stop prices from falling but would not drive another boom due to a weakening economy, the experts said. The market would instead enter a much-needed period of stability after years of boom to bust conditions, which meant buyers and sellers would get more certainty about pricing.”
Domain economist Trent Wiltshire commented on the impacts he expected from the government’s proposed first-home loan deposit scheme and the regulator’s plan to relax serviceability rules. “There are early signs that the property market is close to bottoming out: clearance rates are at their highest point in over a year, price falls have slowed and more people are thinking about buying,” he said.
And when might we see another round of price rises? It’s probably too early to even speculate on when the next upwards swing could commence, but Josh Williamson, senior economist at Citi Research, has gone out on a limb and given us a prediction, forecasting that prices will start to increase by the second half of 2020.
“We’ve upgraded our house price forecasts,” Williamson said in a note to investors. “We now expect house prices to show year-on-year growth of 3 per cent by December 2020.”
Meanwhile, Jason Murphy, property writer for News.com.au, cautions that it would be easy to get excited, but the economy is weakening and the housing market could be affected by external factors, both domestic and international: “With record high household debt, weak wages growth and now also a rising unemployment rate, it is hard to see how much enthusiasm there will be for spending up big on property.”
Empty towers
Nick Sas from ABC News has calculated that about 54,000 apartments built during the past two years will be completed and come onto the market in the very near future, creating a flood of properties and lead to an oversupply of units. Compounding the problems this might create is the rising rate of vacancies across Sydney – now 3.4 per cent and rising.
Dr Andrew Wilson, chief economist from My Housing Market, says the market is being affected by a combination of a massive number of new apartments coming onstream at a time there’s a shortage of tenants seeking properties: "We've come through a massive apartment boom in Sydney, and now we're at peak supply; it's all combined to create those empty towers."
The flip side of the situation is shown by statistics indicating the number of new apartments in Sydney is down 77 per cent year-on year. JLL’s head of residential research for Australia, Leigh Warner, said: “It will take some time for the supply pipeline to get going again and, with still very strong levels of national population growth, we could quite easily move into supply shortages over the next few years at the national level.”
So it could be that the dreaded ‘glut’ of new apartments is actually just in time to meet what is expected to be a growing demand as the Sydney property market begins to recover from two years of price falls. As Mr Warner foresees: “Very low completions over the next few years, along with continued strong population growth, will see us quickly move into an under-provision of space and see rental markets tighten once more.”
The NSW government has its own view of Sydney’s housing future and it’s one of continuing growth. The number of houses and apartments built in Sydney will continue to increase above already record highs with about 192,000 homes expected to be built over the next five years. This figure is an increase from the government’s forecast of a record 185,000 new homes made three years ago.
Writing in the Sydney Morning Herald, Jacob Saulwick has outlined the patterning of this planned growth: “Parramatta will be the fastest-growing council area, with 22,100 dwellings built by 2023. The second fastest will be Blacktown, with 18,300 dwellings, followed by the City of Sydney (14,850), Liverpool (11,950) and the Hills (11,700).”
He said the latest five-year forecast announced by Planning and Public Spaces Minister Rob Stokes shows a large increase in the number of dwellings predicted in Blacktown, Liverpool, the Hills, Cumberland and Ryde, while the pace of growth is slowed in the City of Sydney, Canterbury-Bankstown, Ku-Ring-Gai and Georges River.
The NSW Government’s projections say that another 725,000 homes will need to be built in Sydney over the next 20 years, or about 36,000 a year. A record 42,500 homes were completed in the 2017/2018 financial year, and the average number of homes forecast to be built over the next five years is 38,000 each year.
The end of stamp duty
We generally aim to report on current issues in Sydney housing, but occasionally something arises in the news that points toward future developments of interest to property owners, whether investors or homeowners. One topic that’s been around for a couple of years and simply won’t go away is what’s been termed a ‘broad based land tax’ – let’s call it BBLT for short.
Its most recent appearance was in an article entitled ‘Top government adviser lists reforms needed to kickstart economy,’ by Jessica Irvine in the Sydney Morning Herald on 13 June 2019. The ‘adviser’ referenced in the title is Michael Brennan, the new chair of the Productivity Commission who outlined a series of major economic reforms including doing away with stamp duty.
Stamp duty at present is paid by purchasers of property in NSW. It is the government’s most lucrative source of revenue and in 2017, a boom year for property sales, the NSW Treasury raked in $13.8 billion in stamp duty receipts. About half of this came from sales in Sydney alone. Property Council of Australia chief executive Ken Morrison described stamp duty as "Australia's worst tax", saying: "It locks people out of housing choices, creates a huge hurdle for those saving to buy and adds tens of thousands in mortgage repayments."
No wonder it’s an unpopular topic with home purchasers, many of whom are young couples who’ve struggled to save enough for a deposit only to be asked for another payment up front of up to $40,000 when stamp duty is applied. Governments at both state and federal levels have come up with a few financial cushions, such as the NSW government’s offer of stamp-duty exemptions to first-home buyers on properties under $650,000, but there’s no way the government can do without the stamp duty revenues they now receive.
The BBLT is a solution to many problems, although not one that property owners will appreciate if/when it’s introduced. Just imagine how much a tax on every property in NSW could raise; a true river of gold from property owners to the government’s coffers with little or no chance to escape payment.
The ACT has already begun to replace stamp duty with broad-based property taxes over a 20-year period. The Grattan Institute, often used by governments to provide analytical support for such moves, argues that other states should follow the ACT’s lead. It says a BBLT “could make Australians up to $17 billion a year better off, while also making housing more affordable”.
A figure extrapolated from the 2016 census data calculates there are 2,774,855 occupied private dwellings in this state. If the current stamp duty revenues of $12.8 billion were to be raised from this number of private dwellings, it would mean each dwelling would pay an average of something like $4612 per annum. And the unpopular stamp duty could be done away with, much to the delight of all property purchasers in the state.
Why is the idea of a BBLT coming up at this time? CoreLogic figures show the real decline in the value of property sales as a result of the property price falls of the past two years to be 18.5 per cent in Sydney. That could equate to a loss of something like $2.5 billion in government revenues. No government wants to cut its spending by that kind of money, so a steadier source of income has great appeal in times like these.
There’s nothing happening at present to indicate either Macquarie Street or Canberra has such a tax on its mind, and it would take a very brave government to initiate a tax that would affect every household in the state, or possibly in the nation. But it’s a subject that keeps popping up from time to time and it’s mentioned here just to keep our readers informed.
Sources:
‘Sydney 'ghost-tower' apartments increase as rental vacancies rise, market hits peak-supply,’ Nick Sas, ABC News online, 11 June 2019
‘Number of new apartments halves, shrinking supply pipeline: JLL report,’ Kate Burke, Domain, 2 May 2019
‘Real estate sector 'turns on dime' as housing prospects lift,’ Simon Johanson and Carolyn Cummins, Sydney Morning Herald, 23 May 2019
‘Shock Coalition win set to boost housing sentiment,’ Clancy Yeates, Sydney Morning Herald, 20 May 2019
‘House prices will be rising again by the end of next year, Citi says,’ David Scutt, Sydney Morning Herald, 23 May 2019
‘We have reached the bottom of the housing market but any rebound will be slow to come,’ Greg Jericho, The Guardian, 11 June 2019
‘Sydney property market ‘already bottomed out’ and bouncing back, say experts,’ Kirsten Craze, Realestate.com.au, 28 May 2019
‘It's time to ring the bell': has the housing market troughed?,’ Michael Bleby, Australian Financial Review, 15 May 2019
‘Five property pundits give their market predictions for the next 12 months – including where to buy, Cait Kelly, The New Daily, 7 June 2019
‘To buy or not to buy: Clues hidden in new housing price data,’ Jason Murphy, News.com.au, 18 May 2019
‘Home buyers urged to capitalise on lower prices while they still can,’ Aidan Devine, Daily Telegraph, 8 June 2019
‘Top government adviser lists reforms needed to kickstart economy,’ Jessica Irvine, Sydney Morning Herald, 13 June 2019
‘Housing market may bottom out over next year, Australian property experts say ,’ The Guardian, 22 May 2019
‘Almost 200,000 new homes in Sydney by 2023 - but not evenly spread,’ Jacob Saulwick, Sydney Morning Herald, 17 May 2019
‘Housing closer to the bottom, but the boom's not back,’ Clancy Yeates, Sydney Morning Herald, 29 May 2019
‘There are 80,000 reasons why Australia's property market will struggle to bounce back,’ Chris Bourke, Sydney Morning Herald, 24 May 2019
‘Housing market at its slowest in 12 years — but is that about to change?.’ Liz Hobday and Alex McDonald, ABC News online, 10 June 2019
‘House prices will be rising again by the end of next year, Citi says,’ David Scutt, Sydney Morning Herald, 23 May 2019
‘Homebuyers crying out for a stamp duty tax shake-up,’ Chris Urquhart, News.com.au, 12 May 2019
‘The hidden cost of the house price crash,’ David Ross, New.com.au, 29 October 2018
A Coalition victory, an unchanged cash rate, and signs of stabilisation
Mon, 20 May 2019An election can be a real game-changer for the Sydney property market. Or it can simply be a sign that things will continue much as they are which can also be significant. In this year’s election the Coalition’s victory means the government will not be making any major policy changes with regard to housing, bringing a sigh of relief to many investors.
The Coalition had earlier announced a new National Housing and Homelessness Agreement to work with states and territories to increase the supply of new housing, including $375.3 million in funding to help people who are homeless and need crisis accommodation.
The government will also establish a $1 billion National Housing Infrastructure Facility that will work with states and territories on funding deals with local governments for infrastructure so new homes and apartments can be developed.
The government will continue its First Home Super Savers Accounts that it says will help first home buyers save for a home deposit at least 30 per cent faster by salary sacrificing up to $30,000 per person. It will also continue to help Australians over 65 years of age who want to downsize, by enabling them to make a non-concessional contribution of up to $300,000 into their superannuation fund from the proceeds of the sale of their principal home.
A late addition to the Liberals’ offering is a plan in which first home buyers who have been able to save for a deposit of at least 5 per cent, will be able to access a government guarantee for the remainder up to 20 per cent of a house’s value. The plan will be available for singles earning up to $125,000 a year, and couples earning up to $200,000.
If it had won the election the ALP had plans to end negative gearing, except for investors purchasing newly-built properties, and would have reduced the capital gains tax discount for assets held longer than 12 months from 50 per cent to 25 per cent. Labor had also announced it would offer 15-year subsidies of $8,500 a year to investors who build new houses, with the taxpayer support conditional on the dwellings being rented to eligible tenants at 20 per cent below market rent.
Are we almost there?
Sydney’s housing fall has entered the record books with prices dropping by the biggest-ever margin on record over the past 21 months, but an end to the downturn may be in sight. Property prices are no longer falling as quickly as they once were; CoreLogic figures show that the citywide median home price dropped 0.7 per cent over April which was well below the 1.8 per cent drop in December.
CoreLogic’s head of research Tim Lawless said prices would probably continue falling for the rest of 2019 but the rate of further drops would not be as fast as before. “The data implies that housing market conditions may have moved through the worst of the downturn,” Mr Lawless said.
One indication of the Sydney market’s bottoming came from new house listings in the three months to April. The total fell 21.5 per cent compared to the same period last year, according to Domain data, and the number of new apartments dropped 24.2 per cent.
“When you get to a total listing peak in the market, it’s an indication that it’s getting closer to the bottom,” said Domain senior research analyst Dr Nicola Powell. “All areas are now seeing a decline in new listings. Some started showing this much earlier, while others … like the city and east started seeing new listings drop only this year.”
AMP Capital chief economist Dr Shane Oliver said that while his view on house prices was “quite negative” we’re about halfway through the housing price correction: “We do have more downside to go, and that’s going to have a significant negative impact on the economy,” he said. “But I’m not in the camp that says we’re doomed and about to go into recession, and there’s no helping us,” he said.
Dr Oliver told News.com’s Frank Chung that house prices will start to rebound at some time next year. Price falls of 25 per cent will bring them back to late 2014 valuations, which will entice buyers back to the market. By then, he said, we will “probably have two more RBA rate cuts”.
Deloitte Access Economics partner Nicki Hutley says we haven’t seen the end of the Sydney price falls, but we have probably seen the worst of it: “Employment is growing, wages are not strong but are actually growing — these are all signs to say this is not the beginning of something catastrophic,” she said.
Even more optimistic is Paul Bloxham, Chief Australia and New Zealand Economist at HSBC, who sees the housing market stabilising in the second half of 2019: ““Our forecasts are that national housing prices will have a peak to trough decline of around 10 to 15 per cent, so our central case is that the correction is nearing its end.”
His view is supported by recent housing-related data which has shown some signs of bottoming out when compared to last year’s accelerating tumble: “Evidence of some stabilisation in the housing market is starting to accumulate,” Bloxham said.
Matthew Hassan, Senior Economist at Westpac told the Sydney Morning Herald that the recent moderation in the downturn is broadly consistent with the improved tone from auction markets and consumer sentiment: “While much of the initial moderation in monthly declines appeared to be due to seasonality, the April update shows a clearer shift over and above seasonal variations,” he said.
RBA holds rate
Despite the financial community’s virtual certainty that the RBA would cut its cash rate at the bank’s May board meeting, the event wrapped up with the rate unchanged at 1.5 per cent. In his statement following the meeting, RBA Governor Philip Lowe said the outlook for the global economy remained reasonable, although the downside risks have increased.
“The central scenario is for the Australian economy to grow by around 2¾ per cent in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia's exports. The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices,” Dr Lowe said.
The ABC’s Ian Verrender had earlier said it was an ‘even money bet’ as to whether the RBA would cut its rate by a quarter of a percentage point, adding: “If it doesn't move tomorrow, it most likely will be next month. And there will be at least two within the next few months.”
Two factors may have been weighing on the RBA’s collective mind. The first is the federal election that fell about midway between the May and June board meetings, while the other is the simple fact that a cut from 1.5 to 1.25 per cent isn’t really going to provide much stimulus for our slowing economy. It may well have been the case that Dr Lowe decided to avoid any possible political repercussions by postponing the rate cut for a month or so, knowing it wouldn’t be a crucial delay for such a small fiscal adjustment.
The RBA’s latest Statement of Monetary Policy said the Bank is now expecting dwelling investment to contract by 6.7 per cent next year, compared to February’s forecasts of 4.5 per cent. Since the inflation rate is now only expected to reach 2.1 per cent in two years' time, a level that is at the lower end of its 2 to 3 per cent target, it’s reasonable to assume the central bank believes cuts are necessary.
Westpac economist Bill Evans said that if the RBA did not follow market expectations and chose to keep rates unchanged then underlying inflation may well fall short of the target: “It seems clear therefore that the RBA now believes that it needs to cut rates to barely achieve an acceptable outcome,” he said.
The Reserve Bank does its best to keep an eye on the country’s economic health from a number of perspectives. One of the key metrics is the state of our housing market which of late hasn’t been exactly robust. In fact, the RBA has warned that if property values continue to fall heavily, particularly in Sydney and Melbourne, it could force many borrowers into a state of "negative equity" where the amount owing on a homeowner's mortgage is higher than the value of their property.
The situation’s not critical at present; the central bank says the incidence of negative equity is relatively low with just over 2 per cent of borrowers in that situation. In the RBA’s view, housing prices would have to fall "significantly further" for negative equity to become widespread.
Another concern for the RBA is the rise in mortgage stress being felt by householders beset with a higher cost of living and no increase in wages to compensate them. Research from data crunching firm, Digital Finance Analytics (DFA) shows that a record number of Australian households — more than a million, which is one-third of all home owners with a loan — are experiencing some degree of mortgage stress.
International ratings agency Moody's says that Australia's mortgage delinquency rate has reached its highest level in five years, with 1.58 per cent of people at least 30 days behind on their mortgage repayments when surveyed late last year. Moody's says the mortgage delinquency rate will keep rising because of high debt levels, low wage growth and the conversion of many interest-only loans to principal and interest this year and next. But it still expects mortgage delinquencies to remain low overall, given the current rate of economic growth and low unemployment.
Regardless, housing prices in Sydney are still declining and economists are concerned this drop in households’ perceived ‘wealth’ will spill over into reduced consumer spending. If households cut back on their weekly shopping outlays the whole economy could feel the pinch with a resultant rise in unemployment and strain on government revenues.
Delays at the top
At the prestige end of the Sydney market - $3 million-plus, the housing downturn has created some delays, both in the time it takes to sell a home and in the additional time needed for pre-sale advertising campaigns. Domain says that it’s now taking an average of 85 days to sell homes in the prestige market, up 18 per cent on last year, while discounting from the advertised price to the actual selling price has reached ten per cent.
AMP Capital’s chief economist, Shane Oliver, says this proves the prestige market isn’t as bulletproof as it seemed earlier: “Things like increased supply in apartments, tighter credit conditions and fewer foreign buyers are still likely to impact the prestige market, as they are the broader market, but what’s having a greater impact at the high-end is an uncertain economic outlook, volatility in the sharemarket and a decrease in bonuses in the financial market.”
The desirable Sydney suburb of Mosman has seen the average sales campaign increase by 24 per cent to 98 days over the past 12 months with discounting rising from 6.1 per cent a year ago to ten per cent now. Woollahra has seen an increase of 12.7 per cent in days on market to 62 days and selling times in Hunters Hill have gone up to 48 days, an increase of 11.6 per cent.
However, it's still true that the broader housing market in price levels below the ‘prestige’ end have copped the biggest impacts from the downturn. The citywide median house price as calculated by Domain has come down 11.5 per cent to $1,027,962 which means that since the peak in 2017, it has fallen 14.3 per cent. Days on market for the average property have increased by 51 per cent and discounting has increased from 5.5 per cent a year ago to 8.2 per cent now.
Domain’s latest quarterly house price report tells us that Neutral Bay and Mosman have enjoyed the city’s biggest price gains in the order of 6 per cent, while Gladesville and Epping have seen the biggest declines of around 18 per cent.
Domain senior research analyst Nicola Powell said that buyers are beginning to take advantage of Sydney’s falling prices: “Buyers have had a falling market for some time. There has been renewed interest because buyers are seeing value and are feeling they are towards the end of the downturn.”
Dr Powell says there is a ceiling price for suburbs: “If a price is too high, buyers will move further afield and re-evaluate, making those life changes to provide a better lifestyle for their families,” she said.
Happier returns
Domain’s Kate Burke has released data that shows pockets of Sydney and Melbourne are showing investors receiving better returns from their properties as housing prices fall. In fact, the latest Domain Rental Report shows that all capital cities, with the exception of Brisbane, are delivering better rental yields.
The report shows that Sydney’s gross rental yield for houses has increased from 3.29 per cent in the December quarter last year to 3.32 per cent in the recent March quarter. The year-on-year gain in Sydney has grown by 5.3 per cent.
Units are showing a similar picture. Sydney’s rental yields for units have grown from 3.9 per cent in the December 2018 quarter to 3.97 per cent in the March 2019 quarter. The year-on-year gain is up by 2.7 per cent – not a massive gain but still going in the right direction for investors.
The Agency’s national director of property management Maria Carlino said investors looking to buy an apartment in Sydney needed to choose the right property and be competitive with their rental price: “Yields would be higher on older apartments, but it depends on where it’s positioned,” Ms Carlino said. “You’ll probably find newer apartments have more outgoings, higher strata … you might be able to get more in rent but the cost of it is more.”
The departure gate
The ever-increasing costs of living in Sydney are driving the city’s inhabitants to other parts of the country, mostly to Queensland, according to data compiled by the Australian Bureau of Statistics (ABS). Statistics from the September 2018 quarter revealed that 11,490 people moved from NSW to Queensland, with another 8126 heading south to Victoria. ABS figures from the July quarter last year showed the same trend: 12,802 people fled NSW for Queensland while 8126 headed for Victoria.
The cause for much of this demographic shift is the high cost of housing in Sydney, with a new survey by RateCity.com finding that 23 per cent of Millennials would move interstate so they would be able to buy their first home or upgrade to a bigger one. The survey also found 20 per cent of Gen Xers would also be willing to relocate due to Sydney’s housing unaffordability.
RateCity.com.au researcher director Sally Tindall told News.com that the other capital cities have lower entry-level housing market prices so it takes less time to save for a deposit to acquire a property: “It takes almost double the time to save a deposit in Sydney as it does in Brisbane, and it’s a similar story in Adelaide, Perth, Hobart and Darwin,” she said.
“You can afford a nice family home without having nothing left over. It gives people breathing space and financial options that you might not get in Sydney and Melbourne; Prices have come down in Sydney, but even with that, it’s still hard to get on the ladder,”
Affordable housing needed
Sydney has a huge backlog in social and affordable housing after decades of undersupply, according to research fellow Laurence Troy from the University of New South Wales City Futures Research Centre. His research concludes that Sydney needs to find room for 200,000 more homes for low to moderate-income earners who are now facing chronic rental stress.
“Social housing doesn’t currently deliver enough to even maintain the same share [of the market] and while affordable housing is being built by the community sector, it’s not enough to meet the current unmet backlog,” Dr Troy told Domain’s Kate Burke.
The study found the biggest area of need is the inner south-west, where 33,600 homes are needed within the next two decades just to keep up with demand at that income level. The Parramatta region and the south-west also have a lack of appropriate housing and face a shortfall of 28,000 and 23,000, respectively.
Anglicare Australia’s Executive director Kasy Chambers said a lack of affordable rental properties had created a crisis for people on low incomes: “It’s the worst it’s been. We’re looking at the bottom end of the market and that never gets cheaper because we have more demand than supply and rents fall off at the top end. Rents don’t fall at the bottom end.”
She said there was an alarming change in rental affordability for people on a minimum wage. “We’ve really seen the affordability drop there, which is really disappointing because we didn’t use to register the minimum eight years ago,” Ms Chambers said, adding that more investment is needed in social and affordable housing rather than in tax breaks for investors in the private rental market.
Community Housing Industry Association chief executive Wendy Hayhurst says government action is urgently needed to build a further 117,000 properties across NSW: “It’s a huge total, but if we turn our back on it, all it will do is get bigger and bigger, and more difficult and more difficult to solve … it won’t go away,” she said.
To create such a huge amount of social and affordable housing would cost many billions of dollars. The report indicates governments would need to come up with something like $3.3 billion a year to meet demand; more than $1.2 billion would be needed for housing in Sydney alone.
A spokeswoman for NSW Social Housing Minister Pru Goward said the government would deliver 23,500 new and replacement social and affordable housing dwellings over the next ten years, while an extra 3400 homes were expected to be delivered by community providers under an affordable housing fund.
Both major political parties seem to be aware of the need for more affordable housing. Before the election the Coalition renewed its promise from last year’s budget to give $1.6 billion to states and territories for the National Housing and Homelessness Agreement and pledged extra money to NSW for community housing regulation.
In its pre-election promises, the Labor Party said it would offer tax concessions intended to support the introduction of a build-to-rent market in Australia which it says will lower rental costs by encouraging institutional investors into the sector. It would do this by halving the managed investment trust tax from 30 per cent to 15 aims to balance the impact of the proposed changes to negative gearing and capital gains tax.
Dr Troy expressed his belief that if government focuses on the supply of affordable dwellings it would both support Australians struggling with housing costs and strengthen the now-declining construction market: “A properly designed, large-scale, not-for-profit program could mean investing in new housing becomes a positive for state and national balance sheets,” he said.
“In short, the evidence-based economic case for government investment in social and affordable housing is strong. Given the impending fallout of a property bust following the largest property boom in Australian history, now is the time to act and reshape the nation’s housing system for the long term.”
Sources:
‘Labor says it will match Coalition's deposit scheme for first home buyers,’ Sarah Martin, The Guardian, 12 May 2019
‘Sydney vendors sit on their hands, taking new listing numbers back to 2004 levels,’ Kate Burke and Lucy Macken, Domain, 10 May 2019
‘Property slump steers RBA towards 1pc cash rate,’ Jonathan Shapiro and Matthew Cranston, Australian Financial Review, 10 May 2019
'The correction is nearing its end': Property prices will soon be at rock-bottom, says HSBC,’ David Scutt, Sydney Morning Herald, 11 May 2019
‘Australian dollar headed for a fall as Reserve Bank mulls interest rates cut,’ Ian Verrender, ABC News online, 7 May 2019
‘Rental yields on the rise across capital cities: Domain data,’ Kate Burke, Domain, 16 April 2019
‘The Sydney suburbs where house prices have risen and fallen most,’ Tawar Razaghi, Domain, 3 May 2019
‘Worst of housing slump has passed as property price falls begin to slow,’ Aidan Devine, realestate.com.au, 2 May 2019
‘Property ‘armageddon’: House prices could fall by 50 per cent,’ Alex Brooks, News.com.au, 16 April 2019
‘Annual rental affordability survey finds worst results for low income earners in 10 years,’
Tawar Razaghi, Domain, 28 April 2019
‘Sydney faces shortfall of more than 200,000 homes for low to moderate-income earners, report shows,’ Kate Burke, Domain, 13 March 2019
‘Property faces a ‘day of reckoning’ if Labor scraps negative gearing — hurting every Australian,’ Shannon Molloy, news.com.au, 5 April 2019
'We've never seen it as bad as it is': Researchers warn of rising mortgage stress,’ David Taylor, ABC News online, 5 April 2019
‘Property owners risk falling into 'negative equity' if downturn worsens, Reserve Bank warns,’ Peter Ryan, ABC News online, 13 April 2019
‘RBA warns on debt, falling house prices,’Eryk Bagshaw, Sydney Morning Herald, 13 April 2019
‘How an interest-rate cut could change the housing market,’ Jason Murphy, News.com.au, 5 May 2019
‘Sydney’s prestige property market feeling ripple effect of wider downturn,’ Lucy Macken, Domain, 23 March 2019
‘Thousands of people are fleeing Sydney each month as the city becomes unliveable,’ Shannon Molloy, news.com.au, 10 April 2019
‘Federal budget 2019: Government slammed for lack of affordable housing measures,’ Lucy Bladen, Domain, 4 April 2019
‘Housing explainer: Labor and Coalition policies on negative gearing and capital gains tax,’
Charis Chang, News.com.au, 6 March 2019
‘Federal election 2019: More bosses than teachers get negative gearing tax breaks, ATO figures show,’ Elizabeth Redman, Domain, 25 April 2019
‘Labor proposes slashing build-to-rent tax to provide cheap rent for Aussie families,’ James Hall, News.com.au, 13 April 2019
Prices down, construction down, even interest rates may finally come down
Fri, 12 Apr 2019So, just how bad is the Sydney housing price fall? So far, it’s a good example of the old adages: “What goes up must come down”, and “The bigger they are, the harder they fall”. We enjoyed the ride up, but the ride down isn’t much fun.
It’s notable that Sydney has had the biggest yearly slump of all Australian capital cities. According to The Guardian’s Greg Jericho, residential prices fell an overall 7.8 per cent in 2018 which was the biggest 12 months fall of all capital cities in the past 15 years. Other analysts quote higher rates of decline. Sydney also led the country in price falls in established dwellings: houses down 8.4 per cent and apartments down 6.4 per cent.
In 2019 our city isn’t faring much better. There are more properties on the market and fewer buyers. According to Domain senior research analyst Dr Nicola Powell, the number of units on the market across Sydney is up more than 20 per cent year on year, while houses are up almost 13 per cent.
BIS Oxford Economics says the current price fall in Sydney – 3.7 per cent so far this year, is about twice as fast as historical averages. The research firm’s senior manager, Angie Zigomanis explains: "Investors were a key driver of price growth through their upturns, and the fall in investor demand is now underpinning the decline in prices.
"The weakness in prices and likely concerns about further falls will continue to play on purchaser sentiment through 2019, with further price falls in Sydney and Melbourne expected."
Factoring inflation into the price falls, Mr Zigomanis says that in real terms, Sydney house prices have declined 16 per cent since the last peak in June 2017, which is about three-quarters of the average real decline in prices during previous downturns of 21 per cent. However, he also notes that the longest downturn recorded was 23 quarters during the first half of the 1980s, which resulted in a total real house price decline of nearly 34 per cent, so for those of us with long memories we’re still not record-beaters. Not yet.
Shane Oliver, chief economist and head of investment strategy and economics at AMP Capital, told news.com’s Frank Chung that the past 18 months of steep declines in the New South Wales capital shouldn’t be called a ‘property crash’: “To put it into perspective, prices are really just back at 2015 levels and on track to go back to 2014 levels. We had many years of very strong gains. We’re giving back some of that.”
Dr Oliver says a “crash” was what we saw at the time of the Global Financial Crisis, although he still expects the fall in Sydney prices to continue into 2020 and hit a total of 20 per cent from the market’s peak by the time recovery begins: “Hopefully all of this takes us back to what’s a more affordable market rather than a speculative one. My judgment is that it will be a more measured market, the recovery stage.”
A slightly more optimistic outlook comes from the analysts at Moody’s Analytics who say house prices in Sydney will bottom out in the September quarter of this year, before beginning a moderate recovery in 2020. They foresee a 9.3 per cent fall in house prices and 5.9 per cent slide in unit prices over 2019, before a 3.6 and 4.2 per cent rebound respectively in 2020.
Regardless, global investment bank RBC Capital Markets has done its own calculations and says that sales of houses and apartments in NSW were 40 per cent lower in January than a year earlier. It also says that so far in 2019 sales have fallen by about 26 per cent. This would indicate that the Sydney property market is even weaker than indicated by the 10 per cent fall over the past year calculated by research firm CoreLogic.
What’s selling?
Falling prices, of course, always bring out those bargain-hunters with access to sufficient capital to take advantage of an opportunity. The summer just past saw sales of more than 120 properties a day; between December and February around 11,000 homes were sold in greater Sydney, so the market was anything but dormant.
Domain’s analysis of sales data from that period show that three-bedroom houses were the most common property traded with 2850 sales during that 90-day period. The Agency’s director of sales Thomas McGlynn explains why: “It appeals to nearly every single type of demographic in the marketplace - investors, families, to single professionals and couples after more room … so there’s consistent turnover of that type of property.”
The figures from Domain also showed that four-bedroom houses and two-bedroom apartments were next in demand, with about 2700 and 1750 deals made respectively. Interestingly, other unit sales were far less common, and five-bedroom houses were more in demand than all the other apartment types. As investors withdraw from the market and house prices come down, apartment sales are becoming less common and buyers are opting for a more traditional dwelling.
“There is a tailwind in terms of the demographics, especially the baby boomers who have more capital, as they make that transition to apartments for lifestyle reasons,” David Chin, founder of investment advisory firm Basis Point, told News.com.au’s Frank Chung.
“The larger two- and three-bedroom apartments still have a market. In Europe and (places like) Paris, it is quite common for apartments to be very large, three bedrooms, almost like homes. It sets the higher density living in three- four-, five-storey buildings, not high rises. It works and I think that will be more common in Australia,” he said.
REA Group chief economist Nerida Conisbee said concerns about apartment quality, amenity and overdevelopment have led to a number of states implementing minimum size requirements in the past few years to clamp down on so-called “dog boxes”.
Ms Conisbee said the changing environment meant developers were now having to set their sights on the three owner-occupier groups — first homebuyers, downsizers and upsizers: “Downsizers are a key market, what they’re looking for is often quite bespoke apartments. They want greater choice in the layout, bigger apartments, they’re a bit more fussy about the type of fit-out,” she said.
Some other statistics show a shifting landscape for Sydney property. Of all the properties sold last summer, about 40 per cent of units and 23 per cent of houses were priced at or below $650,000 which is the cut-off point for the first-home buyer stamp duty exemption. There were more houses sold at the lower end of the market, which is around $750,000, than at the $1 million mark.
So, with investors pulling out, and by so doing putting a number of cheaper properties on the market, it’s first-home buyers that are driving the demand for lower-priced properties. Expensive apartments have diminished appeal for those first-home buyers or for owner-occupiers who sell their houses and want to downsize.
In which areas are investors likely to offload their properties? An online property research platform, Sell or Hold, has used what it calls a ‘sophisticated algorithm’ to identify areas likely to have negative growth out to 2020. The firm’s head of research, Jeremy Sheppard, says their modelling is based on those old industry staples of supply and demand.
“If demand exceeds supply obviously prices go up, the other way round they die. What we’re looking for is markets that have the lowest demand to supply ratio, markets which over the next three years are unlikely to keep up with inflation and some might go backwards,” he said.
According to their analysis, 13.2 per cent of NSW markets are likely to record negative growth over the next three years. It’s a subscription service, so to read their predictions about a given area will cost something, but RealEstate.com.au chief economist Nerida Conisbee said the firm’s modelling was “interesting.”
“It’s definitely justified if you’re in Sydney,” she told News.com.au’s Frank Chung. “The market has taken a pretty sharp turn and prices have fallen quite a bit already. The negativity in the media is not really helping at the moment.”
Mothballed projects?
For anybody living within 10km of the Sydney CBD and anywhere near a transport facility, there’s a good probability they’ve seen their suburb grow at least one large block of apartments, and in some cases a whole forest of towers up to 40 storeys high. Apartment construction has been a massive driver of construction and therefore employment over the past five years.
But property price falls and the consequent drop in demand for apartments has meant an accompanying drop in construction; many existing projects under construction are at the risk of being ‘mothballed’ until the market picks up again, and there’s now a serious risk of oversupply in some parts of Sydney.
Scott Gray-Spencer, local head of capital markets at the global real estate firm CBRE, told ABC's The Business: "Areas of oversupply will see a bit more chaos in the next six to twelve months."
The reason’s simple. The usual pattern is that developers purchase a building site, then spend the next 12 months or so on planning and marketing their project. Once around 80 per cent of the development has been pre-sold, finance will be obtained, and construction can begin.
At this stage the developer has the buyers’ deposits but still has to get the balance of their contract price to complete the deal. If, by the time construction is complete and the balance is due, the valuation of the new apartment is less than the original price, the banks will not be willing to finance the full amount of the difference. They may finance a lesser amount and the buyer will have to put up the new, higher amount of the difference; the buyer may also decide to forfeit the deposit and not risk paying full price for a devalued asset.
“At the moment we're seeing a lack of sales in the marketplace," Luke Mackintosh, partner with EY Real Estate Advisory Services told ABC News. "There's a lack of foreign buyers, a lack of investors and not much confidence in the marketplace for first home buyers, and hence [previous] sales rates of 24 to 30 a month are lucky to be one or two a month on a project."
He’s also telling his clients that this is a good time to snap up development sites on the cheap because in two years' time they'll be rewarded by demographics: "We have 50 per cent of the population that are under 35; 35 per cent of millennials still live with their parents. The oldest of the millennials are turning 35 this year. They are the buyers' market. They are the market that developers will be selling into."
RBA’s response
The RBA is concerned that the downturn in property markets across Australia will affect the country’s financial stability. The Bank's assistant governor Michelle Bullock said the increase in apartment construction since the start of the decade could potentially be "sowing the seeds of a decline" now that prices are falling in both Sydney and Melbourne.
Her concerns are accurate, if a bit late: “[This increase in construction] ultimately sows the seeds of a decline in prices which, if large enough, results in development becoming unattractive, new supply falling and the cycle starting again.
"Our main concern with this from a financial stability perspective is the potential for this large influx of supply to exacerbate declines in housing prices and so adversely impact households' and developers' financial positions."
Well, yes. The greatly increased supply of housing is indeed putting pressure on prices and as a result they’re falling. To quote Ms Bullock: "The apartment market is quite soft in Sydney; apartment prices have declined since their peak, rental vacancies have risen, and rents are falling."
One key reason property prices have fallen is that borrowers are finding it harder to borrow the money they need, and loans that used to require a deposit of ten per cent now need twenty per cent deposit or even more. The RBA’s talks with the banks found that, on average, the maximum loan size offered to new borrowers had fallen about 20 per cent since 2015 and only 10 per cent of people borrowed the maximum they were offered.
The RBA’s own economists, Trent Saunders and Peter Tulip, have said that the recent tightening of credit limits - which banks have introduced themselves in reaction to direction from banking regulators and the RBA - "seems to be important in the decline in house prices in 2018".
And once again, at its April meeting, the RBA kept its cash rate at 1.5 per cent, just where it’s been for 32 months. However, Westpac’s Bill Evans said the RBA Governor’s monthly statement contained a “significant” change in language when Governor Lowe said: “The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time”.
Mr Evans said this statement was a “very clear intention to signal that policy is much more ‘live’ than has been the case since the Governor was appointed”. He also said Westpac expected a downgrading of the Bank’s growth forecasts in its May statement.
The International Monetary Fund (IMF) says the Reserve Bank was right to shift from a tightening bias to a more neutral stance given weaker-than-anticipated GDP figures for the fourth quarter and "signals of weakness" elsewhere across the economy. Dr Thomas Helbling, the IMF’s lead analyst for Australia, told the Australian Financial Review: “"I think the question is: will it need to change the monetary policy stance, and I think they are looking at that."
What happens if the Bank’s projected growth rate of three per cent for 2019 falters? Westpac’s analysts hold the view that “that the RBA is on track to adopt an easing bias in May and [will] cut the overnight cash rate in August and November.”
Political possibilities
It’s usual for the property market to experience a brief pause before a federal election. Even if the outcome isn’t expected to impact the buying and selling of real estate, people seem to want to know who’s won before they get back to being concerned about such things as house prices and property auctions. But this year’s a bit different.
There’s no certainty of a particular party winning or losing the May 18 election, although if a majority of Canberra watchers are correct the Coalition’s time is about up and May will see a change of government. But there was little in the Budget papers announced 2 April that would reassure Sydneysiders their housing market would recover soon.
“Uncertainty about the outlook for the housing market, in particular the extent to which housing prices fall, poses a downside risk to the forecasts for both dwelling investment and consumption,” the budget papers read, indicating that the government expects buyers will hold off purchasing a home until they’re sure the market’s hit bottom.
This time around, one of the two major parties contesting the 2019 federal election has a set of policies that will most certainly affect the Sydney property market and have financial implications for investors, developers, builders and almost everybody else in the industry if it’s elected.
First, it must be noted that changes to our governmental policies on housing are overdue. Even after the recent price falls, the cost of housing in Sydney is at unaffordable levels for many who live here. This isn’t helped by having rents so high that they make it hard for many families to save a deposit for a home.
The Conversation’s Duncan Maclennan and Hal Pawson did their homework to analyse the twin problems of falling home ownership rates for young adults and long-term declines in home ownership affordability. They found that: “In Sydney in 2017, moderate-earning and low-earning tenants paid, on average, more than $6,000 a year in rent over and above 30 per cent of their incomes. And that still didn’t spare them the growing costs and lost productivity of commutes commonly exceeding 90 minutes.”
They concluded that this situation reduced economic productivity by blocking people’s opportunities and capabilities. They saw an emerging perception that growth dividends had been directed into raising the prices of land and housing through investor speculation. The few attempts by governments to redress this – with subsidies and tax concessions, have proven counterproductive because they have ultimately driven up demand and therefore prices.
Politicians of both major parties have, over the years, recognised voter dissatisfaction with the increasing difficulty of obtaining suitable housing at reasonable cost. They have responded with a range of measures that may have been well-intended but, to put it simply, haven’t fixed the problem and may well have made it worse.
This year’s federal election will give voters the chance to vote for Labor’s proposed changes to the present system of negative gearing and capital gains taxation. Under their plans, negative gearing will be restricted to new properties only, and the present capital gains tax discount of 50 per cent will be reduced to 25 per cent. These changes will be ‘grandfathered’ and will only apply to properties acquired after January 1, 2020.
Domain’s Trent Wiltshire summarised his expectations of the outcomes if Labor’s policies become law: “Prices are likely to be pushed lower in the short run, rents wouldn’t change much, and housing construction would decrease in the short run due to prices falling, but might rise a bit in the long run.”
These are significant changes, intended to better equalise the positions of first-home buyers with investors and, by reducing demand, should cause property prices to stabilise or even fall. We read on the Labor party’s website: “This policy will see a boost in new housing and will provide young families with the chance to find a home and will take pressure off inner-city housing markets that are predominantly made up of existing dwellings.”
Mr Wiltshire quantifies the hit to property prices if Labor’s housing policies are implemented: “The total impact on property prices of Labor’s policies is in the range of prices falling 3 to 7 per cent lower than they would otherwise. Importantly, these price falls have mostly been “priced in”, meaning much of it has already occurred as investors predicted that Labor’s policies were likely to become law.”
As we would expect from politics, there’s another and quite opposite side to the argument. The Property Council says it is still "strongly opposed" to the proposal and its possible impact on the housing market and broader economy, particularly around new housing construction.
A Cadence Economics report commissioned by Master Builders Australia, has forecast a decline in new home building of between 10,000 and 40,000 dwellings and a loss of 7500 to 32,000 full-time construction jobs if Labor’s changes are enacted. Another report from SQM Research says the changes will cause property prices to fall nationally by between five per cent and 12 per cent by 2022.
Not surprisingly, Federal Trade Minister Simon Birmingham says the start date of Labor's policy would be a dark day for home owners: "Labor's policy announcement today is [that] January 1, should a Labor government be elected, can be marked in the diary as the time in which Australian home owners will see the values of their properties diminish and renters will see the price of rent increase," he said.
Chief economist and head of investment strategy and economics at AMP Capital, Shane Oliver, thinks the timing of any changes is of prime importance. He agrees there will be downward pressure on property prices because of Labor's proposed changes, but he is concerned that, with property prices already falling, this could be the wrong time to make changes to tax breaks for property investors: "The risk is that it just adds to the perfect storm that's around property prices at the moment - that it adds to the uncertainty and pushes prices down even further.
“We all want more affordable housing. Even I think it's unfair that young people have to pay so much for housing, but we don't want that increase in affordability to happen so quickly that it damages the economy," said Dr Oliver.
Sources:
'Delicate': IMF warns on property slide,’ Jacob Greber, Australian Financial Review, 8 April 2019
‘Australian property market contracting faster than predicted according to IMF analyst,’By 9News, 9 April 2019
‘House prices set to fall another 10pc before 2020 rebound, Moody's Analytics says,’ Michael Janda, ABC News online, 10 April 2019
‘The true extent of the house price ‘collapse’ and what happens next,’, Shannon Molloy, news.com.au, 11 April 2019
‘Sydney rent prices remain flat, tenants have upper hand,’ Kate Burke, Domain, 11 April 2019
Labor’s negative gearing and tax reforms: what will it mean for the property market?,’ Trent Wiltshire, Domain, 25 March 2019
‘Multi-property-owning landlords grow as negative gearing wanes,’ Shane Wright, Sydney Morning Herald, 29 March 2019
‘Labor to make negative gearing and capital gains tax changes from January 1, 2020 if it wins election,’ Kate Burke, Domain, 29 March 2019
‘Federal budget 2019: Little for housing affordability amid property slowdown,’ Elizabeth Redman, Lucy Bladen, Domain, 2 April 2019
‘Bill Evans: RBA readying rate cuts,’ Macrobusiness, 3 April 2019
‘House prices keep dropping – and there's no end in sight,’ Greg Jericho, The Guardian, 21 March 2019
‘Half-built blots on the landscape are testimony to the construction slowdown ... and it will get uglier,’ Phillip Lasker, ABC News Online, 21 March 2019
‘Australia's $133b property price slide rapidly becoming the worst in modern history,’ Michael Janda, ABC News online, 19 March 2019
‘NSW's property downturn is worse than it looks,’ Aaron Patrick, Australian Financial Review, 4 March 2019
‘The types of properties and prices most popular in Sydney over summer,’ Kate Burke, Isabelle Chesher, Domain 17 March 2019
‘Research firm names top five suburbs in each state where investors should ‘consider offloading,’ Frank Chung, News.com.au, 27 February 2019
‘Sydney apartments pose financial stability risks, says RBA,’ Eryk Bagshaw, Sydney Morning Herald, 20 March 2019
‘RBA boss Philip Lowe unconcerned about falling house prices, points finger at reduced supply,’ Tawar Razaghi, Domain, 6 March 2019
‘RBA research shows rate cuts inflated the property market,’ Shane Wright, The Age, 12 March 2019
‘Labor's negative gearing changes will force property prices down and rent up, study says
7.30,’ Carrington Clarke, ABC News online, 22 March 2019
‘RBA holds cash rate for 31st month,’ Stuart Condie, AAP release on News.com.au, 5 March 2019
‘Property downturn spells the death of the ‘dog box’,’ Frank Chung, News.com.au, 23 March 2019
Property prices await elections, a rate cut, and the return of investors
Thu, 14 Mar 2019Most property cycles in recent years have seen the Sydney market recover pretty quickly after a period of price correction. For a time, people don’t want to sell their houses in a falling market and buyers hesitate in case the prices are going to go lower, so the whole market turns quiet before it regathers, and then the next upwards cycle begins.
Appearing before a parliamentary committee in Canberra, Westpac chief executive Brian Hartzer described the current market correction as a “cyclical adjustment after six strong years of growth, that so far regulators and banks are managing reasonably well”.
He added: “We see this as a natural response to a recent increase in the supply of housing, along with a fall in foreign investor demand and increased uncertainty about future returns from housing investment after a significant run-up in prices.”
One outcome is that there has been a dramatic increase over the past year in how long properties are taking to sell. More than 83 per cent of all properties in Sydney have been on the market for more than 60 days, an increase of almost 10 per cent on 2018.
Domain’s Kate Burke writes that Sydney home owners across Sydney are cutting prices at a rate not seen in a decade in response to mostly negative predictions for the state of the housing market.
“The average discount on initial prices is 8.2 per cent, or $87,134, for houses and 8 per cent, or $56,160, for apartments. House sellers have not discounted at this level since January 2009, while apartments have not had discounts like this since 2006.”
That’s not to say all Sydney suburbs are affected to the same degree. Auctioneer and real estate adviser Robert Klaric, of thepropertyexpert.com.au, says the market has two speeds at the moment: “Blue-chip areas like Manly, Mosman, Bondi, Hunters Hill, have weathered the storm because the stock level is low and because sellers have said, ‘I am not going to put it on the market unless I get a premium’. But any property 15 to 20 kilometres from the CBD is struggling.”
Property researcher CoreLogic says data for January showed Sydney prices were now 12.3 per cent down from their peak in July 2017 - not as fast nor as severe as feared earlier, but the downward direction is still inescapable and the bottom’s not yet in sight.
Projected figures, based on CoreLogic's daily price index over February, indicate a "moderate slowdown" in the falls recorded from the previous two months, according to Cameron Kusher, research analyst at CoreLogic.
"It's slowed moderately, and we've been of the opinion you won't continue to see those types of monthly falls over the next year," Mr Kusher said as he delivered one of the few traces of optimism in recent weeks.
In times like these the doomsayers come out of their caverns and vie with each other for the most shocking prediction of the price correction’s outcome. One such prediction comes from LF Economics founder Lindsay David who anticipates a ‘property bloodbath’ and says Sydney prices could fall by up to 25 per cent in calendar 2019 alone.
“We think there’s a chance property prices could fall by half in Sydney and Melbourne over the long run,” Mr David said to News.com’s Frank Chung. “I wouldn’t be surprised by falls of at least 40 per cent. When all hell breaks loose you’ve only got so many buyers out there.”
Other experts are less pessimistic. Tim Lawless, the head of research at CoreLogic, expects a peak-to-trough fall of up to 20 per cent for both Sydney and Melbourne before prices start to level out in 2020. "There's not as many buyers around which simply means the rate of absorption is quite low,” he told the ABC’s 7.30 Report.
"While new listings are tracking really low, particularly compared to a year ago, the total number of homes being advertised for sale is actually really high. It's the highest level we've seen since 2012, which was the last time the housing market was in a downturn," he said.
"I don't think we're at the bottom of the market just yet. We're not seeing any evidence that the market's about to turn around, we're not seeing any evidence that credit is about to loosen either. All the credit flows data that's publicly available through the RBA or through the ABS statistics is showing a fairly dramatic and consistent decline."
As Mr Lawless suggests, there’s little to smile about in the latest lending statistics from the Australian Bureau of Statistics. They show new lending to owner occupiers fell 6.4 per cent during December 2018, outpacing the decline in lending to property investors which fell by 4.6 per cent. The total value of new lending to households has dropped 19.8 per cent in the past year which is the biggest annual fall in home loans since the global financial crisis.
Banking on a rate cut
The Reserve Bank (RBA) has recently cut its key economic forecasts for the next two years as risks to the Australian and global economies grow. The RBA now says it believes economic growth will reach a top of just 2.75 per cent in 2020; this is well down from its forecast of 3.25 per cent growth in its last statement released in November.
One of the primary reasons for this drop is the continuing falls in house prices in Sydney and Melbourne and their impact on the rest of the economy: "The current correction in the housing market is a significant area of uncertainty," the RBA said in its February statement on monetary policy.
"Housing prices nationally had increased by almost 50 per cent over the five years to September 2017, and they have fallen by around 8 per cent since then. The implications of the housing market correction for the broader economy depend on how households respond, including how they take previous price increases into account in their spending decisions."
The RBA says that Australia’s housing correction is the result of four main factors: a drop in foreign buyers, stricter lending practices, a surge in properties on the market and increasingly stretched household incomes.
The RBA’s worry about house prices, and the fact that Sydney’s housing market continues its lacklustre performance, means that financial markets are increasingly convinced the next move in interest rates will be down, with a rate cut to 1.25 per cent expected by 2020, if not sooner.
However, Westpac’s chief economist Bill Evans predicts two cuts in interest rates this year as falling house prices create a “negative wealth effect” that could drag down the whole economy. He says the cuts are most likely in August and November and they would reduce the cash rate to a new record low of just one per cent.
“The decision by the Reserve Bank Board to accept the possibility that interest rates could fall further, despite the current record low levels, is profoundly important. Westpac now expects the Reserve Bank to cut the cash rate by [0.25%] in both August and November this year,” he said.
Investors still here
The ABC’s Philip Lasker says that property investors have been battered by a ‘perfect storm’ of falling prices and tighter credit: “In the heady days of the property boom, as big city house prices jumped ahead in leaps and bounds, investors reigned supreme, swatting away first home buyers with their superior purchasing power.
“It was a win-win for the investing class. They had willing banks and favourable tax laws working for them, pumping up property prices and capital gains in a virtuous circle.”
Mr Lasker said that investors are important players in Australia's property market, representing about 42 per cent of total mortgage demand: “A significant shift in investor sentiment could lead to a serious downturn in the property market with job losses in the labour-intensive construction sector, not to mention the serious knock-on effects to the services such as architects and lawyers, as well as retailers who sell household goods.”
AMP Capital chief economist Shane Oliver said both supply and demand contributed to the overall decline in home lending last year. “The banks have made it harder to get a loan but there’s also less demand for loans. A lot of that weakness is concentrated in investors,” Dr Oliver said.
A decline in investment home loans made up the lion’s share of the home lending downturn, recording a 27.8 per cent drop in the past year: “They’ve lost a bit of interest with the expectation prices are still falling,” Dr Oliver said.
Banking giant UBS has warned that Australia’s falling house prices could be about to plummet even lower still as investors retreat from the market. “While investors corrected from a record more than 40 per cent share in 2015, to 28 per cent now, they remain high globally.”
ABS chief economist Bruce Hockman told Domain: “The slowdown in lending for investor dwellings this month continues the steady decline over the past two years, with the value of new investor loan commitments down around 40 per cent from the peak at the start of 2017.
BIS Oxford Economics managing director Robert Mellor says it’s possible some investors are sitting on their hands awaiting the outcome of the federal election and potential changes to negative gearing, but it was unlikely they would rush back if the current tax settings remained because there was little growth on the horizon.
He added that, for the same reason, if negative gearing were to be scrapped by a Labor government, the impact shouldn’t be significant because investors had less market share than in previous years.
Commonwealth Bank senior economist Gareth Aird says that as prices continue to fall, he expected investors would make their way back to the market as increasing yields would become more appealing: “I’m sure there are some investors sitting on the sidelines, just waiting to see the result of the election [and potential changes to negative gearing],” he said.
CoreLogic's head of research, Tim Lawless, says it’s hard to see investors abandoning the property market just yet because most of them are in for the long haul and the transaction costs are high.
'In any sort of downturn, you would generally see investors riding it out looking for that long-term capital gain and hopefully trying to improve their yield as they pay down their principal," Mr Lawless said.
"And are there better places to put your money? At the moment, probably not."
ASIC gets active
The Australian Securities and Investment Commission (ASIC) has stepped up its battle with the major financial institutions with a 50 per cent increase in the number of investigations of misconduct over the past year. This poses a threat to the banks’ ability to make home loans, one of their biggest sources of profits.
If ASIC loses an upcoming case against Westpac – perhaps going to trial later this year, it says it will ask the government to make changes to mortgage rules that could ultimately make it harder and more expensive for borrowers to get a home loan. The focus of this landmark case is the allegation that Westpac did not give proper consideration to borrowers’ spending habits before approving their home loans.
Any changes to current legislation that force banks to do more work in assessing a loan applicant’s finances would probably mean the process of obtaining a home loan would take longer and be more expensive. It’s also likely that many home buyers might even find it hard to get a home loan under tighter lending rules.
Mark Bouris, founder of Wizard Home Loans and now CEO of Yellow Brick Road, said it was now “particularly hard for mortgage originators and brokers to assist borrowers to obtain an approved home loan”.
“Sentiment surrounding the royal commission, changes in credit approval processes, more intense regulatory oversight and greater compliance requirements and costs have created significant uncertainty.”
“In all the years of being involved in the home loan business, I have never seen such difficult borrowing conditions,” he said in a statement to the Australian Stock Exchange.
There were earlier fears that the findings of the Hayne royal commission would result in far-reaching reforms that would seriously affect the ability of the banks to lend funds for housing. However, as UBS banking analyst Jon Mott commented: “"While we do not anticipate a loosening of underwriting standards or reacceleration of lending, the soft recommendations of the royal commission final report is a clear win for the banks."
Ben Udy from Capital Economics agrees with Mr Mott: "The final report by the royal commission may add to the changes in bank behaviour that are already underway. The report did not recommend much that is likely to cause an upheaval for the finance industry. We therefore expect credit growth to continue to ease, contributing to the housing downturn and a softening in the wider economy."
What oversupply?
Housing Industry Association principal economist Tim Reardon says that, despite a record number of apartments set to be completed, there is little fear of an oversupply of dwellings and significant further price falls: “While unemployment remains low…and population growth remains strong, the depths of this cycle will be relatively shallow,” Mr Reardon said.
He said that apartments now built will clear relatively quickly as developers hold back until conditions improve. He also noted that apartment approvals data for the December quarter was down more than 33 per cent year on year.
“The rate at which they slowed down at the end of 2018 was a surprise, but now that the credit squeeze has occurred, we expect approvals will continue with a relatively slower, slow down over the next two years.”
Seasonally adjusted, total dwelling approvals were down 8.4 per cent between November and December, but apartment approvals were down 18.8 per cent compared to the same period in 2017. Compared to December 2017, the apartment approvals were down 38 per cent to 4,712 and house approvals were down 11.3 per cent to 9,134. The seasonally adjusted value of total building approvals fell 7.5 per cent.
Urban Taskforce chief executive Chris Johnson has called on the NSW Government to manage the significant fall in apartments being approved for construction, arguing that an undersupply of homes will result in property prices again rising by the end of the year: “There needs to be more management by government to make sure we’ve got a more even approach to the supply of new homes, which then keeps a lid on the dramatic increases in price and equally the dramatic drops in price,” he told News.com.au.
“Because there won’t have been enough supply for a long time, the number of approvals won’t be there. The supply chain will be going up, and therefore there won’t be enough new homes on the market for the population growth, so prices will go back up again.”
Developer Harry Triguboff, who's worth $US9.2 billion ($13 billion), according to the Bloomberg Billionaires Index, plans to keep expanding his operations, even if the Sydney property market continues to fall: "We have our ups and downs and we keep building," Triguboff, 85, said in an interview with the Sydney Morning Herald.
"If prices fall, I'll buy the land cheaper," said Australia's second-richest person. "As long as you don't lose your cool. You have to look at things in the longer term."
Sources:
‘RBA boss Philip Lowe unconcerned about falling house prices, points finger at reduced supply,’ Tawar Razaghi, Domain, 6 March 2019
‘Sydney homes sell prior to auction as market observers warn of reduced buyer pool,’
Chris Tolhurst, Domain, 10 March 2019
‘Westpac says banks not to blame for house price falls,’ Frank Chung, News.com.au, 9 March 2019
‘Yellow Brick Road posts $34 million loss as Mark Bouris warns ‘never seen such difficult conditions,’ Frank Chung, News.com.au, 8 March 2019
‘House price falls 'slow moderately', Ingrid Fuary-Wagner, Australian Financial Review, 1 March 2019
‘Desirable’ property’s dramatic 13 per cent price plunge proof of downturn,’ Alexis Carey, News.com.au, 24 February 2019
‘The mystery paper that could explain Australia's housing slump,’ Daniel Moss, Bloomberg, 20 February 2019
‘Interest rates set to be slashed as jobless rate rises, banks warn,’ David Taylor, RN Breakfast, ABC News online, 28 February 2019
‘Property investors battered by a 'perfect storm' of falling prices and tighter credit,’ Philip Lasker, ABC News online, 27 February 2019
‘There are more properties on the market now than at any time since 2012 — and no-one's buying,’ Michael Atkin and Andrew Dickson, 7.30 Report, ABC News online, 26 February 2019
‘Let the bloodbath begin’: House prices in Sydney and Melbourne ‘could halve’ in worst crash since 1890s,’ Frank Chung, News.com.au, 21 February 2019
‘Home loan hit: ASIC will seek to change laws if it loses key case,’ Sarah Danckert, Sydney Morning Herald, 11 February 2019
‘Reserve Bank cuts forecasts as fears grow over housing,’ Eryk Bagshaw, Sydney Morning Herald, 8 February 2019
‘Banks win from 'disappointing' royal commission report, shares surge,’ Michael Janda, ABC News online, 6 February 2019
‘Reserve Bank will cut rates twice in 2019, Westpac chief economist says,’ Martin Farrer, The Guardian, 21 February 2019
‘The big problem with lower house prices nobody is talking about,’ Jason Murphy, News.com.au, 17 February 2019
‘$7 trillion question: how low will house prices go?’ John Collett, Sydney Morning Herald, 17 February 2019
‘Summer Hill auction draws crowd of 100 but investors still thin on the ground,’ Chris Tolhurst, Domain, 3 February 2019
‘What now for Sydney’s property market? 5 experts give their predictions,’ Kate Burke, Domain, 13 February 2019
‘Nearly 1000 less apartments were approved in 12 months,’ James Hall, News.com.au, 9 February 2019
‘Value of Sydney and Melbourne properties tipped to fall dramatically,’ Alexis Carey, News.co.au, 14 February 2019
'I'll buy cheaper': Australia's property king is exploiting the slump,’ Andrew Heathcote, Sydney Morning Herald, 15 February 2019
‘Sydney house prices have highest discounts in a decade, new data shows,’ Kate Burke, Domain, 22 February 2019
Prices fall further and so might interest rates
Sun, 17 Feb 2019At its February meeting the Reserve Bank left rates just where they’ve been for what seems like years – and it has been years, going on for three of them. This has caused a lot of comment among members of the financial fraternity, but even the fiscal experts disagree about where interest rates should go next.
"People with principal and interest, owner-occupier home loans will be paying less this time next year than they are today," Shaw and Partners banking analyst Brett Le Mesurier said, going for a rate reduction on the ABC’s Radio National.
Opting for the middle ground, Reserve Bank Governor Philip Lowe recently suggested an interest rate hike was less likely than the central bank had previously signalled: "Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down," Dr Lowe said.
"Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced."
Another interest rates oddsmaker is UTS business professor Warren Hogan who said there’s a one-in-four chance of a rate cut: "The housing market is the key here," he said. "If it continues to deteriorate in the first half of 2019, like it did in the second half of 2018, I think we will get a rate cut.”
This is somewhat contradicted by Australia’s big four banks who have experienced increases in funding costs in the past three months and independently raised interest rates on some mortgage offerings. Westpac told the ABC, "funding costs are up since November", and the ANZ Bank supported this, saying: "funding costs have increased again in recent months, resulting in an increase to overall bank-funding costs compared to three months ago".
It’s a critically important issue for the Sydney property market, and eventually the RBA will have to decide which direction to take. There is a proven relationship between lending activity and property prices, and the most recent deceleration in home lending has been accompanied by a dramatic fall in property values across NSW.
The extent of the drama can be determined by figures showing the value of lending to owner-occupiers had fallen by 10 per cent and loans to investors had tumbled by 23 per cent over the year to November 2018. Without the access to finance they’d enjoyed before the banks tightened their lending practices, both owner-occupiers and investors had no choice but to pull back from the market and await more opportune times.
This situation didn’t go unnoticed. In December 2018 the Council of Financial Regulators’ released a statement saying that “members agreed on the importance of lenders continuing to supply credit to the economy while they adjust their lending practices … an overly cautious approach by some lenders to incorporating relevant laws and standards into loan approval processes may be affecting lending decisions”.
It's yet to be seen what impacts the findings of the Hayne Royal Commission will have on the banking industry, although many of the reforms recommended have already been anticipated and adopted by the banks. Banking analyst Brian Johnson told ABC TV’s The Business program: "The royal commission is probably not the disaster some people had thought because the banks have already reacted to each of the round hearings as they've come through."
The general conclusion is that the Hayne report may have some sort of effect on the banks’ lending practices but it won’t cause any major upheavals to the industry and shouldn’t directly affect the amount of borrowing to fund home loans, other than to cause a big drop in the use of mortgage brokers.
There is an historic link telling us that if the RBA cuts its prime rate, more people will borrow to buy property. Conversely, higher rates will deter some buyers from entering the market. But the Reserve Bank’s interest rates have never been this low – just 1.5 per cent, and a cut of one-quarter or even one-half of a per cent doesn’t equate to massive savings.
Still, the RBA is faced with declining house prices, a significant slowdown in housing construction, and a slowing economy that is threatened by a weakening in the financial fortunes of our biggest trading partner, China. It might just decide that cutting the prime rate would be enough of a ‘trigger’ to stimulate a sluggish Australian economy and possibly get home lending growing again.
Looking bad
It’s nothing new to hear that Sydney house prices have fallen ten per cent in 2018. That’s a drop of something like $120,000 on the average house, and the downturn is continuing into 2019. Domain’s Nicola Powell sums it up: “House prices have fallen 11. 4 per cent from the mid-2017 peak, pushing them back to mid-2016 levels. It’s the sharpest downturn in more than two decades, although the duration is yet to surpass the 2004-06 slump.”
So, in a way, we’ve been here before. What goes up must come down, and so forth. But that’s not to say that the Sydney property market has ever faced the current set of conditions that are in many ways record-setting. It’s been a rough 18 months or so and thus far there’s not much light at the other end of the tunnel.
Nationally, Australia will probably see one of the world’s biggest price declines this year, according to Fitch Ratings, an international credit rating agency. Fitch Ratings forecast Australian house prices would decline a further five per cent this year, making Australian housing the worst performer out of 24 countries for the second consecutive year.
Capital Economics economists Marcel Thieliant and Ben Udy told the Sydney Morning Herald that they expect prices to fall by an average of 15 per cent across the nation's capital cities, which would make it the deepest and longest fall in prices on record.
"Australia’s housing slump is intensifying. House prices fell by more than in any month in December since the current downturn started and our sales-to-listing ratio fell to a fresh record-low. That suggests that prices will keep falling at a similar pace in the first half of this year," they said.
Analysts from Morgan Stanley have also forecast that prices nationally are likely to fall in real terms by between 15 and 20 per cent. Even more dire is their expectation that the fall will be larger in Sydney and Melbourne leading to inflation-adjusted drops “in excess of 20 per cent”.
Perhaps the most prominent of those with a negative outlook is Shane Oliver, chief economist at AMP Capital. “I think we’re less than halfway through, we’ve got more downside to go,” he said, having revised his earlier forecast even lower and now predicts a total 25 per cent plunge in the price of Sydney property.
The ABC’s Michael Janda recently bought a house after 15 years of renting. He provided these words of advice for anyone who might be holding off purchasing a property in the current market: “An individual property can sell for a lot more or less than what the general market is doing around it depending on a range of factors, from how desirable it is, to how many interested buyers there are, how good the marketing campaign is or whether a couple of other houses are selling on the same street that month.
“Also, if it's your home, not an investment, and you're happy living there and can afford it, why would you care what it's worth at any given point in time?”
The positive side
As we said, we’ve been here before. And although the economic news is pretty downbeat, there are some positive aspects to our present situation that are worth mentioning. The first is that the prices plunge isn’t uniform across Sydney, so some property owners have, on paper at least, lost less than others. Some have even gained.
Domain’s Kate Burke reports that a drop of more than 10 per cent has been seen in regions including the inner-city and eastern suburbs, inner-west, north-west, south and Canterbury/Bankstown. The south was the worst affected, with the median price dropping 14.8 per cent, while the smallest declines were in the Blue Mountains and Central Coast with falls of 1.8 and 3.1 per cent respectively, followed by the west and south-west with respective falls of 6.1 and 6.3 per cent.
As prices continue to fall, many first-home buyers are now able to acquire a property that was previously out of their reach. Others have sold their apartment and upgraded to a free-standing house. For those able to get the finance, it’s now easier to move up from a one-bedroom apartment to one with two bedrooms, or to go from a two-bedroom house to a three-bedroom home.
It’s also now possible to move into a more desirable suburb or to acquire a home closer to the CBD, writes Ms Burke: “Popular suburbs like Newtown, Erskineville and Leichhardt are now more affordable to buy into than Earlwood was in 2017. On the lower north shore Willoughby is now more affordable than Lane Cove was during the market peak. Meanwhile in the south, buyers with a $1 million budget can look at houses in suburbs 20 kilometres closer to the city, swapping Engadine and Heathcote for suburbs like Bexley and Peakhurst.”
Home builders and developers are even offering potential buyers incentives as they try to compete in an increasingly tough property market. Apartment developer Meriton is offering three per cent fixed rate finance as well as a 50 per cent stamp duty refund for all buyers. In Victoria, Amity Property Group is offering up to half a million Qantas frequent flyer points with their new apartments, and in Queensland, Brisbane developer Privium Homes offers the chance to win one of 20 MG 3 cars for putting down a deposit on one of its Canvas homes.
Other builders and developers are offering pricing discounts to lure purchasers. Volume home builder Metricon Homes is offering a promotion on some of its two-storey, four-bedroom houses for $266,900, plus offering $50,000 worth of fittings and finishes for $10,000. National builder Simonds Homes’ current advertising campaign offers prices as low as $138,000 for a three-bedroom house, rising to just $235,000 for a five-bedroom option.
For those looking to rent rather than buy, the present conditions are giving them a very real chance to lower their weekly rentals. Domain figures show that the median Sydney asking price is now $540 a week for houses, down 1.8 per cent in the year ending December 2018, according to the latest Domain Rental Report for the December quarter that saw Sydney lose its title of Australia’s most expensive city in which to rent a house.
Domain’s senior data analyst Nicola Powell said renters looking for better value should look in postcodes with both greater supply and lower sale prices: “For the unit market, it’s those areas that have had a heightened level of supply and were a magnet for investor activity, therefore we’ve seen increased stock and [that] has helped alleviate rents,” Dr Powell said.
“I think you also have to look at the dynamics of the residential sales market. You need to look at those who are relocating and don’t want to sell in a slowing market. Owner-occupiers who are probably nervous about selling in a slowing market are instead choosing to rent out their homes.”
High-rise headaches
The recent (and unfinished) dramas over the Opal Tower at Sydney’s Olympic Park have brought apartment towers into an unwelcome spotlight. Owners in the troubled tower are concerned about issues ranging from the building’s construction quality to their diminished resale values, and these concerns have spread to put a shadow over similar properties in Sydney.
Nick Sas summarised the situation in a Sydney Morning Herald article: “As tens of thousands of new units get set to hit the local market this year — creating an expected oversupply in Sydney — property analysts say the flow-on effect of the Opal Tower drama, combined with softened market conditions, will create a ‘new reality’ for new apartment owners and investors.”
Analysts now say the Opal Tower’s unfortunate tale of woe will affect buyer confidence in other off-the-plan high-rise apartment complexes. Independent property analyst Martin North from Digital Finance Analytics said property valuers he had spoken to had already lowered the price of off-the-plan apartments by 16 per cent since the Opal Tower incident.
"We were already seeing in our surveys that people were quite twitchy about the high-rise developments," Mr North told Nick Sas. “And now some people who are contracted to buy off the plan may well walk away. Forward demand was already shrinking, and there is no doubt we will see considerable slides in prices."
It must be noted that Mr North is not a big fan of high-rise apartment buildings. When he was interviewed on Nine Network’s 60 Minutes, he said that Australia has built a generation of properties that could become slums in just 20 years: “We have so many properties across Australia which are being thrown up, or have been thrown up, with significant defects in them. I think we've built a generation of properties that frankly could become slums in 20 or 30 years.”
But there are some other projects out there that are distressed just because of Australia’s property slump. One of them is the multi-storey Elysee project in Epping in Sydney’s north-west. Receivers and managers are selling 61 units in what’s called a “fire sale” after the developer was unable to successfully market all the units in the project.
Buyers advocate Miriam Sandkuhler told ABC News that buying a property off the plan has always been a risky move: "If there's a downturn in the market, or if there's an oversupply of stock in the market when the property is finally built, that can substantially affect the value of that property and frequently those values come in under the purchase price of the contract," she said.
"You can more or less be guaranteed that approximately 50 per cent of the time the properties may come in under the contract price and therefore somebody's going to settle on it being worth less than what they paid."
Research group CoreLogic has issued its forecast for property markets around the country and it is not expecting a property crash. However, it expects a glut of new apartments to come onto the market in Sydney this year and is already noticing a growing proportion of these developments settling at lower prices.
Chinese puzzle
For a time, it seemed Chinese buyers were withdrawing from the Australian property market. A combination of restrictions imposed by the Chinese government and new taxes and charges on foreign buyers applied by Australian states had caused a noticeable pullback by previously rampant Chinese purchasers.
However, it’s now thought that the number of Chinese buyers of Australian homes is likely to remain steady this year according to a new report ‘Australia 2019 Outlook for Chinese Residential Real Estate Buying’ by Chinese international property portal Juwai.com.
The Chinese economy has made many millionaires, in whichever country’s dollars you’d like to use for calculations, but also benefiting from China’s new-found prosperity has been that nation’s middle class as the wealth of the average adult has risen four-fold over the past six years. And if you’ve recently acquired wealth, you’ll also want a place to put something away for the years to come.
“Unlike Australians, Chinese also lack appealing alternative investments at home,” Juwai chief executive Carrie Law told Domain’s Sue Williams. “Because few other appealing investment opportunities exist, Chinese have put 53 per cent of their wealth into real estate. In a 2018 survey, Chinese overseas investors named residential property their favourite asset class.”
Ms Law also said that the Australian dollar was down about 5 per cent on the yuan, which was helping Chinese buyers justify purchases: “If it falls another 2 or 3 per cent, that completely erases the cost of the foreign buyer stamp duty, which tops out at 7 to 8 per cent, depending on the state.”
Chinese specialist at Sydney Sotheby’s International Realty Lu Lu Pallier also says that 2019 will see similar levels of Chinese buying as the previous year: “But we will see an effect on the off-the-plan market as a lot of people are coming up for settlement this year. Restrictions on taking their money out of China and lending restrictions here mean a percentage won’t be able to settle, will lose their 10 per cent deposit and the property will go back on the market and prices will go down further.”
Jon Ellis, founder of investment portal Investorist, says the Chinese buyers are now less likely to be speculators and are mostly those who want an Australian education for themselves or a family member, or who want to acquire property as part of a migration plan. “The straight investor is gone,” he says.
However, unless some changes are made, Meriton founder Harry Triguboff has warned this year could be worse than 2018 for Sydney’s housing market. In an article in The Australian, Mr Triguboff called for easing of taxes to lure foreign buyers back into the market and for young people to be able to access their superannuation to buy a home.
“It may be as bad as last year, it may be worse,” he told News.com’s Frank Chung. “Australia is completely dependent on the Chinese (buyers). (The slowdown) must affect the broader economy.”
Side effects
"The current correction in the housing market is a significant area of uncertainty," the RBA said in its February statement on monetary policy. "The implications of the housing market correction for the broader economy depend on how households respond, including how they take previous price increases into account in their spending decisions."
The Bank also warned that the correction could have implications for business and household providers, such as real estate and legal services, as well as causing a decrease in stamp duty revenue, which the NSW government is heavily dependent upon to fund its budget.
Writing in Business Insider, David Scutt says the housing downturn has had a marked negative effect on the construction sector, as shown by the Australian Industry Group’s (Ai Group) Performance of Construction Index, or the PCI as it’s known in the industry.
“The PCI slumped to 42.6 points in December in seasonally adjusted terms, down 1.9 points on the level reported in November. So, at 42.6, it indicates that not only did activity levels weaken again during the month, they did so at the fastest pace in over five years. That’s a stark turnaround in conditions compared to what was seen throughout most of 2017 and the first half of 2018.”
The PCI measures perceived changes in activity levels across Australia’s construction sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.
The Australian Industry Group also said that when it came to the residential sector, especially for apartment construction, the news was dire: “Apartment building was the weakest performing sector, declining for a ninth consecutive month and at the sharpest rate since mid-2012. House building also fell further into negative territory with the sector’s rate of contraction the most marked in just over six years.”
The housing downturn has also had serious consequences for some of Australia’s biggest real estate developers. UBS analysts Grant McCasker and James Druce said that Mirvac, Lendlease and Stockland all face a higher risk of settlements falling over because of their exposure to projects that were sold to buyers at the 2017 peak of the property cycle: “We see Mirvac as most at risk followed by Lendlease and Stockland,” they told the Sydney Morning Herald.
The number of buyers cancelling contracts on land purchases is presently low, they said, but the UBS analysts warn that tightening credit, price falls, incentives and lower deposits will increase the number of struggling buyers.
Looking towards the future, CoreLogic’s head of research Cameron Kusher says dwelling approvals have been above long-term averages for a number of years, and developers are now seeking fewer approvals because the property market had turned.
Mr Kusher told New.com’s James Hall that the decrease in projects being approved is a reflection of the changing market cycle but an undersupply would eventually develop and drive prices back up.
“It means there will be less new housing stock,” he said. “Over time it will create a shortage of new housing stock and eventually trigger a new wave of development, but that will occur further down the track.”
Sources
‘Nearly 1000 less apartments were approved in 12 months,’ James Hall, News.com.au, 9 February 2019
‘Reserve Bank cuts forecasts as fears grow over housing,’ Eryk Bagshaw, Sydney Morning Herald, 8 February 2019
‘Why home lending will prove the key driver of property prices in 2019,’ Trent Wiltshire, Domain, 21 January 2019
‘Interest rates on mortgages could be even lower in a year, analysts predict,’ David Taylor, RN Breakfast, ABC News Online, 17 January 2019
‘Sydney house prices fall 9.9 per cent in 2018: Domain report,’ Kate Burke, Domain, 24 January 2019
‘The crucial data to watch as Australia's housing downturn unfolds,’ David Scutt, Sydney Morning Herald, 21 January 2019
‘Sydney house prices fall at fastest rate in 20 years,’ Michael McGowan, The Guardian, 24 January 2019
‘Growing fears RBA will have to cut rates to stop tumbling house prices,’ Shane Wright, Sydney Morning Herald,19 January 2019
‘Sydney buyers get more bang for their buck as house prices decline,’ Tawar Razaghi and Kate Burke, Domain, 26 January 2019
‘Australia to see world's worst 2019 house price fall: report,’ Nassim Khadem, ABC News online, 17 January 2019
‘Just advertising tools’: Incentives and discounts on offer in crowded new-build market,’ Jim Malot, Domain, 16 January 2019
‘Chinese home buyers set to snap up Australian property in 2019,’ Sue Williams, Domain, 21 January 2019
‘Rivers of gold’ dry up: Chinese New Year likely to be flat for property,’ Jim Malot, Twitter, 3 February 2019
‘Housing market falls ‘may be worse’ in 2019,’ Frank Chung, News.com.au, 1 February 2019
‘The downturn in Australia's residential construction sector has gone from bad to much, much worse,’ David Scutt, Business Insider, 12 January 2019
‘Housing slump bites as Sydney apartments line up for fire sale,’ Simon Johanson & Carolyn Cummins, Sydney Morning Herald, 31 January 2019
‘The best value suburbs to rent a house in Sydney: Domain data,’ Tawar Razaghi, Domain, 11 January 2019
‘Why this Gen Y finally caved in and bought a house in Sydney,’ Michael Janda, ABC News Online, 28 December 2018
‘Opal Tower effect to hit Sydney's new apartments as negativity reigns in housing market,’ Nick Sas, Sydney Morning Herald, 21 January 2019
‘Analyst Martin North says Australian high-rises could become 'slums,' Sammi Taylor, 60 Minutes, 3 February 2019
‘Off-the-plan apartment pain as property prices fall,’ Rachel Pupazzoni, ABC News online, 4 October 2018
‘Housing slump bites as Sydney apartments line up for fire sale,’ Simon Johanson & Carolyn Cummins, Sydney Morning Herald, 31 January 2019
‘What lies ahead for the property market this year: more apartments and low interest rates,’ Phillip Lasker, ABC News online, 7 January 2019
‘Banks win from 'disappointing' royal commission report, shares surge,’ Michael Janda, ABC News online, 6 February 2019
The bottom of the market could be in sight – just maybe
Thu, 17 Jan 20192018 is over and 2019 is underway. This much we know, but the future direction of the Sydney property market in this new year is anything but known. The last year ended with prices still falling across the Sydney area after a record ten per cent drop, and there were signs the new year would bring more of the same – for a while, at least.
So, looking back, how bad was the year we’ve just farewelled? In 2018 Sydney was the worst-performing market in the country; it contributed to the poorest national result since 2008 when the GFC ravaged property values. Figures from CoreLogic show that Sydney’s dwelling prices have now plummeted to where they were in August 2016.
SQM Research managing director Louis Christopher said: “We've been in a downturn since the second half of 2017, I would say it's getting beyond temporary now - this is a medium-term downturn. Prices will fall again."
A Sydney Morning Herald article tells us Moody’s Analytics believes Sydney prices will fall even further in some suburbs: “In Sydney, Moody's is predicting an overall drop of 3.3 per cent in values. Areas such as Ryde (6.6 per cent) and the eastern suburbs (6.7 per cent) are forecast to endure substantially larger drops in value.”
CoreLogic’s head of research Tim Lawless agrees and says prices could fall even further in February, depending on how many houses come onto the market: “Typically at this time we see the number of advertised listings ramp up following the Christmas and New Year slowdown. If listing levels return to or exceed levels from late 2018 it could lead to even weaker housing conditions as buyers are spoilt for choice.”
CoreLogic isn’t predicting a property crash in 2019, but it expects a flood of new apartments to come onto the market in Sydney this year and says it is already seeing a growing proportion of these developments settling at lower prices.
Auction clearance rates certainly aren’t giving any signals of a resurgence in prices. Fewer than four homes in every 10 are selling at auction, and vendors have had to cut their price expectations in response to a market crippled by tight credit rules and extended times for processing mortgage applications
Starr Partners chief executive Douglas Driscoll sees rates staying below 50 per cent for at least the first half of 2019: “Tighter credit and lower buyer confidence will see auction clearance rates – which tracked below 50 per cent for the past two months – remain low, and fewer people choosing to sell under the hammer,” he told Domain’s Kate Burke.
Mr Driscoll also provided an insight into judging whether the market is at or near the bottom: “You only know you’ve hit the bottom of the market when it’s too late,” he warned. “You could wait, and the market could drop another 3 to 5 per cent, which [long term] is negligible.”
History shows us that the property price cycle usually pauses between swings. An estate agency specialising in Sydney’s Northern Districts, WigginsKeenan, says that property prices in that area have ‘found their level’ and will stabilise in 2019: “One of the reasons why is because the Northern Districts were the first to experience the boom with huge increases and other areas then followed – the first one to rise is why we are the first to drop.”
Agency principal Justin Keenan noted that prices in the Northern Districts property market had fallen by 15 to 20 per cent since the peak of the boom and said that in his opinion: “It’s hit the bottom and is now levelling out.”
How we got here
Mark Steinert, chief executive of developer Stockland, calls credit the ‘lifeblood of the Australian economy’: “Ensuring fair and equitable access to credit is vital for the stability of key Australian industries including property,” Mr Steinert told the Australian Financial Review.
If you ask CoreLogic’s head of research what caused the ‘boom to bust’ turnaround in Sydney property he’ll tell you that APRA’s tightening of lending criteria was the biggest reason: “Most regions around the country have reacted to tighter credit conditions by recording weaker housing market results,” he said in his company’s end-of 2018 report. “Buyers will be in the driver’s seat when it comes to choosing a property and negotiating on price.”
Recent changes to the availability of credit have had a clear impact on the market, according to ANZ chief executive Shayne Elliott: “There were some figures recently which showed an average family could have borrowed about $550,000 three years ago. Today that figure is closer to $440,000, so that’s a very tangible example of how the borrowing capacity for customers has been curtailed.”
Another banker, Westpac chairman Lindsay Maxsted, recently warned that further tightening of banking regulation, including placing excessive restrictions on new loans in the wake of the royal commission, is tightening credit and causing the pace of lending to homeowners and businesses to slow.
Australian economist John Adams said the Hayne royal commission had exposed poor banking practices that had resulted in banks making changes even before the commission’s findings had been released: “Credit growth in the economy has now slowed as a result. This spells economic disaster for an economy that is addicted to debt.
“Slower growth in household debt means that there are fewer property buyers in the market, resulting in house prices falling sharply in Sydney and Melbourne and a general slowdown in the Australian economy.”
The ABC’s Phillip Lasker says we shouldn’t expect the banks to rescue the property market: “What many people now describe as a ‘lending crackdown’ or ‘credit squeeze’ is simply the banks behaving as they should, lending more responsibly and conducting thorough loan assessments.”
Cutbacks on interest-only loans, popular with about a quarter of property investors and one in five owner-occupiers, were applied in early 2017 when the Australian Prudential Regulation Authority limited interest-only lending to no more than 30 per cent of new loans. In 2015, interest-only loans accounted for 42 per cent of the new loans market, but after the 2017 limits were applied the number of interest-only loans fell rapidly and have now declined to just 15 per cent.
Many of these earlier fixed term loans are now approaching their expiry dates. About 900,000 loans worth an estimated $300 billion will need to be extended with existing lenders, converted into principal-and-interest loans with higher repayments, or transferred to new lenders. Investors, many of whom purchased property through their self-managed super funds using interest-only loans, will have to renew their mortgages in a much tighter lending environment than when they took out their original loans.
Very interesting
The Sydney Morning Herald’s Shane Wright said that in its mid-year update to the federal budget, Treasury noted that while house price falls had not had a "significant effect" on the household sector, further drops "could dampen spending".
He also noted that there is a link between the wealth-effect of rising housing prices and broader consumer spending: “Markets have started betting the Reserve Bank will slice official interest rates because they anticipate home owners will close their wallets in line with the diminishing value of their single largest asset.”
Official interest rates have remained at an historic low of 1.5 per cent for the past two and a half years. At year’s end, money markets were pricing in a 28 per cent possibility that the Reserve Bank would cut interest rates by late 2019. This is quite a turnaround from the market’s position early this month when expectations were for a rate hike in the first half of this year.
AMP’s chief economist, Shane Oliver, has already forecast that the Reserve Bank will reduce rates in 2019, saying the effects of falling house prices will drag on growth, especially when combined with weak wages growth and record levels of household debt. “That’s a red flag,” he told the Herald’s Matt Wade.
Westpac chief economist, Bill Evans expects no change in rates for another two years: “The housing drag on the economy is going to last into 2020, inflation will be stuck at around a little below 2 per cent and global risks at the moment are certainly not conducive to the central bank raising rates,” he said. “At this stage I don’t see any reason for them to change.”
Will rates stay where they are, or go up or even go down? It’s hard to say with our economy in somewhat uncharted waters. On the positive side, we have low unemployment, good levels of business investment, and an election year with probable commitments for expenditures on major new infrastructure projects.
But the flip side is an ongoing wages slump, tighter credit requirements, a threatened construction sector and a housing market beset with plummeting prices. Daniel Blake, a strategist at Morgan Stanley in Sydney, says that in 2019 the RBA will be placing greater importance on the housing sector.
"Since 2016, the RBA's focus on financial stability has held them back from further rate cuts as they wait for wages and inflation to recover. In 2019, we see their focus turning to monitoring the negative wealth effects from a housing market adjustment."
Threats to negative gearing
In simple terms, negative gearing is the ability to write off the losses accrued on an income-generating asset against your total income, a tax measure dating back to 1922. With a federal election on its way, this issue is already becoming a hot topic for Australian political parties.
Whereas the Liberal party is quite happy with things as they are, the ALP has announced its intention, if it wins government, to limit the concession to new buildings while grandfathering existing properties. Opposition trade spokesman Jason Clare said his party would clamp down on negative gearing "within the first 12 months of a Labor government".
The opposition also promised to improve housing affordability by halving the capital gains tax exemption from 50 to 25 per cent. The ALP says its changes will achieve $32 billion in extra revenue over the next decade.
Negative gearing is important to many players in the property market, including owners of rental properties, tenants, first-home buyers and government tax collectors. Taxation data shows that in 2015-16 there were close to three million rental properties around the country, and 1.8 million of them lost money on their property investments.
The Henry tax review of 2010 found that highly indebted investors received a huge tax advantage from negative gearing that was ultimately being paid by ordinary taxpayers. The Reserve Bank of Australia (RBA) recently released research findings that showed 76 per cent of Australians would be better off by abolishing negative gearing, with more people able to buy their own home.
Data compiled by the Parliamentary Library shows that, of the approximately 480,000 residential properties bought last financial year, between 10.3 per cent and 16.8 per cent were then negatively geared by the new owners. This equates to as few as one in 10 or, at the most, one in every six - a finding the ALP says proves Labor's policy poses no risk to the economy.
Even the Liberals former federal treasurer Joe Hockey, in his final speech to Parliament in late 2015, called for big cuts in personal tax rates that would be paid for by overhauling tax concessions: "In that framework, negative gearing should be skewed towards new housing so that there is an incentive to add to the housing stock rather than an incentive to speculate on existing property," he said.
The current federal treasurer Josh Frydenberg says the policy proposed by the ALP will be devastating for the property market and to small-time investors with one or two properties: "Labor’s policy will make sure that people who own their home will see the value of their home be less, and fall, and if they rent their home, their rent will go up as a result of Labor’s policy," he recently said on Sydney radio.
UBS's chief economist also has worries about the effects the ALP’s proposed changes would have on the economy: "My concern would be that if you were to make a material change to tax policy at the same time as banks are tightening lending standards, it could exacerbate what's already a downturn into something more serious," he told ABC News.
The 2019 federal election is likely be in May, although politics and other circumstances may make an earlier or later date the actual time we go to the polls and choose a government. Although the election date remains ‘TBA’ it’s a certainty that policies on negative gearing and capital gains taxation as they relate to housing will be hot items on the agenda until then, and probably long afterwards.
Policies and prophecies
Labor has announced a $6.6 billion plan to build 250,000 new homes over a decade for those struggling to pay their rent. The scheme intends to benefit people on low and moderate incomes and would offer subsidies to new homes with rents that are 20 per cent below the market rate.
If the ALP wins government and implements the scheme, it will provide a direct subsidy of $8500 a year over 15 years for investors who build new dwellings and offer them to people in need on lower rents. The policy makes it clear that overseas students, temporary foreign workers and other non-residents would not be eligible tenants for the new homes.
The policy will start slowly over the next term of Parliament with only 20,000 new units and houses to be built during the term on a federal outlay of $102 million over the four years to 2022.
The total cost of Labor’s housing affordability policy has been estimated at $6.6 billion over the decade to June 2029. The housing policy would be funded by increases in tax revenue, to be more fully detailed in Labor’s election platform. The ALP expects to save $32 billion over a decade from changes to negative gearing and capital gains tax plus another $56 billion over a decade from changes to tax refunds from dividend imputation on shares.
It should be noted that The Australian Housing and Urban Research Institute (AHURI) estimated in late 2018 that there is already a shortfall of 433,000 social housing units, and about 36,000 need to be built every year nationally to meet projected future demand. The ALP proposal is only a first step towards meeting that objective.
One of the authors of the AHURI report, Dr Laurence Troy from the University of NSW, told the Sydney Morning Herald’s David Crowe that Australian governments have only been funding about 3000 new social housing units every year: “We estimate that output of about 15,000 is needed just to stop the existing shortfall from getting even bigger. To fix the current problem as well, over a 20-year period, calls for a 10-fold increase,” Dr Troy said.
Labor says that, if it wins government, it would work with community housing providers, the residential construction sector and institutional investors to implement the scheme. It has not yet said whether individual investors could also build new homes that qualify for the subsidy, although this seems an obvious way to augment the planned construction of new housing without incurring extra expense to taxpayers.
Towering concerns
A recent development affecting the overall Sydney property market is the structural failure of some elements in the four-month old Opal Tower that caused the occupants of the building’s 300 units to be evacuated and 51 of those units to be declared ‘unsafe to occupy’.
This led to the NSW government announcing what it called a ‘safety audit’ of private building certifiers and construction sites with the intention of assuring public confidence in the quality and safety of the residential towers that have sprung up across Sydney in recent years.
Two engineering experts, commissioned by the state government, prepared an interim report that identified a number of problems in the Sydney Olympic Park tower. Professors Mark Hoffman and John Carter said they had identified several issues that would require further investigation.
Writing on News.com.au, economist Jason Murphy said that apartment defects are common in Australia, usually leaks of some type, but to some degree this can be expected: “Buildings will normally have more quality problems than something like a car. They are not precision-made inside factories.
“Buildings are unique, made on their own sites with their own drainage and soil conditions. They are put together by a diverse group of people, mostly working outdoors, in a range of conditions. Expecting perfection is unrealistic.”
This doesn’t mean that any of our recently-constructed apartment buildings are in any danger of falling over, but faults must be rectified, and somebody will have to pay for the work. Who’s that going to be?
“Some builders will say, ‘It’s nothing to do with my workmanship I just built what was specified by others,” Australian Council of Strata Lawyers president Tim Graham told Jason Murphy, adding that architects and engineers will say ‘Nothing wrong with my design, it is a question of faulty workmanship.”
Because of the difficulty assigning the blame, owners often end up paying for the repairs themselves. This seems unfair – especially to the owners hit with often large and unexpected remediation costs. There’s also the issue that owning an apartment in a building that is known to be faulty, even if the problems are later rectified, will devalue the price the owner is likely to receive when the property is sold.
This is why the follow-up audit and probable NSW government legislation that follows are so important. The Berejiklian Government has announced four new measures include a large compliance operation that will see 25 to 30 per cent of certification work audited every year, undertaken in what it calls a "strike force-style approach".
"We're looking at buildings that are currently being constructed, and buildings that have gone up in recent times," said Minister for Better Regulation, Matt Kean. "I want to make sure we do whatever is possible to give the public confidence that the buildings that they are living in across Sydney are safe."
Tenants get some help
Pressure on governments from renters has built up in recent years, thanks in no small way to unaffordable house prices in all our capital cities that have locked out a growing number of families from home ownership. 2018 became the year in which political parties had to develop tenant-friendly policies in anticipation of state and federal elections in 2019, most particularly in NSW which has the nation’s highest property prices and rental rates.
ABS figures show that almost one-third of Australians now rent their homes, and that this proportion has been rising as property price growth outpaced wage increases. Significant tenancy reforms were legislated in Victoria and NSW, while steps were also taken in Queensland and Western to respond to the concerns of tenants, and indications are that more reform of this sector is yet to come.
The NSW government has passed legislation that ensures minimum standards for lighting and ventilation, plumbing and drainage, and bathroom and toilet facilities. The legislation limits rent increases by restricting them to once every 12 months for periodic leases. It also avoids penalties for domestic violence victims who break a lease; tenants who are victims or a co-tenant who is not the perpetrator will not be held accountable for property damage that occurred during a domestic violence incident.
This is all good news for renants, but the plan has been criticised for failing to outlaw no-grounds evictions – the practice of evicting a tenant without reason outside a fixed-term lease.
Leo Patterson Ross, senior policy officer at the Tenants’ Union of NSW, told Domain that the laws made tenants’ rights clearer but not necessarily stronger: “They will provide clarity about what the obligations are, but the question mark remains, will you be able to enforce the standards if you can be evicted,” he said.
Sources:
‘House values set to fall up to 11 per cent in some Australian suburbs in 2019,’ Shane Wright, Sydney Morning Herald, 8 January 2019
‘What lies ahead for the property market this year: more apartments and low interest rates,’ Phillip Lasker, ABC News online, 7 January 2019
‘Why 2018 was the year of the renter,’ Elizabeth Redman, Domain, 30 December 2018
‘Weakest property market since 2008: Sydney, Melbourne house prices tumble,’ Jennifer Duke, Sydney Morning Herald, 2 January 2019
Australian house prices falling at fastest rate in a decade,’ Naaman Zhou, The Guardian, 2 January 2019
‘End of Year Market Wrap,’ WigginsKeenan December Update, 19 December 2018
‘The far-reaching consequences of Opal Tower,’ Jason Murphy, News.com.au, 31 December 2018
‘NSW Government to crack down on dodgy building certifiers following Opal Tower saga,’ Jonathan Hair, ABC News online, 31 December 2018
‘After a 96 year losing streak, is time up for negative gearing?,’ Shane Wright, Sydney Morning Herald, 15 December 2019
‘Labor committed to scaling back negative gearing despite steepest housing downturn since GFC,’ David Chau, ABC News Online, 4 January 2019
‘New analysis shows negative gearers account for as few as one in 10 property purchases,’ Shane Wright, Sydney Morning Herald, 15 December 2018
‘Labor to unveil $6.6bn affordable housing plan at national conference,’ Katharine Murphy, The Guardian, 16 December 2018
‘Labor promises a $6.6 billion housing boom to bring down rents,’ David Crowe, Sydney Morning Herald, 16 December 2018
‘Sydney's property prices are becoming the RBA's biggest worry,’ Michael Heath, Sydney Morning Herald, 19 December 2018
‘Auction clearances still at 40pc but properties are selling after auction,’ Michael Bleby, Australian Financial Review, 16 December 2018
‘What to expect for Sydney’s property market in 2019,’ Kate Burke, Domain, 4 January 2019
‘Interest rates in the balance amid housing slump,’ Matt Wade, Sydney Morning Herald, 29 December 2018
‘Sydney's property prices are becoming the RBA's biggest worry,’ Michael Heath, Sydney Morning Herald, 19 December 2018
‘RBA control fraud is its crowning blunder,’ Macrobusiness article, 17 December 2018
‘APRA to remove banks' interest-only lending restrictions,’ David Chau, ABC News Online, 19 December 2018
‘Borrowers still seeking interest-only loans despite falling house prices and RBA warnings,’ David Ross, Domain, 14 December 2018
‘Aussie experts warn of worrying consequence of royal commission,’ Alexis Carey, News.com.au, 5 January 2019
‘Property borrowers brace for $300b interest-only credit crunch,’ Duncan Hughes, Australian Financial Review, 6 January 2019
Chicken Little meets the RBA and prices fall
Fri, 14 Dec 2018Chicken Little might have been right – the sky is indeed falling.
We’ve seen Sydney home prices go up, and up and further up, until they reached levels that can only be described as ‘sky high’. Now, for several reasons we’ll discuss in more detail later, they’ve plummeted. Will house prices ever recover? Eventually, yes, but probably not in the near future.
CoreLogic figures show that cumulative losses since the peak of the property boom in July 2017 are on track to exceed the previous record 9.6 percent drop in values that happened between 1989 and 1991.
For property owners it sounds like a disaster, and worse may be yet to come. According to comparison website Finder.com, a 15 per cent fall from the peak of the market would wipe $145,500 off the median value of a Sydney freestanding house and $108,000 off the value of a median Sydney unit.
Yet we should keep in mind that dwelling values in Sydney today remain 41 per cent higher than they were five years ago, when we reported in this column on 13 December 2013: “John Edwards of Residex remarked there were a number of milestones achieved during 2013, including that the median value of houses in Sydney is now approaching the $750,000 mark.”
Since then, after years of continued growth, the market’s finally come off the boil. In times like these it’s never hard to find doomsayers - those who forecast housing prices falling by some huge percentage, or at least those who expect the misery to continue indefinitely.
But as the ABC’s Michael Janda points out, this downturn is different from the previous ‘big one’ in 1989: “The last time Sydney property prices fell this much, mortgage rates were around 17 per cent, unemployment was six per cent (on its way to 11) and Australia was heading into the recession we had to have.
“What a contrast to the current real estate downturn, where new borrowers can get mortgage rates under four per cent, unemployment is at five per cent and has been falling for the past few years, and the latest official figures out this week are expected to show the economy growing above average at 3.3 per cent,” Mr Janda said.
Mr Janda points out the biggest difference this time around: buyers are finding it harder to get the money to buy property. Credit availability for housing purchases has declined alarmingly. Housing credit is still growing, but at the slowest monthly pace since 1984 and the weakest annual pace since 2013, and the rate of growth is still decelerating.
However, there was a rare bit of year’s end good news when data from the Australian Bureau of Statistics (ABS) showed an increase in both the number and total value of mortgages issued in October when 52,654 loans were approved, up 2.2 per cent on September.
$30 billion in mortgages was written in October which was a 2.6 per cent month-on-month increase. Owner-occupier loans accounted for $20.1 billion, up 3.5 per cent while loans to investors rose 0.6 per cent to $9.8 billion in October.
The economic ripples
We know that falling property values impact other sectors of the economy, as the Sydney Morning Herald’s Matt Wade points out: “As prices fall, and fewer properties change hands, home builders and property developers may respond by scaling back their construction plans. That, in turn, can reduce activity and employment in the construction industry.
“Sydney’s last big housing boom, which peaked around 2003, was followed by a protracted downturn in home building activity which contributed to a long phase of below par growth for the NSW economy,” he added.
The Paris-based Organisation for Economic Co-operation and Development (OECD) believes that if price falls continue at their current rate consumers will reduce their spending, putting pressure on the whole economy. The OECD has warned the Australian Coalition that a house price crash could be so economically damaging that the government would have no choice but to reinforce the nation’s biggest banks as happened in the GFC.
"A direct hit to the financial sector from a wave of mortgage defaults is unlikely. However, if house prices collapse, consumer spending could suffer, via negative impact on wealth including from exposures to bank shares, which would encourage deleveraging," the OECD warned.
Economists say the reversal of the ‘wealth effect’ that has been created by rising house prices is the cause of reduced consumer spending. When house prices and share prices fall at the same time, households pull back on their spending and are more inclined to spend out of their savings. The current slow growth in wages is a further reason to be less financially adventurous.
CoreLogic head of research Cameron Kusher said that there’s been a big slowdown in retail trade as housing price weakness grows: "I wouldn't be surprised, particularly over the Christmas/New Year period, if we do see much weaker retail conditions than what we've seen over recent years, due to the fact that property prices are falling fairly rapidly in Sydney and Melbourne."
Citi economists Paul Brennan and Josh Williamson said that the weakness of consumer spending reflected poor income growth in a recent research note: "Although nominal GDP is growing strongly, up one per cent in Q3 and by 5.2 per cent over the past 12 months, the share going to employees has declined," they wrote.
"Additionally, household income available for consumption has been further squeezed by payments growing faster than income [5.8 per cent vs 3.5 per cent over the past 12 months]."
Stephen Letts of ABC News reported that figures from the Reserve Bank show that Australia’s ratio of income-to-savings has fallen to a new post-GFC low: “There are only three ways household consumption can increase: wages increase, savings rate decreases, and borrowing or credit increases.
“Wages are clearly going nowhere. Household savings are shrinking — sadly, they are not some sort of magic pudding that can always be consumed without the need to be replenished. And credit availability is turning from a squeeze to a crunch,” he said.
Banks crucial to recovery
If there’s one reason for the collapse in housing prices that stands out above all the others it’s the tightening of credit by Australia’s major banks. Reserve Bank of Australia deputy governor Guy Debelle warned in a speech to the Australian Business Economists annual dinner in Sydney that the Australian banking industry's habit of ‘acting as a pack’ could make the housing slowdown even worse, adding that both monetary policy and fiscal policy had assisted Australia in the Global Financial Crisis (GFC) and there was scope for both to be deployed in the event of another crisis.
"[The banks’] similar behaviour and similar reaction to events such as falling house prices run the risk of amplifying the downturn in the housing market. That lesson is relevant to the situation today in Australia, where there is a risk that a reduced appetite to lend will overly curtail borrowing with consequent effects for the Australian economy," he said.
Dr Debelle said a mixture of well-delivered policy and good luck delivered Australia through the GFC better than other countries: “Monetary policy was eased rapidly. The Australian banking system was much less affected by the problems bedevilling banking systems in other countries (partly through good luck).
"Fiscal stimulus in Australia, in my view, was absolutely necessary and was a critical factor behind Australia’s good economic outcomes," he said. "While one can argue about the exact nature of the implementation, the fact that it was designed to take effect quickly was vital in the circumstances."
The new ‘normal’
Once rising into the 80 and even 90 per cent range, Sydney Auction clearance rates are now mired in the mid- to low 40 per cent range. SQM Research managing director Louis Christopher told Property Observer there were only three previous times that has happened: “That was in October/November 2008 during the GFC, May 2004 after the NSW vendor stamp duty was introduced and July 1989 when the cash rate hit 17 per cent.”
However, one Sydney estate agent gave a somewhat positive analysis of the present situation by describing the market as ‘normal’: “People are buying, people are selling,” he said. “The only difference is the price point in some areas – and that is not everywhere at all – and the length of time it takes to sell.”
He said that we have neither an oversupply of properties for a handful of buyers, nor a multitude of buyers for a handful of properties: “What people have to get their head around is where the price point is for the transaction to take place. Then they have to understand that buying and selling in the same market is critical.”
And there are a few signs that a recovery, or at least a period of stabilization, has already begun. Domain Group data confirms that across the greater Sydney area prices are still trending lower, but over 100 suburbs are still recording price gains.
Domain figures show that as 2018 comes to a close the city and eastern suburbs and the lower north shore have been the best auction price performers, but no region has been immune to price weakness: “All regions of Sydney had their clearance rates affected by the current market conditions,” said Eliza Owen, Domain research analyst.
“On average, Sydney regions saw a 15-percentage point decline in the auction clearance rate.”
Buyer’s agent Peter Kelaher, of PK Property Search & Negotiators, said that the constant commentary about falling prices isn’t affecting everybody in the property market: “In general, a lot of property is selling, and it is selling for okay prices, but in the worst cases it has come off by 20 per cent. Out west and down south is a nightmare, and that’s what is bringing the median price down.”
The combination of falling housing prices, ongoing low interest rates and reduced levels of buyer competition have made this ‘the time to buy’ for those who can access the capital needed to acquire property.
Buyer’s Agent Nick Viner from Buyers Domain Australia told News.com’s Shannon Molloy: “This environment is the absolute perfect time to buy because you’ve got more time to consider your options and there’s more choice in terms of available homes. You also have the ability to focus on really blue-chip properties in your budget. You can bag a more superior property that you can really only get for cheaper in markets like this.”
Mortgage Choice CEO Susan Mitchell said she thinks house price slumps could generate a new legion of buyers that will eventually drive renewed growth in a sluggish market: “The decline in dwelling values, particularly in the nation’s capitals, could open the door to those looking to get their foot in the property market,” she said.
Off-the-plan regrets
There’s little doubt that those who bought off-the-plan apartments at the peak of the property boom are now feeling the pain of having the valuations of their properties reduced by the banks, meaning they have to borrow more money to settle on their purchases. Angie Zigomanis, head of residential research for BIS Oxford Economics, said: “It’s going to be challenging to have a valuation above your purchase price if you bought in 2017.”
Figures from CoreLogic show that more than 14 per cent of Sydney apartment owners’ resales were made at a loss, a rise from 11 per cent in the past 18 months. Meanwhile, the number of off-the-plan apartments valued at a lower price jumped from 11 per cent in April last year to 30 per cent in September 2018.
According to JLL national director and head of residential research Leigh Warner, it’s the larger projects that were targeted at investors that will be the hardest hit by falling prices: “Better quality, smaller developments that appeal a little more to owner occupiers and astute investors will perform much better,” he told Domain.
Two words have become the ‘scare words’ of the property market in recent times: negative equity. In simple terms, borrowers in negative equity are in the position of paying off mortgages for more than their properties are worth. If they sell, they have an outstanding debt to the bank, and if they don’t sell, they have to finance more debt at higher interest rates than applied to their original loan.
Frank Chung of News.com.au came up with some interesting statistics. In November 2018, a Roy Morgan survey of 10,000 borrowers found 8.9 per cent were slipping into negative equity — up from 8 per cent 12 months earlier — which equates to around 386,000 Australians.
And the founder of Digital Finance Analytics, Martin North confirms that there are around 400,000 households across the country in negative equity, both owner-occupiers and investors: “There are about 3.25 million owner-occupier borrowers and 1.25 million investors, so around 10 per cent of properties are currently underwater.”
Colliers International said that the proportion of buyers unable to settle has almost doubled [since the market’s peak] due to tighter lending restrictions. The company also said that the settlement risk for projects was now between three and five per cent, but it’s three to four times higher for development projects relying on sales to international buyers through third-party agents.
Dennis Vertzayias, national director for residential at Colliers International, said those affected, mostly foreign buyers, would lose their deposit and, in some rare cases, be liable to cover any price differential if the property resold at a loss. “These buyers are not [as] emotionally invested … they’re prepared to walk away and lose their 10 per cent deposit [if they can’t get finance],” said Mr Vertzayias, adding that multiple external factors had seen settlement defaults climb to 20 per cent.
Very interesting
Interest rates have been kept steady for the past two-and-a-half years. The RBA reduced the cash rate to a record low of 1.5 per cent in August 2016, following an earlier cut to 1.75 per cent in May. There has not been an RBA cash rate increase since November 2010.
Most bets in the financial world are still on a rate hike being the next move, but not all economists agree. Market Economics director, Stephen Koukoulas has forecast a rate cut to 0.75 per cent by the end of 2019.
"Based on the scenario where house prices fall around 7 to 10 per cent in annual terms over each of two years, real retail sales per capita will fall by about 1 per cent in each of those two years. Retail figures have not been that weak since the global financial crisis and the early 1990s recession."
And there are others in the economists’ fraternity who also sense there’s a chance for a cash rate cut rather than an increase due to the continuing weaknesses in the economy. One of these is the AMP’s Shane Oliver who has gone from thinking rates would stay on hold for years to anticipating a cut in 2019.
"With the RBA still seeing the next move as being up it will take them a while to change their thinking, so we don't see rates being cut until second half next year," Dr Oliver told the ABC. "When it does start cutting, the RBA will likely stick to 0.25 per cent increments — and since rate moves are a bit like cockroaches there is likely to be more than one."
Other dissenters include UBS's George Tharenou, who said he couldn't rule out a rate cut if weak data continues in 2019, and the NAB economics team who recently published a note saying its "monetary policy forecasts are currently under review".
The Guardian’s columnist Greg Jericho supported those who don’t foresee a hike in rates: “It is unlikely a rate rise will occur while housing finance continues to fall, and with no real signs of inflation or wages growth getting back to levels that the Reserve Bank would even consider to be neutral, let alone needing to be slowed, it is unlikely the RBA will do anything that would increase the likelihood of a hard landing.
“As such the era of low-interest rates looks set to continue for some years yet, and so too does the hope for a soft landing.”
Sources:
‘Shock property market data released today bucks the recent trend of dire predictions,’ Shannon Molloy, News.com.au, 12 December 2018
‘With the housing market off the boil, could it end in doom and gloom?’ Greg Jericho, The Guardian, 11 December 2018
‘Banks' pack behaviour could drive housing lower: RBA,’ Mathew Dunckley, Sydney Morning Herald, 7 December 2018
‘Why now could be the time to buy property, with some tipping an imminent market recovery,’ Shannon Molloy, News.com.au, 7 December 2018
‘Aussies 'squeezed' as spending grows and savings evaporate,’ Stephen Letts, ABC News Online, 7 December 2018
'Prepare contingency plans': OECD warns Coalition government on falling house prices,’ Shane Wright, Sydney Morning Herald, 10 December 2018
‘Property market falls tipped to dwarf 90s recession,’ Jessica Irvine, Sydney Morning Herald, 4 December 2018
‘Sydney auction clearance rate steadies as buyers hold out for discounts,’ Chris Tolhurst, Domain, 9 December 2018
‘Eye of the storm’: Sydney off-the-plan apartment buyers caught out by lower valuations,’ Tawar Razaghi, Domain, 9 December 2018
‘Perth's four-year housing bust is nothing like what Sydney and Melbourne's property markets face,’ Emily Piesse, ABC News Online, 9 December 2018
‘Sydney House Prices Edging Towards Cliff,’ Molly Wilson, The Australian Tribune, 6 December 2018
‘This property downturn is a different beast from the big one in 1989,’ Michael Janda, ABC News Online, 6 December 2018
‘One million Aussies could become ‘prisoners’ in their own home as falling prices put them in negative equity,’ Frank Chung, News.com.au, 5 December 2018
‘Housing slump 'the biggest threat to the Australian economy,’ Matt Wade, Sydney Morning Herald, 5 December 2018
‘Off a cliff: House prices alarmingly close to record-hitting territory,’ Elizabeth Knight, Sydney Morning Herald, 3 December 2018
‘Sydney housing downturn to eclipse 1989 recession,’ Frank Chung, News.com.au, 3 December 2018
2018: A year to remember for all the wrong reasons
Thu, 15 Nov 2018The Sydney property market is well and truly back in the news, but unlike just two years ago it’s now all about price falls rather than soaring property values. We’re now heading for a new 28-year record annual drop that will eclipse the fall in 1990 when prices tumbled by 7.9 per cent annually. How times have changed.
Restrictions by regulators on interest-only loans and investor lending have taken effect and are now being felt by homeowners, vendors, developers and even first-home buyers. Banks have tightened their lending requirements and are now applying intensive scrutiny to their loan applicants’ estimates of living expenses, prompting Finance Brokers Association of Australia executive director Peter White to say: “This doesn’t affect the wealthy. It affects those who can least afford it, and it has almost stalled the home loan refinance market.”
CoreLogic's head of research Tim Lawless told AAP the home lending system had been let down by a failure to enforce existing laws: "We've already seen [that] tighter credit policy has been, in our view, the primary driver of the slowdown, particularly the reduction in investment activity," Mr Lawless told AAP.
"If it becomes harder to get a loan or if more segments of the market place are restricted from credit, then absolutely that should have a further dampening effect on the market."
At least economic pressures for an interest rate increase have eased. Capital Economics chief economist Paul Dales told the Herald’s Eryk Bagshaw that the weaker housing market, slower consumption growth and tighter lending standards meant he believed the Reserve Bank was unlikely to raise the cash rate from its historic low of 1.5 per cent until late 2020.
Meanwhile, major banks have already begun to raise their interest rates on some forms of lending, and that’s before the RBA applies any tweaks to its present record low interest rate that’s survived two years untouched.
The view from here
Our major banks continue to downgrade their forecasts for the Australian housing market. Most analysts believe Sydney will be hit harder than Melbourne. Domain’s Kate Burke compiled some numbers: “In the year to September, $75,000 slid from the [Sydney] median house price; a fall of 8.1 per cent since the peak mid-last year, and a 4.4 per cent fall in unit prices.”
NAB expects house prices will flatten in 2020, with a peak-to-trough fall of 6.5 per cent in Sydney and 2.5 per cent in Melbourne. Westpac, Australia’s biggest lender to landlords, says it expects demand for loans to remain “weak” and expects falls to continue ‘for a while’.
ANZ said it expects to see peak-to-trough falls of about 10 per cent in both Sydney and Melbourne in the same period. Macquarie Bank recently raised its estimate of the fall’s percentage from a previous 4 to 6 per cent prediction to “around 10 per cent”.
Deloitte Access Economics partner Chris Richardson told the ABC that housing prices in Sydney are falling by over $1000 a week: “Our house prices here in Australia had streaked past anything sensible by way of valuation,” he said. “Now, finally gravity has caught up with that stupidity and prices are falling.”
American multinational investment bank and financial services company Morgan Stanley said in its latest forecast that property prices in Sydney could drop by up to 15 per cent: “We now see a 10-15 per cent peak to trough decline in real house prices, from 5-10 per cent previously, which would mark the largest decline since the early 1980s. This downgrade largely reflects the downturn’s extended length, as we expect the relatively orderly declines to date will continue,” Morgan Stanley said in the report.
Perhaps the most negative of all available forecasts came from AMP Capital which had previously predicted top-to-bottom price falls of 15 per cent in Sydney by 2020, or by about five per cent per year. However, AMP Capital chief economist Dr Shane Oliver now says that the total of the decline is likely to be 20 per cent as “credit conditions tighten, supply rises and a negative feedback loop from falling prices risks developing”.
The previously longest downturn began in early 2004 and lasted until late 2006. During that time the median Sydney house price fell 7 per cent overall. Domain senior research analyst Nicola Powell said: “This downturn is new territory for Sydney … driven by banking regulators who have implemented tighter lending conditions. And the banking royal commission has driven even more conservative lending. What APRA and the RBA wanted to do was slow price growth. They’ve achieved what they wanted.”
In September house prices dropped by their biggest monthly fall since the global financial crisis. To say the traditional spring selling season hasn’t happened is an understatement, as median prices continue to slide.
It’s not just price growth but the whole market that’s in a slowing mode. Sydney’s housing turnover is approaching a 20-year low and properties are taking longer to sell. Even though fewer properties are being listed for auction, fewer than half are selling under the hammer. In what should be a buyer’s market, this means that vendors are setting their selling prices too high for current conditions.
Matt Hayson, director of Cobden & Hayson, said that buyers were holding back because of reduced borrowing power, although it’s not necessarily a bad time to be in the market: “For people both buying and selling in the current market, it’s all quite relative. If you need to sell for a legitimate reason sell, but if you can afford to hold, hold,” he said.
Geography of a pullback
Geography has become an even more important determinant in the price of a property now that the boom is over. The situation was summed up by Domain’s Kate Burke: “Sydney house prices have taken their biggest hit in decades but about one-third of suburbs across the city are still seeing price rises, data shows.”
Despite the overall trend of falling prices, some parts of Sydney have maintained their prices much better than others. The latest figures from Domain show that the inner west took the biggest hit to prices overall in the year to September, with a median fall of almost $180,000. However, the city’s biggest drop was in Rose Bay, where the median price dropped 20.4 per cent to $3.25 million.
Suburbs in the city and east where the supply of new apartments is more limited were the top performers for unit increases, while suburbs in the west, south and south west where houses are more affordable made up the majority of suburbs that saw strong house price growth.
A new report from global property firm JLL says that Sydney’s unit sales fell more than 20 per cent last financial year, and the number of units being marketed over the three months to the end of September was also down more than 20 per cent on the previous quarter.
Leigh Warner, national director and head of residential research at JLL, said apartment prices were holding up better than house prices — as reduced borrowing capacity was limiting more buyers to apartments — but the softening market made it harder to get new projects off the ground.
Suburbs with the strongest house price growth – name, median price, (year-on-year change):
Cremorne -$2,750,000 (20.9%)
Blakehurst - $1,950,000 (18.8%)
Marsden Park - $827,000 (15.0%)
Woollahra - $3,470,000 (14.3%)
Suburbs with the biggest house price falls:
Rose Bay - $3,250,000 (-20.4%)
Russell Lea - $1,900,000 (-17.4%)
Lane Cove North - $1,820,000 (-15.5%)
Glebe - $1,595,000 (-14.7%)
Suburbs with the strongest unit price growth:
Elizabeth Bay - $1,075,000 (23.6%)
Vaucluse - $1,400,000 (21.7%)
Rozelle - $1,360,000 (19.8%)
Rushcutters Bay - $804,000 (17.4%)
Suburbs with the biggest unit price falls:
Newtown - $655,000 (-17.1%)
Bellevue Hill - $1,102,500 (-15.2%)
Double Bay - $1,275,000 (-15.0%)
Turramurra - $830,000 (-13.8%)
Steven Letts at News.com.au noted that house prices have been falling for a year across Australia: “To date, most of the slump has been quarantined at the top end of the market — among the most expensive 25 per cent of houses and apartments.
“However, since June the more affordable end of the market has also started to fall. Cheaper housing tends to have less extreme swings in price and falls are quite rare, but when the bottom end does fall, it tends to point to more persistent weakness in the property market.”
Quality counts more now
During the Sydney housing market’s five-year boom before it ended in mid-2017, most buyers found they had to pay around 10 per cent above reasonable estimates of a property’s value to acquire a desirable property. Today’s buyers are more likely to be purchasing at fair-value prices or even below.
Quality homes are still finding buyers, with renovated properties and blocks of land in prime locations especially sought after. Buyers of higher-priced homes are generally meeting the asking prices in prime suburbs.
Buyer’s agent Rodney McLoughlin, of TBAS, told Domain’s Chris Tolhurst that the outer suburbs would be the worst affected by the decline in prices in Sydney compared with inner areas: “The dynamics of the market have changed, but it’s different in Bellevue Hill, I’ve noticed,” McLoughlin said. “People still want to be in Bellevue Hill because it’s close to the private schools.”
Domain’s Dr Nicola Powell said that between second-tier suburbs and their more expensive neighbours is the predominance of local buyers in the high-end market upgrading to beachside, lifestyle locations, according to Domain’s senior research analyst Nicola Powell.
“The $5 million-plus end of the market is holding up really well this year, unlike the $990,000 to $2 million market,” Dr Powell said.
With the weekend auction clearance rate dropping below 50 per cent, it’s been noted that some buyers think they can snare a better deal by waiting until after the auctions and negotiating to buy passed-in properties.
Another tactic that’s being employed by canny purchasers is to make offers 15 to 20 percent below an estimated value, hoping to get a better deal from a vendor who might be concerned about the market slipping further if the sale doesn’t take place.
But these tactics aren’t successful everywhere. Tracey Chandler, a buyer’s agent who specialises in the eastern suburbs, told Domain that every property listed in the area was selling, and vendors were taking advantage of the opportunity to sell both houses and apartments for strong prices.
“A lot of vendors are sticking by their guns on price and they are getting what they wanted,” Chandler said. “There is not a great deal of properties on the market in the eastern suburbs – people are holding off to see what happens.”
Tenants win
Although not a pleasant outcome for property investors, one result of the decline in housing prices has been a reduction of up to ten per cent in rental costs in some parts of Sydney. This is largely due to the high number of apartments on the market, which is why asking rents for houses have remained relatively stable.
“Those Sydney regions that were overexposed to investors will be more prone to rental price decreases,” said Nicola Powell, Domain senior research analyst. “That’s already unfolding in the lower north where there is a high level of tenants and they have seen significant rent declines.”
Median weekly rentals in the lower north shore dropped by $100 over the past year, according to Domain's Quarterly Rental Report with rentals now sitting at $1000.
Margaret Woo, head of property management at Ray White Lower North Shore, told Domain’s Tawar Razaghi that it’s a particularly tough rental market at this time: “We virtually have to drop rents straight away to get people through the house compared to this time last year,” said Ms Woo.
She said rent increases in the past few years had been “out of control” and it had recently become more common for tenants to negotiate prices, as well as breaking leases to move to cheaper rentals.
But the lower north shore wasn't the only area to see a decrease in median weekly asking rent. Rents in the city and east (down 4.8 percent), inner west (3.2 percent) and northern beaches (3.1 percent) have all decreased in the last year.
Dr Powell puts this down to an all-time high in rental supply, largely due to apartments that were built during the property boom that are now coming to completion: "Tenants will find they have considerably more houses and units to choose from than this time last year," she said.
Another reason rents are dropping across Sydney is that there are more rental properties sitting vacant than at any time in the last 13 years. Figures from SQM Research published on News.com.au show that 19,114 rental properties in Sydney were untenanted; this equals 2.8 per cent of the city’s rental stock.
This figure is well above the 1.9 per cent vacancy rate at the same time last year and is the highest since SQM began keeping records in 2005.
Revenue streams suffer
One problem with a housing boom is that governments get used to the ‘rivers of gold’ flowing their way in stamp duty from property sales, and when these revenues decline, they begin a search to find new ways of raising the now foregone billions of dollars.
The number of settled sales has already dropped significantly and further falls are predicted. Sydney’s 18.5 per cent drop in transactions has been accompanied by falling values, adding further constraints to the NSW government’s spending plans. And with an election coming early next year this government is frantically casting about for new sources of cash.
Tim Lawless, CoreLogic head of research, told news.com.au: “Clearly there’s a double whammy of less turnover and fewer stamp duty events,” he said. “That’s going to have to have an impact on budgets and revenues for a state government.”
The Grattan Institute’s Brendan Coates said that NSW had relied too heavily on stamp duty income to pay for government expenditure. He said that NSW has “essentially become addicted to rising stamp duty revenues.”
He added that the NSW treasury had been forecasting relatively modest declines in revenues of around 10 per cent, but the actual 18.5 per cent decline was larger than what most economists expected.
The Grattan Institute has been leading the charge for a major change in taxation that would affect every household in Australia. On the surface, it’s simple: do away with stamp duty and replace it with a broad-based land tax on family homes. Very positive for state government coffers, but also very politically problematic.
The move to such a tax may have already begun this month with NSW treasurer Dominic Perrottet announcing what he called “the biggest overhaul to stamp duty in 30 years”, outlining a plan to index stamp duty brackets on residential property transactions to the consumer price index.
However, the stamp duty ‘overhaul’ would only save the purchaser of an average dwelling around $500 – not much of a reduction. No wonder that the treasurer said he was ‘open to further reforms’ of property-related taxes, but that these would require the cooperation of the Commonwealth government and the other states and territories.
A June 2018 report concluded that Australia stood to gain $24.3 billion every year in GDP from 2047 if state governments replaced stamp duty with a broad-based land tax. All good if you’re a free-spending government, but not so good for homeowners who already paid stamp duty when they bought their homes and may well resent being asked to pay more annually.
But it’s also been argued that Australia’s favourable taxation treatment of the family home – leaving vendors free to pocket their capital gains tax-free in most cases, allows the greatest benefits to go to those who already have the most wealth. The resulting inequality, it’s said, is creating a divide between ‘rich’ homeowners and ‘poor’ renters.
Advocates for social housing say that replacing stamp duty with a broad-based land tax would benefit younger Australians buying their first home. They also point out that it would lift annual federal and sate tax revenues by something like $11 billion. However, they have yet to come up with a way to ‘sell’ it to existing homeowners, particularly those older retired people who might have some problems coming up with an extra $2000 to $3000 or more per annum just to pay a new tax.
Sources:
‘Housing slump set to be the largest in nearly 40 years, Macquarie says,’ David Scutt, Sydney Morning Herald, 7 November 2018
‘Westpac expects further house price falls,’ Clancy Yeates, Sydney Morning Herald, 6 November 2018
‘NSW to make the biggest changes to stamp duty in 30 years,’ Matt Wade, Sydney Morning Herald, 5 November 2018
‘The Sydney suburbs where house prices aren’t falling,’ Kate Burke and Tawar Razaghi, Domain, 4 November 2018
‘Home values are back to 2015 levels in parts of Sydney,’ Stephen Nicholls, realestate.com.au, 3 November 2018
‘Sydney leads national home value falls with biggest annual decline since 1990,’ Isabelle Lane, The New Daily, 3 November 2018
‘Developers downsizing, offering more incentives in cooling market: JLL report,’ Kate Burke, Domain, 1 November 2018
‘There had to be a reality check’: Crows Nest home passes in at auction as buyers refuse to bid,’ Kate Burke, Domain, 13 October 2018
‘Sydney house prices to continue downward trend, experts predict,’ Kate Burke, Domain, 26 October 2018
‘Spring property season kicks off under a cloud,’ Frank Chung, News.com.au, 1 September 2018
‘Chart of the day: Upmarket housing led the price falls — but cheap properties are following,’ Stephen Letts, News.com.au, 30 October 2018
‘Flight to quality’: Buyers mark properties harder than six months ago,’ Chris Tolhurst, Domain, 28 October 2018
‘It’s a strange market’: Middle ring faces price pressure at weekend auctions,’ Chris Tolhurst, Domain, 14 October 2018
'Primary drag': Sydney house prices down 6.1% over 12 months,’ James Hall, Sydney Morning Herald, 1 October 2018
‘House prices have biggest drop since GFC amid warnings of credit crunch,’ Patrick Hatch & Eryk Bagshaw, Sydney Morning Herald, 1 October 2018
‘Sydney clearance rates tread water, as vendors sell to buy upwards,’ Chris Tolhurst, Domain, 7 October 2018
‘Sydney rent prices drop by up to 9 per cent in year, Domain report shows,’ Tawar Razaghi, Domain, 10 October 2018
‘Sydney Rents Drop In Some Areas By $100 Per Week,’ Alex Bruce-Smith, Ten Daily, 11 October 2018
‘Morgan Stanley forecast reveals house prices could fall by up to 15 per cent,’ Alexis Carey, News.com.au, 12 October 2018
‘AMP downgrades housing forecast, now expects prices to fall 20 per cent by 2020,’ Frank Chung, News.com.au, 19 October 2018
‘Sydney’s bridesmaid suburbs, where record prices are no longer a one-off,’ Lucy Macken, Domain, 13 October 2018
‘Reserve Bank 'alert but not alarmed' by house price decline,’ Eryk Bagshaw, Sydney Morning Herald, 16 October 2018
Affordable housing can be a reality, even in Sydney
Tue, 16 Oct 2018Housing finance figures from the Bureau of Statistics confirm that investors continue to depart the housing market. Unlike earlier periods of investor disinterest, this time around owner-occupiers are also taking out fewer mortgages than they were a year ago.
Despite interest rates being at record lows, Australians aren’t choosing to to buy or invest in property nearly as much as they were doing just a couple of years ago, and that includes first-home buyers who usually would find this a more inviting market than during the boom times of the past few years.
The underlying problem is the unaffordability of Sydney housing. The NSW government has introduced a range of policies intended to assist first-home buyers to acquire a home, but these aren’t sufficient to enable would-be purchasers to take on the mortgages needed to convert them from tenants to homeowners.
Property prices across Sydney are easing, and that should mean younger Australians would find it easier to acquire property, but the size of the average mortgage is still increasing –about four per cent higher than at this time last year, and the introduction of new restrictions on borrowing have made it more difficult than ever for young families to buy a home of their own.
It’s not only owning a home that’s becoming harder. It’s also getting harder to find a rental property that fits within a household budget. Although rents in many parts of Sydney are falling, by as much as five per cent in some areas, the median rent for houses of $550 per week is simply beyond the reach of many lower and middle-income families.
Housing stress a factor
For low and middle-income earners who live in Sydney, housing stress has become a major concern. What is housing stress? It’s when housing costs take up more than 30 per cent of a household’s income, and when that household is among the bottom 40 per cent of income earners.
The latest Household, Income and Labour Dynamics in Australia (HILDA) survey shows the rate of housing stress in Sydney was 10.1 per cent between 2001 and 2004 and reached an all-time high of 13 per cent between 2013 and 2016. About one household in every eight is now enduring housing stress, whether they’re renting or buying their home.
Renters have been those most affected by housing stress. Across Australia, one in five low and middle-income renters are in housing stress compared with one in 10 of those with a mortgage.
A related survey finding was that the average mortgage burden on homeowners aged under-40 doubled between 2002 and 2014 leaving them especially vulnerable to rising interest rates.
The HILDA survey showed a sharp decline in the number of those under 45 years of age able to make the transition from tenant to homeowner. It also found that people living in flats had the highest rate of housing stress followed by people living in semi-detached houses; those living in detached houses had the lowest rates of housing stress.
The report’s co-author, Melbourne University’s Professor Roger Wilkins, told the Sydney Morning Herald’s Matt Wade that the rising rate of housing stress in Sydney is due to the long run-up in property prices: “House prices and, to some extent, rents have been rising relative to incomes,” he said. “That’s really the bottom line.”
Not surprisingly, Professor Wilkins said the decline in people moving from renting to home ownership was most pronounced in big cities like Sydney: “It’s very much connected to house prices, especially the rise in house prices relative to incomes,” he said.
Rental vacancies abound
There’s no scarcity of rental properties available across Sydney. In fact, the Sydney rental market is at its highest vacancy rate in more than a decade - almost 20,000 rental properties are estimated to be empty.
Data from property analysts SQM Research show that 19,572 residential rental dwellings are currently available for rent. The present vacancy rate of 2.8 per cent is the highest since SQM began keeping track of the data in 2005.
SQM managing director Louis Christopher summed up the situation for Domain’s Kate Burke: “There is now a greater supply of rental accommodation at a time when the growth in rental demand is probably falling a little,” Mr Christopher said.
This should mean good news for renters. There’s more rental stock after the recent boom in housing construction, and a there’s also a slight slowdown in population growth resulting from a reduced intake of migrants to Australia.
Property manager Anthony Cachia of Ray White Nolan & Iken, says those looking for rental accommodation face less competition than they did a couple of years ago: “There’s still a lot of people out there looking, but they’ve got a lot more choice now. Instead of having ten people looking at one property we’re having most often one or two that come through.”
St George Property Agents principal Michael Stojanovic said properties are taking longer to rent out than they used to: ““There are a lot of properties out there compared to eight or nine months ago,” he said. “Most of the time it takes a couple of weeks [to rent out a property], when once it would have taken a few days.”
For those interested in renting a prestige property, renting a house in some of Sydney’s most expensive neighbourhoods has actually become cheaper in the past year thanks to competition from newly-built apartments available on the rental market.
Renters in the city and east are now paying $60 less weekly than they were a year ago, and the median house rent in Sydney’s inner city has dropped 5.5 per cent year on year to $1,040. Rental costs year on year also fell for houses in the north west, northern beaches and upper north shore. However, rents rose higher on the edges of greater Sydney as houses in the city’s west, Blue Mountains and Central Coast all saw increases.
A growth in the number of Sydney rental listings over the June quarter was a key factor for easing prices, with the number of houses for rent up 6.9 per cent from the previous year, and units up 16.4 per cent – their biggest annual increase since 2012.
“We’re seeing building completions peak and seeing a lot of off-the-plan properties sold to investors [in previous years] coming onto the rental market,” Domain’s data scientist Dr Nicola Powell said.
Search for solutions
Affordable housing, even in greater Sydney isn’t an impossibility. Other cities around the world have faced the same or similar problems, and thanks to their efforts at finding solutions we have some options to consider.
Phil Ruthven AM, the Founder and continuing director of market research firm IBISWorld, believes the solution for Australia would be to adopt the leasing model common in Europe. This is a model which allows tenants to take out longer term leases – five to 10 years or more and gives them flexibility in how they fit out and use their homes.
“For years I’ve been advocating that it’s better to lease than to own a home — but I don’t mean renting, which is unstable, short-term and limiting,” he told News.com.au’s Alexis Carey.
“Less than half of people in Germany own their own home … because with leases you can paint the bloody house purple if you want; the owner might say to return it to the original condition at the end, but it’s a two-way deal with more flexibility.”
“Renting is very degrading, in a sense, compared to leasing,” he said. “We have to change our rental rules — they are backwards in Australia currently; it’s antediluvian.”
There are also concerns that the type of apartments now being constructed across Sydney won’t meet the needs of young families as they grow. Investor demand has seen apartment construction boom, but Angie Zigomanis from BIS Oxford Economics says the studio, one and small two-bedroom apartments that are attractive to Generation Y as they rent in their 20s are unlikely to hold the same appeal as they age.
“The large-scale, high-rise developments that sell apartments off the plan to investors do not hold the same appeal to owner-occupiers. Demand for medium-density housing is not as easy for developers to meet — apartment sites go up, but townhouse and villa-style developments require going out” according to Mr Zigomanis.
An answer at hand
In recent times housing has become an investment vehicle as much as a source of shelter. UK-based Places for People build-to-rent fund director Alexandra Notay says it’s important to understand this isn’t necessarily a good thing: “The baby boomer generation benefited from unprecedented house-price growth - they could basically guarantee that their house was going to double in value in a very short space of time,” she said.
“It’s getting people to understand that that is not the norm, that was a bubble in the housing market that is highly unlikely to reoccur. If you can give people security, so they know they’re not going to get thrown out or have to find somewhere else, they can get their kid into a local school, they can be part of the community,” Ms Notay said.
Sydney’s high property prices have made housing unaffordable for many, as both owner-occupiers or renters. But if governments and the private sector join forces there could be a way to provide the market with something close to the ideal.
Build-to-rent is the formula that could well unlock housing for those who presently can’t afford to buy or who find themselves severely stressed by expensive rents. It’s relatively simple in concept, but to make it financially attractive to investors will require a deal of private and public sector co-operation.
The Herald’s Carolyn Cummins explains: “CBRE research revealed that yields on build-to-rent investments would sit slightly above yields in the residential sector (2-3 per cent) at about 4.5 per cent. While this is an attractive return given the low-risk nature of build-to-rent, it is still low, and land tax will erode it.
“In a hypothetical model from CBRE, the impact of GST is quite significant and the internal rate of return (IRR) falls 99 basis points for both foreign and domestic investors.”
Build-to-rent aims to provide affordable, good-quality housing that suits the needs of low- to middle-income people who are now priced out of the owner occupier and private rental market. Within the build-to-rent model, investors, developers and governments work together to build high-quality apartments solely for the purpose of renting (or leasing) them out at an affordable price.
The model transforms housing into infrastructure that offers investors a long-term and low-risk investment opportunity. National Affordable Housing Consortium managing director Mike Myers told Domain that support from governments was important.
“I think the start-up stuff is going to be supported at a state government level, because their social housing systems are shrinking, home ownership is falling away, and they’ve got this major gap with the population boom going on, and they’re going to be the people accountable if they don’t fix it,” he said.
Expectations of infrastructure investors, unlike mainstream property developers, are based on long-term timeframes with stable returns and greater security. Toll roads, airports and seaports are some examples of this type of investment.
Investment bank Investec has entered the mostly-untilled field of affordable housing development in Adelaide with an 86-dwelling mixed-use project at Bowden, which offers for-sale and key-worker rental units. The scheme also allows key workers a discounted rental rate for up to three years while they save for a deposit to purchase their home.
Investec has now registered an interest in NSW’s ‘Communities Plus’ program to develop a 1.1-hectare residential precinct in Sydney's inner-city Redfern. The project at 600-660 Elizabeth Street anticipates a return of around half that sought by mainstream developers, but says the return is still acceptable.
"We are able to mitigate major project risks by working collaboratively with various layers of government," Investec Australia's infrastructure finance and investment team, Nils Miller, said.
A variant of build-to-rent – co-living, is also now available in Sydney. Hotel group Veriu is offering units in co-living property UKO in Sydney’s inner west, having 33 studios. Another co-living property is being offered by Caper Property in an inner-city location.
Although new to Australia, co-living has been well-received in the US, Britain and Asia.
Co-living enables a number of renters to live under one roof. The real estate is owned a single landlord and the units are leased out over the long term. Domain’s Alison Cheung describes the concept:
“The property is typically an apartment complex with communal areas and also comes with services such as cleaning and laundry, as well as a host who organises group activities to foster a sense of community, all of which is included in the rent.”
In 2017 the NSW government began looking at a housing affordability plan that might enable people now locked out of the Sydney market to lease affordable housing on a long-term basis. Construction giant Mirvac has also been looking at this promising area for developers.
"Australians are renting in greater numbers and for longer periods. With this evolution comes the need for greater housing choice, housing diversity and improved security of tenure for renters," Mirvac chief executive Susan Lloyd-Hurwitz told the Australian Financial Review.
"Build to rent can provide secure, quality, long-term and professionally-managed rental accommodation in key urban locations providing people with this choice and security,” she said.
Real affordability requires planning
The City of Sydney Council has a plan to create up to 3,600 affordable homes by the year 2030, but only if a new affordable housing levy is approved. The council currently has an affordable housing levy, but it only applies to new developments in Green Square, Pyrmont and the southern employment lands (the area between Sydney airport and the CBD).
Under the terms of the levy, a developer makes a contribution to affordable housing based on the total floor area of its development. The council has lobbied the state government to allow the City of Sydney to extend the levy, and if it is approved the council will phase in the changes by June 2022 to allow “the property market time to adjust”.
The levy is an attractive option for councils, as it is not an increase of development or density but ensures that a certain proportion of new development is affordable. As a Council spokesperson described it: “It’s not about more housing. It’s about built-in plans for affordable homes.”
In 2014 the NSW government announced a plan to sell property it owned in and around the Rocks area in Sydney. The funds raised were to be used to create a “fair social housing system” by building 1500 residences further away from the city’s central districts. Since that time the government has so far built 839 social housing units using those funds, with another 320 residences under construction.
These measures, and more, have been implemented with noble goals, but the waiting list for social housing increased from 57,000 persons to 60,000 in just the two years from 2014 to 2016. It now stands at 55,949 by the NSW government’s own statistics which are believed to understate the extent of the problem.
A national housing plan was launched in March this year by an alliance of housing bodies, based on reforming Australia’s taxation system and using funds saved to develop affordable housing. Director of the campaign, Kate Colvin said that ‘rebalancing’ the tax system was the first step to fixing Australia’s “broken” housing system.
“We are calling on government to not only reduce the cost of housing tax concessions, but to also directly reinvest these savings into delivering the second part of our plan – increasing the supply of affordable rental housing,” Mrs Colvin said.
The plan envisages a national housing strategy including new investment to generate 300,000 new properties for social and Aboriginal housing. It also recommends a new tax incentive or direct subsidy to encourage private sector investment in 200,000 low-cost rental properties for low and middle-income earners.
Supporting the plan, Professor Julian Disney AO said the federal government needed to reduce the tax discount for capital gains and cut what he termed the “excessive” tax deductions for negative gearing. He also said that stamp duty on modestly priced homes should be removed too.
More apartments the answer?
About a third of homes in Sydney are now apartments, while detached homes have dropped to around 50 per cent. Townhouses and terrace houses account for the remaining 15 per cent. We know this because the 2016 census listed apartments at 30 per cent of Sydney’s homes, and since 70 per cent of new housing is now apartments, it’s estimated they have reached at least one-third of Sydney’s total dwellings.
One of the main drivers of the swing to apartment living, according to a study from McCrindle research, is affordability. The average detached house in Sydney is selling for $1.15 million while the average apartment is $710,000.
For several years the NSW government insisted that the solution to having more affordable housing would be to encourage the construction of more homes. This morphed into a virtual blanket approval for high-density apartment construction in and around major transport hubs across Sydney, with the state government taking over planning approval powers from local councils.
Although there’s recently been a bit of a pullback in approvals for new apartment construction, there are predictions of a return to new apartment supply later this year and in early 2019. Developers have suddenly become a bit hesitant to reveal their positions in a softer market than we’ve had over the past five years as apartment approvals have decreased and demand has slowed with the fading of the Sydney property boom. However, property consultancy group Urbis says the reduced supply will be short-lived.
“I think it’s going to pick up,” said Urbis associate Director Alex Stuart. “What we’re seeing in the last three to six months is more activity, particularly in regard to transport corridors and development precincts around Sydney.”
Domain reports that across Sydney, 29 new projects – comprising 24,000 units – commenced in the March quarter, with 123 projects actively selling. The March quarter also saw 32 developments completed. These are now being marketed and prices have become more competitive, with the price of off-the-plan apartments on average dropping from $1,110,463 at the end of 2017 to $1,099,569 at present.
Pete Wargent, from Wargent Advisory, doesn’t agree with Urbis and says Sydney’s apartment supply won’t really begin to bounce back before the end of 2018: “I think it’s got a way to drop yet – from talking to industry contacts, it’s a lot harder to finance projects now,” he said.
He said that banks were more reluctant to lend money for development projects, and developers needed high presales for the builds to commence: “I wouldn’t say it’s particularly unexpected – it’s just part of the cycle. But the question mark for some developers is – if prices do start to decline for apartments. That’s when you see projects run into trouble.”
AMP Capital’s chief economist, Dr Shane Oliver, told Domain that future development was related to bank lending standards: “If buyers have trouble getting finance and prices do continue to slide, a lot of the development activity being talked about, and approved, might not actually come to fruition.”
“The problem with a spike in supply is that you can get indigestion problems – sales don’t occur, they pass in, properties sit around vacant for a while. That encourages developers to sit back until it clears – and that is probably what will happen here,” said Dr Oliver.
Experience has shown that no matter how many new apartments of the current variety are constructed, they have little or no impact on the affordability of housing. Developers continue to build apartments primarily to market to investors, and a ‘luxury’ tag is generally applied to promotions of their offerings.
The new apartments coming onto the Sydney market are simply not built to be affordable, whether they’re intended to be purchased by owner-occupiers or to be bought by investors so they can be rented out.
Dr Dallas Rogers, from the School of Architecture, Design and Planning at University of Sydney, told Domain’s Tawar Ragazhi there is a real need to turn around Australia’s housing affordability problem: “The forces that produced the housing affordability problem are structural, so I’m not surprised that housing affordability remains largely unchanged,” he said.
“We often see some movement in housing costs, the different buyer groups and rental costs and stock, but significant and lasting changes to the housing affordability problem will need strong government leadership and action taken over the long-term.”
Sources:
‘Tax regime hinders build-to-rent sector,’ Carolyn Cummins, Sydney Morning Herald, 4 September 2018
‘First Australian co-living properties set to open in Sydney,’ Alison Cheung, Domain, 29 August 2018
‘The housing market is cooling. But the affordability crisis isn't over,’ Greg Jericho, The Guardian, 26 July 2018
‘Housing stress in Sydney hits a new high,’ Matt Wade, Sydney Morning Herald, 31 July 2018
‘Rental vacancies in Sydney hit highest rate in more than 13 years: SQM Research,’ Kate Burke, 17 July 2018
‘Sydney apartment supply trailing off, but only temporarily: Urbis report,’ Nicole Frost, Domain, 7 June 2018
‘It’s a renter’s market’: Asking rents fall across pockets of Sydney,’ Kate Burke, Domain, 12 July 2018
‘City of Sydney could add up to 3600 affordable homes by 2030 if extended housing levy approved,’ Tawar Razaghi, Domain, 25 June 2018
‘Social housing sell-off ‘fails to fix growing NSW homelessness crisis’, Daniel Butkovich, Domain, 1 April 2018
‘Housing affordability slightly worsens over the December quarter: REIA report,’ Tawar Razaghi, 7 March 2018
‘Futurist and author Phil Ruthven on what‘s in store for jobs, housing and standards of living,’ Alexis Carey, news.com.au, 2 June 2018
‘How build-to-rent could solve Australia’s housing woes as first developments near,’ Jemimah Clegg, Domain, 3 July 2018
‘Build to rent could fix Australia’s foreign investment, affordable housing problems: experts,’ Jim Malo, Domain, 30 May 2018
‘Sydney changing its look,” Chris Johnson, Urban Taskforce, Sydney Morning Herald, 12 May 2018
‘Shoebox apartments won't meet family-friendly housing demand as millennials come of age,’ Stephanie Chalmers, ABC News online, 3 August 2018
‘Infrastructure offers a solution to shortage of affordable housing,’ Nils Miller, Sydney Morning Herald, 23 June 2018
‘Investec ventures into affordable housing in NSW,’ Su-Lin Tan, Australian Financial Review, 5 April 2018
Spring is here with early rewards for property buyers
Tue, 11 Sep 2018The slowdown in real estate activity continues across Sydney, but there are signs the market is quickly adjusting to the new realities confronting buyers and sellers in a changed property environment.
Harry Triguboff, owner of Meriton and one of Australia’s richest men, told ABC News that Australia is in an apartment development slowdown: "I'm experiencing [the downturn] more than anyone because I build the most," he said. "That doesn't worry me."
"So what I do is, I sell some of my old blocks so then I give more variety for the purchasers. I will also be leasing more. When the market will improve, I will take some of those units from leasing and sell them."
CBRE chairman of residential, Justin Brown, says that developers have been quick to reformat their plans: "There's been a lot of adjustments. Developers are stalling projects; their next stages aren't coming on."
"You see all sorts of offerings, whether it's a reduced price, a rebate on stamp duty or a rental guarantee."
One interesting development is that auction clearance rates, subdued since the start of the year, have begun to pick up. SQM Research's Louis Christopher said that auction volumes are beginning to climb upwards from the winter lows: "The pick-up for the spring selling season is now upon us. The market is going to be very much tested," he said.
Sales volumes are still well down on those of the previous three years, but pre-auction sales are picking up as vendors accept early offers on their properties.
Doman’s Chris Tolhurst summed up the reasons why there’s been a shift in this new direction: “This is a tried-and-true strategy that can work well in a more subdued market because it allows cashed-up buyers who’ve sold an existing home to profit from the traditional surge in stock between October and December.”
Auction clearance rates aren’t the only way of gauging the health of Sydney’s property market. In fact, the majority of Sydney homes sell by private treaty rather than auction. But there is a correlation between price appreciation and the ratio of auction sales to those sold by other methods.
Domain’s Dr Nicola Powell tells us that during strong periods of price growth a higher percentage of homes will sell by auction. During slower periods the opposite is true. Furthermore, a lower proportion of units sell by auction compared to sales of houses.
“The peak rate of growth for Sydney house prices was reached during 2015. At the same time the market also experienced the highest proportion of sales under the hammer, with 30 per cent of houses sold by auction in the six months to the end of October 2015,” Dr Powell says.
“Prior to the recent price upswing, roughly eight per cent of units were sold by auction and this rose during the boom to a high of 20 per cent of units selling by auction in the six months to the end of September 2017. This has been declining since.”
First-home buyers are becoming more active as investors take a break. The NSW government released figures in August showing the number of buyers taking advantage of stamp duty concessions has tripled in the past year.
Before the state government eliminated or reduced stamp duty for first-home buyers purchasing a property valued at up to $800,000, the number of first-home buyers receiving stamp duty concessions averaged 780 per month. In the year since the stamp duty concessions were implemented, this figure has risen to more than 2700 per month.
Pull-back welcome
Falling house prices and a weaker property market have been given a cautious welcome by Philip Lowe, governor or the Reserve Bank. In his semi-annual testimony to Parliament he said that although sliding prices may worry some people, we should keep things in perspective.
"Not so long ago there was concern in the community about rapidly rising housing prices and debt and declining housing affordability," he told the House of Representatives standing committee on economics.
"These earlier trends were not sustainable and were posing a medium-term risk to our economy. So, a pull-back is a welcome development and can put the market on a more sustainable footing.”
Dr Lowe added that he felt the Australian economy, with GDP growth above three per cent, inflation around two per cent and unemployment below 5.5 per cent, continues to move in the right direction.
He also said that the average borrower was now getting a better interest rate than a year ago: "I say this to everyone: if you are unhappy with the interest rate you are getting, go to your bank manager and ask for a lower one; because when I tell people this they actually come back and say 'yeah, it actually worked'. If you're a good quality borrower, you can get a good deal."
BIS Oxford Economics’ forecast for Sydney property indicates that Dr Lowe has little to worry about until 2021 or thereabouts. The market analyst says that home prices will rise by a meagre three per cent by 2021 – the slowest growth rate of all capital cities.
It also expects Sydney’s median home prices to decline by two per cent over the 2018-19 financial year; however, it says a major fall is unlikely due to the development of an anticipated undersupply.
BIS senior manager Angie Zigomanis said that although new housing supply has been at record levels with more than 200,000 dwellings being completed each year since 2015-16, population growth is expected to rise above 400,000 this financial year: “It's the highest level since the peak in net overseas migration in 2008-09, although this will still not be sufficient to meet [demand].”
Property advisory firm Charter Keck Cramer's National Executive Director Bennett Wulff says over the next five years Sydney needs to build about 196,000 dwellings per annum just to keep up with growth in population: "We do expect to see supply come back again," he told ABC News’ Rachel Pupazzoni. "The NSW government has indicated that we require 36,000 new dwellings over the next 20 years per annum and we're only just touching those numbers now."
Recent reports from ANZ, Macquarie Securities and UBS have all expressed expectations of weaker prices. Global ratings agency Moody’s Analytics, however, said it believed the worst was over and forecast Sydney house prices to begin a weak upward move from early next year.
Another positive outlook was expressed by Ray White chairman Brian White who told the Australian Financial Review he is confident the market will rebound this spring: “I am confident the downhill slide is easing and there are better prospects of getting good prices [this spring]," he said.
"Confidence will increase on the back of low interest rates ... traditionally when the market is down, it is usually accompanied by a rise in interest rates."
Overpriced?
The Economist magazine recently found that Sydney is one of the world’s most overvalued cities when it comes to prices of residential property. It concluded that Sydney is among the world’s top 10 cities where property price rises are “unsustainable” when compared to household incomes.
Using this method of comparison, the magazine ranked Sydney as seventh in its global cities index while saying home prices were “overvalued by 50 per cent” when compared to average earnings. This puts Sydney in the same unaffordability league as Amsterdam, London and Vancouver.
The magazine said that national house prices in Australia, Canada and New Zealand have been more than 20 per cent above fair value compared with income and 30 per cent above fair value compared with rents for the past three years. They have now hit 40 per cent above fair value for both methods of calculation.
CoreLogic property analyst Cameron Kusher said there is a simple reason for the prices of Sydney property to now take a backwards step: “It is clear that on a historic basis housing costs are expensive, and values are falling indicating that the prices that people are seeking are not prices that potential buyers are willing to meet,” Mr Kusher told The New Daily.
Looking further into the background of Sydney’s now-ended property boom, The Economist said that “demand, supply, the cost of money and foreign investment” were behind the unprecedented property price rises of the past three years. It noted that prices have fallen 4.5 per cent over the past year but did comment that Sydney’s rate of house-price inflation has fallen from its peak, suggesting we are nearing a turning point.
Another viewpoint came in research conducted by realestate.com.au that showed the number of buyers actively looking for a home dropped by nearly a quarter over the past twelve months. It also found that Sydney property would not rebound by spring but is likely to bottom out by early 2019.
Less growth
There’s been a significant clash between the NSW government’s desire to increase housing supply and community concerns about overdevelopment. As a result, some of Sydney’s largest residential development schemes have been put ‘on hold’ for an indeterminate period, although sceptics say it could just be until the next state election, scheduled for March next year.
On her first day in the Premier’s job, Gladys Berejiklian nominated housing affordability as her foremost priority. This led to a series of legislative and structural changes that largely took planning powers for major developments out of the councils’ hands and put them into the hands of state government planning authorities.
The planned precincts – termed “priority precincts” and before that, “urban activation precincts” – in which higher-density housing would be partly master-planned by the state, had meant the installation of high-density apartment towers in many suburbs favoured by rail transport links. Homeowners within a few hundred metres of railway stations suddenly found themselves overshadowed by thousands of new apartments – but little or no new infrastructure or services like schools, parks and roads.
Commenting on the NSW government’s changed attitude towards these developments, Chris Johnson, from property developer group Urban Taskforce, reported on a meeting between developers and the Department of Planning and Environment held to discuss the delays in approvals:
“Quite a number of our members have got big concerns about progress in planned precincts where they were expecting the government to be having fairly speedy planning approval processes but in many areas across Sydney they are finding planning is on hold,” Mr Johnson said.
“I think the mood of the meeting was such that it appeared there were higher order decisions being made than from the staff members from the planning department.” In other words, the elected officials at the top had taken a political decision to slow down the pace of development and contain some of the opposition growing at voter level.
The chief executive of the Urban Development Industry Association NSW, Steve Mann, said: “Without planned precincts we may see a return to the seven-year slump that created a 100,000-dwelling backlog. Industry requires the certainty planned precincts provide to make investment decisions.”
Seeking to reassure developers that the current pause in approvals for major developments was only to ensure that projects were given adequate consideration, Planning and Housing Minister, Anthony Roberts said the planned precinct program was about making sure growth was managed in a co-ordinated way.
“We’ve always said that the success of the program relied on sound research and collaboration – with local councils, communities and other stakeholders – and this process takes time,” Mr Roberts told the Sydney Morning Herald.
Rents and prices
There’s no doubt that a simplistic interpretation of the ‘law’ of supply and demand equates to lower housing prices and reduced rents if more housing comes onto the market. And recent market statistics show that Sydney’s housing prices and rental rates are indeed falling as a huge number of new apartments become available.
Figures from SQM Research show that Sydney’s vacancy rates have hit a 13-year high of 2.8 per cent, and SQM’s Louis Christopher expects this figure to rise further: “Sydney has…experienced slowing population growth, which has helped to push asking rents lower, as landlords increasingly struggle to fill properties,” he said.
“Vacancy rates will most likely reach 3 per cent in Sydney … I suspect that will happen before the year is out, which is great news for tenants but not for landlords.”
Prices too take a hit from increased supply. In fact, research by Hotspotting.com.au declared 17 Sydney suburbs “danger” markets for buying property due to the risk of prices falling after a home is purchased. The majority of these ‘danger’ zones were in the Greater Parramatta area, Sydney Olympic Park area and a belt of suburbs stretching south of the Sydney CBD to the airport.
And while 17 suburbs might be considered ‘dangerous’ due to a perceived oversupply, other parts of Sydney are doing quite well with ongoing growth that seemingly defies market trends. The Knight Frank Australian Prime Residential Review reveals that despite an overall softening of the market the top end is still showing strong momentum.
The Review found that “prime property” – the top five per cent of a market by value – tends to follow global wealth patterns rather than Australian income growth. This is the explanation for sales of properties above $3 million-plus increasing nationally every year since 2014 and still rising.
Sydney “prime” prices rose 8.7 per cent over 2017, making it the 9th best performing city globally for growth. Sydney saw 1809 sales above $3 million in 2017, up 7.6 per cent on 2016. But even at this level there are some striking variations in growth of different price segments.
Michelle Ciesielski, Head of Knight Frank Residential Research, said that despite a generally strong performance, certain prime property segments were ahead of others: “In Sydney, despite a reasonably good result, the $5 million to $10 million price point saw lower growth in sales turnover than those in the $3 million to $5 million and $10 million-plus cohorts,” she said.
She added that expats returning from overseas looked for homes close to the water, which helped drive demand in suburbs like Longueville, Clovelly and Manly.
And maybe the rampant success of property sales in the top brackets of housing prices isn’t so surprising after all. According to figures provided by Domain’s Nicole Frost, 10,000 people with a net worth of more than $US1 million migrated to Australia in 2017, according to the New World Wealth. Australia posted the biggest inflow of High Net Worth Individuals for the third year running.
She also said that Australia ranks third in the top five countries to move to for Ultra High Net Worth Individuals (a net worth of over $US30 million excluding their primary residence) considering emigration.
To paraphrase what the voice tells Kevin Costner in the movie ‘Field of Dreams’: “Build it because they’re coming.”
Sources:
‘Meriton's Harry Triguboff stops buying land as apartment downturn bites,’ Rachel Pupazzoni, ABC News online, 28 August 2018
‘As Sydney’s spring selling season looms, vendors become willing to accept early offers.’ Chris Tolhurst, Domain, 19 August 2018
‘Sydney is one of the world’s most ‘overvalued’ cities for housing, new data shows,’ News.com.au, 14 August 2018
‘Slowing housing market and falling prices welcome, RBA governor Philip Lowe says,’ Stephen Letts, ABC News Online, 18 August 2018
‘The housing downturn we had to have, according to RBA governor Philip Lowe,’ Patrick Commins, Australian Financial Review, 11 August 2018
‘More housing or unhappy locals? NSW wrestles with desire for growth,’ Jacob Saulwick, Sydney Morning Herald, 18 August 2018
‘Six months left: Hidden danger in falling house prices,’ David Ross, News.com.au, 13 August 2018
‘Auction market steadies, readies for spring tide,’ Nick Lenaghan, Australian Financial Review, 20 August 2018
‘Sydney House Prices Are ‘50% Overvalued’: The Economist,’ The Urban Developer, 14 August 2018
‘Data deep dive: Why auction clearance rates don’t tell the full story on home sales in Sydney,’ Dr Nicola Powell, Domain, 17 August 2018
‘National rental vacancy rates dip to 2.2 per cent in July: SQM research,’ Kate Burke, Domain, 14 August 2018
‘Seventeen Sydney suburbs declared danger markets for buyers,’ Aidan Devine, News.com.au, 8 August 2018
‘The only suburbs in slumping Sydney and Melbourne property markets revealed,’ Stephanie Bedo, News.com.au, 16 August 2018
‘Knight Frank Prime Residential Review shows strong growth in Australia’s top end despite a softening market,’ Nicole Frost, Domain, 5 July 2018
‘Returning first-home buyers competing in most robust sector of the market,’ Chris Kohler, 10 August 2018
‘Australian construction hits record $29.9b in June quarter but experts warn it won’t last,’ Tawar Razaghi, Domain, 22 August 2018
‘Sydney housing market poised to languish until 2021,’ Gerv Tacadena, Your Mortgage, 26 June 2018
‘Sydney slump drags on but Brisbane, Perth to rise,’ Turi Condon, The Weekend Australian, 26 August 2018
‘Auction clearance rate: House buyers know they have the upper hand,’ Su-Lin Tan, Australian Financial Review, 27 August 2018
That sinking feeling as prices head south
Thu, 16 Aug 2018It’s a bit like watching a sinking ship. The prices of Sydney property are going down, and from the surface we can see the hull going under. But how low it will go before it finally settles is hard to predict, and property analysts are coming up with a variety of forecasts.
As we reported last month, the ANZ Bank was the first major financial institution to predict a fall in the market of about 10 per cent from their late-2017 highs. Now the National Australia Bank has followed suit, saying houses will drop another 3.7 per cent this year, with units also dropping but by just 1.4 per cent.
According to the latest Corelogic Hedonic Home Value Index, Sydney’s prices have dropped 5.4 per cent for the year, prompting Corelogic head of research Tim Lawless to comment: “We can't see any factors that may halt or reverse the housing market’s trajectory of subtle declines over the second half of 2018."
Interestingly, the falls seem to have been felt more in higher-income areas including the east, the upper north shore and the inner west where prices have dropped as much as 12 per cent, while lower-income areas including the south-west and the central coast have been less affected.
“I think it reflects a combination of those areas being among the most popular. During the boom they were the key beneficiaries,” Dr Shane Oliver, AMP Capital’s chief economist told Domain’s Tawar Razaghi. “That’s where investors played a bigger role in the boom times, therefore those areas have become more vulnerable when the market has turned down again.”
Another surprise is that apartment prices have fallen just 3.5 per cent, which means they performed better than houses, contradicting earlier predictions that the huge number of apartment towers now rising into the city's skyline would cause a housing glut.
Domain’s Dr Nicola Powell tells us that houses are now taking an average of 62 days to sell and units 64 days, spending respectively 15 and eight days longer on the market compared with last year. She also says that this extra time on the market is affecting prices. During the first three months of the year on average the median house price dropped $344 daily and $38 a day was shaved off the median unit price.
Capital Economics’ Chief Australia & New Zealand Economist, Paul Dales said warned that the worst is yet to come: "Our relatively bearish forecast that prices will gradually fall by 12 per cent from peak to trough is starting to look a bit optimistic."
There’s a genuine ‘perfect storm’ battering the Sydney market at this time: low wages growth, tightened lending criteria by major banks, fears of a possible interest rate rise, conversion of many existing mortgages from interest-only to principal and interest loans, withdrawal of overseas buyers and the simple fact that prices have risen to levels that have proved unsustainable.
So, yes, it’s stormy seas ahead for a while, and property prices show few signs of bottoming out just yet. But if history is any guide to the future, and it usually is, we know that eventually the market will first stabilise, then recover. It’s all a question of timing.
If it’s any consolation, house prices around the world are falling, and there are many reasons for the slide. Prices in London are falling as fears grow about the impact of Brexit, a slowing economy and high prices.
China's clampdown on an overheated property market has halted sales and sent values into a tailspin. New homes there are now being offered for less than existing homes by some developers. In New York, home sales in the city’s most expensive borough have fallen for three straight quarters, as fears grow that home prices climbed too high and too fast.
Ten years ago, in August 2008, the Sydney property boom of the mid-2000s was coming to an end and prices were dropping fast, causing some market watchers to express their concerns which included worries about a plummeting share market and high interest rates that stifled borrowing.
At that time in this column we said: “Sydney real estate has consistently outperformed most other forms of investment in the long-term. There will always be boom times as there will be periods of slow or even negative growth, but the graph has always eventually turned upwards.” And so it did.
We are now without question in a period of negative growth. There are some forces in play that will ensure it probably stays this way to the end of 2018 before we begin to see an upwards turn in the graph. A period of stability is what we are now waiting to see.
Interest rate fears
Banks are becoming more competitive in their quest for depositors’ funds. Analysis by interest rate comparison website Canstar shows there is a trend toward banks paying higher retail term deposit rates in recent months, according to anaging director of Curve Securities Andrew Murray.
"In the wholesale space where banks are looking for specific dollar amounts and are willing to pay up, we are seeing rates that we have not seen for a number of years, all across the curve. That will eventually flow through to the man in the street in terms of their deposit rates, and also the man in the street in terms of their mortgage rates. It's almost unavoidable," he said.
As lower interest rates generally stimulate the property market, higher interest rates tend to pull it back. Canstar group executive Steve Mickenbecker says this can be good news for some: "The overwhelming conclusion is that bank funding costs are on the rise. Good news for savers and self-funded retirees, but not such a good sign for home loan borrowers. Whatever the RBA does, home borrowers should be expecting to see rate increases from their lender."
One independent analyst told David Taylor on ABC Radio National that up to one million households could be at risk of mortgage default if the big four banks raised interest rates by as little as 0.15 percentage points: "I think that by September we will see these rate rises in place, unless the international financial markets change direction quickly," said Digital Finance Analytics principal Martin North.
"The pressure is building, and it will continue to build. We're going to see the Federal Reserve raising rate further in the US. We've seen the funding costs really not adjusting back very quickly, so I think they've probably got to do something."
Queensland Investment Corporation's director of research, Katrina King, explained to David Taylor that the banks are facing increasing pressure from shareholders to maintain their profit margins, and that means they will raise their rates soon: "I think that they do have to listen hard to their equity investors, and with their cost of funding increasing, this may be some way to alleviate the pressure on their net profit, and the expectations for their profit, and be able to reward their shareholders," she said.
Meanwhile, despite economic growth above three per cent and unemployment at 5.4 per cent the Reserve Bank has kept its rate at the record-low 1.5 per cent rate set in August 2016, almost two years ago.
ANU economist professor Warwick McKibbin has criticised the RBA for “talking itself into a monetary policy dead-end” and urged it to prepare Australian households for a rising global interest rate environment through an official hike of at least 25 basis points.
"If the argument is 'we can't raise rates because if we do we could make the housing market a lot worse’ or prick some other asset bubble and cause a shock – if that's the problem – it's better to raise rates now than wait six months," he told the Australian Financial Review.
"The bank has backed itself into a position where it's justifying where interest rates are based on inflation, and inflation is stubbornly low. So, it continues to do the monetary policy injection, which in my view is driving up asset prices," he said. "But it leaves them in a problematic situation where they have to raise rates when global rates are rising."
Jason Murphy, an economist who writes for News.com.au, says the RBA is ‘stuck in the middle’: “It would like to cut rates to encourage inflation and wages growth, but it can’t because that would raise house prices. It would like to have raised rates to curb house prices, but it can’t because that would kill wages growth and inflation,” he said.
Crackdown on lending
The banking regulator ASIC has recently claimed success on its measures to cool excessive demand for investment and interest-only loans. Although the royal commission into banking isn’t due to report for another two months, it’s likely that banks will be told to set higher standards for lending and take greater care in determining households’ actual living expenses.
This clampdown will affect the ability of would-be buyers to enter the housing market, which will take some of the pressure off the RBA to adjust its prime rate. Younger people will be the most affected, although tighter lending standards will serve to prevent them from becoming overextended and facing financial disasters when interest rates eventually rise.
Morgan Stanley Research tells us that Australians will be able to borrow $30,000 less to buy a home as a result of the banks’ tighter lending practices. The size of the average new loan is expected to fall about eight per cent, from $379,000 down to $349,000, as banks specifically target high-risk loans.
IFM Investors chief economist Alex Joiner told Domain: “The scrutiny that the retail banks have been under from the royal commission, and these regulations from APRA, certainly mean that it’s a different conversation a mortgagee is having now when they step into a bank than they might have been, previously,”
Investor lending has certainly pulled back with figures from ABS showing that lending has dropped to its lowest level since January 2016. The latest mortgage lending data shows that investor loans weakened by a further 0.9 per cent in seasonally adjusted terms in April 2018 and now sit at $10.7 billion.
This fall has been somewhat offset by an increase in first-home buyers which reflects lessened competition from investors, but there is still less money coming into the property industry now than there was two years ago, according to Tim Reardon, principal economist for building lobby group the Housing Industry Association.
“The increase [in the] first-home buyer’s market is around a third of the value of the decrease by investors. That’s less money coming into the industry than what there was investing,” Mr Reardon said.
“That’s a significant reduction in the value of investment coming into the housing market, which does have significant impact on the number of homes being built,” he said. “Any reduction means fewer homes being built which exacerbates housing affordability.”
Construction falling
Forecaster BIS Oxford Economics is predicting the biggest correction in housing starts since the global financial crisis hit in 2008, with the number of starts set to fall by almost 23 per cent by 2020.
BIS associate director Adrian Hart told the ABC's AM program that the slump would be led by a cutback in high-density dwelling construction: "What we're seeing is that what goes up tends to come down. It is a bust in residential apartments in the high-density segment. But you have to look at how far it's come up," Mr Hart said.
"You can see that house prices have stagnated, and that price effect is really going to start influencing investor behaviour on top of all the policies which have been trying to keep the speculative element of the housing market under control."
Noting that the recently-ended construction boom was fuelled by the purchase of apartments by investors, Mr Hart said that residential commitments in Sydney would fall by 26 per cent over the next two years.
"Land prices have spiked in Sydney and Melbourne in recent years, pricing many people out of the market for new houses, " Mr Hart told ABC News. "This (the correction) will act as a disincentive for new house building and pull buyers towards the established dwelling market."
When will this slump end?
It’s all guesswork at this stage because nobody can forecast an end to the present slump without making some pretty broad assumptions. A Bloomberg survey of 15 economists turned up a consensus expectation that the slump will last at least another two years, not ending until at least 2020.
Of course, all these economists have their own opinions, which is the usual way with members of their profession. Three of them forecast falls of 15 per cent in Sydney, while two saw declines of less than seven per cent.
Only three believed prices will rise again in less than two years, and most of those surveyed felt that 2020 would see prices stabilise rather than rebounding. Sally Auld, chief economist for Australia at JPMorgan Chase & Co, said: “Given regulators' desire to see stability in the house price-to-income and debt-to-income ratios, we think it will be some time before house prices start to move again."
A former ANZ Bank economist, now at Macquarie Bank, Justin Fabo, released his own note on home prices, forecasting a peak-to-trough fall in Sydney of about 10 per cent, leading national falls of between 4-6 per cent over the next couple of years.
According to Domain Group data, prices are now about two per cent below their December 2017 peak, but the downturn could be as little as one-sixth of the way through. Or it might be as much as halfway there, depending on which economist you ask. But all agree that a house price resurgence won’t happen until more value is wiped off Sydney’s median prices.
As happens when there’s a 180-degree turn in the cyclical housing market, conditions have swung so they now favour buyers after years of favouring sellers. Buyers no longer experience ‘FOMO’, or ‘fear of missing out’, and now it’s the vendors who have to ensure they price their offerings realistically to make a sale.
Domain’s Dr Nicola Powell gets the last word this month: “It will be the vendors who understand this new selling environment who will succeed in securing a timely sale. Meanwhile, buyers will be welcoming this change; it presents an opportunity, providing time to ponder a purchase decision and negotiate the price.”
Sources:
‘Housing powder keg ready to blow,’ Jason Murphy, news.com.au, 24 June 2018
‘Australia’s house price outlook worsens: NAB, ANZ,’ Chris Kohler, Domain, 12 July 2018
‘Falling prices, no tenants, the worst is yet to come for Sydney housing market,’ Su-Lin Tan, Australian Financial Review, 2 August 2018
‘Bank battle for savers to lift deposit and mortgage interest rates,’ Clancy Yeates, Sydney Morning Herald, 1 July 2018
‘Brake on Australia's addiction to property has come just in time,’ Jessica Irvine, Sydney Morning Herald, 16 July 2018
‘Investor and owner occupier (excluding first home buyers) was down again in the latest ABS figures,’ Tawar Rasaghi, Domain 13 June 2018
‘Sydney housing slump to last until at least 2020, say economists,’ Emily Cadman, Kimberley Verschuur & Cynthia Li, Sydney Morning Herald, 19 July 2018
‘Building approvals rebound as property sector shows resilience in the face of the property slow down,’ Stephen Letts, ABC News online, 1 August 2018
‘Construction set for its biggest fall since the global financial crisis,’ Peter Ryan, ABC News online, 24 July 2018
‘Prepare Australians for rate hikes now, Warwick McKibbin tells RBA,’ Jacob Greber, Australian Financial Review, 24 June2018
‘House price debate goes from if they'll fall to by how much,’ Michael Janda, ABC News online, 21 June 2018
‘Is the bottom about to fall out of our $6.9 trillion property market?,’ Jessica Irvine, Sydney Morning Herald, 21 July 2018
‘Australia’s property price correction still has some way to go,’ Chris Kohler, Domain, 26 July 2018
‘New bank mortgage loans to fall 8 per cent amid APRA, royal commission crackdown,’ Chris Kohler, Domain, 20 June 2018
‘Home buyers must keep their cool,’ Editorial, Sydney Morning Herald, 26 July 2018
‘Why properties are taking longer to sell in Sydney (and what that means for you),’ Dr Nicola Powell, Domain, 1 July 2018
‘Up to 1 million households 'on the edge' of mortgage default by September, analyst warns
RN Breakfast,’ David Taylor, Radio National, ABC 11 July 2018
‘Sydney’s inner west bears the brunt of the city’s steepest annual drop in house prices,’ Tawar Razaghi, Domain, 28 July 2018
Sydney property sees tighter credit, falling prices, rising mortgage rates
Sun, 15 Jul 2018The end of the 2017-18 financial year has come with a wealth of statistical data about house prices, and the property market experts are poring over the numbers to make their predictions for the balance of 2018 and beyond.
Their conclusions are broadly that house prices in Sydney have dropped about four to five per cent since their peak and will slip further before the end of the year, by at least another two per cent or possibly more. Because these are ‘average’ figures, it really means that some parts of Sydney will fall more than others, and as always, some parts of the city will defy the trend and rise.
According to figures from ANZ Research, in Sydney’s CBD and inner south house prices have fallen by 13.6 percent since their peak in June last year, while Ryde and the inner west have seen falls of just over 10 percent since August and March 2017 respectively.
On the city’s North Shore, property values have fallen by 8.7 percent, while the Northern Beaches have recorded a 7.5 percent drop since June last year. The inner south west, Parramatta, Blacktown and the Baulkham Hills/Hawkesbury regions, have all recorded falls of between 5.9 and 6.8 percent.
"Tighter finance conditions and less investment activity have been the primary drivers of weaker housing market conditions, and we don't see either of these factors relaxing over the second half of 2018," CoreLogic head of research Tim Lawless said in a Reuters release.
He said the pullback in demand was due to a combination of tougher rules from regulators, lenders and tighter borrowing standards resulting from findings of widespread malpractice on loans and financial advice by the Banking Royal Commission.
BIS Oxford Economics is one of several experts predicting a further slowing of the housing sector in its new report ‘Residential Property Prospects 2018 to 2021.’ The report says that house prices will fall by another two per cent over the 2018-19 financial year, and the median price will remain below its peak of June 2017 for the next three years before modest rises in 2020-21.
The report also said that apartment prices, previously supported by investor demand, will show a decrease of four per cent in the financial year just ended, and fall a further three per cent in 2018-19.
The report’s author, Angie Zigomanis, who is Senior Manager – Residential Property at BIS Oxford Economics, told Domain’s Allison Worrall that the chance of a major price correction was being lessened by low interest rates and a relatively stable economic environment. Nevertheless, there’s no doubt a correction is happening.
The report’s view of an Australia-wide property price correction has been echoed by Macquarie Bank, UBS, AMP, Capital Economics and the ANZ Bank, among others. Although they agree that weakness in housing prices will continue for some time, they differ in their estimates of both the amount and the duration of the decline.
Deloitte financial services partner James Hickey described the slowdown as a healthy pullback from unsustainable levels of recent years: "When placed into perspective, the strong lending growth of the 2013 to 2016 period was never going to be sustainable in the long term," Mr Hickey said. "The market recognises the need to take stock and find a new sustainable base for the long term."
ANZ Bank has recently predicted Sydney property prices will drop about 10 per cent from their late-2017 highs, while AMP chief economist Shane Oliver sees an even greater drop of 15 per cent top-to-bottom. Macquarie Bank’s economists Justin Fabo and Ric Deverell say that Sydney prices will fall ten per cent overall, but that “despite almost daily negative headlines in the mainstream media, the rate of adjustment has also been relatively orderly.”
Credit is the key
The ANZ Bank admitted that the decline in Sydney house prices had outgrown its earlier expectations. ANZ senior economist Daniel Gradwell said the rate of price decline had recently accelerated in Sydney and previous forecasts that the market would have "stabilised" by now have been revised.
"Additional headwinds are possible, such as the shift away from interest only loans," he said. "There could also be further tightening of credit as the impact of the current regulatory focus on mortgages flows through into lender behaviour. All of this suggests that the fall in house prices will be quite a bit larger than we previously expected, with recovery coming later."
The ANZ Bank’s June housing update said the present price cycle is being driven by tighter credit rather than higher interest rates: “Higher interest rates in 2019 are expected to be an additional headwind, though rate hikes will only occur if the housing market has broadly stabilised.
"We note that Australia has had six previous episodes of declining housing prices since 1980, with the peak-to-trough range of 2½ per cent to 8 per cent. Nearly all previous corrections occurred following interest rate rises, a drag unlikely to be repeated anytime soon in this cycle."
At its July meeting the Reserve Bank left the cash rate on hold at its record low of 1.5 per cent for the 23rd consecutive month. The RBA board had earlier noted that loan approvals to investors and owner-occupiers had eased, consistent with a decline in demand for credit as well as with lenders tightening their own requirements.
"Falls in housing prices in Melbourne had been concentrated in inner-city areas, whereas the declines in Sydney had been more widespread," the board said. It also noted that housing prices were still 40 per cent higher in Sydney and Melbourne than at the beginning of 2014, and auction clearance rates in Sydney and Melbourne had fallen to their lowest levels in a number of years.
The RBA’s head of economic analysis, Dr Alex Heath said that she expected demand for housing to remain strong overall because population growth was also likely to remain strong: "Housing price growth has been strong until recently in Sydney and Melbourne, where population growth has been strong," Dr Heath told a conference at the Urban Development Institute of Australia in Wollongong on Thursday.
"Given that housing accounts for around 55 per cent of total household assets, we are paying close attention to these developments," she added.
The ABC’s David Chau points out that Sydney has seen prices rise by 85 per cent since 2013, with investors driving prices to record highs: “In 2013 a Sydney house typically cost about $650,000 while today the average house in Sydney will set buyers back about $1.2 million.
“Its median house price hit a peak of $1.2 million in June 2017 and has since declined (to $1.1 million) due to the banks' tighter lending policies, mandated by the Australian Prudential Regulation Authority (APRA),” he said.
On the positive side, the Westpac Melbourne Institute index of consumer sentiment recently indicated that home buyer demand is recovering from its recent low. The number of consumers who say now is a good time to buy a home has risen substantially in the past year.
The index has recovered from its low point of 90 in May 2017 to 105.7 this June. A reading of 100 means equal numbers of pessimists and optimists.
This index is still below long-term averages, but it is now clearly ahead of last year's lows. And the sharpest increase in sentiment has been in NSW, the least affordable market. Deloitte Access Economics director Michael Thomas told AAP that Australia’s residential market was still largely supported by solid underlying demand.
“Taken together with the outlook for interest rates, slowing house price growth moderating the prospect of further capital gains, (and) restrictions on lending such as on interest-only loans and loans to investors as well as to lending to foreign investors, we expect a period of moderation rather than an abrupt adjustment,” Mr Thomas said.
Today’s falling prices are strongly influenced by the availability of credit. Banks are not willing to lend as much as they were a few years ago; they are more closely scrutinising how much money borrowers need to live on, and as a result are taking longer to approve loans.
This is largely because the royal commission into the financial services sector has sent a chill through the banking sector, and bank lending practices have become the subject of particular scrutiny. This has had a dramatic impact on lending standards.
UBS analyst Jonathan Mott told the Herald’s Clancy Yeates that he estimated if banks assumed more realistic living expenses, the maximum amount they would lend customers would be about 30 to 40 per cent less than today. This would cause housing credit growth to come to a near standstill.
Four in 10 loan applicants, including borrowers financing existing property loans, are now being rejected because lenders have increased their scrutiny of applicants’ capacity to service a loan, according to analysis by Digital Finance Analytics.
However, despite the banks’ tightening their loan requirements, the Commonwealth Bank's chief economist Michael Blythe is optimistic that the market won't see a major drop from current levels. The factors that historically drive large downward moves in housing, including rising unemployment and rising interest rates, are "either not present or still a fair way off," he said.
RBA rates stable, but…
According to the Financial Review survey of leading economists covering the final three months of fiscal 2018, the Reserve Bank of Australia is not expected to hike interest rates until 2019 at the earliest. This is a significant change from three months ago, when economists had been forecasting two interest rate hikes in that period.
The economists surveyed also felt that Australia's population growth will continue to support demand for housing: "Strong population growth is preventing house prices from declining too far," commented Stephen Roberts at Laminar Capital.
But another economists’ survey has a different opinion. The BusinessDay Scope survey is Australia's longest running and is compiled from forecasts of 26 leading Australian economists. 23 of the 26-person panel expect interest rates to climb by the middle of 2019. Four of them said rates would rise more than once.
The Reserve Bank isn’t the only institution that can raise mortgage rates. Citigroup forecasts that the rising cost of funding will force Australia’s major banks to increase their mortgage interest rates, saying it expects the banks to begin lifting their mortgage rates by an average of eight basis points by September.
Until the global financial crisis, Australia’s retail banks took their cues to raise or lower their lending rates from the Reserve Bank's interest rate cycle. But Citi now says that Australia’s banks are likely to raise mortgage rates out-of-cycle to the RBA due to higher wholesale funding costs as well as the regulatory pressures resulting from the banking Royal Commission.
JP Morgan's chief economist Sally Auld says that the political cost of raising interest rates wouldn’t be "too high" for the big four banks: "What that [view] ignores is the fact that they're businesses with a clear commercial imperative; at the end of the day, they care about their margins and preserving it," she said.
They have to "make a call on whether the political heat they'll get is any worse than the cost to margins of not lifting rates," she added.
The ANZ Bank's chief executive Shayne Elliott told ABC's The Business last month that banks may have no choice but to raise their mortgage interest rates independent from the RBA’s prime rate settings: "The reality is we have to run our business. As long as we make decisions responsibly, ethically, looking at all the stakeholders, we'll make decisions as appropriate for the time."
BoQ's acting head of retail banking, Anthony Rose outlined the principal reason for out of cycle rate hikes: "Funding costs have significantly risen since February this year and have primarily been driven by an increase in 30 and 90-day BBSW (bank bill swap rate) along with elevated competition for term deposits," he said.
Interest-only loans
One fly in the housing price ointment is the need for home owners with interest-only loans to roll them over to principal plus interest. It’s estimated by the RBA that over the next three years 200,000 interest-only home loans worth something like $360 billion will need to be refinanced, meaning higher monthly mortgage repayments that borrowers might find difficult.
Interest-only loans became popular in Australia largely because of the country’s negative gearing taxation benefits. Property analyst Pete Wargent told news.com.au that a major driver of these loans was the ability to claim a tax deduction on the interest paid: “It’s smart investing from a tax efficiency point of view but the issue is that so many people are doing it.”
By 2015, interest-only loans had grown to almost 40 per cent of Australia’s outstanding housing credit. While there’s a great deal of debate on just how much this massive refinancing will affect property prices, at least the Sydney market has risen substantially since the period in which these interest-only loans were made.
The federal government, the Reserve Bank and the Australian Prudential Regulation Authority (APRA) became concerned about possible consequences of these loans in 2017. They took action to limit them to a maximum of 30 per cent of all mortgage loans, as well as encouraging lenders to make interest rates higher on these loans.
Interest-only loans have now fallen by almost 60 per cent since APRA’s limits on them began in March 2017. "The outstanding stock of [interest-only] loans has now slumped $93 billion year-on-year [-16 per cent] with interest only-loans making up 31 per cent of all mortgages, down from 39 per cent a year ago," UBS analysts wrote in a note to clients.
UBS economist George Tharenou told ABC News that, although the switch from interest-only to principal and interest (P&I) loans was a modest 0.1 per cent, or $1.6 billion, of nominal income across the economy, it hit individual borrowers harder: "For individual households the [around] 35 per cent increase in repayments is significant.
"With $120 billion of interest-only loans expected to mature every year for the next three years, this is likely to remain a modest negative for consumption, but the larger risk is from 'stressed selling' as some households struggle to meet the higher repayments" Mr Tharenou said.
"The kind of nightmare scenario is where a lot of people need to sell at once, and that's when you see a kind of fire sale mentality, and could see very significant downward pressure on prices," said Professor Richard Holden from the University of New South Wales Business School.
Chinese investors pull back
Chinese investments in Australian property have been important drivers of prices for Sydney houses and apartments as well as land for development. However, recent changes to investment regulations by authorities in Australia and China have seen Australia’s share of China’s global spend fall 11 per cent to $US10.3 billion ($13.5b) in 2017, according to a report by KPMG and the University of Sydney.
The NSW Treasury had been warned in an expert’s report that imposing new taxes on foreign investors could have a "large negative impact" on investment in Sydney's real estate. The warning also suggested that the new taxes would have little impact on Sydney's house prices because foreign investors account for just 5 per cent of residential sales.
The Foreign Investment Review Board’s (FIRB) latest annual report shows that approvals for residential purchases by non-Australians fell by 67 per cent over the 2015/2016 financial year because of the combination of state-based taxes, increased fees and tighter capital controls.
In 2017, the Australian government increased fees for foreign buyers applying to buy property by 10 per cent, and last year NSW also doubled its stamp duty surcharge from 4 per cent to 8 per cent for foreign buyers. Treasury data revealed by the ABC shows that in June 2017 foreign buyers purchased 4,000 homes in a race to sign contracts and avoid the eight per cent duty. In July, when the new tax took effect sales fell to just 70.
From this year foreign investors will also pay an annual two per cent land tax on their properties. However, Michael Zhang, head of JLL’s China Desk in Australia says that Australian real estate is still a ‘key destination for Chinese capital’.
“There has been a notable shift in the scale and type of investment into Australian real estate. Investors and developers are becoming more selective in acquisitions, with mandates increasingly geared towards higher quality investment assets and well-located sites with less planning risk.’’
The FIRB report shows that Sydney has remained the number-one destination for all commercial real estate capital, which was mainly residential development (44 per cent), offices (30 per cent) and mixed-use sites (9 per cent) deals in 2017.
Greenland Australia managing director Sherwood Luo says that while Thailand, Vietnam and Japan are growing competitors to Australia for Chinese capital in the field of residential development, Australia remains a strategic investment destination because it is “a very stable and transparent environment”.
This year's NSW government’s budget papers acknowledged that foreign investment is falling, predicting just 2,000 foreign purchases in 2018-19. When questioned about the falling levels of foreign investment, a Treasury spokesperson said the market impact was "relatively small", adding that commercial operations were not affected.
Sources:
‘RBA paying 'close attention' to house price falls,’ Reuters and AAP, Sydney Morning Herald, 5 July 2018
Home prices fall for ninth month as tighter lending bites,’ Reuters, Sydney Morning Herald, 2 July 2018
‘Australia’s house prices to remain flat over 2018-19 financial year, BIS Oxford Economics report tips,’ Allison Worrall, Domain, 25 June 2018
‘Are economists saying the Sydney and Melbourne markets are going bust? Not really,’ Chris Kohler, Domain, 25 June 2018
‘Fall in house prices is 'quite a bit larger' than expected, says ANZ,’ Clancy Yeates, Sydney Morning Herald, 6 June 2018
‘Brisbane, Perth, Canberra to lead property price rises as Sydney slows, analysts say,’ David Chau, ABC News online, 25 June 2018
‘Sydney, Melbourne house prices tipped to fall 10 per cent,’ Melanie Beeby, Sydney Morning Herald, 19 June 2018
‘Why this house price slump is different from the last one,’ Clancy Yeates, The Age, 20 June 2018
‘Top economists turn more bearish on property prices,’ Sarah Turner, Australian Financial Review, 2 July 2018
‘Rate rise an even-money bet as inflation gets up off the floor,’ Peter Martin,
The Age, 30 June 2018
‘Why you should prepare for a mortgage shock,’ Leith van Onselen, Unconventional Economist. 3 July 2018
‘Big four banks face mounting pressure to lift interest rates,’ David Chau, ABC News online, 28 June 2018
‘Chinese investors now after smaller, higher-quality real estate in Australia: report,’ Meredith Booth, Commercial Real Estate, 12 June 2018
‘Chinese developers here to stay, unperturbed by government measures to cool foreign buying,’ Tawar Razaghi, Domain, 25 June 2018
‘NSW Treasury warned higher foreign investment taxes would have 'negative' impact,’ Greg Miskelly, ABC News online, 30 June 2018
‘Fears of housing 'fire sale' as interest-only loans roll into principal plus interest,’ Liz Hobday, ABC News online, 21 June 2018
‘Investor lending falls almost $100 billion in 12 months as property market softens,’ Stephen Letts, ABC News online, 24 June 2018
‘Australia’s cooling property market unlikely to lift in near future,’ Stuart Condie, AAP, 5 July 2018
‘The Sydney suburbs where house prices are set to plunge,’ Lara Pearce, News.com.au, 19 June 2018
What went up has now come down, but for how long?
Thu, 14 Jun 2018To read reports in the daily press, it sounds like some sort of disaster has befallen the Sydney property market: “Auction clearance rates down, asking prices down, times on market up, investor lending falls,” and if we weren’t comparing our present numbers to those of the recent three years of boom conditions we might be more concerned.
Which is not to say that there are many signs of buyers experiencing the FOMO (Fear of Missing Out)that they might have felt in 2016. The ANZ Bank even admitted it had underestimated the extent of the slide in Sydney housing prices. In a June research report ANZ senior economist Daniel Gradwell predicted further weakness ahead for the housing market, before it starts stabilising later this year.
"Weakness in Australia’s housing market has persisted longer than we expected, and the rate of decline in prices has recently accelerated. This weakness is challenging our previous view that prices would stabilise and then recover somewhat to finish the year in positive territory," he said.
He commented that there were several factors to blame for the fall in housing prices, including the shift away from interest-only loans and tightening of credit in the wake of the royal commission. While obviously things aren’t as good as they were last year, Mr Gradwell said it was important to note that “these movements pale in comparison to previous cycles”. In other words, the sky hasn’t fallen and isn’t about to.
Further reassuring is his belief that our strong population growth and record low interest rates will directly influence and lift housing prices. This will mark the beginning of a new price cycle, commencing at a point much higher than the previous upswing.
Some aspects of Sydney’s real estate market are consistent, year after year and cycle after cycle. Level blocks in the inner suburbs with potential for development generally do well, as do renovated properties in good locations. Properties in the prime markets of the north shore, the city, the eastern suburbs and the inner west remain sought-after.
Domain’s Chris Tolhurst tells us that most people instinctively try to buy in the best location they can afford: “They recognise that this purchasing strategy gives them the best chance of maximising capital growth and the least chance they will watch a property drop in value.”
The most prominent features since the boom’s demise have been more realistic asking prices and slightly longer times on market as buyers become more selective in their searches. The Agency’s Scott Thornton says the market’s now in a good place: “If the property is priced correctly, it will sell. The buyers are too well-educated now to pay ridiculous prices. If you are not in line with the market place, buyers will not engage with you.”
Admittedly, Sydney has experienced some of the worst price drops of all Australian capitals, with the current average sale price 4.2 per cent lower than this time a year ago. Sydney dwelling prices slipped by 0.2 per cent in May, and 0.9 per cent in the last three months.
Nationally, the value of investor housing loans slumped a seasonally-adjusted 9 per cent in the month and now sits at $10.88 billion – its lowest level since January 2016, according to Australian Bureau of Statistics data, while the value of owner-occupier loans fell 1.9 per cent.
Chris Kohler, writing in Domain, says that first-home buyers haven’t retained the momentum they displayed in this year’s first quarter: “The return to form seen from first-home buyers stalled in March, after stamp duty discounts and exemptions saw a jump in activity from the group in late 2017 and early 2018.”
He said that the number of first-home buyer loans written – as a percentage of total owner occupier loans – fell to 17.4 per cent in March from 17.9 per cent a month earlier.
But economist and blogger Jason Murphy says there’s some good news in recent figures that show few Aussies are defaulting on their mortgage loans: “The rate of non-performing loans is under 1 per cent. We have not got to a crisis point where many people are forced to sell into a falling market, which could cause a rapid collapse.”
Domain Group data shows the average days on market fell 9.2 per cent in the year to February to 227 days, down from250 days the year before. Discounting also fell to 11.5 per cent in the same 12 months, from 12.2 per cent two years earlier. 'That suggests either improved market conditions at the high end or vendors pricing more appropriately,’’ Domain data scientist Dr Nicola Powell said.
And there’s one segment of the market that always seems to be run by its own set of rules. Some of Sydney’s wealthiest residents are popping the corks on their bottles of Moet, with new data showing homes in the ultra-prestige category - $10 million or more, are selling faster than a year ago.
Foreign buyers scarce
The rush of foreign buyers to acquire Sydney property is, for the most part, over. Figures from Swiss multinational bank UBS showed there were 13,198 approvals for foreigners to purchase residential real estate last financial year totalling $25.2 billion worth of investment.
This according to UBS was a 65.2 per cent decrease in the value of investment, from a peak of $72.4 billion in approvals and 40,149 applications a year earlier. Figures from the Foreign Investment Review Board (FIRB) confirm that approvals for foreign buyers to acquire residential property fell by 67 per cent in the last financial year.
"The reduction in approvals reflects investor reaction to the introduction of FIRB application fees in 2015, which has changed investor behaviour by encouraging applications only for properties they intend to acquire," the FIRB report said."Investors now have an incentive to apply only when they have a high certainty of purchasing."
The pullback by foreign investors wasn’t a great surprise given moves by state and federal governments that increased charges on foreign purchasers while removing some of their previous favourable tax treatment as well as placing a cap on sales of new developments. These moves followed a series of Chinese government actions aimed at reducing capital outflows into foreign investments.
A recent survey by UBS of 3400 mainland Chinese citizens showed a clear drop in Chinese buying intention from the boom year of 2016, with their interest shifting to other Pacific neighbours including Thailand, Vietnam and Japan.
However, a prime factor in reducing overall Chinese interest in foreign investment, the capital controls introduced by the central government to stem capital outflows, may not be as long-lasting as was at first thought, according to Carrie Law, chief executive of Chinese property website Juwai.com’
“China’s capital controls have worked,” she told Domain. “Today, China’s foreign reserves are up, the Yuan is stronger, the flow of money out of the country has been reduced, and fears of a devaluation have virtually disappeared. But they have succeeded without having to make it impossible for ordinary Chinese families to buy property overseas.
She says the environment in China is changing and buyers are beginning to anticipate a time, perhaps later this year, when investing overseas again becomes easier: "Chinese buying enquiries for Australian property in March were 5.7 per cent higher than the month before and in April they were 22.3 per cent higher."
Interest rates avoid the brink
It’s hard to remember how long it’s been since the RBA’s prime rate dropped down to 1.5 per cent, (it was August 2016) and even harder to believe it’s stayed there so long (22 months). About the only thing on which most – but not quite all - economists agree is that the RBA’s next move will be up.
Having experienced such low interest rates for so long it’s hard to believe that there was ever a time when interest rates were so high they were a worry. Yet 29 years ago in June 1989 the standard variable mortgage rate hit 17 per cent and remained there through to March 1990. And together with high interest rates we also had a high rate of inflation – 6.8 per cent, in fact.
RBA board member Ian Harper stresses that the Bank’s current policy settings are the “best thing the bank can do for encouraging confidence and stability”. He also adds that when it comes to determining the official interest rate settings house prices won’t be the determining factor.
Speaking to the Wall Street Journal, Mr Harper, who is Dean of Melbourne Business School, said that the direction of house prices simply wouldn’t matter, at least in his opinion, if other circumstances aligned for a rate rise.“The bank will raise interest rates when it has a basis for doing that — because inflation is starting to pick up,” he told the WSJ.
Harper says what’s happening in the broader Australian economy matters most, particularly the outlook for wages growth given its implications for inflationary pressures: “From my perspective, as somebody who has an input into the setting of monetary policy, what matters is what is happening right across the economy,” he said.
So, with annual wages growth of around 2 per cent – a far cry from the 3.5 per cent level that could bring underlying inflation back to the midpoint of the RBA’s target range of 2-3 per cent, unemployment of 5.6 per cent poses no threat to the 5 per cent level which might increase wage pressures.
(Just for the purposes of comparison, in the five years from 1989 to 1994, male full-time earnings rose 22 per cent, or 4.4 per cent per annum – more than double the current rate.)
Not all that long ago the sudden rises in house prices across Australia were causing murmurs of alarm within the RBA, with fears of “inflation” seeming to make a rate rise inevitable. But it never came due to concerns about other areas of the economy.
And now? With falling housing prices, low inflation, low wages growth and unemployment at acceptable levels (except for those unemployed, of course), it looks like interest rates will simply stay where they are for many more months ahead.
Tax idea won’t go away
In 2017 we reported that the federal Parliamentary Budget Office had costed a proposal by The Greens to abolish stamp duty and replace it with a broad-based land tax. The purported purpose of implementing this national broad-based land tax would be to replace over $19 billion in revenues raked in by state and territory governments in stamp duties on property purchases.
At the time the Grattan Institute said it would be politically difficult to deliver but was generally regarded as a ‘good policy’. Yes, it could indeed be ‘politically difficult’, as the Grattan Institute estimated that to replace stamp duty revenue with a broad-based tax would probably require a tax of ‘about $6 for each $1000 of unimproved land value’.
As we said in April 2017: “For your reasonably average Sydney family home with an unimproved land value of $900,000 the land tax would be around $5,400 – about the same as the current rate of land tax in NSW for properties that aren’t principal places of residence.” All homeowners would be affected and have to pay the new tax.
This ‘good policy’ tax won’t go away. Two years later it’s still being floated as the solution to numerous government revenue worries, and now we find a new headline in the daily press: “Australia stands to gain $24.3 billion every year in GDP from 2047 if state governments phased out stamp duty replacing it with a broad-based land tax.”
Infrastructure Australia’s ‘Making Reform Happen’ paper which brought this tax to the surface once more made the case for major reforms to “better deliver infrastructure including land use to prepare for the ‘profound change’ Australia will face as the population is projected to grow to more than 30 million people by 2031.”
In a Domain article about the paper, IA’s chief executive Philip Davies said in this new iteration revenue generated from switching taxes would come about from ‘productivity benefits’ rather than homeowners’ direct tax contributions. It would be levied, for example, on gains in land value from land is rezoned or when a new train station is announced.
And in this latest proposal, the annual levy of this hypothetical tax for someone in Sydney would supposedly work out to between $1500 and $2000 on a median-priced house, according to the Infrastructure Australia report which appears to misinterpret the 2016 Grattan Institute calculations. However, regardless of how it’s calculated, the broad-based land tax is an idea too lucrative to disappear from government’s list of ‘possibles’ for new taxes. And it would be just as distorting to the property market as it would be beneficial to housing purchasers by removing stamp duty on purchases.
As the Domain article concluded: “Mr Davies acknowledged that there might be negative community perception around broad-based land tax, but it was up to the states and territories to prove a compelling narrative to inform the community and industries that the current system was broken.”
Build-to-rent rises again
In August 2017 we mentioned the idea of build-to-rent as having great potential for creating affordable housing once the apartment-building frenzy of the recent property boom faded away. Now it’s back in the news.
Build-to-rent envisages developers building large clusters of apartments at affordable rental levels. While this sounds like a reasonable idea, it doesn’t enable developers to benefit from deposits in the traditional build-to-sell model; some sort of government support would probably be required.
Tim Graham, global sales director of foreign investment facilitator Investorist, says it’s already beginning to happen here: “If we talk about Australia, the [bigger players like the] Meritons are the only ones doing it well,” he told Domain. “It comes down to the land cost and the development outcomes here. It’s also just a big cultural change.”
He also said he believes that promoting investment in build to rent could help bring more cash into the country.
Affordable housing group PowerHousing Australia chief executive Nicholas Proud said there is a key question for our housing market: “Can an affordable housing build-to-rent component play a larger role to maintain steady supply in the coming years?'”
The build-to-rent concept is supported by Phil Ruthven AM, founder of IBISWorld who has established a reputation as a futurist. He says we should adopt the leasing model that’s common in Europe, wherein tenants take out long term leases of five to 10 years or even longer. They also have greater rights and control over how they fit out, decorate and use the home.
“For years I’ve been advocating that it’s better to lease than to own a home — but I don’t mean renting, which is unstable, short-term and limiting,” he told news.com.au.“Renting is very degrading, in a sense, compared to leasing. We have to change our rental rules — they are backwards in Australia currently; it’s antediluvian.
“Less than half of people in Germany own their own home … because with leases you can paint the bloody house purple if you want; the owner might say to return it to the original condition at the end, but it’s a two-way deal with more flexibility.”
Backyard dream ends
The days of the backyard are ending and there’s not much hope for a reversal of the process now in progress. Population densities are increasing while the size of new houses grows, and at the same time older houses are being bulldozed to make way for towers of apartments.
So, what happened to a city like Sydney where backyard cricket and a swimming pool for the kids were once elements of a homeowner’s dream that’s now rapidly shifting into the realm of impossibility? One way of looking at it is to understand that we are increasingly getting short of time for tending large gardens.
Researchers at Swinburne University asked 2000 people in 2016 in Melbourne and Sydney’s middle ring suburbs to describe the home they aspired to. As you might expect, nearly 60 per cent of respondents said they wanted a detached house and yard.
60 per cent sounds like a substantial number, but it’s nowhere near the 90 per cent in the early 1990s who said they wanted a big backyard. The house stayed popular, but the additional space on the block for a garden wasn’t nearly as important.
Jane Fitzgerald, the Property Council of Australia’s (PCA) NSW executive director, told news.com.au: “I don’t think the great Australian dream is dead, but I think it’s different now. Sure, when Generation Y get to 40 they might want a quarter acre block, but that choice is being delayed by most people and what they are doing now is choosing apartment living.”
Sources:
‘As our cities become denser, the great Australian backyard is paying the price,’ Benedict Brook, news.com.au, 3 June 2018
‘Build to rent could fix Australia’s foreign investment, affordable housing problems: experts,’ Jim Malo, Domain, 30 May 2018
‘Buyers are too well-educated’: Sydney house hunters seek safe haven suburbs as clearance rate tumbles,’ Chris Tolhurst, Domain, 14 May 2018
‘Clearance rate falls as market cools down,’ TawarRazaghi, Domain, 13 May 2018
‘Fall in housing prices will be ‘quite a bit larger than expected’,’ Natalie Wolfe, news.com.au, 7 June 2018
‘Foreign buyers of Australian real estate plummet, Foreign Investment Review Board figures show,’ Lucy Macken and TawarRazaghi . Domain, 29 May 2018
‘Foreign property investment plummets as tougher regulations bite,’ Stephen Letts, ABC News online, 30 May 2018
‘The fear of missing out for buyers has gone’: Sydney auction clearance rates continue to nosedive,’ Chris Tolhurst, Domain, 3 June 2018
‘Futurist and author Phil Ruthven on what‘s in store for jobs, housing and standards of living,’ Alexis Carey, news.com.au, 2 June 2018
‘House prices set to tumble after buyers flee,’ Jason Murphy, news.com.au, 31 May 2018
‘Housing market posts first annual drop in 6 years, driven by Sydney and Melbourne,’ David Chau, ABC News Online, 2 June 2018
‘Housing slump’: Mortgage lending plunges, further weakness expected,’ Chris Kohler, Domain, 11 May 2018
‘Replacing stamp duty with broad based land tax could increase revenue to $11.2 billion by 2047, new report shows,’ TawarRazaghitwitter, Domain, 4 June 2018
‘Why Australia's governments, banks and economy don't want 'affordable' housing,’ Ian Verrender, Sydney Morning Herald, 28 May 2018
‘RBA's Ian Harper says if rates need to rise, 'who cares what’s happening to house prices'
David Scutt, Business Insider Australia, 28 May 2018
‘Interest rates are lower than ever. So why is owning a home harder than ever?,’ Greg Jericho, The Guardian, 5 June 2018
‘Lending to Australian housing investors plunged by over a billion dollars in March,’ David Scutt, Business Insider, 11 May 2018
‘Sydney’s best places to bag a property bargain this winter,’ Stephen Nicholls, news.com.au, 4 June 2018
‘Sydney’s wealthy dodge market correction,’ Lucy Macken, Sydney Morning Herald, 13 May 2018
‘Warning signs on housing, but are we cautious enough?,’ Jason Murphy, news.com.au, 30 May 2018
Housing slide ‘larger than expected’, Clancy Yeates, Sydney Morning Herald, 8 June 2018
Sydney property sets world record, then steps back
Thu, 17 May 2018Interesting news from Domain: Australian house prices recently set a world record after gaining 6556 per cent in 55 years, according to calculations from the Bank of International Settlements and referenced by UBS, with growth averaging 8.1 per cent each year during that period.
The report added that prices had doubled every nine years, and that it was the longest upswing in the world during that period without a “downswing” – a downswing was defined as a sustained price decrease of three years.
The media have recently been repeating themselves about Sydney property. “The housing boom is over” they often say, and rightly so. Investors are withdrawing from their previous high levels of activity, and vendors are finding that expectations of ever higher prices for their properties can be overly optimistic.
Other indicators – namely auction clearance rates, time-on-market, numbers of properties sold, and property lending figures all say the same thing. Yes, the Sydney property boom is behind us. But a return to normal conditions is what we’re now seeing, and the chances of going from boom to bust are miniscule.
As the New Daily’s Michael Pascoe wrote: “The fall in Sydney and Melbourne auction clearance rates over the weekend is a gift for writers of scary headlines. Before they get too excited, keeping some perspective paints it as part of a return to something more like normal – not heralding the constantly-predicted crash”.
Cooley Auctions' auctioneer Damien Cooley told the Financial Review’s Su-Lin Tan: "Things are changing and the market is not as good as it was, but it's a very fair market." He’s right. A fair market is just what we’re looking at, and while clearance rates remain in the 60 per cent levels, quality properties continue to achieve above-reserve prices at auctions.
But across the board prices are softening. Property advisory firm SQM Research has revised its Sydney price estimate forecast to between -4 per cent and zero per cent growth this year, from a previous estimate of between 4 per cent and 8 per cent.
It says that moves by the Australian Prudential Regulation Authority (APRA) to strengthen mortgage markets are weighing on the national property market: “This action, predominantly targeted at property investors, has triggered a decline in demand for residential property.”
The recent tightening of credit restrictions by banks and other financial institutions is reminiscent of the year 2015 when APRA announced a 10 per cent cap on the growth rate of banks’ loans to investors – a situation that affected prices for a period but was gradually relaxed.
Foreign investors, particularly those from China, have largely pulled out of the Sydney market, but this has opened up opportunities for first-home buyers and owner-occupiers who have been quick to take advantage of the stock of new apartments on offer.
2018 Budget impacts
Despite repeated concerns about housing affordability, the federal government’s 2018 budget, which it must be remembered doesn’t come into effect until it’s been passed by the Senate, offered little that will affect the property market - nothing on negative gearing and nothing on capital gains tax reductions.
This was a bit surprising after a study presented to the Reserve Bank of Australia concluded that almost 75 per cent of households could own their own homes if the current negative gearing policy was abolished, and house prices would soften by 1.2 per cent while rents would rise “only marginally”.
The paper, by Melbourne University department of economics researchers Yunho Cho, Shuyun May Li, and Lawrence Uren, found that eliminating negative gearing would lead to an overall welfare gain of 1.5 per cent of gross domestic product.
However, as News.com.au’s Liz Burke puts it: “Though housing affordability is frequently cited as a major concern for young Australians and a top financial issue, prospective property owners have apparently been forgotten by the Government.”
A cutback on tax incentives for vacant land was one of the few property-related measures in the budget, which means property owners will no longer be able to claim tax deductions for expenses such as council rates and maintenance costs for vacant land. The changes will take effect from July 2019.
At present, property owners can claim deductions on land they never intended to make an income from while ‘banking’ the land, hoping to sell it later and make a windfall profit when property prices have increased.
Under the government’s new tax settings, property owners would be able to claim deductions only after a property had been constructed on the land, the property had received approval to be occupied, and the property was available for rent.
The government hopes this will curb the popularity of land banking, which has the effect of tying up land that could otherwise be used for housing or other development. The measure is expected to add $50 million to the government’s income in 2020-21 and 2021-22.
Urban Development Institute of Australia’s national executive director, Kirk Coningham expressed concerns about the measure: “We know that it can take seven to ten years to bring house and land packages to the market in Sydney, so to be punished for the slow processing would be one big concern we would have.”
Lance Cunningham, national tax director at BDO in Australia, told Domain’s Kate Burke that denying vacant land holders from making normal deductions appears to be an attempt to stop developers holding onto land long term.
“I think it’s really aimed at property developers holding lots of land because they think they can perhaps get better profits in the future,” he said. “To try and free up some of the land for housing.”
Another housing-related twist in the budget was the government’s offering homeowners over 65 a ‘reverse mortgage’ worth up to $11,799 per year, meaning that anyone over the retirement age can now access equity in their homes without selling them.
This scheme based on the previous Pension Loans Scheme addresses the problems faced by many older Australians who have their wealth tied up in property and have little access to extra cash when needed. The rise in life expectancy also places financial pressures on retirees who can’t really know how many years they’ll be able to stay in their own homes.
The importance of this facility is shown by Grattan Institute figures which show that Australians between the age of 65 and 74 are $480,000 wealthier in real terms than households of that age bracket 12 years ago, but most would have to sell their homes to access some or all of that money.
An interest rate of 5.25 per cent will apply to the loans. This rate is unchanged since the Pension Loans Scheme was introduced in 1997 and is typically about 0.5 per cent below the rate offered by most banks.
The plan would improve the outlook for retirement-age homeowners, noting that a Grattan Institute report on housing affordability found that the over 65s are the only group of Australians with an increasing rate of home ownership.
“Retirees who have paid off the mortgage are insulated from rising housing costs, a substantial safety net if they exhaust their retirement savings,” said the report, which written by chief executive John Daley and Australian Perspectives Fellow Brendan Coates.
Medium-density popular
The NSW government recently introduced a new medium-density housing code, although some councils are resisting its implementation due to concerns about overcrowding.
NSW Planning Minister Anthony Roberts announced the new housing code in April, saying that low-rise medium-density housing is the “missing part” of housing stock between traditional free-standing homes and apartments.
The code permits homeowners and developers to divide blocks into terraces and dual occupancy dwellings, or to create what are being called “manor houses” in which a single building houses three or four dwellings. Development approvals would be managed using a complying development process that is supposedly faster and cheaper than existing approval processes.
This is a response to an important shift in the marketplace shown by growing demand for medium-density housing. Medium-density is a category that includes townhouses, terrace houses and three-bedroom apartments – suitable for downsizing older homeowners or young families looking for low maintenance properties that suit their time-poor lifestyles.
Knight Frank’s Michelle Ciesielski, head of residential research, told the Herald’s Carolyn Cummins that in 2013 the volume of medium-density development sites in Australia was $152.8 million, but by the end of 2017, the volume had increased to $1.1 billion.
“The shift towards low-maintenance living has only just begun, with an aging population in downsizing mode, more first-time buyers and an increasing trend in time-poor communities,'' Ms Ciesielski said.
She said her company’s analysis was that the portion of three-bedroom apartments being built is expected to increase by 42 per cent for higher density projects now under construction, and for those due for completion in the next four years.
There’s a measurable shift in the market occurring between the prices of apartments and detached houses. CoreLogic’s data shows that capital city detached house values grew at an average annual rate of 7.3 per cent over the past five years and unit values grew by a lesser 5.5 per cent over the same period.
“Despite the surge in unit construction over recent years, the past 12 months has seen unit values continue to trend higher, up 1.9 per cent, compared with a 1 per cent fall in house values,” CoreLogic head of research, Tim Lawlesssaid.
Some experts have said the mix of tighter lending restrictions, first-home buyer incentives and a flood of new apartments were the reason for the drop in house prices.
“[People who would have normally bought houses] may be thinking there’s better value in units, buying something brand new, close to the city usually on a good transport line,” AMP Capital’s chief economist, Dr Shane Oliver told Domain’s TawarRazaghit.
“Perhaps [that switch] in favour of units over houses has helped absorb the supply, which has put a dent in demand for houses,” he said.
Commonwealth Bank economist Kristina Clifton told The Guardian’s Gareth Hutchins that unit prices may be holding up better because they tend to be located in the larger capital cities, where population growth is strong, and close to public transport.
“Also, unit prices didn’t rise as quickly as house prices during the boom years,” she said.
Choosy at the top
Selling agent Jack Fontana says the market at the top has ‘definitely shifted’: “There are buyers but they’re cautious and picky. They’re looking for the suitable property, especially at that high end.
“It is not a two to three-year purchase for them but something that is long term. They want to make sure that the home is right, and the position is right, and if it is a waterfront, a lot of them do want the private jetty.”
The top end of the market is alive and well, as was demonstrated at a recent auction for a new-build five-bedroom house in Hunters Hill. The property attracted pre-registrations from five families; three of them made bids, driving the home to an under-the-hammer sale price of $5.8 million - $700,000 up on the $5.1 million reserve.
“We had over 150 groups through during the campaign, 60 of them on the first Saturday the property was open for inspection,” said the selling agent Paul Cavarra from McGrath Hunters Hill.
“The final price eclipsed the price point where everyone thought it would end up, that’s for sure,” he added.
The president of the Real Estate Institute of NSW, Ms Leanne Pilkington, said agents were finding it harder to get buyers to make purchase decisions because Sydney’s market has eased.
“Twelve months ago, the buyers were really fuelling the price growth because there was huge demand. They are not as willing to pay that premium right now, so I would say the market is cooling.
“It is not as if everyone is throwing offers on the table – that is not the way a market like this works.”
Tenants feel rent pressures
The Anglicare Rental Affordability Snapshot surveyed all the private rentals available in Australia over one weekend in March.It found a 28 per cent increase in supply across Sydney's rental market has failed to push down prices, and less than 1 per cent of properties in Sydney's market could be considered "affordable".
Rental properties are considered "affordable" if they cost up to 30 per cent of a person's income.
Anglicare's head of research and advocacy Susan King said an increase in supply has not helped low income earners, and there needs to be an increase in public housing: "Even though there are 28 per cent more listings available it hasn't translated to increased affordability," she said.
Long-term underinvestment in public housing, treating homes as an investment vehicle, massive tax concessions for homeowners and continually rising property prices have put the entire housing system under stress, Laurence Troy from the UNSW City Futures Research Centre told the Herald’s Nigel Gladstone.
“People who are pushed out of the home ownership market into private rentals with relatively good incomes put inflationary pressure on rents that are able to be charged,” Dr Troy said.
“Then at the bottom end [of the housing market] you have people that are pushed out of public housing into the private rental market because essentially that’s the only option, but they’re in a worse position because the rental market is under significant strain.”
However, CoreLogic's head of research Cameron Kusher said that Sydney’s rental yield of 3.2 per cent was below the median yield across the country of 3.68 per cent, and that Sydney had its weakest first quarter since 2009.
Mr Kusher forecasts that the capital cities (except for Hobart) will continue to experience slowing rental growth over the coming quarters.
The RBA’s position
Market-watching economists say that Australia’s cooling housing market will add to the case for rates to remain on hold even longer. But after 21 months of unchanging interest rates we’re beginning to get a bit edgy about the RBA making a move in either direction. We know a change will come, but nobody can say when.
In April the Bank issued a warning that as many as 1.5 million mortgage holders will face sharply higher payments over the next four years as interest-only loans convert to principal and interest loans. warned.Bank officials described the switchover an “area of potential concern”.
The warning comes two days after Reserve Bank Governor Philip Lowe said that the next move in official interest rates would most likely be up, and that it would “come as a shock to some people”.
Critics of the RBA say the Bank should be clearer about when rates are likely to change, what their direction will be, and what could be the magnitude of the change. This is called “forward guidance” and is provided by other central banks as a reinforcement of economic policy.
During a recent telecast of “The Conversation” on ABC News, participants used the example of the US Federal Reserve Bank announcing in 2008, when the cash rate was at zero, that “…weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time”.
This kind of communication influences the public's expectations about the future course of US monetary policy, and effectively advises consumers and businesses to expect an expansionary monetary policy for some time. It givespeople more information about the strategy the Reserve will take with rates, rather than simply providing forecasts about its expectations of future economic conditions.
In Australia it seems the RBA is concerned that record low interest rates, accelerating asset prices and a growing appetite for risk could be laying the groundwork for a sharp correction across financial markets.
In its latest Financial Stability Review the RBA said that strong global economic conditions over the past six months suggest asset prices have surged because investors "see little chance of adverse outcomes".
The RBA warned that a rise in interest rates from rising inflation could catch investors by surprise and lead to what it calls a "disruptive and lasting correction in a broad range of markets.”
The Bank commented that investors have taken on more risk in recent years which makes them more susceptible to large losses if there was a generalised fall in asset prices.
"This could be triggered by a sharp rise in interest rates in the absence of stronger economic growth arising from, for instance, a jump in realised or expected inflation or a change in investors' risk appetite."
However, for the time being the RBA believes tougher regulatory measures and a strengthening in lending standards have sufficiently helped to moderate housing market conditions in Australia, and in the absence of more definitive “forward guidance” we can expect things to stay as they are for the foreseeable future.
Sources:
‘Federal Budget 2018: Property owners sitting on vacant land targeted in budget measures,’ Kate Burke, Domain, 8 May 2018
‘Every homeowner over 65 offered reverse mortgage to unlock home’s equity,’ Chris Kohler, Domain, 8May 2018
‘Sydney house prices are set to drop. And it’s nothing to fear,’ Michael Pascoe, The New Daily, 30 April 2018
‘Prepare for sharply higher mortgage payments, Reserve Bank warns investors,’ Peter Martin, The Age, 14 April 2018
‘How the Budget affects housing affordability,’ Liz Burke, News.com.au, 9 May 2018
‘Sydney, Melbourne housing boom is over, auction clearance rates show,’ Su-Lin Tan, Australian Financial Review, 18 March 2018
‘Investors making way for owner-occupiers in housing sector,’ Carolyn Cummins, Sydney Morning Herald, 25 April 2018
‘House price forecasts slashed in all but three capital cities,’ Chris Kohler, Domain, 7 May 2018
‘Sydney prestige sellers slash prices at weekend auctions as investors target apartments,’ Chris Tolhurst, Domain, 8 April 2018
‘Sydney auction clearance rate drops below 60 per cent as market turns,’ Chris Tolhurst, Domain, 29 April 2018
‘Annual capital city home values fall for the first time since 2012,’ Gareth Hutchens, The Guardian, 1 May 2018
‘RBA should be clearer about when and how interest rates will change,’ Efrem Castelnuovo, Bruce Preston and Giovanni Pellegrino, ‘The Conversation’, ABC News Online, 19 March 2018
‘RBA warns a sharp rise in interest rates could lead to disruptive and lasting market corrections,’ Peter Ryan, ABC News Online, 14 April 2018
‘Sydney renters paying $582 a week, while Darwin and Hobart enjoy best rental yields,’ David Chau, ABC News Online, 18 April 2018
‘Supply increase makes no impact on Sydney's rental market as tenants struggle to pay,’ Kathleen Calderwood, ABC News online, 30 April 2018
‘Sydney property boom blows poor towards public housing,’ Nigel Gladstone, Sydney Morning Herald, 2 April 2018
‘As Australia’s house prices fall, watch the bottom pickers start to emerge,’ Chris Kohler, Domain, 26 April 2018
‘House prices in Sydney drop 2.6 per cent over March quarter: Domain Group data,’ TawarRazaghit, Domain, 26 April 2018
‘Home ownership would rise if negative gearing is scrapped, study says,’ Ben Doherty, The Guardian, accessed 29 April 2018
‘Cash rate on hold as house prices to fall ‘5 per cent this year, another 5 per cent next year,’ Frank Chung, News.com.au, 2 May 2018
'Bulldozers in every street': NSW govt facing suburban revolt over new housing code,’ Andrew Taylor, Sydney Morning Herald, 30 April 2018
A tale of trillions, softening price rises and intergenerational theft
Wed, 18 Apr 2018In case you’ve ever wondered just how much Australia’s housing market is worth, a new report from the Australian Bureau of Statistics (ABS) tells us – a whopping $6.87 trillion. In fact, just between September and December 2017 it grew by almost $93 billion, but it’s the details of that fourth-quarter that make for interesting reading.
Even though the national annual average residential property gained 1 per cent in the December quarter, Sydney house prices slipped into negative territory, prompting CommSec senior economist Ryan Felsman to tell Domain’s Suzanne White: “The rebalancing of the Aussie housing market continues…and the slowdown in residential building construction is becoming evident – especially in NSW.”
In previous articles we’ve mentioned the somewhat complex methodology used by CoreLogic to compile its Hedonic Home Value Index, a measurement which tracks price movements down to the ABS Statistical Area 4 level. Using figures from CoreLogic’s index, Moody’s Analytics has forecast further house price falls for Sydney, but interestingly not for apartments.
Moody’s says house values across Sydney will decline 4.2 per cent in 2018 before recovering in 2019:“Incomes in NSW have increased faster than the national average and underpin some of the recent gains in home values. However, housing values have risen even faster and are overvalued relative to equilibrium value. Therefore, Moody’s Analytics expects a correction across NSW.”
Geography will play a part in Moody’s forecast drop. “House values in the City and Inner South region are forecast to fall by 10.1 per cent in 2018 to be the worst-performing statistical areas in Sydney,” the group says.
“For the Eastern Suburbs … our forecast [looks for a] 9.3 per cent decline in values in 2018 and a further 3.9 per cent decline in 2019, which would bring house values back to their level in 2016.”
Moody’s says house prices will also fall by more than the city-wide average in the Inner West, Ryde, North Sydney and Hornsby in the year ahead. However, according to Moody’s, apartment prices will make a moderate gain of 0.3 per cent due to ongoing demand.
“Apartments are expected to also slow but not as sharply with a 0.3 per cent expansion expected in 2018, down from the 9.8 per cent growth in 2017.”
The good news is that Moody’s thinks the downturn won’t be long-lasting: “By 2019, the correction is expected to have largely passed, with house and apartment values forecast to increase by 0.9 per cent and 1.6 per cent, respectively,” it says.
CoreLogic head of research Tim Lawless said that Sydney's property market was already showing signs of solidifying, with the 0.3 per cent monthly fall its slowest rate of decline since late 2017.
“If the trend towards an improving rate of decline persists, the Sydney housing market
may have already moved through its peak rate of decline," Mr Lawless told Reuters.
There is an ‘elephant in the room’ that could impact the prices of Sydney property in 2018-19, and that’s the Hayne inquiry into bank industry misconduct, including mortgage lending practices. The findings of this Royal Commission could result in a further tightening of lending laws that would make mortgage finance more difficult to obtain.
UBS economists George Tharenou and Carlos Cacho wrote a note to their clients which said mortgage borrowing limits could fall by as much as 35 per cent if higher living expenses were fully factored into lending calculations. This would reduce borrowers’ repayment capacity, hitting first-home buyers and lower income borrowers hardest.
UBS has already predicted house prices would sit between flat and -3 per cent year-on-year in 2018 and 2019 but warned a credit tightening scenario would see larger price falls.
The Hayne Royal Commission is expected to submit an interim report no later than 30 September 2018 and will provide its final report by 1 February 2019. ??
Another elephantine factor awaiting resolution is in the warning issued by the RBA which delivered the unwelcome news that around 30 per cent of all outstanding national mortgage debt will be subject to conversion from interest-only to principal and interest repayments over the next four years.
"Liaison with the banks suggests that there is a small share of borrowers who have not accumulated prepayments despite having had their loan for some time and may have little margin for unexpected increases in living expenses or income falls," the RBA said.
There are presently 1.46 million outstanding interest-only mortgages. A ‘small share’ of these, say just one or two per cent, would still mean many thousands of property owners would experience a degree of mortgage stress.
Is the RBA worried? Not yet. In its statement the Bank said: “"The share of borrowers who cannot afford higher P&I repayments and are not eligible to alleviate their situation by refinancing is thought to be small.”
Apartment construction slows
There’s been a significant drop-off in apartment construction which reduced the number of buildings approved across the country in February, according to the latest ABS data. Industry experts predict this trend to continue as more developers delay commencing projects and tighter lending standards for investors coincide with a flood of new apartments going onto the market.
AMP chief economist Shane Oliver said there were still a record number of cranes on our skylines, but it won’t last: “You’ve got falling [property] prices in Sydney, and rising levels of unit supply, eventually the number of cranes across Sydney…will start to come down.”
“As supply impacts at a time of tighter lending standards I think more developers [will decide] to start delaying projects,” he added.
Housing Industry Association senior economist Shane Garrett said the dramatic fall in the number of apartments and high-density dwellings came at a time of near-record construction volumes. High-rise apartments had been especially affected, with the number of units approved for buildings four storeys or higher over the year to February down 15 per cent on the previous year.
Mr Garrett said approvals have yet to bottom out, predicting that won’t happen until about mid-2019: “The thing that worries us … is that if fewer new apartments are being built it represents a risk to supply … and that could have unfavourable outcomes, in terms of acceleration of property prices and rents.”
One group that wants more apartments in Sydney is the Urban Taskforce a group that represents the development industry. It says it’s concerned that the Greater Sydney Commission’s recently-announced ‘Region Plan’ hasn’t said how it would ensure that medium-to-high density apartment living will be given planning certainty.
By 2036, the Commission’s plan forecasts that Sydney's residents will see a city develop with “little change in the outward spread [of housing but an] increase in intensity of development within existing centres and the existing urban area”.
Chris Johnson, CEO of the Urban Taskforce, says there is significant tension in the community about the planned increase in intensity of development: "The language in the GSC's plan is about more diverse housing and about a mix of house types, presumably leaving the actual mix to council plans.”
Mr Johnson told the Sydney Morning Herald’s James Robertson that leaving the determination of the plans open could expose them to political pressure from MPs concerned about “stopping the squeeze”.
Group buying to save
One purchasing methodology that might give purchasers a better deal on apartments – or possibly even houses, is group buying. Although not a new idea, the current high prices in eastern capitals have made group buying an attractive option for those interested in acquiring property.
It’s essentially buying in bulk – a group of people who are looking to buy a similar type of investment organise themselves, often with a specialist property agent, to negotiate lower prices for something like off-the-plan apartments in a single building, or perhaps units in multiple buildings that have a common owner.
Buyer’s agent Nathan Birch, co-founder of BInvested.com.au, explains that developers often need to pre-sell a number of properties before they can secure finance to begin development.
“A lot of legwork, marketing and promotion go into finding and securing these buyers ahead of the build. Some developers have seen us as an easy outlet for removing all the stress and pain from doing large marketing campaigns,” he told Nila Sweeny from Property Market Insider.
He says that if a significant number of buyers come to the developer with a proposal to purchase units or blocks of land in a development they can often secure property well below market value.
This sounds logical, and in theory it should work out to be a win-win situation for both purchasers and developers, but there are possible ways to lose as well. Fees from buyer’s agents can be high, and there can also be problems with some would-be purchasers getting finance. Due diligence of both the property developer and the intending purchasers is essential to ensure the deal goes ahead with favourable outcomes for all parties.
Intergenerational theft?
A range of housing affordability measures at state and federal levels have been implemented in the past year. There have been a variety of stamp duty exemptions and discounts, first-home buyer grants and a federal “super scheme” that allows first-home buyers to save for a house deposit by making extra contributions into their superannuation.
However, a study by the Australian Housing and Urban Research Institute concluded that most of the government’s housing expenditure continued to be heavily skewed towards wealthy homeowners rather than new first-home buyers.
Former Liberal leader John Hewson recently was quoted in the media with a statement that governments had “kicked the issue of housing affordability down the road for decades,” and labelled the result “intergenerational theft”.
Dr Hewson was adamant that successive governments had failed to develop a national strategy to solve the problem and the issue has now become a crisis: “Problems don’t get solved … they get kicked down the road, and when you kick issues like housing affordability down the road or budget repair down the road, or climate change down the road, you are stealing from the next generation who are just going to be left to try and solve those problems.”
He argued that broad-based tax reform is needed and that housing-related tax concessions such as those on negative gearing should be grandfathered and capital gains concessions that benefit investors should be capped over time.
Dr Hewson said with a whole generation of Australians locked out of the housing market, the result of the next election could hinge on the country’s youth: “The youth of Australia underestimate how much political influence they can have if they work together.”
Economist Ross Gittins, a regular contributor to the Sydney Morning Herald, agrees with Dr Hewson that the solution for younger generations lies in generating more pressure at the ballot box.
“The feds failed to limit the growth in demand (by limiting immigration and fixing the tax system), while the states did too little to increase supply (by discouraging the building of new homes on the outskirts and by permitting a first-in-best-dressed mentality by people in inner and middle-ring suburbs).
“Why are they allowing the proportion of home owners to decline? Because most things they could do to genuinely help first home buyers would come at the expense of existing home owners, who have more votes than the youngsters,” he said.
Liberal MP John Alexander says that Australia’s housing market must be recalibrated towards home ownership. This requires ensuring that wage earners who aspire to be owner-occupiers are competing in the market against other wage earners, not investors.
His preferred solution is to give the Reserve Bank of Australia (RBA) the power to adjust the tax deductibility of housing. As an example, he said the RBA could decide that investors could only deduct 70 per cent of the cost of their borrowings.
Mr Alexander has also announced his own scheme to attract private investment in affordable housing. He wants to create an Australian Housing Trust in which investors can buy shares that will finance affordable housing.
Under his plan, renters could reduce their rent by becoming part-owners of in the properties they occupy eventually becoming full owners in what he terms an “equity mortgage.”
Interest(ing) times
We have now had record low RBA interest rates for a record length of time, and no signs of an impending change to the situation. About the only movement is the growing distance between now and the time the market expects the next rate change to take place.
At the end of January, the market was predicting a rise in rates to 1.75 per cent in November 2018. Currently it’s anticipating a rise to 1.75 per cent by June 2019. This is largely due to a continued slowing in housing price growth, high debt levels and weak wages growth.
AMP Capital’s Shane Oliver said: “high business confidence, strong jobs growth and the RBA’s own growth and inflation forecasts argue against a rate cut, but risks around consumer spending, weak wages growth and inflation, the slowing Sydney and Melbourne property markets and the still too high $A argue against a rate hike.”
Housing finance is definitely taking a backward step. In January this year the level of housing finance was 1.5 per cent below what it was 12 months earlier - the first annual fall since August 2016. Clearly, the fall in housing finance is being driven by a decrease in investor finance.
But another significant factor that’s holding back housing finance volumes is the slowing prices for established houses. In September 2017, the average price across all capital cities for established houses was 9.3 per cent above where it was 12 months earlier; in December 2017 this had fallen to growth of just 5.6 per cent.
As always, Sydney generates its own, unique statistics. Since December 2011, established house prices in Sydney have grown by 83 per cent, whereas average full-time earnings in NSW over the same period grew just 17.5 per cent. The price growth strength was based on investors and progressively lower interest rates, but with new rules limiting investors and interest rates most likely at their lowest point, the housing boom is all but over.
Mathew Tiller of LJ Hooker told News.com’s Sophie Foster that housing markets across the country remained active with listings increasing and auction clearance rates just below the long-term average.
“More properties on the market for sale has provided more choice for buyers and when combined with the moderation of investor demand has led to a slowdown in price growth. In weighing up these variables, it is likely that the RBA will keep the cash rate at the record low of 1.5 per cent over the short-term.”
Also in agreement were Noel Whittaker of QUT who said “housing not rising - markets wobbly - no reason to move”, and Clement Tisdell of the UQ School of Economics who said he agreed with: “No reason for a change.”
There is, of course, a possibility that the banks themselves could raise mortgage interest rates, thereby causing a countering reaction from the RBA. Ian Verrender from ABC News Online says that between them, the big four banks hold about 80 per cent of all Australian mortgages.
“Our banks have borrowed around $700 billion on offshore markets and watched on in glee as we've ploughed that into real estate, pushing prices to the heavens, forcing new entrants to borrow even more.
“Real estate has become their dominant business, comprising up to 60 per cent of their total loan books.
“If we do see our banks pushing the button on a series of mortgage hikes in coming months, the RBA will have no option but to hack into its already record low of 1.5 per cent just to keep the economy on track.”
With that possibility and the forthcoming interim report of the Hayne Royal Commission due in September, we’re assured of interesting times ahead!
Sources:
‘RBA flags dangers of $480b in interest-only loan resets over the next four years,’ Jacob Greber & Jonathan Shapiro, Financial Review, 14 April 2018
‘House prices predicted to keep falling, but Melbourne and Sydney units to take biggest hit,’ Michael Janda, ABC News Online, 11 April 2018
‘What’s next for Australian property prices? 3 economic heavyweights make their case,’ Chris Kohler, Domain, 9 April 2018
‘RBA should be clearer about when and how interest rates will change,’ Efrem Castelnuovo, Bruce Preston and Giovanni Pellegrino, ‘The Conversation’, ABC News Online, 19 March 2018
‘Australia's property market is now worth almost $6.9 trillion - a record high,’ Suzanne White, Domain, 21 March 2018
‘Group Buying: How Does it Work and What Are the Hidden Traps You Need to Be Aware of,’ Nila Sweeney, Propertymarketinsider.com.au, 23 March 2018
‘Moody's tips house price 'correction' across NSW,’ David Scott, Sydney Morning Herald, 19 March 2018
‘Australia’s housing affordability crisis ‘intergenerational theft’: John Hewson,’ TawarRazaghi, Domain, 26 March 2018
‘Who is to blame for the housing crisis and how to fix it,’ Ross Gittins, Sydney Morning Herald, 14 March 2018
‘John Alexander on why Australia's housing market risks 'grotesque' inequality,’ Paul Karp, The Guardian, 25 March 2018
‘The housing boom is over – and the RBA isn't busting to raise rates,’ Greg Jericho, The Guardian, 22 March 2018
‘The pullback of investors off the back of tighter lending restrictions is also taking its toll,’ Kate Burke, Domain, 2 April 2018
‘The number of cranes dotted across city skylines is set to fall with a decline in building approvals for apartments,’ Kate Burke, Domain, 4 April 2018
‘Why Sydney needs more apartments,’ James Robertson, Sydney Morning Herald, 19 March 2018
‘RBA to sit on 1.5pc cash rate with economy “not strong enough” to handle a rise,’ Sophie Foster, News.com.au, 2 April 2018
‘RBA should be clearer about when and how interest rates will change,’ Efrem Castelnuovo, Bruce Preston and Giovanni Pellegrino, ‘The Conversation’, ABC News Online, 19 March 2018
‘Sydney, Melbourne property prices continue to slide,’ Reuters, Sydney Morning Herald, 3 April 2018
Sydney property in 2018: no hurry, few worries
Wed, 14 Mar 2018The gradual slowdown in the Sydney property market continues, showing few signs of any sudden acceleration that might indicate vendors are heading for the exits. In fact, vendors seem to be adapting well to easing prices and are adjusting their expectations accordingly.
The Financial Review’s Michael Bleby reported that discounts are rising and times on market are growing as key indicators of the slowing conditions.
“The average house discount - the difference between listing price and final sale price - rose to 5.6 per cent in January, up from 5.4 per cent the previous month and 5.3 per cent in January a year earlier, Domain Group's latest State of the Market report shows.
“Discounting has also risen on Sydney units and average days on market for both housing types have also lengthened, to 50 days for houses and to 58 days for units,” he said.
Figures from consultancy SQM Research showed residential listings jumped 19 per cent from January to 31,204 in February. Asking prices of houses in Sydney fell 1.5 per cent and asking unit prices slipped 0.6 per cent.
Buyer’s agent Rich Harvey from propertybuyer.com.au told Domain’s Chris Tolhurst that properties in the outer areas of the western suburbs, the north and southwest had slipped in price but well-located real estate would maintain its value over the long-term.
“The prime areas are still performing quite well; however there has been a general slowdown,” he said.
“Properties were being sold within 20 days or even a week, and now we are noticing the days on market starting to trend upwards. The buyers that are doing their homework are seeing some good opportunities, but it’s not bargain territory…It is just a natural turn in the cycle and what you’d expect in Sydney: a levelling off of demand,” he said.
Sydney has once again been Australia’s weakest market in February, falling for the fifth month in a row, and is now down by 2.4 per cent in the past three months according to figures from CoreLogic.
CoreLogic's head of research Tim Lawless said the Sydney market has now fallen 3.7 per cent since its peak in July 2016: “This was fuelled by tighter credit policies, particularly focused on investment and interest-only lending, which reduced demand from that part of the market.
"It's not like the Sydney market is crashing - it's more a controlled or managed slowdown, largely due to a reduction of investment in the marketplace." Said Mr Lawless.
In its first Housing Pulse research note for 2018, Westpac said that breaking down mortgage arrears data nationally points to "benign conditions" that are unlikely to lead to distressed sales. In NSW mortgage arrears are the lowest nationally at just 0.8 per cent, well below the state's long-term average of 1.4 per cent.
"Arrears were notably higher in NSW through the 2003-07 tightening cycle peak, highlighting both the higher debt servicing load in the state and a range of market-specific factors," Westpac said.
Alison Cheung, a Sydney-based commercial real estate reporter, identified a developing trend that shows how quickly the players in Sydney’s property market can adjust to changing conditions.
“Older unit blocks in Sydney are seeing a flurry of trading activity, as investors seek assets that fit long-term hold strategies in an uncertain property market. Apartment block owners are sensing the peak of the market and are selling up to take advantage of this stage of the cycle.”
Ms Cheung says that yields for older unit blocks in Sydney are generally about three to five per cent, although investors aren’t as concerned about that as much as they are in getting a stable, long-term income stream.
She quoted Nick Tucksworth from Savills Australia who said there’s been so much growth [in older unit blocks] over the past two or three years that owners realise the prices have just about peaked: “People love them for (their potential to) add value, so they look for rundown blocks, buy them, add value and make good profits. If it’s already refurbished, just park money and take the rents,” he said.
Another quote in the article came from CBRE Research associate Bradley Speers, who said: “The lower yields typically associated with residential assets provide a stable, long-term income stream that will meet investor demand for longer-duration liabilities.”
After several recent years of rapid capital growth, owners are happy to realise the returns on their investment, while new long-term investors are looking for a place to put their money where it will both be secure now and offer future growth opportunities in the years ahead.
The coming undersupply
Economists from Bank of America Merrill Lynch (BAML) have taken a good look at Australia’s capital cities and concluded that, despite our recent burst of unit construction, we can forget about any potential housing oversupply and should instead be thinking about a developing risk of undersupply.
In their recent Australian research note, BAML economists Tony Morriss and Alexandra Veroude say that our moderating property market will lead to fewer housing starts which will then feed into an undersupply situation by 2020.
Their reasoning goes like this: Building approvals peaked in 2015. Assuming a three-year construction period on average, the mass of new buildings will be completed in the coming year. New housing starts will pull back due to moderating house prices, higher rates and climbing construction costs (in terms of both labour and building materials), and today's abundance of new housing will turn into a scarcity by 2020.
Another interesting finding by the BAML economists was that the timing of the now-fading construction boom is going to prevent most existing off-the-plan property transactions from being affected by falling bank valuations.
As the Financial Review’s Patrick Commins wrote: “While property prices have moderated of late, three-quarters of the new apartments scheduled for completion this year are in Melbourne and Sydney, where values have jumped by a fifth since 2015.
“Less chance, then, of bank valuations on the completed property coming in well below what the buyer agreed to pay. Rental vacancy rates are low at 2 per cent in the two cities, another hopeful sign that those who bought to let can expect to find tenants.”
Economists Morriss and Veroude say the current situation of Sydney property, where prices have fallen 3.1 per cent since the market peaked, is now a market ‘in balance’ and will remain so until the undersupply situation develops (around 2020): "Laws of supply and demand suggest that house price pressures would be expected to [again] build from this time."
Interest rates stay down
It’s getting to be a regular feature on our monthly financial calendar – at its March meeting the Reserve Bank once again held rates to their record low 1.5 per cent, making it 19 consecutive months since a movement occurred in either direction. The last change (a small move down) was in August 2016, just after property prices had begun to slow across the country, and there were forecasts of sluggish growth in 2017.
There’s assuredly now a period of sluggish growth in progress, but this suits the other elements of our current economic situation: weak wages growth, weak inflation, and weak business investment. Weaknesses all around, but this time there’s certainly no inclination from the RBA for a rate cut.
RBA Governor Philip Lowe issued a statement after the March meeting that said the Bank expected the Australian economy to grow faster in 2018 than it did in 2017, anticipating some wages growth this year after saying the wages growth rate ‘appeared to have troughed’ and some employers were now finding it hard to hire skilled workers.
Speaking specifically about housing, Dr Lowe said the housing market in Sydney had slowed: “Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas.
“In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years.”
He credited APRA’s supervisory measures and tighter credit standards for containing what he called ‘the build-up of risk in household balance sheets’ and for putting the brakes on an overheated housing market. He also indicated that the RBA was unwilling to raise rates just to solve the overheating as the rest of the economy needed lower interest rates.
In February Dr Lowe told the House economics committee that “it would be a good outcome if we now experienced a run of years in which the rate of growth of housing costs and debt did not outstrip growth in income, as they have in recent years”.
He also told the committee that over time we’ve structured our economy to ensure higher housing prices. “If you asked anyone how a country would deliver high housing prices, you’d find we’ve made all those choices: live in fantastic coastal cities, under-invest in transport, have a liberal financial system, and not want high density”.
He said that, while this has led to high levels of debt, it has also led to high levels of asset prices – including housing, and he said the current situation was “perfectly sustainable”. So, for the immediate future it’s not likely that interest rates will be going anywhere, but if the economy does indeed show the faster growth he expects we may well see interest rates going upwards before the end of 2018.
The winning doomsayer?
We said last month that it would be hard to find a single year without someone in the media mentioning a forthcoming ‘crash’ of the Sydney housing market. It’s only March, yet we could already have this year’s winning fateful forecaster - Harry Dent, a US demographer and financial commentator.
Mr Dent, who apparently predicted the 2008 GFC and consequent economic crash, has now gone into print with predictions of a new global financial crisis. He says there is a global real estate and stock market “bubble” that has been artificially inflated by central bank money printing policies, and it’s all going to pop within the next five years.
“I’m talking about a second global crisis because we never solved the problems of the first one,” he said. “We have $57 trillion more debt, real estate and stocks are more overvalued. I’m seeing signs. Bitcoin finally crashed, the US stock market looked like it was melting down, I think real estate comes next.”
Because he is currently touring the country to promote his new book ‘Zero Hour’, Mr Dent has provided Australia with its own individual doomsday scenario, saying Australian property prices could crash by up to 50 per cent in the looming global crisis that’s going to be worse than the GFC and possibly even worse than the Great Depression. He’s predicted this catastrophic meltdown will most likely begin between the end of 2018 and early 2020.
It should be noted that Mr Dent incorrectly predicted a 50 per cent wipe-out in Australian property prices in 2014, but he thinks this time that it’s really going to happen: “Your problem is you’ve got the second highest real estate costs compared to income in the world. I see Australia as the best house in a bad neighbourhood, but you can’t escape a global crisis.”
Even our perennial favourite for negative forecasting, Australian economist and author Dr Steve Keen, will find it hard to top Harry Dent for the scope and depth of his ‘crash’ predictions.
Unaffordability won’t go away
Housing affordability continues to plague both governments and first-home buyers, both of which would like to see increased buying opportunities for those who now find Sydney median prices for houses and units beyond their reach.
The costs imposed by state and local governments enforcing zoning restrictions make a significant contribution to unaffordability, according to a recent research paper commissioned by the Reserve Bank.
In the paper, economists Ross Kendall and Peter Tulip say that up to 70 per cent of a home’s value is made up by land, and restrictions on developers add more than $100,000 to the cost of apartments.
NSW Planning Minister Anthony Roberts responded by saying zoning is just one element of housing affordability and that the provision of roads, sewer, power, transport, school, hospitals added to both the supply of housing and to the value of land.
"Liveability is a most important ingredient in the development of communities and that’s why we have strong policies on open spaces and park lands as part of infrastructure," he said.
Housing affordability worsened over the December quarter, according to the latest Adelaide Bank/REIA Housing Affordability Report. Australians now allocate 31.6 per cent of the median family income to loan repayments – an increase of 1.6 per cent over the quarter. The figure for NSW is a whopping 37.8 per cent of the median family income that goes to repay their home loans.
The Guardian’s Greg Jericho says, however, that those measures which would have the best chances of improving affordability – increased housing density, reducing the capital gains tax discount, abolishing stamp duty, and limiting negative gearing – also have the least political appeal.
Mr Jericho suggests reading the Grattan Institute’s latest report on housing affordability, which he describes as “a report that shows the result of 30 years of policy geared towards surging housing prices which has left people increasingly locked out of the market.”
In their report the Grattan Institute’s John Daley and Brendan Coates summarise the state of housing in Australia: “Today, home ownership largely depends on income, and how wealthy your parents are. Housing is contributing to widening gaps in wealth between rich and poor, old and young. Lower income households are spending more of their income on housing and are under more rental stress”.
As Daley and Coates note, “home ownership rates are falling among all Australians younger than 65, especially those with lower incomes”.
They also say that, whereas at the start of the 1980s more than 60 per cent of 25-34-year-olds owned a home across almost all income brackets, that rate has now dropped below 50 per cent for all but the highest income group. The biggest fall has been for those in the bottom 20 per cent of household incomes, where only a fifth of those under 35 own a home, down from nearly two-thirds just a few decades ago.
Greg Jericho says that a big reason affordability has declined so much for those with lower incomes is because the price of the lowest-cost houses and apartments has risen the fastest over the past decade: “From 2003-04 to 2015-16 the prices of the cheapest dwellings have actually risen more than have the most expensive.”
The report concludes there is little hope of reversing the trend of declining affordability unless politicians implement policies that are now politically unpalatable. Daley and Coates note that because “no single level of government owns the challenge of managing population growth in our biggest cities” it means “no government is responsible for the serious consequences of failing to plan for growing populations”.
If supply is indeed the answer to the problem, it would seem we’re finally doing enough to keep up with demand. In the past few years Sydney has added 80,000 new apartments in four years, including 60,000 in inner and middle-ring suburbs. Sydney has been undergoing its biggest-ever housing construction boom, with over 200,000 new homes expected to be completed in the five-year period from the start of 2016 to the end of 2020.
But the Grattan report cautions that “today’s record level of housing construction is the bare minimum needed to meet record levels of population growth driven by rapid migration”.
It also says the current growth in housing isn’t enough to make up for the shortfall created during previous years when not enough new properties were being built: “For much of the decade from 2005 to 2014, annual housing construction was at or lower than the average of the previous 25 years, even though population increase was much higher.”
More Grattan Institute research shows that people want more apartments, townhouses and semi-detached dwellings in established suburbs. 10 years ago, just 38 per cent of Sydney’s housing stock was like this, and now it’s 44 per cent. According to the Institute, 59 per cent of Sydney residents say that it’s the type of housing they want to live in.
Which is fine, but opposition to more development and greater density is growing. A poll published recently by Fairfax Media found that fully two-thirds of residents agree with the statement that “Sydney is full” and any additional development should be done outside the metropolitan area.
Daley and Coates say that governments should do a lot more to address the affordability problem: “The state government should use carrots and sticks to ensure councils help meet the housing needs of a booming Sydney. Where local councils fail to meet housing targets, independent planning panels, or the Greater Sydney Commission, should be given more responsibility for assessing development applications.”
Until this happens, Daley and Coates say we will continue building more housing estates on the city’s urban fringe where land is less costly and fewer objections will come from existing residents. But this housing will be far from jobs and existing infrastructure, and house prices will just keep rising.
We’ll leave the closing statement to Dr Dallas Rogers, from the School of Architecture, Design and Planning at University of Sydney, who told Domain that much more needs to be done to address Australia’s housing affordability dilemma: “We need to revisit urban planning mechanisms such as inclusionary zoning and non-market housing supply measures to address the housing affordability problem.
“We also need to rethink the current approach to addressing the housing affordability problem, which seems to be to build more unaffordable housing and subsidising people to get into an otherwise unaffordable housing market,” Dr Rogers said.
Sources
‘Housing affordability slightly worsens over the December quarter: REIA report,’ Tawar Razaghi, Domain, 7 March 2018
‘Homebuyers are paying a heavy price for zoning restrictions: Reserve Bank,’ Eryk Bagshaw, Sydney Morning Herald, 8 March 2018
‘Australian housing prices slip for fifth straight month, national property report finds,’ David Chau, ABC News Online, 1 March 2018
‘Australian housing stuck between a rock and a hard place,’ Greg Jericho, The Guardian, 6 March 2018
‘Beware what you wish for Sydney,’ John Daley & Brendan Coates, Sydney Morning Herald, 4 March 2018
‘Construction of new housing is not making a huge difference to housing prices,’ Charis Chang, News.com.au, 6 March 2018
‘Financial doomsayer says Australian property prices could crash by 50 per cent in coming global crisis,’ Frank Chung, News.com.au, 28 February 2018
‘Get ready for the next property cycle: Bank of America-Merrill Lynch,’ Patrick Commins, Australian Financial Review, 26 February 2018
‘Housing costs: Young, poor pay the price for NIMBYism, says Grattan,’ RN Breakfast, Michael Janda, ABC Online, 5 March 2018
‘Owners of unit blocks call a peak in the Sydney property market,’ Alison Cheung, Commercial Real Estate, 5 March 2018
‘RBA holds rates at 1.5 per cent in March as it lowers GDP expectations,’ Stephen Letts. ABC News Online, 7 March 2018
‘RBA confirms property boom in Sydney and Melbourne is over,’ James Fernyhough, The New Daily, 7 March 2018
‘Sydney vendors fail to recognise property slowdown,’ Michael Bleby, Australian Financial Review, 6 March 2018
‘Housing risks 'catastrophic': Grattan Institute,’ Peter Martin, Sydney Morning Herald,
4 March 2018
‘Low mortgage arrears shows housing market unlikely to collapse: Westpac,’ Stephen Letts, ABC News Online, 28 February 2018
‘Sydney house prices fall for the first year since 2012,’ Jennifer Duke, Sydney Morning Herald, 1 March 2018
‘Sydney property prices not affected by new stock, parliamentary inquiry hears,’ Sarah Gerathy, ABC News Online, 8 March 2018
‘Sydney posts 70 per cent auction clearance rate off large volume of sales,’ Chris Tolhurst, Domain, 26 February 2018
Sydney property enters the slow lane – for now
Fri, 16 Feb 2018In the ten years since our Market Comment began, it would be hard to find a single year without someone in the media mentioning a forthcoming ‘crash’ of the Sydney housing market. Even if times are good, the doomsayers will often forecast a dire ending.
And if times are bad, too often there’s a focus on the negatives and warnings of how much worse it could become. However, during those ten years the market has resolutely made its way upward – sometimes faster than other times but, in the long-term, always ending up ahead.
Current market indicators show that Sydney’s house price growth has virtually stopped, falling to a 15-month low as a combination of lending restrictions, increased building supply and first-home buyer concessions take effect.
Sydney leads what is an Australia-wide property price pullback, down 2.1 per cent for the December 2017 quarter and finishing the year 2.2 per cent below the market’s peak in August last year. Scarcely a sparkling performance, but not an unexpected one according to CoreLogic’s Tim Lawless.
"We're likely to see lower to negative growth rates across previously strong markets, more cautious buyers, and ongoing regulator vigilance of credit standards and investor activity," he said. "There's going to be a negative growth rate, probably most similar to the 2000 to 2003 [time period] when prices fell by about seven per cent."
While a seven per cent fall equates to a sizeable sum for Sydney’s average million-dollar plus properties, it still represents a small fraction of the 75 per cent growth in prices over the past five years. And it may not even happen.
One of the most consistently objective, analytical property market watchers during this time has been the ABC’s Michael Janda whose comments have been quoted many times in this column. It was therefore a bit of a surprise to see his by-line in an article captioned: “Australian housing crash is a possibility that should worry us all” on 18 January this year.
The article, however, proved to be an interesting discussion of just how difficult forecasting the future can be, and of how the worst possible ending can never be ruled out, just as we must also say there’s always a chance for a splendid, rewarding outcome. It’s all about the multitude of variables that affect every economy, and nobody can say with any certainty precisely how those variables will impact something as significant as housing prices twelve months down the track.
Mr Janda references Steve Keen whom we’ve mentioned before in these pages. Dr Keen is noted for his consistently negative position on housing prices, forecasting falls of ten, twenty or an even greater percent when asked his thoughts on the year ahead. He’s also famous for his walkup Mt Kosciusko after losing a bet on house prices with economist Rory Robertson. But is there anybody who can say exactly what’s going to happen next?
In June 1942 Japanese submarines breached a wartime defence boom erected across Sydney Harbour, surfacing to shell such iconic Sydney suburbs as Bondi, Rose Bay and Woollahra. Naturally, this had a somewhat negative effect on Eastern Suburbs property prices.
However, according to contemporary reports, by October 1942 auction prices for eastern suburbs flats and houses had recovered and once again compared favourably to Neutral Bay or Strathfield. Whatever panic selling had taken place was quickly over and, despite the continuation of the Second World War on Australia’s doorstep, property prices returned to their contemporary normal.
So, what could happen in today’s economy that might help realise Dr Keen’s perennially gloomy forecasting? Another attack by Japanese submarines is unlikely, but Michael Janda does list some possible causes of a serious Sydney property price correction: rising interest rates, rising unemployment or a falling population. He notes that Ireland, Spain and the US all experienced property price crashes during the GFC; it’s also worth noting that it didn’t happen here.
There are factors in play right now that will no doubt ensure a continued cooling of the Sydney property market, among them: a flood of new apartment buildings coming onto the market, a possible interest rate rise later this year, a tightening of bank loan restrictions, additional costs imposed on overseas buyers, and a pullback of investors from the market. The end of a five-year boom is apparent, but it’s happening in a very orderly fashion.
We’re entering the slow lane for sure. But a crash – no!
Future slowing
A new Fairfax Media Scope economic survey conducted among a panel of 26 of Australia’s leading economists paints an overall unexciting picture for Australia’s economy in the near future. The panel forecasts economic growth of just 2.7 per cent, a growth in living standards of 1.8 per cent, Sydney housing prices to slip by 0.9 per cent, and negligible wages growth. The panel also sees further falls in housing investment as well as in Sydney housing prices.
JP Morgan economist Henry St John told the Sydney Morning Herald there is a "close relationship" between lending to property investors and house prices: "The final housing finance report for 2017 was unambiguously weak, corroborating some of the price adjustment seen in the Sydney and Melbourne property markets through December and January," he said.
Figures from ABS show that the number of loans to people buying a home to live in fell by 2.3 per cent in the month of December, while the value of approvals to people intending to buy their property for an investment fell by 2.6 per cent in the month.
Steven Anthony of Industry Super Australia even says there is a 30 per cent chance of a recession within the next two years: “This current housing boom is easily the greatest in the history of our major capital cities, and history shows that the deepest recessions tend to follow real estate busts,” he said.
“The key risk to the domestic economy in 2018 and 2019 is depressed spending on the back of a property slump in eastern Australia combined with record household debt and rising borrowing costs.”
However, most of the panel indicated a ‘steady as she goes’ situation wherein modest economic growth happens alongside a mild fall in housing prices, due primarily to little or no wages growth.
When it comes to the chance of a recession in the next couple of years, University of Tasmania’s Saul Eslake - quoted frequently in this column as a proven forecaster of economic developments in Australia, had this to say: “Recessions are the result either of a policy mistake, or an external shock.
“There is no compelling reason to think that policy-makers have made, or are about to make, a mistake of the sort that could precipitate a recession. My estimate of a one-in-six chance of a recession reflects my assessment of the probability of an external shock, most likely emanating from policy mistakes in the United States."
Interest rates stay low
Interest rates have remained at their record low 1.5 per cent after the RBA’s February board meeting decided the present level was “continuing to support the Australian economy.”
In other words, things are cruising alright at this time and nothing’s screaming out for an immediate rate hike or cut. But Credit Suisse disagrees, saying the RBA’s forecasts for the economy are ‘too optimistic’.
The Bank thinks the economy would benefit from additional stimulation delivered by a combination of lower rates and tax cuts, saying that the rate of household saving is too low.
IFM Investors chief economist Alex Joiner agrees, saying: “It’s evident from the Reserve Bank’s own forecasts that they’ve been too optimistic on household consumption for too long, and have consistently had to revise their forecasts lower,”
So, is a rate cut at all likely to happen? NAB chief economist Alan Oster doesn’t think so. He told Domain: “The chance of getting more rate cuts is virtually zero,” he said, adding that another rate cut would “just fire up the housing market again”.
Australian economists are in general agreement that the next interest rate move will be upwards with an average rate forecast of 1.7 per cent, and most expect at least one hike late in 2018. It’s likely that Credit Suisse will be overruled by RBA Governor Philip Lowe who clearly feels an upwards move would be in the right direction, but not just yet.
A flipping good year
Something new has been added to the real estate literature this year. CoreLogic has just released its first ‘Property Flipping Report’ – a document that conducts a national analysis of properties that were bought and re-sold within a short time for a profit in 2017.
That’s what ‘flipping’ is all about. CoreLogic’s research measures ‘flips’ within one year of purchase and those within two years of purchase. This first report also tracks national trends over the past 20 years and its findings will be of interest to all property investors or those who would like to invest in property but just haven’t yet.
Nationally, 2017 was a good year for flipping. Almost nine in ten flipped properties made a profit. To break it down a bit, for properties re-sold within one year of purchase 89.1 per cent were profitable; for properties re-sold within one to two years of purchase 89.9 per cent made a profit.
The highest rate of flipping was in Sydney where 6.8 per cent of property sales over 2017 were flips between one and two years of ownership. 94.3 per cent of these were profitable. Only 5.7 per cent of flips made a loss. Regional NSW didn’t perform badly either, recording 94.5 per cent of flips as profitable, and just 5.5 per cent were unprofitable.
Interestingly, Westpac’s latest Home Ownership Report found that Australian women are considerably more active than men in planning some sort of real estate transaction over the next five years, and it’s not just buying a home (although women outpace men in this area by 28 per cent to 20 per cent).
16 per cent of women plan to buy an investment property, while only 13 per cent of men have this intention, and when it comes to planning the sale of a property women outpace the men by 17 per cent to 14 per cent. And to really show who values home ownership, 43 per cent of female first home buyers said they strongly believed that ‘owning your own
home is a reflection of your success in life’, compared with just 22 per cent of men.
Westpac’s head of women’s markets Felicity Duffy said she expected to see a spike in home loan applications from women over the next five years: “They’re taking matters into their own hands and increasingly investing in property as a potential way to secure their financial futures.”
Foreign buyers retreat
The share of foreign buyers in Australian housing markets continued to fall in the fourth quarter of 2017, dropping to a six-year low of 8.4 per cent in new property markets and a five-year low of 5.5 per cent in the established housing market.
This isn’t surprising as recent policy changes in NSW mean that foreign investors are charged 8 per cent of the purchase price in stamp duty, double the previous level. The Chinese government has also continued to tighten its rules on offshore investing, successfully dampening demand.
According to research conducted by Credit Suisse, Chinese buyers accounted for as much 87 per cent of foreign property investment in NSW between January and June 2017. Foreign buyers, the majority of whom are Chinese, are expected to account for around 18 per cent of residential sales in NSW in the three months to March 2018.
A recent article in the Australian Financial Review highlighted problems for foreign investors that have also affected major developers. The article said: "Government taxes and credit restrictions have started to hit foreign buyer demand for residential property so hard in Australia that major developers are either pulling out of the apartment market altogether or, like Meriton's Harry Triguboff, are left grappling with Chinese investors who can't settle on pre-sold apartments."
In an interview, Mr Triguboff agreed that many Chinese investors have put down deposits on units, but he insists their inability to settle isn’t leading to a correction in the market. "So now we have to resell them – there is another problem. And everyone thought that the Australian buyer would come in when the prices started coming down – they haven't – I knew they wouldn't – it wouldn't make any sense if they did," he said.
And the reason Australian buyers haven’t rushed in to fill the vacuum? According to Harry Triguboff: "The problem with Australians is they are very slow," he told the AFR. "They ask their lawyer, they ask their financial adviser, they ask their family, they ask everybody. The Chinese don't ask anybody, they come off the plane, buy their unit and go."
If that’s the case, it’s just a matter of time before Aussies step up to purchase those units that Chinese investors no longer want. However, it would be most unlikely that Australian buyers would simply accept the original prices as they ones they’d have to pay. Expect to see some aggressive discounting and ‘special offers’ in the coming months.
Canada’s foreign buyers hit
A Reuters analysis of data compiled by Statistics Canada (equivalent to our ABS) found that foreign buyers have driven up the price of property in that country’s two largest housing markets, Vancouver and Toronto.
Not surprisingly, public debate about foreign investment in Canada has surged, with locals saying price increases of 60 per cent in Vancouver and 40 per cent in Toronto over the past three years have kept them out of the market.
With echoes of recent developments in Sydney property, Reuters’ number-crunching found that in Toronto the average value of a detached home built in 2016-2017 and owned by a non-resident is C$1.7m - 48.7 per cent higher than C$1.1m for residents. In Vancouver the difference was less, but still a solid 40.6 per cent. (The Australian dollar buys about 98 Canadian cents.)
Jane Londerville, a real estate professor at the University of Guelph in Southern Ontario, said that the data shows that foreign buyers tend to focus on the most affluent neighbourhoods: “If the goal is to get a couple million dollars out of their country and put it in a very safe, calm economy, you might as well buy a C$2m house,” she said.
In response, in 2016 Vancouver imposed a 15 per cent ‘foreign buyers’ tax, followed by a similar impost in Toronto in 2017. This has resulted in a slowdown of purchases by foreign buyers in both markets, although local analysts say the cooling may be only temporary.
Negative gearing debate
Australia’s federal politicians have already started gearing up for the next election and one subject – negative gearing, is sure to be on the table for vigorous consideration. Liberal governments generally support negative gearing, arguing that it helps to increase the supply of housing and increased supply will (eventually) result in a reduction in the costs of housing.
The other side of politics says that negative gearing unfairly favours the wealthy over those without sufficient capital to invest in property and castigates taxation policies that discount taxes on capital gains made from property investments.
A recent Melbourne University research project by researchers Yunho Cho, Shuyun May Li and Lawrence Uren concluded that eliminating negative gearing entirely would lead to an overall welfare gain of 1.5 per cent of GDP, which would make three quarters of the population better off.
According to the project’s findings, renters and owner-occupiers would be the biggest beneficiaries. Biggest losers would be landlords, especially those who are young, high earners. Another interesting conclusion was that thirty per cent of rental properties would be freed up and bought by Australians who would have otherwise have rented.
Perhaps even less certain is the finding that renters would benefit because, although rents would climb by 2.4 per cent, the government would be in a position to compensate them with the extra $2 billion it would make in increased tax revenue.
A bit more veracity can be attributed to advice given to treasurer Scott Morrison by Australian treasury officials in early 2016 that said the ALP’s policies to restrict capital gains: “…could introduce some downward pressure on property prices in the short term, particularly if the commencement of the policy coincides with a weaker housing market. In the long term, increases in taxation on rental property could have a relatively modest downward impact on property prices."
And, as for the impact on property prices if negative gearing is abolished, Treasury said: “'Overall, price changes are likely to be small.”
In 2016 then NSW planning minister Rob Stokes presented the moral case against tax write-offs like negative gearing: “We should not be content to live in a society where it’s easy for one person to reduce their taxable contribution to schools, hospitals and other critical government services – through generous federal tax exemptions and the ownership of multiple properties – while a generation of working Australians find it increasingly difficult to buy one property to call home.”
However, respected economist Saul Eslake said that politicians will never scrap negative gearing for one simple reason, and it all comes down to votes: “On average, about 100,000 people successfully become home buyers in every given year. They would obviously like the government to do things to make housing cheaper, more affordable for them,” he told ABC’s 7.30.
“There are over two million people who own at least one investment property, and the last thing they want a government to do is make housing cheaper and more affordable for people who don’t currently own housing.
“Even the least intelligent of our politicians can do that maths: 100,000 people who want cheaper housing versus two million people who want housing to get more expensive.”
The battle will rage to the next federal election, due sometime in 2019, but property owners needn’t be concerned over much about the outcome of this particular debate. The Grattan Institute, an independent think-tank, estimated that halving the capital gains discount, and phasing out negative gearing after a decade, would only reduce house prices by a maximum of two per cent.
Sources:
‘Housing investor loans slumped by 10 per cent in 2017,’ Clancy Yeates, Sydney Morning Herald, 9 February 2018
‘9 in 10 Australian Properties Are "Flipped" For A Profit,’ CORELOGIC, 29 January 2018
‘A Bill market - meet the forecaster who owned 2017,’ Peter Martin, Sydney Morning Herald, 3 February 2018
‘Australian housing crash is a possibility that should worry us all,’ Michael Janda, ABC News online, 18 January 2018
‘When Sydney’s beachside property came with a view of a barbed wire fence,’ Marea Donnelly, History writer, The Daily Telegraph, 17 June 2016
‘Axing negative gearing would boost economy and home ownership, RBA conference paper finds,’ Peter Martin, Sydney Morning Herald, 13 January 2018
‘Government negative gearing claims contradicted by official advice, FOI reveals,’ Dan Conifer and Michael McKinnon, ABC News online, 8 January 2018
‘Why we shouldn't be too scared of dramatic house price drop predictions,’ Michael Pascoe,
Sydney Morning Herald, 15 January 2018
‘Dismal, but no disaster. How the BusinessDay economic panel sees 2018,’ Peter Martin, Sydney Morning Herald, 3 February 2018
‘The jig’s up for Coalition’s negative gearing lies – and apologists in the media,’ Rob Burgess, The New Daily, 9 January 2018
‘NSW and Victoria’s property decline sees other states shine,’ Chris Kohler, Sydney Morning Herald, 2 February 2018
‘Foreign buyers are dropping out of the Australian property race,’ Chris Kohler, Domain, 11 January 2018
‘Why rate and tax cuts should be on table in 2018 – Credit Suisse,’ Chris Kohler, Domain, 15 January 2018
‘Sydney property prices tipped to fall 10 per cent in 2018,’ Jennifer Duke & James Robertson, Sydney Morning Herald, 3 January 2018
‘Girl power driving property market: report finds more women than men buying homes,’
Elizabeth Tilley and Samantha Landy, The Courier-Mail, 3 February 2018
‘Only way is up: Brace for a rate rise this year, most economists say,’ Eryk Bagshaw, Brisbane Times, 2 February 2018
‘Sydney, Melbourne house prices have one-in-five chance of correction: JP Morgan,’ Michael Janda, ABC News online, 27 January 2018
‘Simple reason negative gearing will never be scrapped,’ AAP release on News.com.au, 17 January 2018
‘House prices fall in Sydney’s inner west, lower north shore and northern beaches,’ TawarRazaghi, Domain, 1 February 2018
What’s going to happen to Sydney Property in 2018?
Tue, 16 Jan 2018As the new year gets underway and we start writing ‘2018’ where ‘2017’ used to be, Sydney property owners and would-be owners would naturally be interested to know what events will shape the city’s property market over the next twelve months.
We are once again reminded by concerns about property prices that property investments are always best viewed as long-term activities. The ‘quick killing’ isn’t very common when it comes to bricks and mortar, although it’s also clear that many astute investors have done exceptionally well over the past five years of our greatest-ever property boom.
As the Herald’s Jennifer Duke says: “Typically, property prices have been known to double in Australia every seven to 10 years in capital cities after a strong market cycle. So, home owners who stay put for lengthy periods should see their property value increase in the long run, irrespective of short-term hiccups.”
It’s a certainty that the next twelve months won’t provide more of the kind of capital gains that we’ve become used to since 2012. However, there are most certainly gains to be enjoyed, even if the overall market isn’t booming, and a number of trends are already becoming apparent that will determine events in the year ahead.
Price rise reversals
The first and most talked-about trend is that Sydney prices have stalled and even, in some parts of the greater Sydney area, gone backwards. They’re following the national trend that now shows housing prices down 2.1 per cent for the final quarter of 2017 and 2.2 per cent below the market’s last peak in August.
HSBC’s chief economist for Australia, Paul Bloxham, says house prices in Sydney have been growing at low double-digit annual rates over the past five years, but during the past six months Sydney prices have fallen: “A hard landing is possible, but we believe this would require a negative shock from abroad and a sharp rise in the unemployment rate,” Mr Bloxham said.
“We do not see a significant local housing imbalance and view Australia as having had a housing boom rather than having a housing bubble.”
Treasurer Scott Morrison said the Federal Government deserved credit for the market’s gradual cooling, thereby avoiding a potential ‘crash’: "What we have seen is a fall off a very high pace of dwelling investment," Treasurer Scott Morrison told reporters in Canberra.
"I'm encouraged by what I'm seeing in the housing sector. You'll be aware of the measures we took early in the year which have had the desired effect of cooling the more enthusiastic investor parts of the market, particularly in Sydney and Melbourne,” he said.
However, there are many reasons for this price reversal and most of them are the result of actions taken by four of the market’s biggest players: The Reserve Bank, The Australian Prudential Regulation Authority (APRA), The Australian Securities and Investments Commission (ASIC), and the major Australian banks.
If you think there’s been a lot of pressure applied by these sources to bring the five-year property boom that began in 2012 to a controlled ending, you’re right. For some time, Australian governments at federal and state levels have expressed serious concerns about skyrocketing housing costs and consequent high levels of household indebtedness, most especially the costs of servicing housing loans.
The Herald’s Elizabeth Knight gave much of the credit to APRA: “APRA seems (to date) to have successfully employed ‘macroprudential’ measures, which essentially put checks on bank lending and curb the rate of growth in interest-only loans and investor loans. In response banks started to increase the interest rates for these borrowers, which had the effect of cooling demand,” she wrote.
Capital Economics' Paul Dales also gives credit to APRA for creating the conditions that ended five years of price rises: “"The cut in the supply of credit to investors and the rises in investor loan rates caused by APRA's new rules in March that triggered this slowdown will probably continue to weigh on the market [in 2018].
"They [the housing markets] are also more exposed to further falls in prices, as our house price to income ratios suggest prices there are well above their sustainable level,” Mr Dales told ABC News.
Two senior ANZ Bank economists, Daniel Gradwell and Joanne Masters, said in a recent report that they expect further slowdowns in house price growth in 2018. “APRA’s tightening on investor borrowing and interest-only loans has resulted in higher interest rates for those borrowers, and lowered demand for housing,” they wrote.
“Weaker auction results point toward further slowing as we move into 2018. Our forecast that the RBA will increase interest rates [in 2018] will also work to lower price growth. But if the RBA doesn’t tighten, then prices will likely slow less than we forecast. Importantly, there is still nothing to suggest to us that prices are going to enter widespread declines.”
Interest rate moves
Interest rates, particularly those applied to mortgages for property purchases, are critical factors in property pricing. Years of record low prime rates have encouraged borrowing, and both homeowners and investors have gleefully borrowed as much as they could. This is fine until interest rates rise and some borrowers find they struggle to afford the higher repayments.
Earlier fears of a price ‘bubble’ and warnings of a property disaster to come seem to have been calmed and we’re now seeing a soft landing rather than a sudden broad-based selloff and crash. But there are still some areas of concern – such as the large number of apartments yet to come onto the market as well as some parts of Sydney losing their previous degrees of sales appeal, but overall, we seem to be on the right track.
Interest rates won’t stay where they are forever and once they move it will most likely be upwards. After taking over the top job at the RBA in 2016, governor Philip Lowe left us in no doubt he wouldn’t be cutting rates further. When he said that easing wasn't in the national interest, the Bank’s easing cycle came to an abrupt end.
CoreLogic’s head of research Tim Lawless says the RBA would probably keep interest rates on hold during 2018, with lower rates unlikely because they would counter the controlled slowdown in the housing market, while any rise would stifle household consumption and business investment.
"Regulators and policy makers will be encouraging households who hold high levels of debt to reduce their exposure while rates remain low," he said in an AAP release.
Mr Lawless also said that the next move in interest rates was more likely to be up, not down.
But some banks have already raised their mortgage rates for investors, and many analysts feel it won’t be too long before the RBA hikes its prime rate from 1.5 per cent to at least 1.75 per cent or possibly two per cent. Increases will be small and incremental rather than dramatic, but with more than 300 Sydney suburbs forking out over $30,000 per year in mortgage repayments it won’t take much of an interest rate increase to create some financial stresses.
What’s the monthly cost of an interest rate increase? The average new housing loan in Sydney is somewhere in excess of $600,000 according to mortgage broker AFG. But let’s say the loan is an older one for ‘just’ $400,000. ME Bank head of loans Patrick Nolan told Domain: “[Higher RBA rates] mean repayments will also increase, typically $50 for every 25 basis point rise on a $400,000 loan.” So, an increase from 1.5 per cent to two per cent will cost an extra $100 a month or $1200 a year on what has become a relatively small mortgage amount.
Some Sydney residents will have it even tougher when interest rates begin to go upwards. Data from the 2016 Census show that seven harbourside and northern beaches suburbs have median annual home loan repayments of more than $50,000 per annum. These suburbs are Dawes Point ($62,400 a year), Duffys Forest ($60,000 a year), Whale Beach ($57,200), Clontarf ($52,000), Linley Point ($52,000), Longueville ($52,000) and Balgowlah Heights ($51,500).
There was a bit of good economic news in the latest Census data. Despite booming property prices and few signs of wage and salary growth, the share of Sydney households devoting more than 30 per cent of their incomes to repayments - a generally-accepted definition of the point where mortgage stress kicks in – fell from 12 per cent of households in the 2011 Census to 8.4 per cent of households in the 2016 Census.
First-home buyers return
Investors’ interest is cooling as prices are now so high that their chance of getting a reasonable return on capital is becoming difficult. This opens a gap that is now seeing a return of first-home buyers to the Sydney market.
Whereas investors have previously had taxation advantages that encouraged property investments, it’s the first-home buyers that now feel empowered by NSW government stamp duty concessions and competitive interest rates on offer from banks. There’s also a growing selection of new apartments on the market with more to come over the next two years as projects reach completion.
A Perth-based property expert, Geoff Baldwin, says that a price slowdown that could assist first-home buyers is ‘absolutely’ coming for Sydney: “In Sydney prices are just crazy and the closer to the CBD you get the crazier they become. It won’t come back to an affordable point but my prediction is there will be a 10 per cent drop in prices, especially for high-density apartment prices over the next few years.”
Capital Economics’ Paul Dales noted that Sydney’s population growth, even at present rates, would only boost housing prices if the extra demand wasn’t met with additional construction: "However, in recent years the number of new homes built has far exceeded the number required by the growing population. This overbuilding is much greater for apartments than houses," he said.
The Guardian’s Greg Jericho also commented on the drop in Sydney apartment prices: “In the September quarter the average price of apartments fell by 1.4 per cent - the biggest quarterly fall for six years – while established house prices fell 1.3 per cent.
“It means that both elements of the Sydney housing market are mostly moving together – with the annual growth of both being down on where it was six months ago.”
Mr Jericho wrote that one of the beneficiaries of the lower growth in apartment prices has been first-home buyers.
He said that research conducted by the Reserve Bank had found the average number of bedrooms in affordable housing in Sydney has declined over the past 20 years, due mostly to apartments now being smaller.
“But it also found that while the average distance from the CBD of affordable houses has increased over the past 20 years – in Sydney from slightly over 40km to a touch less than 60km – the distance from the CBD of affordable apartments has remained relatively stable.
Curbs on foreign investors
New Australian laws concerning empty houses and apartments will have implications for many foreign investors that have purchased property here but choose to leave their properties unoccupied.
In November 2017, federal Parliament passed legislation giving the Australian Taxation Office (ATO) the power to fine foreign investors up to $5500 a year if they allow their properties to remain empty, plus up to $52,500 for failing to lodge the paperwork required.
News.com’s Frank Chung quoted UNSW professor Hal Pawson who explained how authorities might be able to identify empty properties: “Lack of reliable data on empty homes is a major problem in Australia,” Prof Pawson wrote in The Conversation.
“In 2014, an analysis of water usage data by Prosper Australia estimated that about 82,000 homes in Melbourne were vacant — about half the Census figure. Applying a similar ‘conversion factor’ to Sydney’s Census numbers would indicate around 68,000 speculative vacancies.”
An ATO spokesperson said that foreign investors would be required to lodge an annual vacancy fee return which will consist of an online declaration and payment system. If there are doubts about the validity of the vacancy fee return, the ATO would check the claim through “tax return data, immigration data and information from electricity and other utility providers”.
“If the foreign investor claims that they have rented the dwelling or made it available for rent then the ATO can check against the data detailed above as well as lease and real estate agent agreements, internet searches and records of rental tenancies authorities,” she said.
“If the foreign investor claims the dwelling is rented, but this is through short-term leases of less than 30 days, even if this totals over six months ... the foreign owner will still need to pay the vacancy fee as the law requires leases to be of a residential nature of at least 30 days duration.”
If fees and charges accumulate and remain unpaid, a hold can be placed over the property so that unpaid amounts are recouped when the property is sold: “The Treasurer can also have a property sold to recoup unpaid fees if required. The ATO expects that the severity of the penalties for non-lodgement will encourage foreign investors to lodge the vacancy fee return.”
Stamp duties or…
One big contributor to Sydney’s high housing prices has been the state government’s stamp duty on all property transactions. Over time, what was once a troublesome but vaguely affordable tax, usually financed within a mortgage as part of the overall purchase transaction, has become a crippling impost that has begun to limit people’s options for such things as purchasing a larger property for a growing family or for older couples downsizing after retirement.
In 1997, when the median house price in Sydney was $234,361, stamp duty would have been the equivalent in today’s dollars of $10,916. Jump ahead 20 years to 2018 and the stamp duty cost for a median Sydney house will be somewhere north of $50,000.
“We talk about bracket creep with income tax, but this is the biggest bracket creep you could ever see,” BDO National Tax Director Lance Cunningham told Domain’s Chris Kohler.
“The state governments have just been sitting there watching the house prices [and stamp duty] go up.”
Mr Kohler gave another example that is simply eye-watering. “Let’s say a couple who live and work in Sydney find out their family is about to grow – all of a sudden, their home is looking a bit small and they decide they need another bedroom and bathroom.
“The bank would have no concern lending to an upgrading owner-occupier couple like this, but if the house they wanted was worth $2 million – pretty standard for a family home within an hour of Sydney – the stamp duty would land at $105,490.”
Stamp duty is understandably unpopular, except with the NSW government for which it’s the source of around 11 per cent of total revenues. And with housing sales and prices in a downturn after five years of boom time, this ‘river of gold’ is under serious threat.
Joanne Seve, a Sydney lawyer and specialist in state-based taxes, told the Herald’s Jennifer Duke that the predicted market decline would be "really bad news for NSW revenue" – even more than just the projected $650 million in stamp duty revenue.
"It will also affect future projections of land tax revenue in NSW [which are based on a three-year average]," she said, noting that Land tax is worth about $3 billion to the state on top of around $9 billion in stamp duties.
But what could the government do to replace such an unpopular but lucrative form of taxation?
One answer to this question keeps popping up from time to time, but is usually quickly rejected by politicians who don’t want to be seen to be supporting something that would anger almost every homeowner in the state – a broad-based land tax applied to all properties.
In March last year the federal Parliamentary Budget Office costed a proposal by The Greens to abolish stamp duty and replace it with a broad-based land tax. The proposal was supported by the Grattan Institute which said it would be politically difficult to deliver but was generally regarded as a ‘good policy’.
Nationally, stamp duties bring in over $19 billion in revenues to state and territory governments. The Grattan Institute estimated that to replace this revenue with a broad-based tax would probably require a tax of ‘about $6 for each $1000 of unimproved land value’.
So, for your reasonably average Sydney family home with an unimproved land value of $900,000 the land tax would be around $5,400 – about the same as the current rate of land tax in NSW for properties that aren’t principal places of residence. Add to this figure whatever rates are applied by your local council, and it’s a big hit to household budgets.
What introduction of the broad-based tax would achieve is simple – elimination of stamp duty on property transactions. In theory, housing prices would therefore decrease, thereby making property more affordable and lowering real estate values generally. But at the same time rents would increase and it would be necessary for all homeowners to come up with several thousands of dollars more to hand over to the government each year.
This could very easily be seen as a solution that’s much worse than the problem it’s intended to solve!
Nevertheless, with a new year ahead and a state election just over a year away we may once again see the proposal for a broad-based land tax resurface. At least we can be certain of two things: governments will want more revenues, and stamp duty will remain unpopular.
So, what’s going to happen?
Prices for Sydney property have weakened and will continue slowing in 2018. Experts expect some areas to experience price falls of from three to eight per cent, although the most popular suburbs will continue to show moderate gains.
Interest rates have stabilised and won’t be falling further. The RBA will eventually increase the prime rate, probably towards the end of 2018 and then only by 25 or perhaps 50 basis points.
With a large number of apartments underway but yet to be completed across the greater Sydney area, and only a much smaller number of new houses to be constructed, price falls for apartments are sure to be higher than those for free-standing properties.
Investors will find it harder to get a suitable return on their Sydney property investments and will increasingly look outside Sydney to invest in both residential and commercial property. The interest of foreign investors will undoubtedly shift elsewhere as restrictions on them in NSW and Victoria are toughened.
First-home buyers’ activities will continue to increase as investors withdraw, although their continued participation will depend largely on government support in crucial areas like stamp duty concessions.
Watch for moves to replace stamp duties with broad-based property taxes, perhaps by a reduction in the former coinciding with the introduction of a ‘moderate’ BBT as a beginning of the process. It’s already happening in the ACT.
We’ve seen the end of one Sydney property cycle and the beginning of another. There won’t be a ‘crash’ but a gradual reduction in prices will happen, eventually followed by a return to prices growth.
As we said over six years ago, in this forum on 29 July 2011, just before the property boom of the last five years began: “Housing prices in Sydney are not as robust as they were a few months ago, but aren’t about to topple in established suburbs. Some prices will slip back towards their levels of a year ago, but most analysts don’t foresee much of a decline.
“The market will have slight falls in some areas but mostly stable prices in suburbs within 10km of the CBD. Some rises are also possible. Affordable interest rates and negotiable prices on quality property are just what astute buyers look for in Sydney real estate.”
And so we see another cycle about to begin.
Sources:
‘Real estate 'boom is over' as most experts tip property price weakness in 2018,’ Michael Janda, ABC News online, 3 January 2018
‘Foreign buyers are dropping out of the Australian property race,’ Chris Kohler, Domain, 11 January 2018
‘Sydney property prices tipped to fall 10 per cent in 2018,’ Jennifer Duke & James Robertson, Sydney Morning Herald, 3 January 2018
‘House prices in Australia's capital cities are threatening 'negative growth' in 2018,’ David Scutt, Business Insider, 2 January 2018
‘For most, predicted downturn will be little more than a blip,’ Jennifer Duke, Sydney Morning Herald, 3 January 2018
‘Real estate 'boom is over' as most experts tip property price weakness in 2018,’ Michael Janda, ABC News online, 3 January 2018
‘Two things to watch in 2018 - interest rates and house prices,’ Elizabeth Knight, Sydney Morning Herald, 27 December 2017
‘Five property market trends to expect in 2018,’ Chris Kohler, Domain, 19 December 2017
‘Foreign cash driving top-end house prices in Vancouver and Toronto,’ Reuters in the Sydney Morning Herald, 23 December 2017
‘Sydney's biggest mortgage bills: how your suburb compares,’ Matt Wade, Sydney Morning Herald, 18 August 2017
‘Australia’s housing boom is almost over, says HSBC chief economist Paul Bloxham,’ AAP in Domain, 12 December 2017
‘High-density living: the rise of Sydney's 'vertical families',’ Matt Wade, Sydney Morning Herald, 11 December 2017
‘Real estate experts expect house prices to fall in Sydney, but don’t expect a bargain any time soon,’ Alexis Carey, News.com.au, 30 December 2017
‘Will the end of the housing boom come with a bang or a whimper?’ Greg Jericho, The Guardian, 14 December 2017
‘Criminal sanctions are available for false statements’: ATO tools up for empty house crackdown,’ Frank Chung, News.com.au, 23 December 2017
‘RBA chief faces his biggest task yet in 2018,’ Bloomberg in the Sydney Morning Herald, 19 December 2017
‘Home sales rise while Sydney leads price dip,’ AAP in the Sydney Morning Herald, 18 December 2017
‘House prices expected to fall in 2018: CoreLogic,’ AAP in the Sydney Morning Herald, 23 December 2017
‘House prices off the boil, but will population growth keep things simmering?,’ Stephen Letts, ABC News Online, 12 December 2017
‘Mid-year budget update: Housing investment rates to fall, raising prospect of long-term downturn,’ Eryk Bagshaw, Sydney Morning Herald, 19 December 2017
‘Property News,’ Cameron Kusher, CoreLogic, Onthehouse.com, 7 December 2017
‘Soaring stamp duty: How the tax system is urging millions of homeowners to renovate,’ Chris Kohler, Domain 17 December 2017
Owner-occupiers step up as investors step back
Fri, 15 Dec 2017Over the past five years we’ve become used to investors dominating the Sydney property market, but new restrictions on loans to investors have decreased their previous levels of activity and have even started to influence property price rises.
Cameron Kusher, senior research analyst at CoreLogic, says that at their peak in May 2015, investors accounted for 54.8 per cent of new mortgage demand. Noting that investor demand is now slowing, and Sydney dwelling values are also falling, he believes that NSW is the state that will feel the greatest effects from the investor slowdown.
“Over the past five years, dwelling values nationally have increased by 39.3 per cent, largely driven by Sydney and Melbourne where values have increased by a much larger amount. Similarly, over the most recent five years investors have committed to housing finance commitments totalling $695.6 billion.
“With investor demand continuing to reduce due to tighter credit conditions, low yields and affordability constraints, it is reasonable to expect that this will have the greatest impact on NSW housing markets followed by those in Victoria.”
It’s been a great party, but the latest Housing Outlook Report for 2017-20, produced by BIS Oxford Economics for insurer QBE, agrees that higher interest rates and lower loan-to-value ratios for investor lending have reduced the capacity for investors to enter the market or pay higher prices, and it looks like the party balloons are now being deflated.
September saw a 7.8 per cent decline in commercial lending. New lending commitments, which include housing, personal, commercial and lease finance, experienced their largest decline in nine months.
Home loans to owner-occupiers were also down, but only by 2.1 per cent in seasonally adjusted terms to $20.7 billion, according to the Australian Bureau of Statistics (ABS).
In Sydney, over the past five years property prices have averaged an annual increase of more than 11 per cent, but this year the rate of increase is now around five per cent and it even fell by about one per cent between September and November. First-home buyers are starting to re-enter the market but their ability to fund the former rate of price increases that was investor-driven is doubtful.
Domain’s Nicole Frost reported that a mix of stamp duty concessions, tighter lending to investors and lower interest rates are the biggest factors in the return of first-home buyers:“First-home buyers now make up 24.5 per cent of the owner-occupier market, excluding refinancing, thanks to increases across all states and territories,” she wrote.
Perhaps it’s not surprising that 37 per cent of Australians want lower house prices, according to a survey of 1500 Australians by ME Bank. It’s interesting to note that 24 per cent of those surveyed own a home and 20 per cent have an investment property. Amazingly, the answer to the question of why would they want lower prices is simple:“to help address the housing affordability issue”.
Not only have we now reached price levels that are unaffordable; even homeowners feel that housing prices have become unfair, according to ME Bank’s general manager of home loans Patrick Nolan.
“Traditionally Australians fall into two camps when it comes to property prices: owners, who want them to rise, and non-owners, who want them to fall,” Mr Nolan said. “But with high prices disrupting the dream of home ownership and the benefits that brings, views are changing.”
Some relief from high prices is already being felt; CoreLogic figures show that prices in Sydney slipped 0.7 per cent in November, dragging annual growth down to 5 per cent from 7.7 per cent the month before and almost 19 per cent early in the year. But buyers shouldn’t start looking for a fire sale as Sydney remains the most expensive property market by far.
Another sure indicator of a slowing market is the falling rate of Sydney property auction clearances. According to Domain’s Daniel Butkovich, in November one in six sellers called off their intended auction ahead of time, and just over half of homes offered at auction were sold.
Sydney auctioneer Damian Cooley said the high number of properties withdrawn before auction was due to an expectation in the market that conditions would improve in 2018:
“Some vendors are prepared to take the risk that the market will be better in the new year, and they’re happy to take their property off the market.
“The first quarter will tell us a lot. People will be watching the market to see how it performs,” he added.
Propertybuyer CEO Rich Harvey told Domain that he believes the pendulum is finally swinging towards buyers: “We have noticed across the board the last couple of weeks a general softening, which is great for us as buyers’ agents,” says Mr Harvey. “The intensity and the heat has really come out of the market which works in our favour.”
AMP Capital chief economist Shane Oliver said buyers no longer had a “fear of missing out”, (or ‘FOMO’) which has until recently been a big driver of the auction market: “I think the sentiment around the property market is a lot weaker than it was two years ago. Buyers can afford to take their time, they can be more considered about what they’re buying.”
Interest rates poised
An important factor influencing borrowing by investors is growing concern about a possible interest rate increase. Tim Lawless, head of research at CoreLogic, says borrowers should exercise caution: "Household budgets are already thinly stretched," he told the Sydney Morning Herald. "Household balance sheets will be tested when interest rates eventually start to rise.”
A recent UBS report raised the issue of an alarming proportion of what it called 'liar loans' currently in the Australian banking system. These are the $500 billion of loans that were made based on factually incorrect borrower information. In other words, borrowers’ ability to make loan repayments aren’t as good as their statements indicated, casting some doubt on their ability to keep up with payments if interest rates increase.
Bloomberg’s Chris Bourke says that Australian households are seriously indebted which is causing the Reserve Bank (RBA) some concerns: “It reckons the financial system is well-placed to withstand any shocks, but isn't so confident [about] consumers.
“That puts it out of step with developed-world peers that are incrementally tightening policy, with RBA Governor Philip Lowe this week making clear local interest rates aren't going anywhere soon.”
So at least for now, interest rates look like staying where they are. Mr Lowe’s comments when he recently spoke in Sydney indicated economic conditions aren’t right for rate rises, and that we’ll be seeing more low wages growth and therefore low inflation.
Not that the RBA is giving away any clues of its own as to what its longer-term future direction might be. At its November meeting it again left the cash rate at 1.5 per cent where it has been since August 2016.
But rate rises are starting to happen in other parts of the world, gaining back some of what was lost after interest rates were slashed following the GFC in 2009. The global economy is showing signs of health after years of shaky performances and the central banks of countries in Europe and North America are slowly raising their prime rates with a close watch on what the effects might be.
There’s a growing feeling in the financial community that eventually the RBA’s next rate move will be an increase. It’s likely to be a small one, followed by a ‘wait and see’ period while its impacts are analysed. But it will bring no joy to many investors who have taken out large mortgages to fund their expectations of making large capital gains that are now less likely.
Investment firm Watermark Funds Management said the most concerning part of the Australian housing market is the ‘extreme’ level of mum and dad investors in residential property. If their properties don’t rise and give them a profit, they are at risk of being unable to meet other financial commitments.
Watermark noted that the proportion of new mortgages taken out by non-professional property investors in Australia is 35 per cent, which is about three times higher than the US, UK and Canada.
Supply and prices grow
For years governments at both state and federal levels have been selling the fable that the way to reduce the cost of housing is through the mechanism of increased supply. Build more housing and the price will come down, it’s been said.
Even the Prime Minister has supported this belief. In May 2016 Malcolm Turnbull told us: "Now this is how you address housing affordability. Housing affordability is the result of there being insufficient supply of housing. You need to have more supply of housing."
However, the past five years of rapid growth in housing construction across Sydney have also seen rapid and unrelenting growth in property prices. Supply has increased, most certainly, but so have prices, causing more than a little embarrassment to many politicians. A recent study by analysts from the Australian National University (ANU) has confirmed that the myth of “more supply, lower prices” is fundamentally incorrect.
The ANU report by academics Ben Phillips and Cukkoo Joseph concluded that while increasing housing supply has ‘some benefits’ it is ‘unlikely in isolation to create affordable housing’ in Australia.
"If, as this report suggests, housing in Australia is not in short supply, then we need to find alternative explanations for house-price growth – such explanations would direct policy in applying levers capable of affecting housing affordability," the report said.
The report's co-author, economist Ben Phillips, told the Herald’s Matt Wade that the behaviour of property prices at the regional level in Australia ‘has nothing to do’ with the usual underlying fundamentals of housing demand, including population growth.
"Housing is an asset and assets don't always reflect the fundamental underlying value – it's not like the demand for ice cream or bananas," he said.
Dwellings get smaller
After so many years of building ever-larger McMansions, the tide has turned, and Australians are beginning to reduce the average size of their homes. This, according to Chris Pash from Business Insider, is because the increased building of apartments means people are living in smaller dwellings.
When broker CommSec analysed data from the Australian Bureau of Statistics, it found the average new home is 189.8 square metres, down 2.7 per cent over 2016 and the smallest since 1997. But averages can be deceptive. The average new free-standing house in 2016-17 was 233.3 square metres, more than 11 per cent bigger than 20 years ago and 30 per cent bigger than 30 years ago.
The shrinking average size of new homes is because apartments are now being built in record numbers. In 2010 about 27 per cent of all homes built were apartments. Today this figure has increased to 47 per cent of all new homes and this percentage is still rising. A statistical side effect of this shift in construction emphasis is that the size of the average household – the number of people per dwelling, has decreased. But this could change.
The 2017 Sydney Lifestyle Study, commissioned by Urban Taskforce Australia, found a rapid growth in the number of couples with children who live in apartments – so-called ‘vertical families.’ Their number leapt from 65,000 families in 2011 to more than 87,000 in 2016, while single-parent families now comprise 8 per cent of all those living in high-density accommodation.
CommSec economist Craig James told Business Insider: “More Generation Ys have been looking to move out of home and take ownership of accommodation more appropriate to their needs.
“The question is whether household size continues to fall over the next few years or whether higher home prices acts to stall demand, again prompting greater co-habitation of dwellings.”
But not everyone can meet their accommodation needs with an apartment. There’s been a construction boom in Sydney’s outer suburbs where a free-standing house can still be constructed at a much lower cost than closer to the CBD.
Domain’s Tom Westbrook says demand for new homes on the edges of Sydney is ‘running harder than tradesmen can lay bricks’: “The construction rush driven by more people moving to the outer suburbs has helped reverse a downward trend in building approvals.
“House approvals touched an 18-month high of 9,929 in September, unexpectedly prolonging a boom many thought was winding down.”
He says that borrowing to buy finished new homes hit a 38-year peak in September: “The monthly rate of building loan creation is also cantering at 6,400 – harking back to the boom-time borrowing rates of three years ago.
“Private-home construction approvals rose for a seventh straight month in September, enough to turn back a downtrend in overall approvals, as some of the country’s around 230,000 annual migrants built homes for themselves.”
Chinese interest continues
There’s apparently no way of diminishing the interest of Chinese investors wanting to acquire property in Australia.
Data from the Foreign Investment Review Board (FIRB) show that in 2015–2016, 40,100 property purchases by foreign buyers were approved, valued at $72.4 billion. Chinese purchasers were the majority of those buyers.
It’s also estimated by FIRB that ‘foreign activity’ made up 15 to 20 per cent of all new housing transactions in NSW during 2015-2016.
The Chinese government has seriously toughened regulations covering the ability of its citizens to invest in property overseas, and according to real estate firm Cushman & Wakefield and Real Capital Analytics, mainland China’s third quarter outbound real estate investment dropped 51 per cent to $US 2.5 billion – its lowest total since 2013.
However, Australia remains a popular destination for these funds, capturing $US 783 million in the September quarter. The Chinese government has recently designated overseas real estate investment as a ‘limited’ category, but not a ‘prohibited’ one, and approximately $US 1.2 billion was invested in Australia in the first three quarters of 2017.
There’s little doubt that Chinese investment in Australia is going to be affected by the new regulations and that a drop will be experienced across all sectors, from hotels and offices to residential property developments.
The Reserve Bank of Australia's (RBA) head of financial stability, Jonathan Kearns, told the Sydney Morning Herald that foreign buyers accounted for about 10 to 15 per cent of new construction, or about five per cent of total housing sales and around one-quarter of newly built apartments.
"Many foreign buyers come from China, seemingly around three-quarters," Dr Kearns said in a speech to an Australia-China property conference.
"Purchases of new properties by foreign buyers have eased over the past year, reportedly because of stricter enforcement of Chinese capital controls and tighter access to finance for foreign buyers."
Dr Kearns said the RBA is monitoring loans for property development, particularly in the commercial and apartment sectors where rapid growth in lending by foreign institutions such as Asian banks has been a major factor driving up property prices.
Joe Morello, principal of NWC Finance, says Chinese developers and investors are using non-bank lenders and other sources to acquire urgent short-term finance for projects now underway: “There is strong demand for short term, low doc finance to alleviate the emergencies created by last-minute withdrawal of support and we expect this trend to continue throughout the 2018 financial year.
“Many companies are finding ways to get around the Chinese controls through purchasing and funding development of foreign real estate through offshore financial institutions and investing through Hong Kong,” he said.
Is build-to-rent the answer?
There’s ample evidence that high property prices in Sydney have caused a growing number of people to become tenants instead of homeowners. Ernst & Young estimate that currently 31 per cent of all households in Australia rent their accommodation.
The increase in demand for rental accommodation parallels the growth in recent years in the percentage of properties that are owned by investors, and rents are steadily increasing across the metropolitan area.
Adam Hirst, general manager capital allocation at developers Mirvac, says that apartment living is becoming a ‘lifestyle’ choice for many millennials, young families and downsizers: “There are currently 2.5 million rental homes in Australia and we see that growing in the next few years with purpose-built apartment buildings for the rental market.
“It’s well-established overseas but, in Australia, it’s a new form of housing and there’s a lot of excitement around it.”
Mr Hirst is talking about a relatively new concept in property development that has recently received significant attention from governments, both state and federal. This is the concept of build-to-rent in which developers invest in apartment blocks that are intended for long-term rental instead of resale.
The present system of taxation benefits for investors in Australia has to date encouraged ownership of property as a means of getting a return on capital, but it has also led to much of our housing stock becoming unaffordable. While the market’s been heated for the past five years, it’s now cooling and returns to investors are falling.
Large developers including Mirvac and Grocon are holding discussions with governments in NSW and Victoria to explore the possibilities for institutional investors to channel their funds into build-to-rent housing.
Some concessions from state and federal governments, it is felt by proponents, would be needed to ensure there was a meaningful level of investment that would help meet the growing need for rental accommodation, and governments have already indicated their interest in finding solutions to the growing problem of housing unaffordability.
Scott Langford of St George Community Housing, told Domain that Australia is seeing a 'structural shift in the Australian market to allow more people to rent': “The rate of increase of rents over the past 10 years has been a lot higher than other asset classes like retail, industrial and office. And in a low interest rate environment, we’re seeing real structural change…Home ownership isn’t likely to be the norm in the future.”
Building to rent has already met with some success in the UK, US, Japan and Europe where many families have chosen to live in rental accommodation rather than trying to acquire a property of their own.
A lifetime of tenancy may now seem alien to Australians, but the Property Council of Australia’s chief executive, Ken Morrison, told The Guardian that it’s a well-established way of putting a roof over people’s heads in many other countries and needs to be considered here.
“It’s a recognition that people are renting for longer or renting for their entire lives,” he said. “The institutional investors want continued income; the renter wants a stable place to live.”
Build-to-rent offers something for both sides of the housing equation.
Sources:
‘High-density living: the rise of Sydney's 'vertical families',’ Matt Wade, Sydney Morning Herald, 11 December 2017
‘One in six Sydney homeowners withdrew homes from auction in November,’ Daniel Butkovich, Domain, 10 December 2017
‘ANZ finds foreign buyers own up to 400,000 Australian homes,’ Phillip Lasker and Michael Janda, ABC News Online, 9 December 2017
‘Experts predict build-to-rent revolution coming to Australia,’ Sue Williams, Domain, 5 December 2017
‘One quarter of home owners ‘happy’ to see property prices fall: survey,’ Chris Kohler, Domain, 29 November 2017
‘‘Sydney's housing market trumped by Canberra and Hobart,’ David Chau, ABC News online, 3 December 2017
Home prices stall as Sydney hits an air-pocket,’ Reuters, 1 December 2017
‘Down and up? Place your bets on house prices and interest rates,’ Elizabeth Knight, Sydney Morning Herald, 30 November 2017
‘Chinese property investors still call Australia home,’ Carolyn Cummins, Sydney Morning Herald, 14 November 2017
‘Property prices at a turning point - or the pause that refreshes,’ John Collett, Sydney Morning Herald, 15 November 2017
‘Starting to bite’: Lending clampdown slows property investors,’ Christian Edwards, Domain, 13 November 2017
‘Sydney leading market slowdown but buyers still paying top dollar for knock-downs at auctions,’ Kate Farrelly, Domain, 12 November 2017
‘Build-to-rent plan could put Australian residential property sector back on the boil,’ Anne Davies, The Guardian, 19 November 2017
‘RBA says Chinese buyers go cool on Australian homes,’ Reuters in the Sydney Morning Herald, 20 November 2017
‘Housing supply alone won't fix the affordability crisis, modelling shows,’ Matt Wade, Sydney Morning Herald, 20 November 2017
‘The apartment boom has driven average Australian home sizes to a 20-year low,’ Chris Pash, Business Insider, 20 November 2017
‘Are Investors Driving A Market Slowdown?,’ Cameron Kusher, CoreLogic, 23 November 2017
‘Fringe benefits: Home demand in outer Australian cities prolong building boom,’ Tom Westbrook, Domain, 16 November 2017
‘Australia faces housing hangover twice the size of the GFC subprime era,’ Chris Bourke , Sydney Morning Herald, 24 November 2017
‘China's foreign capital rules start to bite,’ Joe Morello , Sydney Morning Herald, 25 November 2017
‘Mum and dad investors have Australia teetering on the edge of a housing crash, report warns,’ Sue Lannin, ABC News online, 1 December 2017
‘Australian first-home buyers back in September quarter, with a surge in NSW,’ Nicole Frost, Domain, 6 December 2017
Interest rates stable but property price growth slows
Mon, 13 Nov 2017One month of negative growth in the Sydney property market has been followed by a second monthly fall, and by an announcement from CoreLogic that home prices have dropped 0.6 per cent in the past quarter. Not a disastrous result, true, but confirmation of a price trend that’s likely to be with us for quite a while.
"Seeing Sydney listed alongside Perth and Darwin, where dwelling values have been falling since 2014, is a significant turn of events," said Tim Lawless, CoreLogic’s head of research. "The slowdown in the pace of capital gains can be attributed primarily to tighter credit policies, which have fundamentally changed the landscape for borrowers.”
“Additionally, interest-only borrowers and investors are facing premiums on their mortgage rates which are likely to act as a disincentive, especially for investors who are generally facing low rental yields on investment properties,” he added.
In October global investment bank UBS sent a note to its clients saying the Sydney housing boom is ‘officially over’. The authors of the note – George Tharenou and Carlos Cacho, said: “There is now a persistent and sharp slowdown unfolding” after 55 years of unprecedented growth during which home values have risen by more than 6500 per cent.
Just over the past five years Sydney home prices have gone up 74 per cent; a remarkable rate but also an unsustainable one. It’s also true that since 1955 (UBS went back a long way for its starting date) that there have been both good years of price growth as well as not-so-good years in which prices have contracted. The property market is cyclical and periods of boom and bust are historical features.
Regardless, in the present cycle Sydney home prices have now been slowed by banks applying tighter lending rules for property investors while raising home loan interest rates at the same time. Other factors, including a huge increase in the number of units coming onto the market and restrictions on foreign investors, have also played a part in causing the downturn.
The speed of the downturn over the past five months has come as a bit of a surprise to Messrs. Tharenou and Cacho who admitted “the cooling may be happening a bit more quickly that even we expected,” before they reduced their 2017 growth forecast from seven per cent to five per cent.
Another factor that will further affect the rate of ‘cooling’ is the extremely high – and still growing, price of residential land in Sydney. According to the latest HIA-CoreLogic Residential Land Report the price of residential land in Sydney has reached a record high of $1051 a square metre, setting a new benchmark for land values. The report also noted that in the past 10 years, Sydney land prices have increased 83 per cent.
Housing Industry Association (HIA) senior economist Shane Garrett told the Sydney Morning Herald "the speed at which land price is increasing is a concern as it compounds the housing affordability problem".
Also quoted in the Herald, CoreLogic's commercial research analyst Eliza Owen said "record-high lot prices over the past five quarters are likely to have contributed to worsening affordability and influenced the unprecedented level of high density developments under construction".
Analysts are divided in their forecasts about what’s likely to happen in Sydney’s property market over the next 12 months. SQM Research predicts that Sydney’s prices will remain mostly static until mid-2018, and then price growth will rebound in the second half of the year.
The McGrath Network in its 2018 report says that although we appear to be through the peak of the boom, the strength of the demand for residential housing has separated Sydney from the rest of Australia: “A strong economy, rising population and chronic shortage of housing coupled with low mortgage rates is keeping property prices rising. We expect this to continue over the next few years, albeit at a slower pace.”
AMP Capital's Head of Investment Strategy and Chief Economist, Dr Shane Oliver isn’t quite so optimistic. He sees a continued slowing of the market leading to a five to ten per cent decline in prices in the next 12 to 18 months.
“I suspect there is more downside to come in Sydney going forward, but it doesn’t necessarily mean the market will be going down in a straight line. The big issue is the apartments and the complication in Sydney is that those apartments are going up all over the place,” said Dr Oliver.
Some areas better than others
There are some interesting – and growing, disparities in the pattern of property prices across the greater Sydney area.
Property investors have been hit by tighter lending restrictions and higher bank interest rates, and the results of these changes are becoming apparent. Figures from the Australian Bureau of Statistics (ABS) show that investor loans are down six per cent on 2016, while loans to first-home buyers are up 30 per cent on last year.
J.P. Morgan economist Henry St John told ABC News that mortgage lending was gloomy in September: "Investor lending was unambiguously weak in September, and provides further evidence that Augusts' modest uptick against the trend was more noise than anything else," he said, saying there was a ‘bearish trend’ in investor lending.
However, while some higher-priced markets close to the CBD have experienced price declines, prices in Sydney’s south-west still climbed 5.3 per cent in the September quarter. Across the greater Sydney area, five regions made price gains: The Central Coast, the Blue Mountains, the South West, the West and the Northern Beaches all came out ahead.
Some parts of Sydney have experienced more than their fair share of price falls, most notably those suburbs affected by major infrastructure projects like WestConnex. Data from Domain Group shows that prices in the formerly red-hot suburbs of Haberfield and St Peters have dropped in the past six months by 17.2 per cent and 9.2 per cent respectively.
Domain data scientist Dr Nicole Powell explained: “It’s the unknown, people are unsure of what the WestConnex will do to that area, that’s the key that will influence whether buyers will purchase and that will inevitably impact prices.”
But a Sydney Motorway Corporation spokesman told Domain that the situation would improve when the work is finished: “The community outcomes will be overwhelmingly positive once the project is complete – more than 18 hectares of new parklands and active transport links across the inner west will be created, including at the site of the old Alexandria Landfill which is being cleaned up to enable community use for the first time in decades.”
Neighbouring suburbs have also felt the impacts of WestConnex. While most other suburbs in the inner west performed well, Lilyfield, sited between Haberfield and Rozelle, experienced a fall in the median house price of 4.9 per cent despite not being directly affected by the construction work.
Other parts of Sydney are expected to ultimately benefit from infrastructure projects. The NSW government is developing a $20 billion Metro scheme that will build a new train network across the Sydney metropolitan area to link the Parramatta and Sydney CBDs. The planned Metro stations will be commercial hubs that can include apartments, offices and even hotels in some locations.
Sydney Metro program director Rodd Staples said work would begin on the Sydney Metro Northwest project in the first half of 2019: "Sydney Metro is more than just a world-scale public transport project – it's a defining city-building opportunity.
"This is an opportunity to build on the revitalisation Sydney Metro brings, creating truly landmark places and developments that showcase world's-best practice for transit-oriented developments."
The Metro will also provide investors with opportunities to share in the growth resulting from the development of new office space and residential complexes in ‘revitalised’ suburbs along the route from Sydney’s west to the city.
As well, some suburbs in the northern districts are enjoying a ‘new normal’ of $2 million to $3 million median prices, according to Northern District Times writer Shayne Collier: “Gladesville has a current median price of $1.95 million, and has been forecast to surpass $2 million ($2,009,037) in January [2018]. Neighbouring suburb, Hunters Hill, has a current median price of $2.855 million; it is predicted to rise above $3 million ($3,017,266) in February,” he wrote.
The estimated median prices were assessed by looking at CoreLogic RP Data sales data and trends over the last three years.
Giving up the dream
A recent report from the Australian Institute of Health and Welfare showed that a higher percentage of people in Eastern European countries like Hungary and the Czech Republic own their own home than Australians. The surprising report also showed home ownership for young Australians has fallen by more than one-third in the past 25 years.
Up to 35 per cent of Australians have given up on buying a home of their own, according to a new study from Finder.com.au. The findings also show that more than one in 10 Aussies have abandoned hope of ever owning any property.
However, the national survey of 2,010 people found that almost two thirds (65 per cent) of Australians surveyed still possessed a dream of home ownership, although 27 per cent of those respondents said they’d have to compromise on the property size or location to ensure they were able to purchase a home.
Owen Thompson, from Ontheouse.com.au, says that when it comes to housing affordability, Australia consistently ranks as one of the least affordable countries in the world, as is shown in the latest Demographia International Housing Affordability Survey.
“The latest data does nothing to dispel this stark reality, with the annual Demographia International Housing Affordability Survey stating that our five capital cities rank within the top 20 least affordable cities anywhere. According to the Demographia research, Australia also ranks in the top three of unaffordable national markets, with only Hong Kong and New Zealand being less affordable.”
Mr Thompson says that of the 54 Australian property markets identified by Demographia, 33 are rated as ‘severely unaffordable’ while 14 are regarded as ‘seriously unaffordable’. (In other words, 47 markets out of 54, or 77 per cent of property markets across Australia are too expensive for most people wanting to buy a home.)
“The actual rate of Australian property price increases is also referred to, with Demographia stating that Sydney’s median multiple has risen 60 per cent since the first survey was conducted in 2004. It also adds that for the past two years, Sydney has represented the poorest housing affordability ever recorded outside Hong Kong.”
Bessie Hassan, a money expert at finder.com.au, says the possible consequences of Sydney’s housing unaffordability are ‘sobering’: “Many Aussies are disenchanted with the homeownership dream, believing property is unattainable. Many are accepting the idea of long-term renting - however, not building up equity or having the security of a home could be problematic later in life,” she said.
It’s certainly not getting any easier. The latest CoreLogic Housing Affordability Report found the cost of buying a house currently takes 7.2 times the annual income of a typical household, up from 4.2 times the annual income 15yearsago and that home ownership is becoming the privilege of high-income earners who are being forced to assign ever-increasing levels of expenditure to mortgage servicing.
Herald journalist Matt Wade posed the question: “House price growth in Sydney and Melbourne now appears to be slowing, so can we expect anxiety over housing to fade?”
He doubts that it will: “Economic modelling published recently by the Australian Housing and Urban Research Institute found more than 1.3 million Australian families are in ‘housing need’. About 60 per cent of them are existing households that require rental support. The remaining 40 per cent are people who would have formed households if not for housing affordability constraints.”
Apartments the solution for some
Apartments continue to gain in popularity as Sydney now has one apartment for every two houses and is heading for equality between the numbers of apartments and free-standing homes within the next 20 years, according to property agents Laing & Simmons.
“Put simply, affordability and availability are responsible for Sydney's apartment boom,” says an article in Laing & Simmons ‘Property News’.
“With house prices rising consistently over the last few years - even as the amount of available stock has gone down - we've entered a state of high demand and low supply. This is fantastic news for anybody looking to sell a property in Sydney, but it can make things challenging for buyers, particularly first-home buyers.”
The article says that new developments have meant more areas of high-density living where property is affordable and not too far from the city centre: “Of course, apartments aren't suited to every type of lifestyle, but there are plenty of Sydneysiders, particularly young people, for whom an apartment is a realistic and sensible first step on the property ladder.”
Ben Graham at News.com.au says that we are entering a new era of high-rise apartment buildings and the Australian dream of home ownership is set to change forever.
“Startling new projections show a glut of apartments is likely to see unit prices fall in the majority of Aussie cities, which is good news for young people wanting to live close to the action and where they work. But, the same report released by QBE Insurance…shows house prices are expected to surge in our major cities over the next three years,” he said.
The QBE report he refers to also says that Sydney ‘bucks the trend in projections’ with house prices expected to fall by around 0.2 per cent and apartments to see a drop of around four per cent by 2020.
QBE Lenders’ Mortgage Insurance CEO Phil White says in the report that units now account for 46 per cent of all residential construction across the country: “We need to be building around 190,000 homes a year to keep up,” he said. “Last year, Australia built around 215,000. That’s a good year, but we have to keep it up.”
Georgia Sedgmen, an associate town planner at Tract Consultants, told Domain that over half of the apartment population was born overseas: “In many other parts of the world, the traditional 'dream' of owning a house isn't such a big deal. People from Asia and Europe are more likely to have grown up in apartments, they find it quite unusual that people aspire to own a detached dwelling. That's a very Australian idea," she said.
Approvals for blocks of new units will be the only way Sydney councils will meet their targets for housing supply set by the Greater Sydney Commission over the next five years. Councils will have to provide for almost 200,000 more dwellings by 2021, despite community concerns about housing density and the provision of more transport and infrastructure.
The Greater Sydney Commission was established in 2015 as an independent body to develop a long-term planning strategy for Sydney. Its revised plans, released in late October, estimate the city will need about 725,000 extra homes over the next 20 years.
The Chinese puzzle
An interesting piece of research was recently conducted by the economics and equity teams from global financial giant Credit Suisse that found strong correlations between Chinese capital flows and Sydney property prices. It concluded that movements in China’s capital markets impacted property demand in Sydney about twelve months later.
ABC News reported that modelling by Credit Suisse found that Chinese capital flows and real interest rates have predicted roughly three-quarters of the variation in NSW property transfers since 2010.
"Over the past few months, the Sydney housing market has not only cooled down, but has arguably turned cold," Credit Suisse wrote. "Over the past year, Chinese capital flows have fallen considerably, in part reflecting the impact of stricter capital controls. This fall foreshadows weakness in NSW housing demand in the year ahead."
Commenting on the Credit Suisse findings, Stephen Letts from ABC News said that in recent months, preliminary auction clearance rates have drifted lower to 60-65 per cent from around 75 per cent a year ago. Revised auction clearance rates that account for late reported results have even dipped below 60 per cent.
Credit Suisse noted: "This is a significant development because recent RBA analysis suggests that a 60 per cent clearance rate is typically the break-even point for house price inflation. In other words, house prices tend to fall when the clearance rate is below 60 per cent."
Credit Suisse said the Reserve Bank was in a difficult position because the drying up of offshore investment poses ‘a very big risk’ to the economy: "We believe that the RBA will need to cut rates further to deal with the housing market slowdown in train," it noted.
Rate cuts ahead?
But will the Reserve Bank cut rates further after seven years of reducing rates to a level that is now historically low? Domain’s Chris Kohler did a ring around and got some differing opinions.
“In terms of the broader outlook, it’s a rabble. ANZ chief economist Richard Yetsenga is calling for hikes next year, Credit Suisse and independent economist Stephen Koukoulas say cuts make more sense, while UBS and Westpac reckon the RBA should stay on the sidelines for the foreseeable future,” he said.
The ANZ Bank says rates need to rise in 2018. It believes inflation is no longer the ‘guiding light’ for the RBA and the Board will be considering several other factors in making rate decisions.
Westpac chief economist Bill Evans sees the RBA continuing to sit on its hands and keep rates unchanged: “Even though the market is now predicting a rate hike next year, it’s been our view for a couple of years that rates are going to remain on hold for 2017 and 2018.”
UBS, who are firm in their position that the property boom is over, say that tighter lending regulations are working, and the RBA will most likely wait until mid-2018 to see how things go before heading in a new direction.
Writing for the ‘Your Mortgage’ website, property journalist Michael Mata quoted the Credit Suisse report which argues that cooling house prices may lead to interest rates cuts: “We understand that policy needs to be set on what is known, rather than what is unknown, and Chinese capital flows are a very big unknown because of the absence of high-quality and timely data,” the Credit Suisse report said.
“But the issue for us is that the recent shift down in Chinese capital flows is having a visible, negative impact on house prices and consumer spending now,” said Mr Mata.
Meanwhile, New Zealand is tackling its own housing crisis with new legislation that bans foreign buyers from purchasing existing homes. Writing in The Guardian, journalist Richard Partington said the results of the restrictions would be closely watched by other countries, including Australia.
“The country [New Zealand] has become a hotspot for wealthy Americans seeking an escape from political upheaval elsewhere, viewed as a stable nation with robust laws and far from potential conflict zones,” he said. “Global financiers have been increasingly snapping up properties in the country.”
However, The Guardian’s article noted that of the 48,603 property transfers registered by the NZ government in the three months to June, just three per cent were buyers with an overseas tax residency: “The bulk of those buyers were Chinese, followed by Australians. Tax residents of the UK, US and Hong Kong were also among the biggest buyers of property.”
Sources:
‘Property market softens as investors exit, allowing first home buyers a foot in the door,’ Stephen Letts, ABC News online, updated 12 November 2017
‘Rise and fall: A closer look at Sydney’s shifting unit prices across its regions,’ Nicola Powell, Domain, 10 November 2017
‘Australia's world record housing boom is 'officially' over, UBS says,’ Miriam Steffens with AAP, Sydney Morning Herald, 2 November 2017
‘House prices fall dramatically in Sydney suburbs affected by WestConnex project,’ Dan F Stapleton, Domain, 28 October 2017
‘Sydney Metro stations to include office, residential and hotels,’ Carolyn Cummins, Sydney Morning Herald, 1 November 2017
‘Buyers holding the cards as Sydney’s auction clearance rate slips below 65 per cent,’
Chris Tolhurst, Domain 29 October 2017
‘Sydney house prices continue to fall in October,’ Frank Chung, News.com.au, 1 November 2017
‘Over a third of Aussies reckon they’ll never afford a house,’ Ben Graham, News.com.au, 27 October 2017
‘Sydney property goes cold as 'Chinese capital flows fall',’ Stephen Letts, ABC News Online, 1 November 2017
‘Property News,’ Laing & Simmons, 30 October 2017
‘Seven years since an RBA rate hike, is another on the way?,’ Chris Kohler, Domain, 3 November 2017
‘How Australia’s Housing Affordability Compares With Other Countries,’ Owen Thomson, Onthehouse.com.au, 27 October 2017
‘High-rise future predicted as apartment prices tipped to drop,’ Ben Graham, News.com.au, 25 October 2017
‘New Zealand to ban foreign buyers snapping up existing homes,’ Richard Partington, The Guardian, 26 October 2017
‘Sydney property market outperformed by Melbourne and Hobart, national housing report finds,’ David Chau, ABC News Online, 1 November 2017
‘Suburb set to hit $2 million or $3 million medians,’ Shayne Collier, Northern District Times, 25 October 2017
‘Commission holds firm on housing targets for Sydney councils,’ Lisa Visentin, Sydney Morning Herald, 27 October 2017
‘Melbourne land values surge while Sydney tops $1000 a square metre,’ Nicole Lindsay, Sydney Morning Herald, 24 October 2017
‘Housing affordability: QBE report predicts apartment prices to fall, gives hope for first-home buyers,’ David Taylor, ABC News online, 25 October 2017
‘Growth Conditions Remain Flat on a National Basis While Sydney Values Fall,’ Tim Lawless, CoreLogic, 2 November 2017
‘Housing volumes could plummet and prices tank, Citi says,’ Stephen Letts, ABC News Online, 27 October 2017
McGrath Report 2018, The McGrath Network, November 2017
‘From boom to gloom: how rising house prices have become a worry,’ Matt Wade, Sydney Morning Herald, 5 November 2017
Special report: 2012-2017 - Anatomy of a property boom
Fri, 20 Oct 2017We’ve experienced five years of a property boom that’s unprecedented in this city’s history. It’s dramatically increased real estate values across the metropolitan area and made asset-rich millionaires of almost everyone who owns a freestanding house within 20km of the CBD. And now it’s ending. But how did it start and what drove it along the way?
2012
Early in the year a Sydney Morning Herald article by Domain’s editor Antony Lawes analysed price growth on Sydney’s north shore and concluded that over the previous ten years the average annual growth in Neutral Bay was 4.3 per cent, and in Mosman was 6.68 per cent. Solid, but nothing too dramatic.
There had been a slowdown of real estate activity since 2008 resulting from the Global Financial Crisis, but NSW had experienced a modest rise of 5.3 per cent in sales of new homes in 2011, while Sydney auction clearance rates hovered around the 55 per cent level.
Housing Industry Association chief economist Harley Dale told AAP that the housing sector needs more support for a full recovery: "In a contemporary economic environment where interest rate settings are too high, finance conditions persistently tight, consumer and business confidence too low, and plans to tighten fiscal policy inappropriate, it is hard to envisage a sustained recovery in new home sales in coming months,” he said.
At its April meeting the Reserve Bank of Australia decided to leave its cash rate unchanged at 4.25 per cent, igniting a series of debates on whether an interest rate reduction had become essential to Australia’s economic future. The Governor of the Reserve Bank, Glenn Stevens, pointed out that conditions in Australia posed no particular threats at present, saying: “Interest rates for borrowers remain close to their medium-term average. Credit growth remains modest.”
Australia’s growing housing shortage was in the news. A report by a UK housing expert, ‘Homes for All’, found that Australia's housing market was producing only half of the supply needed to meet demand. The report’s co-author, Dr Tim Williams, said that Australians are building 14,000 to 15,000 homes a year when the figure should be more like 40,000.
By mid-year there were increasing signs that the Sydney market was ‘bottoming out’ or ‘stabilising’ according to the Real Estate Institute of NSW in an AAP release on News.com.
The Institute noted that the state’s median house price was down $40,000 from the previous financial year and the annual median house price for the 12 months to March had dropped by 6.7 per cent.
However, a later property update from REINSW found that prices for residential properties in Sydney had stabilised in the three months to March. Prices had mainly fallen in the top end of the housing market, with pricing in more ‘affordable’ suburbs remaining firm.
Later in the year, Bronwen Gora, the Sunday Telegraph’s property writer said the Sydney property market was “creeping out of the doldrums”, noting that house prices below $1 million had recovered from the previous year, and Sydney's median house price had bounced back to $620,000 from $582,000 twelve months earlier.
At year’s end, the RBA said there was no danger of another housing boom like the market experienced in the 1990s, although various economic indicators were looking slightly more optimistic. The Bank’s head of economic analysis Jonathan Kearns told an Australian Business Economists’ lunch that conditions were right for a rise in the cost of housing: ‘‘We are not seeing declines in income growth or a significant increase in unemployment, so the strength in earnings and incomes for households is still going to be quite reasonable and certainly sufficient to support an increase in housing construction.’’
The Australian Bureau of Statistics reported that house prices rose in Sydney during the September quarter and that annual price growth had returned nationally for the first time since March 2011. Lower interest rates had made borrowing cheaper, and it appeared that some confidence was gradually returning to the market with auction clearance rates rising above 60 per cent.
2013
The new year began with standard variable mortgage costs at their lowest level in two years.
Economists at NAB revised their interest rate outlook and forecast the official cash rate to fall to 2.25 per cent by December. NAB's chief economist Alan Oster even forecast three separate 25-basis-point rate cuts in 2013.
Senior economist at Australian Property Monitors, Dr Andrew Wilson, said he expected prices nationally to grow between 3 per cent and 5 per cent: “2013 should continue to build on the modest gains of the past year, however the forthcoming federal election and the likelihood of a protracted campaign may result in some uncertainty among homebuyers and sellers, with confidence already low,” he said.
Savanth Sebastian, an economist in Sydney with Commonwealth Securities, said that migration was at a 3 ½ year high which meant more homes would be built, but rental yields would be the real driver of growth: “Because vacancy is back under 2 per cent rents will go up, and then people look at the yield on those properties and say 'well, this home should be worth more'."
There was certainly no flood of new home building threatening those holding current housing stock. Australian Bureau of Statistics figures showed that new homes under construction fell for the third straight year in the 12 months to 30 June, and building approvals dropped for a second straight year in the twelve months to 31 October.
However, the number of residential building approvals rose 2.9 per cent from a low base in November, according to the Australian Bureau of Statistics. The figures suggested a modest recovery was underway in the housing sector, although almost all the growth was in approvals for multiunit properties.
The 25 basis points interest rates cut announced by the Reserve Bank after its May meeting came as a surprise to most economic forecasters. In the RBA's quarterly Statement on Monetary Policy, the Bank emphasised that the Australian dollar had remained high while inflation at its present rate posed few concerns.
However, the RBA did note that a reversal of its recent easing of monetary policy could be required if "dwelling prices rise more quickly than assumed, spurred by low interest rates.”
Master Builders Australia chief economist Peter Jones told ABC News that it was unusual for rate cuts to take so long to have an impact: "It's a little bit of a hangover from the financial crisis - this aversion to debt and lack of confidence in things like global economic developments, some uncertainty at home as we go through structural change. It is a little bit unusual, but it does look like interest rates are starting to improve the situation."
By August the Sydney property market was accelerating at a pace that hadn’t been seen for years, powered by lower interest rates, high levels of buyer demand, and a noticeable lack of housing stock. The second weekend in August, Sydney recorded an 83.8 per cent auction clearance rate with record levels of buyer activity despite a surge in property listings. This was the highest clearance rate recorded for the year and the fifth consecutive weekend with clearance rates above 80 per cent.
RP Data research director Tim Lawless said that by including rental yields in the company’s housing market outlook, some clarity could be provided as to why investors were becoming so active. The RP Data-Rismark Accumulation Index, which factors in both capital gains and gross rental yields, was up 9.4 per cent over the year. Meanwhile, a typical capital city dwelling was selling in just 45 days compared with 59 days at the same time a year ago.
By the end of the year the word ‘bubble’ was again being mentioned. Simon Johanson, Property Editor for The Age, said that we were experiencing the start of a boom but not a bubble, according to the economists he’d spoken with. He noted that capital city values peaked in September above the previous high set in 2010, and Sydney's prices were up 5.2 per cent over the September quarter.
There was a glimpse of what was to come when new home sales hit a two-and-a-half year high in November, driven largely by sales of new apartments, mostly off the plan. Nationally, sales of new apartments rose by 21 per cent, with Asian investors helping to drive nearly 11,000 sales for the year.
Commonwealth Securities economist Craig James firmly denied a bubble existed: ''Rather than a 'bubble', couldn't it just be that home prices are lifting from a low base in response to very favourable influences such as super-low interest rates? That is the sensible view, and also the right view,'' he said.
2014
As 2014 began, analysts looked back at 2013 and saw that Sydney had Australia's highest median home value growth with an impressive rate of 14.5 per cent, according to RP Data-Rismark figures.
Senior research analyst at RP Data, Cameron Kusher told the Herald's Christina Zhou that the principal drivers of this growth were the RBA’s cuts to the cash rate and investors putting more of their funds into property: "The combination of lower interest rates and the fact that property has become a little bit more affordable has lured buyers back into the market," he said.
Mr Kusher said the middle and prestige segments of the Sydney property market were the best performers in 2013: “The middle market has seen values rise by 15.3 per cent over the year and the top end of the market has seen value growth of 15 per cent.”
So remarkable was Sydney’s price growth that it was even commented on in the Wall Street Journal, one of the USA’s most influential financial newspapers. WSJ Journalist James Glynn wrote that Sydney had some of the most expensive property in the world and raised the prospect that the market was ‘overheated’.
Data from the Housing Industry Association showed that since the end of 2013, units were the main source of sales growth. HIA figures showed that sales rose 7.5 per cent in November with multi-unit dwellings up 30.5 per cent and detached homes rising just 3.6 per cent. The HIA's chief economist Harley Dale told Michael Janda from ABC News that this surge could continue: "The upward momentum evident in new home sales since the closing stages of 2012 continued late last year – that is a good sign for residential construction activity in 2014."
ABS figures showed that in NSW building approvals for non-detached dwellings such as units outnumbered detached house approvals in every month of 2013, reflecting a shift to apartments as the primary form of new residential development.
Senior manager at BIS Shrapnel, Angie Zigomanis, told Domain’s Toby Johnstone that growth prospects would be mixed in 2014 and that he expected Sydney’s growth rate to be more subdued after the high levels of activity in the year just ended: “Sydney will see solid growth - might be more the five to six per cent range rather than the double digits,” he said.
Dr Andrew Wilson of Australian Property Monitors also saw a slower year ahead. “Sydney house price growth in 2014 will likely be half that of [2013] at best with most of that recorded in the first part of the year,” he said.
However, the Sydney market wasn’t about to slow down and by April the new ‘boom’ was in full swing. RP Data said half of Australia's capital cities were at record property price levels, with Sydney the most expensive at 15.8 per cent above its previous peak. Despite this, auction clearance rates were still steaming ahead. The first Sydney auctions in April brought a new record of ten consecutive weeks of clearance rates above 80 per cent. The median house price was $1.12 million and the median apartment price was $706,500.
Just twelve months before this the clearance rate was 66 per cent and the average house price was $890,000 while apartments averaged $591,000. As Dr Andrew Wilson of Australian Property Monitors commented: “We are heading into uncharted territory in the Sydney market...”
By August even seasoned followers of Sydney's property trends were finding it hard to believe the strength of the real estate market. Figures from the Australian Bureau of Statistics showed that Sydney property prices rose by 3.1 per cent over the June quarter and by 15.6 per cent over the past year. One record after another was overtaken.
Writing in Australian Property, economist Leith van Onselen expressed his thoughts about real estate activity in the city he calls 'investor central': "The speculator frenzy that has engulfed Sydney’s housing market continues to reach absurd proportions, with today’s Lending Finance data for June, released by the ABS, once again smashing all records, with both the value and proportion of mortgages going to New South Wales investors surging to another all-time high."
In December, the Organisation for Economic Cooperation and Development (OECD)
warned that the low rate-driven, investor-led rise in housing credit was a serious risk to financial and economic stability: "House price increases are encouraging construction and consumption, but are also a concern in that a sharp reversal could cut aggregate demand."
2015
With warnings about an overheated property market regularly featuring in mainstream media, the year began with a feeling that much of what would happen in the next twelve months would be a continuation of what took place in 2014, although there were some new factors in play which could make 2015 a somewhat different year from its predecessor.
Peter Kouilzos, an Australian lecturer and author who specialises in property valuation and economics, summarised the previous year’s outcomes. He noted that at the beginning of the year Sydney had 22 per cent fewer properties for sale than 12 months previously, and prices had nowhere to go but upwards: "There was not as much property for sale so there were relatively high numbers of prospective purchasers at your home opens and auctions. During the year, the time to sell a house in Sydney fell from 29 days to 26 days."
There was confidence that interest rates would remain low which would support housing price growth, and oil prices were unlikely to rise which would also reduce pressures on the average Aussie's cost of living. But wages growth had slowed and was hardly sufficient to offset inflation. In many sectors wages were going backwards. Despite the often-expressed claim that this would encourage employers to add more workers to their payrolls, rising unemployment figures suggested that this belief was somewhat flawed.
Housing supply started to rise. Over the next 12 to 18 months a record supply of stock would enter the market, predictably leading to forecasts of a reduced growth of home prices and lower increases in rental rates.
Writing in the Daily Telegraph, Aidan Devine said Sydney's home price boom was about to reach its conclusion: "CPM Realty research has predicted total price growth of between 5 and 7 per cent over the year, echoing earlier BIS Shrapnel and CommSec forecasts of up to 7 per cent growth — a slowdown from the 12.4 per cent spike to the median house price over 2014."
By the middle of the year speculation about a ‘bubble’ was again rife. Australia's top economic bureaucrat, treasury secretary John Fraser, told a Senate estimates committee hearing: "When you look at the housing price bubble evidence, it's unequivocally the case in Sydney."
Reserve Bank Governor Glenn Stevens told members of the Economic Society of Australia that he too had concerns about soaring property prices: “What is happening in housing in Sydney I find acutely concerning for a host of reasons, many of which are not to do with monetary policy,” he told the audience. “I think some of what’s happening is crazy, but we [the RBA] have a national focus and so that just increases the complexity.”
There was growing recognition that there are downsides to skyrocketing housing prices, including that more and more first-home buyers were being priced out of the market. The Australian Prudential Regulatory Authority (APRA) asked Australia's biggest lenders to cut back on risky practices in investment lending.
RBA deputy governor Philip Lowe says these efforts were influencing bank lending practices: "In the past couple of weeks, you have seen a number of banks say they are requiring larger deposits for investor loans and offering smaller discounts on interest rates, smaller rebates and are requiring higher serviceability levels.”
In Sydney, the undersupply of housing stock was expected to continue driving the market, according to BIS Shrapnel senior manager of residential Angie Zigomanis. He said Sydney's growth may slow over the next 12 months, but it would be rising interest rates that would slow Sydney down, not an oversupply of homes: "In Sydney, it might take three to four years [for supply to catch up with demand], but there is the possibility that it might not fully catch up if something like rising interest rates choke off demand first," Mr Zigomanis told Domain's Jennifer Duke.
However, in mid-October the auction clearance rate dropped to 65.1 per cent - the lowest clearance rate in three years. AMP Capital chief economist Shane Oliver said the poor result was caused by Westpac’s move to lift mortgage rates by 0.2 per cent: “The bottom line is that buyers are worried that the Westpac move is a sign of things to come,” Dr Oliver said.
The feeling that the latest property cycle had peaked was picked up in the “time to buy a dwelling” index published by Westpac and the Melbourne Institute. The index had fallen by 11 per cent over the previous year and was then 30 per cent below its September 2013 peak. More tellingly, in Sydney the index had reached its lowest point since the survey began in 1975.
For the previous three years a shortage of homes for sale had been an important driver of Sydney’s property price rises, but supply was finally beginning to catch up with demand.
This was demonstrated by two statistics in the McGrath Report for 2015. The first was that by August stock availability was only 5 per cent lower than it was in August 2014. The latest statistics also showed that stock levels were 4.7 per cent higher than at the same time last year.
2015 ended with a widespread belief that the boom was slowing towards an end. Reserve Bank economists Marion Kohler and Michelle van der Merwe released a paper titled 'Long-run Trends in Housing Price Growth,' noting that over the previous 30 years housing prices had risen across Australia by an average of just 7.25 per cent a year, but the increase had been anything but uniform. During the past decade price growth was relatively moderate until the last three years when it rose dramatically, fuelled by heavy borrowing.
2016
Last year kicked off with a lot of introspection, giving market watchers confidence that the boom was going to continue coasting slowly to an end. We had become accustomed to double-digit growth in property values, to auction clearance rates northwards of 80 per cent, to on-market times dropping to be measured in days rather than weeks, and to a growing number of investors snapping up properties that were expected to be sources of capital gains more than rental returns. And all this aided by the lowest interest rates in living memory.
Was it going to last forever? Of course not. Sydney’s median house price dropped 3.1 per cent over the December quarter 2015, the first drop since June 2012, according to the Domain House Price Report. Eliza Owen, market analyst from Onthehouse.com.au said it had been a pretty good ride until it came to a halt: “The upswing in the current cycle lasted almost two years and, in real dollar terms, the median house price increased by approximately $375,000.”
Stephen Nicholls, executive editor at the Sydney Morning Herald, called it “the house price correction Sydney has long needed”: “Prices had risen so much – an extraordinary 52.6 per cent over three years. The 14.8 per cent growth last year was beyond everyone’s expectations. House prices can’t keep going up at those sorts of rates forever,” he said.
By May, it seemed there could no longer be any doubt that Australia’s housing boom was over and growth would be returning to more sustainable levels. “Sydney’s median house price falls below $1 million” was the way the Sydney Morning Herald headlined the story, and statistics from Domain Group did indeed show a March quarter drop of 1.5 per cent to $995,804. Across Sydney, that is.
Looking at a bit more detail we see that houses in the lower north shore, city and east, and northern beaches continued to show gains, albeit lower than the same time in the previous year. As the article pointed out: “House prices fell in five out of nine regions, remained flat in the south west and grew in the city and east, and northern beaches by 7.4 per cent and 1.9 per cent respectively.”
Figures from CoreLogic RP Data also confirmed the general slowdown, showing annual home price growth down to its slowest rate in 31 months. Its index of home prices for the combined capital cities rose 0.2 per cent in March, compared to February when prices increased by 0.5 per cent.
But Spring brought with it a return to price growth that brought unexpected sunshine to the property market. Weekend auctions showed a surge in listings and record clearance rates, although the number of properties on offer was well below figures at the same time last year.
Domain’s Dr Andrew Wilson noted that investors remained a key ingredient of the rising housing market, pointing out that Australian Bureau of Statistics residential lending data reported another surge in activity over June for NSW. “The prospect of a change to negative gearing has activated investors since May, with a June total of $6.6 billion – the highest monthly result since June last year,” he added.
A shortage of properties on the market became evident, particularly in the more desirable areas like the lower north shore and the northern beaches. One sign of the times was the median price of a three-bedroom apartment reaching $1 million – a 50 per cent increase over five years. “This data shows we’re still seeing a considerable demand for higher priced and bigger units in Sydney; there are plenty of buyers out there who are happy to live in a unit but they want a bigger unit even at a higher price,” said Dr Wilson
BIS Shrapnel associate director Kim Hawtrey said New South Wales would remain undersupplied for some time, although even home building in Sydney would slow down:
"Sydney is up against an affordability ceiling as well as constraints on site availability; investor demand is cooling, and the city will see a surge in new supply coming on stream over the next one to two years," Dr Hawtrey said.
CoreLogic’s Cameron Kusher said that over the past 12 months house prices had outperformed unit prices across Australia: “House values have increased by 7.2 per cent compared to a 5.5 per cent rise in unit values. With a record pipeline of units under construction we would expect that growth in unit values will continue to underperform that of houses for the foreseeable future.”
Mr Kusher said that compared to [2015] there was a low volume of fresh stock for sale, with Sydney’s offerings down nearly 21 per cent on the previous year: “The low level of new stock becoming available for sale appears to have been a key driver of the ongoing strength in the Sydney and Melbourne housing markets over recent months.”
By November the NSW government was working on the next generation of new housing for Sydney, announcing plans for something like 200,000 new homes to be built over the next five years. NSW Planning Minister Rob Stokes said that these new homes would be mostly apartments and townhouses, and that development would be focused on Parramatta, Blacktown and the City of Sydney: "While there will continue to be opportunities to buy detached homes on the blocks on the fringes of Sydney,” he said, “there's a real focus on apartments, on terrace houses and on medium-density developments in established areas."
Meanwhile, despite a marked slowing of property markets in other capital cities, Sydney’s boom refused to die. CoreLogic’s Cameron Kusher said that at the end of the June 2016 quarter there were 55,682 units under construction across NSW: ““If you look at the long-run averages you can see that the current unit construction boom is unlike anything we’ve ever seen before. The long-run average for units under construction is 16,194 in New South Wales.”
Further analysis showed that, if all the approved units are completed, over the following two years unit stock in some regions of Sydney would increase dramatically - Strathfield-Burwood-Ashfield will increase by 20.7 per cent, Parramatta unit stock will increase by 19.2 per cent and Auburn by 26.1 per cent.
At the end of 2016 there were some safe bets for 2017: Sydney housing prices would remain on their upwards trajectory, the rate of prices growth for detached houses would be higher than the rate for units, auction clearance rates would stay robust, some parts of Sydney would strongly outperform others, and investors would continue to acquire property thanks to the taxation advantages they enjoy.
2017
This year began with mixed expectations. The 2017 ANZ/Property Council Survey asked property professionals for their opinions about the likelihood of price growth in the future. The Council’s NSW executive director Jane Fitzgerald told Domain that the state is in a good position to start the year: “NSW had a strong 2016 and the next 12 months are looking positive with high expectations for growth, investment and hiring across the state,” she said.
A note of caution came from Angie Zigomanis, senior manager of research house BIS Shrapnel, who sees continuing growth in 2017 but said: “We won’t get price growth forever … we still think things will start to ease back again in 2018.”
Moody's Analytics economist Emily Dabbs said Sydney property prices had grown 11 per cent in 2016 and her company’s data indicates the strong price growth we saw in 2016 will continue into 2017: "We haven't really seen a significant decline in prices in Sydney for quite some time, and it's very unlikely to be that way, just because of the amount of demand that there is in the city," she said.
More than 31,000 new homes were built in Sydney in the 12 months to October 2016 - the highest annual number of new homes in over four decades, according to data released by the NSW Department of Planning. But end-of-year figures show the numbers of development applications and approvals were trending downwards.
Once more, worries about a bursting bubble surfaced in the media. Even the OECD issued a biennial assessment that warned of an impending ‘rout’ in Australian house prices, saying both prices and household debt have reached ‘unprecedented highs’. In the OECD’s own words: “A continued rise of the market, fuelled by both investor and owner-occupier demand, may end in a significant downward correction that spreads to the rest of the economy."
"There is some need to tighten lending conditions for some Australian housing markets in terms of geographical areas and dwelling types," Housing Industry Association chief economist Harley Dale told The Australian Financial Review’s Michael Bleby.
"However, a blanket tightening of lending conditions – as now seems to be emerging again – is the wrong policy and risks damaging Australia's financial stability. That is the very opposite to the ideal outcome authorities want to achieve."
By April, some housing market analysts were calling for the end of the current housing boom to commence later in the year. BIS Oxford Economics managing director Robert Mellor told the Building Industry Prospects conference in Sydney that house prices would drop by five per cent over the next two years.
“Given that price growth over the last 12 months has been much greater than we would have anticipated six or 12 months ago, we now expect price declines probably between 2017 and 2019 somewhere in the order of 5 per cent in the detached housing market in Sydney,” he said.
But other analysts saw 2017 as yet another year of price rises, followed by a slowing market in 2018. SQM Research managing director Louis Christopher said it was likely prices would rise by 11 to 16 per cent by the end of 2017, adding: “Next year is questionable … we could see some storm clouds in 2018,” he told Domain’s Jennifer Duke.
And property prices continued to rise as the first half of the year rushed by. Auction clearance rates remained high and good numbers of properties were on offer in Sydney each weekend – even delivering a record number of sales for a June auction, well ahead of the corresponding weekend in 2016. Median prices were also well ahead of the same weekend last year, something like 17 per cent higher.
In July, the entire Sydney market reversed a weak downwards trend and prices again resumed their upwards movement. Auction clearance rates remained in the 70 per cent levels and any concerns of a massive surge in either direction proved unfounded. The monthly rate of growth in home prices fell around one per cent – from 3.1 per cent to 2.1 percent according to CoreLogic statistics. But Sydney’s property market has continued to produce record prices, with the median house price now $1.18 million, according to data from Domain released in late July.
Unit prices grew at twice their growth rate during the June quarter, which was a clear indication that apartment supply is still lagging behind demand. As a result, Sydney apartment prices jumped 3.2 per cent in the June quarter to $757,991, as shown in the latest Domain ‘State of the Market Report’.
As we head towards the end of the year we seem to be experiencing a ‘measured slowdown’ that is enabling our greatest-ever Sydney property boom to end gradually without causing any massive economic disruption. And to say the boom is ending is not to suggest prices growth is over – not by any means.
Sydney is the only capital city to show an increase in approvals in medium and low-density housing, rising by 11.6 per cent in the year to March. Over the five years to June 2017 medium-density stock grew by 14.7 per cent to a total of 860,423 dwellings while the state’s population grew by 8.1 per cent to 7.5 million. There’s plenty of stock available to supply the market for at least the next two years.
Commonwealth Bank economist Kristina Clifton told the Herald’s Eryk Bagshaw that she believed the latest residential construction cycle had peaked: "We think the downturn will be gradual, and we expect an extended plateau where residential construction activity remains at a high level over 2017 and into 2018," she said.
The demand for housing isn’t going away but it is decreasing, and developers are scaling back their activities. UBS economist Scott Haslem told the Herald’s Clancy Yeates that there won’t be a crash but "One would anticipate that we will get a meaningful correction in the next couple of years in the number of cranes that you will see on the horizon."
The 2012-2017 Sydney property boom happened as the result of a once-in-a-lifetime combination of many factors: taxation rules that favour investors, availability of new housing stock, accessibility to adequate capital from domestic and international sources, low interest rates, support from overseas buyers, a willingness by governments to allow rapid and often unpopular development, the popularity of property auctions and a widespread desire among Australians to own their own homes.
Now conditions are returning to what, for Sydney is normal. Rich Harvey, a buyer’s agent from propertybuyer.com.au came up with a good analogy when he said anybody waiting for “dramatic price falls in in-demand areas such as the lower north shore and the inner west” is not going to see them.
“The market is like a car driving forward: the foot has come off the accelerator but it hasn’t been taken completely off and there is still forward momentum. And in certain high-demand suburbs prices will continue to hold up very well. Demand may drop, but prices aren’t dropping, that’s for sure.”
No more double-digit growth, but growth nevertheless
Mon, 18 Sep 2017As evidence that Sydney’s recent property boom is ending, the latest figures from CoreLogic confirmed that dwelling values in August were flat across the country: “As for Sydney, its housing values slowed to just 0.3 per cent in the last three months, and has been consistently easing since October last year.”
"If the current trends continue, by the end of the year we could see dwelling values across Australia's two largest housing markets, Sydney and Melbourne, trend lower as they move through their cyclical peaks," said CoreLogic's head of research Tim Lawless.
Domain’s Jennifer Duke said Sydney was entering this year’s Spring selling season ‘with a whimper rather than a bang’: “While the beginning of the year started out very similarly to the booming auction market of 2016, with seven in 10 homes selling under the hammer, this season is on a very different trajectory compared to last spring.”
Ms Duke asked five top Australian economists for their forecasts of Sydney’s property price growth (or otherwise) over the next twelve months. Not surprisingly, each had their own view of where the market will go. In fact, the only point of agreement between the five was that the days of double-digit price growth are behind us.
Three of the five expect prices to fall. AMP Capital’s chief economist, Shane Oliver, sees a seven per cent decline over the next twelve months. He says official interest rates may stay unchanged but the banks will continue to hike mortgage rates on interest-only loans to investors as well as tightening loan requirements.
“This, along with a surge in the supply of units, will likely result in falls in unit prices and a slowing in home price gains,” he told Ms Duke, adding that there will also be a cooling of demand from offshore buyers.
Market Economics’ Stephen Koukoulas expects a two per cent price drop resulting from increased supply of properties as well as tighter loan controls by banks: “Throw all these things into the melting pot and it appears as though the long-overdue cooling in Sydney and Melbourne is poised to happen,” he said.
The third economist predicting a drop is BIS Oxford Economics’ managing director Robert Mellor. He expects a one per cent decline in apartment prices due to “a substantial reduction in investor demand from local and offshore buyers”.
However, two of the five economists were more optimistic when asked for their forecasts and didn’t foresee any dramatic problems of apartment oversupply. HIA chief economist Shane Garrett believes there will be a significant fall in home building, with apartment starts falling by 18.4 per cent in 2017-18 compared to 2016-17, and house starts falling 14 per cent over the same period.
“We see the downturn in the new dwelling starts as arising from a few factors, particularly the tougher regime around foreign investor participation in the property market and tighter financing conditions on the domestic investor side,” he told Jennifer Duke.
Compass Economics’ Hans Kunnen also had a positive outlook for Sydney’s unit market, saying he expected a ‘strong growth trajectory’ in the order of 5-10 per cent, citing population growth and good economic activity levels as the drivers: “While pockets of oversupply may occur … there is also likely to be reasonable demand and access to finance.”
Apartments abound
Apartments now comprise 28 per cent of housing in Sydney. While most of this high-density construction has been in and around the inner city, even suburbs in the west and northwest have concentrations of apartment towers undreamt of just a few years ago.
In 2016 Australia built more apartments than houses, and this trend is likely to continue. Developers build for investors, and between the two of them they’ve certainly done a lot to catch up with a perceived construction shortfall as immigration pumps thousands of new residents into the city of Sydney every year.
The continuing growth of Sydney property prices and an increasing number of renters have rekindled an interest in medium density developments in NSW. Bankwest’s Housing Density Report found that development approvals for units, townhouses and semi-detached houses grew almost six per cent in the year to March 2017, in contrast to a national drop of 6.5 per cent in medium density approvals.
In fact, Sydney is the only capital city to show an increase in approvals in medium and low-density housing, rising by 11.6 per cent in the year to March. Over the five years to June 2016 medium-density stock grew by 14.7 per cent to a total of 860,423 dwellings while the state’s population grew by 8.1 per cent to 7.5 million.
Some Sydney suburbs have experienced so much apartment-building in recent times that banks are beginning to ask purchasers for higher deposits when buying units in certain postcodes.
A report by the Daily Telegraph’s Aidan Devine found that global lender Citi has identified 34 Sydney postcodes that it considers ‘blackspots’ with a risk of apartment oversupply that could lead to a possible reduction in property values. These include the area around Sydney airport, Parramatta, Chatswood, Ryde, Sydney Olympic Park and parts of the Hills district.
This means that, for a unit costing $900,000 – the median price for an apartment in places like St Leonards, Waterloo or Chatswood, a purchaser would have to come up with a 35 per cent deposit of around $315,000. Add to this figure another $35,000 for stamp duty and a minimum amount of $350,000 would have to be available to finance the balance of the purchase price.
A typical ‘blackspot’ suburb is one in which a number of new apartment buildings have been constructed, and where there are additional high-rise projects approved and/or underway. AMP Capital and NAB have also followed Citi’s lead and raised their deposit requirements for those Sydney suburbs believed to have oversupply risks.
BIS Oxford Economics analyst Angie Zigomanis told Aidan Devine that an oversupply could be ‘catastrophic’ for some housing markets. He said it could push down property prices and cause recent buyers to have mortgages worth more than the value of their properties. With something like 25,500 new apartments to be completed this year in Sydney, areas with high concentrations of new units, including the Sydney CBD, are the most likely to be affected.
However, Urbis associate director Alex Stuart noted that over the last quarter, Sydney had recorded the highest number of apartment sales of all capital cities, slightly down on sales a year ago with an unchanged average selling price ago of $1.16 million.
"From our surveyed sample, [Sydney] apartment sales and prices all look healthy," he said, noting that one-bedroom, no car park apartment sales had risen to 28 per cent of all sales.
No cliff ahead
Property research group CoreLogic believes that when the August property market figures for Sydney are analysed they’ll show a plateauing of prices or perhaps even a slight drop. The firm’s head of research, Tim Lawless, says prices won’t ‘fall off a cliff’: "Sydney has been gradually cooling since November last year, auction clearance rates have started slowing...all signs the market is cooling," he said.
He added that there would be fluctuations in Sydney house prices as the market starts to soften, but history shows price corrections in Sydney have never exceeded 10 per cent. "Six months down the track, you will see a consistent decline in the housing market; the question is what will be the difference between the peak and trough," he told the AFR’s Su-Lin Tan.
Prices have now risen to a point where people on average incomes find it difficult to purchase a property or rent one that’s a reasonable distance from their place of work.
But even with the winter cold putting somewhat of a dampener on the auction market, prices stayed high despite a reduction in auction clearance rates that kept them near or below 70 per cent. Domain’s Chris Tolhurst wrote: “In the first half of the year, many auctions of A-grade properties within 20 kilometres of the CBD drew offers from eight or more bidders, a ratio that has now slipped to one to four bidders.”
This trend was also noticed by Domain’s Dr Andrew Wilson, who said: “Inner-suburban, higher priced regions continue to generally produce the best suburban results in Sydney, but clearance rates in those areas are now consistently lower than recorded over autumn and the early winter market.”
And prices keep rising. Rich Harvey, a buyer’s agent from propertybuyer.com.au said anybody waiting for “dramatic price falls in in-demand areas such as the lower north shore and the inner west” is not going to see them.
“The market is like a car driving forward: the foot has come off the accelerator but it hasn’t been taken completely off and there is still forward momentum. And in certain high-demand suburbs prices will continue to hold up very well. Demand may drop, but prices aren’t dropping, that’s for sure.”
Bubble deflating
There are still concerns about a property ‘bubble’ somehow popping and causing a massive crash in property prices. ABC’s ‘Four Corners’ program foresees this kind of calamity resulting from borrowers over-leveraging themselves on property and getting hit by a sudden interest rate rise that pushes their repayments beyond affordable levels. The resulting forced sales, said the program, would cause the bubble to burst and prices to crash.
There are a couple of problems with this scenario that make it relatively unlikely, despite property price bubbles in other countries causing a fair amount of economic mayhem. The first thing to note is that Australia has never had one of these bubbles burst as has happened in the US, Ireland and Spain.
Our property price cycles traditionally end by flattening out and entering a period of price stagnation. Australians tend to keep up with their mortgage requirements until they become absolutely impossible, rather than walking away when they’re merely difficult.
Our banks have generally been tougher than their overseas counterparts on mortgage requirements, asking for higher deposits and avoiding ‘low-doc’ loans to risky borrowers. The Australian Prudential Regulation Authority (APRA) and the Reserve Bank have kept watchful eyes on the property market and have tightened up mortgage conditions considerably over the past year, meaning that deposits are generally enough to cover any price falls that might occur.
This isn’t to say that prices in some parts of NSW and even in greater Sydney can’t slip. It’s likely that some areas where apartment construction is rampant will be oversupplied and asking prices will have to be reduced for corporate vendors to remain competitive.
Prices in Sydney were flat in August after a rise of 1.4 per cent in July. CoreLogic’s Tim Lawless said that the rolling three-month price rise in Sydney has fallen to 0.3 per cent from its 2016 peak of 3.7 per cent in the three months to last November.
Domain’s Jessica Irvine summed up the current situation, saying that we have no other option than to trust that banks and mortgage brokers have composed their loans in such a way that the inevitable rises in borrowing rates can be met by the borrowers.
“Absent a rise in the jobless rate, which has been falling recently, it's hard to see where the trigger for forced property sales would come from. In times of price weakness, home owners tend to just sit on their properties, keeping volumes low and price falls capped,” she concluded.
A big industry
Housing construction is a major industry, making up some five or six per cent of Australia’s economy. Over the past five years we’ve had a housing construction boom that peaked in 2016 at a rate of 250,000 new homes per annum, the majority of those being high-rise apartments. This also created thousands of jobs and a massive demand for building materials – all good to have at a time mining investment was decreasing.
The Australian Bureau of Statistics estimates that every $1 million spent on residential construction generates 17 full-time jobs. "The number of new residential building approvals had stepped down since 2016 and members noted that, if approvals remained at current levels, construction activity could also begin to decline," the RBA board said in its August statement.
We’re already seeing signs of building activity cooling down. The demand for housing hasn’t gone away but it is decreasing, and developers have scaled back their activities. UBS economist Scott Haslem told the Herald’s Clancy Yeates that there won’t be a crash but "One would anticipate that we will get a meaningful correction in the next couple of years in the number of cranes that you will see on the horizon."
There will still be a significant number of new properties coming onto the market during this period of contraction, leading to what Haslem calls ‘moderation in house price growth’. He also sees house prices stabilising in 2018 while rent increases will slow due to a greater number of available rental properties.
Commonwealth Bank economist Kristina Clifton told the Herald’s Eryk Bagshaw that she believed the latest residential construction cycle had peaked: "We think the downturn will be gradual, and we expect an extended plateau where residential construction activity remains at a high level over 2017 and into 2018," she said.
Building and construction activity is slowing, but the latest ABS data showed a fall of 1.7 per cent in July nationally which was less than analysts had forecast. Another surprise was the gain of 9.3 per cent in all sectors of construction work during the June quarter, although the ‘other dwellings’ category which includes apartment blocks fell 6.7 per cent.
Mortgage Choice, one of Australia’s biggest mortgage brokers, sees a decrease in demand for interest-only loans developing as banks find it easier to meet APRA’s cap on interest-only lending.
This could lead to a period in which banks won’t have to further tighten their credit policies, and higher premiums for interest-only loans could come to an end, according to Mortgage Choice chief executive John Flavell: "My feeling is there's room to kind of wind some of that back a little bit," he said.
In the meantime, Westpac and CBA, Australia’s two largest banks, say they will comply with APRA’s cap on interest-only lending. Westpac said interest-only loans made up 44 per cent of new lending in the June quarter, down from 52 per cent in March, and it was "on track" to be below the 30 per cent cap in the September quarter.
Chinese puzzle
When it comes to Sydney property the ‘elephant in the room’ is really a tiger. Figures from Knight Frank show that Chinese companies bought 38 per cent of all the residential property development sites sold in Australia last year, spending $2.4 billion.
The average size of property development sites sold to Chinese companies in Australia last year was 21,045 square metres, an 18-fold increase from four years ago, according to the company’s report.
Based in Beijing, Dalian Wanda’s Australian businesses include a $1 billion Australian apartment project at Circular Quay in Sydney. Shanghai-based DahuaGroup last year spent $400 million in Sydney to buy multiple suburban sites to develop as master planned estates. Investments on this scale have had a major impact on development in Sydney.
But this flow of funds could diminish or even dry up afterChina's National Development and Reform Commission’s recent declaration that the property sector was "not the real economy" and companies investing in overseas real estate could be harming China's financial stability by increasing capital outflows.
Officially, the property restriction is on deals worth more than $US1billion, but The Brisbane Courier-Mail has reported that the Beijing government’s already widening the restraints with Chinese nationals transferring cash to Australia having to sign statements declaring the funds were not for real estate.
Australia’s new suite of property taxes on overseas investors has also had a dampening effect on Chinese demand for Sydney property. David Wang, the vice-general manager of international sales at Chinese agency 5i5j, told the Australian Financial Review that sales of Australian property had dropped 80 per cent in Julyand he's expecting an equally poor result in August.
Despite the introduction of new taxes, NAB chief economist Alan Oster told ABC News its residential property survey for the June quarter showed the share of foreign buyers in new property markets had increased from 10.8 per cent to 11.6 per cent over the quarter: "I think, ultimately, crackdowns on capital [outflow] will cause an impact, but at the end of the day, there's a lot of money that's already been brought out," he said.
Sources:
‘Stern tests ahead for softer Sydney market,’ Dr Andrew Wilson, Domain, 7 September 2017
‘Apartment sales tumble as projects, funding dries up, Urbis figures show,’ Larry Schlesinger, Australian Financial Review, 6 September 2017
‘Hobart is 'best performing' property market as Sydney's growth slows, CoreLogic figures show,’ David Chau, ABC News Online, 1 September 2017
‘Market has lost its energy’: Sydney entering spring selling season with a whimper,’ Jennifer Duke, Domain, 1 September 2017
‘Flat August: Has the heat gone out of housing market?’ Reuters in Sydney Morning Herald, 2 September 2017
‘Sydney property prices: Citi reveals postcodes where buyers need 35 per cent deposits,’ Aidan Devine, Daily Telegraph, August 10 2017
‘Soaring Sydney property prices, growing population raises demand for smaller properties,’ AAP release in Sydney Morning Herald, 16 August 2017
‘Soaring Sydney property prices, growing population raises demand for smaller properties,’ AAP release in Sydney Morning Herald, 16 August 2017
‘What now for Sydney property prices? Five economists give their predictions,’ Jennifer Duke, Domain, 17 August 2017
‘Sydney house prices expected to flatline and even decline in August: Corelogic,’ Su-Lin Tan, Australian Financial Review, 28 August 2017
‘The problem with property doomsayers,’ Jessica Irvine, Sydney Morning Herald, 28 August 2017
‘Sydney auction clearance rate falls below 70 per cent as west lags behind,’ Chris Tolhurst, Domain, 21 August 2017
‘Apartment-building boom tipped to run out of puff,’ Clancy Yeates, Sydney Morning Herald, 22 August 2017
‘No further crackdown for interest-only customers: Mortgage Choice,’ Clancy Yeates, Sydney Morning Herald, 24 August 2017
‘Australian dollar eyes US80c as ABS data surprises,’ AAP release in Sydney Morning Herald, 30 August 2017
‘RBA warns construction activity could start to decline,’ Eryk Bagshaw, Sydney Morning Herald, 15 August 2017
‘New investment rules to curb China's foreign acquisition binge,’ Kirsty Needham, Sydney Morning Herald, 21 August 2017
‘Chinese property agents report sharp drop in demand for Australia,’ Angus Grigg and Matthew Cranston, Australian Financial Review, 15 August 2017
‘Sting in Dragon’s tail for Chinese buyers clears path for bargain hunters,’ Sophie Foster, News.com.au, 22 August 2017
‘Up to half of Chinese buyers leave apartments vacant,’ Simon Johanson, Sydney Morning Herald, 23 August 2017
Sydney property to see further growth as units outperform houses
Thu, 17 Aug 2017July auction figures showed that, as expected,Sydney's housing market continues to slow. The monthly rate of growth in home prices fell around one per cent – from 3.1 per cent to 2.1 percent according to CoreLogic statistics.
National valuers Herron Todd White say that Sydney's five-year property boom for houses and units is running out of steam as lenders' demands for bigger deposits and higher borrowing costs begin to take effect.
"Sydney has property at a price point to suit many. But entry level pricing might not always suit the first home buyer's lifestyle aspirations, " said Kim Quick, NSW residential director.
Commenting on the findings by CoreLogic that over half of the mortgage demand for Sydney property in the month of April was from investors, Mrs Quick said: "It stands to reason that this important segment has had much influence on the overall position of the market."
Slowing though it is, Sydney’s property market continues to produce record prices, with the median house price now $1.18 million, according to data from Domain released in late July. Market analysts were somewhat surprised to see that unit prices grew at twice their growth rate during the June quarter, which was a clear indication that apartment supply is still lagging behind demand.
Sydney apartment prices jumped 3.2 per cent in the June quarter to $757,991, while houses grew by 1.6 per cent to $1,178,417, as shown in the latest Domain ‘State of the Market Report’.
BIS Shrapnel senior manager residential Angie Zigomanis was one of those surprised by recent unit price growth, saying it was “higher than expected” due to former house buyers opting for apartments: “The indicators are still solid for Sydney, it is still under-supplied and we don’t see the market tipping into over-supply despite the building [boom].”
The ABC’s Michael Janda said that recent housing construction data shows an apparent decline in demand:“ABS data [in July] showed a 2.4 per cent fall in the value of construction work done, led by a 4.4 per cent slide in new residential building and a 5.1 per cent slump in renovations and additions. This reinforces the downward trend in building approvals, which are off almost 20 per cent over the past year.”
He quoted the Australian economics team at global bank UBS that has already called the top of the property boom and sees the number of new homes across Australia dropping to around 170,000 at the end of 2018.
However, despite a slowing market there are very few analysts tipping anything like a price crash in the next year or two. A Fairfax media team of Jessica Irvine, Matt Wade and Ross Gittins concluded that we are unlikely to see a massive fall in prices unless there’s an economic recession or a large spike in joblessness.
The team felt it was more likely that the Sydney market will experience a period of price weakness. Matt Wade warned that this could have an impact on consumer spending and confidence: "It may not be a crash, but even a period of stagnation can hamper the economy."
Alan Oster, NAB's chief economist, also believes the Australian housing market is entering a cooling phase after several years of very strong growth: "Affordability will be a major constraint" on the property market, particularly if weak wage growth persists and banks continue to tighten lending,” he said.
The NAB forecasts that house price growth will remain strongest along the eastern seaboard this year - with Sydney to see solid (but slower) price growth: "These trends will broadly continue into 2018, with growth in Sydney and Melbourne returning to more sustainable levels," the bank noted.
The bank also said it expects Sydney units to do “relatively well” this year, but has lowered its earlier forecast on how much housing prices would increase due to "record levels" of apartment construction and moves to limit foreign demand for housing.
Writing in the Sydney Morning Herald, Bloomberg Gadfly columnist Nisha Gopalan warned that Sydney will soon feel the effects of a Chinese buyer withdrawal from the market: “Reflecting tighter regulations, China overseas direct property investment could drop 84 per cent to $US1.7 billion ($2.15 billion) this year and about another 15 per cent to $US1.4 billion in 2018, according to Morgan Stanley,” said Ms Gopalan.
“A strengthening yuan, along with China's One Belt One Road initiative that needs funding, will see many property deals dry up.”
BIS Oxford Economics managing director, Robert Mellor, agreed saying: “Overseas investors are now facing significantly higher taxes as well as maybe there's still restrictions upon funds being able to come into the country from overseas, or overseas investors being able to get local funds."
Changing preferences
A new survey conducted by online marketplace ServiceSeeking found that one out of three Australians no longer has the ‘dream’ of owning their own home.
ServiceSeeking chief executive Jeremy Levitt told Domain that rising house prices are changing Australian culture: ““Housing prices and living costs are higher than ever, making it more difficult for younger generations to buy a home. The whole perception of home ownership and its importance in our lives has changed.”
Meanwhile, a June survey from Mortgage Choice found that two thirds of Australians consider home ownership to be ‘something for the wealthy’. However, an earlier survey from the same company found that 86 per cent wanted to own real estate, and that an apartment was considered the ‘most likely’ type of property.
Between 2011 and 2016 greater Sydney added 64,300 flats and apartments to the city’s housing stock. They now form 28.1 per cent of all dwellings in the area. This trend is set to continue with about 70 per cent of all dwellings constructed in Sydney in 2016 classed as medium- and high-density.
So rapid has the rate of apartment construction been that Sydney now has more than 100 suburbs where at least half of the population lives in a flat or an apartment. The apartment-density crown goes to Sydney Olympic Park where 99.6 per cent of respondents to the 2016 census said they lived in a flat or apartment on census night.
This puts them just over the Sydney CBD (99.4 per cent) and Haymarket (99.3 per cent). In fact, there were 15 suburbs where 90 per cent or more of the residents said they lived in a flat or an apartment. 41 Sydney postcodes sited more than 10km from the CBD have 50 per cent or more of their populations living in a flat or apartment.
The ‘affordability barrier’
The shift to higher-density living is due to a number of factors, such as wanting to find proximity to employment, public transport, education, and of course affordability. A Reserve Bank paper published in June said the median prices for apartments are about 30 per cent cheaper than detached houses.
Compass Economics chief economist Hans Kunnen told Domain’s Jennifer Duke that it was likely home buyers were opting for apartments instead of houses due to what he called the ‘affordability barrier’.
“People just can’t afford to buy a house … supply has been strong but demand is clearly stronger,” Mr Kunnen said, adding that he expects the trend of stronger apartment growth to continue for the next six to nine months.
Social researcher Mark McCrindle told the Sydney Morning Herald’s Matt Wade that a growing share of Sydney families with young children is choosing to live in a high-rise building rather than move to a detached house.
"That final ceiling for denser urban living is being broken as parents raise their children through the schooling years in apartments. We've seen that in Europe, we've seen that in some parts of North America and we've certainly see it right across Asia but we haven't really seen it in Australia. So, we are approaching new terrain there."
One interesting development in Sydney’s fast-changing housing mix is that for the first time ever it costs as much to rent an apartment in Sydney as it does to rent a house. The latest Domain ‘State of the Market’ report found that the median rental cost for both types of accommodation is $550 per week.
And even though we’ve built record numbers of apartments in recent years, rents rose $20 per week over the June quarter – a statistic that prompted Tenants Union of NSW senior policy officer Ned Cutcher to say we’ve been building the wrong kind of apartments.
“Development is driven by what investors want rather than what households need,” he said.
“Higher priced apartments are being built where traditionally affordable homes were, at increasing densities and this is what you get.”
Real Estate Institute of NSW president John Cunningham said that many older-style inner and middle-ring houses have been redeveloped into more expensive apartments, and now the majority of rental houses are older homes in the middle-ring and new housing estates on the fringe.
“There’s a massive shortage of houses leaving families no choice,” he told Domain’s Jennifer Duke.
Interest rates stay low
One market factor that always has the potential to affect both investors and owner-occupiers is a rise in interest rates. It has to come sometime – it always does, but at this point there’s no way of forecasting when it might happen.
The chief economist of UBS in Australia, George Tharenou, said home prices would remain flat next year, but “if you did have a combination of the RBA starting to raise interest rates on an outlook which is getting better, based on better jobs [numbers] and it intersects with a timing that foreign demand [for housing] is now starting to fall and banks continue to reprice mortgage rates you are running the risk of having a harder landing for the housing market."
ABC journalist and economist Ian Verrender, shared these concerns: “"A house price boom borrows growth from the future, and both NSW and Victoria will have to pay back some of that in the years ahead as today's housing prices gradually reconnect with reality."
The ABC’s Michael Janda’s conclusions were that, if everything that could go wrong does so suddenly in this year, consumers will spend less and unemployment will rise: “If people did start losing their jobs, they would be unable to meet their mortgage repayments, thus defaulting, causing losses for the banks, and with forced property sales driving prices even lower with the danger of a downward spiral.”
A July report from Deloitte Access Economics said that interest rates didn’t need to rise by much before it created "mortgage stress" in inner-city suburbs. "Interest rates are now a massively more potent weapon for slowing the Australian economy than they've ever been before," the report said.
"The Reserve Bank knows that, and so it will be taking baby steps as it increases the cost of capital once again."
Riki Polygenis, National Australia Bank's head of Australian economics says the RBA is unlikely to raise interest rates this year: "The RBA will still be wary of choking off the gradual recovery we're seeing through the non-mining economy, and they'd also prefer a lower currency," she said.
"So, rate hikes are still some way off and we don't actually have them pencilled in until 2019, with some chance of it being a bit earlier in the back half of 2018."
The California crisis
In case you hadn’t heard, California’s currently going through what is called there a ‘full-fledged housing crisis’ that has some similarities to the current situation in Sydney. Median housing costs are high and there’s a serious lack of affordable housing for middle-class families.
As the New York Times described it: “The median cost of a home here is now a staggering $500,000, twice the national cost. Homelessness is surging across the state.”
In Sydney, we wouldn’t consider a $500,000 median price ‘staggering’ by any means, even when converted to Australian dollars, but for Californians it can mean living in caravans or commuting two hours each way to get to work. It also means that the state has to make a lot of urgent changes to even begin solving its housing problems.
For years the state has resisted the pressures of development. Governments of local communities, the equivalent of our local councils, have knocked back projects they felt were ‘out of character’ with their neighbourhoods, leading to a serious shortfall in new housing construction. The state’s government is now considering ways to intervene and get more of these projects approved and urgently underway.
Issi Romem, chief economist of San Francisco-based BuildZoom, a company that helps homeowners find builders, says: “To accommodate all those people you need to build a lot, and the state’s big metro areas haven’t [built much] since the early ’70s. To catch up, cities would need to build housing in a way that they haven’t in two generations.”
A rapid catch-up in housing construction is, of course, precisely what’s been happening in Sydney and yet, despite an unprecedented construction boom of our own we still have the same high median prices and a lack of affordable housing. Increasing supply isn’t the answer to everybody’s housing problems.
The NSW government is looking at a housing affordability plan that might enable people now locked out of the Sydney market to lease affordable housing on a long-term basis. NSW treasurer Dominic Perrottet said he’s establishing a working group that will consider ways to implement a ‘build to rent’ sector of property development in this state.
The ‘build-to-rent’ industry, already working successfully in some parts of the US and manyEuropean countries including Germany and Denmark, is where large investors or institutions build blocks of apartments to be leased on a long-term basis. Each apartment cluster is managed by a single corporate landlord.
"Australians are renting in greater numbers and for longer periods. With this evolution comes the need for greater housing choice, housing diversity and improved security of tenure for renters," Mirvac chief executive Susan Lloyd-Hurwitz told the Australian Financial Review.
"Build to rent can provide secure, quality, long-term and professionally-managed rental accommodation in key urban locations providing people with this choice and security,” she said.
Who knows? The next economic cycle for Sydney property might just be driven by investment opportunities in affordable housing that would once again stimulate construction and lead to another boom that history shows is likely to happen almost as soon as the current one is over.
Sources:
‘NSW government to establish a build-to-rent property sector,’ Su-Lin Tan, Australian Financial Review, 12 August 2017
‘Plan could see renters settled for decades,’ James Robertson, Sydney Morning Herald, 12-13 August 2017
‘Sydney, Melbourne house price growth slows over month,’ AAP release in Sydney Morning Herald, 24 July 2017
'It All Adds Up' podcast episode 6: Five myths about the housing market busted,’ Fairfax media podcast, Sydney Morning Herald, 27 July 2017
‘The Cost of a Hot Economy in California: A Severe Housing Crisis,’ Adam Nagourney and Conor Dougherty, New York Times, 17 July 2017
‘Sydney apartment rents catch up with houses as experts raise doubts about ‘supply solution’, Jennifer Duke, Domain, 20 July 2017
‘High density Sydney: How your suburb rates, according to the 2016 census,’ Matt Wade, Sydney Morning Herald, 19 July 2017
‘Housing market sentiment falls in every state: NAB survey,’ David Chau, ABC News online, 14 July 2017
‘If disaster does strike, here’s how to get out unscathed,’ Jason Murphy, News.com.au, 5 August 2017
‘Housing market 'powder keg' could blow if interest rates rise,’ Michael Janda,
ABC News online, 18 July 2017
‘Sydney house prices jump again, but ‘days of double-digit growth are over’, Jennifer Duke, Domain, 20 July 2017
‘House price growth to slow further but not crash: UBS,’ Clancy Yeates, Sydney Morning Herald, 17 July 2017
‘Home ownership not a priority for one in three: Rising prices ‘changing Australian culture,’
Jennifer Duke, Domain, 9 August 2017
‘Sydney house and unit markets 'starting to decline' as tougher lending bites,’ Duncan Hughes, Financial Review, 7 August 2018
‘That whoosh? It's the Great Chinese Property Pullback,’ Nisha Gopalan , Sydney Morning Herald, 8 August 2017
‘Residential construction heading for 31pc three-year collapse,’ Michael Janda, ABC News online, 10 August 2017
The boom retreats, the bubble deflates, and a dream ends
Tue, 18 Jul 2017The latest – and greatest, Sydney property boom has now been with us for half a decade, and in that time prices have rocketed upwards by an average of $100,000 each year. In so many ways, things will never be the same again.
Prices are so high that for many would-be buyers they’re unaffordable. Who in 2012 would have thought the median Sydney home would ever change hands for $1.15 million? Indeed, who in 2012 would have thought that 78 Sydney suburbs could possibly have a median price of $2 million or more?
Domain’s Jennifer Duke summed up the dimensions of what’s happened to Sydney housing prices in recent times: “In 2012, the median house price was $646,000. Today, it is $1.15 million and the city’s population is largely split between property millionaires and perennial renters.
“Despite the record number of cranes in the sky and new apartment blocks in once suburban enclaves, the affordable options for new buyers have largely vanished.”
And what a cultural shift this has meant for Sydneysiders. We’re now building more apartments than houses, and rental rates are now so high that hopeful tenants with average incomes are virtually locked out of many parts of the city.
‘Rentvesting’, where tenants invest in property while renting elsewhere, is a growing phenomenon, and the traditional ratio of investors to homeowners has shifted from 30/70 to “more like 60/40” according to BIS Economics managing director Robert Mellor.
He warned that there will be huge “social and economic consequences” for Sydneysiders: “There will be a massive reduction home ownership by the under-35 age group. The look and feel of the city is changing dramatically. The next five or six years after the price growth will be critical to see what the future will look like.”
That bubble again
The ABC’s business editor, Ian Verrender, sees a bubble developing in more than just the Sydney property market. He says the problem for central bankers in Europe and Japan is that the bubbles they have formed — in property, stock and bond markets — are entirely of their own making.
“Since 2008, when the financial crisis was threatening to destroy capitalism, central banks have been manufacturing [money] by the petabyte (or whatever measurement is appropriate). The problem is, most of that created cash has been used — not for productive purposes, but for speculation.”
Although he points the finger at easy credit being behind the world’s various asset bubbles, he still sees property as being a critical element in the problem: “The real problem for the Australian economy, courtesy of the deluge of cheap cash flooding the globe, has been in real estate,” he says.
Sydney’s housing prices are overvalued by 14 per cent and Melbourne’s by 8 per cent, but the bubble will deflate, not burst, according a report by advisory group KPMG Economics quoted in The Australian.
KPMG chief economist Brendan Rynne predicted Sydney’s residential market would fall faster than Melbourne’s in the next few years, but this was likely to be “gradual rather than a collapse in the median dwelling price”.
“Whether the current Sydney and Melbourne housing prices constitute a bubble is a matter for debate, but we estimate that short-term factors have pushed median dwelling prices above their long-term equilibrium prices by about 14 per cent and 8 per cent respectively,” Mr Rynne said.
David Levy, an American economist and author and chairman of economic consultancy Jerome Levy Forecasting Center in New York, says that Australia’s housing bubble is ‘extraordinary’: "Australia will go through a contained depression – the RBA and rest of the government will not let its banking system collapse – but it will still be a relatively tumultuous process."
AMP's chief economist Shane Oliver told the Sydney Morning Herald he agrees: "I'm not in the camp that says the economy will crash. To get that we need higher interest rates and/or higher unemployment, and I don't think we will see that."
Dr Oliver does see house prices decreasing from their current peaks, with house prices falling 5 to 10 per cent and apartments falling more, by 15 to 20 per cent over the next two years. Maybe not a ‘crash’, but it would most certainly be a significant retracement.
What affordability?
Sydney house prices have risen so quickly over the past five and half years since the RBA began cutting interest rates that the problem of housing affordability is now almost impossible to solve.
The Guardian’s Greg Jericho says that during that period Sydney housing prices have grown at a rate that bears no relation to what has happened elsewhere in the economy: “The latest residential housing price data released…by the ABS showed that in the past year Sydney house prices grew by 14.4 per cent – the fastest in the nation.”
He also notes that NSW accounts for 41 per cent of the total Australian housing stock’s valuation, despite the NSW economy accounting for just 32 per cent of Australia’s GDP and population.
Advisory firm KPMG Economics says that Sydney’s housing prices are overvalued by 14 per cent, about the same as the rise in prices in the 12 months to March 2017.Using a method of calculation other than Domain’s it says Sydney’s median prices are expected to peak around $980,000 in the 2019 financial year, up from $880,000 in June 2016, and then gradually ease to between $930,000 and $950,000 by mid-2021, according to KPMG’s Housing Affordability report.
Will government actions to improve housing affordability work? Greg Jericho thinks not: “At this point, things are so dire in Sydney housing, that I can’t see policies such as those proposed in the NSW budget, to cut stamp duty for houses up to $650,000 and to increase the construction of homes, doing anything more than tinkering around the edges.”
Property prices in ‘affordable areas’ were expected to jump following the changes to first-home buyer stamp duty concessions that started July 1. There were even tales of vendors holding off accepting offers to take advantage of the expected increase in demand.
As it turned out, the entire Sydney market reversed a weak trend noted in the previous month and prices again resumed their upwards movement. Auction clearance rates remained in the 70 per cent levels and any concerns of a massive surge in either direction proved unfounded.
For those who espouse the theory that a looming housing surpluswill be a cure for Sydney’s affordability problem, there’s at least one analysis that shows a surplus of housing in Sydney is a long way off.
ABC business reporter Michael Jandaquoted Philip Soos of LS Economics who says that Sydney is the one city in Australia that has few worries about an oversupply of housing.
"I would say that Sydney, given that it has the highest rent-to-income ratio and also has the highest rent growth at the moment, is probably the most supply constrained," he observed.
BIS Oxford Economics, an economic consultant to some of Australia's largest property and building materials firms, has conducted its own analysis and doesn't see a huge national housing oversupply at the moment, nor does it see much of an undersupply, except perhaps in Sydney.
However, there’s growing acceptance of the idea that Sydney’s housing prices may well decline from their present highs, but the decline won’t be great and in any case, won’t be enough to make housing ‘affordable’ for average wage-earners.
Following from that is the argument that a percentage of all new housing should be deliberately conceived as housing that will be affordable, whether for purchasers or for tenants. But how could this be achieved?
An Urban Taskforce report released exclusively to The Daily Telegraph found that planning rules including those applying to ceiling heights, sunlight and floor sizes add $157,200 to the price of the average $750,000 two-bedroom, two-bathroom apartment in Sydney.
The report, by Sydney Planners HDC, architects Turner Studio and quantity surveyor John Ferrarin, found that rules requiring an extra 10sq m floor size for a two-bedroom unit add $100,000 alone to the sale price.
Urban Taskforce chief executive Chris Johnson has called on the NSW government to amend its planning laws to Melbourne standards for new projects that will contribute to housing affordability.
“The NSW standards are from well-meaning planners wanting big apartments that get lots of sunshine but these amenities come at a cost that is forcing many purchasers out of the market,” Mr Johnson said.
Foreign buyers react
At least the federal and state governments can point to one successful policy related to ‘solving’ the housing affordability crisis. Recent announcements of changes that penalise foreign buyers are getting a lot of notice from overseas investors, according to global news service Reuters.
“My phone never stopped, I charged my phone three times, no kidding – overseas clients, overseas agents, my channels in China,” said Shan Lin, a Sydney-based estate agent who deals mostly with Chinese-based investors.
“They definitely feel the pressure. They say, ‘Shan, look, I will not consider investing in Australia or investing in Sydney’.”
Incidentally, a Credit Suisse report found that foreigners account for a quarter of new housing sales in New South Wales, with Chinese investors the biggest buying group by far.
Also quoted in Reuters, SutonoPratiknya, a Sydney-based sales consultant, said the changes sent a clear signal to his overseas investors they were not welcome: “We used to do five property tours a month, picking up a dozen investors from the airport and showing them our latest offering. Now, there’s nothing.”
“It seems like the tax increases are never-ending,” said Esther Yong, a director of Chinese property agencies Sodichan and ACproperty. “I have buyers who were looking at Australian property and agents in China convinced them to buy in the U.K. instead.”
This slowing of demand might be a success from the governments’ point of view, but there were already signs of the market beginning to cool well before the legislative changes were announced.
“The fact is that a lot of developments hinge on foreign investment,” said David Bare, the NSW executive director at the Housing Industry Association. “Applying these measures when the market is starting to cool is going to have a much greater effect than it might’ve 12 or 18 months ago.”
Even as house prices keep rising, one important indicator is starting to head in the opposite direction. Sydney’s auction clearance rates have now dropped below 80 per cent in recent weeks, with the figure falling below 70 per cent on four occasions.
There’s no denying that tighter lending rules are beginning to have a noticeable effect on home loans to investors, with lending to property investors growing at its slowest rate in nine months - which is still equivalent to an annual rate of fifteen per cent, but a contraction nonetheless.Seasonally adjusted figures released by the Australian Bureau of Statistics show that the value of investor loans contracted 1.4 per cent in May following a 2.5 per cent fall in April.
As a consequence, owner-occupiers continued to grow in their percentage of total loan activity, with the value of loans to this group up 2.9 per cent - the fourth consecutive month owner-occupier lending has grown. First home buyers' share of the market was also rising, up to 14 per cent of total mortgage commitments from 13.8 per cent in April.
JP Morgan's Henry St John told ABC News that the noticeable slowdown in investor lending was likely to soon become a drag on prices: "The private measures of house price growth suggest some moderation is already taking place, although it is too early to assess the full impact that these measures are having”, he said.
Hans Kunnen of Compass Economics has a short explanation for the cause: “Each nudge up in house prices knocks a few more buyers out of the market,” he told Domain. He also said that falling auction clearance rates could be put down to “buyer fatigue and APRA induced rate hikes”.
The dream is over
Perhaps it’s not surprising that new research commissioned by the publicly listed mortgage broking firm Mortgage Choice found that more than 60 per cent of Australians believe only the wealthy can achieve the “Great Australian Dream” of home ownership.
Home ownership is taking a battering. Australian Bureau of Statistics data shows that the home ownership rate in Australia decreased to 67 per cent in 2011 from 68.9 percent in 2006. The national home ownership rate averaged 69.2 percent from 1966 until 2011, reaching an all-time high of 71.4 per cent in 1966 and a record low of 67 per cent in 2011.
Figures from Domain tell us the nationwide home ownership rate dropped 1.5 per cent to 65.5 per cent between 2011 and 2016. In Sydney, the ownership rate has dropped three per cent according to Grattan Institute fellow Brendan Coates: “Home ownership rates have fallen in [Sydney] by three per cent, more than double the pace of the decline seen nationwide,” he said.
The ‘Great Australian Dream’ study found that more prospective home buyers are willing to compromise in their property choices. Apartment ownership is now increasing in acceptability for those who previously wanted a free-standing house.
Mortgage Choice chief executive John Flavell told Domain’s Chris Tolhurst this was evidence that apartments were becoming a popular property option among Australians: “While some buyers are choosing to purchase apartments for the lifestyle options they offer, a lot of people are seeing them as a cheaper way into the market. From the data, it is clear that Australians are keen to use a variety of purchasing strategies in order to achieve their property ownership goals.”
After the fall
What might happen if those wishing housing prices were lower suddenly got their wish? A housing downturn might not have many benefits for anybody, least of all those wanting prices to fall.
Economist Saul Eslake crunched some numbers and came up with a few surprises. First, how about a $50,000 drop in prices: “It certainly wouldn't make much difference to anyone's ability to purchase with the price at the median currently in excess of a million," he said.
Wouldn’t a price fall put lots of properties on the market as owners dumped their former investments? Mr Eslake said Australia isn’t like America where this would be a possible outcome.
"It's never going to be rational for Australians ... in a position where they owe more on their property than their property is worth to walk away from a mortgage in this country," Mr Eslake told ABC News. "History shows, Australians will go to considerable lengths to avoid putting themselves in that position."
He said the consequences of a sudden property price drop could well include greatly reduced consumer spending, leading to increased rates of unemployment and greater restrictions on borrowing for housing purchases.
The head of the School of Economics at the University of Sydney, Professor Colm Harmon, cited his experience in Ireland during the GFC when housing prices collapsed: "The idea that some big shock is needed is wrong. The Irish experience is one where prices started to fall before the shock."
He said that as consumer confidence in Ireland fell, so did prices. Figures out last year from Ireland's statistics office showed a 54 per cent drop in prices from 2007 to 2013.
Fortunately for most of us, indications at present are that Sydney prices will decline but not drastically over the next couple of years, and most of the gains made by property owners in Australia’s biggest city over the past five years will be retained. However, it’s sadly obvious that affordable options for new buyers are unlikely to reappear.
Sources:
‘Blowing bubbles: The new world economic order,’ Ian Verrender, ABC News online, 4 July 2017
‘Who would move to Sydney? The harbour city has priced itself out of reach,’ Greg Jericho, The Guardian, 4 July 2017
‘Housing surplus raises real estate crash risks,’ Michael Janda, ABC News, 4 July 2017
‘Almost two-thirds of Australians see home ownership as something for the wealthy, survey finds’ Chris Tolhurst, Domain, 19 June 2017
‘What does a housing slump actually look like?,’ Jessica Haynes, ABC News online, 6 June 2017
‘The aftermath of the boom: How five years of soaring prices has changed Sydney,’ Jennifer Duke, Domain, 25 June 2017
‘Sydney real estate: Strict planning rules add thousands to apartment prices, new report reveals,’ Annabel Hennessy and Christ Harris, The Daily Telegraph, 19 June 2017
‘The aftermath of the boom: How five years of soaring prices has changed Sydney,’ Jennifer Duke, Domain, 25 June 2017
‘Sydney property prices ‘14pc too high’, Melbourne’s 8pc,’ Business Review, The Australian, 21 June 2017
‘Sydney prices to jump ‘overnight’ as first-home incentives kick in: experts,’ Jennifer Duke, Domain, 24 June 2017
‘Housing affordability: NSW Treasury documents offer no relief to Sydney home hunters,’ Greg Miskelly and Michael McKinnon, ABC News online, 19 June 2017
‘Census 2016: The Australian cities where home ownership declined the most,’ Nicole Frost, Domain, 28 June 2017
‘Property investor lending continues to slow as mortgage repricing bites.’ Stephen Letts, ABC News online, 12 July 2017
‘Census 2016: Properties stand idle as home ownership sinks to a 60-year low,’ Peter Martin, Sydney Morning Herald, 28 June 2017
‘Sydney housing market enters ‘new phase’ as auction clearance rates head south,’ Jennifer Duke, Domain, 27 June 2017
‘Are Chinese investors turning their backs on Australia after the foreign buyer tax hike?,’ Jonathan Barrett and Tom Westbrook, Reuters, 14 June 2017
‘House prices showing signs of cooling as impact of apartment boom hits,’ Stephen Letts, ABC News online, 21 June 2017
‘Sydney property prices ‘14pc too high’, Melbourne’s 8pc,’ Business Review, The Australian, 21 June 2017
A package, a hit on overseas buyers, a bubble and a peak
Wed, 14 Jun 2017It’s been a big month for Sydney property. One important development was the Berejiklian government’s release of a package of measures intended to improve housing affordability, clearly favouring first home buyers over investors in a softening market.
When Premier Gladys Berejiklian first came to power in January this year she said housing affordability was ‘the biggest issue people have across the state’: "I want to make sure that every average, hard-working person in this state can aspire to own their own home," she said.
Making her announcement of the new housing affordability package, Ms Berejiklian said her government was doing everything it can to level the playing field for first home buyers. She indicated the measures would cost the State Government an estimated $1.2 billion, but added that a new surcharge on foreign investors would offset some of the increased costs.
The measures that come into effect on July 1 include:
Stamp duty for first home buyers on existing and new homes up to $650,000 will be abolished;
There will be stamp duty discounts for properties worth up to $800,000;
No stamp duty will be charged by banks on lenders’ mortgage insurance if it is required for first home buyers with limited deposits;
The foreign investor surcharge, introduced last year, will be doubled from four to eight per cent on stamp duty;
Overseas buyers will pay an additional two per cent surcharge on land tax (up from 0.75 per cent);
To help first home buyers compete with investors, the government will remove stamp duty concessions for properties bought off the plan; and
The government has scrapped a $5000 grant to all purchasers of new homes and reduced eligibility for a $10,000 first home owners grant.
NSW treasurer Dominic Perrottet told ABC News that the thresholds for stamp duty and concessions had been carefully considered: "The median price in Sydney is $700,000 for an apartment. We believe this is an incredibly generous package and one that provides great support for first home owners."
Figures from industry research firm CoreLogic show that over the past 12 months 45.4 per cent of dwellings sold in NSW had a price tag of $650,000 or less, and 58 per cent had a price tag of $800,000 or less. That’s across all of NSW, but just within the Sydney metropolitan area only 25.8 per cent of sales in the past year were under $650,000.
The government noted that in recent years the number of first home buyers has been declining as investor numbers grow. According to the Australian Bureau of Statistics, first homebuyers made up just eight per cent of owner-occupier mortgage commitments in March, well below the long-term average of 17 per cent.
(However, figures released by the Australian Bureau of Statistics also show home loans to investors as a proportion of all loans fell 1.25 per cent in March to 48 per cent, down from a high of over half of all home loans in January.)
Other measures in the state government’s package targeted increased supply of housing, including allowing councils to borrow more money for infrastructure at reduced interest rates to accelerate rezoning around new developments.
"The State Government will support up to $500 million in additional borrowing by councils by halving the cost of borrowing for eligible projects through infrastructure subsidies," said housing minister Anthony Roberts.
“The Government will also boost the use of independent panels for Sydney councils to ensure development applications were dealt with swiftly."
The minister also said that approvals for ‘well-designed’ terraces, town houses and dual-occupancy dwellings would be fast-tracked by expanding the code for complying developments.The government promised $3 billion in infrastructure funding to accelerate delivery of housing, and unveiled proposals to streamline planning.
Overall, the government estimates its changes to stamp duty will save first home buyers around $25,000 for most purchasers, and if applied in full the total package could equate to more than $34,000 in savings.
Not everyone agrees
The NSW government’s announcement received criticism from many housing industry experts who cautioned that the contents of the housing package could increase demand and therefore push up prices.
CoreLogic says that removing or reducing the transactional costs for first homebuyers is likely to provide both positive and negative consequences as it is “widely accepted that policies aimed at stimulating demand tend to push prices higher”.
CoreLogic’s head of research Tim Lawless told News.com’s Frank Chung:“Abolishing stamp duty for first home buyers is likely to create some headaches for eligible buyers who have recently entered into contracts. Additionally, we can expect first home buyer activity to stall before surging higher on July 1 2017. The long-term outcome may be self-defeating due to higher demand pushing up prices.”
Professor Peter Phibbs, head of Urban and Regional Planning and Policy at the University of Sydney, said the government’s measures were based on a desire for "political popularity"and could leave behind "an enduring legacy of sustaining house price inflation".
"We've got a 30-year history in Australia of giving first home owners more money, and it only adds to the price”, he said. "If you were really trying to help first home buyers, you'd try to supply some stock that is affordable."
A May 19 article in Domain, reporting on a study on housing supply, pointed out another problem that the government’s price limitations fail to address: “The study shows 80 per cent of new unit approvals were in the top 20 per cent of local government areas with the highest unit prices.
“This is while 80 per cent of new house approvals were in the top 40 per cent of local government areas with the highest house prices. There is very little new supply in areas where house prices are lower, where households on low to moderate incomes can afford to live.”
A new report by the Australian Housing and Urban Research Institute and the Bankwest Curtin Economics Centre also says thatmost growth in housing supply has been in the upper price range.
The report concluded that “most new housing stock in Sydney is in the middle to high price range and fails to improve housing affordability by ‘trickling down’ to lower prices for those on low incomes.”
The report also noted that “housing tax preferences and asset test concessions” such as negative gearing and the capital gains tax concession “increase the demand for housing by encouraging the accumulation of savings in housing wealth”.It said these helped fuel house prices by adding to demand, in turn making “supply-side reform even more important” if governments are unwilling to curb the concessions.
Even former Reserve Bank of Australia governor Glenn Stevens, who advised the NSW government on the housing affordability package, gave it only qualified support. He said the government must try to increase supply and not rely too heavily on "demand side" subsidies that inflate house prices.
In his report on the package, Mr Stevens warned of the risks in slugging foreign home buyers at a time when the real estate market appeared to be slowing: "One area for caution might be demand side measures like taxing foreigners. If foreign purchasers are slowing down anyway, we may not want to push them down further," he said.
Hitting foreign buyers
The impact of overseas buyers on the NSW housing market is a matter for lively debate. Foreign citizens accounted for about 11 per cent of home purchases across NSW in the September quarter last year, according to NSW government data.
It’s generally acknowledged that strong demand for Sydney property from overseas buyers has been a significant contributor to the city’s ever-rising prices. A May survey for the ABC program ‘The Conversation’ found that Sydneysiders are seriously concerned about foreign investors pushing up the cost of housing.
The Conversation’s researchers Dallas Rogers, Alexandra Wong and Jacqueline Nelson asked 900 Sydney residents over 18 years of age for their opinions on foreign investment in the property market and found a majority said they believed foreign investors should not be allowed to buy residential real estate in Sydney.
The most commonly nominated driver of house prices (64 per cent of respondents) was ‘foreign investors buying housing’, and more than three in four participants (78 per cent) agreed with the statement "foreign investment is driving up housing prices in greater Sydney".
For a number of reasons, clouting foreign buyers with additional costs on their property purchases might at first glance seem a good idea.First, it would raise money that can be used to subsidise local first home buyers and reduce their purchasing costs. Secondly, it might deter some overseas purchasers, thereby reducing competition for property in general and taking some of the upwards pressure out of the market many analysts see as ‘overheated’.
But it’s not that simple. The Urban Development Institute of Australia (UDIA) warned that the increase in taxes on foreign buyers could ultimately raise prices because developers rely on pre-sales, largely to overseas buyers, to raise the capital needed to start construction.
This is supported by Domain’s Jennifer Duke who said: “Despite the promises of a ‘beautiful new lifestyle’ and ‘high quality fitments throughout’ in their finished products, the focus of developers is always on pre-sales to ensure a project goes ahead.”
UDIA NSW says any resulting drop in the number of foreign buyers could lead to projects being cancelled, thereby worsening Sydney’s undersupply crisis: “You can’t expect to make things cheaper by increasing the tax on it,” UDIA NSW chief executive Steve Mann told News.com’s Frank Chung.
“Australian buyers won’t benefit from reduced competition if there’s fewer properties being built and sold. Every percentage point makes a difference in the development industry. Even though foreign buyers are only 11 per cent of the market, that could be enough to prevent thousands of new homes being built for Australians.”
Chinese investors are already beginning to leave the Melbourne property market, according to Ming Li, a real estate agent in that city’s eastern suburbs who specialises in selling Australian property to Chinese investors.
"The Melbourne apartment market is cooling down," he told ABC News’ Emily Stewart."It is kind of [an] oversupplied market, and the Chinese investors are losing their interest in buying an apartment in Melbourne. The capital gains return is so low."
He said that another reason for the downturn relates to the Chinese government's restrictions on its citizens' ability to move money offshore: "The Chinese government's new policies only allow Chinese individuals to transfer about $US50,000 overseas, per head per year; if it is more than that amount, they need to submit [an] application to authorities, and it becomes harder and harder."
There are some fairly important changes to Australia’s federal legislation in the May budget that also impactforeign buyers - as of July 2017, anyone whose home sells for $750,000 or more will have to submit a clearance certificate proving they are not a foreign investor or face having an increased 12.5 per cent of the sale price withheld from the seller and given tothe AustralianTaxation Office.
New laws in effect from July 1 this year will also require the sellers of property to prove they are Australian citizens when selling a home worth $750,000 or more. This new law is expected to affect 60 per cent of the property market Australia-wide, yet few vendors know about this new requirement.And it’s going to affect a high percentage of property transactions. An analysis of Sydney auction data from a recent weekend by Domain Group found that only 44 of 836 properties sold for less than the threshold amount.
Australian housing bubble
A growing number of mainstream economists and government policymakers are now acknowledging that Australia has some kind of housing bubble.According to economist Philip Soos: "There certainly is a housing bubble in Australia. Since 1996, we've seen housing prices inflate above all known fundamentals, such as GDP, inflation, income, rents and population growth."
Australians are holding more debt than ever before, he said: "Australia has accumulated the world's second highest household debt to GDP ratio at 123 per cent and rising.All countries that have a ratio above 100 per cent have experienced or are currently experiencing a housing bubble."
Citigroup Inc. chief economist Willem Buiter said Australia is experiencing a "spectacular housing bubble" which needs to be addressed with tougher regulatory measures: "It had better be focused on immediately, to try and tether a soft housing landing," Buiter said. "Clearly if these things are not managed well they can be a trigger for a cyclical downturn."
And even if they haven't used the word ‘bubble, analysts such as Chris Richardson and Shane Oliver have clearly inferred people would be making a very brave decision to buy property now, especially in Sydney with its sky-high prices.
Some respected analysts have already gone public with predictions of how far the market could tumble if the bubble should actually burst. Most agree that the worst-case scenario would be something like a 10-15 per cent drop, which would really just wipe out gains from the past twelve months or so.
The ABC’s Michael Jandahas offered his own set of circumstances that could lead to the long-awaited bubble burst:
Australia’s record household debt has now reached around 189 per cent of incomes and more than 123 per cent of GDP;
An increase in interest rates, especially if combined with tightened lending standards;
An increase in costs resulting from a falling Australian dollar; and
An increase in unemployment.
He also notes that anything generating a sudden number of forced sales could start a cascade of falling prices as vendors cut prices to quit unprofitable investments, such as happened in the US, Ireland and Spain and more recently in Western Australia: “Economic cycles are great on the way up, but the spiral back down can be very painful, especially in markets with low liquidity where the adjustment can take years, not days or months” says Mr Janda.
Is the peak behind us?
With an underperforming economy and the prospect of negative economic growth over the March quarter increasingly likely, together with the likelihood of further mortgage rate increases from the major banks, additional stimulus from the Reserve Bank from an official rate cut in the next few months remains a possibility.
Meanwhile, auction clearance rates remain high and good numbers of properties are on offer in Sydney each weekend – even a record number of sales for a June auction, all well ahead of the corresponding weekend in 2016. Median prices are also well ahead of the same weekend last year, something like 17 per cent higher.
But not all indicators are positive for further strong price rises. During the first week of June figures from CoreLogic show that Sydney prices declined by 0.1 per cent after falling 0.5 per cent the week before. The decline over the month of May was 1.3 per cent. These aren’t massive falls by any means, but are a change from several months of consecutive increases.
CoreLogic's head of research Cameron Kusher cautioned against calling this ‘an end to the property boom’: "We haven't called the peak of the market yet. We want to see more data, we don't want to jump in too early," Mr Kusher said.
St George senior economist Janu Chan said in a Bloomberg article: "It appears that a perfect storm of factors have dented confidence in housing, and led to some heat coming out of the market. Nonetheless, we do not expect widespread large-scale price falls given that interest rates are expected to remain low, and absent a spike in unemployment."
Greg Jericho, writing in The Guardian, says that no state in Australia had more building approvals this April than in the same month last year: “The latest construction data, which saw a 0.7 per cent fall in the March quarter, has some economists thinking the [next set of] GDP figures could show the economy went backwards in the first 3 months of this year.
“And the latest building approval figures…certainly do nothing to suggest work in the building sector is flourishing. In the past year approvals for private sector houses have fallen eight per cent and for apartments and flats, 19.7 per cent,” he said.
Angie Zigomanis, BIS Oxford Economics property analyst, expressed a similar outlook: "If you look at apartment approvals, which is a bit of a reflection on apartment off-the-plan demand, they peaked 18 months ago, and [now] they have started to slow,”he said
He said prices had peaked, but that predictions of a sharp fall were wrong: "We think prices can be justified by population growth, interest rates, demand and employment growth," he said. "In some ways, prices are priced to perfection.In the next two to three years, we don't see a big shock which will push prices down."
ANZ’s Chief Executive Officer Shayne Elliott said home prices in Sydney are “very inflated” in an interview with Bloomberg Television. However, when asked whether a crash is looming, Elliott replied it was “a really low probability, but it is certainly something we stress test a lot, and think about.”
S&P Global Ratings director Sharad Jain said his base case for the housing market is an "orderly unwind" of house prices he outlined at The Australian Financial Review Banking and Wealth Summit in April: "We still maintain our base case expectation that the unwinding of these imbalances will be orderly, and we think that will be either a slowdown growth rate of property prices or a very mild decline in property prices. That is our base case."
Journalist Michael Pascoe is a contributing editor to ‘Business Day’. He recently looked at the Australian housing market and concluded: “It looks like the housing supply side is correcting before prices fall off a cliff. The regulators' efforts to curtail investor and lender enthusiasm is likely to end up supporting prices by preventing oversupply.”
The editor of the monthly report from property monitor Residex also sees an easing but nothing in the way of a crash: “My view is that conditions in Sydney and Melbourne will continue to moderate due to less demand from investors, affordability barriers, and an overall weakening in housing related sentiment as well as the disincentive of higher mortgage rates and stricter credit policies from Australian banks.”
John McGrath, founder of the McGrath real estate advisory business, dismissed concerns of a property "bubble" saying in his weekly column in the ‘Switzer Daily’ that he has seen such talk "time and time again over 30 years and the 'doom and gloom' predictions simply haven't eventuated".
In his opinion, the pace of growth in property prices will slow down but not stop - prices will keep growing but at a lesser rate per year: "We have a minor correction, where the market will do as it has done before and give back about half of the prior year's growth, so that would be around five per cent," he said.
"Neither scenario is cause for panic. If the boom is indeed over."
Sources:
‘Australian house prices ‘very inflated’, ANZ chief executive Shayne Elliott says,’ Emily Cadman, Domain, 7 June 2017
‘Sydney, Melbourne home price falls pause,’ AAP and Business Day, 6 June 2017
‘First home buyers to have edge over investors under NSW housing affordability package,’ Sarahm Gerathy, ABC News online, 2 June 2017
‘Housing affordability package benefiting NSW first home buyers to be announced,’ Brigid Glanville, ABC News online, 1 June 2017
‘Premier Gladys Berejiklian announces housing affordability reforms,’ Sean Nicholls, Sydney Morning Herald, 1 June 2017
‘NSW housing package ‘may push up prices’,’ Frank Chung, News.com.au, 2 June 2017
‘Chinese investors pull out of Melbourne apartment market,’ Emily Stewart, ABC News online, 26 May 2017
‘Berejiklian's full housing tax break: about 25pc of Sydney properties, analysis shows,’ Lisa Visentin, Sydney Morning Herald, 3 June 2017
‘NSW slugs foreigners to help first home buyers,’ Geoff Winestock, Australian Financial Review, 1 June 2017
‘Sydneysiders blame foreign investors for high housing prices: survey,’ Dallas Rogers, Alexandra Wong and Jacqueline Nelson, ABC News online, 31 May 2017
‘Foreign’ until proven otherwise: ‘Subtle’ 2017 budget change affects thousands of sellers,’ Jennifer Duke, Domain, 3 June 2017
‘Strong results for Sydney auction market with late surge in listings for big May weekend,’ Dr Andrew Wilson, Domain, 22 May 2017
‘What will sink the housing market and drown property investors?,’ Michael Janda, ABC News online, 30 May 2017
‘House prices in Australia's big cities fell again in May,’ David Scutt, Business Insider Australia, 30 May 2017
‘House prices go into reverse for first time in 18 months,’ Emily Cadman , Sydney Morning Herald, 1 June 2017
‘How quickly talk changes: from ever-booming house prices to fears of a hard landing,’ Greg Jericho, The Guardian, 1 June 2017
‘Home prices ease across capital cities,’ Prashant Mehra, Australian Associated Press, 22 May 2017
‘Get used to your commute: data confirms houses near jobs are too expensive,’ Rachel Ong, Christopher Phelps, Gavin Wood, Steven Rowley, Domain, 19 May 2017
‘John McGrath bursts property bubble 'myth',’ Carolyn Cummins, Sydney Morning Herald, 1 June 2017
‘Increased housing at top end not 'trickling down' to help poor, report finds,’ Paul Karp, The Guardian, 18 May 2017
‘Residex Repeat Sales Index Hints at Easing Housing Market Conditions in April,’ Residex Report, CoreLogic, 4 June 2017
‘House price risk hits small banks,’ James Frost, Australian Financial Review, 23 May 2017
‘Have we finally reached 'peak' house prices in Sydney and Melbourne?’ Richard Holden, The Conversation, 2 June 2017
‘Doom and gloom: Property market scaremongers need to pipe down,’ Michael Pascoe, Sydney Morning Herald, 3 June 2016
‘Developers stuck in ‘limbo land’ as record supply fails to deliver affordability,’ Jennifer Duke, Domain, 17 May 2017
‘Stop building apartments for investors and start building for future generations,’ Jennifer Duke, Domain, 29 March 2017
‘Sydney has biggest ever June auction Saturday with 789 homes bid on,’ Dr Andrew Wilson, Domain, 5 June 2017
More price rises, investor worries and the magic pudding of supply
Tue, 16 May 2017The May 9 federal budget’s promised ‘housing affordability package’ turned out to be amixed bag of 15 measures aimed at "reducing pressure on housing affordability". These measures might bring a bit of relief to low-income tenants, restrict investor lending to some extent, help older Australian downsize their homes, and raise the hopes of some first-home buyers, but are unlikely to have a major impact on Sydney property prices.
The budget left negative gearing and the capital gains tax discount untouched, except for slight capital gains tax changes for foreign buyers and temporary residents. It cracked down on some concessions related to investment housing, as well as tighteningallowances for foreign investors.It even got down to the finer details like preventing property investors from claiming a tax deduction for travel to and from properties they own.
Overseas investors will be charged $5,000 if they don't occupy or lease their property for at least six months each year, and will face new capital gains taxes when their properties are sold. Also, developers can’t sell more than 50 per cent of new developments to overseas buyers, although it’s unclear how these strictures will be applied or policed.
First-home buyers have been given a new First Home Super Saver Scheme that will allow first home buyers to funnel some of their income into super accounts at a lower tax rate than normal. This, according to the Government, will help first-home buyers to save a deposit 30 per cent faster.
Older Australians get a new incentive to downsize. From July 1, 2018, if they’re over 65 each Australian will be able to put up to $300,000 from the sale of their family home into super, meaning a couple selling a median-priced home in Sydney can put up to $600,000 into their super before they go shopping for their new home. Unfortunately, they’ll still be paying many thousands of dollars in stamp duty when they purchase a ‘downsized’ property.
Faster growth
The start of this year has seen more astounding growth in Sydney house prices, and there was little in the budget that might stem their upwards trajectory. The rate of annual price growth has now reached 19 per cent and statistics compiled by Domain show the Sydney medianhouse price has now reached $1.15 million.
According to property researcher CoreLogic, house values in Sydney are now growing at their fastest annual rate since 2002.Interestingly, the figures for the first 27 days of April show Sydney house prices declining by 0.1 per cent for the first time since December 2015, but whether this is the start of a trend or just a statistical ‘blip’remains to be seen.
Fairfax journalist Clancy Yeates says the small drop in prices is not a dramatic change and the publicity it received is a sign that things in the housing market are ‘getting out of hand’:“Further complicating things, the figures take in a month that included Easter and the ANZAC Day long weekend, not to mention a regulator crackdown on interest-only home loans.”
Data from Domain show that 78 Sydney suburbs now boast a median house price of $2 million or more. Five years ago the list showed the names of only six suburbs, prompting Domain’s Dr Andrew Wilson to quip: “Two million dollars has become the new $1 million rather quickly.”
However, a recent report, ‘No Place Like Home: The Impact of Declining Home Ownership on Retirement’, by economist Saul Eslake, says that the rate of home ownership inAustralia, which peaked at around 73 per cent in the mid-1960s, has fallen to around 68 per cent today.We aren’t the nation of homeowners we used to be.
The report also says the proportion of home owners who own their homes outright has declined even more, from a peak of 61.7 per cent at the 1996 census to 47.9 per cent at the 2011 census.
“We’re creating a city of winners and losers,” said head of Urban and Regional Planning and Policy at the University of Sydney, Professor Peter Phibbs. “There are fewer and fewer options in Sydney for people on middle and lower incomes.”
CoreLogic’s head of research, Dr Tim Lawless, says that a clear divide has emerged between types of property across Australia, with houses growing at a faster rate than units and apartments (13.4 per cent versus 9.8 per cent across all capital cities).
He added that the weaker price growth of units and apartments reflects high levels of new supply in some inner-city suburbs and also suggested that "consumer confidence has been negatively affected by the warnings of a potential unit oversupply".
CoreLogic’s figures also show that dwelling prices in all Australian capital cities except Sydney have grown at a slower pace since the start of the current decade to what was seen between January 2000 and February 2007. According to CoreLogic, prices in Sydney have grown by 78.3 per cent since January 2010, well above the 61.1 per cent increase seen from January 2000 to February 2007.
The peak?
Shane Oliver, AMP’s chief economist, thinks we’ve probably seen “the peak in the momentum” of price growth: "Housing is a central part of the Australian economy and it has a big impact on the economic cycle," he commented.
Global investment banking giant UBS says the Australian market has peaked. The UBS economic team said it usually takes rising interest rates to stop the upward phase of a property cycle, but allows for Sydney’s extended boom to be a bit different.
"While the historical trigger (RBA interest rate hikes) for a housing downturn is missing, mortgage rates are rising, and sentiment of home buying collapsed to a [near] record low," wrote Scott Haslem, George Tharenou and Jim Xu from UBS.
"Hence, we are 'calling the top', but stick to our forecasts for [dwelling construction] commencements to 'correct but not collapse' to 200,000 in 2017 and 180,000 in 2018."
So, as UBS sees it, the fire under the boiler’s about extinguished but there’s enough steam in the vessel to keep things bubbling along for a while. UBS sees the residential building boom topping out at roughly current levels in the second half of this year, before starting to ease off in 2018.
And how about prices? While UBS sees building activity dropping steeply, it does not see prices following the decline: "While we see a sharp correction for activity, which would not be unusual following a prolonged boom, we still don't expect a collapse of prices which would have a broader negative feedback loop for the labour market and economy," the investment bank predicted.
UBS is tipping around seven per cent annual price growth over 2017, down from current levels of around 13 per cent, and zero to three per cent growth next year.
Looking ahead over the next 18 months, Citi bank analysts Paul Brennan, Josh Williamson and Vivian Jang predict a fall of up to seven per cent in house prices. The trio believe that moves by the Australian Prudential Regulation Authority (APRA) to cool the housing market will be more effective than previous attempts, and conclude that a ‘partial correction’ is likely for Sydney.
Compare this to the NAB survey of market professionals in the March quarter which produced forecasts of house price growth in Sydney this year of 10.5 per cent, cooling to 4.9 per cent over 2018. Units were forecast to gain 9.7 per cent in Sydney this year, but then become flat next year.
Then look at the forecast from Michael Matusik, an independent property analyst, who is slightly less optimistic about Sydney saying it’s going up five per cent to 7.5 per cent in the twelve months to March 2018.
The numbers vary when it comes to forecasting the degree of the rise in prices of Sydney property, but there’s general agreement that the only way is still up – with the possible exception of units in some overbuilt metropolitan areas once the additional supply now under construction comes onto the market in 2018.
Louis Christopher, head of SQM Research, says “Our opinion is that the market continues to boom and APRA will likely have to step into the market later this year.”
That bubble again
Is our housing market in a ‘bubble’? It’s hard to say, not least because the definition of a bubble is vague and varies widely, depending on who’s defining it. Dr Timo Henckel, a lecturer at the Research School of Economics, ANU, says we’re in one now.
“There are plenty of arguments why current house prices are exactly where they should be, based on the fundamentals,” he said.
“But in my opinion these explanations do not pass the smell test: double digit increases in house prices, combined with unprecedentedly high household debt (more than 120 per cent of GDP, the third highest in the world) and household debt servicing ratios (also the third highest in the world), make for a precarious situation.”
The ABC’s Ian Verrenderalso thinks we’re in a bubble, and says: “The problem, as is usually the case with bubbles, is that no-one really wants it to deflate, let alone allow it to burst. The consequences are unthinkable. And all the action so far taken to slow it has failed.”
If there really is a ‘bubble’ out there in the real estate of greater Sydney, the government hopes it’s one that can be gently deflated. Which is why it’s scrupulously avoiding actions that might cause it to pop with disastrous consequences for owners and investors.
“We are already seeing signs the heat in our housing markets may be coming off, especially in the apartment market,” Treasurer Scott Morrison says in notes seen by Guardian Australia. “Cooling foreign investor interest, due to tougher foreign investment rules implemented by our government and capital outflow restrictions in China, are already having an impact.
As a sign the building boom is nearing its end, March figures from the Bureau of Statistics showed a 13.4 per cent slide in building approvals for dwellings, led by a 22.5 per cent slump in apartment approvals. There was also a 4.3 per cent drop in the detached house sector.
Westpac Bank's Matthew Hassan says the drop was primarily due to the previously booming high-rise apartment sector: "The detail points to a virtual collapse in 'high-rise' approvals, down about 50 per cent month-on-month to the lowest monthly reading since July 2013," he wrote.
Mr Hassan said recent data point towards a faster end to the construction boom than had previously been anticipated: "Overall this is clearly still a very weak update with the pull back in high rise pointing to a more aggressive downturn than previously suggested," he wrote.
Investor lending concerns
Australia’s largest mutual bank, CUA with an $11 billion loans book, has stopped writing new loans for property investors: “In response to continued growth in our investor lending and forward projections of this growth, we’ve taken the decision that we need to temporarily pause new investor lending,” said CUA’s chief operating officer Andy Rigg.
Investors have unquestionably been the drivers of Sydney’s exceptional housing price rises. They come in all types and sizes, from the ‘mum and dad’ investors who buy an investment unit to the professionals who own more than a dozen properties. But most have one aspect in common: they borrow to acquire funds for their investments.
It’s all smooth sailing when prices are rising and investments show a probable profit when the properties are sold. But what happens when prices fall?
Bank of Queensland chief executive John Sutton summed it up when he revealed that some of his competitors were offering maximum loans of up to 30 per cent more than BoQ was prepared to write. He gave the market a timely warning: "This will end in tears."
Claire Moodie at ABC News put together a story for the 7.30 Report about plummeting property prices in Perth that shows what happens when too many property investments are made without adequate consideration about what might happen over time.
When the mining boom was generating high incomes and people in Perth had money to invest they borrowed to grow their funds even more by investing in property. As one would expect, property prices surged and borrowings increased accordingly.
Perth’s median house price peaked in 2014. Since that time, the mining boom has tapered off, unemployment has risen, the cost of living has gone upwards, and property prices have dropped dramatically. Owners and investors are now experiencing housing stresses they never expected.
Perth property valuer Gavin Hegney said there were lessons for policymakers to be learned from developments in Perth: "You probably want to be planning policies now for when the market comes off, and it will come off. What policies then should we implement to soften the blow of the market?”
APRA takes action
The Australian Prudential Regulation Authority (APRA) recently put new controls on interest-only loans and investor lending by banks. APRA chairman Wayne Byers said this would help protect the economy.
"Our objective with these new measures is to ensure lenders are recognising the heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions," he said.
Interest-only loans are seen as riskier than principal and interest loans because once the interest-only period ends, borrowers have to pay both interest and principal in less time. Borrowers also wind up paying more interest over the lifetime of the loan.
However, analysts said that moves by APRA to take some of the heat out of the housing market aren’t enough to deter investors.Morgan Stanley said that APRA’s latest measures would reduce higher-risk lending but wouldn’t “materially slow growth in investment property”.
Macquarie Wealth analysts say APRA’s controls on investor lending and interest-only loans allowed the banks to continue lending but would place constraints on the runaway housing market.Macquarie said that cutting the cap would have destabilised the housing market, noting that settlements on new developments over the next 18 months are estimated to be 5-6 per cent of total loan flows.
Reserve Bank governor Dr Philip Lowe has said he appreciates APRA’s efforts but noted that conditions in housing vary markedly across Australia: "In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining," he said.
"In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for two decades."
He also said that lenders should adjust their loan requirements for current market conditions and that it would be a positive development if the number of interest-only housing loans would decrease.
Another regulatory body, the Australian Securities and Investments Commission (ASIC) said it would start surveillance of interest-only lenders and mortgage brokers who recommend high numbers of interest-only loans.
ASIC chairman Greg Medcraft said ASIC is concerned about a surge in interest-only loans to property buyers — both investors and owner occupiers: "If your repayment is lower because you're only paying interest and you ignore the fact that you will eventually need to pay the principal, that is a concern if you can't afford it," he told ABC News.
ASIC governs non-bank lenders, who have taken a bigger chunk of the home loan market in recent years.ASIC deputy chairman Peter Kell said lenders and mortgage brokers need to ensure that consumers were being provided with home loan products that best meet their needs.
"Lenders and mortgage brokers need to think twice before recommending that a consumer obtain a more expensive interest-only loan," he said.
It’s not only the investors who’ve raised concerns for APRA and ASIC; it’s also the banks themselves. Banks can make mistakes and those mistakes can cause disruptions for Australia’s financial structure. What happens if a bank makes too many loans with inadequate security and the market crashes? The GFC gave us many examples worldwide, and in simple terms the banks were bailed out by their country’s taxpayers. Remember subprime mortgages?
“Personally, I don’t believe in the doomsday scenario being painted by some,” Ralph Norris, the former Commonwealth Bank chief told The Weekend Australian.
“The banks have sophisticated risk management processes in place today to manage the risk, and in their latest results there hasn’t been any evidence of mortgage stress in their provisioning.”
He says lending will be supported by population growth over the long-term: “The projected strong growth in the population of Australia’s major cities over the next 35 years doesn’t indicate to me that demand is going to be a problem; land release and infrastructure are going to be the inhibiting forces on supply,” Norris says.
But RBA governor Philip Lowe doesn’t agree: “Too many loans are still made where the borrower has the skinniest of income buffers after interest payments,” Dr Lowe said.
ASIC has made agreements with eight major lenders to offer assistance to bank customers who have been given bigger loans than they can manage: "In addition to typical hardship processes, lenders will individually review cases where consumers suffer financial difficulty in repaying their home loans, and determine whether they have been impacted by shortcomings in past lending practices," ASIC noted.
"Where appropriate, consumers will be provided with tailored remediation, which may include refunds of fees or interest."
Not to worry
It’s often said that our national addiction is real estate. We’ve created a superheated property market that has made many millionaires and now has the potential to create a sizeable number of bankrupts if Sydney prices were to collapse.
Jenni Henderson and Wes Mountain from ABC’s ‘The Conversation’ say that Australia could see a property bubble burst due toany of these four scenarios that focus on different ‘tension points’ in Australia's and the global economy:
- Lending tightening, interest rate hikes and mortgage stress
- Underemployment and unemployment creating a slow deflation
- Government intervention failure and market repair, or
- Global crisis
However, RBA's assistant governor economic, Luci Ellis, has given us several reasons why Australians shouldn't be too concerned about the level of the nation's home prices and household debt.Her first was that Australian home prices relative to incomes are pretty much in line with comparable countries. (However, those ‘comparable’ countries include many with possible housing bubbles of their own, including several large cities in New Zealand and Canada.)
Secondly, Dr Ellis argues that Australia's high mortgage debts are relatively safe because the biggest debts tend to be held by higher income households. That’s all fine if the higher incomes result from two people in secure employment. But high incomes can end quickly, and even if one half of a married couple loses their high-paying position their joint financial enterprise can quickly tumble into trouble.
A third argument is that the falling rate of home ownership among younger people (25-34 years old) started before home prices really took off in the mid to late-1990s, and is therefore due to demographic change more than lack of affordable housing for purchase. More likely, though is that this ‘demographic change’ is because younger people have simply given up on getting a home of their own and are holding themselves out of the market until conditions change – like a sudden massive fall in housing prices.
But if there is a sudden drop in property prices, it could mean smart investors dumping their losing properties onto a market that’s populated with first-home buyers and less-knowledgeable investors who’ll pay too much for assets that will soon depreciate. It’s a worrying thought!
At a time of low inflation and low wages growth, the RBA is likely to raise interest rates only very gently, cushioning households from a sudden big hike in interest rates. And the lowering of interest rates in the late 1990s and again after the GFC has increased the amount of debt households can afford to service from a given income.
The magic pudding
It gets almost boringwhen both the Prime Minister and Treasurer keep lecturing us about the solution to housing unaffordability being ‘supply’. We need more ‘supply’ to meet demand, they say, until prices finally start to drop. Until then, give developers full rein and let them go for it.
(In case you were wondering, Australia’s 225 federal politicians own a total of 561 declared properties worth an estimated $370 million. Nearly two-thirds of MPs own more than one property, including 18 of the 22 members of federal cabinet.)
To quite a large extent that’s what’s happened already. The building boom in Sydney is the greatest housing volume producer in history and will continue for at least the next two years, albeit at a declining annual rate.
The ABC’s David Taylor says there’s already enough supply to meet the demand: “There are currently 220,000 dwellings under construction. This is forecast to fall to 200,000 this year, and 180,000 in 2018. So, there simply isn't the pent-up demand for new homes that there once was.”
We have lots of supply, yet prices just keep rising. It’s almost like the more we build the higher prices go. In fact, that’s just what’s happening.But because supply is the Coalition’s sacred cow our government doesn’t want to touch negative gearing arrangements or favourable capital gains tax treatment for investors.
Parliamentarians pay scant attention to the criticism levelled at banks’ lending standards by RBA governor Philip Lowe who stated that one of the reasons banks’ investor loans and interest-only loans had climbed so fast was “the taxation arrangements that apply to investment in residential property in Australia.”
Labor shadow treasurer Chris Bowen said Mr Lowe's comments on tax concessions represented a strong intervention by the governor:"The governor doesn't intervene lightly in these debates and I think it just adds to the long list of people who have called this out: that negative gearing is the most generous property tax concession in the world. Combined with the capital gains tax discount [it is] making housing affordability worse," he said.
Sources:
‘After the boom: What Sydney can expect when the property party is over,’ Matt Wade, Sydney Morning Herald, 13-14 May 2017
‘Housing peak called by economists as building approvals slide,’ Michael Janda, ABC News online, 9 May 2017
‘Cap on foreign buyers to hit home,’ Simon Johanson and Carolyn Cummins, Sydney Morning Herald Property, 13-14 May 2017
‘Federal Budget 2017: Scott Morrison's fresh start budget comes with fresh pain,’ Michelle Grattan, Sydney Morning Herald, 10 May 2017
‘Rising population won't prevent 7 per cent housing slump, says Citi,’ Mathew Dunckley, Sydney Morning Herald, 4 May 2017
‘House prices: Where are they heading? Crash, correction or more of the same?,’ David Taylor, ABC News online, 3 May 2017
‘Housing slowdown follows 'unsustainable' growth,’ Clancy Yeates, Sydney Morning Herald, 1 May 2017
Markets Live, Sydney Morning Herald (online website), 3 May 2017
‘Scott Morrison says Coalition's policies 'already having an impact' on housing market,’ Gareth Hutchens, The Guardian, 27 April 2017
‘No Place Like Home: The Impact of Declining Home Ownership on Retirement’, by economist Saul Eslake, 23 March 2017
'Whopping: 78 Sydney suburbs pass $2m median house price mark,’ Kate Burke, Domain, 22 April 2017
‘Houses of Parliament: Politicians own an estimated $370m of property,’ Adam Gartrell and Tom McIlroy, Sydney Morning Herald, 22 April 2017
‘Australian house prices aren't growing as fast as they used to, except in Sydney.’ David Scutt, Business Insider, 31 March 2017
‘Four ways an Australian housing bubble could burst, illustrated,’ Jenni Henderson and Wes Mountain, The Conversation, ABC News, 1 May 2017
‘APRA crackdown won't slow investors, analysts say,’ Georgia Wilkins, Sydney Morning Herald, 4 April 2017
‘Perth's housing slump 'a lesson for Sydney and Melbourne,' Claire Moodie, ABC News Online, 27 April 2014
‘Australian house price growth surges to seven-year high,’ Patrick Hatch, Sydney Morning Herald, 4 April 2017
‘ASIC tightens interest-only mortgage lending screws,’ Andrew White, The Australian, 4 April 2017
‘APRA moves to tighten mortgage rules,’ Georgia Wilkins, Sydney Morning Herald, 31 March 2017
‘Chainsaw or scalpel? Scott Morrison hits back at call to curb investor tax breaks,’ James Massola, Sydney Morning Herald, 5 April 2017
‘Housing market top called by investment bank UBS,’ Michael Janda, ABC News Online, 24 April 2017
‘ASIC joins APRA in interest-only home loan crackdown,’ Georgia Wilkins, Sydney Morning Herald, 3 April 2017
‘No bubble, no pop’: why banks are as safe as houses,’ Richard Gluvas, The Australian, 8 April 2017
‘Banks are still lending too much to property buyers,’ Noel Whittaker, Sydney Morning Herald, 7 April 2017
‘Banks to assist customers disadvantaged by dodgy loan assessments: ASIC,’ Stephen Long, ABC News Online, 4 April 2017
‘House prices: Ideas and solutions range from dangerous to disastrous,’ Michael Janda, ABC News Online, 17 February 2017
‘Stop building apartments for investors and start building for future generations,’ Jennifer Duke, Domain, 29 March 2017
‘There's no housing bubble - unless you're in Sydney or Melbourne,’ Michael Pascoe , Sydney Morning Herald, 7 April 2017
‘Housing bubbles: What economics has to say about the 'b' word,’ Timo Henckel, ABC News Online, 4 April 2017
‘Real estate: Australian banks must learn lessons of US sub-prime crisis, warns ASIC boss,’
Andrew Robertson and Mark Tamhane, ABC News Online, 4 April 2017
‘Why our regulators are losing sleep over housing,’ Ian Verrender, ABC News online, 3 April 2017
‘Sydney median house price hits $1.15 million: Buying becoming ‘out of the question,’ Jennifer Duke, Domain, 20 April 2017
Housing affordability is in the news and on the table
Mon, 24 Apr 2017It seems like everyone wants to improve housing affordability but none of the major players who might be able to do something about it want to take the first steps towards actually achieving it. There’s little question something has to be done, but what is it?
As National Australia Bank chief economist Alan Oster told the Herald’s Eryk Bagshaw, housing prices have literally gone through the roof: "The housing markets in Sydney and Melbourne continue to defy belief," said Mr Oster.
He’s right. Figures released in late March from CoreLogic show that since January 1, 2017 Sydney house prices have gone up another 5.3 per cent, with auction clearance rates continuing in the 80+ per cent bracket and median prices above $1.3 million.
A NAB analysis found that median dwelling prices have climbed up to nine times higher than gross household incomes in Sydney. Investor demand is often cited as the main cause of the ever-increasing prices: “In the year to January lending to property investors climbed 27 per cent. Investors borrowed $13.8 billion that month, more than the $13.6 billion that was lent to owner-occupiers. Of the $13.8 billion, only $1.2 billion was for building new homes,” commented Peter Martin in the Sydney Morning Herald.
It's property price growth that outstrips wages growth that make homes overpriced, according to Paul Dales, Capital Economics' chief economist for Australia & New Zealand: "With household income per employee having stagnated in the fourth quarter of last year, the rise in prices has made housing look even more overvalued. When compared to the average ratio to disposable income per employee between 1990 and 2015, housing now appears to be 44 per cent overvalued."
Another clue to the source of the ongoing strength of Sydney’s property prices comes from arecent reportfrom Credit Suisse analysts Hasan Tevfik and Peter Liu which shows that 25 percent of all NSW property sales are now to an overseas buyer.
80 per cent of these foreign buyers are classified as Chinese and are from mainland China, Hong Kong, Macau and Taiwan. The paper says this ‘makes sense’ because, while Australian housing is probably at the peak of its cycle, it's still cheaper to buy an apartment in Sydney than buying an apartment in China's major cities.
The end is in sight
Some housing market analysts are already calling for the end of the current housing boom to commence later this year. BIS Oxford Economics managing director Robert Mellor told the Building Industry Prospects conference in Sydney that house prices would drop by five per cent over the next two years.
“Given that price growth over the last 12 months has been much greater than we would have anticipated six or 12 months ago, we now expect price declines probably between 2017 and 2019 somewhere in the order of 5 per cent in the detached housing market in Sydney,” he said.
Other analysts see 2017 as yet another year of price rises, followed by a slowing market in 2018. SQM Research managing director Louis Christopher said it was likely prices would rise by 11 to 16 per cent by the end of 2017, adding: “Next year is questionable … we could see some storm clouds in 2018,” he told Domain’s Jennifer Duke.
Domain Group’s chief economist Andrew Wilson said it was difficult to predict even six months into the future, given the present uncertain economic outlook. However, he also said that it is likely prices “will stagnate” in the second half of 2017
AMP Capital chief economist Shane Oliver told The Australian’s Daniel Palmer that the housing market is now “expensive on all metrics”. He expects a price retreat of five to 10 per cent in the housing market once the RBA starts raising rates with falls of up to 20 per cent for unit prices in Sydney.
Mr Oliver also said, in another interview with Philip Baker from the Australian Financial Review, that he didn’t expect rate hikes to begin until 2018: "To see a general property crash – say a 20 per cent plus average price fall – we need to see one or more of the following: a recession – which looks unlikely; a surge in interest rates – but rate hikes are unlikely until 2018 and the RBA will take account of the greater sensitivity of households to higher rates; and property oversupply – this would require the current construction boom to continue for several years," says Oliver.
The Melbourne Institute of Applied Economic and Social Research began its consumer confidence survey in 1974. One of its key questions is: “What is the wisest place to put your savings?” and gives options including bank deposits and paying down debt.
Real estate is traditionally one of its most popular answers. In September 2015 28 per cent of respondents nominated real estate, which was the highest score for any asset class; in March this yearthe score had dropped to just 11.6 per cent – the lowest score ever recorded for this asset class.
Westpac chief economist Bill Evans said the result showed a clear increase in risk aversion: "Consumers are saying: yes, we expect [real estate] prices to rise, but we are a little cautious. There is no doubt there is nervousness about the sustainability of the prices."
Maintain the status quo
The federal government has until now steadfastly ruled out any changes to the current negative gearing and capital gains taxation arrangements. Despite the likelihood that these are the principal economic drivers of investors’ property-buying frenzy, they have been ‘off the table’ as the government looks elsewhere for solutions.
As Ross Gittins, the Herald’s economics editor describes the lack of willingness for an all-out effort on housing affordability: “Our problem in Australia isn't so much fake news as fake government – governments that, lacking the courage to implement controversial solutions to problems, just create the pretence of solving them.”
The Turnbull government still insists that increasing supply is the best mechanism to reduce the cost of housing. "The key to having more affordable housing is to build more housing and so the argument against demand side measures in isolation is that all you do is, is pump up the market," Malcolm Turnbull told ABC radio.
The Commonwealth has even handballed the problem to the states, saying it’s up to each state and territory to solve the problem by rejigging things like stamp duty and releases of land for development. It also wants to see the processes of development applications speeded up.
But pressure is growing on the Turnbull government to do something about sky-high housing prices, especially in Sydney and Melbourne. The promised ‘housing affordability package’ in the next federal budgetcould show a change of heart, maybe even with tweaks to negative gearing and a possible reduction in the capital gains tax discount rate. We’ll know more after May 9.
Victorian treasurer Tim Pallas recently tried to shift some of the responsibility back to the federal government, saying: "We believe the Commonwealth government needs to play a more active role in increasing land supply across the country.
“We would like to work with the Commonwealth on an audit of federal land to identify opportunities to increase the supply of housing within the urban growth boundary," he said, hinting that some Defence properties in Victoria could be converted to housing estates.
RBA treads carefully
Truly in the classic position of being ‘between a rock and a hard place’, The Reserve Bank is concerned that if it lowers interest rates to stimulate economic activity, which would help intending owner-occupiers to afford a property of their own, it would also stimulate investors who would most likely use their leverage to further disadvantage the first-home buyers who are already a threatened species.
But the RBA also knows that an increase in its cash rate would quickly be passed on to most Australian households, thereby raising the chance of increasing housing stress and decreasing spending on consumer goods.
Herald columnist Michael Pascoe says the RBA and the Australian Prudential Regulatory Authority (APRA) aren’t specifically interested in housing prices and the concerns of first-home buyers: “Their concern is whether lending for housing has gone crazy to the extent of potentially damaging banks in the event of a downturn – thus the regulators might not limit their efforts to investors if they fail to get adequate traction.”
Author and financial adviser Noel Whittaker outlines the consequences of a rate hike: “Any increase in interest rates would mean mortgage repayments would rise, putting pressure on household budgets; also, people buying properties would find it harder to qualify for a loan.
“These factors combined would put downward pressure on property but, of course, the effect on an individual property would depend on its location and price range. The pressure would be less for investors as the interest on their loans is tax-deductible.”
The RBA has also expressed concerns that any actions taken that led to a fall in housing prices might also trigger an economic slump. The Bank’s assistant governor (financial system) Michelle Bullock said there was a danger in the general assumption that prices would always rise: "What happens if things turn down, will the slump be bigger than it would otherwise be?"
A too-rapid or too-strong decline in prices could cause overstretched investors to get out of the market at ‘fire sale’ prices, leaving other owners owing more than their properties are worth. First-home buyers would benefit, and tenants could possibly get rent reductions, but for investors and existing homeowners this could be an economic disaster, especially if it happens at a time such as now when full-time employment is falling and income growth is sluggish.
"There is some need to tighten lending conditions for some Australian housing markets in terms of geographical areas and dwelling types," Housing Industry Association chief economist Harley Dale told The Australian Financial Review’s Michael Bleby.
"However, a blanket tightening of lending conditions – as now seems to be emerging again – is the wrong policy and risks damaging Australia's financial stability. That is the very opposite to the ideal outcome authorities want to achieve."
But what can we do?
The decisions of several previous governments limit the field of options available to the present federal administration. At present, it’s investors who get the immediate benefits from housing through their ability to negatively gear properties and from a 50 per cent discount on capital gains when the properties are sold.
Owner-occupiers get their biggest and about only break through their family homes being exempt from capital gains as well as from the pension assets test. Politicians are unlikely to make any drastic changes to the status quo, fearing political repercussions from voters that might be affected if the rules of the game shift against them.
An editorial in the Sydney Morning Herald cautioned that “Harsh measures to improve affordability now might spark a crisis of confidence and exacerbate price falls,” but added “Still, some measures are worthwhile if introduced slowly”.
Here’s a summary of the measures to improve housing affordability now under active consideration:
Shared home equity
One suggestion that could be appealing to housing policymakers is neither new nor costly to the public purse. It’s called ‘Shared home equity’ and was the result of a report by the Menzies Research Centre commissioned by the Howard government in 2003.
In this scheme the government, which could be either state or federal, or a participating institution takes a 25 per cent equity share in private homes. The payoff comes when the property is eventually sold and could be something like 40 percent of any price increase. These contracts could be ‘bundled’ and sold to other long-term investors such as superannuation funds.
Shared home ownership schemes have been trialled for several years in South Australia. A report by the University of Adelaide analysed ten years of data and concluded that suburbs with shared equity schemes enjoyed an 8 per cent rise in levels of home ownership compared to similar areas in NSW and Victoria
Among the many positive outcomes of these schemes are lower costs to the incoming purchaserof a home and the creation of a new class of asset for investors. By making housing more affordable it could also contribute to rising prices, but in theory at least it will increase the number of potential purchasers and make life a bit easier for first-home buyers.
Capital gains amnesty
It’s possible some sort of hybrid scheme may be introduced at the federal level through a capital gains ‘amnesty’ for a set period of time. Investors could sell their investment properties and instead of a 50 per cent discount receive either a higher discount rate or even a full exemption from capital gains tax if the sale takes place by a specific date.
However, given the federal government’s reticence to do away with any tax income unless it’s replaced from some other source, it would be hard to find a way to finance such a scheme without making some other sector of the housing industry more expensive and that would only lead to increased housing costs.
Introduce a land tax
Doing away with stamp duties and replacing any lost revenues with a broad-based land tax is another option that’s gaining favour in some sectors. The Henry Tax Review in 2009 gave some of the reasons why: “People who move house frequently are whacked with much more stamp duty than people who tend to stay put. So they experiment with staying put, driving longer distances [and] clogging up roads.
“They renovate rather than move, or buy bigger houses than they need in case they run out of room. Older Australians put off downsizing in order to put off stamp duty.”
Stamp duty in NSW works out at something like $40,000 on the purchase of an average home, and land tax adherents say this could easily be replaced by an annual tax on all properties.
In theory, this would reduce the cost of purchasing a home and ‘encourage’ (i.e. force) older homeowners to downsize, thereby adding to the supply of family homes on the market. Those senior citizens who’ve sold their family homes would then move into apartments, conveniently helping to reduce the oversupply that’s anticipated in a couple of years.
If you’re wondering how much tax the average homeowner would have to cough up each year, Grattan Institute fellow Brendan Coates told ABC News that stamp duty accounted for $19 billion nationwide each year and new land taxes would have to match that revenue.
"To do that you're probably talking about a tax on unimproved land value of about $6 for each $1,000 of unimproved land value," he said. “In Sydney, you would be looking a little north of $3,000."
It’s no wonder John Daley, the chief executive of the Grattan Institute, said: "When you talk about tax reform, this is far and away the biggest prize on offer. It would generate billions of dollars in annual returns to the NSW budget while also relieving federal government spending over a 15-year-period.”
The downside for homeowners is that this would add an extra expense – and not a small one either, that would have to be paid annually by all those who already are paying off mortgages, as well as raising the cost of renting property for all tenants – two very important political negatives as Greg Jericho notes in The Guardian.
“It’s a big ask. Only the ACT has gone down the land tax route. Stamp duty is a big money spinner for state governments, but it is a tax that you choose to pay. A land tax hits everyone and even if done in a staggered manner as is the case in the ACT, it’s a tough political sell.”
Let’s let the Herald’s Noel Whittaker have the last word on this topic: “The ACT liked the concept so much that they've already implemented it – well, at least partly. You guessed it: they've introduced land tax on the family home, but retained stamp duty on purchases.
“There have been numerous reports in the press about protests by Canberra home owners who've seen their cost of home ownership rise by more than 40 per cent,” said Mr Whittaker.
Use super for deposit
A great deal of media coverage has been given to the idea of allowing first-home buyers to access their superannuation for a deposit on a property. This has even been extended to the possibility of allowing employers’ superannuation contributions to be directed to mortgage repayments while homebuyers are employed.
The first problem with this is that it would simply add to demand for housing and stimulate price increases without contributing to supply. It would also mean greatly reduced amounts of capital invested in superannuation funds, thereby reducing retirement incomes and increasing the number of age pension recipients.
The ABC’s Michael Janda says allowing superannuation funds to be used for housing deposits would facilitate intergenerational theft:“Allowing first home buyers to access their super for a deposit will create a fresh pool of buyers.
“We could be left with thousands of formerly investment apartments in the hands of first home buyers, just as Australia's big cities enter a widely-acknowledged apartment glut. The smart boomers will walk away with the biggest profits, having been in the market the longest, while recent younger buyers will be left with more housing debt than equity and no superannuation either.”
A DIY approach
There is of course always the option for the federal government to build its own social housing, but columnist Michael Pascoe doesn’t think the Commonwealth’s commitment will go to that extent: “Treasurer Scott Morrison has foreshadowed the May budget will include an improved financing mechanism for social housing, but odds are that it will fall a long way short of what's required to address the bigger affordability crisis.
“It's unlikely to even balance the diminished role states have chosen to play in public housing over recent decades.”
Queensland University economist Cameron Murray is even more critical: "If you want more housing, you build it. Instead, governments tweak the funding settings for social housing, tweak rules about town planning, buy equity in homes, and provide cash gifts to home buyers."
Bond aggregator favoured
And finally, another idea that would help community housing providers develop rental homes for people struggling to locate affordable accommodation is to create an Affordable Housing Finance Corporation (AHFC).
A proposal by the Australian Housing and Urban Research Institute for an AHFC was submitted to state and federal governments last December and the federal government has said it will create a taskforce to investigate the plan.
The institute's proposal is for the AHFC to source capital from the bond market so it can provide longer-term, low-interest loans to the community housing sector than are now available. The Corporation would distribute the money to community housing groups who would develop and manage the rental accommodation.
This type of financing is called a ‘bond aggregator’ and has already been established in the UK with some success. At a March 24 meeting in Canberra with federal treasurer Scott Morrison and all state and territory treasurers it was agreed to take the ‘bond aggregator’ concept “to the next level”.
However, Mr Morrison reiterated his party’s position that the key factor in the housing affordability problem is supply, and the states can improve this with better planning and zoning regulations. He also made it clear that the federal government will not provide funding to the states for any tax changes, including such imposts as stamp duty.
Mark Bouris, columnist and chairman of Yellow Brick Road, sums up the problems anyone faces when attempting to tackle the vexed problem of housing affordability: “In the end, property markets are driven by supply, demand and the cost of debt. Any measure that doesn't address these factors in a sustained fashion has little chance of succeeding.”
While we wait
One way or another, tens of thousands of new apartments will be added to Sydney’s housing stock over the next couple of years. There’s one consequence of all this rapid development of high-rise housing that is only now being admitted, with the solutions many years ahead.
Liberal NSW Planning Minister Brad Hazzard introduced what he called ‘Urban Activation Precincts’ in 2014, despite concerns from a number of councils and residents that were affected. Three years later these have become ‘priority precincts’ and their number is now increasing.
Priority precincts are Sydney suburbs, primarily those in close proximity to the existing and planned rail network, targeted for high-rise development. This development has gone ahead at an unprecedented rate, replacing older free-standing houses or small apartment buildings with new apartment blocks up to 23 storeys high, and massively increasing the population of communities like Macquarie Park and Epping.
The problem? Vital infrastructure – schools, roads, healthcare facilities, parks, water and sewerage provisions, communications (think of the NBN) and energy supply are lagging far behind and struggling to catch up. It’s going to take many years before residents of these new ‘priority precincts’ enjoy such attributes as open parklands and primary and high schools for the children of thousands of families who will live in them.
Planning and Housing Minister Anthony Roberts announced in March that the state government is looking at increasing the number of ‘priority precincts’.He’s also admitted to the Northern District Times that he and Ryde MP Victor Dominello “have been busy doing what we can with respect to retrofitting the infrastructure — which is a lot more expensive than having a good plan from the beginning”.
And what about housing affordability? It now seems it was never part of anyone’s plan.
Sources:
‘Don't bet the house on solving the affordability crisis,’ Mark Bouris, Sydney Morning Herald, 26 March 2017
‘The Bank of Mum and Dad is just generational self-interest to keep house prices high,’ Ross Gittins, Sydney Morning Herald, 28 March 2017
‘House prices jump 3.7 per cent since start of year,’ AAP Release on Sydney Morning Herald online, 27 March 2017
‘Chinese buyers to prop up Australian housing market: Credit Suisse,’ Myriam Robin, Sydney Morning Herald, 24 March 2017
‘Politics ensures Reserve Bank's housing pushback already failing,’ Michael Pascoe, Sydney Morning Herald, 23 March 2017
‘Rate cuts dismissed as house prices ‘defy belief’,’ Daniel Palmer, The Australian, 16 March 2017
‘Parliamentary Budget Office costs plan to abolish stamp duty in favour of broad-based land tax,’ Henry Belot, ABC News Online, 18 March 2017
‘Priority: better planning,’ Ben Graham, Northern District Times, 22 March 2017
‘Can budget 2017 fix housing affordability? Here are seven options,’ Greg Jericho, The Guardian, 17 March 2017
‘Home ownership 8 per cent higher in suburbs with shared equity schemes, study shows,’ ErykBagshaw& James Massola, Sydney Morning Herald, 24 March 2017
‘Australian housing markets 'defy belief' but bank warns against knee-jerk policy reactions,’
ErykBagshaw, Sydney Morning Herald, 16 March 2017
‘A shared home equity scheme will put roofs over more people's heads,’ Peter Martin, Sydney Morning Herald, 8 March 2017
‘Can budget 2017 fix housing affordability? Here are seven options,’ Greg Jericho, The Guardian, 17 March 2017
‘Adopt US model of tax deductions for homeowners, not investors,’ Daryl Dixon, Sun-Herald, 19 March 2017
‘House price shock: governments get serious,’ Editorial, Sydney Morning Herald, 18 March 2017
‘How would rising interest rates affect property prices?,’ Noel Whittaker, Sydney Morning Herald, 16 March 2017
‘Confidence in housing collapses to lowest level in 40 years: survey,’ ErykBagshaw and Peter Martin, Sydney Morning Herald, 16 March 2013
‘December quarter house price growth accelerated: ABS,’ Michael Bleby, Australian Financial Review, 21 March 2017
‘Superannuation for housing deposits would facilitate intergenerational theft,’ Michael Janda, ABC News Online, 16 March 2017
‘Fall in home ownership threatens to sink Australia's retirement system,’ Gareth Hutchens, The Guardian, 23 March 2017
‘Land tax: Parliamentary Budget Office costs plan to kill off stamp duty,’ ErykBagshaw, Sydney Morning Herald, 18 March 2017
‘Push to increase foreign stamp duty in NSW as more foreigners than first-home owners buying homes,’ AAP on Domain, 14 March 2017
‘Overvalued but no property crash on the horizon,’ Philip Baker, Australian Financial Review, 16 March 2017
‘Treasurer Scott Morrison pushes crackdown on investor loans amid house price concerns,’ ErykBagshaw& James Massola, Sydney Morning Herald, 25 March 2017
Is 2017 the year we reach ‘peak price’?
Wed, 15 Mar 2017It’s a bit like watching a play where you know something about the plot but you don’t know how long the performance will last. Sydney’s housing prices continue to achieve record heights, and it’s logical to expect a retracement at some point; history tells us this, but just when will it happen?
Look at the cast onstage. The 45 to 54-year olds have two thirds of their total wealth in the form of housing, and for the 55 to 64-year olds the figure is about 60 per cent. While the older cast members are comfortable, the younger actors from generations X and Y are envious with low levels of home ownership and a choice of either playing the part of tenants the rest of their lives or of taking on the stresses of dealing with large amounts of mortgage debt.
Now add a new sub plot from the Organisation of Economic Co-operation and Development (OECD). This august body has just issued its latest biennial assessment that warns of an impending ‘rout’ in Australian house prices and says both prices and household debt have reached ‘unprecedented highs’.
In the OECD’s own words: “A continued rise of the market, fuelled by both investor and owner-occupier demand, may end in a significant downward correction that spreads to the rest of the economy."
The audience won’t want to leave its seats until the final curtain so they can see how it all turns out.
The OECD survey also says that in real terms Australian house prices have climbed to 250 per cent of their level in the 1990s, with much of the increase taking place in the past few years, "straining affordability, especially for first-time buyers in Sydney".
And it’s ‘housing prices’, plural, that deserve consideration. First there’s the price of houses – detached or semi-detached structures on their own block of land. Then there’s the price of apartments – a self-contained unit that occupies part of a building that contains other apartments. And there are a dozen other variables to consider including geographic location, proximity to the CBD, school catchment areas and so on.
For our purposes we’ll stick to the ‘median’ prices of houses and apartments as generally recognised by the Australian Bureau of Statistics (ABS) and the principal statistical compilers in the property industry. Even then, as we’ve noted before, there are variances in the methodologies used to calculate ‘median’ prices, but sooner or later we anticipate the ‘peak price’ of houses and apartments will be reached.
Cameron Kusher, CoreLogic’s senior research analyst, gives us a summary that puts the whole Sydney property market into perspective: “At the end of 2016, looking at both houses and units, 20.5 per cent of Sydney suburbs had a median value of less than $600,000 compared to 38.5 per cent of suburbs having a median value of at least $1 million.
“To further highlight deteriorating housing affordability in Sydney, [only] 34.6 per cent of suburbs had a median [apartment]value of less than $600,000 at the end of 2016.”
He also commented that more Sydney suburbs have a median house value of $2 million than a median value under $600,000: “If you are earning a relatively low income in Sydney and are looking to buy a house or unit, you are competing for a rapidly declining pool of housing stock across the city.”
Irrational exuberance
Recently, after yet another frenetic weekend of sales activity, Domain Group chief economist Dr Andrew Wilson declaredthat we are now in “uncharted waters”.
“The amount of bidders and competition out in the Sydney market today…truly confirms what we’re all seeing – this is a hot market. The big question is where will prices go? I’m not sure buyers have capacity to keep pushing up prices.”
Lucia Stein from ABC News had this to say: “House prices can't keep rising forever. At some point, everyone will just calm down and refuse to pay way too much for a tiny place that isn't even in the area they really wanted to live.”
She quoted RMIT property economics professor Chris Eves who reminded us that it’s normal for housing prices to rise and fall.
"One of the things that sets Australia apart is that there are sectors that are currently oversupplied [too many houses] and there is potential that there won't be much market demand for those types of properties, which could lead house prices to fall," he says.
She also quoted LF Economics property economist David Lindsay who says we’re “in a pit of irrational exuberance.”
Mr Lindsay says we have a ‘speculative, credit-fuelled housing bubble’ and warns that the housing market isn’t bulletproof: “A lot of people thought the housing market was invincible and it could only go up, and one day it crashed and it burned a lot of people, and the financial system along with it."
Ms Stein’s conclusion is that when there are fewer people buying properties and supply continues to grow, prices will start to go down: “Eventually prices will reach a point where people won't buy and then you will see a slowdown in growth. But this might not happen for some time and, as Mr Eves suggests, what it means for first-time homebuyers is that they may be renting for the foreseeable future.”
The ABC’s Ian Verrender says that real estate is ‘baked into the Australian psyche’: “All up, Australians are in hock to the tune of more than $1.4 trillion on housing. That's a hell of a lot of debt just to keep the wind and rain out. Of that, more than half a trillion is on loan to property investors.”
He says that modern economies are geared to growth: “At the micro level, profits, wages and taxes all ideally should steadily increase, feeding into a moderate inflation rate and modest rises in asset prices that feeds into an expanding economy.
“Governments and central banks will do almost anything to avoid a bubble bursting, which is why no-one is serious about housing affordability. In the ensuing policy vacuum — and with the tax system geared to turbocharge prices — the Government and the Reserve Bank are praying for a moderate but relatively quick property market slump; a minor correction and a plateauing in national prices at the lower levels.”
But does this mean we’re in a bubble? Westpac boss Brian Hartzer doesn’t think so. He says in his opinion a housing bubble is fuelled by credit, but says: “I don’t think that’s what’s happening in Sydney or Melbourne.”
He told a House of Representatives economics committee that what’s happening to prices is the result of severe supply constraints running into a significant increase in demand from foreign buyers.
“There has been a significant ramp-up in construction and a big chunk of that has probably been targeting overseas buyers whose desire for the nature of the property isn’t necessarily the quality local buyers would want,” he told the hearing in Canberra.
Herald columnist Harold Mitchell poses a good question: “Why are we so concerned about owning our own property anyway?
“The great German economy has 60 per cent of residents renting their home. They don't feel the need to buy a property because the clever German government controls the rental market so that a family can securely lease a home for decades.”
Mr Mitchell says we need to change something soon: “It's plain we are letting our kids down, our country and now our grandkids. None of them are going to have the opportunity we had unless we have the courage to make some tough decisions soon. Reforming negative gearing would be good start.”
Investors take the lead
In the first quarter of 2017 there’s little doubt prices growth is being fuelled by investors. First home buyers represented just one out of seven housing loans taken out in December while the latest figures from ABS tell us that investors accounted for more than half – 57 per cent, of all housing loans. A growing number of would-be homeowners are giving up their aspirations and becoming long-term tenants, which only encourages more investors to acquire rental properties.
Sydney prices growth shows no signs of weakening. News Limited’s journalist Julia Corderoy tells us that CoreLogic’s Home Value Index shows house prices have risen an astounding 18.4 per cent from their levels a year ago.
“This is the highest annual growth rate in 14 years — since the 12 months ending December 2002 when the housing boom of the early 2000s started to slow. Over the past five years, Sydney house prices have surged 75 per cent,” she writes.
CoreLogic’s head of research, Tim Lawless, ascribes this growth to investors chasing capital gains on their property: “It clearly is not about the yield because yields are at record lows in Sydney. Investors are willing to sacrifice the cashflow on their property and are buying to secure future capital gains it would seem,” he told Ms Corderoy.
These are clearly good times for investors. Interest rates are low, prices keep rising, and those with existing properties can leverage those properties to borrow and acquire new ones.
The Australian Prudential Regulation Authority (APRA) tried to arrest rampant investor demand in late 2014 by imposing a cap on how many investor loans Australian banks could settle. Banks responded by raising interest rates and deposit requirements for investors, but the strategy hasn’t worked.
Martin North, financial services analyst and principal of Digital Finance Analytics told News.com.au that he thinks fiscal policy has failed and interest rates are too low: “I believe we have a major question as to whether what has been done is the right stuff. I think we should stand back and question where to from here? I don’t think just keeping a growth limit and doing nothing more is a strategy which is going to work.”
The state’s new Planning Minister Anthony Roberts, who has promised to deliver a government policy on housing affordability in the ‘very near’ future, recently declared that if you can get into the Sydney housing market you are then “pretty well set for the rest of your life”.
Mr Roberts also commented that Sydney is an international city: "And as such we are paying international prices for homes.”
He has a good point. The Knight Frank Wealth Report for 2017 tells us that the super-rich people of the world like what they see in Australia and are coming here in increasing numbers. The report states that of all the people worth $US30 million or more in net assets, termed ultra-high-net-worth individuals (UHNWI), over 70 per cent will invest in Sydney and Melbourne property over the next 10 years.
And then there are the plain high-net-worth individuals, (HNWI) with a net worth of over $US1 million, excluding their primary residence. Michelle Ciesielski?, Knight Frank's director, residential research, Australia, says the latest figures show that Sydney has seen an annual net inflow of 4000 HNWIs.
"Sydney is at the top of the list for the highest net inflows of HNWIs globally, with the inflow representing growth of 4 per cent of the HNWI population already based in the city," Ms Ciesielski told the Sydney Morning Herald.
She said that historically low levels of homes listed for sale, strong population and tourism growth, continued investor appetite, rebounding foreign investment and a slow approval process which restricts new development have driven Sydney’s house price growth well ahead of other cities.
It might bereassuring to know we live in a country that’s viewed by others as “offering a fiscal and political ‘safe haven’ as well as quality of life”, but it also means that domestic property buyers will be competing with relatively wealthy buyers from overseas who may only have to pay what for them is a small premium to get the Sydney property they desire.
We might mention that Australian businessman Dick Smith has gone into print blaming immigrants for high house prices, declaring that the "enormous population increase" makes it impossible for young families to buy their first home.
"All of our problems are from this unbelievable population increase,” he says. “You can't drive in Sydney at the moment. The housing prices are enormous.”
Pollies’ affordability solutions
He’s certainly right about one thing: Higher housing prices do make housing less affordable, and affordability remains a huge problem for politicians and economists. In June 2015, the former treasurer Joe Hockey said that Australians wanting to buy their first home should "get a good job that pays good money".
And in February this year federal Victorian MP Michael Sukkar, Assistant Minister to the Treasurer, who has been delegated the task of finding solutions to the country's housing affordability problems, said a "highly paid job" is the "first step" to owning a home.
Not surprisingly, there are thousands of hopeful first-home buyers out there who don’t find such simplistic statements helpful to resolving their problems with unaffordability.They also question why the government has repeatedly rejected suggestions to curb negative gearing and capital gains concessions.
In March, Reserve Bank Governor Philip Lowetold a Standing Committee on Economics that altering negative gearing and the capital gains tax would take some heat out of the housing market, at least in the short term.
"It's likely it would reduce investment demand for a while, and if you have less demand for a while, you'd have lower prices and that would take the heat off housing market,” he said, noting that these kinds of taxation measures are outside the RBA’s authority.
Dr Lowe admits the Reserve Bank now finds itself in a difficult position. It could cut interest rates to stimulate the economy, but this would further fuel real estate prices. Or, it could raise interest rates to take some heat out of property prices, but this could also create serious problems for those with high levels of household debt.
The RBA’s March meeting left interest rates untouched and the Bank’s post-meeting statement commented that there had been a recent increase in borrowing by investors which would have the effect of adding to rental housing stock and lowering rent rises.
“In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years,” it said. “Growth in rents is the slowest for two decades.”
But this could be wishful thinking. The most recent appointee to the RBA’s board, high-profile businesswoman Carol Schwartz, told The Australian newspaper thatNSW’s strong economy supported by infrastructure investment was sustaining housing prices in Sydney.
“Unless there is a major global event, I can’t see what will bring it to an end,” said Ms Schwartz, who is also a director of the country’s biggest residential developer Stockland.
Also wary of international economic fluctuations is Greville Pabst, the executive chairman of valuers and buyers’advocate WBP Property Group. Mr Pabst expects Sydney house prices to continue their upwards trajectory: “I don’t see a correction this year, barring global events,” he said.
The Herald’s Peter Hartcher says much has happened on the demand side of the housing market in recent years as interest rates have fallen and the population has grown:“But no serious change has been made to address the supply side. The lopsided nature of the market, with rising demand and inelastic supply, has exaggerated price rises.”
Credit must therefore go to property developer Mirvac for their innovative ‘Right Start’ initiative that targets Sydney’s affordability crisis.
Mirvac’s General Manager of NSW Residential and Major Projects, Toby Long, told News.com.au’s Julia Corderoy that Sydney’s high prices have reached the point where a generation of young people face the prospect of never owning their own home.
“We’ve been looking at affordability for some time trying to find ways to give first homebuyers an opportunity to get into the Sydney market. We were looking at the pain points and two of the biggest pain points first home buyers have is not having the opportunity and then not being able to save up that 10 per cent deposit.”
As a way to overcome these ‘pain points’, Mirvac’s Pavilions development,a proposed 690 apartment project at the gateway to Sydney Olympic Park, will offer 60 of its lowest price apartments exclusively to firsthomebuyers, giving them priority over investors and owners of other homes.
In addition, first home buyers will be able to purchase the apartments, priced from $575,000 to $749,000, with just a 5 per cent deposit - about half the usual deposit requirement.
The remaining five per cent of the deposit can be paid in two annual instalments of 2.5 per cent. By the time the apartment reaches settlement when the development is completed in 2020, the first homebuyer will have the full deposit.
However, the NSW Government has ambitious plans for another 10,000 homes to be built at Olympic Park over the next decade, but so far only 3 per cent of these are to be designated as ‘affordable properties rented below market rates’.
So open the curtains and let the play begin. There’s drama aplenty as the dispossessed youths take on their elders in a battle over family castles. See the barons in Canberra and Macquarie Street fight their wars of words without reaching any meaningful conclusions, and beware of the foreign hordes that lie just without, poised to invade and capture the locals’ territory for themselves.
And amazingly the prices of dwellings in the kingdom of Sydney, from manor houses to the smallest cottages, continue to elevate skywards. The play’s the thing, the ending is still out of sight, and the drama’scertainly not over yet.
Sources:
‘Westpac ‘putting customers first’,’ Colin Brinsden and Mary Silk AAP, News.com.au, 8 March 2017
‘Increased pressure on Federal Budget to use taxes to help first-home buyers,’ Malcolm Farr, News.com.au, 7 March 2017
‘Bank of mum and dad: Parents' property key to children's wealth,’ Thuy Ong, ABC News
Online, 3 March 2017
‘Annual growth in Sydney house prices the strongest in 14 years,’ Julia Corderoy, News.com.au, 1 March 2017
‘Sydney, Melbourne property now affordable – if you are ultra-rich,’ Carolyn Cummins, Sydney Morning Herald, 2 March 2017
‘Buy property in Sydney and you're 'pretty well set for life': Housing Minister Anthony Roberts,’ Jacob Saulwick, Sydney Morning Herald 24 February 2017
‘Rise and rise of house prices showing no signs of slowing down,’ Turi Condon and Sam Buckingham-Jones, The Australian, 2 March 2017
‘RBA's Philip Lowe takes aim at negative gearing, questions global race to cut corporate taxes,’ Thuy Ong, ABC News Online, 26 February 2017
‘A manifesto for Generation Rent,’ Jessica Irvine, Sydney Morning Herald, 22 February 2017
‘House prices: When will we get to the point that we just say NO?’ Lucia Stein, ABC News Online, 2 March 2017
‘More Sydney suburbs have a median house value of $2 million than a median value under $600,000, Cameron Kusher, CoreLogic, 23 February 2017
‘Coalition MP tasked with housing affordability says 'highly paid job' is 'first step' to home ownership,’ Latika Bourke, Sydney Morning Herald, 21 February 2017
‘The government is missing the opportunity to solve the housing crisis,’ Peter Hartcher, Sydney Morning Herald, 25 February 2017
‘Major apartment development to offer first homebuyers dibs,’ Lisa Corderoy, News.com.au, 27 February 2017
‘Immigrants to blame for high house prices, businessman Dick Smith claims,’ Michael Koziol, Sydney Morning Herald, 22 February 2017
‘Housing affordability: How did we get here, and do first-time buyers ever stand a chance?
Analysis,’ Ian Verrender, ABC News, 20 February 2017
‘Australia must face some home truths about housing affordability,’ Harold Mitchell, Sydney Morning Herald, 24 February 2017
‘First home buyers: Treasurer Scott Morrison vows to tackle runaway house prices,’ Peter Hartcher, Sydney Morning Herald, 21 February 2017
‘OECD warns of 'rout' in house prices if investors head for the doors,’ Peter Martin, ABC News Online, 3 March 2017
A happy New Year for Sydney property in 2017
Sat, 14 Jan 2017The old year’s behind us and the new year will bring changes, but one thing that isn’t about to change is the price growth of Sydney property. As News.com’s Julia Corderoy put it at the end of 2016: “It has been a hell of a year for the Australian property market.”
The 2017 ANZ/Property Council Survey asked property professionals for their opinions about the likelihood of price growth in the future. The Council’s NSW executive director Jane Fitzgerald told Domain that the state is in a good position to start the year: “NSW had a strong 2016 and the next 12 months are looking positive with high expectations for growth, investment and hiring across the state,” she said.
SQM Research managing director Louis Christopher has also predicted a strong Sydney housing market, with forecasts of 11 to 16 per cent for the 2017 calendar year:
“This year could be a repeat of 2015,” he told Domain. “The first two quarters will be strong.”
A note of caution came from Angie Zigomanis, senior manager of research house BIS Shrapnel, who sees continuing growth in 2017 but said: “We won’t get price growth forever … we still think things will start to ease back again in 2018.”
Moody's Analytics economist Emily Dabbs said Sydney property prices had grown 11 per cent in 2016 and her company’s data indicates the strong price growth we saw in 2016 will continue into 2017.
"We haven't really seen a significant decline in prices in Sydney for quite some time, and it's very unlikely to be that way, just because of the amount of demand that there is in the city," she said.
Nationally, figures from Domain show that the median house price increased by 3.7 per cent over the three months ending November to a new record spring high of $774,799. The national unit price also rose by 3.2 per cent to $550,150.
The national house price is now 6.1 percent higher than that recorded over spring 2015 with the national unit price increasing by 4.2 percent over the past year.
Sydney has been Australia’s standout price performer for some time, with prices rising by a massive 67 per cent over the current growth cycle that commenced in June 2012.
The Sydney median house price increased by 4.9 percent over the three months of spring to a record high of $1,106,415 – an increase of 7.4 per cent over the past year.
In December, the auction market boomed, sharply reversing the previous trend of lower auction numbers compared to 2015 at the same time. There were 2463 weekend listings over the month of December compared to 1936 listed over December 2015.
The December weekend auction total was also the highest ever recorded for that month exceeding the previous record of 2421 set in 2014.
Domain Group chief economist, Dr Andrew Wilson, says that Sydney house prices can be expected to increase by 4 per cent in 2017 “…with the increasingly likely stimulatory impact of lower official interest rates offset by higher mortgage rates set by banks.”
He says that unit prices can also be expected to continue to rise although at a lower annual rate than houses. He estimates a rise of 3 per cent as the result of higher levels of new apartment stock entering the marketplace.
CoreLogic's head of research Tim Lawless said the relative weakness of units compared to houses is the result of a surge in supply that demand isn’t keeping up with.
"We are already seeing quite a divergence in the growth rates in the marketplaces where unit supply is looking problematic," he told the ABC.
Mr Lawless said that while there is the possibility of some substitution between houses and units if apartment prices continue to fall in relative terms, there aren’t many options for those wanting to buy a stand-alone house.
"We aren't seeing a great deal of new detached housing development and greenfield development at the outskirts of the cities; the current building boom is all about high-rise developments."
In 2017 the price growth will be noticeably stronger in some areas than it is in others. The days of buying just any property as long as it’s somewhere in Sydney are pretty much behind us, and the new year’s crop of buyers will be more selective.
Simon Cohen, co-founder of buyer’s agency Cohen Handler, says that family homes on the lower north shore are still a “great investment” in the north, while anything near the new light rail in Sydney’s east is worth considering.
“The hottest property types in the east and inner-city areas are two or three-bedroom apartments, as there [has been] an abundance of downsizers selling in 2016 but wanting to remain in the area,” said Mr Cohen.
Building construction slows
We can look at the numbers of building permits issued in NSW and get some idea of what sort of construction industry activity levels to expect over the next two years.
More than 31,000 new homes were built in Sydney in the 12 months to October 2016 - the highest annual number of new homes in over four decades, according to new data released by the NSW Department of Planning. But end-of-year figures show the numbers of development applications and approvals are trending downwards.
NAB senior economist David de Garis told ABC News that the large decline in apartment approvals at the end of 2016 indicated a faster and stronger slowdown in construction than had been expected.
"[Recent] building approvals point to real risks now that the dwelling activity cycle over the next one to two years will now likely be softer than previously expected unless demand and finance soon come to the rescue," Mr de Garis said.
"Against the now clearer decline in the apartment development pipeline, approvals for "alterations and additions" (the renovation market), picked up this month, though even there the trend is negative."
Approvals in NSW were down 19 per cent in figures released by the Australian Bureau of Statistics in November, and Sydney’s position as the driving force in apartment construction is under threat.
RBC Capital Markets' chief economist Su-Lin Ong says she expects the strong construction activity concentrated in east coast apartments will peak next year: “Most striking is the weakness in approvals for private apartments in New South Wales over the last three months, with monthly approvals running at around half their previous pace."
Ms Ong told ABC News that the figures indicate the housing cycle will peak in mid-2017 and that the Reserve Bank will make at least one more rate cut early this year.
One ongoing question is: “Are we building too many units in Sydney?” Fitch Ratings have compared Australia to Ireland, Spain and Great Britain and concluded we do not appear to currently be building more housing than it needs to match population growth, with 0.57 homes completed per extra person.
Australia is currently building enough new homes for each one to house 1.75 people, where the fairly long-term average household size has been 2.6.
Less global in nature but certainly relevant is a 2016 report by BIS Shrapnel that concluded Sydney is still suffering from an undersupply of housing.
BIS managing director Robert Mellor said in the report: “It’s so severe we won’t see an oversupply in Sydney in the next four years. A downturn in Sydney between 2004 and 2012 was so severe, basically only in the last 12 months we’ve started to see construction move above the level of demand.”
Affordability skewed by tax
Both the State and Federal governments have expressed their concerns about how hard it is for ‘ordinary’ Australians to buy a home, particularly in Sydney.
Prime Minister Malcolm Turnbull told The Daily Telegraph that councils are taking too long to approve development applications and that this is fuelling Sydney’s high housing prices.
“We’re not asking people to compromise on planning standards, but it shouldn’t take you 18 months to get a DA if in other cities it can take you six months,” he said.
Housing affordability also remains a major concern of the Property Council of Australia. According to the council, stamp duty is just one of the areas in need of urgent reform with the typical buyer in NSW forking out an average of $40,000.
The council has a good point. Jacob Saulwick, writing in the Sydney Morning Herald, tells us that about 12 per cent of NSW government revenue comes from taxes charged when individuals and companies buy property. Almost 8.5 per cent of revenue comes from taxes charged on residential stamp duty; residential stamp duty increased by 19 per cent in 2014-15, and by 13.4 per cent in 2015-16.
However, NSW Treasurer Gladys Berejiklian insists that housing affordability can only be corrected by increasing the supply of housing: "Tackling housing affordability remains a major priority for the NSW government and we believe the best thing our government can do is to help deliver more houses to put downward pressure on prices," Ms Berejiklian said in her government’s half-yearly budget review.
Professor Peter Phibbs, head of urban and regional planning at the University of Sydney, disagrees. He says that NSW "has done everything right" by supporting an increase in housing supply, but there is no evidence it had done anything to improve affordability.
"It will help, and we should do it," he says. "But we're at 40-year highs [in building completions] and it hasn't generated any significant benefit."
The Daily Telegraph says that Sydney’s high prices are creating “real estate refugees’’ who have to leave the city and migrate north to find affordable housing: “Home buyers are now spending almost half their income on mortgage payments, with Sydney homes costing 10 times more than the average annual wage.”
Coalition MP and federal member for Bennelong, John Alexander chaired a 20-month long enquiry during 2015 and 2016 that looked for ways to help genuine buyers – the ‘owner-occupiers’ rather than investors, own their own homes.
Because the Coalition is committed to a position of not changing the current capital gains tax and negative gearing rules, this leaves little room for other options to be considered.
Treasurer Scott Morrison has outlined the federal government’s position: "It is the Government's view that the mum and dad investors, who actually provide the capital for the nation's rental housing stock, if we were to withdraw that, then that has the only outcome of increasing rents," Mr Morrison said.
Mr Alexander’s enquiry considered such mechanisms as making continuing adjustments to the ability of banks to lend to investors, and allowing workers to divert the 9.5 per cent of wages now going into superannuation towards paying off a home loan.
But to date no clear direction has emerged from the enquiry’s findings. In fact, the enquiry was unable to make any recommendations to the government for reform of the present situation.
"The committee notes that rates of home ownership and investment in housing have remained broadly steady for many decades and that the current price cycle in the housing market across the nation overall is not inconsistent with historical trends," the enquiry’s report said.
Committee chairman David Coleman fell back on the argument that there is no structural problem with housing affordability and supply should be boosted as appropriate.
Grattan Institute chief executive John Daley told the Sydney Morning Herald: "They cannot be serious. It's laughable. There's clearly a housing affordability problem for younger households."
Mr Daley added that housing data showed home ownership rates for people under 55 and for low-income Australians are "falling like a stone".
And it’s not being caused by foreign buyers. A recent study by two Treasury officials concluded that the impact of foreign buyers on Sydney property prices is relatively small.
A working paper by Treasury officials Chris Wokker and John Swieringa said that compared to the average quarterly increase in property prices of around $12,800 in Sydney and Melbourne, foreign demand increases prices by between $80 and $122 on average.
“Foreign demand has accounted for only a small proportion of the increase in property prices in recent years,” the paper concluded.
But it’s not like investors are leaving the scene, according to The Guardian’s Greg Jericho: “It is now five years since the RBA began cutting rates in November 2011. In that time there has been a veritable surge in the housing investment that has helped fuel economic growth,” he writes.
“So strong has been the growth of dwelling investment in NSW that while in total NSW accounts for just under a third of all such investment in Australia, it has accounted for 61% of the growth in that investment in the past five years.”
Soon, there could even be a rush of Americans who aren’t sure they want to live under a Trump administration looking for new homes in Sydney, according to the Financial Review’s Su-Lin Tan.
“Aside from apartments, ‘fleeing’ Americans [are] also looking for ‘traditional Australian homes’ in Sydney's eastern suburbs and most were willing to spend between $3 million to $5 million.”
She quotes Raine & Horne's Ric Serrao who said he received the number of inquiries from America that he normally has all year in just six weeks after Mr Trump won the US election.
"In my market [in Sydney’s eastern suburbs] we normally get 10 to 15 inquiries all year. We have had 12 to 15 since the election," he said.
Clearly, the opportunities for further growth in property prices that are offered by Sydney more than any other capital city are too good to be overlooked by investors who’ve already done well and will simply continue doing what they’ve been doing in 2017.
Interest rates TBA
Although there are several conflicting forecasts already being made for interest rates this year, it would be a brave economist indeed who would bet their own house on a percentage of increase or decrease until we gain an idea of just how the election of Donald Trump will affect US financial markets.
The new US President has said he will slash taxes on business and expend massive amounts on infrastructure and the military, financed in no small means by deficit spending. The US GDP will most likely rise, as will the national debt. But nobody really knows what it means for interest rates.
Steve Keen, economics professor at London’s Kingston University, thinks Trump’s first term will see a sharp acceleration in US growth – to perhaps 4 per cent a year.
(Although he hates being reminded of it, we should mention that this is the same professor Keen who in 2010 made a 225-kilometre trek to Mount Kosciuszko after losing a bet he made in 2008 that Sydney house prices would fall by 40 per cent.)
But whatever happens, it will affect interest rates in Australia. The Guardian’s Lindsay David believes that Trump’s policies could be inflationary for Australia’s economy: “The post-Trump election bounce in US bond yields has already fed into an increase in borrowing costs in Australia” he wrote.
“Rising bond yields mean that the government or banks have to pay a higher yield (interest rate) to borrow money because the market is starting either to demand greater reward for risk – or to combat real economy inflation in a nation that has its banking and household sectors already highly leveraged.”
Although that national description can be applied to Australia, most Australian economists are still betting – in print, on at least one rate cut early this year. However, the OECD is predicting the Reserve Bank will start to increase rates late in 2017 as the economic recovery strengthens and housing prices blow out.
"This is not completely crazy," said Paul Dale from Capital Economics, in an interview with the Sydney Morning Herald. He points to a stronger-than-expected housing market, a weaker Aussie dollar, and Trump's surprise victory contributing to a spike in Australia's key commodity prices as well as a six per cent rise in equity prices.
However, Mr Dale also says the RBA is "almost guaranteed to leave interest rates on hold" following the surprisingly big fall in construction work in the third quarter of 2016, a concern over deterioration in the labour market and still-soft wages growth.
The major banks have already begun to raise their variable interest rates on new and existing loans. The increases are small, but they are being applied without any increase in the RBA’s rate and despite a general belief among most economists that rates will not increase in the short-term.
"We consider a range of factors when we set interest rates, such as what is happening in the economy, the market, and regulatory requirements. This includes when changes need to come into effect," a NAB spokeswoman told the Herald’s Clancy Yeates.
Macquarie economist James McIntyre is predicting a base case of two RBA cuts in the first half of 2017, taking the cash rate to a new record low of one per cent.
"The recent data flow suggests that the RBA will be presented with weaker-than-expected economic growth, and potentially lower inflation, when it meets in February," he told a briefing in Sydney.
The RBA has been counting on continued strength in home building to offset the lingering drag from a slump in commodities prices and mining activity.
"Total approvals are still relatively high but the speed at which they are rolling over is a real surprise," said Shane Oliver, chief economist at AMP, quoted in a Reuters release.
"It already looks like the economy lost momentum in the third quarter and now residential investment could turn into a drag on growth [in 2017]. That only underscores our call for another rate cut."
Meanwhile, the RBA has been resisting further easing following cuts in August and May that took the cash rate to an all-time low of 1.5 per cent.
Government policymakers argue that the drag from a slowdown in mining investment has almost passed, and a revival in prices for key commodity exports in recent months indicates a rise in national income is about to happen.
Mortgage Choice chief executive John Flavell told News.com.au that the possibility of a rate hike became far more likely when the US Central Bank announced it would increase its benchmark short-term interest rate in December.
“The [US] Central Bank said the recent progress of the economy gave them the impetus they needed to increase the Federal Funds rate by 25 basis points to 0.75%,” he said.
“The Bank also indicated that the Federal Funds rate could rise by a further 75 basis points throughout 2017 — through three separate rate increases.
“This announcement, combined with the fact that many of Australia’s lenders have started to raise rates across their suite of home loan products, would suggest a cash rate increase by the Reserve Bank of Australia is now more of a possibility than not in 2017,” he told News.com.au.
There are some safe bets for 2017: Sydney housing prices will remain on their upwards trajectory, the rate of prices growth for detached houses will be higher than the rate for units, auction clearance rates will stay robust, some parts of Sydney will strongly outperform others, and investors will continue to acquire property thanks to the taxation advantages they enjoy.
But interest rates remain uncertain. At its last board meeting of 2016, the Reserve Bank said that conditions in the established housing market have strengthened in recent months.
“In Sydney and Melbourne, housing price inflation had picked up and auction clearance rates were at high levels,” the RBA’s December 6 board meeting minutes declared.
This could mean the RBA is setting up conditions for a rate rise in early in the new year. But don’t try to be brave and bet your house on interest rates going up, going down or even staying the same in 2017. It’s very much a case of ‘To Be Advised’.
Sources:
‘Expected house price growth in 2017 could spell trouble for Sydney,’ Jennifer Duke, Domain, 13 January 2017
‘Sydney real estate: Home values DOUBLE in eight years, buyers forced to migrate north,’ The Daily Telegraph, 3 January 2017
‘Wealthy Americans eye Sydney property to escape Trump,’ Evan Vucci, Australian Financial Review, 1 January 2017
‘Steve Keen: rebel economist with a cause,’ Patrick Commins, Sydney Morning Herald, 5 January 2017
‘NSW Treasury braces for Sydney property market slowdown,’ Jacob Saulwick, Sydney Morning Herald, 12 December 2016
‘Year in review: A look back on the big stories affecting the real estate industry in 2016,’ Kate Jones, Domain, 29 December 2016
‘Economists predicted house prices would stabilise in 2016, but the opposite happened,’ Gareth Hutchens, The Guardian, 4 January 2017
‘Property 2017: Gold Coast set to boom, but still no end in sight for Sydney,’ Julia Corderoy, News.com.au, 25 December 2016
‘Record number of homes built in Sydney, but it's still unaffordable,’ Lisa Visentin, Sydney Morning Herald, 22 December 2016
‘As Australia's housing bubble gets bigger, the Reserve Bank prepares to blame Trump,’ Lindsay David, The Guardian, 1 December 2016
‘Apartment approvals crash as building cycle rolls over,’ Stephen Letts, ABC News Online, 30 November 2016
‘Sydney property prices show no signs of slowing down in 2017, while other major cities ease up,’ David Taylor, ABC News Online, 30 November 2016
‘Malcolm Turnbull's big chance to be the new Menzies and help first home buyers,’
Peter Martin, Sydney Morning Herald, 1 December 2016
'It's laughable': Government slammed for housing affordability probe that proposes no changes’, Michael Koziol, Sydney Morning Herald, 18 December 2016
‘Spring house prices surge – Sydney and Melbourne still booming,’ Dr Andrew Wilson, Domain, 18 December 2016
‘Housing affordability: ‘Red tape’ to blame for property crisis,’ Daily Telegraph, 27 December 2016
‘Sydney auction market ends year on record high,’ Dr Andrew Wilson, Domain, 20 December 2016
‘Housing supply and demand in balance: Fitch,’ Michael Janda, ABC News Online, 30 November 2016
‘Rate hike? A cut is far more likely, economists say,’ Zac Crellin, Sydney Morning Herald, 1 December 2016
‘Australia home building boom fast turning to rubble,’ Wayne Cole, Reuters, 30 November 2016
‘House prices tick higher but unit values fall,’ Michael Janda ABC News Online, 1 December 2016
‘Study: Foreign buyers lift prices between $80 and $122 on average per quarter,’ AAP on Domain, 2 December 2016
‘Investors are back: the uneven housing market, interest rates, and what the RBA can do,’ Greg Jericho, The Guardian, 14 December 2016
‘Are we headed for a housing crash — or not?,’ Charis Chang, News.com.au, 4 December 2016
‘Speedy rate hikes protect bank margins,’ Clancy Yeates, Sydney Morning Herald, 11 December 2016
More homes planned for Sydney but affordability concerns grow
Mon, 12 Dec 2016The NSW government, having already raked in unprecedented millions in stamp duty from the superheated property market of the past three years, has now announced that something like 200,000 new homes will be built in Sydney over the next five years.
NSW Planning Minister Rob Stokes said that these new homes would be mostly apartments and townhouses, and that development would be focused on Parramatta, Blacktown and the City of Sydney.
"While there will continue to be opportunities to buy detached homes on the blocks on the fringes of Sydney,” he said, “there's a real focus on apartments, on terrace houses and on medium-density developments in established areas."
Without a great amount of detail about the government’s plans at this stage, he said the government was spending $73.3 billion on infrastructure over the next four years that would "support growth in the right areas".
The NSW Government also has plans extending 10 years into the future. The Department of Planning forecasts that an extra 600,000 people will be living in Sydney’s south and far west in the coming decade.
The Minister says the city’s future housing needs will be met in thirds. According to ABC News Online’s Jacob Saulwick, the government’s intentions are that one-third of Sydney’s new housing will be built on the outer south-west and north-west fringes of the city; one-third will be spread through the city’s existing suburbs, and one-third will be delivered close to existing public transport in state government led programs.
And it’s not all about apartments. In October, the NSW government released the draft of a ‘Medium Density Design Guide’ that it hopes will encourage the construction of new townhouses and terrace style housing.
Mr Stokes calls terrace houses in the draft ‘the missing middle’: “What we know is that we’re getting a lot of apartments and high-rise units across Sydney, we’re also getting detached housing on the fringes of Sydney,” Mr Stokes said in an interview with the ABC.
“What we are missing out on though is that human scale of development that typifies so many cities overseas and that really is all about terraces.”
As News.com.au journalist Julia Corderoy points out, builders would rather construct apartments: “Medium density housing accounts for just 10 per cent of housing approvals in Sydney, with just 5,390 approved in 2015-16.
“This is despite there being the potential for almost 280,000 medium density dwellings in Sydney based on current council zoning and planning controls.”
This situation could change if apartment sales continue to slow and developers turn to the yet-untapped market for townhouses and terrace houses that represents an unsatisfied demand from young families and recent retirees.
Minister Stokes made the news again in late November when he blamed negative gearing tax breaks for reducing housing affordability in Sydney, and said increasing the supply of new dwellings will not make property more affordable.
Several property industry figures immediately rebutted the Minister’s position, and Prime Minister Malcolm Turnbull confirmed there are no plans to change the present negative gearing taxation arrangements.
Unit construction boom continues
CoreLogic’s Cameron Kusher says that at the end of the June 2016 quarter there were 55,682 units under construction across NSW: ““If you look at the long-run averages you can see that the current unit construction boom is unlike anything we’ve ever seen before. The long-run average for units under construction is 16,194 in New South Wales.”
Further analysis shows that, if all the approved units are completed, over the next two years unit stock in some regions of Sydney is going to increase dramatically - Strathfield-Burwood-Ashfield will increase by 20.7 per cent, Parramatta unit stock will increase by 19.2 per cent and Auburn by 26.1 per cent.
As expected, the building boom is showing signs of slowing, with building approvals falling 8.7 per cent nationally in September as the number of new apartments approved fell to its lowest total in eleven months. Apartment approvals in NSW experienced a 20 per cent month-on-month decline in September, the biggest fall in over a year.
UBS economist Scott Haslem said he wasn’t surprised by these figures as they were anticipated by market analysts: "Nonetheless... the backlog of approvals / commencements implies housing supply will not actually peak until 2018. This will support housing activity throughout 2017 and into early 2018."
Price growth unstoppable
Domain Group data found Sydney’s median house price has now reached a record $1,068,303, after a 2.7 per cent jump over the September quarter. Investor activity also increased 9.2 per cent in the year to August 2016, said Domain Group chief economist Andrew Wilson.
“The growth is raging back into Sydney … we have auction clearance rates in the mid-80 per cent range, and there were two interest cuts in August and May this year,” Dr Wilson said.
Figures from CoreLogic also confirm that home prices in Sydney continue to rise with a 10.6 per cent year-on-year gain to November. This is a price “reacceleration” according to CoreLogic’s research director, Tim Lawless.
"Consistently over the past two months we've been seeing Sydney clearance rates above 80 per cent, in fact there's only been one week over the past eight where the clearance rate has dipped only slightly below the 80 per cent mark," he said in an interview with ABC News journalist Gordon Taylor.
"So I think we have seen some rebuilding in the housing market on the back of a lower cash rate and lower mortgage rates."
He added that the current home price spike is still a significant reduction from the peak growth rate of almost 19 per cent per annum for Sydney property prices in July 2015.
Property analysis firm SQM Research believes the “reacceleration” will continue into 2017. Its ‘Property Outlook Report’ forecasts price growth over 2017 of between 11-16 per cent in Sydney.
Louis Christopher, head of SQM, said in the report: “What we have noticed in very recent weeks is an acceleration, particularly in the Sydney housing market. Our view is that this acceleration will continue, it will go well into 2017."
He does recommend the Reserve Bank of Australia (RBA) and the bank regulator APRA take some action to further tighten lending criteria before 2018: "What we suggest is that it's best to move sooner rather than later because, if there is no action, it could be a large issue in 2018 where potentially a hard landing could play out."
Supply shortage to 2018
Seeing a potential glut of apartments in parts of Sydney, National Australia Bank has identified some suburbs where buyers will need a minimum 20 per cent deposit to get a home loan from the bank.
It has issued a list to brokers of what it calls ‘Group A’ postcodes in rural areas, where lending is capped at 70 per cent of the property’s value, and ‘Group B’ postcodes where an 80 per cent loan-to-value ratio will be required. Sydney’s Chippendale, Waterloo, Haymarket, Carlingford, Parramatta, Barangaroo and Homebush are some of the suburbs on the latter list.
Comparison website Canstar editor Justine Davies points out that aspiring property owners can always look outside the ‘Big Four’ banks for a loan: “There are more than 100 home loan lenders in the market, and the vast majority still offer home loans with a deposit of 10 per cent or less.”
At least one of the ‘Big Four’ isn’t worried about a glut being caused by the number of apartments now being built in the greater Sydney area. The head of Westpac’s consumer bank, George Frazis, says he is confident that Sydney will still have a shortage of homes over the next two years, and quite possibly longer than that.
Although he expects something like 10,000 new apartments to be completed over that time, he said in an interview with Business Day that Westpac has no concerns about its exposure to inner-city units.
"We still have a structural shortage of housing in Sydney because of the population growth and the pent-up demand," he said. "Even if we look at what's coming online over the next year or two, we'll still have structural undersupply."
He did say that Westpac had “lowered its exposure” to inner-city apartments, but pointed out that the proportion of inner-city apartment loans more than 90 days behind in repayments was lower than the bank’s loan book average.
Regardless of whether Westpac has reason for any concern about a possible glut of apartments, CoreLogic figures show that apartment prices in the Sydney CBD have fallen – a 9.1 per cent drop over the past 12 months.
One cause of this decline is the change in the attitude of the ‘Big Four’ over the past two years, from one of expansion to the present tightening of loan requirements.
REA Group Chief Economist, Nerida Conisbee believes this has been caused by “settlement risk” saying: “Banks are now being restricted on the amount that they are lending, particularly to investors. People have put down deposits two years ago…but [in that time] the banks can change their approach to risk quite significantly.”
In some cases, buyers who paid their deposit on an apartment two years ago may now find that their bank won’t lend them the full amount of the balance of the purchase price. That can force the original buyer to sell the property for a lesser amount than they originally agreed to pay.
Ms Conisbee told news.com.au journalist Julia Corderoy that at least this offers a glimmer of hope for first-home buyers: “It is fantastic for affordability. People talk about an oversupply and in the same breath an affordability problem, but you kind of have to have an oversupply to lead to affordability.”
Another glimmer came from a recent ruling that foreign investors can only purchase new properties. As news.com.au journalist Frank Chung described it: “If an off-the-plan sale falls through, the property will be considered second-hand. This means thousands of foreign buyers will be stopped from picking up the properties, lowering the eventual resale price.”
Inevitably there will be some off-the-plan sales that fall through. It may well be only a small percentage of the total number of new units coming onto the market, but property research firm CoreLogic says around 230,000 apartments are due to be completed across all capital cities by 2018 - more than double the annual average sales of apartments over the five years to April 2016.
The affordability issue
Housing affordability is increasingly being identified as a serious problem for those wanting to acquire a home in Sydney. With prices as high as they are, and no end in sight to the upwards price curve, governments at both state and federal levels are waking up to the fact that would-be buyers – especially those who are younger and earning lower wages, have been priced out of the Sydney market.
This also affects those who want to find rental accommodation in Sydney. Rents are broadly based on property prices – the more valuable the property, the higher the cost of renting it. High prices mean high rent costs, and despite some indications of price falls in CBD units, Sydney is still an extremely expensive city in which to rent an apartment.
The answer isn’t just to build more apartments if it’s going to cost over $1 million for a 2-bedroom unit within 20 km of the CBD, nor is it to have apartments built on the city fringe where infrastructure – such as public transport, schools and hospitals is missing or in short supply, and where jobs are hard to find.
There are many voices offering a variety of solutions, some of which are practical, at least in theory, and others that are wildly optimistic and impossible to implement. Social housing is often mentioned in the media, but governments at all levels have no plans or funding for constructing large social housing projects in our capital cities.
John Daley, CEO of the Grattan Institute, offers his opinions: “New developments on the edge tend to be a long way from where additional jobs are being created. Over half of the net growth in jobs in Melbourne, Sydney and Brisbane in the last five years was within 10km of the CBD.”
But the market is clearly showing it doesn’t want this new supply to be ‘inexpensive’ apartments, according to LJ Hooker Head of Research Matt Tiller: “I think at this stage, developers are building what the market demands. They have obviously seen demands for these luxury high-end apartments,” he said.
So, even if the problems of housing affordability are easy enough to delineate, their solutions are proving elusive. One thing is clear: no matter how much housing is added to the market in the greater Sydney area, prices will keep rising.
Looking forward
Looking toward the future, most observers of the Sydney property market can see only blue sky ahead. Despite a slowing of the year-on-year price growth, there’s little doubt that the present upwards price pressures will continue well into 2017.
The property market seems to be going its own way, regardless of mixed economic signals – we have a lower jobless rate but falling full-time employment levels, the Australian dollar remains high while inflation and interest rates are at record low levels.
Interest rates have suddenly popped back into the news with speculation that the election of Donald Trump in the USA could bring on global conditions that would favour an increase in interest rates.
It was only a few weeks ago that both Trump’s election and a rise in interest rates seemed out of the question. Concern about inflation had led the RBA to cut rates twice this year which had the effect of adding strength to the Sydney property market.
More recently, financial traders have grown increasingly confident about the Australian economy and are now pricing in a greater than 50 per cent chance of a rate hike in 2017.
Westpac’s George Frazis also raised the possibility of higher mortgage interest rates as a result of the recent surge in bond yields: "Obviously, if the yield curve is going up, then that will have an implication for fixed rates, potentially," he said.
Westpac is the first major bank to increase interest rates on its fixed rate home loans and investment loans - an increase of 0.6 percentage points to 4.59 per cent in the interest rate for five year loans to investors, and market watchers expect other lenders to follow.
Domain asked three of the city’s most prominent analysts what they thought would happen in the coming year and here’s what they replied:
HSBC chief economist Paul Bloxham said there’s likely to be more price increases over the next few months, but it will be single digit rather than double-digit growth on an annualised basis,
BIS Shrapnel residential researcher Angie Zigomanis thinks price growth is likely to continue, as investor numbers are looking better and the banks could be loosening some of their criteria for lending.
Century 21 chairman Charles Tarbey said he has “bullish prospects” for the market to the end of the year but thinks prices may start to moderate in 2017.
Eliza Owen, market analyst for Onthehouse.com.au, sees the market slowing but still strong: “In the NSW market, capital growth, sales and development are still steady, though capital growth in Sydney is lower than the previous year. [More affordable] Western areas of Sydney in particular are being capitalised upon by developers.”
And in his October ‘Property Snapshot Infographic’, CoreLogic’s research analyst Cameron Kusher also remained cautiously optimistic, saying: “We are expecting Sydney and Melbourne value growth will remain strong for the remainder of 2016 [but] will probably start to slow throughout 2017 as more supply enters the market.”
Sources:
‘Forget apartments: We need more townhouses,’ Julia Corderoy, News.com.au, 29 November 2016
‘November Market Update’, Eliza Owen, Residex, 25 November 2016
‘NSW Government should abolish stamp duty and leave negative gearing, real estate industry figures argue,’ Jennifer Duke, Domain, 25 November 2016
‘Westpac's George Frazis hoses down apartment glut,’ Clancy Yeates, Sydney Morning Herald, 21 November 2016
‘Apartment prices in our CBDs are falling,’ Jill Corderoy, News.com.au, 20 November 2016
‘Sydney set for biggest-ever housing construction boom in 'war against sprawl',’ Virginia Small, ABC News Online, 20 November 2016
‘Where we’ll live’, Jacob Saulwick, ABC News Online, 22 November 2016
‘Home prices continue rising; Sydney, Melbourne, Canberra lead,’ Michael Janda, ABC News Online, 1 November 2016
‘Home prices to keep surging in Sydney, Melbourne over 2017, risk of 2018 bust: SQM Research,’ Michael Janda, ABC News Online, 3 November 2016
‘RBA grapples with uncertain job market, accelerating housing,’ Michael Heath, Bloomberg in Sydney Morning Herald, 15 November 2016
‘Failed off-the-plan apartments ‘second-hand’,’ Frank Chung, News.com.au, 24 October 2016
‘These Australian suburbs could see explosive growth in new apartments in the next 2 years,’ David Scutt, Business Insider, 25 October 2016
‘NAB blacklists loans for properties in ‘risky’ suburbs,’ Dana McCauley, News.com.au, 24 October 2016
‘Solutions beyond supply to the housing affordability problem,’ John Daley, Joe Hurley, Nicole Gurran, Robin Goodman, Domain, 25 October 2016
‘Strongest Sydney house price growth in a year: Domain Group,’ Jennifer Duke, Domain, 27 October 2016
‘Building approvals fall more than expected in September as apartments slump,’ Michael Bleby, Australian Financial Review, 2 November 2016
‘Demand for luxury apartments signals worrying trend for affordability,’ Julia Corderoy, News.com.au, 28 October 2016
Sydney property is past peak growth but it’s not over yet
Mon, 31 Oct 2016The ‘Great Australian Dream’ may be over but prices growth in Sydney is sustained by strong demand while affordability remains a concern for first-home buyers.
The media love a good disaster, which is why every so often there’s a headline about an impending property price collapse, often predicted by an overseas ‘expert’ or even an Australian analyst who’s not getting his or her desired share of media attention. The words ‘crash’ and ‘bubble’ are familiar in such articles.
It’s not just the tabloid media that likes to push the ‘bubble’ button. Global asset manager UBS even has a ‘Global Real Estate Bubble Index’ report which recently analysed residential property prices in 18 financial centre cities around the world, with Vancouver, London and Stockholm at the top of the list and Sydney in fourth place.
Using a methodology developed by the US Federal Reserve Bank of Dallas, UBS found the real house price to disposable income ratio per capita had risen to its highest point since the survey started in 1985 and showed Australian house values had moved about seven per cent above previous peaks in 2003, 2007 and 2010.
"A change in macroeconomic momentum, a shift in investor sentiment or a major supply increase could trigger a rapid decline in house prices," the UBS report said, concluding that: "Investors in overvalued markets should not expect real price appreciation in the medium to long run."
Morgan Stanley went a step further. The firm’s analysts issued a research note that forecasts a national housing oversupply of about 100,000 dwellings will develop by 2018. It believes the RBA will be forced to cut interest rates even more in the second half of 2017 – to a new record low of one per cent.
Journalist Clancy Yeates, writing in the Sydney Morning Herald, commented on recent media reports about homes selling for big premiums above their reserve prices and auction clearance rates at or above record levels: “When you consider prices have already surged 60 per cent in Sydney and 40 per cent in Melbourne in the last four years, it can start to look a bit ‘bubbly’, says Mr Yeates.
He looked at the results of Westpac’s October survey which shows consumers are getting cautious about housing. Their responses to the question: “is this a good time to buy a dwelling”, are about evenly-divided between pessimists and optimists. With interest rates at historic lows this came as a surprise.
It does help explain why banks’ approvals for new home loans are showing signs of declining. With a high number of rental apartments due to come onto the market over the next couple of years, rents are likely to also decline and that makes renting a more attractive option to buying.
52 months of growth
This column has a focus on the greater Sydney area where prices have most certainly gone skywards in recent times. It must be remembered that property is always a long-term asset in a market that has experienced cycles of ‘bust’ and ‘boom’ many times.
Domain Group data shows that Sydney’s median house price is now at a record $1,068,303, after a 2.7 per cent jump over the September quarter. Naturally, after 52 continuous months of property price growth, we wonder what’s coming next in the mix.
CoreLogic head of research Tim Lawless told News.com.au that the last time the market had experienced such a long period of growth was during the housing boom between 2000 and 2004 but conditions aren’t the same in 2016.
“More and more segments of the marketplace just simply can’t be involved in the market because they can’t either scrape together a 20 per cent deposit because prices are so high or they simply can’t service a mortgage, despite the very low mortgage rates because the buy-in price is quite substantial,’’ Mr Lawless said.
However, in 2016 we can see some definite parallels with the boom of 2004. An independent consultant, Shane Lee, investigated the situation regarding apartment oversupply in the Eastern states.
"We saw this (oversupply) in 2004 and a sharp correction in prices," Mr Lee told ABC News Online’s Stephen Letts. "Over 18 months to two years we saw apartment values fall 15 to 20 per cent in Sydney."
At that time, when there was a resources boom in Western Australia and Queensland, property investment followed the flood of workers to the resource rich states and apartments in Sydney became vacant.
Combined with rising interest rates, this caused a halt in Sydney apartment construction and we’re just now getting back to filling the vacuum created by the undersupply.
Lots of apartments, but not many houses. In fact, according to an article by Julia Corderoy on News.com.au: “The latest Metropolitan Housing Monitor statistics released by the NSW Government show just 35 detached houses were built in the inner-city Sydney local government area in 2016. This compares to the 2836 multi-unit dwellings completed.”
From GFC to stability
In the past two years, we’ve seen a period of price stabilisation following the recovery from the Global Financial Crisis – an economic event so significant that just the initials ‘GFC’ bring memories of widespread financial losses. But that was really a crisis of 2008-2009 – long enough ago for our property market to have not just recovered but to have made amazing gains.
We’re now in a time of ‘unprecedented uncertainty’ according to Michael Bleby of the Australian Financial Review. As he describes it: “A record year for Australia’s volume home builders raises concerns that the country’s largest-ever housing construction cycle has peaked.”
The Australian Bureau of Statistics (ABS) keeps a close watch on the housing situation and their figures clearly show that house price growth is slowing. Statistics from CoreLogic show that growth in Sydney slowed to just 0.8 per cent in September.
Another factor in the housing cycle, particularly in metropolitan Sydney, is the serious decrease in affordability; housing is too expensive. The situation is especially dire for first-home buyers who are the most talked-about victims of the housing market’s high prices.
Domain’s chief economist, Dr Andrew Wilson said the current strong auction market has predictably translated to higher prices which please sellers: “Potential first-home buyers, however, will not welcome higher prices that will act to offset the benefits of current record-low interest rate and a highly competitive lending environment.”
In fact, a recent revision in statistics collection methods by the ABS found that numbers of first-home buyers were even lower than previously reported. An ABC News Online article by reporter Thuy Ong revealed the original ABS numbers showed that 14.1 per cent were first-home buyers nationally in July 2016, but that has been revised lower to 13.2 per cent. In New South Wales that figure drops to 8 per cent.
"I think it reinforces what a lot of people think and that first home buyers are really struggling in the market at the moment," said Cameron Kusher, head of research at CoreLogic.
Also reported by ABC News Online, research by Deutsche Bank's chief Australian economist Adam Boyton shows it would take a 25 per cent decline in Sydney home prices to bring the size of the deposit required back the average level of the past 20 years.
"The more pressing affordability issue has less to do with mortgage repayments in our view, but more to do with the ability of those that have not enjoyed the most recent run-up in prices to enter the market," said Mr Boyton.
More supply not the answer
In a lunch-time address to the Urban Development Institute of Australia in Sydney, Federal Treasurer Scott Morrison dismissed suggestions that cheap credit is causing an investor-driven housing bubble in Australia. He outlined a major push by the Turnbull government to increase supply and help first home buyers own their own home.
He said the federal government will focus on focus on “how state governments can do away with planning rules that stop, or delay, new houses being built” to increase the supply of housing in areas where housing is unaffordable.
However, Domain’s Jennifer Duke says simply adding more housing to the Sydney area won’t solve the affordability problem: “An additional 30,000 homes were built in Sydney in the last financial year, the most building activity since the city’s 2000 Olympic Games”, she writes.
“In 2015-2016, 30,191 new houses and apartments were completed, up 10 per cent year-on-year…This compared to 30,520 new homes built in 1999-2000, when builders were rushing into the market before the introduction of GST in July 2000.”
As any first-year economics student knows, prices won’t go up unless there are purchasers for the goods or services, and in this case investors and overseas buyers have come to the party and picked up almost everything on offer. There is so much demand for Sydney property that estate agents are finding it hard to meet the demand of potential buyers on their books.
CoreLogic says that its figures show that fewer than 20,000 dwellings are for sale across Sydney, which is less than half the number listed five years ago. Ken Jacobs, who owns a luxury property agency in Double Bay, says there aren’t even enough $5 million houses on the market. "There's more inquiry than actual properties available," said Jacobs
Auction clearance rates have never been higher and there’s a real ‘Fear of Missing Out’ (or FOMO as it’s known) among property buyers that has underwritten the recent rises in auction sales results.
Why aren’t sellers rushing onto the market to profit from high prices? Newtown agent Duncan Gordon told Domain’s Stephen Nicholls the answer is simple: “People haven’t got a choice of somewhere to move to so why would they sell … a lot of those who are selling have a high motivation – death, divorce or investors cashing in for retirement.”
For a time, it seemed the construction of new apartments would satisfy the demand. Australia’s biggest construction firms – Meriton, Brookfield Multiplex and Mirvac, planned for towers of apartments in Sydney and Melbourne with confidence they’d sell off the plan. But times change and the ‘big three’ are now cutting back on starts of new projects.
This has opened a door of opportunity for smaller builders like Newcastle-based MJH Group who’ve just moved into eighth place in the builders’ rankings. Their managing director, Andrew Helmers, says that greenfield developers can still keep volumes rising if they’re willing to cut their profit expectations.
“The prices have to come off,” Mr Helmers told the Australian Financial Review. “The peak of the market was about Fathers’ Day last year, [but] it’s still a land of opportunity for any agile builder in my view.”
A possible bit of good news for first-home buyers was raised in The Australian by journalist Frank Chung, who said a ruling by the tax office could place some apartments purchased off-the-plan off limits to overseas investors.
Mr Chung said that if an off-the-plan sale falls through, the property will be considered second-hand, meaning that foreign buyers will be stopped from purchasing those properties, thereby lowering the eventual resale price.
If a significant number of off-the-plan apartment purchase failures eventuates as some analysts believe is beginning to happen, this could create buying opportunities for local purchasers to acquire them at less than their original prices.
Return to terrace houses
One of the factors now dampening demand is the acceptance by the generations that followed the Baby Boomers that the ‘Aussie dream’ of a quarter-acre block in suburbia is beyond their reach. NSW Planning Minister, Rob Stokes, says we need to change our cultural views: “In 1975 … Sydney was a homogenous sprawl of terracotta roofs. To buy a house it cost four times the average salary – today, the same home costs at least 12 times the average salary,” he said.
One possible solution currently being floated in the media is a return to terrace houses that could fit five dwellings into a typical 800 square metre block. Frasers Property Australia’s Residential NSW general manager Nigel Edgar, says there is already strong demand for terraces and townhouses.
“For Sydney to cope with its population growth, there needs to be more options on the market,” he told Domain. “At the moment we’ve got two peak strategies for new development, either greenfield land or apartments and there needs to be much more variety than that.”
NSW Planning Minister, Rob Stokes says it’s possible that new terrace housing could be on the market in as little as 12 months: "This is very much pointing to what the Sydney of the future might look like," he said. "There will continue to be a lot of detached housing stock ... but it is very clear we need a greater diversity in housing types."
Upwards ever upwards
Urban Taskforce chief executive Chris Johnson disagrees, saying that more medium-density housing was unlikely to solve Sydney’s future housing needs: “My worry is that if people aren’t realistic to say that we do need taller buildings as part of a mix and need a reasonable number of them, we’re going to struggle,” he said.
“Where is the available land? If we don’t seriously address land usage through height we’re just going to run into big problems.”
But investors are critically important elements of demand in the present market, and just building more towers of apartments doesn’t necessarily mean that they’re going to be seen as good investment propositions. Scott Phillips, the Motley Fool's director of research, says property investors should think carefully about borrowing to acquire an investment unit just because of the old saying: “They’re not making any more land”.
“That's spot on”, he says, “but they're sure as hell making more units. And more units, and more units. Some are saying that'll precipitate a crash, but even if it doesn't, that's going to put - to use the pollies favourite phrase - 'downward pressure' on prices.”
According to figures from CoreLogic, an extra 2857 units are expected to be completed in Sydney’s inner city in the 12 months to April 2017.
The Reserve Bank of Australia (RBA) recently issued a warning that some off-the-plan unit buyers were having problems settling on their purchases. It identified the risk that off-the-plan buyers may not be able to settle because the banks could value the properties at less than the contract price, and noted that Sydney would have 10,000 new units over the next two years.
“In part they are correct but the RBA is overplaying it a little,” said Louis Christopher of property research group SQM Research.
“They say growth has moderated and yes, up until the first half of the year, but there are many indicators particularly Sydney that says the market is accelerating again. The oversupply is not enough to create an almighty crash.”
Chris Richardson of Deloitte Access Economics says that property could become a bad investment choice ‘over coming decades’. He told the Australian Financial Review that a combination of falling apartment prices and rising interest rates will lead to tough times ahead for property investors.
"In some pockets, you would absolutely expect that by 2019 those inner-city apartments would be selling between 10 and 15 per cent lower in price than today", he said. “That's always the way, as booming housing prices starts to get old, the last people through the door are the ones who end up getting hurt."
Dr Nigel Stapledon of the UNSW Business School said he didn’t think it would be quite so dramatic: “Quite a high number of units are under construction and will be fed into the market in the next year or two, so there’s a pipeline of work which is unusual,” he said.
“It’s still going to be profitable to go in and some people will still do OK in the real estate market but it’s going to be harder.”
Citi's Paul Brennan agrees, saying the apartment boom isn’t over yet: “Apartment completions lag starts by one-two years, so the developing oversupply will continue to build into 2017 and 2018 with completions probably doubling across the eastern states," Mr Brennan said.
Past the peak?
CoreLogic’s Cameron Kusher says that the quarterly pace of capital gains in Sydney peaked over the June quarter of 2015 at 7.4 per cent, but prices growth is still robust.
“Although value growth in Sydney and Melbourne is not as strong as it was at its peak, growth continues to be supported by high auction clearance rates which are now at their strongest levels since the June 2015 quarter. In Sydney, clearance rates remained above 80% throughout September.”
Phil White, CEO of QBE Lenders’ Mortgage Insurance looked three years into the future and concluded: “prices are forecast to soften through the three years to 2019, which is likely to be positive for housing affordability. It's expected owner-occupiers, including first home buyers, will be stepping in to pick up some of this opportunity in the market."
Domain’s Dr Andrew Wilson has no doubts the boom still has legs to run, saying there was a ‘predictable’ resurgence in residential investors after a mid-year pause: “The latest Australian Bureau of Statistics data reports that lending to NSW investors increased by 1.6 per cent during August to $5.78 billion – 9.2 per cent higher than that recorded during August last year.”
“Rising prices, relatively attractive yields and tight vacancy rates will continue to attract investors to the booming Sydney market, again keeping upward pressure on already steeply rising prices”, he said.
Sources:
‘Strongest Sydney house price growth in a year: Domain Group,’ Jennifer Duke, Domain, 27 October 2016
‘Australian cities are not building houses anymore,’ Julia Corderoy, News.com.au, 7 October 2016
‘Motley Fool: why property investment is nuts right now,’ Scott Phillips, Motley Fool, 19 October 2016
‘Will my property drop in value?’ Hannah Blackiston, Smart Property Investment Blog, 1 September 2016
‘Unprecedented uncertainty’ down the line as number of home starts breaks 12 year record,’ Michael Bleby, Australian Financial Review, 22 September 2016
‘Consumer caution may dampen property party,’ Clancy Yeates, Sydney Morning Herald, 18 October 2016
‘Unrealistic Great Australian Dream of a quarter-acre block is over for Sydneysiders,’ Kate Burke and Jennifer Duke, Domain, 21 September 2016
‘Home prices would need to drop 25pc to help first time buyers: Deutsche Bank,’ Michael Janda, ABC News Online, 27 September 2016
‘Sydney at risk of 'housing bubble', warns UBS,’ Bloomberg, Business Day, 28 September 2016
'This is just the start': China's passion for foreign property,’ Tom Phillips, The Guardian, 30 September 2016
‘CoreLogic: property values have chalked up 52 continuous months of price growth,’ Michelle Hale, News.com.au, 3 October 2016
‘Off-the-plan settlement risk rising, RBA warns,’ Clancy Yeates, Sydney Morning Herald, 14 October 2016
‘Housing boom has peaked, apartment glut to rock the economy: Morgan Stanley,’ Peter Vercoe, Bloomberg in Sydney Morning Herald, 21 October 2016
‘Property set to become ‘worst investment’, Charis Chang, News.com.au, 20 October 2016
‘Apartment prices fell 20pc back in 2004, could history repeat?,’ Stephen Letts, ABC News Online, 5 October 2016
‘September Property Snapshot Infographic,’ Cameron Kusher, CoreLogic, 20 October 2016
‘Terrace housing to come to Sydney suburbs under NSW government proposal,’
Lisa Visentin, Sydney Morning Herald, 17 October 2016
‘Sydney auction market rises as the spring property boom blossoms,’ Dr Andrew Wilson, Domain, 16 October 2016
‘ABS revision shows first home buyers at lower numbers than previously thought,’ Thuy Ong, ABC News Online, 5 October 2016
‘New apartments in Sydney sell like hotcakes despite RBA’s glut warning,’ Su-Lin Tan, Domain, 16 October 2016
‘Shortage of homes defies effort to rein in prices,’ Angus Whitley, Business Day, 7 October 2016
‘Morrison criticised for being ‘out of touch’ with first home buyers,’ Julia Corderoy, News.com.au, 11 October 2016
‘Australian house valuations hit record high, UBS research shows,’ Stephen Letts, ABC Online, 15 October 2016
‘A month into spring and there’s a vicious cycle – no homes to buy, so no-one is selling,’ Stephen Nicholls, Domain, 7 October 2016
‘Sydney housing boom has peaked after crackdown on investor loans, QBE says,’ Emily Cadman, Sydney Morning Herald, 13 October 2016
‘Scott Morrison puts states on notice over house prices,’ James Massola, Sydney Morning Herald, 24 October 2016
‘Failed off-the-plan apartments ‘second-hand’,’ Frank Chung, News.com.au, 24 October 2016
Sydney property descends from the peak
Tue, 4 Oct 2016There’s a shortage of available housing stock as prices keep rising. We’re probably building too many apartments and not enough houses, and mortgage restrictions are impacting a slowing market.
The spring auction market has given every indication that it’s going to live up to its tradition as a season of good clearance figures and strong prices achieved.
If anything’s holding it back it’s a shortage of stock. Clearance rates have been around or above 80 per cent, but listing numbers remain considerably lower than they were 12 months ago, especially in high-demand areas near the CBD.
“Last year in August and September, there was too much supply,” said Belle Property Beecroft’s Nick Bedford. “This year it’s quite tight; there is nothing available.”
Investor numbers declined in early 2016, but since the July election they’ve returned to enjoy more certain taxation benefits while they take advantage of low interest rates.
Australian Bureau of Statistics (ABS) figures for July show that the value of investor housing purchased for rent or resale nationally rose by nearly two per cent over the previous month.
Domain Group chief economist Dr Andrew Wilson said the investor share of NSW residential lending is now 56.5 per cent: “I think there was underlying demand for investment properties and there’s been a fear of missing out.
“Numbers are now up to what they were before the peak of the market with investors looking towards higher yielding, low-priced properties,” said Dr Wilson.
Sales in the outer suburbs, subdued during the winter auctions, have shown a resurgence with higher results in terms of both clearance rates and prices being achieved.
Starr Partners chief executive Doug Driscoll told Domain that investors now make up almost half the number of all buyers in western Sydney: “There’s so much infrastructure proposed, the west has some solid buying,” he said.
This month has also seen key housing price statistics become a source of disagreement between the industry’s four main numbers compilers. Recent house price growth figures have shown fairly wide differences and analysts are now trying to work out which to believe.
CoreLogic has been the usual data source for the Reserve Bank of Australia (RBA) but it recently changed the way in which it gathers and analyses data, prompting the RBA to say in its August statement that "strong increases reported by CoreLogic were overstated as a result of methodological changes".
Data from CoreLogic for August showed a 1.1 per cent rise in home prices across the nation's capitals in August, bringing the increase in capital city home prices to 7 per cent year-on-year. Sydney’s rate of increase was even higher at 9.4 per cent.
CoreLogic's head of research Tim Lawless told ABC News Online that the boom was at its peak: "That's virtually half the rate of growth that Sydney was seeing last year, when values were rising at more than 18 per cent in Sydney on an annual basis.”
Economists at JP Morgan challenged the figures from CoreLogic saying their figures show home prices have been growing more slowly nationally than CoreLogic's index has suggested.
"This leaves us with the view that dwelling price growth has been running closer to 2 per cent nationwide this year, rather than the 8 per cent recorded by the CoreLogic hedonic index," said JP Morgan's Ben Jarman.
September figures from Residex showed a growth of 1.19 per cent in Sydney’s median house values from August last year to August 2016, with a growth in unit values of 3.75 per cent over the same period.
HSBC’s chief economist Paul Bloxham sought to clarify the reasons for the divergence.
"Compositional shifts in housing turnover are making it difficult to get a clear read on housing price growth but, importantly, housing loan approvals and credit growth have slowed," he said.
"One plausible explanation is that a greater amount of lower priced housing has been turned over recently. This fits with the fact that a lot of newly built apartments have been coming to market and apartments tend to be lower priced than detached houses."
Regardless of the discrepancies in growth numbers between the four major indicators, the RBA said they all showed a reduction in both housing loan approvals and credit growth which confirms the Sydney market is cooling.
Down from the peak
The Housing Industry Association (HIA) says the housing industry construction cycle has now peaked and it expects the next two years to see a continuing fall in new housing sales.
“New home construction has been the kingmaker of the Australian economy, but the cycle has peaked,” the HIA’s chief economist Dr Harley Dale said following the release of the Association’s July report.
“The short term outlook for healthy levels of new home construction remains intact – calendar year 2016 will be a record year for new dwelling commencements, but the situation could look very different from next year,” he said.
The HIA’s report showed that new home sales slumped 9.7 per cent nationally in July, dropping to their lowest level since July 2014. The NSW drop was 6.2 per cent.
Dr Dale added a note of caution about ‘sensationalising’ the statistics: “We would do well to remember that this down cycle is following a record high that is some 24 per cent higher than the previous (1994) peak and that there is an unprecedented degree of uncertainty this time around as to how the next few years of new home building unfold.”
Paul Sheard, chief economist at ratings agency Standard & Poor’s, told the annual Australian Banking & Finance magazine’s ‘Breakfast with the Economists’ that the country was at risk of thinking that housing prices would continue to rise.
“I don’t get the impression that we have a housing bubble here yet ... but I would say that Australia must beware of the narrative that because prices have never fallen they can never fall again,” he said.
Westpac’s chief economist, Bill Evans, told the Breakfast audience that “we shouldn’t be too negative,” noting that while the $200bn liquid natural gas development boom was slowing, it was being offset by $90bn of state infrastructure spending.
Shane Oliver, the chief economist at AMP, agreed saying that the Australian economy had been surprisingly resilient and flexible. The post-mining boom drag was bottoming out, he said, and sectors including education and tourism were benefiting from the lower dollar.
In an interview with The Australian Financial Review, retiring RBA Governor Glenn Stevens said that he has had ‘some discomfort’ about rising Sydney house prices, but also noted that housing remains an important stimulant of economic activity.
“It’s not without risk, and it certainly gives me some discomfort, but then we’re balancing that against the other obligations we have to pursue.”
Mr Stevens admitted that the lower interest rates of recent years had contributed to rising Sydney housing prices: “Most of the domestic effects of cheap money comes through the household sector - higher house prices than otherwise, more borrowing than otherwise, wealth effects, lower saving rate, etc.” he said.
“It’s probably not that surprising that parts of Sydney are leading the charge, because this economy is leading the country at the present time.”
A two-speed market
CoreLogic’s Cameron Kusher says that over the past 12 months house prices have outperformed unit prices across Australia: “House values have increased by 7.2 per cent compared to a 5.5 per cent rise in unit values.
“With a record pipeline of units under construction we would expect that growth in unit values will continue to underperform that of houses for the foreseeable future.”
Mr Kusher says that compared to last year there is a low volume of fresh stock for sale, with Sydney’s offerings down nearly 21 per cent on last year.
“The low level of new stock becoming available for sale appears to have been a key driver of the ongoing strength in the Sydney and Melbourne housing markets over recent months.”
The Ai Group/Housing Industry Association's monthly Performance of Construction Index shows that house building across Australia has contracted while apartment building has continued to expand.
"Very weak conditions in the house building sub-sector overshadowed the positive news for apartment building, commercial construction and engineering construction in August and pulled the broader construction industry down for the month," Ai Group policy head Peter Burn commented.
The Ai Group’s report noted that the new figures followed a decline in private sector house approvals in July, indicating there would be a further softening in house building activity in coming months.
Towering problems ahead?
Apartments are proving to be a very distinct category of the housing market with a 23 per cent jump in approvals of new apartments, townhouses and semi-detached homes in the month of July according to figures from the ABS.
In NSW, monthly approvals of multi-unit dwellings rose by almost 50 per cent to 5,104 from 3,442 in June causing some economists to again raise the question of whether developers are building too many apartments.
"Is this increase in approvals today led by demand or by supply?" UBS economist Scott Haslem asked in the Australian Financial Review. "If it's led by demand, then we're all okay. If it's led by supply, there may be cheap apartments to buy in the next few years."
Economic forecasters BIS Shrapnel have already called the turning point of the apartment building frenzy.
According to its ‘Building in Australia 2016-2031’ report, national dwelling commencements are estimated to have reached their peak over 2015-16 and will begin to decline from this level in the coming year.
“After recording strong growth during the past four years, we estimate that total
dwelling starts reached an improbable 220,100 in 2015-16, an all-time high,” said Dr Kim Hawtrey, Associate Director at BIS Shrapnel.
“From this level, national activity is forecast to begin trending down over the following three years, with the high-flying apartments sector leading the way down.”
It’s not hard to see why many of those with an overview of the Sydney property market perceive there’s a potential for serious problems over the next two years.
Towers of apartments in choice locations near public transport have been created to provide purchasing opportunities for overseas investors whose goal is primarily to shift wealth to a ‘safer’ country rather than leave it at home.
Many of these expensive developments have already been constructed. Others are rapidly taking shape floor-by-floor while still more are little more than a cleared block of land with an impressive website to market units off-the-plan.
It was a bit surprising in September when a Washington DC-based body called the International Strategic Studies Association (ISSA) issued a dramatic warning that “changes in local banking policies” could see foreign direct investment in Australia’s property sector “decline markedly”.
“This will profoundly impact the Australian government’s ability to fund major programs in the defence and civil sectors,” it said in an article titled: “Australia Risks Strategic Setback from a Significant Foreign Direct Investment Drop Due to Changes in Bank Policies.”
How long do we have before the banks’ tightened restrictions precipitate a collapse in the property market? “About six weeks” according to ISSA whose article appeared on 12 September, meaning by the time this article reaches its designated place on ‘Market Comment’ there are about two weeks left before some sort of property market Armageddon.
Or maybe not. Naturally, a number of Australian market analysts disagree with ISSA. NAB chief economist Alan Oster described ISSA’s prediction of an imminent collapse as “garbage”.
“One of the big problems of apartments is [that for] most of them, we don’t know who’s funding them,” he said. “If the big banks don’t know who’s funding them, then the bottom line is, basically the main risk is somewhere else.”
Mr Oster told The Australian’s Frank Chung that the issue of settlement risk was “probably further down the track” in 2017-18. “The idea that the banks, who might own 20 to 30 per cent max of these apartments, will somehow crash the market is silly,” he said.
‘Big 4’ reduce lending
However, a report in September by advisory firm Credit Lyonnais Securities Asia (CSLA) says that Australia's housing cycle has peaked and a ‘correction’ in apartment prices could lead to defaults among developers and a contraction in construction activity
“The squeeze from lenders continues, albeit recent actions indicate it is highly targeted towards foreign investors and apartment-focused lending,” CLSA said.
“Regulation aimed at foreign buyers (and we expect more to come) will also create an impact. While there has been an official crackdown on capital leaving China, it appears to be less of a constraint than we thought 12 months ago.”
If support for construction of new apartments dries up, postulates the report, it could cause dwelling prices to fall sharply and even lead to a recession in the ‘worst case’ scenario. And it will all begin, says the report, with apartment buyers failing to settle on their pre-construction purchases and foregoing their ten per cent deposits.
An article in The Australian quoted Albert Callegher from ACM Finance, a specialist finance broker that provides top-up funding for property developers, who said CLSA’s prediction was already coming true.
“The small to medium developers doing projects between $2 million and $20 million, they’re going broke,” he told journalist Frank Chung. “I’ve had one client say to me he’s got one developer with over 2,000 apartments that can’t settle. We’re hearing it everywhere but it’s not making the news because you don’t want an avalanche.”
The voice of Australia’s richest man, billionaire property developer Harry Triguboff, can also be heard warning that a “very significant” number of Chinese buyers are now failing to settle purchases of their off-the-plan units.
If this wasn’t bad enough, according to Mr Triguboff, a bigger risk is yet to come in the next new wave of developments. As apartment price growth stalls or goes backwards, he says, the risk of buyers walking away from their deposits also grows.
More warning flares are being sent skywards by global financial services firm UBS which says the growth in apartment supply over the past 12 months poses a danger to Australia’s banks.
A UBS statement noted that in that period residential approvals have hit a record 235,000, and 73,000 of those are for apartment buildings four-or-more storeys high.
UBS banking analyst Jonathan Mott told ABC News Online that it isn’t the big four banks - CBA, Westpac, NAB and ANZ - that have been funding the apartment boom recently.
"Data released by the Australian Prudential Regulation Authority indicates the major banks have significantly reduced this lending, with total exposures to residential commercial property held flat during the June quarter and up only 2 per cent over the last six months," Mr Mott said.
However, Westpac’s Lyn Cobley says her bank has seen settlements slowing but it’s what’s expected at this stage of the property cycle.
“We’re really comfortable with the portfolio and some developers now are taking the view that ‘I was going to build something but it’s not the right time of the cycle. I think I’ll leave it for a year or two and see what things are like then’.”
Foreign banks, principally Chinese, have effectively been funding the ongoing boom in apartment construction up to this point in time, but there’s no guarantee this flow of funds will continue.
Yet still they build. The number of multi-storey apartment buildings under construction in Sydney has more than doubled in the last few years to record levels, and as mentioned previously there are concerns this might create an oversupply that could cause a slump in property prices.
But for this to happen, say the analysts, there would have to be at least one ‘trigger’ that sets off a wave of selling. There are several contenders for this dubious honour.
The first mentioned is that foreign buyers who had paid deposits to purchase ‘off the plan’ apartments can’t get finance to complete their deals. This would create a pool of apartments that would have to be sold quickly.
The second, and probably least likely given global conditions, would be a sudden rise in interest rates that would raise the cost of loan repayments and could force many marginal purchasers to dispose of their properties.
This possibility can’t be completely discounted, however. US Federal Reserve Chair Janet Yellen spoke at a symposium on the 26th of August saying “the case for an increase in the federal funds rate has strengthened in recent months”.
The third possible trigger is a sudden rise in unemployment. It’s reasonably stable at around six per cent at present and there are no signs this is likely to change in the immediate future.
Affordability problems remain
Is there anything the government can do to make Sydney housing more affordable? The ever-rising level of prices in the greater Sydney area indicates that there’s not much anyone can do unless the market experiences major economic disruptions.
Herald journalist Elizabeth Knight outlined the problem: “Already, housing affordability is stretched and thanks to an extended four years of extreme price rises, first home buyers now make up a record low 10 per cent of demand for mortgages. Only six years ago, that figure was around one-third.”
Shadow treasurer Chris Bowen made headlines in September when he said, in an address to the McKell Institute in Melbourne: "The inability of young people, in particular, to buy a home to accommodate them has reached, I say calmly and soberly, crisis levels. We are a nation that can no longer house its own children."
Planning expert and Committee for Sydney CEO Tim Williams says that in the housing market, demand is not driven by housing 'need' but by access to housing finance.
"Homes are unaffordable not because we are building too few but because the market is flooded with cheap credit," he said in a Sydney Morning Herald article.
"Increasingly access to this is being channelled to existing homeowners over first-time buyers, leading to many Sydneysiders owning two and three properties while the average 30-year-old cannot get into home ownership.”
It seems that our long-held view of laws governing supply and demand simply don’t apply in this market. No matter how many new homes come into the mix, prices still keep rising. House prices have risen by 40 per cent since 2011 and dwelling completions have rocketed upwards by 85 per cent.
Professor Bill Randolph, director of UNSW's City Futures Research Centre, says the state and federal governments are going about trying to make housing more affordable the wrong way.
"If they understood how housing markets actually worked, this would come as no surprise at all. The problem is you can't apply year 10 economic theory to a metropolitan housing market."
Economist and geographer Professor Peter Phibbs, takes up the thread: “With housing, because it's an asset market, as the price goes up it encourages buyers to get into the market because they can see the potential gain of holding an asset that's going up in value."
The professors and many other economists have long recognised that the housing market isn’t the same as the market for bananas or beans. One of the major distortions is the tax advantages for investors purchasing housing.
"Nobody has ever shown … that you can supply enough housing into a market to effectively make prices fall. New supply is two per cent of the housing market. Even if that doubled, what impact would that have? Most of us buy second-hand housing."
Professor Randolph says that we need to reset some entrenched ideas about how we provide housing, including encouraging investment in properties for long-term rental rather than resale for capital gain.
"It is a wicked problem," he said. "That's why most of our governments just rub their heads and walk away."
Sources:
‘Housing market really is cooling, HSBC says,’ Jessica Sier, Business Day, 27 September 2016
‘Slump in supply hikes up prices,’ Shayne Collier, Northern District Times, 28 September 2016
‘September Market Update,’ Eliza Owen, Residex, 25 September 2016
‘Lean times hit skinny skyscraper as ‘mum-and-dad’ developers hit funding wall,’
Frank Chung, News.com.au, 24 September 2016
‘Westpac will ride out property challenges: Lyn Cobley,’ Michael Bennet, The Australian, 17 September 2016
‘Chris Bowen's blunt housing crisis prediction,’ James Massola, Sydney Morning Herald, 22 September 2016
‘RBA governor Glenn Stevens admits Sydney house prices cause him ‘discomfort’, Karen Maley, Australian Financial Review, 9 September 2016
‘RBA Holds Rates in September,’ Eliza Owen, Onthehouse.com.au, 6 September 2016
‘No stopping property prices as strong Sydney auction market lifts off for spring,’ Dr Andrew Wilson, Domain, 5 September 2016
‘The government says it has a plan to fix the housing affordability crisis. This chart suggests it doesn't,’ Inga Ting, Sydney Morning Herald, 5 September 2016
‘Foreign banks funding the apartment boom: UBS,’ Stephen Letts, ABC News Online, 3 September 2016
‘Housing bubble a ‘recession risk’, Frank Chung, News.com.au, 2 September 2016
‘Lending squeeze to be catalyst for apartment market correction: CLSA,’ Michael Bennett, The Australian, 2 September 2016
‘Apartment correction to cause Australia-wide recession: report warns,’ Simon Johanson, Sydney Morning Herald, 2 September 2016
‘Standard & Poor's economist warns Australian house prices can't be trusted,’ Martin Farrer, The Guardian, 1 September 2016
‘Building approvals jump in July: apartments up 23pc from June,’ Michael Bleby, Australian Financial Review, 30 August 2016
‘This might be the end of Australia's new home boom,’ David Scutt, Business Insider, 29 August 2016
‘Home prices continue strong rise in Sydney, Melbourne; fall in Perth, Darwin,’ Michael Janda, ABC News Online, 1 September 2016
‘Australia six weeks from a housing collapse, US report warns,’ Frank Chung, News.com.au, 12 September 2016
‘Expect more cranes: apartment glut to dampen market,’ Clancy Yeates, Sydney Morning Herald, 6 August 2016
‘August Property Snapshot Infographic,’ Cameron Kusher, Property Value Pulse, 14 September 2016
‘Apartment building expands while houses slow: Performance of Construction Index,’ Michael Bleby, Australian Financial Review, 7 September 2016
‘The house price souffle is rising again,’ Elizabeth Knight, Sydney Morning Herald, 17 September 2016
‘New multi-residential building to plummet 50 per cent by 2020,’ Media release from BIS Shrapnel, 1 August 2016
Our latest Sydney property boom began 16 years ago
Wed, 31 Aug 2016A shortage of properties for sale keeps price levels up as we look back to December 2000 for the beginnings of our current boom.
Winter chills are behind us and as we head into spring we also enter the peak selling season for Sydney property. Weekend auctions already show a surge in listings and record clearance rates, although the number of properties on offer is well below figures at this time last year.
An unseasonably strong late-winter market looks set to flow seamlessly into spring, and there’s every reason to expect the price growth to continue as the weather warms up.
But for a moment let’s seek out what might be called ‘the dark side’ of property price forecasts, and as usual professor Steve Keen of Kingston University, London can be called on for a negative appraisal of the property market.
You might recall professor Keen achieved some fame a few years ago when he predicted a catastrophic crash in Australian house prices following the GFC and had to walk 225 kilometres from Canberra to Mount Kosciuszko as a result of losing a bet.
The professor now says that Australia's current credit binge will implode as early as 2017, with house prices falling between 40 and 70 per cent, accompanied by a sharp rise in unemployment.
"We have borrowed ourselves so much to the hilt that we are now dependent on that continuing to rise over time and it simply won't," he told the ABC's The Business.
However, all indications are that professor Keen will need another pair of hiking boots if he’s made a similar bet this year to the one he made in 2010.
We now have a situation where there’s still an undersupply of housing and population growth continues. Prices are high and still increasing in most parts of Sydney and auction clearance rates remain at ‘boomtime’ peaks, including the highest clearance rate ever achieved in August.
AMP Capital chief economist Shane Oliver says there’s a serious shortage of housing stock that explains why the clearance rates stay so high: “You can see the sales volumes are down a lot on a year ago, by about 40 per cent.
“That could well be because sellers have done their selling. The last few years have seen record levels of sales and people would have taken advantage of that, so even though now they’re getting better deals … they have already done their selling,” he said.
Investors are back in the market in a big way, borrowing again and stretching investment lending in such a way that banks are concerned that APRA will flex its muscles to return to the regulator’s ten per cent annual growth rate limit, or possibly lower the threshold to seven or even five per cent if borrowing continues at such high levels.
Mortgage Choice chief executive John Flavell said the number of loan applications received by the broker in recent weeks suggested record low interest rates were boosting the mortgage market.
"When you get the cash rate changes, that always takes a little while for the dust to settle, but the dust settled and application volumes are very, very, very strong," Mr Flavell told the Herald’s Clancy Yeates.
"The market's pretty tight, and everyone's looking for new stock to come onto the market, so when it's there, it's moving quickly and it's getting snapped up.”
Domain’s Dr Andrew Wilson notes that investors remain a key ingredient of our rising housing market, pointing out that the latest Australian Bureau of Statistics residential lending data reports another surge in activity over June for NSW.
“The prospect of a change to negative gearing has activated investors since May, with a June total of $6.6 billion – the highest monthly result since June last year,” he added.
Foreign investors are still key elements of the buying mix. The Foreign Investment Review Board (FIRB) says in its latest annual report that the value of approvals for foreign investment in Australian real estate increased 75 per cent last financial year to $61 billion, with Chinese buyers accounting for around two-thirds of the applications.
An ANZ Bank research note said that the lower Australian dollar has supported foreign investor demand for Australian housing, although the bank’s economists wrote: “Tighter lending conditions may see this ease.”
The research note also said tighter borrowing criteria and increased taxes on foreign buyers “could see reduced demand from foreign buyers, although as yet there is little hard evidence of this”.
Affordability’s a growing issue
Housing affordability is a hot topic at present. Domain’s Jennifer Duke recently conducted an analysis of the present situation and concluded that, in every capital city with the exception of Sydney, homes were more affordable in 2016 than their 15-year average.
In fact, even in Sydney affordability was improving from 2010 to 2013 until it was quashed by the latest period of rapid price growth.
As recently as 2012, Sydney’s median house price was $645,000. Just four years later it’s more than $1 million. Domain Group says that every second house owner ‘can now stake the claim of being a property millionaire’.
Just five years ago, only one in six of Sydney’s 600-odd suburbs had a median house price above $1 million. By mid-2016, 323 suburbs had six-figure price tags.
That’s quite a leap, but looking back a few years we can see the forces taking shape that have now made Sydney Australia’s least affordable city.
Just how unaffordable has Sydney become? Data from real estate research firm CoreLogic shows that NSW has just over 68 per cent of all national suburbs with a median home value of at least $1 million, up from 60 per cent in 2008.
However, BIS Shrapnel senior manager Angie Zigomanis tells us that from December 2000 to December 2003 there was a Sydney property boom that makes 2012 “pale in comparison”. He reminds us that prices growth in this period was 65 per cent for houses, and people were actually leaving Sydney due to those high prices.
“At the same time, the government introduced all sorts of development levies into the market, including vendor tax. This hit the market,” he said.
The result that followed was a prolonged time of underbuilding – of providing a lower number of dwellings in the Sydney area that were needed to accommodate a fast-growing population. Land releases slowed and the new layers of development costs either retarded or prevented development.
An ‘Infrastructure Charges Report’ published in 2009 by the Master Builders Association shows that over the four years from 2001/2002 to 2005/2006 developer contributions grew at an average rate of 8.2 per cent a year for each new dwelling.
By 2009 only 25,000 dwellings were being added to the housing stock in Sydney annually. To give you an idea of just how much of a shortfall this represented, it’s less than half the number constructed in 2015/2016 which still leaves Sydney undersupplied.
Housing Industry Association figures identify a window of increasing affordability from 2010 to 2013, when housing prices dipped slightly and interest rates were cut, but the pause was short-lived and prices soon began to rise again.
Naturally enough, at that time investors leapt into the property market to take advantage of growing demand for rental accommodation and favourable interest rates. And the more investor activity there was, the higher prices rose.
So, there was only one possible outcome from years of chronic housing undersupply and that was a growing unmet demand that would drive property prices upwards at a rate far higher than could be met by growth in incomes.
First home buyers still around
First home buyers have reminded us they’re still in the market, albeit in a relatively small way when compared to investors. The number of grants claimed by first home buyers in NSW went up by almost 11 per cent last financial year, according to figures from the Office of State Revenue (OSR).
NSW Treasurer Gladys Berejiklian says the government’s first home owner grants are helping to improve housing affordability: “We have consistently said that supply is the key to putting downward pressure on prices’
"Our policies to encourage the construction of new homes are clearly bearing fruit, with residential building approvals soaring by 10.5 per cent over 2015-16,” she said.
The latest OSR figures show the number of first home owner grants rose by 900 to about 9400. The total value of the grants was $138 million.
Ms Berejiklian’s optimism about increased supply is offset by June figures from the Australian Bureau of Statistics (ABS) showing that new building approvals fell to their lowest total in seven months.
The number of new homes approved by planning authorities fell 2.9 per cent to 18,693 from 19,250 in May, the lowest monthly figures since November 2015.
The June figures showed the fall in the monthly figure for multi-unit dwellings was 3.4 per cent, while the decline in standalone houses was 2.4 per cent.
The Housing Industry Association sees these figures as indicative of a gradual slowdown of building activity: "Approvals on both the detached house and multi-unit side peaked in mid-2015," HIA senior economist Shane Garrett said.
"Since then, detached house approvals have glided lower in an orderly manner. The immediate pipeline of new home building work is set to remain very solid, based on this latest approvals update."
Supply shortage continues
There’s clearly a shortage of properties on the market, particularly in the more desirable areas like the lower north shore and the northern beaches. One sign of the times is the median price of a three-bedroom apartment reaching $1 million – a 50 per cent increase over the past five years.
Three-bedroom apartments are the dwellings of choice for people downsizing from detached homes as well as for those who want to buy a family home but can’t afford the $1.5 million for a house.
“This data shows we’re still seeing a considerable demand for higher priced and bigger units in Sydney; there are plenty of buyers out there who are happy to live in a unit but they want a bigger unit even at a higher price,” said Domain Group chief economist Dr Andrew Wilson
BIS Shrapnel associate director Kim Hawtrey says New South Wales will remain undersupplied for some time, although even home building in Sydney would slow down.
"Sydney is up against an affordability ceiling as well as constraints on site availability; investor demand is cooling, and the city will see a surge in new supply coming on stream over the next one to two years," Dr Hawtrey said.
He said the fall in activity from its current peak would mostly be felt in the higher density segment of the market: “New commencements of multi-residential dwellings are forecast to fall by from around 107,000 currently to just 53,800 by 2019-20."
Rents fall as supply grows
CoreLogic figures show that according to data going back to 1996 rents are falling at their fastest rate on record. However, although rents are falling in most capital cities, Sydney is still the most expensive city to live in, with a median average weekly rent of $595.
A CoreLogic report noted rental yields had remained at record lows in July and were expected to see a further reduction in the months ahead.
“Renters will continue to have more choice and will likely be able to move into superior rental accommodation for similar or even lower costs.
"However, with capital gains starting to slow, investors may place a renewed focus on maximising their rental returns, which could prove to be difficult given the already soft rental conditions and substantial ramp-up in housing supply."
Citi bank has issued a caution that Australia’s apartment-building boom is nearing its end and warned that housing starts have reached 230,000 this year across Australia, but these will fall to 205,000 next year and to 172,000 in 2018.
"Apartment completions lag starts by 1-2 years so the developing oversupply will continue to build into 2017 and 2018 with completions probably doubling across the eastern states," the bank said in a research note.
That bank said that, while Sydney as a whole is less at risk of seeing supply exceed demand, there are some areas of concern, namely the Botany council area, Auburn, Lane Cove and Ryde also at some risk of excess supply that will begin to show up late next year.
In the short term there are no indications of forthcoming marketplace changes that will cause housing values to make any dramatic retracements from boomtime levels. There are, however, a number of signs that some easing will take place.
David and Libby Koch say the market is at an interesting crossroads: “The really good news in our view is our booming major cities are finally showing signs of slowing down... and not crashing.
“And despite a few areas of concern...it looks like there is still enough demand in our two major cities to support prices while annual growth slows to more reasonable levels.
“We believe this is a strong signal that we have simply seen a boom in these markets, not a bubble, and we’re returning to a more ‘normal’ cycle,” say the Koches.
Cameron Kusher of CoreLogic RPData sums up what seems to be the general attitude of property analysts looking at the city’s future: “Tighter lending policies, less offshore investment, record low rental yields, falling rental rates, higher housing supply and stretched housing affordability in Sydney and Melbourne would suggest that a slowing in value growth is imminent.
“These factors are dynamic and change fairly quickly but CoreLogic is anticipating further slowing of value growth in Sydney and Melbourne throughout the remainder of 2016,” said Mr Kusher.
Sources:
‘Housing affordability in Sydney was actually improving three years ago – then the boom hit,’ Jennifer Duke, Domain, 17 August 2016
‘Median price for apartment now $1m,’ Jennifer Duke, Sydney Morning Herald, 20-21 August, 2016
‘Real estate: Rents fall across most capital cities in July,’ Thuy Ong, ABC News Online, 10 August 2016
‘Apartment building to collapse 50 per cent says BIS Shrapnel,’ Peter Martin, Sydney Morning Herald, 1 August 2016
‘Australia headed for recession next year, Professor Steve Keen says,’ Elysse Morgan, ABC News Online, 1 August 2016
‘Property investor surge could see regulator step in, economists say,’ Jennifer Duke, Domain, 10 August 2016
‘Sydney’s market booming as spring approaches,’ Dr Andrew Wilson, Domain, 19 August 2016
‘July Property Snapshot Infographic,’ Cameron Kusher, CoreLogic RPData, 16 August 2016
‘NSW first home owner grants reach $138 million,’ Sean Nicholls, Sydney Morning Herald, 11 August 2016
‘June new home approvals fall 2.9pc to seven-month low,’ Michael Bleby, The Australian Financial Review, 3 August 2016
‘David Koch explains what’s good, bad and ugly in the Australian property scene,’ David and Libby Koch, News.com.au, 11 August 2016
‘Number of million-dollar suburbs soars in wake of housing boom,’ Andreea Papuc, Sydney Morning Herald, 5 August 2016
‘Vancouver slaps 15% tax on foreign house buyers in effort to cool market,’ Ashifa Kassam, The Guardian, 3 August 2016
‘Interest rates: Reserve Bank confirms housing slowdown a key factor in cut,’ Michael Janda, ABC News Online, 5 August 2016
‘Why Chinese property buyers are here to stay,’ Frank Chung, News.com.au, 21 August 2016
‘Sydney auction market kept hot by ‘sellers’ conundrum’, Jennifer Duke, Domain, 22 August 2016
‘Sydney spring market opens with record-level buyer energy,’ Dr Andrew Wilson, Domain, 26 August 2016
‘Apartment glut looming in 2017, property downturn imminent, warns Citi,’ Michael Janda, ABC News online, 27 August 2016
Sydney property changes speed but not direction
Mon, 8 Aug 2016The national property market has changed its rate of growth from the strong upwards trend early in the year to a more sedate level mid-year as banks tighten credit and investors and owner-occupiers find it harder to obtain finance for property purchases.
Figures compiled by Domain show that property prices have begun to slow across the country, and there are forecasts of sluggish growth in 2017.
Sydney property prices nevertheless achieved good gains in the June quarter with both apartment and house prices recovering strength, according to CoreLogic’s monthly house price index.
That index showed that in the three months to June property prices surged 6.8 per cent in Sydney, aided by an interest rate cut and an unseasonal rush of investor activity before the end of the financial year.
“A lot of the growth was fuelled through April and May, but Sydney’s June growth was exceptional after a moderating trend until early 2016,” CoreLogic’s head of research Tim Lawless said.
“We thought last year was the last hurrah, but there has been growth again. However, we’re not back to the frothy times of halfway through [2015] and we’re well below the peak of July last year,” he said.
St George Bank senior economist Hans Kunnen said that the strong fundamentals of Sydney’s property market would ensure continued stable growth: “In Sydney, there’s population growth and a previous lack of supply that’s still behind demand.”
A report from the PRDnationwide group said the Sydney market’s return to more sustainable prices growth in the first half of 2016 was a promising sign after the rapid price hikes of 2015.
PRDnationwide national research manager Dr Asti Mardiasmo said that sentiment toward the market ‘remains positive’: “Consumer confidence (is) the highest since January 2014,” she told News Corp’s Aidan Devine.
“This has flow-on effects for the property market, with buyers more willing to borrow capital,” she said.
Another positive factor noted by the PRDnationwide report was the strong performance of Sydney’s rental market in the first half of 2016. It said the city recorded the highest growth (6.7 per cent) in median rent for three bedroom houses and has the lowest vacancy rate of any Australian capital city at 1.7 per cent.
Sydney’s auction clearance rates also continued at high levels – mid-70 per cent and above, although at well below the volumes recorded twelve months ago.
Director of Auction Services Rocky Bartolotto told Aidan Devine of News Corp that his auction house was experiencing a 30 to 40 per cent drop in the number of properties going under the hammer compared to last year.
He also said that for some agents, particularly those in the inner west, the drop in volume has been closer to 50 per cent.
The lower number of homes available for sale has discouraged many homeowners from listing their properties. However, the scarcity of offerings has only increased competition among buyers and sale prices are generally above expectations.
New home sales decline
Housing Industry Association (HIA) statistics show that new home sales fell 6.7 per cent in May as sales of detached houses declined in Australia’s eastern states.
Even though multi-unit sales rose 4.9 per cent in the month after a 10.7 per cent fall in April, this rise wasn’t enough to offset the drop in detached houses, and private new home homes sales were down 4.4 per cent overall.
HIA chief economist Harley Dale said there was nothing alarming about a reversal in the trend for new home sales: "There is a cyclical downturn ahead for new residential construction activity, as new home sales signal, but the early pull-back will be mild by historical standards."
The HIA did issue a cautionary note that some of the high numbers of new apartments being approved may not be constructed.
"A key factor to watch is the medium/high density market where the large pipeline of work to be completed and the record pipeline of work approved but not yet commenced sets up a period of unprecedented uncertainty," it said.
"Regardless of the relative strength to any trend recovery [in apartment approvals] over the last six months, these lead indicators provide less forward guidance than usual because of the uncertainty surrounding the record pipeline of work approved but yet to commence construction."
Urban Taskforce chief executive Chris Johnson said the brakes had been put on lending in Melbourne and Sydney, and warned those buying in these developments to be concerned about financing.
“People put 10 per cent down and wait a couple of years until the project is finished to get finance. If by that time the extra 90 per cent is hard to get from the banks, there will be issues settling,” he told Doman.
UBS economist Scott Haslem said in the same article that there is some market risk, with forecasts of 10 to 15 per cent falls in some inner city areas where there had been too much apartment construction: “My view is there’s a risk we are overbuilding in some narrow segments of the market, and it’s possible we will see some reasonable price falls in some of those segments.”
One big cause of the industry’s concerns about apartment sales is the recent decline of Chinese investor interest in NSW property. This is largely due to the introduction of stamp duty and land tax surcharges by the state government for non-residents buying residential property in NSW.
REA Group chief economist Nerida Conisbee said the slowing of international sales meant there would be less development of new apartments: “Developers need a high pre-sale level; a drop-off in sales to either local investors or offshore investors means development won’t proceed.
“You won’t get the same level of completion [as before the restrictions were introduced],” she said.
Another problem in recent times is the impact of new borrowing rules on off-the-plan buyers of Australian apartments. According to several mortgage brokers and financiers, thousands of investors who have paid deposits are now having difficulties getting the finance needed to complete their purchases.
Scott Kirchner, the manager of Bella Resident in China told the Australian Financial Review that the inability of offshore buyers to access finance was "really starting to bite".
"We are reluctant to take on new clients unless they have 100 per cent of the cash for a property," he said, adding that it was getting harder to take money out of China.
He said that there was still strong demand for Australian property from Chinese buyers, but many were holding off making purchases until they knew how valuations would be affected by recent Australian restrictions on borrowing.
The dream fades for some
In literature the ‘great Australian dream’ has always been to own a home, preferably a freestanding house on a quarter-acre block with a backyard and a barbeque. A recent study shows this might only be possible for a minority of the population after this year.
As reported in The Australian, the great dream of home ownership will soon reach a tipping point when fewer than half of all Australian adults are expected to own property, according to the University of Melbourne.
Data collected by the university’s Melbourne Institute show that the proportion of adults who own their home has fallen from 57 per cent in 2002 to 51.7 per cent in 2014.
Professor Roger Wilkins, the deputy director of the Household, Income and Labour Dynamics Australia survey, says that based on trends the national ratio will likely fall below 50 per cent as early as next year.
“I don’t think there has been a real decline in people's aspiration to own their own home other than the fact people have just given up on it because it seems unattainable,” he said.
The NSW ownership rate, the highest in the nation, has fallen during the period 2002-2014 from almost 67 per cent down to 63 per cent.
Meanwhile, housing affordability has worsened over the June quarter, according to the HIA’s Housing Affordability Index which shows that affordability in Sydney dropped 1.6 per cent.
The Australian Financial Review’s Su-Lin Tan said this was because a further cut to the cash rate this year had increased housing demand, while uncertainty triggered by a delayed election and world events had increased vendors’ reluctance to sell.
In hopes of easing housing unaffordability, the federal government has consistently focused its attention on increasing supply through land releases and boosting roads and rail.
“Now this is how you address housing affordability,” Mr Turnbull said during the election campaign. “Housing affordability is the result of there being insufficient supply of housing. You need to have more supply of housing.”
The peak body for aspiring property owners, the First Home Buyers Association (FHBA), has criticised the Coalition for its argument that increasing supply will fix the housing affordability problem.
“This, we all know, is easier said than done, especially in the near future,” the FHBA said.
“We are concerned about the time it will take to work with state and local governments to fast track the supply of land and new housing.”
At least industry concerns about negative gearing changes have been mitigated by the confirmation of the Coalition as winners of the July 2 election. Some pundits had forecast that the ALP’s proposed changes would have seen property prices fall by up to 15 per cent and rents rise by six per cent.
SQM Research managing director Louis Christopher said that the proposed changes might have made property more affordable but that also meant lower property prices.
“While we take the view that negative gearing reform is a good thing, such reform should be done as part of a wider property tax reform,” he said.
Forecasts of future trends
The Westpac-Melbourne Institute’s Survey of Consumer Sentiment report records how people feel about whether it’s a good time to purchase a home. The survey’s ‘It’s Time to Buy a Dwelling Index’ showed a fall in those believing it was a good time to purchase property - down another 1.8 per cent in July after a 2.7 per cent drop in June.
The NAB released its Quarterly Australian Residential Property Survey Q2 2016, concluding that nationally house prices will grow 0.5 per cent, while unit prices will drop 1.5 per cent.
It said Sydney apartments are forecast to drop 1.8 per cent and 1.5 per cent respectively over 2017 and 2018, primarily due to growth in supply.
"We have maintained our expectation that the housing market will cool appreciably, despite the near-term strength," it says in the report.
"Our average national house price forecast for 2016 has been revised up...Price growth is then forecast to stall while fundamentals [namely wages] begin to catch up."
The survey’s 230 property industry respondents included real estate agents, property developers, investors, asset managers, fund managers and valuers.
But the picture for the remainder of 2016 is brighter, according to NAB chief economist Alan Oster, who said the national house price growth is estimated at 5.1 per cent while apartments are expected to grow 3.6 per cent.
At the same time, BIS Shrapnel’s ‘Residential Property Prospects’ report predicted house prices would drop across most capital cities over the next three years.
AMP Capital’s chief economist Shane Oliver was especially negative about apartment prices: “I still think there will be declines of 15 to 20 per cent in the next couple of years,” he said.
The ANZ/Property Council survey of property market professionals found that expectations for prices growth and confidence within the industry had both dropped, with only NSW escaping the consequences of an oversupply of housing.
The survey concluded that in 2017 the state would have an expected shortage of 41,031 homes, representing only a slight improvement on the current shortage of 53,386 homes.
“The oversupply is becoming almost an urban myth, a truism, with no data to support it,” said Domain Group chief economist Andrew Wilson.
Foreign buyers, acknowledged as an important driver of prices growth, have increased their market share slightly in NSW to 11.8 per cent from 11.1 per cent in the first quarter, but this is well below the growth rate of 21 per cent in the first quarter of last year.
The Reserve Bank of Australia (RBA) is likely to cut interest rates further, but Eliza Owen, market analyst for Onthehouse.com.au, said that this might not have a significant impact on a slowing housing market.
“The impact of low interest rates on the property market has previously been somewhat ‘intercepted’ by regulatory authorities who have attempted to limit home lending to investors and increase capital held by banks.
“However, irrespective of interest rates, recent events could still direct investors to property – the historically safe investment market – staving off the downswing for another few months.”
Independent property valuation and advisory group Herron Todd White released a report in mid-July which supports the view that prices for Sydney houses and apartments have yet to reach their peak.
The report acknowledged that price growth in 2016 was “slower than previous years” but said there had been consistent solid price growth in the ‘value band’ across the metropolitan area due to investor and entry-level owner occupier demand.
NAB chief economist Alan Oster said that the continued growth in Sydney had “surprised everyone.”
“At the end of last year we expected one per cent [property price] growth, and it’s already at eight per cent,” he said.
“Sydney surprised everyone by its strength in the last couple of months,” he said. “The growth will probably continue for a little while,” he said.
Dr Shane Oliver, chief economist at AMP Capital agreed, telling Domain’s Jennifer Duke that property prices are unlikely to fall until interest rates start rising, something that’s not likely to happen for some time.
“There have been lots of predictions of peaks and reports of property prices falling, but … prices will continue to creep higher into next year,” he concluded.
Sources:
‘Banks put the brakes on high-rise developers,’ Clancy Yeates, Jennifer Duke, Domain, 30 July 2016
Residex Market Update, Eliza Owen, Onthehouse.com.au, 27 July 2016
‘Frozen loans trigger Australian property funding crisis,’ Angus Grigg and Duncan Hughes, Australian Financial Review, 25 July 2016
‘Oversupply an ‘urban myth': 10 suburbs where apartment prices are surging,’ Jennifer Duke, Domain, 23 July 2016
‘NSW property market in stable condition after making a positive start to 2016, new report claims,’ “Aidan Devine, News Corp Network, 13 July 2016
‘Apartment prices to drop in four capital cities in 2017, NAB survey suggests,’ Jennifer Duke, Domain, 15 July 2016
‘Housing affordability: How the major parties plan to tackle the crisis,’ Dana McCauley, News.com.au, 30 June 2016
‘Federal election 2016: House prices to fall, rents to rise under Labor negative gearing policy,’ James Massola, Jennifer Duke, Domain, 22 June 2016
‘Five graphs that show why Australia’s property price growth is over,’ Jennifer Duke (with AAP), Domain, 14 July 2016
‘House prices to rise faster than expected this year, NAB says,’ Michael Bleby, Australian Financial Review, 15 July 2016
‘Housing affordability has worsened in June quarter: HIA,’ Su-Lin Tan, Australian Financial Review, 19 July 2016
‘Low supply of homes for sale helps push Sydney’s auction clearance rate to highest in the country at 79 per cent,’ Aidan Devine, News Corp Network, 11 July 2016
‘New home sales fall for a second month in May: 'Nothing alarming', HIA says,’ Paul Rovere, Australian Financial Review, 29 June 2016
‘NSW real estate: Chinese investors cast their eyes over to western Sydney,’ Alison Cheung, News.com.au, 30 June 2016
‘Property prices continue to surge in 2016, report shows,’ Jennifer Duke, Domain, 1 July 2016
‘RBA Keeps Rates on Hold in July,’ Eliza Owen, Property News, onthehouse.com.au, 5 July 2016
‘Sydney’s house price growth hasn’t peaked yet: Herron Todd White,’ Jennifer Duke, Domain, 6 July 2016
‘The Australian dream: soon, fewer than 50 per cent will own home,’ Rick Morton, The Australian, 20 July 2016
An election, a Brexit – what’s next for Sydney property?
Mon, 4 Jul 2016A shortage of prestige properties and a loosening of banks’ credit restrictions keep property prices rising, despite concerns about unit numbers.
It’s certainly been an interesting end to the 2015/2016 financial year. First came the Brexit on June 23 with its repercussions that will affect the world’s financial markets for some time. Then on July 2 came the Australian federal election.
The outcome of the election will mean, if promises made prior to the election are kept, no changes to negative gearing or to the current taxation treatment of capital gains. This will be good news for property investors who benefit from both.
But a new problem has arisen that’s causing headaches for both investors and the top end of property buyers. There was a 6.7 per cent decline in the number of sales of detached homes in May which wasn’t enough to offset a 4.9 per cent rise in the number of multi-unit sales.
It seems that owners have decided to hold onto their properties and not sell into the current mini-boom that’s seen auction clearance rates climb back into the high-70 and 80 per cent levels.
As Antony Lawes, Domain editor describes it: “The property drought is most severe in higher-priced, inner-ring suburbs, especially on the north shore and northern beaches where some agents are reporting up to 70 per cent fewer listings than this time last year.”
Domain Group’s chief economist Andrew Wilson compiled data on the total number of listings for the first four months of each year going back to 2011, which show that listings in the eastern suburbs, lower north shore and the northern beaches when compared with previous years have dropped dramatically.
“Lower listing numbers are clearly a result of what was an astonishing year last year, where there was a bonanza of buying and selling,” he said. “It’s still very much a sellers’ market in the inner-suburban, higher-priced areas.”
The Raine & Horne network conducted its own analysis of current market conditions and found listings have dropped by 68 per cent on the northern beaches this year compared with 2015, and 31 per cent on the north shore.
Head of SQM Research Louis Christopher also said his data showed fewer listings in the inner-ring areas this year compared with 2015: “The economy is moving along quite well at the moment so affluent home owners have no reason to sell; their businesses are doing okay.”
There are a few indications that investors are losing some of their lust to acquire Sydney property.
Australian Bureau of Statistics (ABS) figures released in early June showed a significant five per cent drop in investment housing loans. The total value of investor finance came to $11.291 billion. At the same time the value of owner-occupier loans was a much higher $20.702 million.
First-home buyers showed a bit of a recovery with their share of total finance commitments improving from 14.2 per cent to 14.4 per cent. However, when investor and owner-occupier lending are combined, the value of total housing loans for April was a decline of 1.8 per cent from the previous month.
This led some economists to forecast another interest rate reduction from the Reserve Bank (RBA) that could rekindle inflation and in so doing keep the value of the Australian dollar under control once the initial effects of the Brexit have worn off.
After having surged 8.5 per cent in May, the Westpac-MI index of consumer confidence slipped back one per cent in June. Although optimists still outnumber pessimists, one element of the survey has continued to fall since June 2014.
The survey’s question about whether this is ‘time to buy a dwelling’ fell another 2.7 per cent from the May figure and is now 7.4 per cent down since the start of 2016. It’s also down 14.4 per cent from its score two years ago. However, the separate ‘house price expectations’ index rose by a further 3.6 per cent taking it to its highest level since September last year.
“Both buyer sentiment and price expectations are still well below the readings seen a year ago but have shown a clear firming from the weak levels in early 2016, the RBA’s May rate cut clearly a supporting factor,” Matthew Hassan, senior economist at Westpac commented.
Banks loosen the restraints
In the past year housing investor credit growth fell from a peak of 11 per cent a year in 2015 to just 6.5 per cent after the banking regulator restricted growth in this market to a maximum 10 per cent a year.
AMP Capital chief economist Dr Shane Oliver said that APRA's 10 per cent cap appeared "quite excessive in the scheme of things" when compared with the much slower growth in household incomes.
A note published in mid-June by credit rating agency Moody’s noted that house prices are pushing up again and banks have returned to chasing property investors.
"While some of the newer activity can be explained by investors bringing forward ahead of the July 2, 2016 federal election, there is evidence that bank appetite for investor lending is returning after a period of tighter underwriting," the note said.
Westpac, Australia’s biggest lender to landlords, has begun allowing customers to include tax benefits from negative gearing in their loan assessments, and started to accept smaller deposits from investors.
The Bank of Queensland recently raised its maximum loan to valuation ratio (LVR) for investors to 90 per cent, up from 80 per cent, which allows investors to acquire property with smaller deposits.
"Banks don't want to miss the market," chief executive of Mortgage Choice, John Flavell told Business Day’s Clancy Yeates.
"If the market has come off a bit for investors, and it has done, then you can turn around and moderate your policies and your pricing to get your loan growth up towards your cap.”
However, a report from Macquarie analysts says that lending standards in parts of the mortgage market are likely to tighten further in the longer term: "While the changes implemented by banks appear to be prudent, we expect further tightening in lending standards over time.
"This would likely result in further pressure on housing prices and credit availability, which would ultimately result in ongoing pressure on housing volume growth," the report said.
Too many towers?
The Organisation for Economic Co-operation and Development (OECD) warned in June that a sharp rise in apartment construction could lead to a "dramatic and destabilising" fall in Australian property prices.
The Reserve Bank (RBA) had previously raised concerns of an apartment glut, and forecaster BIS Shrapnel described it as "an accident waiting to happen".
A June 3 article in Business Day outlined the core of the problem: “Failed settlements are cropping up as a major concern, especially at a time when the banks are tightening credit, meaning buyers who paid a 10 per cent deposit two years ago and are relying on a 90 per cent loan to fill out the rest of the purchase, may now have to pay more.”
But S&P analyst Sharad Jain said that Australia’s ‘big four’ banks had only limited exposure to the apartment building boom, as “…a large share of these units [are] funded by cashed-up developers or overseas banks.”
Sydney’s vacancy rate increased slightly during May, and some parts of the city are showing early stages of an oversupply issue after years of a building boom.
Economists from UBS Group compiled a report that showed why concerns about the number of apartments now being built won’t go away. In terms of sheer quantity, the number of multi-storey apartments under construction has more than doubled in the past few years, and nearly tripled since 2010.
A research study by Jones Lang LaSalle showed that about 61,000 new apartments will have been completed across the city of Sydney from 2015 to 2017. This compares with 44,500 completions from the period 2012 to 2014.
Eliza Owen, market analyst for Onethehouse.com.au, says this is part of a shift that began some time ago: “Most strikingly, the number of high-rise units began outperforming detached housing approvals from March 2011. The salience of this phenomenon increased around the beginning of the 2013 housing boom.”
Sydney had an apartment vacancy rate increase of 0.2 per cent to 2.2 per cent over the month, according to Domain Group senior economist Andrew Wilson, but he said there wouldn’t be a Sydney-wide oversupply problem.
HIA executive director NSW David Bare agreed, saying that over 2015/2016, new dwelling starts were likely to increase 7.6 per cent across the state, followed by a 9.9 per cent decline in 2016/2017 and another expected drop the year after.
“While residential building activity may be at the peak of the cycle, it’s important not to lose sight of the bigger picture,” Mr Bare said. “Ensuring supply meets underlying demand over the long term is critical to housing a growing NSW population and improving housing affordability.”
Ratings agency S&P Global have recently completed a report on real estate investment trusts and say it is unlikely that there will be a sharp drop in property prices.
"However, a scenario of the early 1990s where unemployment reached 11 per cent would place households under severe financial stress," said S&P analysts Craig Parker and Graeme Ferguson in their report.
UBS economists say they only predict a "moderation" not a "downturn," in prices as long as interest rates remain low. They also noted that the official figures on average house prices, including apartments, have been more resilient this year than many analysts had expected.
Interestingly, according to figures compiled by Mortgage Choice, 82 per cent of NSW investors chose to purchase an established investment property in 2015.
“Despite the fact that there is an increasing number of new properties — including new apartment blocks — coming onto the property market, it would seem as though the majority of investors feel as though an established dwelling would best suit their needs,” Mortgage Choice CEO John Flavell told News Limited’s Kirsten Craze.
“They want to invest in a property that has the potential to deliver strong capital growth and rental yields. And looking at the data, it would appear the majority of investors believe an established dwelling will help them to do just that,” he said.
Surcharge for foreign buyers
The NSW Government, still two years away from its next election, has decided a good way to offset any possible decrease in stamp duty collections will be to add an extra four per cent stamp duty surcharge on foreign buyers beginning June 2016. These buyers will also be hit with an extra 0.75 per cent land tax impost, if payable, from the start of 2017.
NSW Treasurer Gladys Berejiklian said the surcharges would not deter foreign investors: "These new measures will ensure NSW's property market continues to be an attractive destination for international investors while making sure that we are able to fund vital services into the future."
After Victoria's announcement of similar tax changes for foreign investors last year, Real Estate Institute of NSW president Malcolm Gunning had urged NSW not to impose similar taxes as "foreign investors would simply decide to invest somewhere else".
This is borne out by Greville Pabst, chairman of Victorian valuation and advisory firm WBP Property Group, who said: “In recent months the Victorian Government announced they were making significant changes to stamp duty for foreign buyers. What they’ve done is they’ve added an additional 7 per cent stamp duty for foreign buyers of property.
“On a million-dollar purchase that’s $120,000 of stamp duty — that’s quite a consideration on that investment, isn’t it? Some of my investor clients I’ve had in Malaysia and Singapore are now looking at Melbourne and saying they’ll shut the door on Melbourne,” Mr Pabst said.
The impacts of the NSW surcharges are expected to be felt at the top end of the Sydney property market. Sydney Sotheby’s International director Michael Pallier said: “I don’t think the market will collapse but there will be ripples felt throughout the sector.”
One of these ‘ripples’ came when Digital advertising company REA Group reported a 25 per cent drop in Chinese visitors to its Chinese language property website Myfun.com.
Gavin Norris, Head of Australia for Chinese property portal Juwai.com, said that for Chinese buyers the advantages of buying property in Australia have until now outweighed the hurdles that they have to go through.
“However there’s a breaking point. In the medium term there are larger forces at play that overcome the new charges, but we seem to be heading in that direction,” Mr Norris told Domain.
Foreign Investment Review Board figures show that Chinese investment in Australian real estate has more than quadrupled over the past two years, from around $6 billion in 2012-13 to $24 billion in 2014-15.
Monika Tu, whose Sydney-based property agency specialises is catering for the Chinese buyer market, said international house hunters were factoring the extra land tax into their property search and reducing their budgets.
“The market is still here; there are Chinese buyers who have a visa and children are at school, and they really want to buy here but these changes do create a lot of uncertainty,” she said.
Looking ahead
There was a small drop in Sydney home prices of 0.7 per cent in the March quarter, but in the three months to June, property prices surged 6.8 per cent upwards according to CoreLogic’s monthly house price index.
JP Morgan economist Tom Kennedy said the fall in March was the result of a change in the dynamics of the property market, brought on by the rapid expansion in the number of apartments.
“This looming supply expansion is expected to exert downward pressure on price growth over the next few years, particularly in Melbourne and Sydney where the expansion has been most pronounced,” he said.
HSBC economists Paul Bloxham and Daniel Smith also expect the property market to cool further over coming quarters: “Tight prudential settings, a significant boost to housing supply and recently increased state taxes on foreign buyers are set to weigh on housing price growth,” they said in an AAP release.
Since mid-2012, Sydney prices have risen by 57 per cent, but Mr Bloxham said that nationally housing prices would only grow four to five per cent in 2016 and slow to somewhere from zero to five per cent in 2017.
Tim Lawless, CoreLogic Director of Research, Asia Pacific, says that compared to other states Sydney has been relatively sheltered from the downturn in the resources sector. Benefits have also come from having a healthy services sector and positive population inflows, but the boom days are definitely over.
“The cumulative effects of tighter lending conditions, more expensive mortgage rates for investors and lower yields, as well as natural affordability constraints and higher levels of new housing supply, is likely to continue to impact the Sydney housing market resulting in a further slowdown over the year.”
The latest NAB survey of residential property developers, owners, agents and investors concluded house prices will rise slightly, but apartment prices will drop as both local investors and foreign buyers reduce their levels of participation.
Credit rating agency Moody's has also repeated its belief that there's a growing chance of a "correction" in house prices - a fall of about 10 per cent it said is possible, though it also said a more "gradual adjustment" is the most likely outcome.
Most market-watchers are still confident that Sydney property prices will continue their upwards trajectory over the next four years, albeit with perhaps a slight dip or two along the way.
A survey of 20 economists and property experts by financial comparison website Finder.com.au found that 35 per cent believed property prices would rise 10 per cent by 2020, and a further 30 per cent expected increases closer to five per cent.
Finder’s spokesperson Bessie Hassan said: “While there was concern about a ‘housing bubble’ or unsustained growth for some time, we’ve now seen a correction phase where the property market has softened yet is likely to go up again.”
Sources
‘Property prices continue to surge in 2016, report shows,’ Jennifer Duke, Domain, 1 July 2016
‘NSW real estate: Chinese investors cast their eyes over to western Sydney,’ Alison Cheung, News.com.au, 30 June 2016
‘Housing affordability: How the major parties plan to tackle the crisis,’ Dana McCauley, News.com.au, 30 June 2016
‘New home sales fall for a second month in May: 'Nothing alarming', HIA says,’ Michael Bleby, Australian Financial Review, 29 June 2016
‘WESTPAC: Australians are feeling confident, but the RBA's still likely to cut interest rates,’ David Scutt, Business Insider, 15 June 2016
‘No sharp correction to house prices coming but debt risk growing, says S&P,’ Patrick Hatch, The Age, 15 June 2016
‘These charts show why some experts fear an apartment glut,’ Clancy Yeates, Business Day, 14 June 2016
‘NSW Budget 2016: Foreign property buyers in NSW to be hit with stamp duty and land tax hikes,’ Sean Nicholls, Sydney Morning Herald, 14 June 2016
‘Cracks emerging in Sydney’s apartment rental markets: report,’ Jennifer Duke, Domain, 14 June 2016
‘May Property Snapshot Infographic,’ Tim Lawless, CoreLogic, 9 June 2016
‘House price growth raises risks to banks: Moody's,’ Clancy Yeates, Business News, 9 June 2016
‘Housing investment loans hit two-year low as rules bite,’ Jeff Whalley, Herald Sun, 9 June 2016
‘Is the heat going to come out of the housing market now investors are backing off?’
Kirsten Craze, News.com.au, 8 June 2016
‘Property experts expect up to 10 per cent house price growth by 2020,’ Jennifer Duke, Domain, 7 June 2016
‘If the Sydney property market is booming again, why doesn’t anyone want to sell?,’ Antony Lawes, Domain, 4 June 2016
‘Market Update: Oversupply Fears Rise as LVRs Drop,’ Eliza Owen, Onthehouse.com.au, 3 June 2016
‘OECD warns Australian property prices facing 'dramatic and destabilising' demise,’ Business Day, 3 June 2016
‘Off-the-plan apartments are under the spotlight as prices slump,’ Kirsten Craze, News.com.au, 2 June 2016
‘Australian capital city home prices fall for first time since third-quarter 2012,’ AAP release in The Guardian, 22 June 2016
‘HSBC: property price growth to halve in 2016,’ Jessica Sier, Business Day, 21 June 2016
‘More tightening in mortgage lending likely: Macquarie analysts,’ Clancy Yeates, Business Day, 21 June 2016
‘Foreign-buyer stamp-duty charge unsettles luxury-home market,’ Jen Melocco, Domain, 22 June 2016
‘Property investors are going for old over new,’ Kirsten Craze, News.com.au, 26 June 2016
Buyers return and Sydney property keeps rolling on
Sat, 4 Jun 2016A federal election’s on its way but Sydney property still powers ahead. Investors stage a last-minute rush as interest rates drop and a unit glut looms.
The federal election is underway and with several weeks to go we might expect the Sydney property market to grind to a halt until after the polls close on July 2. But that’s not what’s happening.
Domain Group senior economist Andrew Wilson noted that the number of auction listings and the price outcomes have softened from the boom times of last year: “The ABS revealed…that Australia is possibly entering into a deflationary environment and to have house prices booming in this context is counter-intuitive,” he said.
But as part of a national trend, ?dwelling values in Sydney continued to rise, although at a rate that’s behind their strong performance in the first half of last year.
"Housing is getting a lot more prominence in the election campaign than it has previously," David Cannington, a senior economist at Australia & New Zealand Banking Group, told Bloomberg.
"The election uncertainty certainly weighs on consumer confidence and home buyer sentiment and that along with softness in the market is having an effect."
CoreLogic RP Data research director Tim Lawless said the price growth rate is now about half last year’s figure: "The annual rate of growth in Sydney peaked at 18.4 per cent in July last year and has since moderated back to 8.9 per cent over the most recent 12-month period."
However, Mr Lawless said that in April Sydney dwelling prices rose 2.4 per cent for the month, supported by mortgage rates at historic lows, high levels of investment and the government’s current supportive taxation policies. This follows a gain of 3.9 per cent over the first quarter of the calendar year.
The last weekend in May, Sydney recorded a median auction price of $1,270,000. This was higher than the $1,110,000 recorded the previous weekend, but also 7.6 per cent higher than the $1,180,000 recorded on the same weekend last year.
CoreLogic RP Data senior research analyst Cameron Kusher said the market was expected to slow in the second half of this year: “We don’t think it’s going to hold or continue but over the last three months after a pretty weak last quarter of last year [there] seems to be a renewed level of confidence,” he said.
There are also signs that investors are becoming more active after a brief pause while they considered the implications of possible changes to negative gearing and capital gains taxation arrangements.
The latest ABS lending finance data showed a solid rise in residential investor activity, with investor loans increasing by 30 per cent in March to a total of $5.5 billion, the highest monthly total since September 2015.
Westpac Bank, Australia’s biggest lender to property investors, has lowered the deposit required and raised the maximum loan-to-valuation ratio for investor loans in a reversal of 2015’s tightened lending conditions.
Otto Dargan, managing director of Homeloanexperts.com.au, said the earlier tightening had gone too far: "A lot of the lenders have realised that the reduced borrowing power for investors was too harsh," he told the Sydney Morning Herald.
Auction clearance rates ranging from the mid-70s and even in the low 80s have been achieved in the current pre-election rush as investors try to beat any changes to the taxation system that might eventuate after July 2.
However, Housing Industry Association (HIA) figures Sales of new homes in NSW dropped during April, with units losing more than houses. The HIA’s New Home Sales Report showed that the number of sales of new homes in March had fallen 8.1 per cent overall.
Of course there are always ‘experts’ willing to predict a future drop in Australia’s housing prices. The latest is London-based Capital Economics whose chief economist, Paul Dales, has forecast a fall of 10 per cent over 2019 and 2020.
"We suspect that the catalyst will be interest rates, although that trigger won't be pulled until 2018 at the earliest,” he said, while predicting a 4.5 per cent increase in 2016 and a 2.5 per cent increase in 2017.
Stock shortages appear
The number of houses listed for sale across Sydney is about 20 per cent down overall on the figure this time last year, and there are now shortages of housing stock in several key areas of the Sydney market.
According to Dr Andrew Wilson, that represents a shortage of about 30,000 listings this year.
“And for April, they were down around 6 per cent from March. Those fewer listings are certainly part of what’s generating strong price growth in many areas, particularly in the eastern suburbs, the lower north shore and the northern beaches.”
Mathew Tiller, head of research at LJ Hooker says that strong demand for property, low interest rates and investor demand have created a high level of competition to buy properties.
“So while, traditionally, you’ve always been told not to buy a property until you sell yours, now that’s turned around, and people are wanting to buy before they sell because they’re not confident they’ll find a good property to buy. That’s having a knock-on effect throughout the market.”
The prestige end of the market is especially hard-hit by a shortage of ‘trophy homes’, according to an article in Domain.
“The number of high-end properties in the slightly more affordable prestige market throughout the eastern suburbs and north shore have also dried up leaving agents dumbfounded at the dramatic turnaround in activity levels compared with the boom-time turnover of previous years,” the article said.
More rate cuts to come?
The RBA lowered the official cash rate to 1.75 per cent in May, saying in its official statement that the drop was the result of lower than expected inflation, low consumer sentiment and a downward trend in house price growth.
Although inflation is often seen as an economic negative, when it’s low or dropping the RBA can lower interest rates in hopes of encouraging borrowing and stimulating spending.
In 2015 housing prices increased rapidly while wages growth was at a near standstill. This meant that purchasers had to spend more of their incomes to service housing debt instead of spending on consumer purchases such as appliances, entertainment and groceries.
Inflation data from the Australian Bureau of Statistics has highlighted a slowing Australian economy, with the annual figure now below the RBA’s target rate of two the three per cent.
The Commonwealth Bank has predicted that interest rates will hit further historical lows of 1.25 per cent this year, with cuts of 25 basis points in August and also in November.
CommBank chief economist Michael Blythe said the RBA's Statement on Monetary Policy in May showed a higher level of concern than had been expected: "The RBA now expects inflation to only limp back to the bottom of the RBA's 2 per cent to 3 per cent target band by mid-2018," he said in a note to investors.
JP Morgan economist Tom Kennedy said the recent low wage rises had supported rapid jobs growth, but he predicted the RBA would cut interest rates further to stop low inflation from becoming entrenched.
Chief market strategist at IG, Chris Weston agreed, saying a cash rate of 1.25 per cent is very possible: "There's every possibility we could get two rate cuts this year, and I don't think they're going out on too much of a limb," he said.
Morgan Stanley strategists Chris Nicol and Daniel Blake added their forecasts to the mix, issuing a note to clients saying the Reserve Bank of Australia will cut the official cash rate to 1 per cent by the first half of 2017.
Apartment numbers keep growing
As towers of apartments continue to rise into the skylines of Australia’s capital cities an increasing number of property analysts are asking the question: “Are there too many new units being built?”
Herald Money columnist Nicole Pedersen-McKinnon describes a possible outcome: “It's widely considered that in Australia there will soon be an apartment glut – and subsequent price fall. The effect is probably already captured in the borrowing figures. If we look at new dwellings only, loan amounts are down 15 per cent in NSW.”
CoreLogic research analysts Tim Lawless and Cameron Kusher released a New Settlement Risk Report which looks at the number of units due to settle over the next six, 12, 18 and 24 months.
It said that across the combined capital cities there are 92,102 new units set for completion over the next 12 months. That figure is expected to rise to a massive 231,129 new units during the next two years.
Mr Kusher says these numbers represent a challenge for the market: “The large volume of new stock, coupled with an ever-growing supply of existing stock means that historic high levels of unit settlements are due to occur over the next two years in most cities.”
In the meantime units have recovered some lost ground, according to Residex: “Units in the Sydney market increased a significant 1.26% over the April quarter, following losses in January. The median Sydney unit is now at a historic high of $695,000” it said in its latest Market Update.
The City of Sydney Council has expressed alarm over the NSW government’s planning for inner city apartments that will result in population densities ‘seen only in pockets of New York or Hong Kong’.
The council’s chief executive officer, Monica Barone, told the Sydney Morning Herald: “Given available public information we expect to see as many as 10 or more buildings over 30 storeys on the Waterloo Estate with others up to 20 storeys."
However, Mr Kusher noted that Sydney’s new unit supply is geographically diverse, with a large number of new units under construction in outer suburban areas including Parramatta, Strathfield, Auburn and Kogarah-Rockdale.
“In some respects this spreads some of the risk around the city rather than other cities where new supply is much more centralised,” Mr Kusher said.
New constraints on foreign buyers
Three of the four major banks have placed restrictions on lending to foreign property buyers. Westpac, ANZ and the Commonwealth Bank now require proof of identity, proof of employment, possession of Australian residency and deposits of at least 30 per cent of the value of the property.
This comes at a time when the National Australia Bank’s residential property index shows a significant drop in foreign buyers in NSW; they have started to look for investment opportunities elsewhere, most likely because Sydney prices are so high that getting a satisfactory return on investment is becoming a challenge.
Mortgage One Australia mortgage consultant Michael Khoury said he had received several calls from developers who expressed concerns about whether buyers who have purchased ‘off the plan’ would be able to get a mortgage on settlement day.
“With restrictions on bringing money in and lending restrictions [in Australia] a lot of these sales will fall over in the next 12 months.”
However, director of Chinese property portal ACProperty, Esther Yong said that offshore Chinese buyers aren’t big risk takers and most would have sufficient cash to cover any problems with funding.
In a separate move that also targets foreign purchasers, from July buyers and sellers of real estate in NSW will have to prove their residency and citizenship status to the state government before a sale is completed.
Foreign buyers will have to provide details of their citizenship and visas, as well as getting clearance from the Foreign Investment Review Board. The Australian Taxation Office will match data provided by the NSW government to ensure foreign buyers have paid a $5000 fee for any property sold for less than $1 million, and $10,000 for properties sold for over $1 million.
Housing affordability worries
The unaffordability of housing is once again in the news following the release of a report by Anglicare Australia that showed a single person on the dole would have to search 3,590 advertised properties before they found one they could afford and that was appropriate for their level of income.
This brought out in the media a number of proposed solutions including one that’s been promoted by some journalists and even an editorial in the Sydney Morning Herald following a March report from the independent McKell Institute that the present high rates of stamp duty were raising housing costs and should be replaced by a broad-based tax on all property.
The report’s estimated $5250-a-year “reasonable and fair” impost on the state’s 2.8 million households would put something in the order of $14.7 billion into the government’s coffers in the first year. Unfortunately, it could also have several negative impacts on the housing market and make a major contribution to housing unaffordability.
It’s likely that rents would rise as landlords recouped the additional annual expense from tenants. Homeowners would have to find another $5250 in their household budgets, on top of existing mortgage payments, and people would hesitate to build a new home if it’s going to immediately start costing them an extra $5250 each year.
And because purchasing a house would automatically incur an ongoing debt of $5250 each year the number of buyers would predictably decline, along with dwelling values. Not a good outcome just to do away with stamp duty.
Negative gearing and capital gains
The Reserve Bank of Australia has expressed concern about negative gearing and the tax concession for capital gains. This has great importance to the housing market because loans to investors account for 46 per cent of all money lent for housing according to a report in the Sydney Morning Herald.
The RBA says that any change that discouraged negative gearing might be "a good thing" for financial stability. That has added fuel to the fires now raging between the two major parties over the future of the system that now operates and provides favourable conditions for property investors.
Labor has promised a massive overhaul to the country’s negative gearing and capital gains tax regime that it says will save $32 billion over 10 years. The Coalition on the other hand has said that the changes proposed by the ALP would cause "a massive shock" to the property market and says it will leave existing tax arrangements alone.
The Greens have even gone a step further. Greens leader Richard Di Natale said he would abolish the capital gains tax discount altogether.
The battle lines are drawn but we’ll have to wait for the outcome of the July 2 election before we have any clear indications of what lies ahead for these two contentious but important financial topics.
In the meantime, Domain executive editor Stephen Nicholls thinks investors will outbid first home buyers in the rush to acquire properties before the election: “My bet is that the investor will come out on top, or certainly push the price higher for first home buyers.
“After all, the opportunity to get those tax breaks could go out the window if they hold off until next winter.”
Sources
‘Sales of new homes took a dive during April according to the Housing Industry Association,’ Michelle Hele, News.com.au, 30 May 2016
‘Chilly end to Sydney autumn auction market as rates slide,’ Dr Andrew Wilson, Domain, 30 May 2016
‘Morgan Stanley tips RBA to cut rates to 1pc, ASX at 4800,’ Vanessa Desloires, Business Day, 25 May 2016
‘Market Update,’ Eliza Owen, Onthehouse.com.au, 29 May 2016
‘Westpac lowers deposit hurdle for property investors,’ Clancy Yeates, Business Day, 24 May 2016
‘FOMO among investors could reignite the Sydney property boom,’ Stephen Nicholls, Domain, 21 May 2016
‘Monthly mortgage payments fall $254 in five months,’ Nicole Pedersen-McKinnon, SMH Money, 19 May 2016
‘Federal election 2016: low wage growth sparks bleak outlook,’ David Uren, The Australian, 19 May 2016
‘House prices rise in April with Sydney top,’ Robert Harley, Australian Financial Review, 2 May 2016
‘Bullish housing data from CoreLogic RP Data a ‘big surprise’, say experts,’ Jennifer Duke, Domain, 2 May 2016
‘RBA Cuts Rates in May,’ Eliza Owen, Property News, Onthehouse.com.au, 5 May 2016
‘Westpac withdraws from real estate lending to foreigners,’ Elysse Morgan, ABC News Online, 28 April 2016
‘Sydney house auction market rises as interest rates and taxes are cut,’ Dr Andrew Wilson, Domain, 6 May 2016
‘Foreign buyers leaving Victoria, NSW in favour of Queensland, NAB data shows,’ Kirsten Robb, Domain, 20 April 2016
‘Chinese buyers to reach new record in 2016, but pain ahead: report,’ Jennifer Duke, Domain, 7 May 2016
‘Foreign buyer crackdown as new identity rules applied to Sydney property market,’ Kirsty Needham, Sun-Herald, 15 May 2016
‘Interest rates will fall further Commonwealth Bank economists predict,’ Liz Hobday, ABC Online, 16 May 2016
‘Property buyers prepared to close the deal before the hammer falls,’ Sue Williams, Domain, 3 May 2016
‘Sydney’s trophy home market fast grinding to a halt,’ Lucy Macken, Ingrid Fuary-Wagner, Domain, 8 May 2016
‘Election 2016: Reserve Bank worried about negative gearing, capital gains tax concessions,’ Peter Martin, James Massola, Sydney Morning Herald, 9 May 2016
‘Boom to bust: how many is too many apartments for our big cities?,’ Kirsten Craze, News.com.au, 13 May 2016
‘Roger Montgomery sees apartment oversupply sending property prices south,’ Jessica Sier, Business Day, 16 May 2016
‘April Property Snapshot Infographic,’ Cameron Kusher, Core Logic, 13 May 2016
‘Sydney auction market soars as investors stage a comeback,’ Domain, Dr Andrew Wilson, 16 May 2016
‘One Out Of Every 3,591 Properties Affordable For Single Person On The Dole,’ Max Chalmers, The Insider, 21 April 2016
‘Stamp duty should be in the state government's sights,’ Sean Nicholls, Sydney Morning Herald, 14 May 2016
‘Clover Moore alarmed by Waterloo apartment plans that dwarf Singapore's squeeze,’ Leesha McKenny and Jacob Saulwick, Sydney Morning Herald, 17 May 2016
‘Election 2016: Sydney house market stalls as poll jitters sideline sellers,’ Narayanan Somasundaram, Bloomberg release in Business Day, 19 May 2016
‘House prices to fall by 10 per cent, say Capital Economics,’ Stephen Cauchi, Business Day, 23 May 201
As the boom recedes we slow down and wait
Wed, 4 May 2016Housing price growth slows, buyers get choosy, foreign investors stay active, rents rise, interest rates stay low and apartment building continues. This is the 2016 Sydney property market today.
There can no longer be any doubt that Australia’s housing boom is over and growth is returning to more sustainable levels.
“Sydney’s median house price falls below $1 million” was the way the Sydney Morning Herald headlined the story, and statistics from Domain Group did indeed show a March quarter drop of 1.5 per cent to $995,804. Across Sydney, that is.
Looking at a bit more detail we see that houses in the lower north shore, city and east, and northern beaches continued to show gains, albeit lower than this time last year.
As the article pointed out: “House prices fell in five out of nine regions, remained flat in the south west and grew in the city and east, and northern beaches by 7.4 per cent and 1.9 per cent respectively.”
But the lower north shore showed the highest house price increase of 12.2 per cent over the quarter, to a median of $2,300,000, so the ‘fall’ is anything but uniform.
Nevertheless, figures in March from CoreLogic RP Data also confirmed the general slowdown, showing annual home price growth down to its slowest rate in 31 months. Its index of home prices for the combined capital cities rose 0.2 per cent in March, compared to February when prices increased by 0.5 per cent.
Annual growth across Australia slowed sharply to 6.4 per cent, down from 7.6 per cent the month before and significantly down from a cycle peak of 11.5 per cent in 2015.
CoreLogic says the moderation in the rate of capital growth in Sydney is the most pronounced, with annual dwelling value growth halving from a high of 18.4 per cent in July last year.
Sydney, which CoreLogic described as a “very different beast" to other capital cities, is on track for a 2 per cent overall rise for the full year, said CoreLogic analyst Cameron Kusher. According Mr Kusher, the dwelling prices slowdown will continue throughout the rest of 2016.
“The cumulative effect of tighter lending conditions, more expensive mortgage rates for investors and lower yields, as well as natural affordability constraints and higher levels of new housing supply, is likely to continue to impact the Sydney housing market resulting in a further slowdown over the year,” he said.
It should be noted that CoreLogic recorded a median auction price in mid-April of $1,150,000. It also said the median remained 12.2 per cent higher than the $1,025,000 recorded over the same post-Easter weekend last year.
Domain expects Sydney auction activity to continue to rise through to the Queen’s Birthday holiday break in June, which it says is the beginning of the quieter winter auction market.
“Although auction listings are well below last year’s results at the same time, inner suburban clearance rates remain encouraging for sellers,” said Dr Andrew Wilson, Domain Group’s chief economist.
“However, weaker buyer activity is set to remain in lower-priced outer suburbs to the west, reflecting falling investor activity and recent strong prices growth subduing the market.”
Regulators breathe easier
The declining property market will impact on the banks' home loan businesses as mortgage growth slows and the potential number of customers that fall behind on their home loans rises.
"We expect the Australia-wide delinquency rate for mortgages showing more than 30 days in arrears to increase in 2016, but remain at a low level," Moody's analyst Alena Chen said.
Moody's said the total arrears rate in NSW would also remain at very low levels, noting that in 2015 the state recorded its lowest mortgage delinquency rate since 2005.
The average home loan in NSW has dropped by 10.15 per cent or $45,500 in three months according to a Finder.com.au analysis of Australian Bureau of Statistics data.
Nationally, home loans shrank by 4.08 per cent in February, reflecting a drop in valuation pricing as well as tougher loan conditions from banks.
The RBA said in its half-yearly statement on the health of our financial system that the steps taken by regulators to tighten lending standards have reduced risks in the financial system while increased lending rates have also tempered both credit and house price growth.
However, it cautioned that tighter access to loans for households could create "challenges" in the apartment construction market given the volume of building undertaken.
Meanwhile, Australia’s property investors had a surprise resurgence in February, with ABS data showing an increase in the level of investor loans.
Lending to property investors grew 4.1 per cent in February but still remains down year on year. Loans issued to owner occupiers grew by a modest 1.7 per cent over the month.
AMP Capital chief economist Shane Oliver told Domain’s Jennifer Duke that the bounce back in the figures came as a bit of a surprise: “It was a bit of a reversal after almost six months of investor lending being soft or below owner occupiers”.
In a Reuters release RP Data head of research Tim Lawless said he didn’t think dwelling prices would be going backwards.
"We are likely to see Sydney and Melbourne dwelling values continue to rise, at least on average over 2016 and 2017; however, growth rates are likely to be substantially lower than what has been recorded over previous years."
Mr Lawless also told ABC News Online that Sydney home prices could retreat before stabilising: "By 2017 we're expecting the Sydney market will probably be tracking at around about the 1.5 to 2.5 per cent growth rate," he said.
"A period of weaker price growth or outright modest declines is likely to become entrenched over coming years," said Merrill Lynch in a note to clients.
"We'd expect that such a period could severely test Australians' long love affair with property investment."
Splits in the market
Divisions are beginning to widen in the Sydney auction market between richer suburbs and those in areas considered less ‘desirable’.
Agents report that there are still buyers in the market but they have become more selective about the type of property they buy and its location.
“They’re being more selective, there’s no doubt about it,” CBRE residential head David Milton told the Australian’s Samantha Hutchinson.
“They’d buy anything 18 months ago, we’d never seen anything like it, but now they’re thinking a lot more about what they’re buying, the apartment, and they’re not prepared to accept secondary properties in a development.”
Tim Lawless, residential research director at CoreLogic RP Data said there has been an erosion of confidence and value growth across the Sydney metropolitan area.
"The inner city areas seem to be more resilient, but the areas from Ryde, the Hills Districts and the outer west is where the pace of value growth has been sharpest in decline," Mr Lawless said.
Domain’s Stephen Nicholls says that there has been a considerable shift away from buying patterns of last year: “This time last year clearance rates were consistently high across the city, but this year lower-priced property in the west and south-west is struggling to find buyers.”
Whereas last March clearance rates in the west were 75.8 per cent, in the same month this year less than half the number of homes put to auction were sold (49.4 per cent).
Domain Group chief economist Andrew Wilson says the reason for the continuing strength in more exclusive areas is due to people with higher incomes benefiting from the strong Sydney economy and also to those parts looking to be good value.
“They haven’t had the same level of price growth as outer suburbs in the past year,” Dr Wilson said in a Herald article.
Foreign buyers active
Data from the Foreign Investment Review Board (FIRB) show that Australia’s property prices continue to be supported by an increasing amount of foreign investment.
There were 36,841 applications by non-citizens who were also not permanent residents to buy residential properties. This represented a 60 per cent increase on the previous year, while the value of all properties covered by the applications rose 75 per cent to $60.75 billion.
Foreign purchasers bought 9,236 established homes last financial year worth a total of $10.1 billion. FIRB figures show that approvals to buy Australian residential real estate have more than tripled since 2012-13.
The majority of individual purchases of real estate were by Chinese nationals, who lodged about two-thirds of the total number of FIRB applications across all categories.
A Bloomberg media release said that the rising level of demand from foreign purchasers has triggered community concern that locals are being priced out of the property market. It said this had “prompted the government to tighten scrutiny of foreign investment”.
Building activity slowdown
There are a number of indicators that show the recent period of accelerated home-building activity is nearing an end.
Earlier this year a rapid fall in new home sales during February seemed to confirm that the property market has entered the first phases of a down cycle. In that month new home sales recorded their steepest monthly fall in more than 21 months.
Housing Industry Association economist Harley Dale said that downwards cycles usually started with a moderation in new home building and sales levels, which then picked up momentum.
“Stage one of a down cycle in new home building will be moderate, but signs of a sharper contraction in subsequent stages may emerge as the year progresses.”
Construction activity has now slipped to a 13-month low on the back of weakness in home building and declining engineering work.
The Performance of Construction Index slumped 0.9 points to 45.2 in March, remaining below the 50-point level separating expansion from contraction.
Ai Group head of policy Peter Burn said the fourth consecutive monthly decline of the index was driven by weakness in home building and engineering construction overwhelming small advances in the apartment and commercial building sub-sectors.
He also warned that there was no indication of any potential turnaround in the near future: "With new orders across the sector also falling, the immediate outlook for construction is for further contraction."
Apartment oversupply concerns
Concerns are being raised about the number of new apartments now being marketed in Australia’s capital cities. Once thought to be immune from the possibility of overbuilding, Sydney has now overtaken Melbourne in the number of new apartment building approvals.
Figures from the Australian Bureau of Statistics show that in 2015 Sydney became the leading capital for apartment developments with 35,538 approvals during the year compared to Melbourne’s 33,023.
Developers have undoubtedly been tempted by the recent price growth in Sydney apartments. According to CoreLogic figures, in the past five years the median unit price has risen 39.4 per cent.
However, Douglas Driscoll, CEO of real estate group Starr Partners, raises the issue that apartments might have more appeal to investors than they do to owner-occupiers: “We are forcing buyers into considering apartments because the reality is that they have very little other option in a semi-affordable price range.
“We are starting to see some ill-effects from an oversupply of apartments such as rents falling for the first time in three years, as well as vacancy rates rising,” he said.
Daryl Dixon, Executive Chairman of Dixon Advisory, cautions against buying an apartment ‘off the plan’ while an oversupply of apartments may cause both bank valuations and rents to fall.
“Holding off on new purchases, even for owner-occupied purposes, individuals could benefit from the lower prices certain to follow the completion of the large number of off-the-plan projects in the pipeline,” he said.
The Reserve Bank of Australia (RBA) even issued a warning to banks about the potential for what it called “large losses” from loans to property developers as a result of the forthcoming glut of apartments in some parts of Sydney.
The RBA identified what it called a "mismatch between a growing supply of geographically concentrated apartments on the east coast and softening demand for these apartments in some areas – given the rebalancing of housing demand and strengthening of lending standards".
The RBA said it doesn’t see the apartment situation affecting value of free-standing houses: “This development is not expected to materially [affect] price performance of detached housing but may [hurt] sentiment towards the property market overall."
Graham Wolfe of the Housing Industry Association said the Reserve Bank was being "overly conservative in their outlook".
He told the Australian Financial Review that 2015 was only the second year in the past decade that housing starts had exceeded demand from annual population growth and that Australia's latent undersupply of housing stock was evident by tight rental vacancy rates.
And Chris Johnson, CEO of the Urban Taskforce said that in fact more homes are needed, particularly in Sydney.
“The NSW Department of Planning says that 33,200 new homes are needed each year for 20 years in Sydney but last financial year only 27,348 new homes were completed,” he told Kirsten Craze at News.com.au.
“I think in the long term value will remain and that’s because of a fundamental shift in lifestyle. A lot of people are preferring a cosmopolitan lifestyle that’s close to public transport, shops and amenities and this is what’s going to keep prices up.”
Rent levels rise
A positive note for investors came from the March 2016 Domain.com.au Rental Report which showed that Sydney rents had increased during the March quarter and remained at record levels despite the recent apartment building boom.
The median unit rent was recorded at $520 per week, while for houses it was $530. Sydney unit rents have now increased by 4 per cent over the past year. Low vacancy rates also continued, according to the report.
Domain's December quarter 2015 report showed Sydney unit rents falling from $510 to $500 per week over the period before recovering in March.
Domain Group’s chief economist Andrew Wilson told the Property Market Outlook, put on by the Committee for Economic Development of Australia, that property prices are now so high that little can be done to make home purchasing more affordable.
“The boom has entrenched significant barriers of entry to the market and fast-tracked the rise of Sydney as the high-rise and renting capital. We’re moving inexorably towards that outcome.”
Interest rates remain low
One key element in the property mix – interest rates, seems destined to remain low for some time, and possibly go even lower.
In its April meeting the RBA announced it would hold the official cash rate at two per cent – the tenth consecutive month that it left the official cash rate on hold.
This was despite a persistently strong Australian Dollar threatening a cash rate cut, although the Australian cash rate is still high compared to other countries such as Japan whose rates are in negative territory.
Eliza Owen from Onthehouse.com.au says that recent optimism regarding Australia’s economy has resulted from increased activity in tourism, real estate and services, which are helping to offset losses in the resource markets.
“I anticipate revenues in real estate will come down over the remainder of this year, but any further cuts to the cash rate may be dangerous in fuelling further debt rather than stimulating the economy.”
She said that many economists expect the RBA’s cash rate to stay at its present level until May next year: “While a cash rate cut may temporarily help prop up further growth in the housing market, with such high levels of debt further growth would only lead to more pain in the economy down the track.”
Ms Owen noted that low interest rates have not worked in the favour of first home buyers. “In fact, in 2014, for the first time in recorded history and while the cash rate was at historic lows, more money was lent to people who were buying investment housing compared to people who were buying something to live in.”
At least for the time being the federal government will make no changes to capital gains tax and negative gearing. Prime Minister Malcolm Turnbull said before the May 3 budget that it was "common sense" to make no adjustments to existing arrangements.
Domain’s Dr Andrew Wilson agrees: “Any new policy that constrains the supply of housing, whatever that may be, will only act to increase prices and rents and exacerbate the looming reality that home ownership is set to be a largely unattainable privilege for most inner-city apartment renters.”
Sources:
‘Sydney’s housing market will soon start to look like New York, expert says,’ Antony Lawes, Domain, 28 April 2016
‘Budget 2016: Malcolm Turnbull takes negative gearing changes off the table,’ Stephanie Peatling, Sydney Morning Herald, 24 April 2016
‘Sydney’s median house price falls below $1 million: Domain Group,’ Jennifer Duke, Domain, 21 April 2016
‘Glut or no glut, what exactly is happening with apartments in our major cities?,’ Kirsten Craze, News.com.au, 19 April 2016
‘Building activity slips to 13-month low,’ The Australian, 7 April 2016
‘Rents continue to rise despite national building boom,’ Julia Corderoy, HomeNews, Australian Broker, 7 April 2016
‘RBA warns of apartment glut risk to banks,’ Clancy Yeates and Jonathan Shapiro, Business Day, 15 April 2016
‘Record drop in NSW home loan size: analysis,’ Jennifer Duke, Domain, 19 April 2016
‘RBA Leaves Rates on Hold in April,’ Eliza Owen, Onthehouse.com.au, 5 April 2016
‘Industry insider says Sydney will soon have too many apartments,’ Kirsten Craze, Property News, news.com.au, 31 March 2016
‘Banks to feel slowing housing market,’ Clancy Yeates, Business Day, 1 April 2016
‘Steep fall in new home sales sounds the alarm,’ Samantha Hutchinson, The Australian, 1 April 2016
‘Australian home price growth slows further in March,’ Reuters in Business Day, 1 April 2016
‘Melbourne houses record strongest price growth as apartments flounder,’ Su-Lin Tan, Financial Review, 1 April 2016
‘March Property Snapshot Infographic,’ Cameron Kusher, CoreLogic Property value, April 2016
‘Home prices set to stagnate as Sydney boom falls flat,’ Michael Janda, ABC News Online, 3 April 2016
‘The growing divide between Sydney’s richer and poorer suburbs,’ Stephen Nicholls, Domain, 2 April 2016
‘RBA Leaves Rates on Hold in April,’ Eliza Owen, Onthehouse.com.au, 5 April 2016
‘The damaging ramifications of the apartment boom,’ Doug Driscoll, Domain, 10 April 2016
‘Foreign real estate investment jumps 75pc in a year, FIRB report reveals,’ Michael Janda, ABC News Online, 11 April 2016
‘Apartment glut a threat to financial stability, warns RBA,’ Jonathan Shapiro, AFR Weekend, 16 April 2016
‘Chinese buyers double down on Australian property,’ Bloomberg on Business Day, 11 April 2016
‘Sydney’s auction clearance rate hits lowest level this year,’ Dr Andrew Wilson, Domain, 18 April 2016
‘Loans to property investors jump in February: ABS,’ Jennifer Duke, Domain, 11 April 2016
‘Property slowdown to test Australia's love of real estate, says Merrill Lynch,’ Jessica Sier, Business Day, 11 April 2016
Residex Market Update, Eliza Owen, Onthehouse.com.au, 17 April 2016
‘McGrath shares crash after resuming trading,’ Carolyn Cummings, Business Day, 18 April 2016
Sydney property moves into the slow lane
Thu, 31 Mar 2016Some parts of Sydney are outperforming others in a slowing market, but auction clearance rates are still showing strength. However, residential construction – a key component of the Australian economy, is declining, and so are rental rates.
As expected, this year’s Sydney property auction results are lagging behind those of 2015. Clearance rates are becoming more uneven geographically with some areas clearly outperforming others.
Domain’s Dr Andrew Wilson said the results continue to show the recent trend of inner suburban, higher-priced regions reporting generally good results for vendors with overall clearance percentages in the 70s most weekends.
“Although auction clearance rates [are] down…the Sydney market overall remains positive for sellers and continues to track at its highest levels since August last year.
Dr Wilson also noted that buying within 10 km of the Sydney CBD has an automatic $1 million starting point: “Even 60 kilometres out people are snapping up very small new homes for $600,000 in some areas”, he told the Sydney Morning Herald.
Research from the University of NSW’s City Futures Research Centre (CFRC) indicates that affordability issues are severely restricting the choice of purchasing locations for average homebuyers.
The CFRC report found that, based on the average salary, three quarters of Sydney suburbs had less than 20 per cent of home sales at an affordable price. It said that only a small amount of affordable housing remains, primarily in suburbs near Penrith and in the Canterbury-Bankstown area.
House prices slip
For the first time in three years the median house price across Australia has slipped, with the decline in the Sydney market leading the fall.
As the Housing Industry Association (HIA) describes the market: “The growth cycle for national residential property prices has peaked, within which the variation in dwelling prices between capital cities (and regional areas) is at its widest in over 20 years.”
Sydney’s median house price fell by 1.6 per cent in the December quarter according to Australian Bureau of Statistics data, the first such drop since March 2012.
The Reserve Bank of Australia’s governor, Glenn Stevens, gave credit for the price fall to regulatory measures introduced to slow lending to investors: "Some moderation in house prices in some of the locations where they had been rising most rapidly, while not the direct objective of the supervisory measures is…in my judgement helpful," he said.
Mortgage activity provides an indication of the demand for property in the near future. The CoreLogic Mortgage Index is trending higher, but the level of activity is lower than it was at the same time last year.
This means the demand for mortgages is not as strong as it was at this time last year, showing that the rush to borrow funds for property investments has slackened.
For investors, rents are also showing signs of easing. According to CoreLogic, Sydney rental rates have increased by just 1.1 per cent for houses and 3 per cent for units over the past year.
Slowing rents mean that home value growth is now outpacing rental growth. Gross rental yields have dropped from 3.5 per cent for houses and 4.4 per cent for units a year ago to 3.2 per cent and 4.2 per cent respectively.
Housing construction declines
The latest Performance of Construction Index by the Australian Industry Group (AIG) and the HIA shows that activity in Australia's construction sector went backwards in February, representing a decline in house building.
As ABC Journalist Michael Janda points out, the housing sector is a critical part of the Australian economy.
“Over the past year, residential construction and renovations grew by around 10 per cent, according to the ABS national accounts. The residential building sector alone thus directly added around half a percentage point to the nation's 3 per cent GDP growth”, he said.
“If the sector stopped expanding, other things being equal, GDP growth would slow to 2.5 per cent. If the industry shrank by an equivalent amount, it would have directly pulled GDP growth back closer to 2 per cent.”
HIA chief economist Harley Dale said that the new residential construction sector will maintain healthy levels of activity this year, but will not generate further growth.
"Detached house building has been quite strong in some markets this cycle, but certainly hasn't satisfied the level of underlying demand, given insufficient availability of shovel-ready land and the excessive user-pays charges for residential infrastructure."
As a new analysis by ANZ Bank points, the ongoing housing undersupply also limits the likelihood of price falls in the Sydney market.
“When prices do start to fall, that creates opportunities for potential households who are priced out of the market” says ANZ senior economist David Cannington.
“This is part of the reason why house prices are able to be supported at the high level that they are at the moment.”
Sydney’s undersupply continues
At least Sydney will be the last capital city to be oversupplied with dwellings if to BIS Shrapnel’s 2016 Building Industry Prospects report proves to be accurate. The report concluded that although Australia will have 24,000 extra homes by 2017, most of them will be in Victoria.
The report also says that the undersupply of dwellings in Sydney is likely to continue for at least the next three or four years. It concluded that in 2017 Sydney will still see a shortage of 41,000 dwellings, representing only a slight improvement on the shortage of 53,386 this year.
Robert Mellor, managing director of BIS Shrapnel, said that Sydney has little chance of overcoming its present housing undersupply by 2020 unless new dwelling construction were to continue at the high levels seen in 2015.
Another limiting factor appears to be a shortage of building materials and manpower, according to Brickworks managing director Lindsay Partridge: “Every plant we have on the east coast is at capacity…the biggest issue for our company is roof tilers. They are very hard to find.”
AMP Capital chief economist Shane Oliver believes we’ve already seen the bulk of the home building momentum and are now entering a phase of the property cycle where growth is slowing.
“If [the building boom] continued for a few years we could eat up the supply issue [in Sydney], but this is unlikely as approvals are starting to roll down.”
Unit prices may have peaked
Australian Population Research Institute president Bob Birrell said the conclusions of the BIS Shrapnel report were consistent with APRI’s findings: “Sydney has had a relative high amount of stock built in the past two or three years compared to before. But this is largely small apartments for which there is a limited market,” he said.
Until now the price growth of Sydney apartments has been impressive. The 12-month median unit price is now $650,000 (after an increase of 38.9 per cent in the past five years according to RP Data CoreLogic figures).
However, figures from the Domain Group show that Sydney’s unit prices fell 2.8 per cent in the December quarter - the first decline in apartment prices since March 2012.
This could indicate that unit prices have reached their peak, especially when you consider that a median freestanding house in any other capital city – including Melbourne, would cost less than the price of a median Sydney unit.
With regard to the currently burning questions about negative gearing and the taxation of capital gains, we’ll have to wait at least until the May budget and possibly even until the next election before we get the full details from the federal government.
Sources
‘Buyers priced out of 75 per cent of Sydney’, Jennifer Duke, Sydney Morning Herald, 26-27 March 2016
‘Housing shortage to boost market’, Jessica Irvine, Sydney Morning Herald, 26-27 March 2016
‘Builders struggling to satisfy housing boom, says Brickworks,’ Tim Binsted, Sydney Morning Herald,24 March 2016
‘HIA State Outlook’, Housing Industry Association NSW, Summer edition, 2016
‘Bubble bursts as prices cool, ending boom of three years,’ Jennifer Duke, Sydney Morning Herald, 23 March 2016
‘February Property Snapshot Infographic,’ CoreLogic Property Value, 8 March 2016
‘Lowest house building figures in more than a year will weigh on economy: AI Group,’ Rebecca Hyam, ABC News online, 7 March 2016
‘Median house price falls in capital cities for first time in three years: Real Estate Institute of Australia,’ AAP release on Domain, 11 March 2016
‘Australia to have too many homes in 2017: BIS Shrapnel report,’ Jennifer Duke, Domain, 10 March 2016
‘The Sydney auction market is lagging this autumn,’ Dr Andrew Wilson, Domain, 11 March 2016
‘Congratulations Sydney, your units are way pricier than a house everywhere else,’ News.com.au, 5 March 2016
‘Negative gearing and the recession we have to have,’ Michael Janda, The Drum,
ABC Online, 16 March 2016
‘RBA's Glenn Stevens says moderating house prices 'helpful', Michael Heath, Business Day, 22 March 2016
Moving right along – just slower than before
Thu, 10 Mar 2016The Sydney property boom of the past four years is over and market indicators are returning to more familiar levels. Prices growth of 3 to 5 per cent is still expected, but buyers will be more selective in the locations and types of property they purchase as investor activity decreases and the construction of thousands of new apartments continues.
It’s been a long time since the Reserve Bank last cut its cash rate – since May 2015 when it came down to the two per cent rate we still see today.
When the RBA’s March meeting decided to keep it at this historic low position it also sent out a few signals that it could go even lower if the Australian economy showed signs of slowing.
This was reinforced by Deputy Governor Philip Lowe who said in a speech on 7 March that the Australian economy was successfully rebalancing after the end of the mining investment boom but there is scope for a rate cut if economic indicators showed a slowdown.
"An important factor here will be whether the growth in aggregate demand continues to be sufficient to accommodate the growth in our labour force," said Lowe.
But at present the expansion of the non-mining sector together with low inflation, satisfactory employment data and increased business borrowing seem to have reassured the Bank that it’s got the numbers about right.
One slightly worrying indicator is the fall in building approvals for the construction of new homes. The market had expected a drop of around three per cent but the January fall was 7.5 per cent.
Until recently the fall in mining investment has pretty much been offset by increased activity in the construction sector, but if both of these key economic forces trend downwards the RBA may cut its rates around midyear, according to AMP Capital chief economist Shane Oliver.
Bessie Hassan, spokeswoman for financial services comparison website Finder.com.au told News.com: “Australians should be cautious — experts are divided about what lenders will do next. While we don’t expect a dramatic upswing in rates, they can turn very quickly and catch borrowers by surprise.”
Meanwhile, Sydney’s housing prices have slowed dramatically. The latest CoreLogic RP Data home value index for February shows the annual growth dropped below 10 per cent, and the past quarter showed a 0.2 per cent easing in prices.
CoreLogic RP Data's head of research, Cameron Kusher, told ABC News that most Sydneysiders can’t afford to pay more than the current high prices.
"I do think we're getting to a point where affordability is stretched and [Australians] simply can't afford to pay some of these prices that are being asked in Sydney," he said.
Sydney property auction clearance rates are lower than last year but remain above 70 per cent, although the number of properties on offer has also decreased. Inner suburban higher-priced regions such as the lower north shore and northern beaches are recording significantly higher clearance rates than outer suburban areas in the south and west.
Property investors aren’t nearly as active as they were before the banks tightened their credit policies in late 2015. Loan growth in the housing investor market has dropped to its lowest rate in two years, as shown in figures from the RBA.
The Bank said the value of housing investor loans grew by 7.9 per cent in the year to January - the slowest annual rise since February 2014.
ANZ Bank economists Daniel Gradwell and David Cannington said that some but not all of the slack in investor loans had been taken up with increased borrowing by owner-occupiers: "Although stronger owner-occupier credit growth has provided some offset to this, overall housing credit growth has slowed in recent months."
The somewhat tenuous shift to a non-mining Australian economy has again raised questions about a housing ‘bubble’, mostly fuelled by comments from international economists.
London-based economist Jonathan Tepper, who earlier predicted mortgage bubble bursts in both Ireland and the United States, said that Australia would be the next nation to experience a shock housing crisis.
In a recent episode of ‘60 Minutes’ on the Nine Network Mr Tepper, founder of macroeconomic research group Variant Perception, predicted a property market crash of 30 per cent to 50 per cent.
His most widely-repeated quote picked up in the Australian media is: "Australia is the only country we know of where middle-class houses are auctioned like paintings."
His prediction of doom was immediately countered by Moody’s Analytics, a risk measurement and management firm, and CoreLogicRPData who forecast that home value growth will merely slow across Australia in 2016 and 2017.
Alaistair Chan, a Sydney-based economist at Moody’s Analytics, said: “Nevertheless, accommodative policy, robust rental growth, and a recovering labour market are expected to support valuations over the medium term.”
An article on News.com.au does say that Sydney’s housing prices are overvalued: “House prices in Sydney are closer to fair value than Melbourne’s, although they are still 9.5 per cent overvalued in aggregate. This smaller estimate of overvaluation is the result of Sydney’s stronger employment market.”
This doesn’t mean a price fall is imminent, however. The article concludes: “Over the medium to long term (2018 through to 2025), Moody’s Analytics expects Sydney house values to rise 4.9 per cent a year in nominal terms versus a 7.3 per cent annual increase that we’ve seen over the period from 1982 to the present.”
Dr Andrew Wilson, chief economist of the Domain Group, says we will probably need to wait until spring to see signs of prices growth: “In the last quarter, downward activity was driven by a lack of confidence, but the underlying shortage of housing will continue to keep demand ahead of supply once confidence recovers.”
What sort of growth can we expect? This is the time of year that analysts look at the first two months of the new year and make their forecasts for the rest of the year ahead. Although estimates range from under one per cent to over seven per cent, the general conclusion is that a housing price rise of around three per cent across Sydney is on the cards.
Louis Christopher, managing director of SQM Research, sees a geographic bias determining where prices rise the most: “Sydney’s outer west, south-west and north-west will experience the full brunt of the slowdown, with price falls likely to be recorded in these areas.
“The middle rings and inner rings are likely to record moderate price gains. These regions underperformed during the boom, but now they will outperform during the slowdown, as they are less influenced by investor activity,” he said.
There’s also a disparity between anticipated growth for prices of units and those of free-standing homes. Dr Shane Oliver from AMP Capital says: “I see modest growth for houses of 4 to 5 per cent and apartment growth of up to 2 per cent.”
A report by the Australian Population Research Institute concluded that Sydney will soon see a surplus of apartments as the number of completions rises to about 21,000 to 22,000 apartments in 2016 and 2017.
The report’s findings were opposed by Urban Taskforce chief executive Chris Johnson who described the report as “alarmist”. He said there is “definitely not an oversupply of apartments,” and referred to NSW Government statistics that forecast a need for 33,200 new dwellings each year in Sydney.
John Cunningham, president of the Real Estate Institute of NSW, says that 2016 will be a year of consolidation.
“I see no more than 3 per cent growth for houses, which will run close to the inflation rate. First home buyers will come back into the market, which might put more pressure on apartment prices, and growth might stretch to 5 per cent,” he said.
Sydney property has always been a good investment as any impartial analysis of the property market’s historic growth will show, and it’s likely to stay that way according to several market-watchers commenting in Domain.
Linda Wang, management consultant with agents Laing + Simmons, said: “Most of us believe Sydney still has a lot of good investment buying. We have a growing population, and often a shortage of accommodation, and those are the two single biggest factors in the property market.”
Metropole Property Strategists CEO Michael Yardney says Sydney’s steady population growth continues to drive the market upwards, especially the investment sector: “We’re still seeing a lot of demand for homes closer to the CBD, in the eastern suburbs, on the lower north shore and the inner west,” he says.
“That’s from a demographic of people whose wages are growing more than average and who have a higher disposable income, so those are always good areas to invest in.”
The Urban Development Institute of Australia (UDIA) released a report in March that said we would need another 16 years of construction activity at the high level of the past three years just to keep up with Sydney’s population growth.
“Prices of land and housing are rising in Sydney faster and higher than any other Australian city and Sydney still needs a dramatic increase in affordable land supply to arrest this trend.”
There are some interesting statistics from the legal and conveyancing fields that could point to a prices recovery earlier than might be expected. A survey by GlobalX Legal Solutions, a firm that provides services to the legal professionals, found that 82 per cent of its clients believed Australia’s home values would stay constant or increase over the next year.
Chief executive Peter Maloney said his clients were involved in the earliest stages of real estate transactions and had already seen a pickup in activity: “Despite the last quarter reporting slower than average growth, our research found one in three conveyancers believe market valuations will increase by more than 5 per cent in the next 12 months.’’
Tim Lawless, CoreLogic’s research director, said the period of lower price growth we’re now entering isn’t a problem: “It’s actually quite a controlled movement, it’s probably just what the doctor ordered when it comes to making an improvement in the stability of our housing markets.”
AMP Capital’s chief economist Shane Oliver said unless there is a very severe recession or interest rates go sky high a fall in prices across the board is not going to happen.
“If we had unemployment at much higher levels than six per cent, if we had mortgage rates at more than 10 per cent, I would be much more worried,” Dr Oliver told Domain.
“But I’ve seen all these claims before and there is an underlying resilience in the Australian housing market that sees it hold up,” he said.
Sources:
‘Australia's economy rebalancing successfully: RBA,’ Reuters article in Sydney Morning Herald, 8 March 2016
‘Sydney auction numbers down as sellers remain cautious,’ Dr Andrew Wilson, Domain, 7 March 2016
‘Apartment bust to shock tens of thousands of investors, report suggests,’ Jennifer Duke, Domain, 7 March 2016
‘First-home buyers dreams dashed as Sydney land prices jump $100,000 in a year: UDIA,’ Jennifer Duke, Domain, 8 March 2016
‘Reserve Bank leaves cash rate on hold as building approvals fall off a cliff,’ Frank Chung, News.com.au, 1 March 2016
‘Home prices: Sydney stalls; Melbourne, Brisbane, Hobart on the rise,’ Michael Janda, ABC News, 1 March 2016
‘Property investor loan growth near two-year low,’ Clancy Yeates, Business Day, 29 February 2016
‘Industry forecasters predict slow and steady growth ahead, with no bubble in sight,’ Kirsten Craze, News.com.au, 26 February 2016
‘We may see prices go backwards … and stabilise in the later part of the year,’ Kate Farrelly, Domain, 26 February 2016
‘Predictions show house prices set to cool down this year, but unemployment could rise,’ Sue Lannin, ABC News Online, 26 February 2016
‘Property price growth may have slowed at the start of the year, but the experts have spotted signs things may soon pick up,’ Michelle Hele, News.com.au, 24 February 2016
‘Sydney real estate still a good investment, experts say,’ Sue Williams, Domain, 20 February 2016
‘Claims that Sydney is heading for a 50 per cent drop in house prices are outrageous, economists say,’ Jennifer Duke, Domain, 22 February 2016
‘The charts that suggest the housing bubble is out of control,’ John McDuling, Sydney Morning Herald, 24 February 2016
‘RBA Leaves Rates on Hold in March,’ Property News, Eliza Owen, Onthehouse.com, 1 March 2016
The good old days are back – just maybe not quite so good
Tue, 16 Feb 2016As we get closer to mid-2016 we’re also nearing the anniversary of the beginning of the biggest real estate boom Sydney has ever seen. It was in June of 2012 that property prices started rising at a rate that turned many owners of very ordinary houses into millionaires by the end of 2016.
We soon became accustomed to double-digit growth in property values, to auction clearance rates northwards of 80 per cent, to on-market times dropping to be measured in days rather than weeks, and to a growing number of investors snapping up properties that were expected to be sources of capital gains more than rental returns. And all this aided by the lowest interest rates in living memory.
Was it going to last forever? Of course not, and now it’s over. Sydney’s median house price dropped 3.1 per cent over the December quarter 2015, the first drop since June 2012, according to the Domain House Price Report.
Eliza Owen, market analyst from Onthehouse.com.au said it had been a pretty good ride until it came to a halt: “The upswing in the current cycle lasted almost two years and, in real dollar terms, the median house price increased by approximately $375,000.”
Stephen Nicholls, executive editor at the Sydney Morning Herald, called it “the house price correction Sydney has long needed”.
“Prices had risen so much – an extraordinary 52.6 per cent over three years. The 14.8 per cent growth last year was beyond everyone’s expectations. House prices can’t keep going up at those sorts of rates forever,” he said.
AMP Capital chief economist Shane Oliver said the drop was the result of rising mortgage rates, restrictions placed on investor lending, a surge of new apartments and a slowdown of Chinese buyers in the Sydney market.
He did say that the price drop “exaggerates the weakness in the market” as it has to be viewed in the context of the huge growth Sydney has experienced over the past three years.
Core Logic head of research Tim Lawless told Newscorp’s Aidan Devine that Sydney’s price crunch was the result of affordability pressures and a changing lending environment that has made it harder for investors to access credit.
“[Regulatory changes] have made it more expensive and difficult for investors to access housing finance. Added to this are higher mortgage rates and more restrictive credit policies and loan servicing requirements,” Mr Lawless said.
“Weakening fundamentals have already seen the market starting to cool, suggesting the best of the price gains are probably behind us,” NAB chief economist Alan Oster said in the ‘NAB Quarterly Australian Residential Property Survey Q4 2015’ released in February.
Now we go back to reality and that means adjusting all those numbers to where they usually were before the boom began. In other words, the market is returning to more sustainable levels and it’s not such a bad thing.
One significant change is that in 2015 Melbourne’s annual growth rate for houses and units combined (11 per cent) is now marginally ahead of Sydney’s (10.5 per cent), according to the January 2016 CoreLogic RPData Hedonic Home Value Index.
However, Sydney retains the crown for having the highest median dwelling price ($776,000), well ahead of Melbourne’s $595,000.
There will still be weekends with impressive auction results like those from the first auction in February which showed a result of 72.5 per cent – a good rise from the previous weekend’s 43.3 per cent.
Even more encouraging was the result the following weekend of 74.3 per cent - the best result since September 2015. The median auction price of $1,041,500 wasn’t bad either.
And despite tighter controls on moving money offshore, including China’s state-owned banks delaying or even blocking money going overseas, Chinese investors haven’t gone away.
Goldman Sachs chief economist, Tim Toohey, even takes the view that “…a flood of money out of China in the last six months means that it may be too early to call the top of the property market.”
Regardless, there’s little doubt among Australia’s leading property market analysts that it’s going to take longer to become a property millionaire (or multi-millionaire considering the high base from which we’re beginning this new cycle) in 2016.
Some parts of Sydney will be in much greater demand than others and market prices will reflect this. Cameron Kusher, senior analyst with CoreLogic, told News.com.au that postcodes will play a key role in whether buyers or sellers are in the driver’s seat in 2016.
“Most years are years of contrast but generally what we’re going to see is slower growth, buyers will have more choice and sellers will have to be more realistic about their prices,” he said.
SQM Research managing director Louis Christopher said that some areas have more housing stock than others – specifically the Hills district and the southwest, and that could lead to depressed prices.
“There won’t be a crash, but vendors need to have realistic price expectations. The reality is that the buyers are still there but they are not as buoyant as last year.”
2016 will be a year unlike those we’ve seen in recent times. Domain Group senior economist Dr Andrew Wilson says: ““It’s undoubtedly a buyers’ market now with no more silly, unbelievable price hikes.”
Dr Wilson says that although it will be a quiet start to the year, buyer confidence will return quickly: “Underlying confidence is strong in the market, and the NSW economy is the strongest in Australia.
“There’s also a shortage of housing in Sydney, rents are still rising, there’s a lot of first home buyers around, high levels of migration into Sydney and while there are a lot of apartments being built, there hasn’t been significant growth in the number of new houses.”
The ABC recently published an article by business reporter Emily Stewart that considered the market for apartments and how it would respond to the end of boom conditions.
“According to NAB,” says the article, “apartment sale prices are forecast to stay flat or fall in all capital cities this year, as tighter credit, worsening affordability and increasing supply hit the residential market.”
Quoting figures from the Housing Industry Association, Domain writer Jennifer Duke says: “New apartment sales dropped 15.1 per cent nationally in November 2015 with slowing population growth, bank regulator controls and an uptick in variable mortgage costs behind the decline…”
In the same article, Commonwealth Bank senior economist Michael Workman was quoted, saying: “It looks like it’ll be very difficult to get high apartment prices by the end of the year.”
The National Australia Bank has revised its earlier estimates and now expects overall capital city house prices to rise by just one per cent in 2016, a downgrade from its previous forecast of 2.3 per cent.
NAB says that house prices in Sydney are expected to rise by just 0.6 per cent, representing a dramatic cut from 2015’s 11.5 per cent growth.
The Herald’s Stephen Nicholls says: “Sydney house prices aren’t about to fall off a cliff. They’re just not going to grow much.”
26 economists from financial markets, academia, consultancy and industry were polled in the Business Day Scope economic survey. The majority concluded that Sydney’s boom time is over and prices will rise by less than three per cent in 2016.
HSBC's chief economist Paul Bloxham said in a Business Day article: "We see Australia's housing boom as over, but expect a soft landing."
And of course we’re still waiting to see what the Commonwealth government does about its ‘tax reform’ package. There could be changes later this year to such crucial areas as the treatment of property in self-managed superannuation funds, capital gains on property sales, the possible introduction of a broad-based land tax – and even to negative gearing, despite earlier government denials.
Newscorp’s Aidan Devine probably summed up all we can be sure of regarding Sydney property this year: “More sedate conditions are expected to continue over 2016.”
Sources:
‘NAB Quarterly Australian Residential Property Survey Q4 2015’, NAB Group Economics, 3 February 2016
‘Confidence returning to Sydney’s home auction market,’ Dr Andrew Wilson, Domain, 15 February 2016
‘Sydney home auction market bounces back hard,’ Dr Andrew Wilson, Domain, 8 February 2016
‘Home buyers in outer Sydney warned by experts to be ‘very cautious’, Su-Lin Tan, Sydney Morning Herald, 11 February 2016
‘Move over Sydney, it’s Melbourne’s time to shine on the real estate stage,’ Kristen Craze, Realestate.com.au, 3 February 2016
‘Off-the-plan apartments carry high and rising risks,’ Emily Stewart, ABC News Online, 5 February 2016
‘Capital outflows could spring a house price surprise: Goldman Sachs,’ Jonathan Shapiro, Sydney Morning Herald, 4 February 2016
‘Property price growth to stall, says NAB,’ AAP on News.com.au, 3 February 2016
‘Drop in new apartment sales in November, Housing Industry Association report finds,’ Jennifer Duke, Domain, 21 January 2016
‘Cash controls on Chinese buyers to hit Sydney property,’ Angus Grigg, Australian Financial Review, 21 January 2016
‘Do vendors need a reality check in 2016?’ Kristen Craze, News.com.au, 23 January 2016
‘Sydney house prices drop 3 per cent: Domain Group,’ Jennifer Duke, Domain, 28 January 2016
‘The house price correction Sydney had to have,’ Stephen Nicholls, Sydney Morning Herald, 28 January 2016
‘BusinessDay Economic Survey: What will happen to house prices in 2016?’ Gareth Hutchens, Business Day, 29 January 2016
‘Muted Sydney property market start hailed as healthy,’ Sue Williams, Domain, 30 January 2016
January 2016 Market Update, Residex Blog, Eliza Owen, onthehouse.com.au
Changes ahead for Sydney property in 2016
Mon, 25 Jan 2016By any historical standards 2015 was an amazingly good year for Sydney property. According to figures from Residex, annual growth in Sydney houses during 2015 was an astonishing 20.53 per cent.
Using a slightly different set of statistics, Robin Ashburn from the Australian Bureau of Statistics told Domain’s Christina Zhou: “Whilst the quarterly growth in Sydney has slowed from the June quarter, through the year, house prices in Sydney have risen 21.9 per cent and attached dwelling prices have risen 15.8 per cent, both the largest annual rises of all cities.”
But by the end of the year that growth had slowed to just 2.93 per cent in the November quarter. This sounds like the beginnings of a trend reversal; is it really all over for growth in Sydney property?
CoreLogic RP Data’s senior research analyst Cameron Kusher says growth was so strong in 2015 that it wouldn’t have the strength to carry over into 2016: “The current value growth phase has been running for more than three and a half years, having commenced in June 2012.”
Jalil Wakim, managing director of finance broker Lendfin, says that 2016 heralds the first buyer’s market after four years of conditions favouring vendors.
“Prices are now coming back to much more realistic levels and where, 12 months ago, things sold within a week, buyers are waiting much more on the sidelines to see what happens, and they’re now taking two, three and four weeks to sell.
“That means savvy buyers are now in a much stronger position where they can negotiate both prices and terms.”
Michael Pascoe, contributing editor for Business Day, tells us that the federal Treasury is saying the housing construction boom ends in 2016: “That's the boom that has carried much of the economy since resources investment tanked.
“The good news is that there is still expected to be growth in new home building and renovation, but not much – 2 per cent [this] financial year compared with a fat 8.5 per cent [in 2015].”
One person who’s not sorry to see a slowdown in real estate price rises is Glenn Stevens, governor of the Reserve Bank of Australia who told the Australian Financial Review he was relieved that prices have now eased.
"I think it had to happen. The pace of growth that we had – you can't keep going at that pace without new stimulus coming into the market from somewhere because the affordability levels just get out of reach for people unless we keep cutting interest rates, which we're not doing right at the moment, obviously.”
However, there’s little chance of a major fall in prices across Sydney thanks to ongoing demand. There’s still not enough housing stock to eliminate the backlog from years of insufficient dwelling construction.
And even if there should be a market correction of something like 5 per cent – which translates to around $50K off the price of the median home in greater Sydney, it’s still much less than the value it has gained in the past twelve months.
There are many factors that will influence property prices in 2016. On the positive side of the ledger is that the federal budget deficit remains manageable and employment is growing slightly (about 2.3 per cent in the September quarter) depending on whose figures are used.
But the share market has gone seriously backwards since the start of the year and there’s little doubt that the recent tightening of restrictions on property mortgages by the big banks plus growing unaffordability have combined to reduce the numbers of people – both homeowners and investors, borrowing to purchase real estate.
Apartment rents are softening and Sydney property auction clearance rates have slumped from their unprecedented levels of 80 plus per cent midyear to around 50 per cent now.
Rents, unit prices weaken
Recent figures from the Australian Bureau of Statistics highlight a dramatic slowing in growth for prices of Sydney units; their rate of growth in the month of November was just 0.55 per cent. ABS figures also show that across Australia approvals for construction of private apartments fell by a massive 23 per cent.
Westpac senior economist Justin Smirk said the decline was greater than the bank had expected.
"Activity in private home construction for particularly the two major states, NSW and Victoria, is holding at reasonably high levels, but it does appear that a big surge in approvals going through for building multi-storey apartments has peaked and is now going through a correction phase," Mr Smirk said.
J.P. Morgan economist Tom Kennedy also expressed surprise at the size of the decline.
"While we had expected the number of high-density approvals to move lower into year-end on the back of tighter bank lending standards and deceleration in dwelling price growth, the magnitude of [the] fall was significantly larger than we, or the market, had projected," Mr Kennedy said.
Meanwhile approvals for new house construction dropped only slightly, down to 9730 from 10,027. Overall, new building starts fell 12.7 per cent from October, which was when the ABS reported the highest annual rate of total approvals since it began keeping records in 1983.
Commonwealth Bank of Australia senior economist Gareth Aird said that weakening home markets could mean fewer new jobs, which until now have helped to offset the decline in mining investment.
"To date, growth in the residential construction sector has provided a superb offset to declining mining investment and associated job losses. But as we head into 2016 there is a risk that mining job losses will outpace job creation in the residential construction space."
No big price falls
CoreLogic RP Data's head of research Tim Lawless told ABC News he is not expecting the Sydney market to experience any serious price falls.
"I think there's still that underlying factor of strong demand driven by low interest rates, and not really the supply issues that Melbourne has seen, I think we'll continue to see Sydney at least remain fairly neutral in its growth," he said.
Domain Group’s ‘State of the Market’ report forecasts growth of just four per cent across Sydney this year as increasing numbers of investors leave the market.
Domain Group senior economist Andrew Wilson said until now Sydney has been what he called an ‘investor magnet’ thanks to its strong economy and a continuing under-supply of homes.
“But the days of two figure growth are well behind Sydney, there’s no rational case for more double figure growth. Economic circumstances are now set to deteriorate and it will be a year of circumspection.”
He believes the lower levels of investor numbers will create a period of consolidation in which prices will slow: “The strongest markets are likely to be the higher priced inner-city suburbs, which performed best in the second-half of 2015.
“Properties in the city, east and lower north shore are tipped to be the best performers of 2016 with 5 per cent growth on the cards.”
The chief executive of Starr Partners, Douglas Driscoll, said that suburbs with numerous apartment buildings might see some stress, including some areas in the CBD: “As the investor boom is well and truly over, those properties are going to be far more difficult to sell heading into 2016.
“The west, which constitutes the vast majority of the Sydney market, was being partially underpinned by the investment boom in recent times, so I certainly believe places like the lower north shore will do well because it is less [susceptible] to this kind of investment as it is more of a family-centric market, much like a majority of the east,” he said.
So, what’s ahead for Sydney property in 2016? Most property analysts agree that the boom of the past four years is over. Prices growth in all areas of Sydney will slow and, in some less-sought-after suburbs could even go into reverse.
Global credit agency Fitch Ratings predicts that a combination of housing unaffordability, exposure to US rate hikes, and tougher prudential regulations will add up to a much slower rate of growth in Australia.
"Stretched affordability and further compression of rental yields are likely to be key factors driving down price growth in Australia," Fitch said in a media statement.
"This is especially the case in Sydney and Melbourne, where price appreciation in recent years has outpaced wage growth - leading to decreasing levels of affordability.”
The outlook for price sustainability is better for free-standing houses than for apartments, reflecting the recent mass of approvals for high-density housing across Sydney. This increased supply will, in turn, act to depress apartment rental rates and reduce returns for investors.
Mortgage conditions will continue to become more demanding of borrowers and fewer investment loans will be made. Interest rates will remain relatively low although banks are likely to raise their fees and charges, particularly for investors, independent of the Reserve Bank’s decisions.
Aussie Home Loans chairman John Symond said in the Australian Financial Review that the key tests in 2016 will be the national and global economies, and policy changes. He believes 2016 will feature global uncertainty and slow economic growth.
But there are many local variables also in play. The AFR’s property journalist Su-Lin Tan commented: “In the longer term, the Turnbull government’s tax reform may change negative gearing, concessional capital gains tax, superannuation, stamp duty and land tax,” she said.
“Each one moves a real estate lever.”
Sources:
‘How to tell if your suburb will see a drop in house prices,’ Bianca Hartge-Hazelman, News.com.au, 16 January 2016
‘Property market to hit the brakes in 2016,’ Mathew Dunckley, Business Day, 14 January 2016
‘Apartment rents tumble by 2 per cent,’ Jennifer Duke, Sydney Morning Herald, 14 January 2016
‘The year of the buyers’ market,’ Sue Williams, Domain, 9 January 2016
‘Where did house & unit prices really rise in 2015?’ Danielle Cahill, Realestate.com.au, 24 December 2015
‘2015 in Review and the Outlook for the Year Ahead,’ Market Update, Residex, December 2015
‘Apartment approvals boom could be over in Sydney, Melbourne with slump in new construction permits,’ Justine Parker, ABC News, 7 January 2016
‘Building approvals slump for apartments and houses,’ Matthew Cranston, Australian Financial Review, 7 January 2016
‘Australian house price growth eases in September quarter: ABS,’ Christina Zhou, Domain, 15 December 2015
‘Bad hangover expected for property market in 2016,’ Su-Lin Tan, Australian Financial Review, 29 December 2015
‘Sydney’s growth run is over in 2016: Domain Group,’ Jennifer Duke, Domain, 15 December 2015
‘Home prices stagnate in December after 2015 surge,’ Michael Janda, ABC News, 4 January 2016
‘Property Value by CoreLogic,’ Cameron Kusher, Property Snapshot Infographic, December 2015
‘RBA governor Glenn Stevens welcomes slowing property market,’ Mathew Dunckley, Business Day, 16 December 2015
What now for Sydney property?
Fri, 18 Dec 2015As the fevered rate of property price increases subsides we might now ask think about how prices could have become so high in the first place. Reserve Bank economists Marion Kohler and Michelle van der Merwe have an answer to this question.
In their paper titled 'Long-run Trends in Housing Price Growth' they note that over the past 30 years housing prices have risen across Australia by an average of just 7.25 per cent a year, but the increase has been anything but uniform.
They see three distinct periods: the 1980s when house prices rose by an average 10 per cent per year but gains were eaten up by inflation; the 'big boom' of the 1990s when the rate of prices growth came down but so did interest rates and therefore inflation took less of the overall growth; and the past decade where price growth was relatively moderate until the last three years when it's taken off dramatically, fuelled by heavy borrowing.
So, now here we are. Inflation rates and interest costs are low, but prices are at record levels and our debt-to-income ratio is the highest it's ever been. Is there much economic fuel in the tank remaining to drive further price increases?
Traditionally growth in house prices has largely been driven by wage increases. In today's economy there's little prospect of wages growth happening.
Wages growth across Australia is low at 2.3 per cent for the September quarter. The unemployment rate has reduced to 5.9 per cent for October but remains high relative to the 10 year average of 5.2 per cent.
November economic data showing a big fall in business investment has also contributed to speculation about further interest rate cuts, although RBA governor Glenn Stevens told economists they should “chill out” about the possibility of a December rate cut.
This later proved to be an accurate guide to the decision at the Bank's November meeting which left the cash rate on hold at 2 per cent. The RBA's next meeting will be in February.
Mr Stevens may have been looking at data showing that growth in the value of outstanding bank loans to property investors had dropped to 9.7 per cent - the first time this year this figure has been below the RBA's 10 per cent target cap and a sure sign that mortgage interest rate increases are beginning to bite.
The rush of foreign buyers has also slowed. Most of the Chinese capital flowing into Australian real estate goes into building new apartments, contributing to increasing the ratio of apartments to detached homes in the current housing construction mix as well as increasing the overall supply of dwellings.
2016 rate cut likely?
Because housing construction has become such an important component of the Australian economy, another interest rate cut by the Reserve Bank may be on its way in early 2016, according to the economists at Citibank Australia.
Citi's Paul Brennan says that the chronic national undersupply of housing, which reached an estimated 49,000 dwellings annually in 2013-14, will reduce to about half that figure within the next two years as new apartment construction comes onto the market.
He believes this will pose a threat to price growth just as the mining boom ends, immigration slows and regulatory restrictions lower demand for property from investors and overseas buyers.
"This narrowing should underpin ongoing slowdown in house price inflation, from 10 per cent in 2014-15 to 0 per cent to 5 per cent in 2015-16 and in 2017."
CitiBank believes that if housing construction's contribution to economic growth decreases the RBA will need to at least maintain or further reduce its already low cash rate.
"With housing prices cooling, consumers still cautious about spending, housing construction expected to make a smaller contribution to growth and no concrete signs yet of a recovery in non-mining business investment, interest rates will need to stay low for longer than normal," Mr Brennan said.
Building approvals were at a record level of 230,000 dwellings in September with a mix of two apartments for every detached home approved.
"Given this significant pipeline of work, especially for apartments, our forecast is for a gradual, rather than rapid, decline in activity over the next few years, assuming interest rates do not rise sharply," said Mr Brennan.
New apartments meeting demand
Terry Rawnsley, economist with SGS Economics and Planning, says Sydney has been casting off its liking for the 'cottage on a quarter-acre block' for some time, but the housing market has been slow to respond.
"Until quite recently the focus for new housing was on greenfields development out west. It's only in the past couple of years that large number of apartments have started to pop up close to the jobs."
He says with the housing market lagging changes in the labour market, the supply of inner and middle-ring housing has not kept pace with demand. The inevitable result has contributed to the higher prices we see now.
A discussion paper prepared by SJB Planning and released by NSW Planning Minister Rob Stokes recommends a new standard for 'medium-density' housing similar to the older-style terrace houses to encourage their construction across Sydney.
"Terrace houses are very desirable now but that's a great irony because there was such a backlash against them," said Peter McNeil, the Associate Dean of the UTS Faculty of Architecture.
The draft plan outlined in the discussion paper would allow residents to be accommodated in a maximum of 10 terrace houses on blocks no smaller than 600 square metres.
It's almost impossible to believe today that certain styles of terrace houses were actually banned soon after federation when garden suburbs became seen as far more desirable by urban planners of that era.
Housing prices still increasing
In the marketplace it's hard to escape the law of supply and demand. The price of a product or service will increase as demand for it increases, just as it will decline if a greater amount of a product or service is available. Replace 'a product or service' with 'housing' and you get the idea.
We've become accustomed to seeing large auction volumes and price results that would have been unthinkable just a couple of years ago. Buyers spent over $31 billion on Sydney property at auction in 2015 - around $7 billion more than was spent in the previous year. This remarkable rate of growth is simply unsustainable.
More housing on the market translates quickly into less upwards pressure on prices. JP Morgan chief economist Stephen Walters recently told a conference of business economists that house price growth had peaked and he isn't alone in this belief.
Economist Saul Eslake says it is possible that house prices could even be lower in two or three years than they are now. He also warns that investors, who now hold a growing proportion of the housing stock, are more likely than owner-occupiers to sell into a falling market.
SQM Research has predicted a 4 to 9 per cent price growth in Sydney for 2016 while ANZ Bank in its latest housing update is forecasting a 3 per cent rise for NSW, about in line with a 2.8 per cent growth forecast for Australia.
“Despite the headwinds facing the housing market through the second half of 2015, we see little significant downside risk to the housing market outlook in 2016," said ANZ’s senior economist, David Cannington and economist Daniel Gradwell.
“The housing shortage remains high, but strong building activity and slower population growth will limit gains.”
At least one property value index showed a drop in Sydney property prices. According to the CoreLogic RP Data Home Value Index released at the end of November, dwelling prices fell 1.4 per cent during the month, resulting in a nett 1 per cent drop over the past three months.
Commenting on the finding, Domain Group senior economist Dr Andrew Wilson said that there was no doubt that the key trend is a decline: “The future will be much more subdued than what we’ve become used to over the past two years,” he said.
However, Dr Wilson still sees some prices growth in 2016: “There will be modest and moderate growth at best in the Sydney market next year”, he said.
Investors more selective
A cooling period such as the one we're entering now will often produce hotspots that stand out from the generally quieter performance of the overall market. In late November Sydney's lower north shore produced an auction clearance rate of 80.4 per cent despite the overall auction market slipping backwards.
" The multi-speed Sydney auction market was evident again - with widely divergent regional results," said Dr Wilson.
"Inner-city higher-priced regions continue to record strong results for sellers. However, buyer activity in the western regions of Sydney has all but disappeared."
He said that greater Sydney auction clearance rates have fallen sharply since the banks announced higher interest rates for owner-occupiers: "Higher rates for residential investors have also affected the Sydney housing market."
Eliza Owen, market analyst for property research firm Onthehouse.com, says this doesn't mean the current period of rising prices has ended: "The latest data indicates that Sydney has peaked in this particular growth cycle," she writes in the company's November newsletter.
"Sydney houses are still increasing in value but the current quarterly growth rate (4.04 per cent) is significantly lower than the 7.58 per cent achieved in the July quarter this year."
Ms Owen points to housing finance data from the Australian Bureau of Statistics that shows a significant drop off in investor lending from a peak of $15.50 billion in June to $12.53 billion in September.
"The median Sydney house is now valued at $1,058,000. Anecdotal evidence suggests that first home buyers, particularly in Sydney, are now entering the market as investors because this is the only way they are able to afford property – having a tenant help pay off the mortgage."
An AAP article in 'Business Day' also commented on the sharp decline in the level of investor lending.
"Loans approved for investment housing were down 6.1 per cent in October, based on their value, while approvals for owner-occupied housing rose 0.4 per cent.
"The total number of home loans approved in October fell by a better-than-expected 0.5 per cent, while the value of total housing finance was down 2 per cent in the month."
Domain journalist Christina Zhou summed up the pre-Christmas state of the Sydney property market, saying some vendors’ expectations are exceeding what the market is willing to pay because prices are no longer increasing at the same high rate seen in autumn.
"A cool change has swept across pockets of the property market, with falling median house prices and weaker clearance rates.
"It doesn’t necessarily mean prices are dropping, but many homes certainly aren’t achieving the same runaway results as their next door neighbour who sold earlier in the year.
Sources:
'Big swing: property investor loans plunge in October,' AAP in Business Day, 9 December 2015
'Consumer confidence cools amid GST talk,' Mark Mulligan, Business Day, 9 December 2015
'Sydney auction market limps into December with 57.5 per cent clearance rate,' Antony Lawes, Camille Bianchi, Anita Balalovski, Domain, 5 December 2015
'Five signs of a cooling property market,' Christina Zhou, Domain, 2 December 2015
'Sydney house prices fall in November: report,' Jennifer Duke, Domain, 1 December 2015
'ANZ says modest growth more likely in 2016,' Su-Lin Tan, Australian Financial Review, 1 December 2015
'Housing loan growth dips below speed limit,' Clancy Yeates, Sydney Morning Herald, 1 December 2015
'House prices are cooling, not crashing – but may force RBA cut, Citi says,' Vanessa Desloires, Sydney Morning Herald, 27 November 2015
'Simple supply and demand will decide what happens next to Sydney house prices,' Jessica Irvine, Sydney Morning Herald, 27 November 2015
Market Update, Onthehouse.com.au, November 2015
'Lower north shore auctions boom as rest of Sydney lags,' Dr Andrew Wilson, Domain, 23 November 2015
'Property sellers in last-minute rush to auction,' Stephen Nicholls, Antony Lawes, Domain, 27 November 2015
'The price of being a global city: Sydney's rent crisis,' Rachel Browne, Matt Wade,
Sydney Morning Herald, 28 November 2015
'Land prices on Sydney’s fringe have surged in 2015,' Kirsten Robb, Domain, 28 November 2015
'NSW Planning Minister Rob Stokes reveals medium-density housing plan,' James Robertson, Sydney Morning Herald, 28 November 2015
Sydney property returns to more traditional statistics
Thu, 19 Nov 2015The Sydney property boom is unquestionably ending. But is it over? Not at all.
Headlines in the daily press have trumpeted the impending collapse of real estate values: "House prices grind to a halt in October", "Waning Sydney auction market hits new low on Saturday", and "Slowdown continues in Sydney property market as new report warns of a housing bubble".
But there's a slight problem. There's been no hint of a sudden collapse in prices. On the contrary, median prices are still rising, albeit at a slower rate than in the previous three 'boom' years.
Look at some of the other, less sensationalist headlines and you get a better picture: "RBA doubts Sydney property boom is over", "Sydney property breaking records, but prices in Darwin and Perth are retreating", and "Sydney property prices expected to continue growing until the end of 2016". The fat lady isn't singing yet!
We are witnessing the end of a cycle which demands a bit more study than simply watching prices rise and rise even further as they do in a boom. We've had the best of the rapid price increases and from now on - for a while, it's back to the more familiar situation of prices rising gradually, more in some parts of Sydney than others.
Meanwhile, the transition to apartment living is happening at a faster rate in Sydney than in any other Australian city. The square kilometre population grid from the Australian Bureau of Statistics (ABS) shows that Sydney is now Australia's most densely populated city.
We're now going back to more familiar auction clearance rates and volumes. There just aren't limitless numbers of buyers out there and those vendors who've waited too long are now finding out that there's no guarantee their property will sell at a premium price just because it's on the market.
Someone noticed that all the new apartment buildings sprouting up around Sydney don't have back yards and so the ' baby boomers' have been castigated for selfishly holding on to their quarter-acre blocks and not freeing them up for young families to acquire.
As reported in the Sydney Morning Herald: " A new report from academics Bob Birrell and David McCloskey warned on Monday that Australia will experience a dramatic increase in demand for detached houses in coming years - mostly from young families - which authorities have failed to plan for."
The clincher was: "Experts say older Australians should be encouraged to downsize their homes."
The response from baby boomer homeowners was quick and direct. As long as stamp duty is so high and potential properties for downsizing are both expensive and fraught with structural concerns, there's no real incentive to put all those older properties on the market.
And for those on pensions, any additional cash in the bank left after downsizing could have a serious impact on their pension eligibility. The so-called 'encouragement' to downsize just isn't there.
Another development during the past month has been a reduction in the number of Chinese buyers shopping for Sydney real estate.
A report in Business Day said that Chinese demand for global property could fall by 30 per cent this year, according to a research note by Credit Suisse analysts Damien Boey and Hasan Tevfik.
The analysts concluded: "All things considered, the likelihood is that Chinese flows into the Australian property market have flattened out in 2015."
The Credit Suisse analysts see this as posing a major threat to the Australian property markets but not a permanent one, thanks to the growing affluence of China's middle class.
"Combine that with a shortage of domestic investment options and ongoing capital account liberalisation, and the structural trend of Chinese money looking for an overseas home stays strong," the analysts conclude.
One of the more downbeat observations about Australian property came from the respected Barclays Bank whose economist Kieran Davies said: "We think activity will turn down later next year, with the significant over-valuation in house prices likely to be slowly eroded by a long period of broad stagnation in prices."
Mr Davies added: "Our expectation is that average growth will slow further into next year given tougher macroprudential standards and reduced affordability."
But the Reserve Bank of Australia isn't yet ready to call a halt to rising property prices. In its late October minutes the RBA said: "It [is] too early to be confident that these signs of slowing in housing price inflation would be sustained."
AMP Capital chief economist Shane Oliver expressed a view that a 'two speed' market may be developing in Sydney.
"The thing is, lending has slowed, clearance rates have slowed … even though there could be an element of a two-speed market in Sydney with some areas slowing more than others", Dr Oliver said.
BIS Shrapnel's associate director Kim Hawtrey told the Financial Review that the next three or four months may still see reasonable housing market indicators, but the real test would be in early 2016.
"As the peak summer season gives way to the traditional autumn slowdown, unaffordability [and] slowing population growth will begin to weigh on the market next year," he said.
The Commonwealth Bank's 'MyBank' report carried a more optimistic report on the Sydney market: "Sydney is once again a standout global city for value growth in its prime residential real estate market, according to the latest Prime Global Cities Index from Knight Frank."
It said that the quarterly report showed that of 34 European, Asian, North American, African and Australasian cities indexed, Sydney came second only to Vancouver for quarterly and annual price growth in its top-tier property market for the September quarter.
"Australia’s Harbour City saw a three-month increase of 3.6 per cent and 12-month increase of 13.7 per cent – one of only three cities, along with Vancouver and Shanghai, to record a double-digit annual price increase."
Another side-effect of recent real estate activity towards the end of the boom is that Melbourne is overtaking Sydney in some parts of the property statistical sweepstakes.
The Daily Telegraph summarised this situation, which will come as a shock to many Sydneysiders who've seen such impressive increases in the values of their property over the past three years:
"The Harbour City’s median home value climbed just 0.3 per cent over October, compared to Melbourne’s 0.6 per cent growth, according to Core Logic RP Data.
"Melbourne’s auction clearance rate also edged Sydney’s at 65.6 per cent, compared to 63.5 per cent for the NSW capital."
But Core Logic RP Data head of research Tim Lawless explained that market conditions have been easing in both cities. The biggest factors affecting Sydney property prices relate to issues of housing affordability and demand from investors.
“In Sydney, the median unit price is equal to, or higher than the median house price in every other capital city,” Mr Lawless told the Telegraph's Aidan Devine.
He added that Sydney’s low rental yields may act as a disincentive for some investors to make new purchases but sees higher levels of vendor competition helping prospective purchasers looking for property.
“We can expect Sydney buyers to face less urgency when it comes to making their purchase decision around property and higher discounting rates from vendors as they face more competition in the market.”
Instead of the Sydney property boom ending with a bang, it's giving every indication of a gradual slowdown in property price increases, accompanied by lowering auction clearance rates and reduced demand from investors.
However, the next time you see a headline in the vein of 'Sydney property price crash' or 'Sydney housing bubble about to burst', ignore it. There's no price crash coming and there isn't any bubble about to burst.
Domain Group's senior economist Dr Andrew Wilson explains: "There is no end in sight to the falling clearance rates in Sydney, with the weekend results remarkably 30 per cent lower than those recorded just six months ago and likely to go lower.
"However, the supply and demand drivers for the Sydney market remain sound, with the strongest capital city economy, a chronic underlying shortage of housing and continuing strong migration levels."
We've enjoyed almost four years of boom times and the heat's going out of the market - for now. There has recently been a noticeable fall in the number of Chinese buyers due to instability in the Chinese stock market and that government's financial constraints, although the lower Australian dollar gives overseas buyers some compensation for these factors.
We're returning to normal times in such closely-watched statistical areas as auction clearance rates, numbers of properties sold, and that all-important metric - the median house price.
Four years ago in our column of November 2011, when Sydney real estate had spent several months in the doldrums, we confidently forecast that real property price growth would begin in early 2012. And so it did.
That growth spurt is now coming to an end, although behind the scenes the Sydney property market will continue its long-term upwards trend.
Price growth is likely to slow between now and the end of 2016 and could stabilise for a period in 2017. Then the next upwards cycle will begin and it's very possible the headlines will once more be about the new Sydney property boom. We'll know for sure in about two years.
Sources:
'Agents claim that the lower north shore property market is performing well despite softening,' Erin Forster, News Corp Australia, 6 November 2015
'Apartment living is redefining the Australian neighbourhood,' Joanne Brookfield, Domain, 17 November 2015
'Waning Sydney auction market hits new low on Saturday', Anna Anderson, Toby Johnstone, Anita Balalovski, Domain, 7 November 2015
'Chinese demand for Australian property waning: Credit Suisse,' Patrick Commins, Business Day, 4 November 2015
'House prices set for long period of 'stagnation': Barclays,' Vanessa Desloires, Sydney Morning Herald, 5 November 2015
'RBA doubts Sydney property boom is over,' Su-Lin Tan, Australian Financial Review, 20 October 2015
' Property Sydney's high-end property market continues high-end performance,' Sam Butler, CommBank My Wealth, 5 November 2015
'Why are property prices still stalling?,' Sam Butler, CommBank My Wealth, 2 November 2015
' Sydney home price growth dips below Melbourne’s over October,' Aidan Devine, The Daily Telegraph, 9 November 2015
'Rising interest rates threaten to crash Sydney housing market,' Dr Andrew Wilson, Domain, 9 November 2015
'Use tax changes to encourage older Australians to downsize homes: experts,' Gareth Hutchens, Sydney Morning Herald, 2 November 2015
'It's offensive': seniors groups defend rights of older Australians to stay put,' Judith Ireland, Sydney Morning Herald, 2 November 2015
'Housing crisis report says backyards for children vanishing as oldies stay put,' Peter Martin, The Age, 2 November 2015
'House prices grind to a halt in October,' Jenifer Duke, Domain, 2 November 2015
' Slowdown continues in Sydney property market as new report warns of a housing bubble,' Aidan Devine, The Daily Telegraph, 2 November 2015
'More than 1000 homes to go under the hammer today in biggest auction day of the spring,' Aidan Devine, The Daily Telegraph, 30 October 2015
' Sydney property breaking records, but prices in Darwin and Perth are retreating,' David Taylor, ABC Radio PM, 22 September 2015
' Sydney real estate the third most overpriced in the world,' Phil McCarroll, Your Investment Property magazine, 2 November 2015
'Sydney house price growth to slump next year, NAB says,' Michael Bleby, Australian Financial Review, 29 October 2015
'Sydney property prices expected to continue growing until the end of 2016,' Aidan Devine, The Daily Telegraph, 28 October 2015
' Western Sydney leads the housing decline,' Su-Lin Tan, Australian Financial Review, 29 October 2015
'Buyers' guide to a property market on the turn,' Michael Bleby, Australian Financial Review, 24 October 2015
'Should I buy now or wait for prices to fall?,' Su-Lin Tan, Australian Financial Review, 24 October 2015
The Sydney property boom is ending...sort of
Mon, 19 Oct 2015There are conclusive signs that the unprecedented Sydney property boom is finally losing momentum.
But first, give credit where it's due. To quote real estate expert John McGrath: "This has undoubtedly been one of the most spectacular booms in Sydney’s real estate history."
Indeed, there has been an incredible rise in property values since the latest growth cycle began in May 2012.
In our Market Comment of March that year we quoted John Edwards, CEO and founder of Residex, who had seen a dramatic increase in sales of his company's property reports. This, he said was an indication that the previously stagnant housing market was about to start moving forward.
The Residex lead indicator (Prediction Report Sales Index) suggested that we were about three months away from an Australia-wide pickup.
From that time onward the Sydney property market has been an unstoppable force, proving Mr Edwards right and leading to today's median house price of somewhere around $1 million, depending on which research findings are used for the calculations.
Boom conditions were clearly evident earlier this year when auction clearance rates peaked at 89 per cent in May. There was ongoing strong demand from investors, both in Australia and overseas, and the supply side was held back by a shortage of stock on the market.
In mid-May the housing stock available for sale was down 21 per cent compared to the same time twelve months previously.
Another statistic - the average time taken to sell a property, also reached a record in July when it dropped to only 26 days, according to CoreLogic RP Data.
But property market records can't continue to be set every month. History shows that each property price cycle has a peak that's followed by a retreat, leading to a period of price stability before the next upwards cycle begins.
In mid-October the auction clearance rate hit a three-year low of 65.1 per cent - the lowest clearance rate in three years.
AMP Capital chief economist Shane Oliver said the poor result was caused by Westpac’s move to lift mortgage rates by 0.2 per cent: “The bottom line is that buyers are worried that the Westpac move is a sign of things to come,” Dr Oliver said.
The feeling that the latest property cycle has peaked was picked up in the latest “time to buy a dwelling” index published by Westpac and the Melbourne Institute. The index has fallen by 11 per cent over the past year and is now 30 per cent below its September 2013 peak.
More tellingly, in Sydney the index has reached its lowest point since the survey began in 1975.
For the past three years a shortage of homes for sale has been an important driver of Sydney’s property price rises, but now supply is beginning to catch up with demand.
This is demonstrated by two statistics in the McGrath Report for 2015. The first is that by August stock availability was only 5 per cent lower than it was in August 2014. The latest statistics show that stock levels are now 4.7 per cent higher than at the same time last year.
This will have an impact on price rises, as Core Logic RP Data head of research Tim Lawless outlines: “The higher volumes of stock have pushed auction clearance rates lower and the average time to sell has likely increased over the past month as well.”
However, that's not the only indication that we've seen the peak of the latest Sydney property boom.
Regulations introduced recently by the Australian Prudential Regulation Authority (APRA) that aim to limit investor loan growth to 10 per cent annually have caused Australia's 'big four' banks to increase interest rates on mortgages to property investors. The banks have also toughened their assessments of borrowers' ability to service a property loan,
Another recent imposition on the banks by APRA has forced them to raise billions of dollars to ensure they retain sufficient liquidity in the event of another financial crisis. As a result, Westpac was the first bank to announce an increase in mortgage interest rates, and the other members of the 'big four' were expected to follow suit.
The Reserve Bank of Australia, without revealing whether it intends to adjust its own cash rate, issued a caution about high property prices but minimised the risks of a housing downturn.
"The risks appear to be comfortably manageable at this stage but they underscore the need to maintain sound lending standards and the resilience of the financial and non-financial sectors," the RBA said in its half-yearly report.
If the Bank has any worries about the property market it would seem to be based on an oversupply of apartments, although it named Melbourne and Brisbane as locations of particular concern.
The question must be asked: "If the boom in Sydney property ends, does that mean there will be a fall in prices?"
AMP Capital's Dr Shane Oliver said Sydney could see a similar situation to that last seen in 2012, when houses that had risen significantly in value over the previous three years experienced some of the largest falls.
"My view would be areas where there has been a significant increase in supply, and the suburbs where there's been the strongest gain, would probably be the most vulnerable in terms of declines," Dr Oliver told Domain.
He said that lower-income areas which had seen an increase in housing supply would be the first to see price declines: " Then, as time goes by, some of that might spread to some areas around the inner-city parts, again where there's been a lot of construction activity, then out to the eastern suburbs.
"When I'm talking about 5 to 10 per cent, some suburbs could see declines of 20 per cent and other suburbs could see none at all," Dr Oliver said.
Dr Andrew Wilson, the chief economist at Domain Group said Westpac’s rate hike had “changed the dynamics” in the property markets. However, he doesn't believe house prices in Sydney are going to fall.
"There's nothing that will grab the attention of Australian homeowners more than the headline 'house prices falling'," he said. "There's no historical precedent for this [prediction], particularly given we do not have the prospect of a sharp increase in interest rates.
"Short term variances might occur, but those things reflect confidence more than anything else."
HSBC’s chief economist, Paul Bloxham, said that interest rates are still very low and that this would support continued price growth: “If effective mortgage rates rise a little that will contribute to some slowdown in house price growth but it doesn’t seem to us that it will mean house prices will fall.”
Economist and financial commentator Saul Eslake indicated that Sydney's property market is still not oversupplied despite the recent surge in housing construction: “The probability of falls in house prices over the next 12 months isn’t zero but it is pretty low.”
National Australia Bank CEO Andrew Thorburn believes that home prices in Sydney will continue to rise at high single-digit rates due to strong demand and limited supply of housing close to city centres.
"You will see in Sydney and Melbourne, high single-digit rates of growth as being quite plausible given the fundamental drivers of what are pushing those prices up," he said at an Australia Israel Chamber of Commerce lunch in Sydney.
It’s important to keep in mind that boom periods are only part of a growth cycle. Prices can continue to rise after the peak of the boom, and it's highly likely that will be the case in most parts of Sydney for some time.
The economy remains strong, unemployment is under control for the time being, and there is a continuing undersupply of property that is only now showing signs of moderating.
Interest rates remain low and are even if they rise sometime in the future they aren't likely to reach levels that would make housing investments unattractive .
The boom, as we knew it, is coming to an end and price rises have probably peaked. However, property prices in the majority of Sydney suburbs will keep on growing from now until the end of the year, and continue their rise into 2016, although most likely at a lower rate than we've seen over the past three amazing years.
Sources:
'Share market closes higher as Reserve Bank warns property market putting financial system at risk,' David Taylor, ABC News Online, 16 October 2015
'Reserve Bank warns of significant housing downturn but says risks are 'manageable,'
Sue Lannin, ABC News Online, 17 October 2015
'RBA sees signs property market cooling in Sydney and Melbourne,' AAP on News.com.au, 16 October 2015
'Sydney homeowners embark on a selling spree in rush to cash in on last stages of property boom,' Aidan Devine, Daily Telegraph, 16 October 2015
'Opinion: Sydney house prices going nowhere but up in the short term,' Tim McIntyre, Daily Telegraph, 14 October 2015
'Beyond the boom: What comes next for Sydney and Melbourne,' Matt Wade, Domain, 16 October 2015
'Property slump looms? Not so, say NAB's Andrew Thorburn and Westpac's Brian Hartzer,' James Eyers, Business Day, 15 October 2015
'Property predictions for the remainder of 2015,' Alice Bradley, Realestate.com.au, 6 October 2015
'HIA: Land prices keep on rising,' Leith van Onselen, macrobusiness.com.au, 15 October 2015
'Sydney property market cooling off,' 7News Sydney, 21 September 2015
'When will the Sydney market come off the boil?,' Todd Hunter, Wheregroup, (Undated - accessed 17 October 2015)
'September listings figures paint different stories for Sydney and Melbourne markets,' Phil McCarroll, Your Investment Property, 8 October 2015
'The Spectacular Sydney Property Boom,' Kevin Turner, Michael Yardney's Commentary, Property Investment, Where to buy investment property, 14 October 2015
'Data shows Sydney houses and units have set a new record for days on market,' Tim McIntyre, Daily Telegraph, 16 July 2016
'Spectacular Sydney boom about to end: McGrath Report 15,' REINSW , 12 October 2015
'Sydney auction market tanks after Westpac hikes rates,' Stephen Nicholls, Camille Bianchi, Anita Balalovski, Anna Anderson, Domain, 17 October 2015
'Which suburbs will bear the brunt of Sydney's predicted house price drop?,' Georgina Mitchell, Sun-Herald, 17 October 2015
Negative gearing - friend or foe?
Fri, 18 Sep 2015More than a million Australians now employ negative gearing and benefit from a tax break that's currently costing the Australian Taxation Office around $8 billion per annum.
When you're a government struggling to find revenues, $8 billion in tax concessions is a tempting target. For this and a number of other reasons, negative gearing has become a hot topic in recent months.
If you're a would-be first home buyer trying to save for your first home it could seem like the government is just handing that money to investors, and as a result they will be able to outbid you at property auctions.
And anyone wanting to buy a home might feel that negative gearing contributes to the rise in property prices by allowing investors to pay more than owner-occupiers because they can gain a tax deduction for any losses.
This belief is supported by many economists including the former ANZ Bank chief economist Saul Eslake, who declared: “The availability of negative gearing contributes to upward pressure on the prices of established dwellings, and thus diminishes housing affordability for would-be home buyers.”
Another doubter is the Grattan Institute’s CEO, John Daly, who wants a public debate on negative gearing because he believes the policy is expensive, inefficient, inequitable and that it reduces home ownership: “For governments under severe budgetary pressure it should be near the top of the reform list,” he says.
And finally, there's a general perception that it's the rich who benefit most from negative gearing because the 'average Aussie' can't afford property investments.
So, who's really taking advantage of negative gearing at this point in time? Research by the Australia Institute think tank shows that the heaviest users, as might be expected, live in government electorates held by PM Tony Abbott and cabinet ministers including Joe Hockey and Malcolm Turnbull.
However this research also clearly shows that the use of negative gearing has spread from traditional Liberal seats to 'battler' suburbs held by Labor. In other words, it's no longer just the 'rich' who take advantage of the opportunity.
Interestingly, statistics from the ATO show that of those taxpayers declaring a net rental interest in recent years, approximately three-quarters earn less than $80,000 per annum. That's hardly what you'd call 'rich'.
An interesting history
Negative gearing has quite a history. As Peter Martin, economics editor of The Age put it: "The story of how we came to be saddled with a system that taxes wages at twice the rate of profits made from trading real estate is an epic tale of revenge, incompetence, bloody-mindedness and gullibility."
Looking back over the history of negative gearing we find it all began in 1985 when Labor treasurer Paul Keating (he of 'banana republic' fame) applied income tax to fringe benefits and capital gains - both previously untaxed.
Until that time most of the personal tax burden had been borne by ordinary wage earners, so these changes seemed reasonable additions to the taxation framework.
Then in 1996 the Howard government rejigged the rules and allowed investors to offset losses on their investment properties against any other income they had. Thus, negative gearing as we know it came into our lives and has stayed there ever since.
During recent economically good years it's been allowed to exist without challenge. But the mining boom is ending and sources of government revenue are drying up, so politicians are now looking for ways to extend the reach of existing taxes so they don't have to impose new ones.
Negative gearing is a prime target in the federal government's sights; this is becoming clear in many of the submissions made to a recent Parliamentary budget office inquiry into negative gearing and capital gains tax concessions.
Negative gearing and the capital gains tax are firmly linked in politicians' minds because, in the words of Greens deputy leader Scott Ludlam: "Normally investors would not be interested in an investment that is expected to run at a loss.
"But many are happy to purchase property where the rental income doesn't cover the interest payments, because they expect to make large capital gains in the future from selling it, which are subject to the massive discount."
The budget office found that by restricting negative gearing to only new property purchases and reducing the discount on capital gains tax, the budget would benefit by the sum of $9 billion over four years.
Even better for the ATO is that over time the takings would rise as home ownership turned over and a lower proportion of homes became negatively geared.
In fact, if it had been implemented on July 1 this year the budget office says the change would have saved $291 million this financial year, $1.5 billion next year, $4.2 billion by 2018-19, and $11.5 billion per year by 2025-26. Beautiful numbers if you're scrounging for revenue.
It all adds up to negative gearing being something that we could probably do without, doesn't it? Well, maybe.
Anything that affects negative gearing will have consequences on both sides of the political fence. And yes, it will affect the top 10 per cent of income-earning households who not coincidentally are also among the country's biggest political donors.
About one Australian taxpayer in every seven owns a rental property. Among our federal politicians, however, it's at least one in three. A study by authors Lindsay David, Paul Egan and Philip Soos found that federal politicians collectively own a portfolio of 541 properties estimated to be worth at least $350 million.
Where to now?
Jamie Alcock, Associate Professor of Finance at the University of Sydney Business School, says that it's a mistake to think negative gearing makes it harder for first-home buyers to get a foothold in the Sydney property market.
"The reality is that by encouraging investment in housing, the supply of rentals increases which keeps rents low," he wrote in Domain.
"For example, in inner-Sydney gross rental yields can be as low as 2.5 per cent in some areas. This benefits the renter, not the investor, and allows renters a better opportunity to save for a deposit for their own home.
"Abolishing negative gearing would, in the long-term, drive rents up and make it much harder for renters to get on the property ladder," he concluded.
Professor Alcock also says it's unfair to blame Sydney's recent meteoric property price rises on negative gearing as some commentators have tried to do.
"Negative gearing rules have been in place for more than a quarter of a century and the number of investors taking advantage of them has been stable for well over a decade. The recent price rises are more closely related to supply restrictions and falling interest rates."
So, where to from here for negative gearing? Federal treasurer Joe Hockey, an acknowledged property investor, has already said the government won’t be touching negative gearing.
“If you change negative gearing in a market like Sydney, which has a very low vacancy rate, you are going to push up rents, which will have a horrendous impact on some of the lowest income families,” he says.
This agrees with the findings of a June 2015 report by ACIL Allen Consulting - 'Australian Housing Investment: Analysis of Negative Gearing and CGT Discount for Residential Property', that concluded if investors were no longer able to carry forward losses it is likely that at least some of the average net rental loss - $9500 in 2012-13, would be added to annual rental costs of tenants.
Finance Minister Mathias Cormann said that the government had no plans to make changes to negative gearing, describing such a move as “counterproductive”.
“The Hawke government tried to make change in this space and very quickly had to reverse that position because of the effect it had on rental prices,” he said.
Even the RBA has issued a caution against viewing the ending of negative gearing as a cure-all.
"We are not suggesting that negative gearing be looked at in isolation," said RBA's head of financial stability Luci Ellis.
"We think that a holistic review of all the tax incentives to engage in leveraged asset accumulation are worthy of review."
Because the honeypot of billions of dollars in taxation revenues is too hard to pass up, it's likely that some changes to the rules around negative gearing will eventually come into being.
But because the practice of negative gearing has been in existence in one form or another for three decades and is part of the financial lives of over a million Australians, it's likely that any changes brought in will be "grandfathered" to exclude those with negatively-geared properties at whatever time such legislation becomes effective.
Investment advisor Richard Livingston says that negative gearing "remains one of the last great Australian tax holidays."
However, he comments that being realistic, because even at today's low interest rates it's costing the federal budget $4 billion a year, it's unlikely to be sustainable forever.
"The talk has been of changing the rules for future investors only, so existing property owners shouldn't be affected. But let the discussion serve as a reminder to keep your mortgage payments where you can afford them, with or without the taxman's help."
Sources
'Cut negative gearing, trim capital gains tax concession and save $9 billion, Parliamentary Budget Office says,' Peter Martin, Sydney Morning Herald, 5 August 2015
'RBA cautions on negative gearing changes,' Peter Trute AAP, News.com.au, 16 August 2015
'Easy tax reform: axe capital gains discounts,' Peter Martin, Sydney Morning Herald
11 August 2015
'Get in before the back pedalling,' Richard Livingston, Sydney Morning Herald, 27 June 2015
'Negative gearing: property’s worst enemy?' Nila Sweeney, Your Mortgage, August 2015
'Is abolishing negative gearing the answer to housing affordability?', Staff writers and wires, News.com.au, 14 June 2015
'How property investing politicians have skin in the game on the negative gearing debate,' Fergus Hunter and Gareth Hutchens, Sydney Morning Herald, 27 March 2015.
'Who is really taking advantage of negative gearing?' Staff writers, News.com.au, 29 April 2015
'Busting the five myths about negative gearing,' Jamie Alcock, Sydney Morning Herald Online, 19 July 2015
'Negative gearing just one culprit in the housing-bubble blame game,' Elizabeth Knight, Sydney Morning Herald, 18 July 2015
'Rents may rise $10,000 a year if negative gearing axed,' Troy Bramston, The Australian Business Review, 27 June 2015
Sydney real estate - a city of property millionaires
Wed, 19 Aug 2015The familiar saying: "All good things must come to an end” is often used when talking about changes in economic trends, such as Sydney's amazing chain of property price rises in the past few years.
These price rises have benefited millions of property owners across the greater Sydney area who've seen the values of their homes and investment properties soar by an almost incredible 48 per cent in just the past three years.
Sydney's median house price has risen to more than $1 million for the first time, according to real estate advertising group Domain.
Domain's quarterly report shows that the price of the average Sydney house rose 22.9 per cent over the year to the end of June to $1,000,616. This is the fastest annual rate of growth since at least the late 1980s, and Domain says it's even outdoing the property price boom of the early-2000s.
Sydney units too have shown a significant increase in their median price, rising 13.9 per cent to $656,078.
(It should be noted that figures from CoreLogic RP Data show slightly lower median figures of $900,000 for houses and $650,000 for units based on June quarter sales.)
Whichever figures are the most accurate, history and the power of logic tell us that no increases of this nature can be sustained indefinitely. There are now indications of slowing price increases across the metropolitan area.
Some of the many reasons for this slowing include declining rental yields, up just 2.5 per cent in the past 12 months, and the major banks tightening their loan facilities by increasing interest rates on property investment loans in response to pressure from the Australian Prudential Regulation Authority (APRA).
SQM managing director Louis Christopher said APRA's pressure could already be taking effect: "I believe the results do represent an indication that the measures undertaken by APRA [the banking regulator] in slowing investor demand are now having an impact on the market."
He hastened to add that it's still early days to say the market is going to do anything but continue slowing: "It is likely that the measures will slow the rate of dwelling price inflation recorded, rather than create a price correction."
Approaching the peak?
As well as Mr Christopher, many other observers of the Sydney property market believe that property price growth is near to its peak. At the very least, most foresee a slowdown in the near future.
McGrath Real Estate's chief executive, John McGrath agrees saying that he feels the Sydney market is 80 to 90 per cent through its current cycle.
"I'd be concerned if Sydney sees another double-digit growth. I'm predicting 3 to 5 per cent more and then I think it's going to be plateauing," he said at the Aussie Home Loans conference in Melbourne.
"I wouldn't panic about the market. Sydney has got a few per cent more, then it might come back a few per cent and then it will go to a steady state."
Figures from market analysts CoreLogic RP Data show that across Australia there have been drops in demand together with an increasing number of owners listing their properties for sale. The old laws of supply and demand are hard to ignore.
Investors may also be cashing in on their property holdings by selling while the market is still undeniably 'hot'. The number of Sydney properties on offer in July was up over 6 per cent on the previous year.
One of the levers the federal government is hoping will slow or stop the escalation in property prices is the conditions that bank regulator APRA has announced applicable to the big four banks and Macquarie Bank that require them to hold more capital reserves to offset potential losses on mortgages.
APRA's aim is to restrict annual growth in property investor loans to 10 per cent per annum. The major banks are complying by raising their rates for investor loans while in some cases reducing rates for first-home buyers.
A gap in the cost of home loans is being created between loans to investors and loans to owner-occupiers, creating a two-tier mortgage market which we haven't seen since the late 1990s.
Managing director of mortgage broker Homeloanexperts.com.au Otto Dargan is expecting further increases in interest rates banks charge property investors.
"The interest rates for most investor loans are likely to be 0.4 percentage points to 0.9 percentage higher than rates for owner-occupied loans by the end of this year," Mr Dargan said.
Principal of consultancy Digital Finance Analytics, Martin North, told the Sydney Morning Herald that the banks' strong growth in lending to investors would prompt them to "throttle back" their interest rate discounts for property investors this year.
"My expectation would be you could see a 70 to 80 basis point gap between owner-occupier and investor as we move forward into the next year," he said.
Tighter credit policies
A spokeswoman for Mortgage Choice said they didn't expect a greater widening in the gap between rates paid by investors and those paid by owner-occupiers, but they did expect further tightening of banks' credit policies.
"Many of Australia's lenders have made some sweeping adjustments to their lending policy in recent weeks and we expect to see more changes moving forward," she said.
Financial analyst David Potts says that the banks are simultaneously cutting the discount on the advertised rate by the same amount for new borrowers: "That's a rate rise of 0.54 per cent on new investment loans without so much as a by your leave.
"All investors are being slugged, but then the banks probably figure who likes landlords anyway? Except them, of course," he said.
Speaking to property analysts, Mirvac chief executive Susan Lloyd-Hurwitz took aim at APRA's moves to slow lending to property investors.
"It's clear that investor lending has been growing very strongly in Sydney, but this isn't the case for the rest of Australia," she said.
"We do need to be careful that national macro-prudential measures don't weaken the overall housing construction market, which is playing a critical role in the economy's transition away from mining to construction.
However, Domain Group senior economist Dr Andrew Wilson says that landlords will simply hit tenants with higher monthly repayments: "Certainly for landlords that are in areas which are popular... it gives them the opportunity to push rents up."
This, he said, will only encourage more investors to enter the market and cash in on higher rental returns, further weakening the ability of would-be first home buyers to save money for a deposit on a property.
Foreign students have also become an interesting factor in the property market mix, according to Business Day editor Michael Pascoe, who says they could be the core of a new wave of housing price pressure.
"A rise in foreign student numbers should mean a rise in demand for rental accommodation in what are already housing hotspots," he comments, adding that we really should be planning right now for relevant housing to meet the anticipated demand.
"Instead it looks like the sharp rise in investor-supplied rental accommodation will intersect with the authorities' attempts to hose down investor activity."
The impacts of those attempts are going to be felt fairly soon according to CoreLogic RPData's research director Tim Lawless.
"The net effect will be a fall-off in demand because investors are such a large part of the marketplace now — they're more than 50 per cent of the market, they're more than 60 per cent in New South Wales," he said.
"I think as we start to see more listings ramp up during the Spring season, will we see buyer demand match that uplift in new stock levels?" he said.
"That's yet to be seen, but with tighter lending conditions we may not see as strong a spring this year as last year."
However, Australian Property Institute's national president Tyrone Hodge says it's not yet time to "ring the bell and say it's over."
"If you look at the fundamentals, we still have lack of supply and growing economy. The only real change is banks increasing the hurdle rate for lending and that takes out more supply which puts more pressure on prices."
Sources:
'Mirvac sees end to double-digit house price growth,' Carolyn Cummins, Business Day, 13 August 2015
'Home prices surge, Melbourne and Sydney lead gains again,' Michael Janda, ABC News online, 2 August 2015
'Interest rate gap between investors and owner-occupiers to widen,' Clancy Yeates, Business Day, 4 August, 2015
'Melbourne leads $6t Aust housing market,' SBS World News, 3 August 2015
' Professor Vernon Smith says Sydney and Melbourne's property prices have grown too quickly,' ABC News Online, 29 Julyi 2015
"Abnormal property listings rise a sign of possible investor exit,' Michael Janda, ABC News online, 3 August 2015
'AMP slaps ban on loans to property investors as expert sees end to housing bubble, 'Michael Janda, ABC News, 29 July 2015
'First-home buyers could take hit from investor interest rate hikes, 'Christina Zhou, Domain, 27 July 2015
'Foreign students set to power housing,' Michael Pascoe, Business Day, 4 August 2015
'John McGrath: Sydney property 'close to peak, Melbourne similar,' Su-Lin Tan and Nick Lenghan, Domain, 10 August 2015
'Last of the rate cuts for home owners,' David Potts, Sydney Morning Herald, 31 July 2015
'Major banks flout housing investor loan limits, APRA figures show,' Michael Janda and Sue Lannin, ABC News, 30 July 2015
'ANZ raises property investor interest rates to cool demand,' Michael Janda, ABC News Online, 23 July 2015
How long will Sydney property prices keep rising
Fri, 17 Jul 2015Predicting the extent of Sydney's property boom is becoming harder as the price rises - both in strength and duration, continue to surprise economists and analysts within Australia as well as internationally.
One thing's certain: Sydney's home price growth is almost three times as fast as the nation's next strongest capital city market in Melbourne, as shown by the latest official figures.
The Bureau of Statistics residential property price index, which includes houses and apartments, showed that Sydney had a 3.1 per cent jump in the March quarter and 13.1 per cent surge over the year to March.
Prices in Sydney have grown by almost a fifth in the year to June. No other capital city has even come close to matching Sydney over the past five years.
As a result of all this action, housing prices in Australia are now 12 per cent overvalued, says a leading investment bank that has encouraged policy leaders to introduce tougher measures that make property prices fairer.
Barclays chief economist for Australia, Kieran Davies, compared the growing gap between household income and mortgage rates, as well as the ageing population and the working age of the population, then developed a model that showed property prices were 12 per cent above fair value.
Respected global business publication The Economist says that of the 26 markets it monitors, Australia is the second most expensive country in which to buy a property.
According to the publication, "property is more than 25 per cent overvalued in seven of the markets we track, notably in Australia, Britain and Canada".
Jeremy Lawson, who is global chief economist of giant British fund Standard Life, also agrees, saying the Australian housing market is "20 per cent to 30 per cent overvalued". Mr Lawson was previously a senior economist at the Reserve Bank of Australia and was also with the OECD.
Overvalued? Reserve Bank of Australia research previewed in early July concluded that even at today's current high prices, purchase prices of Sydney housing are undervalued by 30 per cent relative to the cost of renting.
And somebody's willing to pay for Sydney real estate at these levels. Lots of somebodies. Let's instead assume that property in Sydney needs to become more affordable - something most people in the industry feel would be a good thing to happen.
There is general agreement that for Sydney's real estate to become more affordable there has to be a dramatic growth in housing supply and that's likely to be several years away.
Nick Proud, executive director of residential for the Property Council of Australia says this won't happen overnight, commenting that from building approval to completion is a process that can take up to seven years.
"It can all take a lot of time. Whatever we're thinking today about housing affordability could take years and years to come into play," he said.
Clear sailing for another year
Academics Abbas Valadkhani of Swinburne University, Ronald Ratti from the University of Western Sydney and Greg Costello from Curtin University analysed monthly house price data going back to 1995.
They first predicted where prices would be by May 2015 and proved the results accurate using four different statistical tests. They then extended the results 12 months to May 2016.
Their research findings predicted the average price of a freestanding Sydney house would climb 15.5 per cent to a record high of $951,960, before slipping 0.2 per cent to $949,800.
It should be noted that their findings on Melbourne and Brisbane, in a paper reportedly under review for the Economic Record, were criticised by several prominent economists, although the Sydney predictions went unchallenged.
But even if the next financial year isn't expected to be quite as strong as the one just concluded there's no reason to expect a sudden turnaround in values.
"In the absence of a trigger event, such as a sharp rise in the jobless rate, higher interest rates or an external shock, it is unlikely we will experience a significant correction in dwelling values," CoreLogic RP Data head of research Tim Lawless said.
AMP Capital senior economist Shane Oliver says he's "heard it all before". Although he agrees that house price ratios to rents and GDP are "very high" - "I wouldn't say grossly," he says the Australian housing market is "significantly undersupplied".
Domain Group senior economist, Dr Andrew Wilson, said there's "no sign of investors slowing down.
"There's still potential price growth in the Sydney market and we shouldn't be surprised if it keeps rising," he said.
Angie Zigomanis, author of a report published by building industry analyst BIS Shrapnel, said prices would likely continue to rise through 2015/2016 and start to fall in 2017.
"Interest rates are expected to enter a tightening phase towards the end of 2016," he said in his report 'Residential Property Prospects 2015 to 2018'.
Leading investment bank UBS recently completed a historical comparison that indicates soaring property prices in major cities across Australia have begun to exhibit some bubble-like characteristics but there is no sign yet of an impending cause for it to deflate until 2016-2017.
UBS said it expected a "stronger for longer home building boom" but indicated that worsening affordability and an 'inevitable' rate hike by the RBA will cause a price correction in the next two or three years.
"Sydney is standing out like a sore thumb," said St George Bank senior economist Hans Kunnen.
"There are certain constraints in Sydney that aren't going away any time soon: population growth, low interest rates, self-managed super funds investing, foreign demand and a lack of supply."
He says there's only one thing that can create a sudden fall in prices - a large number of Australians being forced to sell their homes - and any warnings are misguided.
"I think it's overdone - there are still many factors supporting house prices such as undersupply, low interest rates and foreign demand that are not going to go away in a hurry," Mr Kunnen says.
He expects growth in Sydney property prices to slow somewhat over the rest of the year and to keep slowing in 2016.
Growth continues into 2017
A report by National Australia Bank, in collaboration with Core Logic RP Data, has forecast house prices will continue growing this year, but at a more sluggish pace than over the first six months of the year, when the median house price shot up $50,000 — nearly seven per cent.
NAB expects price growth of around three per cent in the second half of 2015, pushing total growth for the year to 10 per cent, followed by growth of 5 per cent over 2016.
Eliza Owen, Market Analyst for Onthehouse.com.au, says that Sydney houses are currently in their largest, longest housing boom.
She points out that the 'house price index' (HPI) rarely goes down, and when it does go down it doesn’t stay down for very long. For example, in 2003, Sydney houses experienced a peak growth rate of 24 per cent.
"The correction that followed between 2004 and 2007 saw a contraction of just 3 per cent. A mere 3 per cent contraction of what houses were worth at the end of a housing boom does not seem like a drastic correction, although this contraction continued for several quarters.
"Such growth patterns prompt me to view the Sydney market as an anomaly that could well stabilise at high prices."
But how about new housing construction? Australian Bureau of Statistics figures show that building approvals rose by 2.4 per cent to 19,414 in May when seasonally adjusted. This is 17.6 per cent higher than it was a year ago.
The ABS figures show this result was mainly due to a rise in approvals for buildings such as apartments or townhouses, which have grown by 46 per cent since the same time last year.
So, there's likely to be a slight rise in housing supply to offset demand. Now, examine loan approvals. One of the country's biggest mortgage brokers, Mortgage Choice, says the APRA restrictions on lending to landlords has dropped property investors' share of its loan approvals to a 20-month low.
Mortgage Choice also says the proportion of its loan approvals going to property investors fell from 34 per cent in May to 30 per cent in June, the lowest share since late 2013.
"It's a 12 per cent reduction in investor loans in a very, very short period of time," chief executive John Flavell said. He said it was the first data pointing to a slowdown in investor lending triggered by banks' tougher credit policies.
But he said the lending policy changes hit hardest the first-home buyers who were also investors, because they tended to have less equity and lower incomes than more-established property investors.
"It doesn't knock out the foreign investor. It doesn't knock out middle-aged, middle Australia with heaps of equity access and excess income and high tax. It knocks out the people who are trying to get in," he said.
A slight growth slowdown between now and the end of 2015 can be expected, but not in such a way that prices begin to slip backwards.
Free-standing houses will continue to outperform apartments and, to a lesser degree, townhouses as increasing numbers of new units come onto the market in Sydney.
In 2016 there'll be more of the same. Slower growth but prices will still rise. The levels could begin to plateau by the year's end and 2017 might usher in a period of price stability but with no serious retracements.
Sources:
'Leading economists slam academics' predictions for Australian house prices,' Jennifer Duke, Domain, 13 July 2015
'Australian house prices 12pc overvalued, says Barclays,' Rose Powell, Business Day, 13 July 2015
'Forget Sydney’s Property Bubble — What About Melbourne?,' The Daily Reckoning, 2 July 2015
'Affordable housing solution is still seven years away,' Kirsten Robb, Domain, 1 July 2015
'Sydney property prices up 16 per cent over the financial year,' Jennifer Duke, Domain, 1 July 2015
'Experts dispel fears of house price crash,' Garry Shilson-Josling, AAP in news.com.au, 30 June 2015
'Sydney prices up 45 per cent, correction next: BIS Shrapnel,' Jennifer Duke, Christina Zhou, News.com.au, 29 June 2015
'Home buyers not scared off by bubble talk,' News.com.au, 5 July 2015
'House prices in a bubble - but what will make them pop?, Rose Powell, Business Day, 1 July 2015
'Loan curbs slow investor borrowing, Mortgage Choice says,' Clancy Yeates, Business Day, 6 July 2015
Is the Sydney Property Market in a Bubble That is Going to Burst?
'Market Update', Eliza Owen, Market Analyst for Onthehouse.com.au, 24 June 2015
'Melbourne house prices tipped to dive, while Sydney's climb then plateau, 'Peter Martin, The Age, 12 July 2015
'New research shows Sydney property more affordable than 26 years ago,' Jennifer Duke, Domain, 17 June 2015
'Report shows Australia's housing market is overvalued,' Garry Shilson-Josling, Domain, 1 July 2015
'Sydney house prices will continue growing, but at a slower pace than the last six months, report says,' Aidan Devine, The Daily Telegraphl 27 June 2015
'Sydney stands alone in home price surge,' Michael Janda, ABC News Online,
'The property market defied predictions of a slowdown at the start of the year, how long will the good results continue?,' News Corp Australia Network, Michelle Hele, 4 July 2015
'Australian property 'bloodbath' prediction ridiculed by economists,' Stephen Nicholls, Sydney Morning Herald, 23 June 2015
Sydney property is bubbling along nicely
Tue, 30 Jun 2015Property price bubbles are back in the news, and this time it's big news. It began when Australia's top economic bureaucrat, treasury secretary John Fraser, told a Senate estimates committee hearing: "When you look at the housing price bubble evidence, it's unequivocally the case in Sydney."
Then, Reserve Bank assistant governor Malcolm Edey? told the senators: "We agree that this is a situation where the market is strong. It's overheated - it's a risky situation. Some people call that a bubble."
These comments triggered an avalanche of media coverage that saw journalists vying with each other to see who could use the word 'bubble' in the most anxiety-causing fashion. Unfortunately, very few of these articles incorporated any definition of just what a property 'bubble' might be.
Full marks, then, to Domain review editor Jennifer Duke who gave us a definition that even economists might agree upon. It goes: "A housing bubble is a period of above-average levels of house price growth that is followed by a drop in prices, back to or lower than the point where the growth started. The drop in house prices begins at the point where the bubble 'pops'."
In other words, a bubble is only proven to have been a bubble when it pops. And for it to pop housing prices would have to drop back to a point below where the growth period began. This is not about a slight retracement.
Figures from HSBC tell us that the cost of buying into Sydney's housing market has jumped by a massive 39 per cent in the past three years, and a drop of that magnitude simply isn't on the cards.
Otherwise what we have is just a sustained period of rising prices. With regard to Sydney, as yet there's no sign of a 'pop' and prices are still going upwards. Auction clearance rates continue to rock along in the mid- to high-80 per cent levels, and selling prices for most properties are well above their reserves.
The most significant change in today's Sydney property market is in the motivation of the buyers. The market is increasingly being dominated by investors who view property as a secure place to put their money and a means of acquiring tax-advantaged capital gains.
Bank interest rates are too low to generate the kinds of returns to investors that real estate can offer, and other options, including shares, are perceived as having higher attendant risks.
CoreLogic RP Data's head of research Tim Lawless confirmed that investors are driving the gains in Sydney property prices: "Historically, we've never seen investors outweighing owner-occupiers based on new mortgage originations, and that's the case at the moment in Sydney.
"Investors account for about 60 per cent of new mortgage origination, so very high and without a doubt I think we will see the regulators looking to curb some of that investor demand through the macroprudential levers via APRA (Australian Prudential Regulation Authority)," he said.
This is why, according to a recent article in The Age, fewer than half of Australia's dwellings - houses and units, are now owned by the people living in them. 30 years ago this figure was around 85 per cent.
Many buyers priced out of the market
Reserve Bank Governor Glenn Stevens told members of the Economic Society of Australia at a business lunch in Sydney that he too had concerns about soaring property prices.
“What is happening in housing in Sydney I find acutely concerning for a host of reasons, many of which are not to do with monetary policy,” he told the audience. “I think it’s a social problem.
“I think some of what’s happening is crazy, but we [the RBA] have a national focus and so that just increases the complexity.”
There is growing recognition that there are downsides to skyrocketing housing prices, including that more and more first-home buyers are being priced out of the market.
The ABC's Michael Janda recently said on The Drum: "With the typical Sydney home now selling for 10 times median annual income, and 6.7 years of saving required for a couple to put aside the $165,000 20 per cent deposit for a mid-priced property, there is no question that affordability is awful in Australia's biggest city."
Committee for Sydney chief executive Tim Williams, who was previously a key adviser to the British government on housing affordability and urban regeneration in London, says that the housing affordability crisis in Sydney has locked 70 per cent of 35-year-olds out of home ownership.
"The housing stress of global cities has reached people on average wages," he says.
Eliza Owen, market analyst for Onthehouse.com.au, has calculated that mortgage repayments as a percentage of income are at an all-time high, representing 35 per cent of income in Sydney, compared to 27 per cent of income nationally.
When she does some additional number crunching using average weekly earnings data, she concludes: "What we can reasonably infer from the numbers is what we have suspected for a long time – that the median household in Sydney cannot afford to purchase the median house in Sydney."
NSW Finance Minister Dominic Perrottet has called for 'a much greater dialogue about housing affordability for young people': "No doubt housing affordability for my generation is a real challenge and it's something that governments need to look at."
He said the NSW government could help the situation by releasing more land and that "obviously tax incentives can also assist".
Who's really buying property?
So, what's behind this situation? There's a recurring myth that high real estate prices are the result of 'Chinese buyers' with loads of cash buying into local real estate.
“It sounds like a big amount, but realistically it’s still a pretty small percentage of the entire market,” Cameron Kusher, senior analyst with property data analysts CoreLogic RP Data, told News.com.au.
National Australia Bank figures show that buyers from overseas - a cohort that includes American, Canadian and UK citizens as well as those from Asian nations, accounted for around 21 per cent of all new houses and apartments sold in NSW in the first three months of 2015. This means that about four out of five buyers of new housing in this state are locals.
Dr James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology, Sydney, told News.com.au that a 2014 parliamentary inquiry into foreign investment concluded that overseas buyers actually helped to increase housing supply, which put downward pressure on house prices.
“Foreign investment is concentrated in new property and this has expanded the supply. If you take away that investment, prices are going to be pushed up.”
Dr Laurenceson is quick to point the finger of blame elsewhere for Sydney's growing housing unaffordability: "The real reasons are right in front of our eyes - limited land releases, zoning regulations, development charges, record low interest rates and tax breaks to property investors."
Federal Treasurer Joe Hockey has admitted that he wonders how his children might afford a home but said he did not support any intervention in the market to deflate house prices.
"The best way to respond to elevated house prices is to increase supply. What we've seen is a massive increase in housing construction in the last year; it's up 18 per cent, 30,000 new dwellings…that is the best way to respond to elevated prices, that is happening," he said in an interview on ABC radio.
However, increased housing supply requires a corresponding increase in land available for development. RBA assistant governor Christopher Kent has warned of even higher home prices, saying stocks of unsold land suitable for development are getting "unusually low".
"Shortages are most evident in Sydney, where greenfield land releases have not kept pace," he said in a public speech at the Australian National University.
Calls for change
Growing concerns about the existence of a property 'bubble' have recently given rise to calls for changes to many current government policies relating to the ways in which real estate is treated - from the release and development of new estates to taxation benefits received by investors.
As a sign that some government bodies are already feeling the heat, Mark Chapman, director of tax communications at H&R Block, said in 'Smart Property' that the Tax Office has recently expressed a determination to ensure property investors aren’t 'rorting the system'.
“Whether it’s a commercial property, a city pad rented out long-term or a holiday retreat for family, friends and holiday markets, the ATO has signalled a big push to check that people aren’t over-claiming deductions,” Mr Chapman said.
In another financial area, the Australian Prudential Regulatory Authority (APRA) has asked Australia's biggest lenders to cut back on risky practices in investment lending.
These 'risky' practices include growing their investment loan book at more than 10 per cent a year, writing high loan to value ratio (LVR) loans where the borrower has less than 20 per cent deposit, and writing long-term interest-only investment loans.
RBA deputy governor Philip Lowe says these efforts are already having an effect on bank lending practices: "In the past couple of weeks, you have seen a number of banks say they are requiring larger deposits for investor loans and offering smaller discounts on interest rates, smaller rebates and are requiring higher serviceability levels.
"My conversations with a number of banks around the country [indicate] the various APRA measures are having an effect."
Changes to the current taxation regime could also be in the pipeline. At the request of the Australian Greens, the Parliamentary Budget Office investigated how much money would find its way into government coffers if negative gearing was scrapped for new residential investments.
The budget office found that removing negative gearing for all asset classes for assets purchased on or after July 1, 2015 would increase revenue by almost $2.94 billion over the next four years.
The extra revenue over the next 10 years would total something like $42.5 billion. Sums like these have a certain appeal to politicians desperately looking for ways to fund their programs.
Interest rate changes a factor
Interest rates are one of the key factors influencing the property market. At its May meeting the Reserve Bank of Australia (RBA) decided to keep its cash rate on hold at the record low figure of two per cent.
This wasn't an easy thing for the RBA to decide. Lower rates are supposed to stimulate economic activity, and all indications are that Australia's economic activity is slowing and will continue to do so, perhaps regardless of the RBA's actions.
Wage increases are at their lowest rate since the government started collecting this data 17 years ago. Household debt is growing, and businesses are signalling that their forward investments in everything from plant and equipment to staff numbers will be cut back over the next 12 months.
The Federal Government tried to induce small business to take on the role of an economic driver in the May budget by giving it an immediate $20,000 tax offset for business-related purchases.
However, according to Dun & Bradstreet’s latest Business Expectations survey, the Business Expectations Index for Q3 2015 has fallen to 14.9 points, down from 20.7 points in the previous quarter and 19.5 points at the same time last year, in a correction to the generally improving outlook that was measured between late 2013 and late 2014.
“There is now a clear cooling in expectations that we expect will continue this year as businesses pull back their earlier optimism,” said Gareth Jones, CEO of Dun & Bradstreet - Australia and New Zealand.
A detailed statistical study by global bond fund PIMCO concluded that Australians' decision to borrow is driven by falling interest rates and rising house prices – not by economic fundamentals reflecting the health of the economy like employment.
If the RBA cuts interest rates further, this will spur investors to make even more property acquisitions which will, in turn, force the prices of real estate up even more.
An answer to the question
Back to the question: "Is there a property bubble in Sydney?" The pressures that have created high property prices in Sydney property haven't gone away. Demand still exceeds supply and will for some time.
It went largely unremarked in the media but the CoreLogic RPData Home Value Index found Sydney's home prices actually fell 0.7 per cent over the month of May - the first time prices had slipped since November last year.
However, CoreLogic's Tim Lawless said these price falls were just "an adjustment" after a strong period of growth: "I wouldn't expect it to be a trend because outside the index there was a lot of data supporting the onwards and upwards values," he said.
"So this is more a correction in the index after a couple of very strong months of data flows. We'd expect a return to growth over the coming months."
Money continues to pour into real estate because other investment options are much less attractive. In the words of real estate marketer, John McGrath: "The market will at some point reach a natural peak — prices will get too high and buyers will lose interest.
“Everyone needs to calm down and remember that this is a solid, high performing property market in a truly international business hub and in my opinion, it is going to stay that way for a long time to come,” he said in an interview with the Daily Telegraph.
A recent analysis by Barclays Bank economist Kieran Davies, says prices may be in a bubble, but it's not one that's about to pop: "I just can't see anything that will cause a correction in the short term, particularly when the RBA has been cutting rates. If any asset was going to crash it should have been during the GFC."
When he was asked if property prices are in a bubble, CommSec economist Craig James replies: "No, these things just go in cycles. Things going a little bit crazy and then settle down, as they did in the 1980s and in the early 2000s."
Speaking at a Trans Tasman Business Circle lunch in Sydney, ANZ chief executive Mike Smith said the current situation is worth close attention: "I don't think it's quite a bubble yet, but it certainly has the potential," he said.
And the chief economist at Bank of America Merrill Lynch, Saul Eslake, says that new supply could be significant enough to affect prices in a few years, but "...there is no trigger on the horizon for the rush of forced home sales it would take to provoke a large house price slide".
In Sydney the undersupply of housing stock is expected to continue driving the market, according to BIS Shrapnel senior manager of residential Angie Zigomanis.
He said Sydney's growth may slow over the next 12 months, but it would be rising interest rates that would slow Sydney down, not an oversupply of homes.
"In Sydney, it might take three to four years [for supply to catch up with demand], but there is the possibility that it might not fully catch up if something like rising interest rates choke off demand first," Mr Zigomanis told Domain's Jennifer Duke.
A bubble? Definitely not. There's no 'pop' in sight.
However, we can hope that the recent debate about Sydney's high real estate costs matures into a reasoned and nonpolitical (or at least bipartisan) examination of the best means to create greater housing affordability without destroying the incentives that have motivated developers and investors to finally build the new housing Sydney has needed for far too long.
Sources:
'First home owner grants may drive up house prices,' Sean Nicholls, Sydney Morning Herald, 11 June 2015
'First cracks emerge in house rules,' Waleed Aly, Sydney Morning Herald, 12 June 2015
'Affordability Continues to Deteriorate,' Eliza Owen, Market Analyst for Onthehouse.com.au, Property Market Update, May 2015
'ATO targets property investors,' Smart Property, 3 June 2015
'Bubbles and bureaucrats: why housing affordability isn't being fixed,' The Drum, Michael Janda, 1 June 2015
'Changes lead to investment blues,' Mark Bouris, SMH Money, 5 June 2015
'Chinese property investment through the roof: What it really means,' James Law, News.com.au, 9 May 2015
'Finance Minister Dominic Perrottet warns first home grants may drive up house prices,' Sean Nicholls, Sydney Morning Herald, 11 June 2015
'Level of risk in housing has picked up, RBA's Philip Lowe says,' James Eyers and Jonathan Shapiro, Sydney Morning Herald, 27 May 2015
'New plan to curtail negative gearing would help the budget, cool property market,' Adam Gartrell, Sydney Morning Herald, 7 June 2015
'No bubble: Sydney home prices are not going to collapse, says John McGrath,' News.com.au, 2 June 2015
'No rest for the Sydney auction market,' Toby Johnstone, Domain, 6 June 2015
'Property bubble in Sydney and Melbourne, says Treasury Secretary John Fraser,' Michael Pascoe, Business Day, 1 June 2015
'RBA governor Glenn Stevens 'very concerned' about 'crazy' Sydney property,' Elysse Morgan and Michael Janda, ABC News Online, 11 June 2015
'RBA Leaves Rates on Hold in June,' Eliza Owen Source: Onthehouse.com.au, 2 June 2015
'Reserve Bank governor Glenn Stevens: More infrastructure spending now, please,' Peter Martin, The Age, 11 June 2015
'Rising house prices 'causing social harm' as property bubble debate continues,' Latika Bourke and Judity Ireland, Sydney Morning Herald, 7 June 2015
'Solution to housing affordability staring politicians in the face,' Michael West, The Age, 1 June 2015
'Sydney property prices dropped in May, but don't expect that to continue,' Antony Lawes, Domain, 1 June 2015
'Sydney tax: Why you pay $150,000 extra to live in Emerald City,' Jessica Irvine and Melanie Kembrey, Sydney Morning Herald, 7 June 2015
'Sydney's skyrocketing house prices are worrying, but Chinese buyers aren't to blame,' James Laurenceson, SMH Comment, 29 May 2015
'The housing bubble explained,' Jennifer Duke, Domain, 7 June 2015
'When Reserve Bank Governor says property prices have gone ‘crazy’, you know it’s bad,' News.com.au, 11 June 2015
'Home price growth continues, but not because of supply shortage, say analysts,'
Michael Janda, ABC News Online, 1 May 2015
'Property price crash more likely in Melbourne than Sydney, experts,' Jennifer Duke, Domain, 13 June 2015
'Reserve Bank: prepare for even higher house prices,' Peter Martin, Business Day, 15 June 2015
'Irrational exuberance in Australian household debt: PIMCO,' Jonathan Shapiro, Business Day, 17 June 2015
Sydney property sure to gain from latest RBA rate cut
Thu, 21 May 2015While the Reserve Bank's rate cut in February came as a surprise to most economists, the cash rate cut to a record low of 2 per cent announced in the RBA's May meeting was almost a certainty.
Also as expected, following the Bank's announcement the value of the Australian dollar dropped and the sharemarket experienced a surge upwards. But once analysts had a chance to consider the fine print in the RBA's announcement the Aussie dollar rose again and the sharemarket's surge came to an end.
The RBA announcement included a statement about the Australian economy that was definitely upbeat. It said the rate cut was: ".... to reinforce recent encouraging trends in household demand."
However, missing was a now-familiar line used in previous announcements that said: "further easing of policy may be appropriate over the period ahead."
Market watchers took these clues to mean that the May rate cut could be the last and we've finally seen the bottom of the interest rate curve. In other words, the next time the RBA changes the cash rate it could be in an upward direction.
Rate cuts have a way of generating predictable outcomes. One of the most important is to lower the cost of borrowing money to purchase property, thereby stimulating activity in the real estate market.
Mortgage analyst firm Canstar says that the recent rate cut, when applied to a $300,000 mortgage loan with repayments over 25 years, creates monthly savings of about $45.
If it's easier to purchase a property more investors and would-be homeowners will do so. This increases the demand for existing property and consequently prices will rise, most notably in Sydney.
The February cut of just 25 basis points certainly had this effect. Figures from the Domain Group show that the Sydney median house rose by 3.6 per cent in the March quarter to an all-time high of $914,056.
RBA Governor Glenn Stevens noted this in his May statement: "Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities," Mr Stevens said.
"The Bank is working with other regulators to assess and contain risks that may arise from the housing market," he added. What he didn't say was that there may in fact be no way to contain the price rises in Sydney that now seem inevitable.
More rate cuts could even be on the way. Nomura Australia rate strategist Andrew Ticehurst says the RBA will be forced to cut the cash rate again by November this year.
"The next real window for an RBA cut is likely August, and we currently assign a 40 to 50 per cent probability to a move at this time", says Mr Ticehurst.
"We think the probability rises again later in the year, and a move by November is more likely than not."
Houses outperform units
About the only recent sign of housing prices slowing in Sydney can be found in the prices of units where their values haven't kept up with the pace of house prices. Sydney units are up 9.7 per cent over the past year while house prices rose by 15.5 per cent.
"For the first time, there are more approvals to build new apartments [in trend terms] than free-standing houses," said CommSec chief economist Craig James.
"And one in four new dwellings approved is in an apartment block of four storeys or more," he added.
The ABC's 'FactCheck' came up with an interesting statistic: "Owners like free-standing homes. Of owner-occupied households, 88 per cent live in separate houses, compared with 57 per cent of renters."
Eliza Owen, market analyst for Onthehouse.com.au, had this to say on the topic: "Historically, houses have outperformed units, and have suffered less in periods of correction.
"Well built houses on large blocks of land will retain value because they come with land and present all sorts of potential for development, extensions and spacious living."
It's likely that free-standing houses will continue to lead the value equation as there are now relatively fewer of them being built in the current mix of housing construction.
Stage set for more rises
Louis Christopher, managing director of independent property advisory service SQM Research, said: "We're at almost record low stock on market, record low interest rates and the market will only rise from here."
Sheryle Bagwell, breakfast business editor on ABC's Radio National, agreed, saying: "House prices in Sydney have rocketed up more than 30 per cent in the past three years as interest rates have fallen.
"Soon the median price for a house in Sydney will hit $1 million. This latest cut will only provide more fuel for that fire."
Ms Bagwell said that lower mortgage rates would give investors more incentives to put their cash into real estate and push up prices even further.
"Those real estate investors will likely include an increasing number of self-funded retirees searching for better returns than they are getting on cash. They will take on more risk just when they should be playing it safe. But that's what happens in a low interest rate environment."
BIS Shrapnel's Angie Zigomanis says we've reached a dangerous point in the Sydney housing price cycle where people are experiencing the 'Fear Of Missing Out' (or FOMO as he calls it).
"Prospective purchasers are prepared to bid up prices now to get into the market before further price rises. A decreased interest rate is likely to provide purchasers with more ammunition to spur this further."
He believes the RBA is looking further afield than just at the housing sector: "They want to encourage more consumer spending and more non-resource sector business investment across the broader economy.
"Ideally construction would remain high, but not be accompanied by excessive price growth."
Whichever way the market goes, interest rates will inevitably rise and when they do adjustments will have to be made by investors who acquire property now when rates are at their lowest-ever point.
"If you're buying property for family reasons and for the long-term and you need to buy in, then buy," says Mr Zigomanis.
"However, ensure that you factor in the potential for further interest rate rises and that you can sustain mortgage repayments if there is a period of unemployment, rather than putting yourself in unsustainable levels of debt."
The federal government's 2015 budget left the housing market untouched, for a while at least. Missing from the treasurer's budget announcement was any commentary on such topics as negative gearing, help for first home buyers and property purchases by self-managed superannuation funds.
However, the government has indicated it will be looking at major tax reforms outside of the budget process so there could well be some interesting developments following discussions on a forthcoming tax white paper later this year.
Assistant federal treasurer Josh Frydenberg told The Australian Financial Review Banking & Wealth Summit in late April that the government will crack down on borrowing by self-managed superannuation funds but will not ban it outright.
"You don't want to see people have their retirement income savings so highly leveraged that they end up being severely damaged as result of another financial crisis," he said.
It should be noted that treasurer Joe Hockey has already commented on the ABC's 'Q&A' that if negative gearing is abolished, there could be serious consequences: "If you abolish negative gearing on investment properties, there's a strong argument that rents would increase."
Michael Bleby, writing in the Australian Financial Review before the RBA's announcement, had thought the Bank would leave rates untouched.
"Policymakers are keen to stimulate an economy that is struggling to fire up in areas beyond housing and construction, but lower borrowing costs are likely to primarily boost investor activity in a sector that is so buoyant it is drawing the attention of international agencies such as the International Monetary Fund."
Yes, apparently even the global financial gurus at the IMF are perplexed by the strength of the Australian housing market. As Radio National's Sheryle Bagwell reported: "Little wonder the IMF is reportedly sending a crack economic team to Australia to take a close up look at the housing market for itself."
If the IMF's economics team arrives around the end of the year they could see the prediction of Dr Andrew Wilson, senior economist for the Domain Group, fulfilled or even exceeded.
Dr Wilson has forecast that Sydney will have a median house price of $1 million by the end of 2015. Looking ahead even further, he's predicting a $2 million median house price by 2030 and a $3 million median house price by 2038.
If those estimates sound far-fetched, remember that 2030 is just 15 years away. Looking at the Australian Bureau of Statistics record of Annual Median House Prices - Capital Cities we can see that 15 years ago in 2000 the Sydney median house price was just $287,000.
Sydney home values in the March quarter increased 3 per cent, according to CoreLogic RP Data's home values index. They rose another 1 per cent in the month of April.
Do the maths and it's clear that at this rate Dr Wilson's forecast for 2030 is quite achievable.
Sources:
'Nomura's Andrew Ticehurst calls third interest rate cut later this year,' Mark Mulligan, Sydney Morning Herald, 15 May 2015
'ASIC chairman Greg Medcraft warns on Sydney, Melbourne property bubbles,' Business Day, Sydney Morning Herald, 18 May 2015
'RBA adds firewater to property punchbowl,' John Collett, Sydney Morning Herald, 6 May 2015
'Federal Budget 2015: What it means for you,' News.com.au, 12 May 2015
'Reserve cuts but there is a sting in the tail,' Malcolm Maiden, Sydney Morning Herald, 6 May 2015
'Record low rates will make Australia's hottest property markets even hotter,' Sheryle Bagwell, ABC News Online, 5 May 2015
'RBA cuts interest rates to historic low,' News.com.au, 5 May 2015
' Reserve Bank interest rate cut to fuel unprecedented buying frenzy in Sydney,' Jennifer Duke, Domain, 5 May 2015
'An interest rate cut would be dangerous for Sydney housing,' Angie Zigomanis, Sydney Morning Herald, 5 May 2015
' Sydney, Melbourne real estate auctions make case against RBA interest rate cut,' Michael Bleby, Australian Financial Review, 3 May 2015
'House prices up except for Canberra,' AAP in The Australian, 1 May 2015
'Sydney Party Time as House Prices Boom 23% P.A.,' Linda Janice Phillips, Propell National Valuers, Index Results as at March 31, 2015
'RBA to cut rates as building booms,' Mark Mulligan, Sydney Morning Herald, 4 May 2015
'Fact file: 9 million homes with 2.6 occupants,' FactCheck, ABC News Online, 6 May 2015
'Disparity between house and unit growth widens,' Eliza Owen, Residex Blog, 6 May 2015
'Reserve Bank governor Glenn Stevens takes heat as $A rises despite rate cut,' Max Mason, Sydney Morning Herald, 7 May 2015
How much higher can Sydney property go?
Mon, 20 Apr 2015Sydney’s property boom continues to amaze politicians, economists and journalists alike. After shooting upwards by something like 40 per cent over the past three years, the market's growth rate once again seems to be on the rise.
Sydney's median house price rose from $765,493 in the September quarter of 2013, to $872,811 in the December quarter of 2014, according to Domain Group data, and it's still going up - to $940,130 at 31 March as reported in the CoreLogic RPData home value index.
Records continue to be set. On the same day as the NSW election was held, an auction clearance rate of 87.5 per cent, an all-time record, was achieved on what was also the biggest-ever auction day with 1128 homes going under the hammer.
Economists may disagree on the exact causes of such unprecedented activity but there's always a reason for whatever happens in the marketplace.
Property and shares are the core elements of most investors' portfolios. The low interest rates of recent times are given credit by many analysts for the recent strong performance of both of these asset classes. There are also market observers who see similar dangers in their growth.
Roger Montgomery, of Montgomery Investment Management wrote on independent publishing service Cuffelinks that eventually: "...the price of those assets [stocks and property] will be pushed way too high.
"After that, a large number of investors will, sadly, suffer financially again – from buying too late and paying too much," he said.
PM Capital's global portfolio manager, Ashley Pittard told Business Day that prices in both shares and property are now approaching dangerous levels.
"They are certainly approaching valuation extremes that would suggest when they deflate they will cause significant damage to the country and it is a timing issue of when problems will emerge.
"It is not sustainable to have [bank] loan growth that on average has increased by 10 per cent per annum consistently for 15 years and a housing market that has only gone one way, which is up, over the same period," he said.
Growth rates will slow
CoreLogic RP Data's head of research, Tim Lawless, believes the primary reason behind the recent prices growth is that investors see the prospect of large capital gains and are taking advantage of the present low interest rates on offer.
Mr Lawless also issued a note of caution to investors: "It does pose the question of how much longer the growth can persist," he said.
"When the Sydney housing market starts to lose momentum, there is some risk that recent investors could be left holding a very expensive but low yielding asset with a lower than expected rate of capital gain over the coming years."
In March, according to CoreLogic RP Data figures, Sydney home values increased 3 per cent, prompting HSBC economist Daniel Smith to say the current growth rate is "unsustainable over the medium term" while issuing a warning that once interest rates start rising there will be "risks to the Sydney market".
Merrill Lynch senior economist, Alex Joiner also cautioned: "Inevitably rates will move back to a more normal level and that is when we see the debt servicing ratio - income used to service debt, moving higher."
It suddenly seems like everything but the price of Sydney real estate is slipping. Consumer confidence surveys are producing declining outcomes, commodities prices are dropping almost daily, and industrial production is down for the third month in a row.
All good things must come to an end eventually, market 'booms' included. But when will Sydney's present property boom finally come to a halt?
Growth will eventually slow as prices grow beyond levels investors can afford. In addition, rental yields are near historically low levels and household income growth has slowed to the point where it's unlikely tenants will dip much deeper into their pockets to pay the landlord.
History shows that housing prices are cyclical and price rises run out of steam as the market approaches its peak. Across Australia, with Sydney being the exception, housing prices are already decelerating and the Reserve Bank is monitoring the situation in conjunction with other authorities.
The RBA's latest Financial Stability Review expressed strong concerns about speculative buying by investors in the property market: "Ongoing strong speculative demand would tend to amplify the run-up in housing prices and increase the risk that prices in at least some regions might fall significantly later on."
The RBA said new lending to property investors had risen by almost 150 per cent in the past three years, yet the Bank is viewed by most analysts as likely to again drop its cash rate before midyear.
It left rates on hold in April so the Heralds's Mark Kenny says May is now firming as the likely date for the next cut: "A rate cut has now become almost certain in May - just before the federal budget - after the RBA listed the pre-conditions and backed specific efforts through tougher regulation designed to 'contain' house price growth being inflated by prospective landlords."
How much more of a cut can we expect? The chief economist of AMP Capital, Shane Oliver, thinks a rate cut of 0.25 per cent is a sure thing in the short term, looking at the weak national economy and the plunging price of iron ore.
And even if there's no rate cut in May, Herald journalist, Gareth Hutchens, leaves no doubt another rate cut is on its way: "Financial markets believe there is a 100 per cent chance the cash rate will be two per cent by September or October this year," he said.
Senior business columnist Malcolm Maiden, also writing in the Sydney Morning Herald, discounted the possibility of the RBA's holding off a cut due to its impact on the housing market: "A rapid rise in house prices in Sydney that would be fanned by another rate cut is a hurdle, but it is probably not an insurmountable one," said
Sydney property still makes sense
Robert Harley, writing in the Australian Financial Review, says that for investors Sydney property still makes sense: "Despite all the cranes, the city remains chronically undersupplied, rents are still rising, and the city's economy is growing more strongly than any other."
He also points out that the number of houses up for sale in Sydney is less than a year ago.
John Edwards, Founder of Residex Pty Ltd, agrees that there is a shortage of existing housing stock being brought to market, and says this is the result of "existing home owners being cautious given current economic forecasts."
In his view, these homeowners don't want to dispose of their current place of residence but instead will leverage their equity to purchase lower-cost rental housing stock - new and existing home units, as investments.
If we take the two price growth 'capitals' - Sydney and Melbourne, out of the calculations, home prices in most cities aren't even matching the rise in the CPI. Perth, Hobart and Darwin have even gone backwards over the past year.
However, there's still little sign of the Sydney market doing anything but continuing its upwards rush, despite prices now being almost a third higher than the previous market peak.
Annual price growth for the 12 months to the end of March for both houses and apartments across Sydney was 13.9 per cent compared with 12.4 per cent for the 12 months to the end of December.
In fact, property values in Sydney have increased each month for the past three years. This parallels the boom in the Australian Stock Exchange which has seen shares trading at seven-year highs, finally taking them back to where they were at the time of the global financial crisis.
A media release from Sydney-based Propell Valuers summed up the situation: "The rest of the housing market may be in the doldrums, but Sydney may as well be in another country, as demand from new inbound population growth, and foreign investors, collide with lack of available property to drive up prices.
"The February rate cut triggered the new boom as buyers become confident that they are not going to pay higher mortgage rates anytime soon, and more cuts in the cash rate this year will only help."
Even though there was no rate cut in April, Peter Arnold, banking analyst at RateCity, doesn't think this will affect the market.
"We're already at record lows and the Sydney and Melbourne property markets are already running hot and things don't seem to be slowing down. We're seeing a lot of competition at the pointy end of the market and we see this continuing regardless of today's decision," he said.
Louis Christopher, the managing director of SQM Research, recently upgraded his forecast house price growth in the city to 11-15 per cent. He also told investors that the Sydney median house price could top $1 million this year.
Vimal Gor, the head of fixed income for BT Investment Management, told Domain that "we have an expensive housing market, but Sydney and Melbourne are two of the most desirable places to live in the world so it's a supply and demand issue."
He said that the RBA would be concerned if house price growth were to slow materially from present levels and he doesn't think that house price growth will be an impediment to the RBA cutting interest rates further.
"House prices will stay expensive for a long time," Mr Gor concluded.
Sources:
'IMF warns Reserve Bank may have to keep cutting rates,' Gareth Hutchens, Sydney Morning Herald, 15 April 2015
'Reserve Bank puts house prices over jobless by keeping rates on hold,' Mark Kenny, Sydney Morning Herald, 7 April 2015
'Reserve Bank's decision to keep interest rates on hold no reprieve for Sydney market,' Jennifer Duke, Sydney Morning Herald, 7 April 2015
'RBA rate cut: It is just a matter of when,' Malcolm Maiden, Sydney Morning Herald, 4 April 2015
'The extraordinary Sydney house price growth that no one wants,' Stephen Nicholls, Domain, 1 April 2015
'Investors warned Sydney house prices can't keep growing forever,' Antony Lawes, Domain, 2 April 2015
'Sydney sets its own pace in home values,' Lee Brooks, Finance News Network,
1 April 2015
'Home prices keep rising led by Sydney surge,' Michael Janda, ABC News Online, 1 April 2015
'Sydney house price growth highest in six years,' Antony Lawes, Domain, 1 April 2015
' Sydney achieves highest clearance on biggest auction day,' Antony Lawes and Anna Anderson, Domain, 28 March 2015
'The boom is about to go bust,' Bianca Hartge-Hazelman, Business Day, 3 March 2015
'Sydney property still makes sense for investors despite price rises,' Robert Harley, AFR Weekend, 27 March 2015
'Sydney Continues to Set the Pace in Patchy Market,' John Edwards, Residex March Property Market Update, 20 March 2015
'Drop in house prices would be a disaster: analyst,' Stephen Nicholls, Domain, 26 March 2015
'RBA sounds alarm about bursting of housing bubble inflated by cheap credit,' Clancy Yeates, Business Day, 25 March 2015
' Sydney Party Time as House Prices Boom 23% P.A.,' media release, Propell Valuers, 2 April 2015
Sydney property the clear winner in race to the top
Thu, 19 Mar 2015When it comes to value growth, Sydney property is out in front and on its own. Regardless of other economic factors that include a rising rate of unemployment, increases in the cost of living, falling commodity prices and concerns over housing affordability, the annual rate of growth in Sydney continues to defy predictions and has performed strongly over the first three months of 2015.
The CoreLogic RP Data February Home Value Index results show that Australia’s combined capital cities have seen dwelling values rise 8.3 per cent over the past twelve months. Sydney is once again the clear leader in value growth with dwelling values 13.7 per cent higher than a year ago.
Housing market consultant Robert Larocca told the Daily Telegraph that the Reserve Bank’s February decision to cut the cash rate to a historic low is behind these statistics.
“[It’s] further indication of the improvement in demand since last year. There can be no doubt now that the interest rate cut had a positive impact on the real estate market,” Mr Larocca said.
A market analysis by Tim Lawless, head of the RP Data research and analytics team, showed that since the beginning of the latest real estate growth cycle in June 2012, Sydney's dwelling values have climbed 34.8 per cent.
"We are already seeing the effect of lower mortgage rates, with auction clearance rates surging to the highest levels we have seen since 2009 and valuation activity across CoreLogic RP Data valuation platforms reaching new record highs based on daily averages over the second half of February," he said.
Mr Lawless did, however, offer a list of factors that could take some of the heat out of the market: "Weaker jobs growth, higher unemployment, declining affordability, low rental yields and political uncertainty are all factors that could dent consumer confidence and provide some counter balance to the rate cuts and quell any additional market exuberance."
Government ponders intervention
There is a possibility that federal government regulators may act to slow the seemingly unstoppable growth in property values.
The Australian Prudential Regulation Authority (APRA) is tightening its grip on the major banks, doing what it can to ensure Australian lenders remain within the government's lending benchmarks.
This could have the effect of making housing finance harder to get, although as yet the impacts of APRA's activities have been minimal.
One proposal to reduce risky borrowing came from John Symond, chair of Aussie Home Loans, who suggested that regulators ban interest-only loans for purchasers buying a house to live in.
"If you can't afford to pay interest and principal, then you shouldn't get a loan," he said.
This might sound a bit drastic, but not irrelevant when he also noted that in the December quarter more than 43 per cent of all new loan approvals to banks with loan books bigger than $1 billion were for interest-only loans.
Mr Symond is concerned that any sudden rise in interest rates would force highly-leveraged investors to sell properties which might start what he called a 'domino effect' that could affect the values of other properties.
In earlier times housing has been hard to afford because mortgage interest rates were too high - up to a horrifying 20% in the early 1980s. But that hasn't been much of a problem since inflation was brought down to more affordable levels in the mid-1990s.
High interest rates once gave governments a political stimulus to help would-be first home buyers (FHBs) by introducing a range of subsidies to help them purchase the property of their dreams. But in hindsight, about all these subsidies accomplished was to inflate the cost of property and place it even further out of their reach.
Recently federal treasurer Joe Hockey came up with a new twist to help first home buyers acquire a place to live. He suggested they could use all or some of their accrued superannuation funds (details weren't forthcoming) to offset some of the cost of their purchase.
It must be admitted that in terms of being a worthwhile investment, this use of super isn't a bad idea. As the ABC's Alan Kohler pointed out:
"According to Chant West, the average 15-year return from super (balanced option) is 5.9 per cent; the average 15-year growth rate from house prices is exactly the same, [but it's] tax free."
So far so good. But since tapping into their super means FHBs can more easily afford to purchase a home, the resulting increased demand means the prices of the homes they want to purchase will go higher.
The real beneficiaries of the treasurer's brainstorm would likely be those who sell their properties to the newly-funded FHBs.
As Stephen Nicholls, Domain executive editor said: "Making it a free-for-all will just push prices higher as more people dive in. We've seen that with the now widely criticised first home buyer schemes that, at one stage, promised $14,000 for buyers of existing property.
"It's no accident that government handouts to first-home buyers right around the country now apply only for new property - a clear acknowledgement that the problem lies on the supply side of the equation."
There's also the slight problem (deferred but still needing a solution) that those who drained their super funds to purchase a home will have fewer accumulated resources to support them in their later years and will require some sort of government help down the track. Or they might be forced to sell their houses.
Of course, it could be just that the government thought it had a win-win situation in which it could please the FHBs - at least temporarily, while at the same time pleasing existing property owners who would enjoy even greater increases in the value of their real estate.
Regardless, the media's response to the treasurer's suggestion was to treat it like a political barnacle and it seems to have faded quickly away.
Jennifer Duke, Domain's review editor, commented on another federal government 'thought bubble' - that overseas investors could be charged a fee when they apply to purchase residential real estate in Australia.
"The recommendation from the House of Representatives Standing Committee on Economics for a fee of $500 to $1500 to be paid on applications may see any introduced cost absorbed by real estate agents and developers."
She quoted Esther Yong from Chinese property listing portal ACproperty.com.au who said the proposed fee of $1500 will not be a deterrent for foreign investors.
"Most Chinese buyers will just pay for it or sometimes agents might be happy to absorb it as part of marketing gimmick," Ms Yong said.
"$1500 is also very minimal in the context of property buying," she added.
Dirt more important than bricks and mortar
Think about what's behind the amazing growth in real estate prices across Australia. House prices have tripled in the past 15 years. But houses now don't cost that much more to build; the big rise in housing costs is due to rising land prices.
It's the old story of supply and demand. When demand increases, if there's no accompanying increase in supply, prices will go up. As Mark Twain is reputed to have said: "Buy land, they're not making it any more".
If a government can stimulate housing construction they'll score points with the electorate. However, whenever governments take steps to stimulate housing construction and assist first-home buyers - including taxation concessions for negatively-geared properties and cash grants for those acquiring their first home, demand is also stimulated.
Add to this mix a rapidly-growing population created by favourable immigration policies - some 200,000 new migrants each year, and rising demand is assured. But what about the supply of housing?
If there is a long-term solution to the vexed question of how Sydney can meet the ever-growing demand for housing within its boundaries, it could be found in the words of Chris Johnson, chief executive of Urban Taskforce.
"Over the next 50 years Sydney will double the 1,660,000 existing homes and the best way to do this will be by encouraging urban housing in apartments as an important part of our housing diversity.
"This will lead to a 50:50 city, with half the dwellings in low-rise houses in leafy suburbia and the other half in mid and high-rise apartment buildings in bustling cosmopolitan urban areas."
Median price to top $1 million
If the brakes aren't applied and house prices keep growing, research conducted by respected economics analyst BIS Shrapnel indicates the median Sydney house price could rise to above $1 million within the next two years.
An AAP release in The Australian said: "Sydney house prices have grown by almost 14 per cent in the year to February, according to Australian Bureau of Statistics (ABS) data, and BIS Shrapnel expects annual growth of 13 per cent for the 2014/15 financial year, which could take the median price just past $1 million."
Realistically, the one factor most likely to eventually affect investors' demand for mortgage finance and take some of the heat out of property prices will be declining rates of rental returns in Sydney.
When rental yields decline, investors receive a lower return on their investment and must place a higher importance on the possibility of capital gains when the property is sold.
ABS figures show that rental yields are softening across Sydney, but as yet this seems to have had little or no effect on the strength of the current property market. Even the NSW election is being overshadowed by activity in the real estate sector.
Sydney auctioneer Matthew Shalhoub, principal of Under the Hammer, told Domain that the election would have no effects on the auction market that day which he predicted would be one of the biggest of his career.
"Given there [is] such a shortage of properties available, anyone who may be distracted by the election is definitely being covered by the people who aren't," he said.
"The real estate market overall seems to be making more headlines than the election at the moment."
Sources:
'Rates keep house prices growing,' AAP release in The Australian, 17 March 2015
'We need more houses, not super-sized bandaids', Alan Kohler, ABC Opinion, 12 March 2015
'Aussie John wants ban on interest-only home loans,' Shaun Drummond, Sydney Morning Herald, 17 March 2015
MyRP Data Property Pulse, Cameron Kusher, 12 February 2015
'City of two halves: how Sydneysiders will split into house or apartment living', Chris Johnson, Sydney Morning Herald, 5 February 2015
'Bumper week of Sydney auctions pushes national auction clearance rate to six-year high,' Aidan Devine, Daily Telegraph, 16 March 2015
'House price metrics headed to new highs: Barclays', Mark Mulligan, Sydney Morning Herald, 2 March 2015
'Joe Hockey and Luke Foley's help for first-time home buyers is a con', Ross Gittins, Sydney Morning Herald, 11 March 2015
'First home buyers think it's super, but is it?', Stephen Nicholls, Domain, 10 March 2015
'Buyers' enthusiasm for Sydney property still at boom-time levels', Andrew Wilson, Domain, 9 March 2015
'David Murray says it's time to tackle superannuation concessions for rich', Nassim Khadem, Business Day, 18 February 2015
'Sydney property predictions for 2015: boom times continue', Carolyn Boyd, Domain, 2 March 2015
Interest rate cuts and Sydney property
Tue, 17 Feb 2015A month can be a long time in politics, as recent events in Canberra have amply demonstrated, but it can also be a long time in the usually more stable world of economics.
The Reserve Bank surprised most financial analysts and economists by bringing forward an anticipated March reduction in the cash rate and announcing a 0.25 percentage point cut at its February meeting - to a record low of 2.25 per cent and with at least one more cut likely to follow.
Was the rate cut really needed? RBA Governor Glenn Stevens, addressing the House of Representatives Economics Committee in Sydney, gave a downbeat assessment of Australia's economic fortunes, and admitted the RBA's ability to encourage economic growth had diminished.
"The board is ... very conscious of the possibility that monetary policy's power to summon up additional growth in demand could, at these levels of interest rates, be less than it was in the past," he said.
The RBA said in its February statement: "A decade ago, when there was, it seems, an underlying latent desire among households to borrow and spend, it was perhaps easier for a reduction in interest rates to spark additional demand in the economy.
"The bank is working with other regulators to assess and contain economic risks that may arise from the housing market."
In a 'Business Day' article, banking reporter Clancy Yeates pointed out that the rapid surge in housing prices hadn't resulted in Australians going on a spending spree as they used to.
"Despite a sustained boom in Sydney prices... there's growing evidence to suggest consumers aren't reacting as the central bank had expected."
He said the 'wealth effect' was a well-established concept among economists and in previous years there had been a correlation between the property market and household spending.
However, the reality is that households this time around won't be increasing their debt levels to fund shopping excursions and as a result there'll be no stimulation of economic activity.
"The reason for this is simple: consumers remain deeply reluctant to take on debt to fund their shopping habits, no how much the housing market boosts their paper wealth."
RBA to monitor housing market
The RBA said in its statement that it would be monitoring the housing market and warned that "an increase in leverage or a decline in lending standards could pose some risk to macroeconomic stability."
"Given the large increases in housing prices in some regions and ongoing strength in lending to investors in housing assets, housing market developments will need to be watched carefully," the RBA said.
"The bank is working with other regulators to assess and contain economic risks that may arise from the housing market."
Peter Martin, economics editor of The Age, noted that the latest unemployment figures showed a rate of 6.4 per cent, the worst for 13 years.
"It's a reminder that nothing much has emerged to drive the economy since the mining construction boom ended; nothing much apart from home building."
He said that half of all new housing loans were being taken out by investors: "The housing construction industry is working full bore in parts of the country and any further borrowing spurred by further interest rate cuts is likely to be diverted into pushing up house prices."
The interest rate cut has "added fuel to what is already a raging fire" according to the Domain Group's senior economist Dr Andrew Wilson, commenting on the incredible 82.4 per cent auction clearance rate the first weekend in February.
He described the Sydney housing market as being "in hyperdrive while the rest of the country is in second gear".
Dr Wilson said sales figures in the December quarter showed that the boom is back: "The median house price increased 4.1 per cent – that's the strongest increase of any of the quarters of the year."
He noted that across Sydney most of the house price growth was in the $1 million to $2 million price range, although prestige prices had grown about 10 per cent over the year.
Dr Wilson said that the median house price for Sydney is now $873,786 and predicted price growth of between 7 and 10 per cent for 2015.
Westpac chief economist Bill Evans said the RBA's interest rate cut had boosted consumer confidence towards buying a house.
"The index tracking views on ‘time to buy a dwelling’ jumped by 9.7 per cent to reach its highest level since February 2014. Similarly, the index of house price expectations jumped by 6.9 per cent to reach its highest level since September 2014.”
Mr Evans said Westpac expects a second rate cut soon: “The most important point is that February is not the end of this rate cut cycle with another cut extremely likely over the next three months.”
A risky strategy?
Ross Gittins, The Sydney Morning Herald's economics editor, called the rate cut a 'risky strategy' and said the RBA could be more worried about the economy than it indicated in its growth forecast.
"The Reserve worries that business investment isn't recovering fast enough. So, despite having already cut the official interest rate from its peak of 4.75 per cent in late 2011, it decided to take off another click or two."
Mr Gittins said he doubted the cost of borrowing was preventing businesses from expanding: "More likely, they don't see any great scope for making a bigger buck, and they're not in any mood to try their luck."
He said the risk in the RBA's strategy was that it would increase borrowing for the purchase of existing residential properties and drive up house prices even further than their present high levels.
Other economists have also warned the Bank's decision could lead to Australia's already-hot investment property market getting hotter, with investor housing loans as a proportion of all loans surging to 41 per cent in December.
"Investor lending has been charging and [this] data is likely to pique the interest of the Australian Prudential Regulation Authority and the RBA, with investor credit growth already running near the 'trigger point' of 10 per cent investor portfolio lending growth," ANZ senior economist David Cannington told clients.
The figures also attracted comment from Commonwealth Bank economist Michael Workman who said: "Investors are borrowing $12.6 billion per month, compared to $18.6 billion for owner?occupiers. Stripping out the refinancing brings the owner?occupiers back to $12.3 billion per month, just below investors."
CoreLogic RP Data's research director Tim Lawless said that the effects of the rate cut could be limited by a lack of confidence in the economy, already high prices and by the prospect of stricter lending limits being imposed on banks by the Australian Prudential Regulation Authority (APRA).
"The key obstacles in the marketplace will be affordability - we're already seeing Sydney median house price up around $850,000 - yields are very low, and I think a big part of demand in the marketplace at the moment is demand from investors and we've already seen some direction action from APRA ... limiting investor lending to no more than 10 per cent a year," Mr Lawless concluded.
Heading into uncharted waters
John Edwards, founder of Residex Pty Ltd, had no doubts the rate cut was premature.
"Affordability calculations indicate that it now takes about 56.9 per cent of the median family’s weekly income to meet their mortgage commitments and leaves them with a very small $734 per week to live on and pay for the necessities in life."
Mr Edwards issued a warning: "We have passed the top of a normal growth period and we are about to have the market stimulated and have further growth. That growth is taking us into uncharted waters where affordability will be potentially worse than we have previously seen."
Regardless of its merits or otherwise, the RBA's rate cut is now a part of history and it will be some time before its impacts can be analysed.
Housing Industry Association economist Diwa Hopkins said the rate cut would help support a strong level of activity, adding that after two years of high growth we could expect some easing.
HIA expects 2015 sales to remain strong, with end-of-year residential building approvals indicating increased construction in the first half of the year.
Propell National Valuers 'Residential Market Report' forecast a 10 per cent growth rate for Sydney property in 2015 saying: " Sydney remains the strongest residential
market, and though the pace of growth is easing it still in excess of one per cent per month.
"Foreign investors are particularly active in inner city apartment developments, and in upper end housing in quality suburbs."
And as it turns out, there are even more first-home buyers than we thought. The Australian Bureau of Statistics (ABS) found that for the past couple of years its figures showing how many people have been buying their first home were about 20 per cent lower than the actual number.
ABS made the announcement after it found some lenders had not reported figures for first home buyers who did not receive first homeowner grants.
Jacky Hodges from ABS explained: “Initially we thought the fall off in first homebuyer loans over the last two years was due to reduced affordability arising from changes in grants, rising house prices, increased investment housing loan activity and general economic conditions.
“However, subsequent analysis and follow-up with lenders has confirmed that the drop was partly due to under-reporting by some lenders” she said.
Even with a correction the national proportion of first-home buyers remains at a near-record low of 14.5 per cent, with Sydney's figure still lower at just 7.1 per cent.
Sources:
"What goes up...', Matt Wade, Sydney Morning Herald, 14 February 2015
'Why the RBA Should Have Left Interest Rates On Hold,' John Edwards, Residex January Property Market Update
'RBA revises 2015 growth forecasts, will watch housing 'carefully,' Jonathan Shapiro, SMH Business, 6 February 2015
'Rate cut bolsters consumer sentiment,' Mitchell Neems, AAP in The Australian, 11 February 2015
'Residential Market Report', Propell National Valuers, January 2015
'HIA upbeat despite dip in new home sales,' Kylar Loussikian, The Australian, 5 February 2015
'Australians won't spend their housing wealth,' Clancy Yeates, Business Day, 11 February 2015
'Worried Reserve Bank officials opt for risky strategy,' Ross Gittins, Business Day, 9 February 2015
'Unemployment hits 6.4 per cent. Will Joe Hockey do a Wayne Swan?,' Peter Martin, The Age, 12 February 2015
'Back to boom: Sydney house prices jumped 14 per cent in 2014,' Stephen Nicholls, Domain, 29 January 2015
'Bubble warning as house prices jump again,' James Glynn, Dow Jones in The Australian, 10 February 2015
'Melbourne and Sydney property developers face very different problems,' Robert Gottliebsen, Business Spectator, 4 February 2015
'Investors embrace rate cut at Sydney auctions', Antony Lawes, Domain, 7 February 2015
'First home buyers surge 20 per cent, and the reason may cause a #facepalm,' news.com.au, 4 February 2015
'Home price gains continue in early 2015,' business reporter Michael Janda, ABC News online, 2 February 2015
'Investment housing loans soar, and set to rise further after Reserve Bank's rate cut', Gareth Hutchens and Clancy Yeates, Sydney Morning Herald, 12 February 2015
'Mortgage owners benefit from RBA interest rate cut and low petrol prices,' Lisa Visentin and Lucy Battersby, Business Day, 4 February 2015
'RBA's ability to influence interest rates has diminished, Glenn Stevens concedes ,' Gareth Hutchens, 13 February 2015
A different year for Sydney property in 2015
Tue, 20 Jan 2015Just because a new year is underway doesn't mean everything in the Sydney property market starts all over again.
Much of what's going to happen in the next twelve months will simply be a continuation of what took place in 2014, although there are some new factors in play which will in all probability make 2015 a somewhat different year from its predecessor.
Peter Kouilzos is an Australian lecturer and author who specialises in property valuation and economics. Writing for realestate.com.au Mr Kouilzos looked over 2014 and summarised last year's outcomes.
He noted that at the beginning of the year Sydney had 22 per cent fewer properties for sale than 12 months previously, and prices had nowhere to go but upwards.
"There was not as much property for sale so there were relatively high numbers of prospective purchasers at your home opens and auctions. During the year, the time to sell a house in Sydney fell from 29 days to 26 days."
There was a bit of bad news for some property owners, according to Mr Kouilzos: "Gross rental yields fell as rents did not increase by as much as property prices."
But by any standards 2014 was a boomer of a year for just about everyone who owns property in the greater Sydney area. Which brings us up to 2015.
The year is already taking shape and there is every reason to expect that it will be another good year for property investors - a description that includes homeowners who've found their home to be one of the best long-term investments they could have made.
Those who purchased Sydney property early in 2014 would certainly have enjoyed the increase of 13.2 per cent that they experienced by the end of the year.
Rate cuts likely
SQM Research managing director Louis Christopher told news.com.au that he expected 2015 to be another positive year for residential property owners: “Basically the money markets think it’s a dead certainty rates are going to be cut by April 2015, with the chances increasing of another rate cut in June.
“If such rates cuts happen, housing markets will be boosted throughout the course of the calendar year,” he said.
This boost will be moderated somewhat by an increase in the supply of new housing that will gradually come on stream during the year. CommSec chief economist Craig James said this will lead to softer price growth, but a major slump was not expected.
“Sydney home prices have just been playing catch-up. Over the last decade Sydney home prices have risen by just 3.6 per cent on average per year, the second lowest of the capital cities,” he said.
CoreLogic RP Data head of research Tim Lawless said he expected Sydney's price growth to soften in 2015, while the firm's senior research analyst, Cameron Kusher, also suggested that peak value growth has now passed.
"We would anticipate that the rate of growth will continue to slow through 2015 despite the low interest rate environment," he said.
Investor activity too will slow down in 2015 due to decreasing rental yields and what Mr Kusher calls "the likelihood of tougher lending criteria to investment buyers".
Dwelling values will continue to rise, but not at the same rate that made price growth so spectacular in 2014, with detached homes in Sydney likely to show a greater percentage of increase than units.
And unlike the previous year in which it seemed nothing in the economic world could affect the Sydney property market, 2015 will see a number of factors in play that will potentially have an impact on what has, until now, been a seemingly unstoppable rate of upwards growth.
Some changes ahead
Data from research house Investment Trends found that the percentage of investors who expected the official cash rate to fall skyrocketed from 4 per cent in August 2014 to 30 per cent in December.
"This is partly driven by the expectation of external shocks, such as falling commodity prices and a Chinese slowdown, having a negative impact on our economy," Investment Trends research analyst Recep Peker told Business Day's Ruth Liew.
"The December edition of our monthly Investor Intentions Index found a sharp deterioration in investors' outlook for the Australian economy."
The research also found that investors' lower confidence in Australia's economic outlook has had a negative impact on their intention to acquire bricks-and-mortar assets.
Investment Trends said the proportion of active investors who planned to increase their exposure to investment property in the next month (3 per cent) was the lowest since October 2011.
One reason for the decrease in confidence is that our currency has gone from being globally sought-after to become much like former PM Paul Keating's famed 'Pacific Peso', and this is going to make almost everything we buy, from overseas travel to electrical appliances, cost more.
Of course we can be confident that interest rates will remain low, which is a factor that supports housing price growth, and oil prices are unlikely to rise which will also reduce pressures on the average Aussie's cost of living.
But wages growth has slowed and is hardly sufficient to offset inflation. In many sectors wages are actually going backwards. Despite the often-expressed claim that this will encourage employers to add more workers to their payrolls, rising unemployment suggests that this belief is somewhat flawed.
Housing supply is starting to rise. Over the next 12 to 18 months a record supply of stock will begin to enter the market, predictably leading to a reduced growth of home prices and lower increases in rental rates.
Writing in the Daily Telegraph, Aidan Devine says Sydney's recent home price boom is about to reach its conclusion.
"CPM Realty research has predicted total price growth of between 5 and 7 per cent over the year, echoing earlier BIS Shrapnel and CommSec forecasts of up to 7 per cent growth — a slowdown from the 12.4 per cent spike to the median house price over 2014."
He quotes CPM managing director Sam Elbanna who said: “Supply will remain restricted, particularly in affordable suburbs with excellent public transport facilities. These areas are being rezoned to allow for higher densities, but local councils are painfully slow in the approval process.
“Coupled with high construction costs this will act as a disincentive for developers to commence new construction,” Mr Elbanna said.
Mr Devine also quoted BIS Shrapnel researcher Angie Zigomanis who said strong activity over the first half of 2015 would drive further price growth, but the market will lose momentum as the year draws to a close
“There is still demand for property, but it is gradually working its way through the market and low rental yields are encouraging investors to look at properties outside Sydney,” Mr Zigomanis said.
On the positive side of the equation, an article in the Australian Financial Review says that, according to forecasts from real estate firm Knight Frank, only two of the eight global cities they monitor will show price gains in 2015 - New York and Sydney.
Knight Frank says the strength of these two markets is the result of the appetite for real estate from foreign buyers and the relative ease of acquiring property.
Knight Frank’s global head of research, Liam Bailey, said: “We expect Sydney to be one of the strongestperforming luxury residential markets in 2015. Rising business confidence and an increasing sense of political stability is helping to attract interest from overseas.
“The weak Australian dollar is adding to this momentum and also reviving interest from Australian expats.
“Low interest rates are forecast to remain steady with no change expected until mid to late 2015 and banks are keen to lend at competitive rates,” Mr Bailey said.
Sydney property retains its attraction for both domestic and overseas investors and there's no doubt value growth will continue to happen, especially in the first half of 2015. Last year's record-breaking rates of price increases however are not likely to be repeated in the twelve months ahead.
Sources
'2014: the year in property,' Peter Kouilzos, Realestate.com.au, 19 December 2014
'Aussie landlords swallow losses to bet on price gains,' Bloomberg in Business Day, 12 January 2015
'Sydney's summer property sales leave lawyers stranded at the office,' Anna Anderson, Domain, 12 January 2015
'Property prices: What to expect from real estate in 2015,' News.com.au, 25 December 2014
'Capital city home values rise by 7.9% in 2014,' CoreLogic RP Data Home Value Index Release, 2 January 2015
'Commsec: property to “slip” in 2015,', Posted by Chris Becker in Australian Property, 7 January 7, 2015
'2014 is Sydney's biggest auction year on record,' Sue Williams, Sydney Morning Herald, 21 December 2014
'A consumer guide to the Australian economy in 2015,' Gareth Hutchens, SMH Online, 10 January 2015
'Get used to low rates - they're here to stay,' Alan Kohler, ABC Online, 11 December 2014
'Sydney property boom to start receding by end of the year, analysts say,' Aidan Devine, The Daily Telegraph, 10 January 2015
'New York, Sydney best for property investors in 2015,' Larry Schlesinger, Australian Financial Review, 5 January 2015
'Growing number expect Reserve Bank of Australia to cut interest rates,' Ruth Liew, Business Day, 8 January 2015
Sydney property - a bit less of the same in 2015
Thu, 18 Dec 2014At its December board meeting the Reserve Bank again left official interest rates on hold at their present historic low of 2.5 per cent. That makes 16 months that the cash rate has been left unchanged. In case you didn't recall the date, the last time it moved was in August 2013.
The minutes from the RBA's board meeting show that the bank remains committed to "a period of stability in interest rates", also acknowledging there were factors creating "market expectations [that] implied some chance of an easing of policy during 2015."
As growth in the housing sector has been shown signs of slowing recently, economists are now talking of a potential rate cut in early 2015.
First cab off the rank was Deutsche Bank chief economist Adam Boyton who said the RBA will cut the cash rate to a new low of 2.25 per cent toward the end of the June quarter before reducing it to two per cent later in the year.
Mr Boyton explained: “Are things going to get better over the next year or two than they have been over the past year or two? We don’t think so,” he told AAP.
“It’s just that combination of some early signs of cooling in house price growth, weaker commodity prices over the past few months, combined with our expectation that the unemployment rate will rise to close to seven per cent next year," he added.
Westpac's chief economist, Bill Evans became the first of the big four banks' economists to predict cuts in the cash rate in February and March 2015, citing comments by RBA Governor Glenn Stevens indicating the bank would lower its growth forecasts in February.
"At this stage we are comfortable to retain our recent call for two cuts in February and March while recognising that the exact timing has had a significant jolt from the Governor’s interview," said Mr Evans.
"Like the Governor we will 'take a fresh look at all these things in the new year' while maintaining that the appropriate policy is to cut rates early in that new year."
The National Australia Bank came in a close second to Westpac after its monthly business survey revealed more downbeat findings that supported two rate cuts in 2015, causing NAB to lower its growth outlook and increase its peak unemployment forecast.
A feast of findings
Interestingly, the Paris-based Organisation for Economic Cooperation and Development (OECD) says that Australia should raise its interest rates no later than the second quarter of 2015 to dampen demand for credit.
In its half-yearly economic outlook, the OECD said the low rate-driven, investor-led rise in housing credit was a serious risk to financial and economic stability.
"House price increases are encouraging construction and consumption, but are also a concern in that a sharp reversal could cut aggregate demand," the organisation warned. Not that the Reserve Bank seems overly concerned about the OECD's opinion.
If you're wondering whether there's really a problem, the RBA recently published its findings on who is at most risk of falling more than 90 days behind on their mortgage.
The Reserve concluded that the size of the debt makes a big difference, and especially the proportion of the property purchase funded with borrowed money.
Those who take out a loan with an LVR (loan to valuation ratio) of 90 per cent or more have a likelihood of missing a payment three and a half times greater than for those with a loan having an LVR of 60 per cent or less, and almost twice as great as for loans with LVRs from 80 per cent to 90 per cent.
The Australian Securities and Investment Commission has announced that it will investigate interest-only loans, which ASIC says make borrowers highly sensitive to movements in interest rates.
ASIC's alarm bells started ringing when interest-only loans as a percentage of new housing loan approvals by banks reached a new high of 42.5 per cent in the September quarter.
"While house prices have been experiencing growth in many parts of Australia, it remains critical that lenders are not putting consumers into unsuitable loans that could see them end up with unsustainable levels of debt," ASIC deputy chairman Peter Kell said.
The investigation will probe both banks and non-bank lenders and look into the possibility that lending practices are encouraging high-risk loans, particularly in Sydney and Melbourne where house prices are the highest of Australia's capital cities.
ASIC said it is working with the Australian Prudential Regulation Authority (APRA), the Reserve Bank of Australia and the Treasury to "monitor, assess and respond to risks in the housing market."
The RBA has also noticed the growth in borrowing by investors, saying in the minutes of its December meeting: "Credit to owner-occupiers was growing at a pace only a little above that of income, but...growth in credit to investors was considerably higher."
APRA has launched its own attack on what it calls "risky lending practices," saying that the current high levels of investment and interest-only property loans threaten the stability of the financial system.
The Authority has independently written to all the banks, requesting them to advise APRA of their plans to support sound residential mortgage lending practices.
As yet it's unclear what, if any action our regulatory agencies might take if they conclude that lending practices have become too risky for borrowers.
The Australian Bankers' Association says it isn't overly concerned: "Lending into housing markets has been a regulatory focus for some time and we are confident that banks have been maintaining appropriate lending standards," said ABA's chief executive Steven Münchenberg.
The recent enquiry into Australia's financial system chaired by former CBA head David Murray released its report to the Commonwealth Government saying that borrowings by DIY super funds should be banned and tax concessions related to negative gearing and capital gains on housing should be removed.
These 'solutions' are easy enough to recommend but any government tinkering with negative gearing, capital gains on sales of the family home and people's superannuation funds would create its own political risks and is not likely to happen just now when the federal government is already dealing with a bagful of its own financial and political problems.
Price rise trend to continue
Even if some sort of regulatory brakes are applied to certain sectors of the mortgage lending market, little can be done to arrest the continuing upwards trend of property prices, especially in Sydney.
Most real estate analysts feel certain that even if the rate of home price growth slows from its heights of this year, growth will continue well into 2015.
Dr Andrew Wilson, Senior Economist for Australian Property Monitors, says that affordability barriers are starting to slow price growth because incomes aren't rising enough to sustain current high levels.
"But overall the Sydney market will be healthy," says Dr Wilson. "NSW has the strongest economy, unemployment is low, there's plenty of confidence around and we won't be seeing interest rates changing any time soon, while there could even be a cut towards the middle of next year."
Another analyst predicting growth in 2015 is Tim Lawless, head of research for CoreLogic RP Data: "In late January and early February when the marketplace becomes active again after the break, my guess is that the market will still be very strong, but not as strong as the finish of this year.
"Confidence will still be high, but there is a disconnect between the exuberance of strong prices and the feeling that the marketplace is overheated," he added.
There's no doubt that investor activity will continue at high levels in 2015 even though rents aren't keeping pace with the recent rapid rate of increase in Sydney property prices.
Numerous apartment projects are already underway across the city while the NSW Government's designated high-growth areas - 'urban activation precincts' (also known as "priority precincts") with high-rise towers in the planning mix are yet to get off the ground.
The Baird government's 'Plan for Growing Sydney' intends to cope with an increase in Sydney's population of 1.6 million by 2031. To do this it will include even greater concentrations of development around transport corridors which are bound to stimulate opposition from many quarters.
Nevertheless, it is certain that Australians' love affair with property will continue for some time, fed by the release of new developments throughout the next few years. And for properties not snapped up by local investors, there are investors overseas who are quite willing to put their money into offerings in Sydney, often sight-unseen.
Earlier this year the federal Treasurer asked the House Economics Committee to investigate just how effective are the rules around foreign residential real estate investment.
Six public hearings and 92 submissions later, the committee made 12 recommendations to strengthen the current rules, which limit overseas resident non-citizens to buying newly built, rather than established, properties.
In response to a proposed $1,500 fee for overseas residents purchasing property, the Housing Industry Association's chief economist Harley Dale said foreign investment has been important for boosting residential construction and a modest fee is unlikely to significantly reduce overseas interest.
"It's unlikely to materially have an impact on the demand for new housing, and nor would you want it to, because that new housing is playing a very important role in growing the broader domestic economy," he said.
So, what can we expect to happen in the year ahead? There are clear indications that interest rates will remain low and may fall even further in early 2015. The present taxation rules applying to negative gearing and borrowings by SMSF investors are likely to remain unchanged while the government fights other battles already underway.
Despite concerns about risky borrowing, a slowing economy, housing affordability, taxation treatment of real estate and rising unemployment, 2014 will flow seamlessly into 2015 for Sydney property.
Prices of Sydney real estate, particularly in areas within a half-hour commute of the CBD, will continue to rise, and vendors who place realistic prices on their properties will be pleased with the results they achieve.
Sources
'Reserve Bank keeps interest rates on a steady course,' Michael Janda, ABC News online, 16 December 2014
'RBA says could cut rates more, but OECD warns of housing risks,' Michael Janda, ABC News, 26 November 2014
'Consumer confidence plunges to 3-year low,' Mark Mulligan, Business Day, 10 December 2014
'Financial regulators united in attack on risky loans,' Georgia Wilkins and Nassim Khadem, Sydney Morning Herald, 10 December 2014
'Property prices to go up again in 2015,' Sue Williams, Domain, 9 December 2014
'What Murray means for you and your wealth,' David Potts, Sydney Morning Herald, 10 December 2014
'RBA leaves interest rates on hold at 2.5 per cent.' News Corp Australia, 2 December 2014
'Auction market at lowest point in almost two years,' Andrew Wilson - Senior economist, Domain Group, 1 December 2014
'Foreign buyers just part of housing affordability,' Sydney Morning Herald editorial, 1 December 2014
'Foreign buyer rule enforcement needs strengthening: committee,' ABC News, business reporter Michael Janda, 27 November 2014
'Size matters when it comes to defaulting,' Clancy Yeates, Sydney Morning Herald, 10 December 2014
Higher prices are in the stars for Sydney property
Tue, 18 Nov 2014Christmas isn't far off and if history is any kind of guide we should be expecting some of the heat to go out of the Sydney property market.
To get an idea of just how frenetic is the present level of activity, the Sydney Morning Herald's website on 10 November featured a link to an article that read: "Auctions Clearance rate plummets".
The article related how the auction clearance rate the previous weekend had slipped to 'just' 75.5 per cent, although it did note that 943 homes were listed to go under the hammer at that weekend, compared to 883 the weekend before.
That’s not really much of a ‘plummet’, so there’s still room for a little more slowing of the Sydney market’s current pace if that’s what happens, but don’t be surprised if prices continue their upward trajectory even after they rose 2.7 per cent in the September quarter.
Buyers are active in all segments of the market. Figures from the Australian Bureau of Statistics (ABS) show that established houses with prices of between $500,000 and $2.2 million contributed most to the September quarter rise, while attached dwellings (units and row houses) with prices of between $550,000 and $650,000 rose the most in their category.
Andrew Wilson, senior economist for the Domain Group, isn’t anticipating a slowdown leading into the holiday season: “Auction activity will continue to rise over the next five weekends with buyers increasingly spoilt for choice and sellers looking for a result before Christmas.”
Analyst Louis Christopher from SQM Research said buyers were desperate to buy homes due to years of underbuilding: “It’s hard to see the market peaking just yet. Prices are going to keep increasing.”
John McGrath, CEO of McGrath Estate Agents, believes values will rise between 5 and 10 per cent by next August: “Right now we’re seeing a catch-up from the GFC period ... there will be single-digit [growth] for the next couple of years.”
And Raine & Horne chairman Angus Raine told the Daily Telegraph’s Aidan Devine that this spring would beat the record-breaking 2013 selling season: “There was a solid spring market in 2013 and many tipped a repeat performance in 2014 to be difficult, but the market has maintained the 2013 rage and it’s fair to expect the run to Christmas 2014 to be even better,” he said.
But it just wouldn’t be Christmas without a Grinch, and a Sydney Morning Herald editorial on 8 November raised the prospect that the Reserve Bank of Australia (RBA) might take some sort of action to spoil the party.
“The Reserve Bank of Australia has a salutary message for irrationally obsessed property investors and overstretching buyers this weekend: the good times are not quite as good as they were and, indeed, they are unlikely to last forever,” the editorial said.
It quoted Wayne Byres, chairman of the Australia Prudential Regulation Authority, who said that although housing lending had historically demonstrated a low-risk profile, APRA has of late been seeing what it called “increasing evidence of residential mortgage lending with higher risk characteristics’’.
It also quoted the chief executive of ANZ Bank’s Australian operations, Phil Chronican, who said some investors viewed buying property as a ‘‘one-way bet’’ and ‘‘There is a bit of an irrational obsession with housing as an investment class. For many investors, they would be better off in assets other than housing.’’
Paul Bloxham, the chief economist, Australia and New Zealand at HSBC Bank Australia Limited, told Jonathan Chancellor that Sydney’s already reached the point of danger: "Although national housing price growth of 10 per cent a year should not be unexpected for now, persistent double-digit growth would be a worry and 15 per cent annual price growth in Sydney is already concerning."
Mr Bloxham also said the RBA is concerned that a speculative element has begun to drive the housing market: "The RBA still sees the risks to financial stability from current trends as low, given that investors tend to be higher-income households with larger mortgage deposits.
"But increased investor involvement could lead to a larger rise in housing prices, which could see a bigger fall some time down the track, exacerbating the economic cycle."
While it is reasonable to say that the present low interest rates could encourage some investors to take on more risk than they should in the quest for higher returns, there’s no clear answer as to what the RBA or indeed any government might do about it.
State governments are enjoying the growth in stamp duty revenues from increased numbers of property sales and the Commonwealth is happy to have the housing industry boom take up some of the economic slack from a slowing mining industry.
The Federal Government could, if it wanted, tackle the perceived problem of speculative borrowing by doing away with negative gearing or preventing superannuation funds from borrowing to finance property purchases. However, politicians of both major parties have no desire to face the resulting political backlash from such unpopular moves.
Besides, even if the Federal Government could find a way to slow the Sydney market’s prices growth, is it really necessary?
RP Data CoreLogic research director Tim Lawless told News.com that although the property market is still strong it is beginning to slow: “Values are far from going backwards, they are still moving ahead quite quickly, it just looks like we have moved through the peak of the growth cycle,’’ Mr Lawless said.
He added a few more details in an interview with ABC News Online’s Michael Janda, saying: “We'll probably start to see a slowdown in investor demand - not just due to the macroprudential rules, but also due to the fact that yields are being quite severely compressed across the largest capital cities due to the fact that values are rising at such a rapid rate compared to rents."
RP Data's senior research analyst Cameron Kusher told BusinessDay that he expected prices to moderate in the coming months but only an increase in interest rates or some sort of controls on bank lending to property investors could cause any rapid slowdown in growth.
He also warned that falling real incomes and climbing dwelling prices would make affordability a key issue: "At some point, people just aren't going to be able to pay the prices of those homes that are available for sale."
In other words, there are natural forces in the marketplace that can achieve the very same outcomes that the government doesn’t have the backbone to create.
It’s also hard to work out exactly when any bureaucratic action should be taken. It was, after all the same Mr Kusher who, a little less than two years ago in January 2013, declared that the days of dramatic property price increases had come to an end.
“It is clear that the previous strong value growth conditions to which many home owners became accustomed of recent years are well and truly behind us,” he said.
But then, way back in 1997 Glenn Stevens, the RBA’s assistant governor (and now Governor) said: “It would be unusual, in our view, were strong rises [in house prices] to persist over a long period or become widespread.”
Well, strong value growth conditions are not behind us; they’re very much with us at present. And there’s nothing unusual about widespread strong price rises persisting as they have for the past twenty months.
As we anticipate the future there are those who say that price rises in Sydney property are in the stars. Astrologer Elizabeth Ball told The Australian newspaper in late 2012 that the property market is dominated by two planets - Jupiter and Saturn.
“A favourable aspect of the two planets will help the market rise at a sustainable rate”, she predicted.
“Jupiter, which rules expansion, hope, confidence and optimism, enters Cancer, which rules home and family, on June 27, 2013, through July 17, 2014, making the property market boom again.”
She surely got that right!
Sources:
‘Reserve Bank's Christopher Kent warns of mining investment slump next year,’ Michael Janda, ABC News, 13 November 2014
‘Housing bubble debate: has a flood of foreign money lifted home prices?,’ Michael Janda, ABC News, 6 November 2014
‘Housing bubble debate: Dwelling shortage may not be as bad as believed,’ Michael Janda, ABC News, 4 November 2014
‘Sydney, Melbourne propping up slowing housing market,’ Mark Mulligan, Sydney Morning Herald, 3 November 2014
‘Home price surge continues in Sydney, other cities subdued,’ Michael Janda, ABC News Online, 2 November 2014
‘Property values continue to rise although the rate of increase has slowed,’ News.com.au, 3 November 2014
‘Property buying all in the stars for 2013, says astrologer’, by Elizabeth Ball, News Limited Network, 30 December 2012
‘Capital city property prices up slightly in October,’ Jean-Paul Pelosi, CBA MyWealth News, 3 November 2014
‘Sydney property investors the key to the three big issues for the RBA: Paul Bloxham,’ Jonathan Chancellor, Property Observer, 4 November 2014
‘Property price growth slowing: RP Data,’ Kylar Loussikian, The Australian, 3 November 2014
‘Analysts say Sydney property prices have plenty of room to grow more as Super Saturday of auctions kicks off ,’ Aidan Devine, The Daily Telegraph, 27 September 2014
Sydney property up, sharemarket down
Thu, 23 Oct 2014Many investors in the sharemarket must be wondering what's happened to their savings. In recent weeks there's been a selloff with the market losing over 9 per cent of its value, and there are fears of worse to come.
Investment advisors generally provide the same advice about property and shares: both should be seen as long-term investments. Shares, however, can be bought and sold much quicker than property and, as a result, are more susceptible to emotional trading.
There are a number of global economic concerns at the moment that are partly to blame for this sudden decline. A falling Australian dollar, lower commodity prices, and a slowing recovery in European economies are all elements in the mix.
Also impacting on consumer confidence are such intangibles as conflicts in the Middle East and the possible spread of the Ebola virus from Africa to other parts of the world.
The media may be having an easy time filling their pages with tales of woe, but it's worth noting that fundamentally not much has changed. The economies of the US and China continue to perform well, while the price of oil - a key element in the cost of living, has dropped as world demand decreases.
Meanwhile, the housing market continues to tick along without disruption, following the inevitable laws of supply and demand as it always does. For so long, across Australia housing supply has not kept pace with demand and the result has been rising prices.
Sydney weekend auctions have seen record-breaking results in August and September, with the trend results continuing into October. Clearance rates remain around the 80 per cent level despite high numbers of properties on offer at each auction.
One consequence of the prevailing economic negativity is that the Reserve Bank of Australia is now less likely to raise interest rates in the next twelve months, aware that any increase could further threaten Australia's economic growth.
It's also less likely that the RBA will be reacting to the surge in housing prices, despite earlier worries about the level of housing investor loans and a feeling the Bank would do something to increase capital requirements in this lending sector.
However, the head of the RBA's financial stability department, Dr Luci Ellis, recently indicated in a speech at a conference on financial stability that the RBA remains concerned about current property prices in Sydney and Melbourne.
She made it clear in her speech that the RBA feels the driver for high property prices is high levels of investment which now account for nearly half of all new home lending: "That share is noticeably higher than rental housing's share of the housing stock, even allowing for a possible faster rate of churn in investor loans. Obviously that can't continue forever," she said.
In recent months the influx of foreign investment funds into the Australian housing market has been the subject of much media attention. The Australian Property Institute conducted a survey in October that found 96 per cent of respondents felt foreign investment was a 'significant driver' of real estate prices.
The construction in Melbourne of the 63-level 633 unit high rise Eq Tower, a project funded by one of China's largest property developers, is the kind of development that makes headlines for several reasons. It will be a massive addition to the Melbourne skyline with a towering height of 202 metres.
Admittedly Australia has long been a tempting target for Chinese real estate developers. The ongoing shortfall in housing supply has been easy to perceive and has finally resulted in increased levels of new construction, particularly in Australia's capital cities. The strong demand for inner city housing where land is scarce has caused prices within 10km of the Sydney CBD to soar.
But foreigners cannot buy established dwellings in Australia. They can only purchase newly-built properties. The large Asian construction firms can self-finance their Australian developments and don't need to borrow from Australian banks. They build their tower blocks of apartments and sell a high percentage of them to mum-and-dad Chinese investors.
Planners have had to adjust their restrictions to allow sufficient new dwellings to be created by developers, both Australian and international. High-density living is the new norm with 25-storey towers sprouting up from suburbs with rail links across Sydney.
These will put pressure on existing infrastructure including roads, schools and power and water supplies, but at least they're being built after years of inadequate housing supply.
Despite the fact that Sydney housing's unaffordability is higher than ever, the market is still growing strongly although slowing slightly at this time. Rises in unit prices are already showing some signs of decelerating as new developments come onto the market, and the rate of increase in Sydney's rental rates is also slowing.
According to Dr Andrew Wilson, senior economist at the Domain Group, the key factors putting downward pressure on apartment rents are "affordability, as well as the increase in supply from investors as well as the new developer stock coming on to the market."
John Edwards, founder of Residex, says the buyers who make up the market have changed and are no longer the median income families; those families are becoming renters so they can afford to live in the 'median value' areas of Sydney.
"Buyers of house and land are now second and third time housing buyers, with income levels which are much higher than the median income wage," says Mr Edwards.
"Median income families who are buying are now buying on the city fringes where housing prices are slightly more affordable."
According to figures from the Australian Bureau of Statistics, buyer activity could be about to slow. The ABS numbers for August show that the value of loans approved in NSW for house sales fell by 9.2 per cent while investor finance was down by 7.6 per cent.
The other side of the coin is that NSW is still the market leader with 43.2 per cent of Australia's residential investor finance across the country. In fact, investor finance increased by almost 40 per cent in NSW over the first eight months of 2014 compared to the previous year.
Only the first home buyers seem to be left out of the stampede. First home buyers now account for just 4.3 per cent of all housing sales finance. The average first home buyer loan for NSW fell to $318,400 in August which was down by 4 per cent from the previous month.
There was also a drop of 6.5 per cent in NSW first home buyers to 1,113, although their number increased by 8.8 per cent over the first eight months of 2014 compared to the same period last year.
ABS figures tell us that Sydney's house price growth is slowing. They also tell us that rental returns are slipping as the rise in rental rates fails to keep up with the rise in real estate prices.
It is probable therefore that the rate of prices growth will continue to slowly decline towards the end of the year, leading towards a period of stability or at least more moderate growth than we've seen over the past two years by mid- 2015.
Sources:
'Flood of China cash to sow the seeds of a hundred towers,' Simon Johanson, The Age, 11 October 2014
'Restrictions on foreign buyers not adequately policed,' Simon Johanson, Business Day, 11-12 October 2014
'Hot Housing barely rates a mention,' Gareth Hutchens, Business Day, 8 October 2014
'Unsettling time for investors,' Daryl Dixon, Money, the Sun-Herald, 19 October 2014
'Don't blame bogeymen,' David Potts, Sydney Morning Herald, 15 October 2014
'10 per cent drop in first home buyers,' Andrew Wilson, Domain, 15 October 2014
'Asking rents fall in desirable inner city suburbs,' Domain, Toby Johnstone, 18 October 2014
'Sellers piling in, but will there be enough buyers?,' Domain, Andrew Wilson, 17 October 2014
' RBA keeps interest rates on hold in October,' Loan Market Media Release, 7 October 2014
'Australia's housing market problems laid bare,' ABC News Online, by business reporter Michael Janda, 10 October 2014
Residex September Property Market Update, John Edwards, 24 September 2014
Springing Into Spring Indeed
Sat, 27 Sep 2014For those who can remember what life was like fifty years ago, about this time of year the big Sydney retailers like Waltons and Grace Bros. would launch a seasonal advertising campaign with the headline "Swing into Spring" or something similar. It didn't matter whether the goods being sold were women's fashions, transistor radios or outdoor furniture, the advent of Spring heralded the start of the selling season.
It was the same for Sydney real estate. You could get a reasonable home for around $10,000 to $15,000 and this was the time of year people would start looking at what was on offer so they could upgrade their residence, from a unit to a semi-detached cottage or perhaps from a two-bedroom place to something bigger, with maybe three bedrooms and a pool.
With summer approaching, some even acquired a holiday home at a place that was far enough away to have affordable beach shacks, like Avoca Beach or Umina or Kiama. The places in those locales weren't very fancy but were within a day's drive of the city with the family packed into their Falcon or Holden.
These days things are a bit different. This is the start of what has traditionally been the biggest real estate selling season of the year, yet we've already experienced the strongest winter for property sales since 2007.
Figures from RP Data show that across Australia real estate prices have risen by 4.2 per cent this winter while Sydney's price rise has topped 5 per cent. Unlike fifty years ago, Sydney prices have gone into overdrive well before Spring, achieving a median dwelling price of $650,000.
RP Data's senior research analyst, Cameron Kusher told ABC News online that it's unusual for prices to rise so strongly over winter: "Maybe we'll see similar conditions again this year, but another three per cent growth over the next three months is obviously very strong in light of the fact that we've already had about 28 months of growth in the housing market."
Tim Lawless, RP Data's Head of Research sees even more property price rises ahead, saying on September 1: "With today marking the first day of Spring, we are expecting listings numbers to rise over the coming month which will provide a real test for the housing market.
"Considering the ongoing high rate of auction clearance rates, a generally rapid rate of sale and the ongoing low interest rate environment, it's likely that dwelling values rise even further over the next three months”.
He also said that improving consumer confidence following the post-budget pullback will "…add fuel to the exuberant buying and selling conditions we have seen during winter".
A competitive Spring
This Spring the market will be active and competitive without a doubt. Rising auction clearance rates do show some signs of a market running hot, but it's been running that way for months. Clearance rates in Sydney for the past twelve months have averaged 74.6 per cent, which is an increase from the 70 per cent in the same period last year. More recently the average has risen above 80 per cent.
Adding strength to expectations of another good Spring selling season are falling interest rates on Australia's international financial debt that has sunk to seven year lows. This translates into reduced interest rates on mortgage loans from Australian banks and lessens any possibility the Reserve Bank of Australia will raise interest rates that are now at a 13-month low.
A Bloomberg survey of 31 economists concluded that the central bank would keep the rate unchanged at 2.5 per cent at its September meeting. The RBA behaved as predicted, saying in its monthly statement: “In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”
There's every reason for the RBA to keep interest rates low and give the housing construction market all the help it needs to replace now-declining levels of investment formerly pumped into the mining industry. Mortgage lending to investors in the 12 months ended July surged 8.9 per cent which was the fastest rate of increase since May 2008.
One effect of the recent steep price increases in Sydney property has been compressed rental yields which make investors focus on capital appreciation rather than rentals to give them returns on their investment returns. But this hasn't dampened buyers' ardour for property in the least, according to John McGrath, CEO of property group McGrath Estate Agents.
“I believe this market has at least two years left in its growth cycle before we see a plateauing," he said, adding that Sydney’s current rate of growth would moderate to a more sustainable five to ten per cent per annum over the next two years.
There are some economists who are concerned about speculation pushing Sydney prices to unsustainable levels. This concern is understandable when we consider that Sydney home prices are now 20.8 per cent above their previous peak.
In a submission to the financial system inquiry led by former Commonwealth Bank chief David Murray, Standard & Poor's Rating Services warned against channelling more credit into the housing market.
"Greater access to housing credit may put further strong upward pressure on house prices. This would increase the risk of a disorderly correction in property prices down the track, which may hurt economic growth and risk financial instability," it said.
Beware of offshore shocks
Fast-rising real estate prices always bring out the voices of doom. Standard Life's chief economist Jeremy Lawson, a former RBA senior economist, said Australia's housing market was 20 to 30 per cent overvalued and warned the country is highly vulnerable to any international or domestic shock.
"Overall financial conditions have probably been too loose and that has undermined longer-run financial stability," he said.
He told ‘Business Spectator’ he’s concerned that the high household debt-to-income ratio in Australia leaves the country exposed should there be another economic shock offshore.
How this might happen was outlined by Financial System Inquiry chairman David Murray who said Australia's financial risks are concentrated in real estate. Speaking on ABC TV's ‘The Business’, Mr Murray warned that Australian banks are still very reliant on foreign money to fund home and business lending, and cash could dry up in the event of a global crisis.
Someone else close to the action whose voice really counts - Reserve Bank governor Glenn Stevens, said that our credit growth of six per cent a year is 'modest' and that Australia's household debt levels are sustainable.
However, addressing the Committee for Economic Development of Australia recently, Mr Stevens said the RBA's monetary policy was aimed at stimulating business investment and generating employment.
"It is stating the obvious that at present, while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that."
Not that the RBA would condone making it easier for smaller lenders to pump massive amounts of credit into the housing market. The Bank said recently that it feels the supply of mortgage finance now available is ample: "Therefore, any proposed policies that could further increase that supply should be subject to rigorous analysis of their costs, benefits to consumer and risks to financial stability."
Writing in the Sydney Morning Herald's 'Business Day', Michael Bleby, Mark Mulligan, and Alana Schetzer questioned whether this year prices will be pushed into what they call 'dangerous territory'.
"Concerns about an out-of-control housing market could lead the Reserve Bank to apply the brakes. At the more extreme end, some commentators warn of bubble-type scenarios that end with a housing market collapse", they warned.
They said that competition is so rugged in Sydney that people who have missed out at auction on the properties they wanted have become more aggressive and can be emotionally-driven into paying too much for properties at auction.
They quoted HSBC bank's chief economist for Australia and New Zealand, Paul Bloxham, who said: "I don't think we have a housing bubble overall, but there's some froth in the Sydney market and some of the potential house purchasers need to be wary."
He cited figures showing that in July, investors accounted for 44 per cent of all new housing loan approvals in NSW, and said it's a sign that people are getting carried away.
To be sure, the market is rising, but it is now doing so at a slower pace than last year. The number of houses sold in Sydney in the first five months of last year rose 28 per cent to 37,719 from the 31,307 sold between January and May 2012. This year the figure is up again, but by a less staggering 6.2 per cent to 40,068.
Rich Harvey, who is CEO of buyers' agency propertybuyer.com.au, said he thinks things are under control: "The key thing that will continue to keep the market tempered is people's incomes. They can only buy what they can afford to borrow. I don't see the market as frothy. I see it as very competitive and very strong."
The ANZ Bank's chief economist Warren Hogan said: “The perceived expensiveness of our property market is, as much as anything, a social issue. We simply don't have the speculative credit element there to describe it as a bubble. Low-income earners getting heavily leveraged was the problem in the United States; we don't have that issue here."
Writing in the Sydney Morning Herald’s ‘Money’ section, economics writer Daryl Dixon outlined the conditions under which property prices could begin to slip off their highs: “While it may be some time off, a…downward ratchet in prices will start when interest rates rise again and when new housing developments result in an oversupply in the major locations”.
As we are now experiencing a prolonged period of low and stable interest rates, together with a construction industry that’s struggling to build 30,000 homes this year when at least 40,000 are needed, this year and every year for the next fifteen years just to catch up with the backlog, Mr Dixon's downward movement seems a long way off.
Sources:
'Beware the 'disorderly correction': Standard & Poor's warns on overheating mortgage market', Clancy Yeates, Sydney Morning Herald, 5 September 2014
'Sydney property market booms into spring', Andrew Wilson, Domain, 5 September 2014
Bloomberg News
'Draghi Cuts Mortgages 17,000 Kilometers Away', Michael Heath, Bloomberg News, 31 August 2014
'Housing market heats up: strongest winter gains since 2007', Michael Janda, ABC News Online, 1 September 2014
'Melbourne, Sydney lead winter house price surge', Mark Mulligan, SMH Online, 1 September 2014
'Test looms for Sydney, Melbourne real estate ', Larry Schlesinger, Australian Financial Review, 28 August 2014
'As in shares, so in property: Skip the hype, grasp the detail', Marcus Padley, SMH Business Day, 29 August 2014
'Spring in the property market may be a leap too far', Michael Bleby, Mark Mulligan, Alana Schetzer,
SMH Business Day, 30 August 2014
'Don't get burnt by the property market', Daryl Dixon, SMH Money, 31 August 2014
'Aust housing may be 30% overpriced: expert', Business Spectator, 25 August 2014
'David Murray warns Australia's financial risks concentrated in real estate', Michael Janda, Neal Woolrich and Ticky Fullerton, ABC News online, 29 August 2014
The Tiger that is Sydney Property
Wed, 20 Aug 2014Even seasoned followers of Sydney's property trends are finding it hard to believe the strength of the current real estate market.
Figures from the Australian Bureau of Statistics show that Sydney property prices rose by 3.1 per cent over the June quarter and by 15.6 per cent over the past year. It's now clear that the most recent boom is still with us as one record after another is overtaken.
Writing in Australian Property, self-described 'unconventional economist' Leith van Onselen expressed his thoughts about real estate activity in the city he calls 'investor central'.
"The speculator frenzy that has engulfed Sydney’s housing market continues to reach absurd proportions, with today’s Lending Finance data for June, released by the ABS, once again smashing all records, with both the value and proportion of mortgages going to New South Wales investors surging to another all time high."
Eight months ago many analysts were issuing cautions that an expected rise in interest rates from the Reserve Bank of Australia would bring an end to the upwards prices curve by mid-year. Some even forecast a price decline, quoting global experts who declared Sydney property was overpriced and existing levels couldn't be sustained.
Those overseas experts, including the US-based International Monetary Fund, viewing Australia from their desks in Brussels, New York, London or Bern got it wrong. But perhaps we should be charitable and admit that even Australia's own economists are finding the present market conditions astonishing.
Investors are driving the bus
The hunger for property is largely in the appetites of investors. The Domain Group's senior economist Dr Andrew Wilson attributes the market's strength to ongoing speculative buying activity from investors, although he's calling an imminent end to the frenzy.
"New South Wales investors make up nearly 50 per cent of the investor market in Australia," he said.
"I think we'll start to see prices growth tracking backwards now as affordability constraints work their way into the market. Clearly the December quarter last year was the peak in terms of prices growth."
The HSBC's chief economist, Paul Bloxham, is on the same track: "The investor share of new housing loans is around record highs," he said.
"I don’t think Australia has a housing bubble but I do think that if the current trends were to continue, particularly in the Sydney market, that would start to become a bit worrisome."
Some slowing in the rate of growth has already been seen in figures from the Australian Bureau of Statistics. They show that Sydney's house prices growth halved in the first quarter of this year, rising by just 2.4 per cent after a lift of 5.4 per cent in the December quarter.
In an AAP media release finance journalist Jason Cadden quoted JP Morgan economist Tom Kennedy who expressed his firm's doubts about the longevity of Sydney's accelerating property price increases.
"We think that prices will moderate a little bit further as activity cools, particularly in Sydney where price growth remains very strong at levels that won't be sustainable."
Another analyst who sees prices moderating is Housing Industry Association economist Diwa Hopkins who said she expects the rate of price rises to ease later in the year as more housing stock becomes available.
"Continuing improvements in the supply of dwellings will be important in taking some of the momentum out of dwelling price pressures, and we may already be seeing early signs of this," she said.
ABC Business News reporter Michael Janda also sees some signs that the prices surge may have peaked.
" The heat in Australia's largest housing market is illustrated by Sydney's median dwelling price of $650,000 sitting more than $100,000 above the next dearest capital, Melbourne," he said.
He quotes RP Data's research director Tim Lawless who says the past six months have shown a slower pace of price appreciation than the peak of the boom in winter and spring last year, and he expects this moderation to continue.
"What is likely...is that the rate of capital gain will continue to reduce, particularly in those cities where affordability constraints are the most significant and rental yields are the lowest."
Mr Lawless also sees investor interest shifting away from free-standing houses. "Additionally, with affordability becoming a more pressing issue in Sydney we would expect buyers to be seeking out medium to high density dwellings located close to the city rather than where they could afford to buy a detached home."
St George Banking Group senior economist Hans Kunnen told Domain's Toby Johnstone that he is expecting house price growth to slow as buyers are increasingly 'choked out'.
"There comes a point when you can’t raise a deposit even if you lean on mum or dad," he said.
"You just don’t feel confident enough to borrow that much money."
Clearance rates stay high
Even though it's been a cool winter the Sydney property market has maintained high levels of clearance rates at weekend auctions, although the numbers of properties on offer have declined slightly from earlier this year.
Importantly, the Reserve Bank seems comfortable with current economic conditions - so comfortable that interest rates have been held steady for a record twelve months and the RBA has given the impression that no plans are in place to change them.
On the economic front we see some signs of rising unemployment although these have been muddied by change to the way in which the ABS calculates its employment figures.
We also see that consumer confidence is weakening, but the reasons for this could be a combination of several unrelated factors including the unmasking of more corrupt politicians by ICAC and continuing problems in the Middle East.
Spring is almost upon us and this is the start of the traditional 'selling season' for Sydney property. So what are the chances the property boom could reignite?
National Australia Bank global head of research Peter Jolly sees no immediate major changes looming in some of the market's key drivers: “Recent house price appreciation has been driven by more than simply a strongly growing population.
"Low interest rates have encouraged domestic investors to make asset allocations into housing. Foreign investors have also been buying. A reduced rental return on housing would eventually discourage domestic investors but that probably comes with a lag."
There has been a substantial increase in the construction of new housing in Sydney, mostly of the high-density variety. A recent NAB report authored by Mr Jolly pointed out that in January this year building approvals reached 17,800 in the month which represented a 37-year high and was the second highest tally of all time. About a quarter of these approvals were for apartment buildings of four storeys or more.
The increasing number of newly-constructed dwellings has helped to reduce the city's chronic undersupply of accommodation and may have been a contributing factor to a recent slowing in the rate of increases in rental rates across Sydney.
Will the boom reignite? Probably not. The present level of prices being paid for Sydney property is appreciably higher than twelve months ago and auction results show a slowing in their rate of appreciation.
But is the boom over? Not at all. Sydney prices will continue to rise for the remainder of 2014 and demand will remain strong across the metropolitan area.
As Domain Group's Dr Andrew Wilson put it: "Strong auction activity in Sydney over winter will translate into prices growth, although the level of growth will be below last year’s boom-time results."
The tiger that is Sydney property is alive and well. But even tigers have to rest now and then.
Sources:
' Auction clearance rates keep climbing', Dr Andrew Wilson, Domain, 18 August 2014
'Sydney house prices up 3.1 per cent', Toby Johnstone, Domain, 12 August 2014
'Sydney property too hot, Walker' Business Spectator, 18 August 2014
'80 per cent clearance rate for Sydney property', Stephen Nicholls, Domain, 10 August 2014
'Auction markets are expected to pick up pace by the end of the month', News.com.au, 8 August 2014
'Sustained growth ahead', John McGrath, Sydney Morning Herald online news, 9 August 2014
'Are we heading back into a boom?', Andrew Wilson, Sydney Morning Herald, 8 August 2014
'Signs property prices could settle', Bianca Hartge-Hazelman, aussieproperty.com, 29 July 2014
'Home prices surge as real estate recovers from autumn slowdown', Michael Janda, ABC News, 1 August 2014
'Sydney leads house price surge', Jason Cadden, AAP media release, 12 August 2014
'ABS house price gains ease', Leith van Onselen, posted by Unconventional Economist in Australian Property, 12 August 2014
'Sydney property rocket exits solar system', Leith van Onselen, posted by Unconventional Economist in Australian Property, 11 August 2014
'China’s corruption crackdown could deliver a blow to Australia’s property market', Robert Gottliebsen, Business Spectator, 14 July 2014
'Sydney house prices up 3.1 per cent', Toby Johnstone, Domain, 12 August 2014
'Commonwealth Bank chief Ian Narev rejects housing market warning', Clancy Yeates, Business Day, 13 August 2014
Sydney Real Estate - the never-ending story
Fri, 18 Jul 2014When a major upswing in property prices begins to slow down it's often said that a 'boom' has ended. Meanwhile, property owners can sit back and enjoy the fruits of their investments while waiting for the next upswing to begin.
Those who missed out might find some consolation in reading articles about how renting can be as rewarding as buying. This month the Reserve Bank of Australia released a report by two of its researchers that sought to answer the age-old question of whether it's better to rent or buy a home, 'better' in this case meaning 'cheaper'.
The RBA report found that if house prices keep growing at the average rate of growth experienced over the past sixty years buying a home would be about the same cost as renting. It also said that, if house price growth were to slow in future, households would be better off renting.
Before leaping into the bonds of tenancy, prospective homeowners should note that according to the RBA house prices rose by an average of 2.4 per cent a year over the past sixty years and by just 1.7 per cent a year over the past decade.
No, this isn’t Sydney we’re talking about. In fact, some other details from the RBA’s study make us wonder just where this report looked for information.
At least the RBA concluded that there were no signs of the dreaded ‘bubble’ in real estate prices, based on a comparison of rental expenses to purchase costs.
The Domain Group’s senior economist, Dr Andrew Wilson said that the paper’s findings were based on the "heroic assumption of long-term falling house price growth".
He said the Bank was practicing ‘megaphone economics’ and was really reacting to concerns about the high level of speculative real estate purchasing. He also said it was unlikely that the annual rate of growth in Sydney would fall below the long-term average in coming years.
Owning beats renting
The AMP’s Dr Shane Oliver said that he expected a period of below-trend annual house price growth to follow the high rates of the past two decades, but said that even if growth were to fall below the historic average of 2.4 per cent, there was still a strong argument for purchasing property.
Dr Oliver stated something that every homeowner knows when he said: "People who buy a property are forced into saving, so even if you have to pay off a mortgage over 20 or 30 years, you tend to end up with a better asset base than renters, who tend to spend their money."
St George Banking Group senior economist Hans Kunnen told Domain’s Toby Johnstone that he didn’t expect real estate prices to fall below their long-term averages just yet: "We are so far behind in the supply of housing that we still have some catch-up to do," he said.
Confirming ongoing high levels of buyer interest, Sydney real estate auctions continued to record clearance rates above 70 per cent, not too far from the 80 per cent figures during last year’s boom times.
More important is that the number of properties on offer at most auctions this year has been well above the numbers during most of 2013. There is no shortage of sellers just as there is no shortage of buyers. Only the rate of price increases is showing signs of slowing.
One market segment that’s now performing especially well is the Sydney prestige property market – properties from $1 million to $3 million, with exceptional auction clearance rates well above 80 per cent and even into the 90s in places like the upper north shore, lower north shore and northern beaches.
Also indicative of market strength are the latest figures from the Australian Bureau of Statistics that show the number of seasonally adjusted owner-occupied home loans approved in NSW in May rose by 1.3 per cent.
Writing in the Australian Financial Review, Sydney Property writer Rebecca Thistleton says there are “modest expectations” about future price rises.
“Economists and property commentators have reduced growth forecasts of between 6 and 10 per cent to between 5 per cent and 8 per cent for this year.”
“Growth has moderated in Sydney, the country’s hottest market, where prices jumped 15 per cent last year”, she added.
Her article quoted RP Data research director Tim Lawless who said the market was slowing but demand still exceeded supply: “I don’t think prices have peaked, but it is likely the market has moved through the peak of the growth cycle,” he said.
She also quoted Stockland chief executive Mark Steinert who said Sydney’s property would see a “golden decade” of stable growth around 3 per cent to 4 per cent a year due to the ongoing undersupply of housing.
Is the boom really over?
Jean-Paul Pelosi from the CBA’s MyWealth website, asks the question: “Is Sydney's property boom really over?”
He said that he’d asked a number of property experts in recent weeks where the Sydney market currently sits, and most of them had the same answer which is that price rises should ease but not stop.
Mr Pelosi notes that the home loan to income ratio will eventually widen so much that investing in property is no longer feasible, but although the current cycle has eased a little of late it is by no means grinding to a halt.
He also tells why some parts of Sydney are still experiencing boom time price rises: “Demand is the driving force here and even as the weather has cooled it’s been insatiable.”
RP Data’s analyst Cameron Kusher expects moderating rates of growth in the near future, according to an article by Kylar Loussikian in The Australian.
“The last six months of last year saw strong growth across the market, but that was coming off the back of strong momentum in the first half,” Mr Kusher said.
“This coming year doesn’t have the same level of momentum, but the real test is the spring.”
Writing in the myRPData Property Pulse, Mr Kusher said he foresees a slowing of investor activity later this year.
“RP Data anticipates that affordability constraints will start to impact on value growth in Sydney and Melbourne throughout 2014 as a proportion of potential buyers continues to be squeezed out of the market as values move higher.”
The National Australia Bank’s index of housing market sentiment has also slipped since housing price increases began their return to more ‘usual’ levels.
The bank’s Quarterly Australian Residential Property Survey for the June Quarter of 2014 has recorded a nationwide reduction in the NAB’s residential property index of 17 points, down to its lowest level in the past twelve months.
NAB Group Chief Economist Alan Oster said Sydney was still expected to experience price growth although not all capital cities will perform as well.
Across Australia NAB is forecasting average house price growth of 4.6 per cent through the year to June 2015 and 3.2 per cent in the year to June 2016.
“Expectations both in relation to house prices and rents have come off, the market is getting closer to flattening out a bit,” he said. But ‘flattening out’ isn’t the same as calling a halt to the amazing growth of Sydney property that we’ve seen in recent years.
The price cycle has its periods of exceptional growth as well as times when growth slows and gets out of the headlines, but as long as demand exceeds supply the curve will inevitably track upwards.
It’s worth repeating the words of CBA MyWealth’s Jean-Paul Pelosi: “Demand is the driving force here and even as the weather has cooled it’s been insatiable.”
Sources:
‘Renting or buying an even money call says Reserve Bank’, Michael Janda, ABC News online, 14 July 2014
‘Sydney auction market bounces back – for now’, Dr Andrew Wilson, Domain, 13 July 2014
‘RBA using ‘megaphone economics’ says analyst’, Toby Johnstone, Sydney Morning Herald, 16 July 2014
‘Sydney Auction Clearance Rates Lowest For A Year - Dr Andrew Wilson’, Michael Yardney's Commentary, Property Investment, 5 July 2014
‘Interest rates ease fears of housing market crash’, Australian Financial Review, 21 June 2014
‘Is Sydney's property boom really over?’, Jean-Paul Pelosi, MyWealth, 24 June 2014
‘Property prices through the roof with Sydney leading charge,’ Kylar Loussikian, The Australian, 2 July 2014
myrpdata Property Pulse, Introduction by Cameron Kusher, 9 July 2014
‘Property sector cools, but new report says no housing bubble to bust’, ABC News online, business reporter Michael Janda, 10 July 2014
‘Property market sentiment and foreign investment down,’ News.com.au, 10 July 2014
Interesting Times For Sydney Property
Thu, 19 Jun 2014Interesting times for Sydney property
For those who observe and analyse the Sydney property market these are indeed interesting times.
Analysts at investment bank Morgan Stanley issued a note to investors in June saying a potential glut of new apartments could affect unit values in inner city areas, while house prices could drop unless the RBA lowers interest rates.
The report said "without further interest rate cuts the current housing cycle is in danger of gradually fading."
It noted that during the past year, 81,000 apartments were approved nationwide - almost twice the long-term average of 44,600 approvals.
An interest rate cut would ease the threat of an oversupply of new apartments in inner city areas as a contributing factor to falling prices, the report argues.
The International Monetary Fund (IMF) recently said in its official blog that Australia has the third highest house price-to-income ratio in the world.
The IMF's Global Housing Watch says prices are "well above the historical averages" in Australia and that it is critical to avoid another unsustainable boom in house prices like the one that preceded the global financial crisis.
IMF deputy managing director Min Zhu said in a blog post that regulators like the Reserve Bank and the Australian Prudential Regulation Authority should move from "benign neglect" and take steps to contain housing booms.
The report also noted that Australia’s price-to-rent ratios are “well above their historical averages”.
In an article about the IMF’s report, Sydney Morning Herald banking reporter Clancy Yeates quoted Barclays economist Kieran Davies who said prices were ''flashing red'' with prices at 4.3 times household income and 28 times annual rent, both just below record highs.
However, Mr Yeates also noted that the latest Reserve Bank of Australia figures show that although housing lending was growing at its fastest annual pace in three years, it is still well below the pace reached before the GFC.
CommSec economist Savanth Sebastian told the Herald’s Penny Pryor that we should expect a retreat in the sales figures: “I think the growth is not going to be what it was in the last 12 months,” he says.
He added that the kind of growth we’ve seen over the past 12 to 18 months is “not sustainable over the longer run”.
Sebastian believes we’ll see an increase in supply over the next few months as the large number of properties that have been approved in the past couple of years are completed and come onto the market.
Like most analysts, he doesn’t see any signs of a crash in property prices, although there’s little doubt that there will be ‘restrained’ growth in prices compared to the recent double-digit rises in recent times.
Investment advisor David Potts agrees, while noting that property prices are coming off a relatively high base.
“Thanks to Australia’s strong population growth and the fact our low-density living gives housing a high land component, which is the part that appreciates in value because buildings depreciate, our property booms tend to fizzle out rather than collapse.”
Mr Potts says that, on the two measures of affordability – mortgage repayments or home prices relative to disposable household income – property values are too steep.
“Treasury forecasts national income will grow only three per cent next year, which rather limits the capacity, unless you’re an overseas buyer, for property prices to rise much more.”
He does say that the biggest threat to further growth in property prices is the rapid rise experienced in recent times.
“This has prompted building approvals for units to jump 26 per cent and for houses 21 per cent in the past year, way more than the population has been growing, so there’s going to be a lot of extra supply soon.”
The anticipation of this extra supply prompted the Reserve Bank of Australia to keep interest rates at the same relatively low figure of 2.5 per cent at its June meeting.
On another positive note the RBA has shifted from predicting that low rates would stimulate a rise in housing construction activity to stating that the lift in housing construction ''is now under way''.
The Domain Group’s senior economist, Dr Andrew Wilson, said the RBA is taking a wait-and-see approach and that rates are likely to stay where they are.
“Unemployment rates have remained steady with solid jobs growth, although jobless levels in some states are still stubbornly high; latest wage growth data is benign reflecting the low inflation economy with the level of real wages generally declining.”
Dr Wilson says there is potential for “solid price growth over winter, although not at the strong levels of 2013”.
RP Data research director Tim Lawless is also hesitant about predicting strong prices growth for Sydney, noting that the city’s property values dropped 1.1 per cent in May.
He told the Herald’s property editor, Stephen Nicholls: “Historically, housing market conditions have softened in April and May as the market rebalances from what is typically a seasonally strong first quarter and also as a result of cooler climatic conditions during the autumn and winter months.
‘‘Outside of the seasonality, we have been seeing signs that the housing market is at or is approaching the peak of the growth cycle.’’
He added that a recent deterioration in consumer confidence reported in the Westpac/Melbourne Institute Consumer Sentiment Index – a drop of 16 per cent since last September, indicated that this may also be playing a role in the slowdown of housing market conditions.
Malcolm Maiden, writing in the Herald’s ‘Business’ section, put the blame for the decline in confidence squarely on the Federal Government’s budget introduced to the public by Treasurer Joe Hockey.
“It is influencing household sentiment, for sure. The most closely watched sentiment index is curated by Westpac and the Melbourne Institute, and it fell by 6.8 points to 92.9 points after the budget.
“Of those surveyed, 59 per cent said they expected the budget to financially hurt them,” he added.
The NSW Government moved to help beleaguered first-home buyers in this month’s state budget, announcing that it will raise the threshold for the first-home buyers’ grant to $750,000. This will allow more home buyers to qualify for assistance, but only if they purchase a new home.
In 2013 just 7800 home owners qualified for the $15,000 grant, compared with 36,600 in 2011 after which the scheme was restricted to the purchase of new homes only, so the rise in the grant threshold is not likely to have much of an impact on the overall market.
Of greater importance was Premier Baird’s announcement that the NSW government has freed up land for 6600 new homes in Sydney’s northwest.
“In western Sydney, there is a massive housing boom occurring and the unlocking of up to 6600 new housing lots at three sites will boost housing supply and make homes more affordable,’’ Mr Baird said in a statement.
Cameron Kusher, writing in Property Observer, says that current data suggests that the growth in the number of new owner occupier housing finance commitments has peaked, although there is still plenty of activity in the owner occupier refinance and investment segments of the market.
“Total returns from residential property have been strong over the past 12 to 18 months; however, we believe that the peak level of capital growth has now passed and rental yields (will) continue to fall.”
Although total returns for investors are still strong they are likely to weaken somewhat. At the same time prices growth is softening and the supply of housing stock is about to increase.
There are some indications that the recent property price boom may have peaked, although Sydney auctions have rebounded after a pause for the June long weekend.
Looking at the longer term, there are few doubts that continuing demand together with ongoing low interest rates will ensure that Sydney property remains one of the best investment options for both capital growth and return on investment.
Because of this, it’s also very likely that the new properties coming onto the Sydney market over the next 12 to 18 months will find owners at the same rapid rate as existing properties are doing now.
Sources:
‘Owner-occupier housing finance commitments topping out,’ Cameron Kusher, Property Observer, 12 June 2014.
‘Property prices about to drop without interest rate cut, warns report,’ Eryk Bagshaw, SMH Business Day, 17 June 2014.
‘Patience suggested as property sales rush eases,’ Penny Pryor, Sydney Morning Herald, 31 May 2014.
‘Property prices feel warmth before chill,’ David Potts, Investing, Herald Money, 4 June 2014.
‘Rates likely to remain on hold over 2014,’ Domain, Real Estate News, 3 June 2014.
‘Property prices head south,’ Stephen Nicholls, Domain, Real Estate News, 2 June 2014.
‘A winter chill for housing cools RBA hopes for a construction lead recovery,’ ABC News Online, Updated 2 June 2014.
‘Reserve Bank quiet on Hockey budget,’ Malcolm Maiden, Sydney Morning Herald ‘Business,‘ 4 June 2014.
‘Home prices outpacing earnings: IMF,’ Clancy Yeates, Sydney Morning Herald, Banking and Finance National, 12 June 2014.
‘Era of Benign Neglect of House Price Booms is over,’ Min Zhu, blog posted on 11 June 11 2014 by iMFdirect
Sydney Property Takes A Well Earned Break, Gradually
Tue, 20 May 2014Geoffrey Chaucer wrote in 1374: "All good things must come to an end". He might have used these same words to describe the great Sydney real estate boom of 2013-2014.
History and the cyclical nature of property prices gives us every reason to expect that the boom will end in a uniquely Sydney fashion, and that a time of rapidly-rising values will gradually give way to a period of stability.
With the Easter holidays, Anzac Day weekend and the Federal Election behind us, we head towards winter and seek to gauge the property market's direction.
Figures from the Australian Bureau of Statistics (ABS) show that Sydney’s house price growth fell from 5.4 per cent in the December 2013 quarter to 2.4 per cent in the first quarter of 2014, while apartments’ price growth slipped from 4.1 per cent to just 2 per cent in the same period.
ABS figures also show the total number of owner-occupied dwellings financed fell from 46,082 in the December quarter to 45,570 in this year, while the size of the average loan has also declined from $363,800 to $355,500.
Australian Property Monitors senior economist Andrew Wilson declared the end of the property boom, saying: “The sugar hit of low interest rates has washed through the market; now we'll have a flatter housing market dependant more on incomes growth and local economic factors.''
Dr Wilson says the current phase represents "the transition from a strong market to a solid market."
AMP Capital chief economist Shane Oliver said: ''I think we have seen the best of Sydney's house price growth.
''Sydney probably has peaked in terms of momentum … affordability has been deteriorating.''
Not a full stop
This of course doesn’t mean the period of rising prices has come to a full stop. The national ABS Residential Property Price Index (RPPI) rose by a seasonally adjusted 1.7 per cent in the March quarter.
Director of RPPI at the ABS, Ms Robin Ashburn, said that, while the quarterly growth in Sydney had slowed from the December quarter, throughout the year house prices had risen 16.6 per cent and attached dwelling prices by 13.7 per cent.
The chief economist for advisory firm Urbis, Nicki Hutley said "The growth rate appears to be levelling off – as you'd expect given the rises in prices in major cities over the last year," but noted that activity in the marketplace was still at a high level.
Crunching the numbers a bit further in the Crikey Property Observer, Pete Wargent says that “Sydney has been one of the weakest performing property markets over the past decade, with house prices lagging incomes significantly since 2003.”
He says that Sydney has been “the best risk-adjusted bet for investors in Australia over the past five years” and that over the medium term prices will eventually catch up again sending the market up towards its next cyclical peak.
And despite some decreasing fervour among local buyers who appear to be giving the Sydney market a bit of a break, Wargent sees overseas buyers stepping up their activities.
"As property prices cool in Hong Kong and Singapore, which have long been magnets for Chinese investment, more money is flowing to real estate markets such as New York, London and Sydney.”
Autumn not so quiet
Jean-Paul Pelosi is a freelance writer who’s based in Sydney and writes for the Commonwealth Bank’s MyWealth investment hub. He noted that autumn is generally a quieter time for Sydney real estate sales and considers the chances of this year following suit.
“It doesn’t seem likely given the high levels of listings to this point and the rate at which those properties are being scooped up by buyers.
“For example, there were 1,471 auctions in Sydney last week (12/13 April) according to RP Data, which represented a 30% rise on the previous week when there were 1,137. The clearance rate at the weekend was 78.5%, compared to 67% on just 529 auctions a year earlier.”
RP Data’s research analyst, Cameron Kusher agrees: “I suspect that fewer properties will be taken to auction but the low mortgage rates and strong buyer demand currently being experienced across Sydney will result in auction clearance rates remaining at levels close to those recorded over the year so far,” says Kusher.
Managing director of buyers’ agency Propertybuyer.com.au, Rich Harvey also sees the market’s momentum persisting this year: “I think it will continue through the rest of the year but at a slower rate,” he says.
“You’re still going to get some capital growth and some price appreciation but at a reduced rate. We won’t get the unsustainable 15% year on year price growth but we’re most likely to see a 7-8% calendar growth rate from January to December.”
Harvey says there are vendors who have held off until now and will to try sell their properties in the coming months, which he thinks will keep volumes high.
“The frenetic pace of the market is slowing but at the end of the day buyers at any level, whether they’re first homebuyers or third homebuyers, need to recalibrate their expectations to meet the market.”
Tim Lawless of RP Data said the rate of growth in values had slowed in April, following strong increases in March and the first quarter of the year. He says that the latest figures show growth is now at a more sustainable rate.
“It suggests to me that the market is still at a very strong place but probably right at peak growth,’’ he said.
“When you look at a market like Sydney I think that (a) very high median price is quite reflective (and) that we are seeing a lot of activity in the marketplace now... at the upper end of dwelling prices.
“We are seeing more activity across the premium marketplace, million-dollar plus and less activity down the more affordable end as we are seeing first home buyers increasingly priced out of detached housing.’’
Interest rates stable
Stability in interest rates has certainly been achieved. For the ninth consecutive month the RBA kept its cash rate at an all-time low to combat the effects of the high Australian dollar and stimulate the growth of non-resource sectors.
Loan Market director Mark De Martino commented: “The cash rate has been under 3 per cent for a full year now - we’ve never had rates so low for so long.
“The combination of historically low interest rates and rate stability are helping homeowners and buyers build confidence in the property market.
“The RBA has made it clear the high Australian dollar is negating some of the pressures to move rates upwards and it’s unlikely we’ll see a rate move in the next few months. Chances are we will go a full year without a rate movement,” Mr De Martino said.
And that other roadblock to stability, the Federal election, is now behind us and has thankfully left the property sector unscathed.
Housing could have been targeted in a number of ways, not the least of which is doing away with tax-advantaged negative gearing. The $6 billion per annum it’s said to cost the government in lost tax revenues wasn’t tempting enough to override the political and economic difficulties its withdrawal would cause.
Financial commentator David Koch told News Limited that the time is probably near when its rules will change.
“Given negative gearing doesn’t appear to be stimulating much in the way of new housing investment - the original intention - and we’re approaching the peak of a property boom, the timing of a change in future concessions is probably right,” Koch said earlier this month, but the Treasurer left it off his hit list regardless.
Also preserved was the Capital Gains Tax-free status for owner-occupied homes, and the family home continues to be excluded from pension means testing.
In a May media release, Propell National Valuers highlighted the risk of the abolition of negative gearing in the budget, which it says is only politically possible at a time of low interest rates and a rising market.
“This was reportedly considered by the government, along with curbs on superannuation tax breaks and including the family home in the assets test for pensions, but these have been dismissed as politically impossible.
“Even disregarding the voter backlash, the government has to consider what it can get through a hostile senate.”
Turning its eyes toward the future, Propell says the greater risk to the housing market lies, not in any specific targeting in the budget, but in the net impact of the expected reduction in government spending, increase in taxes by any name and employment levels.
“These changes, no matter how they are arrived at, will reduce the purchasing power of consumers and increase unemployment through reductions in the size of the public service.
“While these things can be argued as necessary, the net impact on the real estate market will be to reduce demand.”
In the meantime, as the boom slowly comes to an end and the indicators avidly watched by market analysts return to their normal settings, it’s business as usual for Sydney real estate.
Sources:
‘Sydney house price growth halves in 2014,’ Toby Johnstone and Antony Lawes, Domain, 13 May 2014
‘Federal Budget 2014: Homeowners and the property sector winners,’ John Rolfe, News.com.au, 13 May 2014
‘Pace of house price rises starting to slow, according to Australian Bureau of Statistics data,’ Justine Parker, ABC News online, 13 May 2014
‘House prices rise 1.7% in March,’ Bianca Hartge-Hazelmanin, Business Day, Sydney Morning Herald, 13 May 2014
‘Sydney's great property boom appears to have ended,’ Domain, Toby Johnstone, 24 April 2014
‘Property prices easing in capital cities — Australian Property Monitors,’ Sonja Koremans, News.com.au, 23 April 2014
‘Auction market steps down a gear,’ Domain, Andrew Wilson, 5 May 2014
‘Property price growth slows throughout Australia,’ News.com.au, 1 May 2014
‘Will Sydney property continue its hot streak after Easter?’ Jean-Paul Pelosi, CommBank MyWealth, 15 April 2014
‘Sydney market to slow over next five years,’ Staff reporter, Real Estate Business, 27 March 2014
RP Data Property Pulse, Cameron Kusher, 30 April 2014
‘What's going on in Sydney's property market?’ Pete Wargent, Crikey Property Observer, 27 April 2014
NSW Excerpt, May Market report, Nila Sweeney, Your Investment Property magazine, May 2014
‘House price boom at an end’, press release, Propell National Valuers, 5 May 2014
Is this the peak of the Sydney property boom?
Thu, 24 Apr 2014The cyclical nature of real estate prices is well-known. For a while nothing happens, then prices surge upwards and then a reality check ensues. Market watchers scramble to identify the peak of the latest boom and eventually prices begin to stabilise. Are we there yet?
RP Data says half of Australia's capital cities are now at record property price levels, with Sydney the most expensive at 15.8 per cent above its previous peak. Despite this, auction clearance rates are still steaming ahead.
The first Sydney auctions in April brought a new record of ten consecutive weeks of clearance rates above 80 per cent. The median house price was $1.12 million and the median apartment price was $706,500.
The lower north shore reported an exceptional clearance rate of 91.2 per cent following the previous weekend’s 92.5 per cent.
The auction action maintained its momentum when 1100 properties went under the hammer on ‘Super Saturday’ before the two-week break for Easter and the Anzac Day weekend. Australian Property Monitors put the weekend auction clearance rate at 78.1 per cent.
Compare these statistics to just twelve months ago, when the clearance rate was 66 per cent and the average house price was $890,000 while apartments averaged $591,000, and the meaning of the term ‘boom’ is clear. As Dr Andrew Wilson of Australian Property Monitors commented: “We are heading into uncharted territory in the Sydney market...”
At the top end of the market - $2 million plus, there’s now as much action as in the other segments. The number of homes selling for more than $2 million in March is more than double that of the same month last year and record prices for many suburbs have been reported across Sydney.
Even Reserve Bank governor Glenn Stevens implied that Australia is going through a ''boom'' when he used that term in a speech to a conference in Hong Kong, although he was directly referring to residential construction over the next couple of years.
Dream fades for some
There are always tradeoffs when high real estate prices equate to higher amounts being borrowed to finance property purchases. Barclays chief economist Kieran Davies noted that Australian household debt had hit a record 177 per cent of annual disposable income and that house prices were equal to 4.3 times annual income and 28 times annual rent.
A growing number of Australians simply can’t afford the ‘great Australian dream’ of a house on a quarter-acre block with a reasonable commute to their workplaces. Australian house prices leapt almost 11 per cent over the 12 months to 31 March to record levels in absolute terms, with Sydney experiencing capital gains of 15 per cent.
For some the answer is to forego the house and acquire an apartment. Research company Macromonitor found that, while detached houses have traditionally accounted for about two-thirds of new house commencements, the present balance is now about 56 per cent detached and 44 per cent units and townhouses.
But the cost factor alone won’t bring this boom to an end. Much more housing stock is needed in Sydney after more than a decade of serious underinvestment, with the ongoing shortage of supply failing to meet the demand from a growing population.
It was interesting to see that planning approvals for new houses fell back slightly in February after their surge the previous month. However, they’re still 23 per cent above their level in 2013.
There’s even a current Senate enquiry considering ways to improve housing affordability. Although its concerns are more with those in our society who are less well-off, its findings due for release in June will be viewed with interest by all those interested in real estate, from first home buyers to investors, both domestic and those based overseas.
BRW reporter Michael Bleby quoted economist Saul Eslake who criticised the melange of government tax benefits and handouts, saying that priority should go to removing blockages to growth in housing supply.
''What government policy has done has been to inflate the demand for housing by giving more money to buy it with, whilst local governments have constricted the supply of housing through their urban land use and planning policies and by changes in the way they charge for the provision of suburban infrastructure.''
RBA advises caution
In March RBA governor Glenn Stevens warned "we need to be alert to the possibility that the past year of strong rises in dwelling prices leads people to assume that this is the norm".
"Were such an assumption to lead to increasing speculative activity, accompanied by a renewed increase in household leverage with all the associated risks to the housing market ... that would be unwelcome," Mr Stevens said.
Some analysts are already seeing a slowing of the property price spiral. John Edwards, consulting analyst for Onthehouse and founder of Residex, noted that prices are outperforming wages growth and at some point assets such as housing become unaffordable.
“In Sydney, the trend data suggests that house prices are reaching their peak value in dollar terms for this period of growth,” said Mr Edwards.
He cautioned that as consumer sentiment and affordability concerns affect buyers, it is to be expected that housing prices growth in Australia will slow down.
“The Onthehouse data predictions show that Sydney’s annual growth over the next five years will be 4%, Melbourne 3% and Perth 3%. Houses are also still expected to outperform units,” he said, concluding that the Sydney market seems to have peaked.
One of the key factors affecting demand for property is interest rates. At its third meeting of 2014 the Reserve Bank of Australia kept the cash rate at 2.50 per cent for the seventh consecutive month. Loan Market director Mark De Martino suggests those looking to purchase should take a hard look at getting into the market while rates were at a record low.
“With the Aussie dollar surging...we may start to see increasing speculation that the RBA will have to lift rates to protect the economy,” said Mr De Martino.
“If we’re not at the bottom of the rate cycle, we’re pretty close. There’s not much more room to go down.”
Housing supply to grow
CommSec economist Savanth Sebastian told AAP that greater supply of new homes in 2014 would help to restrain further growth in prices: "The strength in property prices has been phenomenal," he said.
“It is likely that increases in land sales, building approvals and new home sales will result in a greater supply of homes over 2014, and, as a result of increased home supply, price gains will become more restrained later in the year."
RP Data research director Tim Lawless said the present rate of growth in dwelling prices was unsustainable: "We expect housing market conditions to cool down as the year progresses.
"If the pace of capital gains doesn't slow, we may see higher interest rates realised much earlier than previously expected."
RP Data’s senior research analyst, Cameron Kusher agreed, adding: ‘‘our view is that the next direction of rates will be a hike but probably not until later this year.’’
National Domain Editor Stephen Nicholls also sees a slowing in prices growth: “Although house prices will certainly rise as a consequence of record auction activity over the March quarter, increases are unlikely to match the near-record levels of growth recorded by Sydney over the December quarter.”
Mr Nicholls concluded that while prices growth is set to continue for the remainder of the year it will do so at “markedly lower rates”.
Sydney Morning Herald business columnist Elizabeth Knight says Sydney property owners are now feeling ‘the wealth effect’ of being 15.6 per cent ahead of where they were a year ago.
“Home owners should be basking in what economists call the wealth effect - feeling richer but without the cash. But with each rise in the property market comes a warning on whether the level of growth is sustainable (or worse) whether property is in bubble territory.”
The Herald’s Glenda Kwek and Toby Johnstone say that interest rates will stay low to stimulate an otherwise sluggish economy: “The stable outlook for interest rates means borrowers can look forward to near record-low mortgage lending levels for an extended period.
“But with the number of prospective buyers at inspections and parties registering at auctions slowing, market watchers think the froth may already be coming out of the market.”
ANZ Bank’s chief executive for Australia, Phil Chronican, said the present level of Sydney house prices is a correction after a decade of slow growth but there was nothing in the market giving the bank any particular cause for concern.
“It’s either going up too quickly or it’s showing signs of running out of steam”, he said. “Frankly we would like a more stable housing market.”
After Sydney housing price rises of 15 per cent in the past twelve months we may indeed be seeing the peak, but a boom that ends with stability isn’t such a bad thing.
Sources:
‘Champagne popped as sellers celebrated Sydney's super Saturday’, Sydney Morning Herald, Stephen Nicholls, Toby Johnstone, Anita Balalovsk, 13 April 2014
‘ANZ boss keeps eye on housing’, Georgia Wilkins, Sydney Morning Herald, 11 April 2014
‘Hammers coming down on dwellings priced above $2m’, Toby Johnstone, Domain, 5 April 2014
‘Boom threatens the great Australian dream of a home’, Michael Bleby, Business Day, 5 April 2014
‘Price growth set to fade’, Andrew Wilson, Sydney Morning Herald Property, 4 April 2014
‘Australia's house prices 'flashing red', debt to income ratio at record levels’, Christopher Joye, Business Day, 4 April 2014
‘Property growth reaches peak’, Onthehouse Data, 26 March 2014
‘Sydney Market reaches its peak’, John Edwards, Residex, 26 Marcvh 2014
RP Data Property Pulse, Introduction by Cameron Kusher ,27 March 2014
‘RBA Rate hold enters 7th month’, Loan Market Media Release, 1 April 2014
‘Markets Live’, Business Day, Sydney Morning Herald, 2 April 2014
‘Aussie home prices hit 18-year high ‘, Belinda Merhab, from AAP, 1 April 2014
‘Reserve Bank leaves interest rates on hold in April’, ABC News Online, by business reporter Michael Janda’, 1 April 2014
‘Capital city home prices surge most on record according to RP Data - Rismark index’, ABC News Online, Michael Janda, 1 April 2014
By business reporter Michael Janda
‘House price growth in all capitals’, Real Estate News , Toby Johnstone, 1 April 2014
‘Prestige market firing as buyers continue to flock to Sydney auctions’, Andrew Wilson, Domain, 31 March 2014
‘Housing bubble fears: property prices could fall 10 to 20 per cent’, Business Day, 31 March 2014
‘Home owners feel the wealth effect’, Sydney Morning Herald, Elizabeth Knight, 2 April 2014
‘Property soars as rates stay on hold’, Sydney Morning Herald, Glenda Kwek, Toby Johnstone, 2 April 2014
‘House auction rates at 80% high’, Emma Partridge, Sydney Morning Herald, 8 April 2014
The Sydney Property Invasion – is this a bad thing?
Thu, 20 Mar 2014The Sydney housing market continues to power ahead with NSW home loan approvals in January an impressive 18 per cent ahead of the same month last year.
Director of finance broker Loan Market, Mark De Martino said that the market for home finance is still growing: "The 51,054 home loan approvals this past January is the highest January total we've seen since 2009.
"As long as interest rates remain low and lenders continue their aggressive moves, we're going to see more growth and more activity in the real estate and finance markets."
He said that the Reserve Bank’s continuing low cash rate and resulting stability had generated consumer confidence and he expected the rate to remain where it is for several months. This seems to have stimulated first home buyers whose percentage of overall lending rose a bit, from 12.7 per cent in December to 13.2 per cent in January, according to ABS figures.
Ruling out further rate cuts in the short term, RBA governor Glenn Stevens told the Commonwealth Parliament's House Economics Committee that the community benefits from rate stability.
"As well as the low level of rates generally, a sense of stability, if we're able to offer that, is something that, at the margins, should be of some help to businesses and households as they make their own plans," he told the committee.
"That's a bit of a shift on our part, where we had been saying that there might be scope to go down a bit more if needed; I don't think we do need to, at this point in time."
Mr Stevens observed that borrowing by housing investors is growing at an annualised pace of around 9 per cent a year.
"Construction of dwellings is set to rise, and probably quite strongly, over the year ahead," he said.
"Over the past three months, approvals to build private dwellings numbered almost 50,000 - that's 27 per cent higher than a year earlier and that's, in fact, the highest three-month total in the history of that time series which goes back to 1983."
If the Reserve Bank continues to leave its rates on hold as it did at its March meeting, this should help Sydney real estate auctions maintain their recent run of record-breaking sales figures.
Dr Andrew Wilson from Australian Property Monitors said that weekend auction clearance rates consistently exceeded 80 per cent over February and into March and that sales levels were unprecedented for this time of the year.
“Auction listings are considerably higher than over the same period in 2013 indicating high levels of confidence from sellers.
“Most suburban regions are recording consistently high clearance rates at auction with the inner west, the upper north shore and south mid-price range markets particularly vibrant.”
He said that he now expected Sydney’s strong housing market to continue at its current level through to mid-year, and added that mortgage rates and costs keep falling which will encourage home buyer activity.
A few worries in the background
One interesting statistic in March was the level of consumer confidence falling to a 10-month low, as shown in the Westpac-Melbourne Institute Index of Consumer Confidence. It’s down nearly 11 per cent from its high levels just after the Federal election.
Westpac senior economist Matthew Hassan said that recent falls seem to reflect employment worries: "The initial declines in December-January looked to be mainly the unwinding of the election-related sentiment boost," he said.
"More recent falls though have had a very clear theme centring on a sharp loss of confidence in the economic outlook and escalating job-loss fears," he said, adding that this didn’t appear to have affected households’ longer-term financial expenditure plans.
In fact, other parts of the economic picture are getting brighter with construction, exports, retail sales, and business profits and confidence all rising.
The Real Estate Institute of NSW wants to maintain the property market’s current high levels of activity, but REINSW President Malcolm Gunning said that for this level of interest to continue, changes must be made to taxes associated with property.
“Now is the time to abolish stamp duty for first homebuyers. Now is the time to reintroduce first home buyers incentives for existing properties. Now is the time to recognise the huge role property plays in the economy,” he said.
Mr Gunning sees the market slowing without some changes being made: “The appetite of the purchaser will diminish. It will happen because the buyers will say, ‘That person got $650,000 for their property last year, I want $700,000’, when it’s really only worth $620,000.
“So as a state, I think we’re probably about 10 o’clock of a 12 o’clock high. When the property clock chimes midnight, all will be reset.”
Domain’s Sue Williams writes that at present the severe shortage of homes for sale in Sydney ensures that the sellers’ market will continue.
“With Easter fast approaching, people planning to sell their properties are torn between waiting until after the holidays are over, and rushing to put their homes on the market now to crack the best deal for their nest egg.
“The experts, however, are mostly of one mind: with a severe shortage of homes for sale, vendors couldn't do better than to beat the Easter bunny's arrival on April 18.”
The Sydney Morning Herald’s business reporter, Glenda Kwek, noted that Sydney home prices continued to rise in February, lifting by 0.8 per cent.
She quoted RP Data-Rismark national research director Tim Lawless, who said the rapid pace of growth in the housing market was expected to slow later this year amid low rental yields as potential buyers struggle with affordability constraints.
"Additionally, with a belief that mortgage rates are likely to start tightening later this year, it may help to quell some of the exuberance we have been seeing," he said.
Is there a foreign invasion?
An issue of growing concern is the incursion of foreign buyers into the Sydney real estate market and its effects on housing costs.
Writing in Business Day, property editor Simon Johansen said that Credit Suisse estimates that $24 billion has been spent by wealthy Chinese on Australian housing.
“And it's not just home ownership heading offshore”, he writes. “Two-thirds of the $51.91 billion in foreign cash spent over the year to June 2013 was for commercial property. Most was sold to Chinese, Canadians and Americans.”
He notes that the idea of foreigners buying 'our' property has become an emotive issue: “It generates anxiety for hard-pressed home hunters watching yet another overpriced property slip through their fingers.”
He says that much of that concern is misplaced, noting that only about 1.6 per cent (by dollar value) of established (that's second-hand as opposed to new) homes in NSW were sold to foreigners in financial year 2013.
Most of the ‘foreign’ money is going into new property, notably the apartments and high-rise towers that are now sprouting up in all major cities, generating a surge in construction that the RBA, among others, hopes will counter the effects of a dwindling resources boom.
Business reporter Max Mason, also writing in Business Day, said that Credit Suisse estimates that Chinese buyers account for 18 per cent of new property purchases in Sydney, and 14 per cent of the supply in Melbourne.
Credit Suisse estimates that wealthy Chinese buyers over the next seven years will spend an additional $44 billion on residential property. The bank said that Chinese buyers are currently spending $5.4 billion a year on Australian properties, with the split relatively even between new settlers and others, which include investors, developers and temporary residents.
But according to the Reserve Bank of Australia, yearly turnover in the housing sector is roughly $360 billion, of which only a little more than 1.5 per cent results from Chinese buying activity.
And, as Dallas Rogers from the University of Western Sydney points out, in 2012 US citizens were the largest foreign investors in Australian real estate, investing $8.1 billion. Foreign investment by Chinese investors in that year was $4.2 billion or just over half that of US investors.
Why we’re so appealing
Why are Chinese investors so interested in Australian property? Still in the pages of Business Day, Stuart Oldfield provides these insights:
“In the past two years Hong Kong has introduced a range of measures aimed at cooling its domestic property market, including a 15 per cent tax on property purchases made by foreigners and a doubling of stamp duty that applies to everyone except permanent residents who are first-time buyers.”
He notes that from January to October 2013, the total number of home sales in Hong Kong plunged 40.5 per cent and economists are forecasting residential property prices in Hong Kong will decline by about 10 per cent in 2014.
Oldfield also said that Canada recently ended a 28-year-old visa scheme designed to attract wealthy foreigners to the country amid growing fears of a housing bubble. It’s to be expected that more Chinese investors will now turn their attention towards Australia.
There have been elements of the media that have commented negatively about the ability of foreign investors – most often those from Asia and specifically Chinese investors, to purchase Australian property.
What’s often overlooked is that the stated policy of the Commonwealth Government is that foreign investment in residential real estate should increase Australia’s housing stock.
The Foreign Investment Review Board’s website states: “That is, the policy seeks to channel foreign investment in the housing sector into activity that directly increases the supply of new housing (such as new developments of house and land, home units and townhouses) and brings benefits to the local building industry and its suppliers.”
As Sydney Morning Herald writer Michael Pascoe points out, we should welcome Chinese investors because the benefits of foreign investment in housing flow through the rest of the economy.
“Roughly two-thirds of Australians either own their homes outright or are paying them off, so they benefit from housing prices rising, while a fair whack of the remaining third either doesn't want to buy a property or have such low income as to not have prospects of buying in last year's market, never mind the present one.
“So this is essentially a protectionist argument – part of the market wants to reduce the competition. And like all protectionism, it would be at a substantial cost to the rest of the economy.”
Mr Pascoe says that the preponderance of new housing in Chinese purchases means the wealth does indeed get spread around.
“New housing likes new appliances and floor coverings, so retailers get a feed. And as the RBA has mentioned, a significant part of the Australian manufacturing industry is housing-related. The lift in housing starts is doing a wonderful job in all sorts of jobs.
“As for the evil business of state government stamp duties and fees on property, struggling treasurers around the nation drool at the thought of those cashed-up Chinese.”
The increased demand from foreign buyers for Sydney property has naturally contributed to recent price increases. But think back to the end of 2010, not all that long ago, and you’ll recall that property owners and newspaper editors become a lot more concerned when prices start moving in the opposite direction.
Sources:
‘New Year High for Home Loan Approvals: ABS’, Loan Market Media Release, 12 March 2014
‘January housing finance figures defy last year's trend’, ABC News online, Michael Janda, 11 March 2014
‘Consumer confidence hits 10-month low, pessimists outnumber optimists’, ABC News online, Michael Janda, 12 March 2014
‘New Year High for Home Loan Approvals: ABS’, Andrew Wilson, Domain APM News, 10 March 2014
‘RBA keeps interest rate steady’, REINSW media release, 4 March 2014
‘Boom and bust: REINSW President addresses press speculations’, REINSW media release, 5 March 2014
‘Sell now, agents urge vendors’, Sue Williams, Domain, 1 March 2014
‘Sydney presses on as house price growth takes a breather’, Glenda Kwek, Sydney Morning Herald, 3 March 2014
‘Foreign home buyers a vexed issue’, Simon Johansen, Business Day, 6 March 2014
Property
‘Locals priced out by $24b Chinese property splurge’, Max Mason, Business Day, 5 March 2014
‘RBA playing a dangerous game with housing’, Business Day, 6 March 2014
‘Why we should welcome Chinese housing investment’, Michael Pascoe, Business Day, 11 March 2014
‘Stevens says another big step up in household debt would be 'asking for trouble', ABC News, Michael Janda, 7 March 2014
‘Auction market set to lose some of its heat’, Lucy Macken, Stephen Nicholls, 28 February 2014
‘It's 86 per cent on Sydney's Super Saturday’, Andrew Wilson, Domain, 24 February 2014
‘Racism hides true culprit of housing discrimination’, Dallas Rogers, University of Western Sydney media release, 25 February 2014
RP Data Property Pulse, Introduction by Cameron Kusher, 24 February 2014
Sydney Property. One Good Year Follows Another
Mon, 17 Feb 2014New figures from the Australian Bureau of Statistics confirm that 2013 ended on a high note for Sydney property. The ABS House Price Index showed that house prices in Sydney grew by 4.9 per cent over the December quarter, making the annual growth rate a healthy 14.3 per cent.
ABS Residential Property Price Indexes director Robin Ashburn said: "Sydney continues to grow at the fastest rate across the country," noting that Sydney also had the largest rise for a total of three consecutive quarters.
According to the National Australia Bank, this will be another good year for property prices in all capital cities, with Sydney looking at a solid growth rate of 6 per cent.
The NAB’s Quarterly Residential Property Survey of Australian property professionals predicts that Sydney will be outperform every other capital city except Brisbane for house price growth in the year to come.
The NAB report also says that while Sydney finished last year with “about 13 per cent” growth in values, this has left it room to grow more in 2014.
The bank’s survey is based on the responses of 290 property professionals to a questionnaire that is sent to a mix of agents, developers, fund managers and investors.
In the report NAB chief group economist, Alan Oster, said property professionals had indicated the housing market would lift further for properties in both the lower and the premium price brackets, and that owner-occupiers would ‘dominate’ the market for the next two years.
Factors identified by Mr Oster that are supporting the forecast growth are continuing low interest rates, more affordability, population growth, lack of supply, and interest from overseas buyers.
Investors buying in
However, investors now make up the biggest share of new mortgages in more than a decade, according to ABS figures, accounting for 39.8 per cent of the value of all home loans issued in December 2013.
This is the highest proportion of loans attributable to investors since October 2003, which was the peak of Australia’s most recent boom in house prices.
JP Morgan economist Tom Kennedy told the ABC’s Michael Janda that it was not long after this peak that the Reserve Bank began lifting interest rates but conditions are different in 2014.
"We see a similar response by the RBA as very unlikely in the current environment, however, with rising unemployment, sub-trend growth, low overall credit growth and benign wage outcomes ensuring that rate hikes should not be forthcoming this year," he wrote in a note on the data.
Domain’s Toby Johnstone says that Sydney's first home buyers are making a comeback with a rise in first timers buying property in December, but they are paying top prices to get into the market.
“Home loan data from the Australian Bureau of Statistics shows that the number of first home buyers grew by 2.8 per cent in December to 1321 - the highest number in a year”, he said.
“But over the same period, the average home loan size taken by first home buyers surged by 7 per cent, from $322,000 in November to an all-time high of $344,000 in December.”
This viewpoint is echoed by the senior economist at Australian Property Monitors, Dr Andrew Wilson: ''First home buyers are now borrowing nearly $50,000 more than at the start of spring, and that means we are now looking at an average purchase price above $400,000.''
But it can be a challenge to find any homes for this price inside the confines of metropolitan Sydney. Some first timers are borrowing nearly three times the average home loan, according to the Domain article.
AMP Capital’s chief economist, Dr Shane Oliver, sounds a note of caution about interpreting the market on the basis of monthly figures, and notes that it is usually the first home buyers who experience financial difficulties making mortgage repayments.
“They often make the mistake of borrowing when interest rates are very low and then find that they can't meet the repayments when interest rates go back up,'' he said, adding that he hoped the banks are doing their homework.
The bubble, again
In the interests of balanced reporting, it must be noted that yet another overseas ‘expert’ has called the price levels of Australian real estate a ‘bubble’ that he sees bursting in the near future.
American economist and demographer Harry S Dent jnr says bubbles have general rules and their ends come about in similar ways due to similar factors, regardless of whether they’re based on tulip bulbs or gold. Or real estate.
In Australia to promote a book he’s authored, Mr Dent says that we should brace ourselves for a spectacular property price collapse of at least 27 per cent over the next few years.
He told the Sydney Morning Herald’s ‘Money’ that the bursting of the Chinese housing bubble will trigger a similar event here. His premise is that foreign buyers are holding our price levels up and it can’t go on forever.
“I think China's bubble is going to burst and I cannot see any way that Australian property prices can keep going up," he said.
In case his prophecies of doom don’t come true, he says it will be because governments “wave the magic wand and kick the can down the road again”.
The NAB Quarterly Residential Property Survey results found that foreign buyers accounted for 11 per cent of all new property purchases nationally and about 6.5 per cent of the established property market in the December quarter.
It also indicated that in Sydney just under 10 per cent of new properties are selling to foreign buyers.
NAB chief group economist, Alan Oster agrees that foreign buyers are a key driver of price growth in the Sydney market this year, but doesn’t see them as underpinning the overall demand for property.
‘‘There is no hard data about how much is being purchased by foreigners, which is mainly Asian, but we know that they are quite a size of the market in relation to new apartments,’’ Mr Oster said.
‘‘There is a shift out of China as they crack down on investment in housing and they move in to some of the safer areas around the world.’’
‘‘There is sort of an extra demand factor there.’’
Greg Jericho, writing in ‘The Drum’, says there is simply no bubble in Australian property prices and conditions are nothing like those that brought on the collapse in US housing prices.
“While housing prices have increased, the average mortgage size has been almost flat since 2010 - a very unique situation, given since 1975 the value of the average Australian mortgage has risen by 26 per cent every three years:
“The RBA will keep a watch on these figures, but for now it believes that the calls of the bubble bursting are a bit premature - not least because they don't see any bubble at all.”
Rismark's CEO Ben Skilbeck told the ABC’s Michael Janda that he does not expect declines in prices in Sydney due to strong population growth and improved consumer sentiment and appetite for borrowing.
"Sydney's annualised 10 year growth to 31 January 2013 is a very modest 3.0 per cent, less than half the rate of national household disposable income growth over the period," Mr Skilbeck said.
So, what do other experts see ahead for 2014? The senior economist at Australian Property Monitors, Dr Andrew Wilson, is expecting 7 per cent growth for houses and apartments.
AMP chief economist Shane Oliver expects an 8 per cent annual rise, and Louis Christopher of SQM Research has predicted that Sydney could record price growth of up to 20 per cent in 2014.
2014 will be another good year for Sydney property.
Sources:
‘Nightmare vision of 2014 property crash’, John Collett, personal finance editor, Sydney Morning Herald 14 February, 2014
‘Property prices to keep growing’, Michelle Hele, News Limited Network, 13 February 2014
‘Inner city Sydney real estate in high demand’ Kirsten Craze, The Daily Telegraph 13 February 2014
‘First timers make comeback’, Toby Johnstone, Sydney Morning Herald, 11 February 2014
‘NAB flags further growth for Sydney’, Toby Johnstone, Sydney Morning Herald, 13 February 2014
‘Australian homes worth $5 trillion as investors hit 10-year high’, Michael Janda, ABC news, 3 February 2014
‘Home prices surge again in January’, Michael Janda, ABC News, 3 February 2014
‘Auction market on fire’, Andrew Wilson, Sydney Morning Herald, 10 February 2014
‘Housing bubble? What housing bubble?’, Greg Jericho, The Drum, 12 February 2014
Sydney's Growth Drives New Unit Construction
Fri, 24 Jan 2014A look back at 2013 shows that Sydney had Australia's highest median home value growth with an impressive rate of 14.5 per cent, according to the latest RP Data-Rismark figures.
Senior research analyst at RP Data Cameron Kusher told the Herald's Christina Zhou that the principal drivers of this growth were the RBA’s cuts to the cash rate and investors putting more of their funds into property.
"The combination of lower interest rates and the fact that property has become a little bit more affordable has lured buyers back into the market,"he said.
Mr Kusher said the middle and prestige segments of the Sydney property market were the best performers in 2013: “The middle market has seen values rise by 15.3 per cent over the year and the top-end of the market has seen value growth of 15 per cent.”
So remarkable is Sydney’s price growth that it’s even been commented on in the Wall Street Journal, one of the USA’s most influential financial newspapers.
WSJ Journalist James Glynn wrote that Sydney had some of the most expensive property in the world and raised the prospect that the market was ‘overheated’.
“The RP Data-Rismark house-price report for December showed home values rose by 9.8 per cent during the 2013 calendar year. Sydney, the country's largest property market, posted a 14.5 per cent gain over the same period.”
Mr Glynn noted that the Australian economy was slowing after 22 years of steady growth and quoted Innex Willox, chief executive of the Australian Industry Group (AIG) who said Australia needed to “put itself on a more balanced and diversified growth path."
He also quoted Paul Braddick, head of property research at ANZ Bank, who said that it was too early to say the market was overheating as the property price growth was driven by fundamental economic factors.
"Gains are largely explained by improved affordability, the release of pent-up sales and some catch up following earlier price falls," Mr. Braddick said.
Apartment sales shoot upwards
New home sales hit a two-and-a-half year high in November. This was driven largely by sales of new apartments, mostly off the plan.
Greg Brown, writing in The Australian, noted that nationally sales of new apartments rose by 21 per cent, with Asian investors helping to drive nearly 11,000 sales for the year.
This is supported by data from the Housing Industry Association that show towards the end of 2013, units were the main source of sales growth. HIA figures show that sales rose 7.5 per cent in November with multi-unit dwellings up 30.5 per cent and detached homes rising just 3.6 per cent.
The HIA's chief economist Harley Dale told Michael Janda from ABC News that this surge could continue well into the New Year: "The upward momentum evident in new home sales since the closing stages of 2012 continued late last year – that is a good sign for residential construction activity in 2014."
ABS figures show that in NSW building approvals for non-detached dwellings such as units have outnumbered detached house approvals in every month of 2013, reflecting a shift to apartments as the primary form of new residential development.
Property developers are understandably delighted. Chris Johnson, chief executive of Urban Taskforce Australia, an organisation that represents major property developers and equity financiers, says that Sydney is undergoing what it calls a ‘cultural change’ with Gen X and Gen Y expressing strong support for apartment living.
“It is clear that an increasing number of people are preferring an urban lifestyle close to amenities and work”, writes Mr Johnson.
“It is likely that Sydney will be half houses and half apartments in 20 years.”
The Urban Taskforce says the growth in the percentage of apartments being constructed is inevitable.
“With another 1.5 million people coming to Sydney over the next 20 years, it is highly likely that a majority will end up in apartments. Many of the immigrants come from cultures where urban apartment living is the norm.”
Units more affordable
Societal issues aside, the cost of detached housing is becoming unaffordable for many aspiring property owners. Sydney’s median house price is now about $200,000 more than the median price for units, according to figures from Australian Property Monitors.
There’s no doubt that Sydney’s population growth will require new housing. Some will be built on the city’s fringe, pushing the urban boundaries outwards, but other new housing will be located within the existing metropolitan area, close to public transport access points, cultural amenities and employment opportunities.
There’s simply not enough land available to house this unprecedented population influx in newly-built detached dwellings, and one way or another units will be built to accommodate them.
So, what does this mean for Sydney real estate in 2014? An AAP article in Domain said that overseas investors could drive the next wave of property price rises.
The article quoted CommSec economist Savanth Sebastian who said: "Australia's starting to look a lot more attractive from a foreign investment perspective with the falling currency and that will probably show up more in the property market than anywhere else."
The Australian dollar has fallen 14 per cent since April last year to around 89.5 US cents now, and there’s a growing feeling that interest rates have now reached their lowest point.
"There's a clear indication that we're getting close to the lows and, if anything, rates will start to lift in 12 months time," Mr Sebastian said.
Senior manager at BIS Shrapnel, Angie Zigomanis, told Domain’s Toby Johnstone that growth prospects would be mixed in 2014 and that he expected Sydney’s growth rate to be more subdued after the high levels of activity in the year just ended.
“Sydney will see solid growth - might be more the five to six per cent range rather than the double digits,” he said.
Dr Andrew Wilson of Australian Property Monitors also sees a slower year ahead. “Sydney house price growth in 2014 will likely be half that of this year at best with most of that recorded in the first part of the year,” he said.
“Much however will depend on the performance of the local economy particularly over the second part of the year despite the increasing likelihood of another cut in interest rates.”
Low interest rates will continue, additional housing stock – mostly units, will come onto the market, overseas buyers will take advantage of a weaker Australian dollar, and first home buyers will re-enter a moderately cooling property sector.
As for home values, look for an increase of five to seven per cent and you won’t be disappointed.
Although this year looks unlikely to repeat the price and sales growth statistics of 2013, it will still be a very good year for Sydney real estate.
Sources:
‘Bumper year for price growth’, Christina Zhou, Sydney Morning Herald, 2 January 2014.
‘New home sales surge on unit developments’, business reporter Michael Janda, ABC News Online, 10 January 2014
‘Australia House-Price Jump Rekindles Bubble Fears’, James Glynn, Wall Street Journal, 2 January 2014.
‘Expats could push up Aussie house prices’, AAP article in Domain, 6 January 2014
‘Apartments fuel jump in new home sales’, Greg Brown, The Australian, 10 January 2014
‘Housing: public interest tuned out in city-suburb battle’, Chris Johnson, Sydney Morning Herald, 11 January 2014
‘Sydney December 21st auction report’, Dr Andrew Wilson, Australian Property Monitors, 22 December 2013
“Familiar pattern to the year ahead,” David Potts, Herald Money, 15 January 2014
Sydney real estate slowdown, speed bumps ahead
Tue, 17 Dec 2013As 2013 reaches its conclusion, vendors are rushing their properties into Sydney's auction rooms to take advantage of what can only be termed a buyers' frenzy.
Nearly 1000 auctions over one December weekend, a Sydney record. clearly shows the heat being generated by an unprecedented demand for both homes and units in virtually every part of the greater Sydney area.
There have even been properties listed for auction just four days before Christmas, so intense is the pressure to sell before the holidays bring their usual pause to the auction market.
The impacts of this pressure can be seen in figures from RP Data that show both house and unit sales volumes are currently above the five year average level and sales over the past three months have risen over 23 per cent compared to the same three month period in 2012.
Auction clearance rates remain strong, although they’re showing a few signs of weakening. After four months of clearance rates above 80 per cent, the Australian Property Monitors weekend clearance figure fell to 76.1 per cent in mid-December which was the lowest since July.
John Edwards of Residex remarked there were a number of milestones achieved during 2013, including that the median value of houses in Sydney is now approaching the $750,000 mark.
“The relatively high rate of growth in Sydney over the last 12 months was not anticipated by market analysts. Residex models predicted growth, but not to this magnitude,” he said.
First home buyers casualties
First home buyers are the obvious casualties of what has become a purchasing war between cashed-up investors and super funds, although there are some signs of a mild resurgence according to the Herald’s Glenda Kwek.
“First home buyer activity improved slightly in NSW in October, lifting to 7.4 per cent from a record low of 6.8 per cent in September,” she noted.
There are of course a number of factors that will affect the Sydney property market in 2014.
Statistics released in late November showed that the construction sector of the Australian economy has expanded for the second straight month, after three years of contraction.
The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (PCI) rose 0.8 points to 55.2 in November, which was the highest level since November 2010.
AiG said that housing building lifted to 62 points, apartments to 57.9 points, commercial construction to 52.9 points and engineering construction to 52.5 points.
AiG’s director for public policy Dr Peter Burn said the fact that growth was reported in each of the four sub-sectors could be an indication that the long-awaited re-balancing of the domestic economy was starting to happen.
“However, given the extent of the slump in residential and commercial construction over more than three years, the expansions recorded in October and November are from a low base and we are still some months from a convincing recovery,” Dr Burn said.
The ABC’s Alan Kohler says that developments in planning laws enacted by the conservative government in NSW are restricting the supply of new housing while demand is escalating.
He also noted there is a ‘globalisation of the apartment market’ that is causing prices to rise.
“The research director at property advisory firm Charter Keck Cramer, Robert Papaleo, told me yesterday that global developers operating in most major cities around the world have been outbidding local developers for the best sites and, as a result, the apartment market is no longer acting as a traditional housing submarket to service the basic accommodation needs of Australia's growing population,” Mr Kohler said.
He commented that the planning reforms of the O'Farrell Government have been deferred following lobbying by community action groups and quoted Chris Johnson of developer representative Urban Taskforce who said: "Sydney needs 32,000 houses every year and we are only producing 21,000 now."
Mr Kohler concluded that the demand for apartments will continue to grow but supply is being choked, inevitably resulting in higher prices and less affordable housing.
Interest rates remain on hold
There are few if any market analysts that expect interest rates to make any sudden moves. In December the RBA’s Governor Glenn Stevens repeated his November statement almost word-for-word when he said the Bank had decided to leave its cash rate on hold and that present monetary settings were ‘appropriate’.
''The board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target,'' he said.
As the RBA sees it, in agreement with a growing number of economists and business leaders, one of the biggest problems Australia faces is a currency that is too strong, preventing growth of manufacturing exports and restricting employment opportunities.
As to whether interest rates will go up or down when they do eventually move, JPMorgan economist Tom Kennedy said: ''There's an easing bias … and given where we are in the cycle, we think that lends itself to a lower cash rate rather than raising the cash rate.
“But in saying that, it's going to be very heavily data dependent in terms of the timing,'' he said.
There is a very large elephant in the room and that’s falling consumer confidence. The level of consumer confidence fell almost five per cent in December, according to the Westpac Melbourne Institute Index of Consumer Sentiment.
This is the lowest level since July and Westpac’s chief economist Bill Evans attributes much of the index’s recent fall to uncertainty about employment.
"In particular, confidence around the economic outlook has faltered. The components of the index measuring consumer views on the economic outlook over the next 12 months and (over) five years are both down by over 10 per cent from their average reads over the last three months," he said.
The National Australia Bank's monthly business survey also showed that improving trading conditions are being offset by a weakening labour market and firms’ confidence levels are slipping.
Although both consumer and business confidence were lifted by the federal election, it’s looking increasingly less likely that this rise in sentiment will be sustained into the New Year.
2014 - a quieter year
Making it even more likely that 2014 will be a quieter year than its predecessor, the imminent withdrawal of Holden from manufacturing vehicles in Australia has been joined by forecasts of ongoing losses by the airline industry’s flagship carrier, Qantas, shaking the faith of both consumers and the business community.
A News Limited article explained why the real estate market will go quiet as 2014 gets underway.
“It can be more difficult to sell in January with professionals required to finalise contracts often on holidays, further motivating vendors,” the article said.
“January also is generally a slow month for builders and contractors. With most people on holidays and factories closed for the break, this makes it a good time to negotiate fees on new homes.”
There’s no doubt a growing percentage of the market’s most active buyers in 2013 have been Chinese for whom Australian real estate offers a good selection of prestige properties at affordable prices in a city with good educational opportunities for younger family members.
Another reason to buy here is the relatively clean air Sydneysiders enjoy, a welcome change from the dense smog afflicting Beijing, Shanghai and other large metropolitan areas in China.
It will be especially interesting to see whether Chinese buyers reduce their market participation in line with the usual Sydney practice of a ‘slow’ start to the year.
Dr Andrew Wilson, Senior Economist for Australian Property Monitors, said in his column on Domain.com that he thought the high levels of activity we’re now seeing wouldn’t last long into 2014.
“The end-of year stampede by anxious sellers has intensified with the market unlikely to be fully focused again until mid-February and into March next year after the long holiday pause.
“And the extraordinary auction market activity levels of this record-breaking spring in Sydney are unlikely to be matched through the autumn season next year – or ever,” he predicted.
Sources
‘Reserve Bank leaves cash rate on hold,’ Glenda Kwek, Sydney Morning Herald, 4 December 2013
‘First home buyers struggle in property market,’ Glenda Kwek, Sydney Morning Herald, 11 December 2013
‘Some home truths on Australian competitiveness,’ The Drum, ABC, Alan Kohler, 11 December 2013
‘Consumer confidence takes a dive,’ Business Day, Glenda Kwek, 11 December 2013
‘Positive news for Australian property,’ John Edwards, Residex Blog, December 2013
‘Sydney's an easy sell for the Chinese,’ Lucy Macken, Prestige Property Reporter, Sydney Morning Herald, 11 December 2013
‘A house for Christmas?’, News.com website, Real Estate, 12 December 2013
RP Data Property Pulse, Cameron Kusher, senior research analysts, December 2013
‘House building up after years of contraction,’ Glenda Kwek, The Economy, Sydney Morning Herald, 6 December 2-13
‘Hope for buyers as clearance drops,’ Christina Zhou, Domain, 9 December 2013
What happens next for Sydney property?
Fri, 15 Nov 2013The Sydney property market is going gangbusters! There's never been anything like it before. Or has there?
In fact, the city's median house price rose by about 160 per cent between 1997 and 2003. In those six years the average price increase in Sydney housing was in the order of 27 per cent per annum.
The Sydney housing market also recorded substantial rates of price growth as recently as 2009 and 2010. Between January 2009 and June 2010, Sydney's quarterly median house price rose by nearly 20 per cent.
This pace couldn’t last forever, and it didn’t. In 2011NSW registered a rise of just 5.3 per cent in sales of new homes and Sydney auction clearance rates dropped to around the 55 per cent level. Pundits lamented that the good old days were over, and talk of a price ‘crash’ surfaced in the press.
As recently as April 2012 the Housing Industry Association’s chief economist Harley Dale told AAP that the housing sector needed more support for a full recovery.
"In a contemporary economic environment where interest rate settings are too high, finance conditions persistently tight, consumer and business confidence too low, and plans to tighten fiscal policy inappropriate, it is hard to envisage a sustained recovery in new home sales in coming months”, he said.
The RBA’s cash rate in April 2012 was 4.25 per cent, not historically high by Australian standards. This is less than twenty months ago, and think of what’s happened since then.
Recently, prices have again accelerated. Sydney real estate values have grown an impressive 13 per cent in the first ten months of 2013, but exciting as those figures are for property owners and investors, it’s still growing at about the same rate as happened between January 2009 and June 2010.
However, in the past couple of years other factors have changed. In previous years the list of prospective purchasers has included a high percentage of first-home buyers, supported by government subsidies at both the state and federal level.
For years they competed primarily with owners of existing homes who wanted to upgrade their standard of housing and who found it easier than the first-home buyers to access finance.
Investors were there too, but mostly in the background. As the ‘baby boomers’ aged they ploughed their money into superannuation funds and those who invested independently chose from the avenues allowed at the time – mostly shares and managed investment funds.
First-home buyers were able to move out of rented premises into a home of their own, and existing homeowners upgraded their accommodation. Both parties were satisfied with the situation, although a continuing shortfall in new housing construction led to a steady increase in prices.
A recent Housing Industry Association report concluded the average annual growth in Sydney house prices over the past 10 years has been just 3.4 per cent – even less than the growth in annual wages.
Market conditions have changed
In the past couple of years things have changed dramatically. The government subsidies for first-home buyers have all but stopped. Home ownership for the under-40s is dropping while the proportion of renters is the highest in decades.
Self-managed superannuation funds (SMSFs) have been allowed to borrow money to invest in property and they’re doing it. As well, China’s growing prosperity has created an aspirational middle class in that country that perceives attractive investment opportunities in Australian real estate.
This has taken most first-home buyers out of the equation. A recent BankWest First Time Buyer Deposit report revealed just 16,577 homes were purchased by first-home buyers in NSW over the past year, which was a 44 per cent drop from the 29,590 in the previous year.
The buyers in today’s market can borrow more which means they can pay more for the housing they purchase.
Meanwhile, Australian Bureau of Statistics figures show Sydney house prices rose 3.6 per cent over the three months to September 30, while house and apartment prices in the eight capital cities were 7.6 per cent above their level a year earlier.
Higher prices mean larger deposits are needed to purchase property. Would-be first-home buyers find it difficult to raise sufficient funds, leaving investors and SMSF trustees to fight it out with overseas buyers for the properties on offer.
Sydney Auctioneer Damien Cooley is having a great year: ''This is the strongest market I've seen in my real estate career”, he said.
“Our market has wanted to grow for the past six years but there just hasn't been enough confidence in the global economy, and in our economy, to permit it. But, with a new government and low interest rates, people have a reason to compete for property again.''
Australian Property Monitors senior economist Dr Andrew Wilson said that November is a month of records for the Sydney market: “November will break all monthly records – number of properties auctioned, number of properties sold, the value of properties sold – since APM has been keeping these sorts of records, going back to 2008.”
APM statistics show Sydney's median house price at an all-time high of $722,718 - a jump of 11.7 per cent on last year, when the median was just $646,960.
Home loan approvals in September 2013 were the highest since October 2009 according to data released by the Australian Bureau of Statistics.
Dr Wilson summed up the current situation with: “These are extraordinary market conditions, which we may never see the likes of again. Sales are being drawn forward as buyers take advantage of strong conditions.”
Change is in the wind
So, what happens next? Dr Wilson says he does not think the momentum will be sustained into next year: “We’re expecting a solid autumn period but the economy is deteriorating in NSW and unemployment is trending up towards 6 per cent, so we expect a moderation in activity”.
And at least one segment of the supply side of the market is catching up with demand, says John Edwards of Residex: “Sydney is the standout performer with its house and land market performing strongly.
“On the other hand, Sydney’s unit market is only performing slightly above inflation (1%). The reason for this is a surplus supply of unit stock. The majority of new stock in Sydney can be found in the unit market, while the house and land market cannot keep up with demand.”
Toby Johnstone, property reporter for Domain, said: “Experts are calling it the spring that will never be repeated. A property heatwave has gripped Sydney this selling season, with almost all of the city's boom-time records smashed: record listing numbers, record sales volumes, record house prices and...the busiest auction day on record.”
“We may never see the likes (of this) again”, and “The spring that will never be repeated” are emotive phrases, but not necessarily correct.
History clearly shows that the Sydney property cycle is a series of upwards price movements followed by periods of calm with occasional slight retracements. There will always be boom times and inevitably they will give way to episodes of price stability.
Eventually the numbers of vendors and buyers decline. Availability of finance decreases and a bit of new housing stock comes onto the market. This will happen in 2014. No bursting ‘bubbles’, no ‘crashes’ – just the usual slowdown in the Sydney property market after a period of enhanced activity.
First-home buyers may again have a chance to acquire property of their own and escape their monthly rental payments. SMSFs will have satisfied their needs to invest in something other than shares (although the share market will most likely also experience a retracement of recent high dividends), and even if the Commonwealth continues to allow overseas investors to acquire property in Australia, foreign investment will be insufficient to drive the market at its present speeds.
2014 will be a year of stabilising. Those who have bought property in 2013 will know they’ve laid the foundations for future growth. Those who missed out in 2013 will find new opportunities and buy into the market while interest rates remain low. Meanwhile, developers will continue to add dwellings, mostly units, to the supply of available housing stock.
History does indeed repeat itself. We don’t have to look back very far to see the same conditions we’re now observing. It’s not all that difficult to answer the question: ‘What happens next for Sydney property?’ It will be what’s happened before.
Sources:
‘Home Loan Approvals Highest in 47 Months: ABS’, Loan Market Media Release, 11 November 2013
‘Home truths’, Domain, Matt Wade, Senior Writer, 2 November 2013
‘Reserve Bank lowers Australia's growth forecast, says benefits of rate cuts may not be seen until 2015’, ABC News Online, by business reporter Michael Janda, 8 November 2013
‘Size in the City doesn’t matter’, Kirsten Craze, The Daily Telegraph, 7 November 2013
‘First-home buyers lead land offers in Sydney’, Tim McIntyre, Real Estate Reporter, The Daily Telegraph 31 October 2013
‘Reserve Bank keeps rates on hold in November’, Staff writer, news.com.au, 5 November 2013
‘Home buyers borrowing more money with less of a deposit’, Business Day, Clancy Yeates, Banking Reporter, 11 November 2013
‘Biggest auction day on record as buying frenzy sets new property highs’, Domain, Toby Johnstone, Property Reporter, 10 November 2013
‘Sizzling home sales set Sydney on course for $3bn month’, Australian Financial Review, Larry Schlesinger, 11 November 2013
‘Home deposit hurdle won’t clear itself’, Matt Wade, Sydney Morning Herald, 13 November 2013
The great Sydney housing price Bubble Conspiracy
Thu, 17 Oct 2013The quickest way to grab a headline in times of rising real estate prices is to shout 'Bubble!" and predict an imminent sudden fall of some massive percentage. Until recently the most consistent of the bubble theorists was economist Steve Keen, Professor of Economics & Finance at the University of Western Sydney.
In September 2011 Professor Keen said the claims of an undersupply of housing stock were not supported by evidence, and that any strength in the housing market was a 'distortion' caused by the variety of stimuli applied by state and federal governments.
This is the same Professor Keen who in 2010 made a 225 kilometre trek to Mount Kosciuszko after losing a bet that Sydney house prices would fall by 40 per cent.
Bubble theorists are a bit like conspiracy theorists; they promulgate something outlandish, back it up with their own selected evidence, and get in print until their theories are disproven.
The simple fact is that prices of Sydney property are rising strongly, and there are several good reasons for this to happen. Will it lead to a sudden price crash? History and the application of logic answer with an emphatic ‘No’.
A boom, not a bubble
Simon Johanson, Property Editor for The Age, says that we are experiencing the start of a boom but not a bubble, according to the economists he’s talked to.
He noted that capital city values peaked in September above the previous high set during the 2010 property boom, according to figures released by RP Data-Rismark, and Sydney's prices were up 5.2 per cent over the September quarter.
Johansen said the spike in values is likely to prompt concerns Australia's housing market may be heading towards a property bubble but Commonwealth Securities economist Craig James said no.
''Rather than a 'bubble', couldn't it just be that home prices are lifting from a low base in response to very favourable influences such as super-low interest rates? That is the sensible view, and also the right view,'' he said.
ANZ Australian chief executive Phil Chronican told News Limited that concerns rising property prices are fuelling a property bubble are “overstated” as there is a two-year shortfall of new homes in the system to meet existing demand.
“What has protected Australia from a sharp downturn has been the absence of an excess supply and continued steady demand from a consistently growing population,” he said.
“No excess supply and no collapse in housing demand; therefore no price collapse.”
Dr Andrew Wilson, senior economist for Australian Property Monitors, says that the Sydney housing market is presently enjoying the support of factors that include low interest rates, rising confidence and a surge in investor activity.
However, like all the upward surges before it, this one will eventually slow as other factors including rising unemployment and subdued levels of wage and profits growth come into play.
Dr Wilson points out that Sydney’s highest annual house price growth over the past 20 years was in 2002 at 22.2 per cent. Next best was 2001 at 17.4 per cent.
If Sydney house prices were to rise by 20 per cent next year as some bubble theorists have suggested that would bring the median price to nearly $900,000. It simply isn’t going to happen.
Because this kind of ‘theoretical’ price level is unsustainable, it’s to be expected that in 2014 prices of Sydney property will slow in their upward rush despite a growing shortage of supply.
Not enough land released
Writing in Domain, property reporter Antony Lawes says there is not enough land being released in Sydney. He says that Sydney “still has the weakest fundamentals of any major Australian market”.
He quotes the NSW director of property consultants Urbis, Russell McKinnon, who said there is not enough land for new houses in 2013 for everyone who wants to build a new house, despite sales of these lots increasing over the past two years.
"Despite the [state] government's current reforms and policy responses there will be ... a two-year lag before we see the full benefits."
In fact there has been a fall in the number of approvals for new houses in Sydney in August with just 1100 new houses approved in Sydney over the first eight months of the year. But this situation could change.
A September report from BIS Shrapnel predicted the number of new houses built each year on Sydney's fringe would double over the next five years as more subdivisions were released, and house and land packages would become more affordable.
Meanwhile auctions of existing Sydney property continue to power ahead with clearance rates holding above 80 per cent week after week. The number of properties on offer are well above last year’s figures, clearly indicating that demand is not about to slack off in the near future.
The current real estate boom has once again reignited debate over the wisdom of negative gearing for property investors.
The tax office tells us that property investors claim billions of dollars a year in tax deductions for their loss-making properties. Wouldn’t it be nice, ask some, to do away with this tax loophole and grab a chunk of the investors’ income for the Commonwealth’s coffers?
Between 1996 and 2003 house prices in real terms doubled and without a doubt many investors made a lot of money. However, since that time conditions have normalised and returns for investors have been good but not exceptional.
Cameron Kusher from RP Data looked at the Tax Office's negative gearing numbers for the 2010-2011 financial year, and found the average annual loss for negatively-geared investors is about $210 a week, or just under $11,000 a year.
Investors would require fairly large capital gains when selling these properties to cover their losses as well as repaying them for other outlays such as stamp duty and the tax on capital gains when properties are sold.
Recent rising property prices and rental levels have been behind investors taking on a big share of new mortgages in Sydney. This hasn’t escaped the attention of the Reserve Bank who issued a warning that it expects growth in house prices to be more in line with income growth than a repeat of the earlier price boom.
Overseas investors active
Rick Feneley, news and features writer for Domain, says that one important source of the current buying strength in the Sydney property market is investors from overseas:
“Foreign investors - a rapidly growing proportion of them from China - now buy almost one in six newly built homes sold in NSW, according to the latest NAB quarterly property index.
“Their slice of the state's new housing pie, whether units or houses, has surged to 16 per cent - from 11 per cent in the bank's June quarter survey, and only 2.5 per cent in early 2011.”
Mr Feneley also quotes NAB chief economist Alan Oster who said: ''If you've got 15 per cent of new stock being taken by foreigners, that's a large stock. Without them, prices wouldn't be as strong.''
But when Rick Feneley raised the question of foreign investors helping to create a bubble with Peter Chittlenden, managing director of residential property at Colliers International, he received an unequivocal response.
''People aren't silly,'' he said. ''They do the due diligence.''
Figures produced by the Housing Industry Association show that Sydney has had a lot of catching up to do when it comes to property prices. Sydney home prices have risen by just 31 per cent in the last ten years - against 80 per cent for Melbourne.
Meanwhile the influx of migrants into Sydney remains high, although net migration into Australia has been slowing since commodity prices peaked in late 2011. Potentially this will result in a further increase in unemployment figures, although it also naturally increases demand for accommodation.
Bubble? What bubble? Sydney real estate prices are simply catching up to other capital cities in terms of percentage increases over the past decade for a number of very good reasons, and property owners and investors can be confident of continuing growth throughout 2014.
Sources:
‘Don't believe crazy boom theory’, Dr Andrew Wilson, Domain, 3 October 2013
‘Sydney land releases fail to meet demand’, Antony Lawes, Domain, 3 October 2013
‘Sydney auction market ramps up’, SMH News Online, 11 October 2013
‘Not a time for tax losses and capital gain’, SMH Money, 9 October 2013
‘Forget the farm, we're selling the city’, Rick Feneley, Domain, 12 October 2013
‘Housing demand from overseas migration strong but slowing’, Tim Lawless, RP Data website, 11 October 2013
‘Sydney buyers remain riveted by auctions’, Nicole Lindsay, Property Business, 7 October 2013
‘Capital city price boom no bubble’, Simon Johanson, The Age, 2 October 2013
‘ANZ chief says property bubble fears overstated’, Stephen McMahon, News Limited Network, 26 September 2013
Consumer confidence rises with Sydney property prices
Tue, 17 Sep 2013The federal election's over and consumer confidence has lifted to its highest level in three years. The Westpac Melbourne Institute Index of Consumer Sentiment rose by 4.7 per cent in September, strengthened by the Reserve Bank deciding at its September meeting to keep interest rates where they are.
This sets the stage for Sydney property to enjoy a spring selling season like it hasn't seen since at least 2010. In fact, according to Westpac's chief economist, Bill Evans, the post-election lift to consumer spirits could be the best in seventeen years.
"The result is comparable with the boost to the index in March 1996 when the Coalition was returned after 13 years in opposition", he said.
In what could be the ultimate confirmation of good times returning, all of the units in the first release of 159 apartments in Lend Lease's new Barangaroo precinct sold within 4 hours of their launch.
This was undoubtedly Sydney's most highly anticipated apartment launch since ‘Bennelong’ 20 years ago. Apartments on offer ranged from a one-bedroom unit which went for $1 million to a $10.5 million penthouse.
RP Data-Rismark figures show that even before the election home prices rose 5.3 per cent across Australia’s eight major cities in the year to August 31, with Sydney home prices enjoying the biggest quarterly rise since April 2009.
Writing in Domain, property writer Susan Wellings summed up the current situation, saying that Sydney prices had certainly grown.
“The Sydney median house price, according to latest figures from Australian Property Monitors (APM) for the June quarter, is $690,064 compared with last year's $646,858 - a rise of 6.67 per cent. The median price of apartments is $491,845, up 4.9 per cent from $468,706.
“Gross rental yields are steady at 4.6 per cent for houses and 5.1 per cent for units, while the combined auction clearance rate is 69 per cent for the quarter, up from last year's 53.5 per cent,” she said.
Economic growth still slow
Over at the National Bank, however, there were some concerns being expressed about the prevailing economic conditions that have little to do with elections.
NAB chief economist Alan Oster told News Limited that conditions are still "soggy" and said that economic growth would remain “below trend” for most of 2014.
"Confidence is now only back at average levels and much will depend on whether the current bounce is maintained or erodes away in the face of poor business conditions," he said.
NAB is also forecasting that unemployment will reach a peak of 6.75 per cent by the end of next year which could have a dampening effect on consumer confidence and could also impact real estate values.
But in the short term at least, things are looking pretty good. The Australian share market recently hit a yearly high, propelled by rises in China’s retail sales and factory output figures. NAB’s own monthly business survey showed business confidence rising strongly, reaching its highest level since May 2011.
The Reserve Bank seems content with interest rates at their present low setting with some financial analysts predicting there will be no change for the rest of 2013, although NAB believes there will be a further reduction in November.
St George Bank economist Janu Chan said that the big question now that the election is behind us is whether the improvement in business confidence can be sustained.
"Although some of the pledges by the new Coalition government would be encouraging for businesses, for example, lowering the company tax rate and pledges to cut red tape, the funding task for all pre-election promises remains a challenging one.”
She points out that Australia still has to deal with the challenge of a currency that is resisting further falls while mining investment is beginning to taper off.
Building approvals rise
An AAP release highlighted figures from the Australian Bureau of Statistics that showed building approvals across Australia rose an encouraging 10.8 per cent in July, and in the year to July building approvals were up 28.3 per cent.
RP Data research director Tim Lawless told ABC News that the number of investors entering the property market continues to grow.
"The number of finance commitments for investors is up about 20 per cent on the past year," he said.
"There has been a small increase in the number of first home buyers, but they still only make up 14 per cent to 15 per cent of the entire market. So we are seeing market conditions now being led by investors, secondly by up-graders, with first-home buyers still being a relatively small portion of overall activity."
Dr Andrew Wilson from Australian Property Monitors wrote in Domain that Sydney’s home auction clearance rate had broken yet another record with a figure of 87.6 per cent the first weekend in September, soundly eclipsing the previous record of 84 percent the previous weekend: “Sydney’s white-hot weekend home auction market has started the spring selling season off with a big bang.”
“Buyers hungry for property are apparently paying whatever it takes to secure homes at auction,” he concluded.
An AAP release published in the Australian showed that the number of home loans approved rose for the seventh month in a row. The article quoted CommSec chief economist Craig James who said he expects the housing market to continue strengthening.
"We would hope that, in a more settled environment, people will start spending, investing and hiring," he said.
"Of all the sectors in the economy, clearly one of the healthiest is housing. Housing is best placed to take over the leadership role from mining as the nation's key economic driver.”
Deloitte Access Economics partner David Rumbens told Colin Brinsden, AAP Economics Correspondent, that housing could also be the key to recovery in the underperforming retail sector.
The Deloitte Access quarterly retail report showed there had been a promising start to 2013 before sales turned what the report called "tragic" by midyear.
"When people are bidding up the price of housing they are also lifting their rate of retail spending," Mr Rumbens said in the report.
"With housing affordability much improved from two years ago, this channel may form a powerful driver."
Investors driving loan approvals
However, JP Morgan economist Ben Jarman issued a note of caution telling The Australian that the strong finance approval figures were driven by investors rather than first-home buyers, who typically take out bigger loans.
"...What you're getting is activity that is tilted more towards the investor and less toward the first-home buyer, so you're not getting that uplift in overall credit growth that you get when first-home buyers come into the market.
"It seems like there's a lot of turnover happening in housing but not enough homes being built and not enough credit growth to make it genuinely stimulatory.”
The ABC’s business reporter, Michael Janda, shares Mr Jarman’s concerns about home price rises being primarily driven by investors.
“These investors provide the competition that prices many first-home buyers out of the market and forces them into being long-term, perhaps lifetime, private renters.
“The number of these investors has ballooned from 1.3 million at the end of last century to more than 1.8 million in 2010-11, the latest year for which Tax Office statistics are available.”
He says the negative comes from more than 90 per cent of this investment going into existing rather than newly built homes, and negative gearing subsidies create an unfair advantage for investors competing against prospective first-home buyers for the same housing stock.
“The inevitable result is the prices of those homes rise, and the first-home buyer generally loses out to an investor with more equity, government tax subsidies and a much greater borrowing capacity behind them.”
Not that this is any problem for property investors. Their problems are more related to a shortage of housing stock into which they can invest their growing pool of superannuation funds.
The RBA’s regime of low interest rates has caused a flood of capital away from term deposits and into other, higher-return vehicles. Real estate offers an unmatched combination of good returns with reliable capital growth, and the recent rise in consumer confidence will ensure it remains an attractive option for investors.
Sources:
‘Abbott win sparks surge in confidence’, Business Day, 11 September 2013
‘Bounce in business confidence reaches two-year high’, Stephen McMahon, News Limited Network, 11 September 2013
‘Building approvals rise 10.8 per cent in July’, AAP, 2 September 2013
‘Capital city house price growth slows to 0.5 per cent’, business reporter Pat McGrath, ABC News, 2 September 2013
‘Hotter than hot on election day’, Andrew Wilson, Domain, 10 September 2013
‘Finance data show housing market improving’, Cadden and Belinda Merhab, AAP release in The Australian, 9 September 2013
‘Homeowner dreams an aged underclass nightmare’, Michael Janda, ABC News, 31 August 2013
‘Housing key to retail recovery’, Colin Brinsden, AAP Economics Correspondent, 11 September 2013
‘Record auction clearance rate for Sydney’, Time McIntyre, Daily Telegraph, 2 September 2013
‘The season to be jolly’, Susan Wellings, Domain, 31 August 2013
For Sydney Property the only way is Up
Tue, 20 Aug 2013The Sydney property market is accelerating at a pace we haven't seen for years, powered by lower interest rates, high levels of buyer demand, and a noticeable lack of housing stock.
The second weekend in August, Sydney recorded an 83.8 per cent auction clearance rate with record levels of buyer activity despite a surge in property listings. This was the highest clearance rate recorded for the year and the fifth consecutive weekend with clearance rates above 80 per cent.
But the latest figures from Residex carry a bit of a surprise. They show that, although Sydney houses increased in value by 4.5% in May and June, they went backwards by about 0.59% in Juy.
This is by no means a sign of falling prices, but there are a few factors dampening the buyers’ enthusiasm, and to some degree they help explain the current shortage of stock, both of houses and units.
The first is a growing concern about unemployment. The mining boom’s slowing down, China’s economy is cooling, and prices in Sydney are at high levels relative to every other capital city.
A soft economy
RBS Morgans’ ‘Investment Watch’ says the Australian economy can be described as ‘soft’: “Employment continues to grow more slowly than the labour force. This means unemployment continues to drift up.
“This higher-than-anticipated unemployment continues to put downward pressure on wage settlements. This downward wages growth in turn puts downward pressure on inflation.”
RBS Morgans foresees further rate cuts between now and the end of 2014: “We continue to believe that the Australian economy will grow by only 2.8% in 2013. It should recover to 3.2% growth in 2014.”
This is an interesting forecast in view of interest rates already being at record lows and having just been reduced further at the RBA’s August meeting.
Sydney rents are high and rising, and alternatives to property for investors are looking less certain if not downright risky. Returns on term deposits are so poor they are no longer worth considering as a serious investment option.
The usual triggers for buyers to open their wallets and borrow to acquire property don’t seem to be as effective as in previous years. Is this going to last?
As Clancy Yeates points out in the Sydney Morning Herald, there has been a long-term build-up in household debt levels over the past twenty years that has resulted in the ratio of household debt to disposable income growing from 50 per cent in the early 1990s to 150 per cent in 2010.
In other words, we’ve been living beyond our means and are starting to pull back on making any further financial commitments. But shouldn’t that leave the market open for first home buyers and, more importantly, first-time property investors?
Most property acquisitions are funded by borrowing. Market statistics show that nationally there were only 7300 loans issued to first home buyers in June. That’s about half the number of that buyer category who borrowed the last time interest rates were low.
Prospective first home buyers are competing with investors, and investors are more likely to purchase existing property rather than build something or buy something ‘off the plan’. There’s not much room to move for would-be first home buyers.
Others who might have been buying investment properties in the past have changed their financial strategies and are using lower interest rates to pay off their existing debts sooner.
The rate cuts are benefiting existing property owners, naturally, but they aren’t stimulating a rush to purchase by those who might previously have been expected to purchase more.
Expectations of higher prices also mean that many potential vendors are holding onto their properties in hopes of greater gains a few months from now.
The B-word reappears
There’s even a resurgence of the ‘B-word’. In his Herald article Clancy Yeates asks the dreaded question: “And by making debt so cheap, what are the risks of inflating a dangerous asset bubble?”
Yes, the threat of a housing price ‘bubble’ is back in the newspapers.
The Herald’s Toby Johnstone says that analysts are concerned that the RBA’s attempts to keep the wider economy afloat could overcook what he calls ‘an already hot housing market’.
He quotes RP Data national research director Tim Lawless: “The difficulty for the RBA going forward will be how to keep a lid on what may be viewed as excessive housing market growth while also providing a sufficient level of stimulus in place to the broader economy via their monetary policy settings,’’ he said.
He also quotes the senior economist at Australian Property Monitors, Dr Andrew Wilson, who said the ‘‘the housing market is hot and it is set to get hotter now’’.
But is a bubble really developing? Clancy Yeates quoted Merrill Lynch economist Saul Eslake who described the reaction from households to low interest rates so far as ''much more muted than history might have led you to expect''.
He also found that the rapid increase in household debt that usually signifies a bubble hasn’t happened, and quoted Mortgage Choice’s CEO Michael Russell, who said “Unlike previous housing market cycles, this recovery is definitely more subdued.''
Sonja Kormens, writing for News Limited says that home buyers need to act soon to beat the rush into property as lower interest rates and investors keep the pressure on house and unit prices.
She quotes RP Data research director Tim Lawless who said: "By including rental yields in our housing market outlook, some clarity is provided as to why investors are becoming so active.”
Mr Lawless points out that the RP Data-Rismark Accumulation Index, which factors in both capital gains and gross rental yields, is up 9.4 per cent over the year. Meanwhile, a typical capital city dwelling is selling in just 45 days compared with 59 days at the same time a year ago.
Spring has arrived
We are about to enter the traditional ‘Spring selling season’. We are also about to clear the decks, politically and economically, with a federal election. These two factors alone make it highly likely that the end of the hiatus in price rises isn’t far away.
Chris Gray, director of property consultancy Your Empire, told Australian Property News that the recent rate cut will have an impact on the market but many buyers are now waiting on the election result before they make their investment commitments: “I think almost no matter what happens at the election, there’s no more excuses.
“Rates are down far enough and there’s nothing else on the horizon, so people will think ‘I might as well go for it’.”
Elders Real Estate says that Sydney is now a ‘sellers market’: “Areas that have a higher number of properties for sale than mortgage commitments is a buyers' market, while places where home loans are outweighing the number of homes for sale are considered to be sellers' markets.
“According to the findings, Sydney's residential property market is currently best suited for sellers as the level of demand for real estate in the city is high.”
Cameron Kusher, RP Data’s senior research analyst, explains why he sees strength in the short-term financial figures:
“In May 2013, $8.4 billion worth of housing finance for investment purposes was committed to. The $8.4 billion was the highest level of finance for investment purposes since January 2008 ($8.3 billion).
“Investment finance commitments have been ramping up sharply over the past 12 months, increasing by 23.7% on a year-on-year basis and indicating a surge in investment activity in the housing market.”
SQM Research director Louis Christopher told Property Observer that a lack of listings could put further pressure on Sydney property prices: "We're not quite there yet in terms of stock on market, but we are approaching that period of late 2009, early 2010 when Sydney real estate prices were growing at an annual rate of around 15%,".
In September last year SQM Research forecast that growth in Sydney house prices in 2013 would be between 5% to 9%.
The market’s performance to date indicates the Sydney market is well on track to meet or exceed this figure that just nine months ago looked wildly optimistic.
Sources:
‘Sydney records five weeks of auction clearance rates above 80 per cent’, Dr Andrew Wilson, Domain, 12 August 2013
‘Rate cut may overcook market’, Toby Johnstone, Sydney Morning Herald, 6 August 2013
‘Sydney currently a sellers' market,' Elders Real Estate News, 30 July 2013
‘Credit may be cheap but wary buyers are reluctant to invest’, Clancy Yeates, SMH Business, 10 August 2013
Residex Newsletter, John Edwards, August 2013
‘Home buyers in for a tough time, according to new RP Data figures’, Sonja Koremans, News Limited, 1 August 2013
‘Investment Watch, RBS Morgans, August 2013
‘Investors and upgraders continue to power the housing market’, Cameron Kusher, RP Data,
18 July 2013
‘Residential properties listed for sale in Sydney down 23.1% in a year adding further pressure to house prices: SQM’, Larry Schlesinger, Property Observer, 4 July 2013
‘Stronger market awaits election outcome’, Australian Property News, 8 August 2013
Will Sydney Property save the Economy?
Mon, 22 Jul 2013Housing is back in the news, this time as a potential saviour of the Australian economy.
Fairfax Media gathered a panel of 27 independent economists from financial institutions, universities, consulting firms and industry groups to compile a forecast of Australia's economic performance in the coming few years.
Their conclusions are of interest to everyone interested in Sydney property, from homeowners to politicians.
They say we might as well accept that the slowdown in China’s economy is already impacting on Australia’s growth and that optimistic Treasury forecasts for 2013-14 and 2014-15 made a few months ago are not going to be reached.
We too will experience a slowdown and it could take some time before our economy again picks up speed.
The mining investment boom has peaked and unemployment will rise, although the decline will be gradual and growth will continue, but at a lower rate than previously anticipated.
Getting down to details, Fairfax’s panel of economists predicted a decline in the prices Australia earns for the commodities it exports, and forecasts continuing falls in domestic retail spending.
The ongoing decline in the value of the Australian dollar will, they say, assist the revival of non-mining industries but not in the next twelve months. Interest rates will remain low and more interest rate cuts are in the offing as households are slow to respond to the borrowing opportunities before them.
This partly explains the recent roller-coaster ride experienced by the Australian Share Market. In the month of June the ASX Volatility Index (VIX), which is a measure of implied volatility on the Australian market, jumped more than 17%.
Slowdown on the way
Credit Suisse analyst Damien Boey told Max Mason, Markets Reporter for Business Day, that analysts are carefully watching economic data to assess how well the mining and non-mining sectors of the economy are coping.
''We do have a slowdown coming and regardless of what policymakers do, we will experience slower growth, the question is, do we go into recession or not?
''Having said that, we have the room to ignite our economy with aggressive enough rate cuts and through fiscal spending,'' said Mr Boey.
As Herald financial journalist David Potts puts it: “The next six months or so were always going to be a rough patch. Mining investment is winding down and, so far, nothing is replacing it.”
Our being in the rundown period before an election isn’t helping. As respected economic journalist Peter Martin said in his ‘A Current Account’ column: “Someone is telling porkies. It’s either Gillard in saying everything is just dandy, or Rudd in evoking a sense of crisis.”
Martin points out that before she was deposed by Kevin Rudd, Julia Gillard said the economy was “growing, stable and strong”; Rudd’s line is more about the end of the resources boom and the need to adjust to the challenges that brings.
Eventually Peter Martin sides with David Potts and with the Rudd point of view. He concludes: “...Australia will have to find something – anything – to take the place of mining investment as a driver as it winds down.”
Housing could just become that ‘something’ that kickstarts an economy losing its way, according to an editorial in the Sun-Herald.
The article notes that Sydney houses just keep getting dearer. This is making it harder for younger people to enter the Sydney market, and the first home buyers’ share of new home loans is hovering near a nine-year low.
Across the state NSW has a shortfall of some 89,000 homes and this figure will only continue to rise unless something is done to increase the supply of housing.
Schemes must build new housing
The answer, as the editorial points out, is not in reviving earlier state and federal schemes that helped first home buyers to acquire existing properties. They didn’t make housing more affordable and, if anything, tended to drive up the price of existing housing.
NSW Treasurer Mike Baird had earlier said the former system was flawed: "Previous incentives to first home buyers for existing properties simply increased mortgage sizes, as they increased demand without any boost to housing supply.''
But even the present NSW first home owner grant of $15,000 that can only be used to buy new homes isn’t proving to be much of a stimulus.
The editorial refers to the state government’s recent White Paper on planning laws and says that its goals are admirable but the government must deliver on its pledge to improve the state's complex planning system.
If the government can actually get more new homes built, housing will become more affordable and the economy will benefit.
“No one knows exactly what will fill the gap left by mining,” says the editorial, “but housing is likely to play a big role, and more home construction would strengthen other industries from retail to manufacturing.”
In the meantime, sales of existing housing power ahead with Sydney's auction market recording the second-highest number of auction sales ever recorded for the month of June. Weekend auction clearance rates this June averaged 75% over the five weekends.
June sales figures from RP Data showed a 2.7% rise in dwelling values over the month. RP Data national research director Tim Lawless said last year’s improved sharemarket outcomes had led to an increase in dwelling values in Sydney’s prestige suburbs.
“Sydney’s most expensive suburbs have seen dwelling values rise by 4.8% over the past six months compared with a 3.2% rise in values at the most affordable end of the market and a 4.6% gain across the broad middle-priced segment of the Sydney market.”
Referring to the property pricing figures from May, John Edwards, founder of Residex says: “If you are anxious for personal wealth gains and you are invested in housing, the May statistics reveal that most markets have produced growth in housing values.
“On the other hand, if you are trying to get funds together to buy a house then the news is not so positive. Rents are rising, house prices are increasing and home savings deposits are growing at a lower rate.”
Mr Edwards notes that a significant landmark was achieved in May when the cost of the median house in Sydney rose to more than $700,000.
“If growth continues at an annual rate of just 5.2% per annum, which is a likely outcome and is less than the Residex model predicts, the Sydney median house price will rise to $1 million over the next seven years.”
Sources
‘Australia tipped to muddle through’, Tim Colebatch, The Age, 6 July 2013
‘Investors jittery on market roller-coaster’, Max Mason, Markets Reporter, Sydney Morning Herald, 6 July 2013
‘Peril amid political porkies’, Peter Martin, A Current Account, 7 July 2013
‘No clarity in confused economic picture’, David Potts, Sun-Herald, 7 July 2013
‘Boosting housing stock one option for economic salvation’, Editorial, Sun-Herald, 7 July 2013
‘Record June sales as market takes its usual July breather’, Dr Andrew Wilson, Sydney Morning Herald, 5 July 2013
‘Median house price in Sydney exceeds $700,000’, John Edwards, Residex Newsletter, June 2013
‘Buyers jump at bigger grant’, Toby Johnstone, Property Reporter, Domain, 30 June 2013
‘It's unanimous: Sydney property on the rise’ Stephen Nicholls, Property Editor, Sydney Morning Herald, 1 July 2013
Sydney property outshines shares and a shaky dollar
Thu, 20 Jun 2013A month can be a long time in economics as well as politics. Since May the Australian dollar has taken a serious tumble, losing about 10% of its value against the US dollar, while the Australian share market has fallen back about the same percentage from its spectacular rise since the start of the year.
At the same time mining investment is declining, the unemployment rate is forecast to rise, and the Chinese economy is slowing.
The Organization for Economic Cooperation and Development said in May that the Australian gross domestic product growth will slow to 2.6% in 2013, down from 3% projected last November – still not bad but indicative of a slowing economy for us as well.
RBS Morgans 'Investment Watch' for June 2013 says that we are still experiencing the negative effects of the RBA's tight fiscal policies in 2012:
“Since the end of 2012, the RBA has begun to cut interest rates. The positive effects of these interest rate cuts are only now being felt. Their effect on the Australian economy is being muted by continued fiscal tightening.”
Yet Sydney property continues to power ahead, apparently independent of most other economic factors, causing many market watchers to question how long the present situation can last.
Dr Andrew Wilson, Senior Economist for Australian Property Monitors, says the market’s strength is confirmed by rising home loans, auction clearance rates and housing prices.
“The clear expectation is that buyer activity will continue to rise driven by record low interest rates and rising confidence in most markets,” he wrote in a Domain.com article.
Figures from the Australian Bureau of Statistics show that in the first four months of 2013 loans for the purchase of owner-occupied homes rose 8.3% compared to the same period last year and 12.6% higher than two years ago.
Investors are especially active with investment loans up 18.3% compared to last year and 25.7% compared to two years ago.
Auction clearance rates stay high.
Sydney weekend auction clearance rates averaged 75% over April and May. Last year they were in their 50s.
RP Data's Cameron Kusher said in a Herald article that it was "unusual" that clearance rates were so strong. "You would expect that home values were rising," he said.
"Auction clearance rates have been very strong, but that won't necessarily translate into property value growth because it's all about the prices at which they're selling those properties.”
Nevertheless, Sydney’s auction market has been a high performer since Easter. This has been the best result since the boom market conditions of autumn 2010 when house prices were rising sharply.
Investors lead the charge
Anthony Keane, writing for News.com, took a look at Australia’s property investors and found they hold more than $4.4 trillion of property, which is three times larger than the value of their shares ($1.3 trillion) or their superannuation ($1.5 trillion).
He said that research by the Commonwealth Bank showed that investors make up more than one-third of Australia's property buyers.
And why wouldn’t investors like property? Daily Telegraph journalist Gemma Wilson said that Sydney rentals continue to rise as vacancies drop.
“The plunging vacancy rates are driving rental costs higher making Sydney the third most expensive city in the nation for renters, below Darwin and Canberra.
“According to RP Data, the median weekly rental price of a house in Sydney is $470 and $440 for a unit, that’s as much as $100 a week more than rental properties in Melbourne,” she said.
Stephen Nicholls, the Herald’s property editor, sees a downside in the high level of investor activity: “Wealthy baby boomers are snapping up apartments across Sydney to bolster their self-managed super funds, helping to dash the hopes of frustrated first-home buyers.”
He also laments the end of government subsidies for first-home buyers of existing properties.
“It's a far cry from the first-timer glory days of 2009 when there were government grants of $14,000 - even $21,000 for new properties - plus stamp duty exemptions.
“These days first home buyers of established property get nothing,” says Nicholls.
Which way for interest rates?
Interest rates now appear to be headed for further falls, according to the Herald’s business columnist Elizabeth Knight who says the Australian dollar is in a classic bear phase.
“The sluggish new home loan numbers provided traders with an excuse to sell the dollar. Make no mistake, the number of home loans approved edging ahead by 0.8% was not a disaster and wasn't bad enough under normal circumstances to move the currency.”
She says it’s clear that the RBA’s interest rates cuts of this year and 2012 have not been sufficient to stimulate increased spending from consumers or business.
“Where only a few weeks ago the experts were predicting one more rate cut later in the year, there are now bets on 50 basis points being shaved off the cash rate within months.”
However, Jessica Irvine, National Economics Editor for News Limited Network, says that her company’s expert panel of nine economists has concluded that interest rates have gone about as low as they can go.
“Just four members think interest rates should fall further in the coming year. Three want rates left on hold for at least a year and two think interest rate rises should be on the table.”
One member of the panel, managing director of Market Economics Stephen Koukoulas expects one more cut this year.
"Global risks and ongoing low inflation mean a future rate cut is still more likely than not," Mr Koukoulas said.
Ms Irvine said the chief Australian economist at Merrill Lynch Bank of America, Saul Eslake, said another cut was likely but the size would depend on the dollar and whether an incoming Coalition government cut spending dramatically.
House prices strengthen
In a recent Herald article Stephen Nicholls posed the question: “Are house prices rising or falling?”
He noted that RP Data’s figures indicated that housing prices fell in April but auction results and data from Australian Property Monitors suggested otherwise.
APM’s most recent figures for the March quarter showed Sydney's median price at a new high of $671,681 and described it as entering an "expansionary" phase.
“So who to believe?” asks Nicholls. “It's plausible, perhaps, that they're both right – with the RP Data figures also taking into account private treaty sales? Or it could be, as RP Data analysts say, that vendors have dropped their prices to meet the market”, he said.
‘Business Day’ writer and editor of MacroBusiness David Llewellyn-Smith commented on the increasing divergence between high auction clearance rates and property prices:
“On balance we would tend to favour the auction data for now but will as it stands the price data is showing no indication of following earlier high clearance rate periods into double-digit price growth territory.”
Mark Bouris, who was the founder of Wizard Home Loans and is now a columnist in the Sydney Morning Herald’s ‘Money’ section, cautions that house price statistics should be examined in greater depth before reaching conclusions.
“While Sydney had a drop in house prices of 1% [in April], it experienced a rise of 3.9% over the previous year.”
Bouris also commented on Channel Nine’s breakfast show that he expected interest rates to be cut further and that this would drive house prices upwards.
“From now until about five years’ time house prices will go up quite a lot and it’s a good time to take the opportunity to invest in real estate.”
Sources:
‘Market strong as buyers back bricks and mortar,’ Dr Andrew Wilson, Domain, 11 June 2013
‘RBA Holds Key Rate at Record-Low 2.75%’, Michael Heath, Bloomberg, 4 June 2013
‘Property investments need time,’ Mark Bouris, 9 June 2013
‘Are house prices rising or falling?’ Stephen Nicholls, Sydney Morning Herald, 3 June 2013
‘Strong winter auction season looms’, Dr Andrew Wilson, Sydney Morning Herald, 3 June 2013
‘Property investors a thriving species,’ Anthony Keane, News.com, 9 June 2013
‘Rental costs rise as vacancies drop in Sydney: Real Estate Institute of NSW,’ Gemma Wilson, The Daily Telegraph,14 June 2013
‘Investment Watch’, RBS Morgans, June 2013
‘Lifting the veil on the property recovery,' Business Day, 4 June 2013
‘Boomers put super squeeze on first home buyers,’ Stephen Nicholls, Sydney Morning Herald, 2 June 2013
‘Mortgage rates tipped to stay steady as $A tumbles,’ Jessica Irvine, News Limited Network, 3 June 2013
‘Property prices slip,’ News Limited, 4 June 2013
‘Unemployment tipped to rise slightly,’ Sky News, 13 June 2013
Sydney Property Upswing is Underway
Mon, 20 May 2013The 25 basis points interest rates cut announced by the Reserve Bank after its May meeting came as a surprise to most economic forecasters. In the RBA's quarterly Statement on Monetary Policy, the Bank emphasised that the Australian dollar had remained high while inflation at its present rate posed few concerns.
So we move back to the position where further rate cuts this year are possible as evidence of a slowdown in the mining sector piles up and fears about the end of the mining boom begin to grow.
There's also the forthcoming September election to consider. The pre-election period is always seen as a time of slowdown in economic activity as business awaits the outcome of the voting.
However, the RBA did note that a reversal of its recent easing of monetary policy could be required if "dwelling prices rise more quickly than assumed, spurred by low interest rates.” Housing is still in the sights of our economic governors, as is a possible rise in unemployment or a marked growth in household indebtedness.
It’s taken a while for the RBA’s rate cuts to have an effect on housing prices. Master Builders Australia chief economist Peter Jones told ABC News that it’s unusual for rate cuts to take so long to have an impact.
"It's a little bit of a hangover from the financial crisis - this aversion to debt and lack of confidence in things like global economic developments, some uncertainty at home as we go through structural change," he said.
"It is a little bit unusual but, it does look like interest rates are starting to improve the situation."
As the recent drop in the value of the Aussie dollar against the US greenback shows, significant changes can happen without much warning and in a very short span of time.
However, whichever way interest rates go in the short- to medium-term they’ll still be at or near historic lows. When the ANZ Bank announced it was lowering its mortgage rates by 0.27 percent, even more than the RBA’s recent rate cut, it sent a clear signal that any substantial increases are a long way off.
Buyers at the Sydney auctions responded to the rate cut in the most positive way; they bought.
"We saw fast, strong, immediate and confident bidding,” Sydney auctioneer Damian Cooley told the Sydney Morning Herald’s property editor Stephen Nicholls.
As an example the article used a house at 56 William Edward Street, Longueville that sold for $1,820,000, which was $220,000 over reserve, with eight registered bidders.
The weekend auction clearance rate was 70.7 percent. It followed the previous week's 78.1 percent, which was the highest for three years.
Australian Property Monitors senior economist Dr Andrew Wilson said that although the clearance rate was slightly weaker than the previous week it was still 10 percentage points above the same weekend last year.
"Expect the fall in rates to work its way through the market over the following weeks," he said.
"This is one of the best weekend auction results for the prestige market for some time."
Mr Nicholls noted that the Sydney auction market has now recorded 11 weekends with auction clearance rates above 70 percent this year, with two others at 69 percent – well above the figures recorded in the past two years and an indication of growing buyer confidence.
Even prices at the top end of Sydney’s market – properties in the city’s prestige suburbs that were languishing in 2012 as lower-priced areas attracted high levels of buyer interest, are now showing dramatic improvements.
According to the Herald’s Stephen Nicholls, much of the activity at the prestige end results from Chinese buyers taking advantage of the government's introduction of the Significant Investor Visa for migrants who invest $5 million in the country.
“On the northside prestige agents are lamenting the lack of trophy homes in that $20 million-plus range, although there has been a string of recent sales about $7 million”, he said.
An AAP report in the Sydney Morning Herald said that the biggest increase in home loan approvals in four years – a jump of 5.2 percent in March compared to the previous month, confirmed the recovery of the housing sector after two fairly bad years.
The report quoted JP Morgan economist Tom Kennedy who commented on the March figures from the Australian Bureau of Statistics.
"Even though today's data may be slightly overstating the strength of the home loan figures, I would say the underlying trend is certainly one of improvement.
"It suggests that investor and owner-occupier activity for non-first home buyers is really the driving force here and I would expect investors to become more active over the coming months as they take advantage of low interest rates," Mr Kennedy told AAP.
Perhaps because of the high level of property prices, of all the states and territories only NSW has a higher proportion of investors in the market compared with last year.
In an article on Domain.com, Dr Andrew Wilson notes that the proportion of investor loans approved in NSW this year has increased to a near all-time high of 50 percent compared to 43 percent during the same period last year.
“Owner-occupier activity in NSW by contrast has fallen by 3.7 percent over the 12 months due to the collapse in the first-home buyer market.
“NSW is quite clearly the current powerhouse of residential investment in Australia accounting for 36 percent of all investor activity.”
Dr Wilson says it’s no surprise that investors are currently active in NSW with house prices that continue to increase, high and rising rents, low vacancy rates and a solid local economy.
Writing in Business Day, Simon Johanson and Chris Vedelago have no doubts about why the housing market has suddenly acquired so much vitality.
“It's investors. They have piled in, fuelled by historic low interest rates, cheaper prices, generous negative gearing tax deductions and relaxed superannuation rules.
“Loans to investors have soared 16 percent in the last year, Australian Bureau of Statistics trend figures reveal. Meanwhile, lending to owner occupiers - the traditional powerhouse of the market - grew at a far slower pace, just 6.6 per cent over that time.”
There has been a measurable shift to drivers of the property markets, according to Johansen and Vedelago.
“We are slowly becoming a nation of property investors rather than home owners, new Tax Office records show. One in seven taxpayers now owns an investment property and one in 10 are negatively geared.”
They say that the repercussions of the Global Financial Crisis have narrowed investors' options.
“Many are hoarding cash in long-term bank deposits but as they reach maturity and new, lower interest rates begin to bite, investors are confronted with a choice - rollover or run.
“These falling returns on cash deposits are accelerating a push into property by self-managed superannuation funds (SMSFs), observers say.”
David and Libby Koch, writing for News.com, say that there are four phases of property:
- Opportunity Phase: best time to buy. Beginning of cycle;
- Growth Phase: investors more confident as they see values rise;
- Peak Phase: inexperienced and timid investors pile in; and
- Correction Phase: buyers over extend, banks tighten credit.
Looking at the present situation there can be few doubts that Sydney property values have gone through a trough and are once again beginning to rise. Unemployment and interest rates are low, the population is growing, the value of the Australian dollar is falling which makes property more affordable for overseas buyers, and consumer confidence is strong.
All of which means this is the start of what David and Libby Koch term the ‘opportunity phase’. Those who buy now will see the value of their investment grow; those who hesitate will miss out on a very real opportunity.
Sources:
‘High dollar, low inflation influenced RBA rate cut’, Michael Janda, ABC News, 10 May 2013
‘4 property phases you need to know’, David and Libby Koch, News.com, 29 April 2013
‘Interest rate cuts spark buyer enthusiasm’, Stephen Nicholls, Sydney Morning Herald, 11 May 2013
‘Investors strong in NSW, but not elsewhere’, Dr Andrew Wilson, Domain.com, 8 May 2013
‘Offshore demand spurs buying spree at top end of town’, Lucy Maken, Domain.com, 4 May 2013
‘Housing figures show RBA rate cuts helping’, ABC News, 13 May 2013
‘Home loan approvals surge in March’,AAP story in SMH, 13 May 2013
‘Investors help lift property market out of the slump’, Simon Johanson and Chris Vedelago,
Business Day, 4 May 2013
Sydney real estate accelerates
Mon, 29 Apr 2013The Reserve Bank decided at its April meeting to once again leave interest rates as they are for now. RBA Governor Glenn Stevens' monthly announcements are beginning to resemble a recorded message - something like: "The economy's going well, rate cuts are working, and if conditions take a turn for the worse we can always look at further reductions."
But there's no turn for the worse in sight. Statistics from RP Data-Rismark showed that capital city house prices rose at their fastest pace in almost three years, gaining 2.8 percent in the three months through March from the previous quarter.
"The strong result comes at a time when we are also seeing a sustained lift in many other housing market measures including a recovery in dwelling values, higher auction clearance rates and less discounting from vendors," RP Data said in its report.
This is not to say the ongoing problems from the GFC, whichever version we’re now watching, are over by any means. Big investors in Cyprus will take massive haircuts on their savings, and Slovenia has just joined the list of European countries likely to need a bailout to stay afloat.
Commodity prices globally are slipping somewhat, and even the price of gold is looking shaky. So, what does all this have to do with the price of housing in Australia? Not much, apparently.
Forward prices on financial markets suggest there will still be one more interest rate cut this year, although a growing number of economists and property analysts are saying there could even be an upwards move before the end of 2013.
House prices trending upward
Prices of existing dwellings are rising despite clear signs of a recovery in housing construction and growth in demand for new homes. House prices in Sydney, still the city with Australia’s highest housing costs, rose 1.5 percent in March from February making Sydney the only capital city to have fully recovered its losses of the past three years.
RP Data senior research analyst Cameron Kusher told Chris Vedelago, property reporter for the Sydney Morning Herald, that the Sydney market has been quite strong since May last year.
"Sydney has experienced a long period of sustained under performance. There's not a lot of new construction taking place but population growth is starting to ramp up again, which is what I really think is driving that market.”
New data from the Australian Bureau of Statistics suggests that state government incentives for first home buyers of new homes in NSW are beginning to have an effect. House building approvals rose by 8 per cent in February, to a level that is 28 per cent higher than a year ago.
"Such a surge in new home building does reflect the first sign that those incentives are starting to bite with first home buyers," senior economist at Australian Property Monitors, Dr Andrew Wilson told Domain’s Chris Nicholls.
"Prices are rising, rents are rising. We've got record low interest rates and they've got a bonus," he said.
"Combined with a solid local economy...activity in the long-subdued new home sector may finally be reviving."
The same article quoted Housing Industry Association economist Geordan Murray who said that indicators of consumer sentiment were improving.
“We may well be seeing an early sign that this is flowing through to activity on the ground," said Mr Murray.
He noted there were 1601 detached homes approved in NSW in February, one of only three months since 2005 when detached dwelling approvals have gone past the 1600 mark.
"The other two occurred during the financial crisis when federal stimulus policies were in full effect,” he said.
New housing construction strong
Antony Lawes, property writer in Domain, said that the construction of new houses and apartments in NSW this year will climb to its highest level in almost a decade.
He quoted the Housing Industry Association's chief economist Harley Dale who said the total number of housing starts is forecast to pass 35,000 for the first time since 2005, and should keep rising for at least the next two years.
But even at these levels, he said the shortfall in new dwellings was still as much as 10,000 a year below what was needed.
It’s a good sign that much-needed new homes are being built, but auction clearance rates are booming as eager buyers push housing prices past their reserves.
In late March the auction day billed as ‘Super Saturday’ achieved a clearance rate above 70 percent. With 709 auctions scheduled due to the fact there were no auctions over Easter the day was a huge success. On the same weekend last year, the clearance rate was just 52.8 percent.
Kirsten Craze, journalist with The Daily Telegraph, uncovered an interesting fact that may help explain the apparent shortage of residential property in Sydney.
“Perhaps it's due to the stamp duty fees, maybe it's the renovation revolution, or it might just be because moving house is stressful. But Australian homeowners are remaining in their houses longer,” she commented.
She referred to a recent study by RP Data's research analyst, Cameron Kusher, that showed the average length of home-ownership for both houses and units was 9.3 years and 8.2 years respectively. A decade ago the figures sat at 6.8 years and 5.9 years.
"The average hold period for houses and units remained relatively static until late 2005. It has, however, increased consistently from this time where we have seen a sharp rise in length of time homes were held for recent years,'' Mr Kusher said.
A Sydney Morning Herald article by Ian Mylchreest, an Australian journalist now living in Las Vegas, said that despite promises from NSW politicians on both sides of Parliament there’s not much governments can do to lower the cost of Sydney housing.
“Two-income families can pay more and they are happy to pay extra to be near the beach or private schools. Negative gearing has become such a popular tax write-off that no government can wind it back even though it encourages too much investment in rental property. That money inflates real estate even more.”
He said that prices may ‘stumble for a quarter or two’ if interest rates or unemployment levels spike but the trend is inexorably upward.
“Politicians could never raise enough revenue to affect the Sydney real estate market that can sell $1 billion or more in a week. If they did reduce prices, home owners would be rioting.”
More dwellings needed
The Herald’s Sean Nicholls and Leesha McKenny analysed the state government’s thinking on the housing situation.
“Sydney will need to accommodate 80,000 more homes than previously forecast over the next 20 years to cope with a population surge under the latest growth targets set to be unveiled by the NSW government,” they found.
“The revised housing target is for an extra 545,000 homes by 2031 - an average of 27,250 a year. This is a 17 percent increase on the extra 23,300 a year - or 466,000 - forecast in the previous strategy, published in 2010.”
The writers noted that the total population forecast has risen to 5.6 million by 2031 due to an immigration spike in 2008-09.
It’s therefore not surprising that the latest survey of consumer sentiment by Westpac and the Melbourne Institute found that 62 percent of respondents expected home prices to rise over the next 12 months, while 30 percent looked for a steady outcome and just 8 percent expected falls.
Meanwhile NAB group chief economist Alan Oster told the Bloomberg Economic Summit that the property market has recovered from its weak patch in 2012.
"Clearly the market is starting to improve and we would expect it to increase moderately as we go forward,'' he said.
Westpac chief economist Bill Evans told the Summit that house prices will rise roughly in line with incomes.
"In Sydney for instance affordability levels are the best they've been for 10 years," Mr Evans said.
"So relative to Australia's affordability measures in the past the current situation looks quite manageable."
There’s no longer any doubt that the start of a new upward cycle in Sydney property is underway. History tells us that the next stage of the cycle will be a period of acceleration and the experts seem to agree.
Sources:
‘House price outlook turns bullish: survey’, Domain, 12 April 2013
‘Home construction set to climb’, Antony Lawes, Domain, 12 April 2013
'Middle Australia' driving home price growth, Stephen Nicholls, SMH, 10 April 2013
‘Rebound for housing’, The Daily Telegraph, 11 April 2013
‘Many first-time buyers priced out of market across Australia’, Kylie Williams, The Daily Telegraph, 11 April 2013
‘House prices post strongest gain since May 2010 ‘, James Glynn, Dow Jones, 2 April 2013
‘Home prices rising as rate cuts fuel confidence’, Chris Vedelago, Domain, 2 April 2013
‘Signs of a pick-up in house building’, Stephen Nicholls, Domain, 4 April 2013
‘Auction overdrive as buyers push past reserves’, Staff reporters, news.com.au, 25 March 2013
‘Sydney's stay-put homeowners’, Kirsten Craze, The Daily Telegraph, 24 March
‘Property market warming up’, The Sunday Telegraph, 24 March 2013
‘Super Saturday lives up to its name’, Domain, Stephen Nicholls and Antony Lawes, 24 March 2013
‘Sydney housing: build it and they will inevitably buy’, Ian Mylchreest, Sydney Morning Herald online, 25 March 2013
‘City's surge pushes up homes target’, Sean Nicholls and Leesha McKenny, Sydney Morning Herald, 19 March 2013
Sydney real estate is a source of confidence
Mon, 18 Mar 2013Despite the usual uncertainties that accompany an impending federal election, Australia's consumers are demonstrating a remarkable level of confidence, according to the March Westpac-Melbourne Institute consumer sentiment survey.
Where a score of 100 indicates that the weight of optimism just offsets the weight of pessimism, the March score of 110.5 is the best recorded since December 2010.
One of the survey's key questions was: "Is this a good time to buy a house?" The answer was a resounding 'yes' with a 3-year high score of 144 and 60% of respondents saying they thought this was indeed a good time.
Confirming recent housing market statistical upticks, ANZ economic analyst Savita Singh said this pointed to a recovery in housing investment because “...sentiment about house purchases usually leads building approvals by around 12 months.”
The survey also found that 21% of respondents thought real estate was a wise place to invest their savings. Confirming the trend, approvals in investor finance for housing rose by 4.4% in January which more than offset the December decline of 2%.
Investors take over
About the only market segment holding back are the mostly young first home buyers, disappointed by the termination of the NSW government’s $7000 grant for established properties, whose numbers dropped for the fourth consecutive month.
MacroBusiness economist Leith van Onselen told the Herald’s Chris Vedelago that baby boomers were picking up the slack: “Young first home buyers are leaving the market but baby boomers are entering the market. There’s a recovery going on but it’s built on investor demand.”
A Bloomberg report in Domain quoted Matthew Hassan, senior economist at Westpac who said the most important interest rate is that paid by borrowers.
“It gets most tempting for investors when mortgage rates get below 5 per cent," said Matthew.
"They're getting close to that level, and if you couple that with vacancy rates around 2 per cent, especially if we get some renewed gains in rents and a clear stabilisation in prices, that'll encourage more investors into the market."
Interest rates remain a topic of interest to owner-occupiers and investors alike. At its March meeting the Reserve Bank of Australia left the cash rate unchanged at 3%. RBA Governor Glenn Stevens said the Board felt conditions indicated there was no immediate need for any adjustments.
“Dwelling investment appears to be slowly increasing, with higher dwelling prices and rental yields,” he said.
He went on to say: “During 2012, there was a significant easing in monetary policy. Though the full impact of this will still take more time to become apparent, there are signs that the easier conditions are having some of the expected effects.”
Expectations of growth
HSBC Australia’s chief economist, Paul Bloxham, thinks the RBA has it right and those using home loan approvals from January as a gauge have missed the upturn that followed.
"The soft patch in the economy is probably behind us, we're going to see growth pick up on the back of the rate cuts that have already been delivered," said Mr Bloxham.
Australian Property Monitors senior economist Andrew Wilson told Domain’s Toby Johnstone that those waiting on further rate cuts this year could be disappointed.
"If the economy starts to move forward reasonably well this year, notwithstanding what happens in housing, I do think the potential direction for the next movement in interest rates is up," he said.
This wouldn’t please Master Builders Australia's chief economist Peter Jones who said that previous cuts had not done enough to boost new home building.
"With six cuts to interest rates in this easing cycle, the industry would have expected recovery to be much more advanced," he said.
Across Australia the expectations of growth in property prices are taking hold. As Michelle Hele writes in the Brisbane Courier-Mail, the latest RP Data Capital Markets Report has revealed "a broad-based recovery'' in capital city dwelling values.
“While values had dropped 7.4% between October 2010 and May 2012, they have now climbed back up by 3.3% in the nine months since May.
“Each of Australia's capital cities has recorded a lift in dwelling values since their respective low points, from a 2.1% rise in Brisbane to 11.2% in Darwin.”
RP Data’s Tim Lawless said that although a recovery is underway the pace of growth would be modest and would stay that way for the rest of the year.
"The growth in dwelling values since the end of May has averaged just 0.4% month to month,'' he said.
He also noted that auction clearance rates remained strong, with rates at the big auction markets of Melbourne and Sydney consistently above 60%. Sydney’s rate has recently topped 70% while the days-on-market figure has come down.
Housing a form of savings
Housing remains the best long-term financial decision people can make, says Anthony Keane from the Adelaide Advertiser who edits ‘Your Money’.
He states that nothing’s as powerful as the financial benefits of holding an asset that puts a roof over your head and delivers what he calls ‘inflation-beating’ benefits.
“Anyone who bought 10 or 15 years ago is sitting on a more expensive asset with relatively low mortgage payments - as long as they didn't blow their equity on big screen TVs and other toys,” he says.
“Even if you don't think house prices are going anywhere in the foreseeable future, owning property gives you a shield against rising inflation.”
He commented that owning property becomes a forced form of saving that will pay off over the long term, especially when a home is the only asset that is free of capital gains tax when you sell it.
“It may not feel like it when house prices are weak, but owning property for the long term is still an extremely wise financial move. Just ask most 60-year-old renters.”
Dr Andrew Wilson, senior economist for Australian Property Monitors, said there is now increased confidence among sellers about realising a sale.
“Signs are also emerging of a lift in Sydney buyer activity, with increased sales in the prestige market.
“Low interest rates are fuelling a strengthening housing market, which has been a typical impact of low mortgage rates on buyer activity in previous housing growth cycles.”
Dr Wilson commented that the RBA will watch for signs of a prices breakout in the housing market, but the official cash rate will remain at 3% over the near term.
“And although the economic climate remains fluid, optimism in the Sydney housing market is rising - and rising.”
Sources:
‘The consumer's thoughts turn to housing,’ Michael Pascoe, Business Day, 14 March 2013
‘Investors scramble as rental crisis bites,’ Bloomberg in Domain, 12 March 2013
‘Modest property growth forecast for capital cities in 2013,’ Michelle Hele, The Courier-Mail, 13 March 2013
‘Home is where the house is,’ Anthony Keane, The Advertiser, 12 March 2013
‘No surprises in the Reserve's decision,’ Toby Johnstone, Domain, 5 March 2013
‘Fresh rounds of interest rate speculation,’ Kelvin Boyle, Mozo.com.au, 13 March
‘Market confidence rises as interest rates take a hold,’ Dr Andrew Wilson, Sydney Morning Herald, 9 March 2013
‘Home Loans Drop,’ AAP report in Sydney Morning Herald, 14 March 2013
‘Consumer Confidence rises with a Vengeance,’ Peter Martin, Sydney Morning Herald, 14 March 2013
‘Fears for housing recovery as first time buyers walk away,’ ChrisVedelago, Sydney Morning Herald, 14 March 2013
‘Statement by Glenn Stevens, Governor: Monetary Policy Decision,’ RBA Media Release, 5 March 2013
2013 off to a good start for Sydney Property
Fri, 22 Feb 2013There were quite a few economists and other property-watchers caught off guard when the Reserve Bank of Australia didn't change its cash rate at the RBA's February meeting. A reduction of 25 basis points had been expected, although it's now a virtual certainty for the Bank's next meeting.
For now the official cash rate remains at 3%. In his statement explaining the RBA's decision, Reserve Bank governor Glenn Stevens said that economic activity, especially in the property area, was showing signs of strengthening.
"There are indications of a prospective improvement in dwelling investment, with dwelling prices moving higher, rental yields increasing and building approvals higher than a year ago."
This is supported by the Australian Bureau of Statistics’ Index of Established House Prices showing that prices increased nationally by 1.6% in the December 2012 quarter with Sydney’s growth higher at 2.3%.
The Sydney weekend property auction on February 9 turned in a respectable clearance rate of 62%, followed by an impressive 72% the next weekend – a clear indication that home buyers aren’t holding out for more rate cuts; they’re actively acquiring what’s on offer.
John Edwards of Residex agrees with the Bank’s positive outlook. In the Residex 2012 summary of housing markets he says higher levels of consumer confidence should carry over into increased housing market activity.
“On an Australia wide basis, capital growth in the house and land market achieved its best performance in the last 18 months,” he said.
“Weekly rentals also increased, with rentals for houses and land maintaining real value while units outperformed inflation by about 3%.”
Residex figures show that for the year ending December 2012 Sydney houses experienced a capital growth of 4.91%. However, predicting a slowing economy John Edwards does say that he believes the RBA will be forced to reduce the cash rate to as low as 2.25%, or perhaps even 2% over the next 12 months.
Unknowns in the picture
There are several unknowns that could contribute to a possible slowing of property market activity. The first is the anticipated slowdown of the current mining boom, particularly its current investment phase. It has to happen, but nobody can say exactly when.
Next, there’s going to be a federal election on September 14, a date that at this point in time is expected to bring a change of government to Australia.
In the lead-up to the election both parties will be announcing a variety of policies, hoping to tempt the electorate into voting for one side or the other. The cash-strapped ALP is already talking about changes to Australia’s superannuation system as a way to pay for programs such as the National Disability Insurance Scheme which it hopes will be vote-getters.
Neither side of politics is likely to go to the polls offering a generous subsidy for home buyers, whether first home buyers, buyers of newly-built homes, or any other sort of real estate purchasers. The money simply isn’t there.
What may be coming, regardless of who takes over in Canberra after September 14, is changes to the concessional taxation treatment of superannuation, both when money goes into super and also while it’s accruing income. The nett result would theoretically be more money going into the government coffers and less into super funds.
This could affect the trend of superannuation funds purchasing property, a factor of growing importance in the real estate sector. However, as the Sydney Morning Herald’s Peter Hartcher points out, the government might not gain much in the way of additional revenues.
“Richer people would simply divert money away from super and into some other low-tax investment, probably real estate. The Treasury wouldn’t be much better off and Australia’s crisis of housing affordability would only get worse”, he said.
Imponderables aside, Australia’s love affair with property is still as passionate as ever. A survey by Realestate.com.au reported in News Limited publications found that nearly 60% of people responding to a survey on the website said they intended to purchase a property in 2013. Almost 50% of the over-65s responding said they intended to sell a property and downsize.
It must be noted that any visitor to the Realestate.com website is naturally interested in property. Nevertheless, these are pretty positive figures and bode well for the property market in 2013. Even more interesting is that 60% of those wanting to acquire property are 18-24 year olds.
A buzz of optimism
There’s no mistaking the current buzz of optimism. Angie Zigomanis from BIS Shrapnel told ABC Radio’s Rebecca Nash that 2013 would be a good year for the market.
“The early part of the year might be a bit soft as confidence starts to turn around, but by the end of the year we expect prices to be showing stronger growth.”
Dr Andrew Wilson from Australian Property Monitors told the Herald’s Chris Vedelago that Sydney’s house prices rose in 2012 by 3.4% to hit a record average of $656,400 while unit prices rose 5.6% to a new high of an average $475,300.
"Sydney has now surpassed the peak it hit in June 2011, wiping out the losses that have been experienced over the two-year downturn. The market has definitively recovered," Dr Wilson said.
Also helpful is that mortgages are already at their lowest level in two decades, even without any further cuts from the RBA.
Michelle Hutchinson from the RateCity website told Domain’s Clancy Yates: “We have never seen average three-year fixed rates this low. It came close in early 2009 but it didn’t reach the average 5.53% that we currently have right now.”
Savanth Sebastian, CommSec economist, told The Daily Telegraph that the NSW housing industry will experience strong growth over the next 12 months.
"It's been a long time coming," he explained. "We are saying five per cent growth nationwide in prices.
"Credit growth has been subdued for some time, but some of the numbers we are looking at internally at CBA (Commonwealth Bank Australia) show a significant pipeline of homebuyers.''
Buyers agents Finders Keepers explained why they were confident Sydney property prices would rise this year: “The market fundamentals for a house-price recovery are all good and our 2013 forecast is coming off a very low base of near-zero growth for 2011-2012.
“We’re expecting price growth roughly in line with 2009, when Sydney median house prices increased by just under 7%.”
Another rate cut by the Reserve Bank will only strengthen the buoyant mood that now prevails in the Sydney property market.
Sources:
‘Gillard’s discordant old song’, Peter Hartcher, News Review, February 16-17 2013
‘Agents back RBA decision’, Toby Johnstone, Domain, February 5 2013
‘Property prices end the year on a high’, Toby Johnstone, Domain 31 January 2013
‘New home sales rise for third straight month’, Simon Johanson, Business Day, January 31 2013
‘Sydney outpaces Melbourne as house prices recover’, Chris Vedelago, Business Day, January 31 2013
‘Sydney house prices severely unaffordable’, Stephen Nicholls, Domain, January 22 2013
‘Capital city house prices rebound’, News.com.au, January 31 2013
‘Love affair with property hasn’t faded’, Andrew Winter, News Limited Network, January 29 2013
‘Could 2013 by the year of recovery for residential real estate?’,Rebecca Nash, ABC Radio, January 30 2013
Residex December 2012 Report, John Edwards, Residex Pty Ltd
2013 looking good for Sydney property
Sat, 19 Jan 2013Although it's been ten years since the Sydney property market peaked, to some it might seem like only yesterday that homeowners could count on their properties shooting up by something like 10% per annum. But since 2003 the rates of increase have been brought much closer to other indices such as the increase in the cost of living or the rise in average incomes.
Not that that's unusual. In fact, property has always been a long-term investment and historically has provided one of the best returns of any form of investment over time. Of course it has the added advantages of putting a roof over people's heads, and is a lot safer than entrusting hard-earned funds to the vagaries of the sharemarket or to investments that sound good but can turn out to be traps for the unwary.
News Limited's Anthony Keane had this to say: "Millions of Aussies have been burnt by investment and superannuation losses in recent years, but if you ignore property and shares you're only ever going to have low-income cash investments where the value of your initial dollar gets continually eroded by inflation."
When the GFC arrived in 2008-09 we began to see prices in some capital cities slip into reverse. Sydney property values fluctuated between no growth and slow growth, and by 2011-12 the boom of the early ‘noughties’ had become a distant memory.
In the words of RP Data’s senior research analyst, Cameron Kusher: “It is clear that the previous strong value growth conditions to which many home owners became accustomed of recent years are well and truly behind us.”
Interest rates to fall further
Now, as we embark on our voyage through 2013, we wonder what lies ahead. Incidentally, Mr Kusher forecasts that in 2013 home prices will increase at a rate somewhere between inflation and wage growth which would mean a rate of increase between 2% and 3.75%.
One of the most important factors in the pricing equation is interest rates. The Reserve Bank of Australia has cut its cash rate by 1.75% since November 2011 bringing rates to their lowest point in half a century.
Standard variable mortgage costs are now at their lowest level in two years, and traders in the currency markets are rating it a 50% chance that the RBA will drop its rate by another quarter of a point to 2.75% by its March meeting.
Economists at NAB have recently revised their interest rate outlook and now expect the official cash rate to fall to 2.25% this year. NAB's chief economist Alan Oster has even forecast three separate 25-basis-point rate cuts in 2013.
"You could well have one in February, if not I think by March anyway," he told ABC News online.
"Then I think the Reserve would like to sit and watch for a while but we think, by the middle of the year, they'll see the need to do more, so we've tentatively put the rate cuts in March, May and August."
Prices to rise in 2013
Senior economist of Australian Property Monitors, Dr Andrew Wilson, says he expects prices nationally will grow between 3% and 5% in 2013.
“2013 should continue to build on the modest gains of the past year, however the forthcoming federal election and the likelihood of a protracted campaign may result in some uncertainty among homebuyers and sellers, with confidence already low,” he said.
Releasing the Australian Property Monitors annual State of the Market report, Dr Wilson said Sydney would easily outpace Melbourne with a predicted rise of from 3% to 5%.
BIS Shrapnel's managing director, Robert Mellor, agrees the election has the potential to be disruptive, but said that he still expects the activity of investors and upgraders to offset any pre-election negativity.
"Sydney would be worst case a couple of per cent growth; optimistic 7% or 8%," he said.
St George Bank economist Janu Chan told Bloomberg that Sydney home prices could rise by 5% to 10% percent in 2013. This is a bit higher than analysts from ANZ and CBA who predict average gains of between 3.5% and 5%, but they nevertheless agree on the direction property prices will take.
Savanth Sebastian, an economist in Sydney with Commonwealth Securities who forecasts a 5% average increase in housing values across the country in 2013, says he believes any increase in home building would ‘keep a lid’ on prices despite the RBA’s easing of interest rates.
He goes on to say that migration is at a 3 ½ year high and this means more homes will be built, but rental yields will be the real driver of growth in 2013.
“Because vacancy is back under 2% rents will go up, and then people look at the yield on those properties and say 'well, this home should be worth more'." He said.
Construction in the doldrums
There’s certainly no flood of new home building threatening those holding current housing stock. Australian Bureau of Statistics figures showed that new homes under construction fell for the third straight year in the 12 months to 30 June, and building approvals dropped for a second straight year in the twelve months to 31 October.
It should be noted that the number of residential building approvals rose 2.9% from a low base in November, according to the Australian Bureau of Statistics. UBS senior economist George Tharenou told AAP that the figures suggested a modest recovery was underway in the housing sector, although almost all of the growth was in approvals for multiunit properties.
"While a third consecutive slowing in the overall pace of contraction in the Australian PCI (Performance of Construction Index) marks an encouraging end to 2012, the updates for housing were disappointing," Housing Industry Association Chief Economist, Harley Dale, told realestate.com.au.
"Detached house building represents well over 60% of all residential construction activity in Australia and the December 2012 Australian PCI points to a steeper decline in activity and new orders, not to mention employment.”
Now consider the returns available to investors. Total gross returns on houses and apartments rose to 4% in Australia’s eight biggest cities when calculated at the end of 2012, according to figures from RP Data. Rental yields remained steady at 4.2% for houses and 4.9% for apartments.
This, together with historically low interest rates, is encouraging more investors to purchase income-producing properties. Investors took out $7.7 billion in home loans as of 31 October which was a 15% rise from two months before.
There are even those who say that price rises in Sydney property are in the stars. According to an article in The Australian by astrologer Elizabeth Ball, the 2013 property market is dominated by two planets - Jupiter and Saturn.
“A favourable aspect of the two planets will help the market rise at a sustainable rate”, she predicts.
“In the past Jupiter transiting Cancer has coincided with the 2002 US housing bubble and the 1998-90 Australian house price boom.
“Jupiter, which rules expansion, hope, confidence, and optimism, enters Cancer, which rules home and family, on June 27, 2013, through July 17, 2014, making the property market boom again.”
Property prices are cyclical. The boom times of ten years ago represent the top of the market just as prices in the post-GFC era represent a pricing trough.
The turning point has already been reached as evidenced by figures released in January by the NSW Valuer General, Philip Western showing the value of residential land in the City of Sydney has risen 11% over the past three years.
Forecasters - whether analysts, economists or even astrologers, broadly agree that the upswing will continue in 2013 with Sydney property prices rising somewhere from 3% to 5% or quite possibly even higher.
As rental returns rise and interest rates fall, growing demand and increased housing affordability should ensure that this prediction will be fulfilled.
Sources:
‘Australia Home Prices to Rise on Rate Cuts: Mortgages’, by Nichola Saminather, Bloomberg, 4 January 2013
‘Big four bankers to make history’, by Phil Jacob, The Daily Telegraph, 5 January 2013
‘Building up, but experts cautious’, AAP, 11 January 2013
‘Despite incentives, we're reluctant to build’, by realestate.com.au, 9 January 2013
‘House prices sink for a second year’, by Chris Vedalgo, Business Day, 2 January 2013
‘Home prices fall for second straight year’, by business reporter Michael Janda, ABC Online,
2 January 2013
‘2012 in review: business’, by Michael Janda, ‘The Drum’, ABC News, 17 December 2012
‘First home deposits take less time to save’, AAP, 7 December 2012
‘What population boom means for housing’, by Michael Matusik, News Limited Network , 1 January 2013
‘Property versus shares’, by Anthony Keane, News Limited Network, 29 December 2012
‘Sydney's west to lead housing boom next year’, by Andrew Carswell, The Daily Telegraph, 22 December 2012
‘Election the unknown for next year's market’, by Stephen Nicholls, Property Editor, Sydney Morning Herald, 13 December 2012
‘NAB lowers interest rate forecasts’, by finance reporter Rebecca Hyam, ABC Online, 11 January 2013
‘Property plunge: At least dinner parties have improved’, by Jessica Irvine, ‘The Punch’, 9 January 2013
‘Property buying all in the stars for 2013, says astrologer’, by Elizabeth Ball, News Limited Network, 30 December 2012
‘Land prices on the rise across state, says valuer’, by Brian Robins, Sydney Morning Herald, 15 January 2013
Optimism is Sydney Property's best Christmas present
Wed, 5 Dec 2012The end of 2012 has set the stage for a buoyant year ahead with Sydney's best spring selling season since 2009. In case you've forgotten, that was the year Australia experienced the recessionary impacts of the GFC and property markets across the nation applied the brakes.
Dr Andrew Wilson, senior economist at Australian Property Monitors, grew understandably bullish, and said in mid-November: "The remarkable consistency of the housing market continues with Sydney now having recorded nine consecutive weeks of weekend auction clearance rates above 60%."
He added that he expected buyer activity and auction clearance rates would remain steady to the year’s end despite the anticipated increase in listing numbers. Auction clearance rates have slipped somewhat as spring gives way to summer, but buyer interest remains strong.
And at its December meeting the Reserve Bank cut the cash rate by another quarter of a percent to 3% - its lowest level since the global financial crisis.
This was the RBA’s response to a flood of soft economic data that included growing fears of unemployment, a slowdown in mining activity, a weakening of China’s growth forecast and slow retail sales.
Domain’s property editor, Stephen Nicholls, said in late November that with four weekend auction dates before the Christmas break there was plenty of action below the $2 million level but vendors had to be realistic about asking prices. The latest rate cut should help keep the action going.
Increase in housing affordability
One reason the auction clearance rates have hit their recent high levels is the rise in housing affordability. The HIA/CBA housing affordability index increased by 5.3% in the September quarter - a rise of 15% on the same quarter in 2011.
Housing Industry Association chief economist, Dr Harley Dale said in an HIA media release that this was the seventh consecutive quarter where the headline affordability had shown improvement.
He commented that, as expected, Sydney remains the least affordable with an index of 54.2 which is noticeably lower that Melbourne at 63.6, but he noted that affordability has been helped by steadily growing incomes, falling interest rates and easing dwelling prices.
“Tentative signs of a recovery in transactions volumes should hopefully gather legs – another interest rate cut in early December would enhance the prospects of this occurring,” he added, and so it will.
Expanding on the HIA/CBA media release, Herald senior writer Matt Wade wrote that Sydney’s affordability index had risen by 13% since the March quarter of 2011.
“And if the brief improvement in affordability caused by the crisis is set aside, the city's housing is now more reasonably priced, relative to incomes, than at any time in the past decade, the quarterly Housing Industry Association-Commonwealth Bank housing affordability index has revealed.”
Economic weaknesses appear
Mark Bouris, executive chairman of Yellow Brick Road Wealth Management writing in the Herald’s ‘Money’ section, sees some economic indicators weakening which he believes will lead to continuing reductions in interest rates.
“As we head for the New Year, some of the economic indicators that were at-trend or better are starting to slip: employment and growth foremost among them.”
He says that few of those reading his article would think we are nearing an emergency situation that would necessitate cutting the cost of money to what he calls ‘bargain basement levels’ to stimulate demand.
“The core requirement of the Reserve Bank is to keep inflation within its target range of between 2% and 3%. And if you read the minutes of the RBA's November decision on the cash rate, the board members are expecting inflation to rise in the short term, a scenario that would suggest a rate rise, not a reduction.”
However, he argues that economic growth has weakened in the second half of 2012, caused principally by a decline in commodity prices and resources exports.
He also notes that Australia’s unemployment rate has started to rise from its 5% per cent to 5.5% levels, and says that buyer confidence remains low.
“Some of the building approval and house price data in the second half of 2012 are slowly rising and should be fuel for some confidence, but they have not been dramatic upturns. And these sorts of measurements go directly to confidence.”
As evidence he points out that, despite interest rates being at historic lows, house values have maintained a flat trend and housing approvals have stayed low.
Super funds buy in
One interesting factor of housing demand that’s growing in importance is self-managed superannuation fund holders switching their investments from listed shares into property, as Chris Tolhust writes on Domain.com: “Many people who embrace DIY super are choosing to escape the sharemarket allocations of retail and industry funds and want to find stable income streams.
“Rent from tenants can work a treat in this regard”, he adds, noting that a key benefit of buying property through super is that once the fund’s beneficiary is on a pension they can sell property free of capital gains tax.
Overseas buyers of Sydney real estate are also playing their part in the growing turnover of properties, both at auctions and in private sales.
Interest rates - the biggest factor of all those that contribute to activity in the property market, look like remaining low for at least the first half of 2013, according to a forecast from the Organisation for Economic Cooperation and Development (OECD).
The OECD’ predicted that the Reserve Bank would cut interest rates twice more – once in December – and so it has, and once again early in the New Year, taking its cash rate to an all-time low of 2.75%.
It sees the cash rate staying at the new floor until halfway through 2014. If fully passed on, the cuts would bring the standard variable mortgage rate to near 6%, slicing a further $90 from the monthly cost of servicing a $300,000 mortgage.
The OECD says the Federal government's determination to achieve a budget surplus will "dampen demand", and force the Reserve Bank to act to stimulate the economy. It even goes so far as to say the Reserve will act in December while inflation is "contained".
A November poll by Sydney mortgage broker Loan Market, asked 907 online respondents: "What action do you think the RBA is going to take at its December meeting?"
72% of respondents said they expected a further cut to the cash rate; 69% predicted a cut of 25 basis points while 3% said the RBA would cut as much as 50 basis points and bring the cash rate to an all-time low of 2.75%.
Loan Market spokesman, Paul Smith explained the survey’s findings: “It's becoming clearer that the previous rate cut in October and the consecutive cuts in May and June aren't lifting the struggling sectors of the economy and haven't been enough to combat the high Australian dollar and slowing inflation rate.”
Property owners positive
Meanwhile, more than three-quarters of landlords are feeling good about their property investments despite falling prices, according to a new report by Sydney-based market research group BDRC Jones Donald.
The report says 77% are positive about their real estate investment and one in five plans to buy another property within 12-18 months.
The survey interviewed 500 landlords and found that 47% had seen an increase in tenant demand and an increase in rental income in the past year.
BDRC Jones Donald managing director Roger Donbavand said the combination of rising rental incomes and low vacancy rates was expected to continue in 2013.
"Those who increased rents last year are more likely to make further increases in the next six months," he told News Limited’s Anthony Keane.
"They think that, in the medium and long term, this will deliver returns for them and are more confident with the property market than they are with financial markets."
Sources:
‘It’s official: market has a spring in its step again,’ Andrew Wilson, Sydney Morning Herald, 24-25 November 2012
‘Buyers spoilt for choice but top end stagnates above $2m,’ Stephen Nicholls, Domain, 24 November 2012
‘Auction clearance rate dips after solid run,’ Sydney Morning Herald, 26 November 2012
‘Sydney housing most affordable since 2009,’ Business spectator, 27 November 2012
‘Sydney housing most affordable since 2009,’ Matt Wade, Sydney Morning Herald online edition, 28 November 2012
‘Economic slowdown will lead to rate cut,’ Mark Bouris, SMH Money, 25 November 2012
‘Building for Retirement, Domain.com, Chris Tolhurst, 17 November 2012
’OECD tips further rate cuts on their way,’ Peter Martin, economics correspondent, Sydney Morning Herald, 27 November 2012
‘Lords of property confidence,’ Anthony Keane, News Limited Network, 25 November 2012
‘An interest rate cut for Christmas?’, Stephen Nicholls, Sydney Morning Herald, 28 November 2012
Year ends with Rising Demand for Sydney Property
Sat, 24 Nov 2012There were several red faces among economists when the Reserve Bank decided not to drop its cash rate at the RBA’s November meeting.
Before the announcement a rate cut was an odds-on favourite, but favourites don’t always cross the finish line first.
In this race the Bank decided to keep things as they were for at least another month and assess the status of the economy a bit closer to Christmas. It was the first time in six years the Bank had left the cash rate unchanged on Melbourne Cup day.
In a statement accompanying the RBA’s decision, the Bank’s governor Glenn Stevens indicated rate cuts in recent months had started to work while at the same time global economic conditions had improved.
"At today's meeting, with prices data slightly higher than expected and recent information on the world economy slightly more positive, the Board judged that the stance of monetary policy was appropriate for the time being," he said.
So far this year the RBA cut the cash rate by half a percentage point in May, followed by a quarter of a percentage point each in June and October, bringing it down to 3.25%.
No bubble danger
And what if housing prices should rise? The RBA believes there’s no danger of another housing boom like the market experienced in the 1990s.
The Bank’s head of economic analysis Jonathan Kearns told an Australian Business Economists’ lunch that conditions were right for a rise in the cost of housing.
‘‘We are not seeing declines in income growth or a significant increase in unemployment, so the strength in earnings and incomes for households is still going to be quite reasonable and certainly sufficient to support an increase in housing construction.’’
He noted that interest rates are low, rental rates are rising and nett rental yields are picking up so a rise in the price of housing is reasonable.
He also identified countervailing factors preventing large and sudden increases; buyers now have a lower tolerance for debt and prices are already at a high level relative to incomes.
‘‘Overall it looks likely that dwelling investment will pick up at a relatively moderate rate in the medium term,’’ he said.
Consumer mood improving
Since the advent of the GFC in 2009 consumers have demonstrated a lack of willingness to spend at any level – from retail sales to prestige properties. Only motor vehicle sales have remained strong since the global financial meltdown.
But Australian retailers this year are anticipating improved trading conditions for Christmas 2012.
Research conducted for the Australian Retailers Association (ARA) research showed that consumers will purchase an estimated $41.2 billion in goods between now and December 25. This would be a 3.9% gain on sales compared to the same period last year.
ARA head Russell Zimmerman said in a statement that he didn’t expect shoppers to be "beating down the doors to go Christmas shopping”, but the improvement in conditions would be welcomed by retailers.
He also said that retailers were "holding their collective breath" for a pre-Christmas rate cut in December.
Will this improvement in consumer willingness to spend carry over into the property market? An article in the Daily Telegraph said the recent strength in property auction clearance rates showed that buyers were willing to purchase real estate if prices were right.
The article quoted RP Data research analyst Cameron Kusher who said that people are being more cautious about how much they spend: "For most people buying a property is the largest investment they'll every make. I don't know too many people that would buy $400,000 worth of shares on any given day."
As always, Sydney stands out from the rest of Australia. Nearly 10% of properties sold at auction during the past year went for between $1 million and $2 million.
"It really highlights that Sydney property is expensive and you've got to be a little bit creative if you've got a low budget," Mr Kusher said.
At least one Canberra journalist, Fairfax’s Clancy Yeates, says it’s wise to take the ‘glass half empty’ point of view for now.
He notes that the Australian Bureau of Statistics found that house prices rose in Sydney during the September quarter and that nationally annual price growth has returned for the first time since March 2011.
He also comments that lower interest rates have made borrowing cheaper, and that it appears confidence is gradually returning to the market.
And he accepts that auction clearance rates have risen above 60% per cent in the traditional spring selling season, and that demand for loans from home buyers has risen in most months of 2012.
So where’s the problem? Mr Yeates points out that a recent Westpac survey found only half of the respondents thought house prices were set to rise. He combines those results with the prevailing consumer sentiment and advises against expecting too much from the current market.
A November Westpac Australian Economic Report by Matthew Hassan, senior economist, says that property prices across Australia have indeed stabilised in line with the bank’s expectations.
He says that: “Latest auction clearance rates and sentiment readings continue to show a promising improvement in October, although we expect prices will tend to 'consolidate' near term before further rate cuts drive a clearer recovery mid to late next year.”
Demand increases
Even if the economists with connections to lending institutions don’t agree on the future of interest rates, most will agree that demand for Sydney property is increasing, and history tells us that increased demand when supply is constant brings higher prices.
Journalist Antony Lawes says that in a typical year the number of property auctions tapers off in December but with clearance rates across the city remaining above 60% this December could be one of the auctioneers’ busiest months of the year.
“Such is their confidence in the market and their need to secure a booking with an auctioneer that some vendors are even agreeing to shorter campaigns, where their houses will be advertised for three weeks instead of four”, he says.
The AAP reported that the number of home loans approved in September across Australia rose 0.9% to 46,395, according to data from the Australian Bureau of Statistics.
This was a slight disappointment to some economists who had expected housing finance commitments to rise 1% in this period, but more telling in regard to housing prices was that total housing finance by value rose 3.8% in September, to $21.203 billion.
CommSec chief economist Craig James concluded: "That suggests that there's increased confidence by borrowers, or that home prices are edging a little higher."
Where rates go from here
The AAP report quoted St George chief economist Hans Kunnen who said the strength of the housing data made it less likely that the RBA would cut the cash rate again at its December meeting.
"This result in itself would lean towards the RBA saying: we'll leave rates where they are because the past cuts seem to be working."
Mr Kunnen said both investors and homebuyers had responded to the previous series of cuts: "When you see investors involved and when you see lending for new homes picking up, you start to get the inkling that people are starting to overcome their conservatism and are thankful for the cut in rate that the Reserve Bank has done.”
However, an article in the Herald’s ‘Business Day’ cautioned not to place too much faith in statistics showing growth and quoted Commonwealth Bank chief economist Michael Blythe who said: “There are lags in these things, so the September-quarter data will reflect decisions made midyear, when the latest round of rate cuts began.”
Macquarie Bank senior economist Brian Redican told News.com’s Sarah O’Carroll that the RBA was taking a ‘glass half full’ view and had moderated its views on the impacts of a peak in the mining boom.
"They're still saying it will peak in the next year, but the implication is that they're only going to monitor the economy as that peak approaches, so it's a very reactive stance, rather than a proactive one."
He concluded there was no reason to expect the RBA would cut rates in December, although a weakening in economic data could change this.
In the same report HSBC Australia chief economist Paul Bloxham said the Bank was responding to a larger than expected rise in consumer prices in the September quarter.
"They got a little bit of a surprise on the inflation numbers and the global economy has stabilised a bit so they decided to sit still for the moment," he said.
Mr Bloxham said the RBA’s decision at the November meeting meant the cash rate may not go much lower: "We could be nearing the end of this easing cycle."
ANZ head of economic research Ivan Colhoun told Chris Zappone the Reserve Bank was going to wait a bit longer before making a decision to cut rates.
“They are looking at how their past decisions are flowing into the data, which suggests they will be somewhat gradual,” he said.
“Reading between the lines, it looks like, if they don’t get signs that they are picking up, then they would be prepared to ease some more,” he said. “But that would probably be later next year.”
Rochford Capital managing director Thomas Averill told Chris Zappone that the Reserve Bank was playing “wait-and-see” by delaying a decision to further reduce rates.
“The RBA want to keep some bullets in the gun,” he said, adding that the decision in December would be a 50-50 call.
If it seems the end result of the RBA’s recent rates-cutting is only stability in prices and other key metrics such as the number of housing mortgages and borrowing for construction of new homes, the Bank is likely to introduce one more rate cut into the equation in hopes of seeing some increased economic activity early in the New Year.
National Australia Bank group chief economist Alan Oster, who said he had been surprised by the RBA’s November decision, commented: “My initial reaction is that the RBA is going to sit and wait for a little while. I still think they have one more cut to come."
Sources:
‘No bubble trouble in house price rise: RBA’, AAP release in Sydney Morning Herald, 13 November 2012
‘Aussies still prepared to splash out on real estate’, Victoria Craw, The Daily Telegraph, 16 November 2012
‘Retailers cashing in - it's a jolly good season in store’, Phil Jacob, The Daily Telegraph, 16 November 2012
‘Insight: Are housing markets stabilising?’, Clancy Yeates, SMH Money, 14 November 2012
‘Australia: house prices stabilise’, Westpac, Australian Economic Reports, Matthew Hassan, Senior Economist, 6 November 2012
‘Auctioneers ready for December rush as sellers jump in’, Antony Lawes, Domain.com, 10 November 2012
‘Firm pattern of recovery in Australia's housing markets, just as RP Data-Rismark data showed’, Tim Lawless , RP Data, 12 November 2012
‘Home loan rise shows impact of rate cuts’, AAP release on SBS World News, 12 November 2012
‘Home values flat despite clearance rate rise’, SMH Business Day, 7 November 2012
‘Housing finance rises in September’, ABC News, 12 November 2012
‘Interest rates remain steady on Melbourne Cup day’, Sarah O'Carroll, Business Editor, News.com, 6 November 2012
Interest Rate Cuts Drive Sydney Property Resurgence
Thu, 18 Oct 2012The Reserve Bank’s announcement of a cut in the cash rate on 2 October was not a surprise for most analysts of Sydney’s real estate market. Nor was the relatively small amount of the cut – just a quarter of a percent, bringing the rate down to 3.25% as of 3 October.
In his statement following the RBA October board meeting Governor Glenn Stevens said that the rate cut was the result of several economic factors, both domestic and international.
He noted that world economic indicators weren’t as buoyant as they were a few months ago and that growth in China, Europe and the USA had slowed. He also pointed out that prices for Australia’s key commodity exports had softened.
The other side of the coin, he said, is that Australia’s domestic economy is still in good shape: “In Australia, most indicators available for this meeting suggest that growth has been running close to trend, led by very large increases in capital spending in the resources sector.”
The rate of inflation is running about 2% and is expected to stay within the Bank’s target range (between 2% and 3%) for the next two years.
Offsetting this to some degree is continuing weak investment in both dwellings and non-residential building despite interest rates being a bit below their medium-term averages.
So the RBA gave the domestic economy a small tickle by cutting the rate, leaving room for another 0.25% cut in December if investment doesn’t start to accelerate.
Or, as Governor Stevens put it: “The Board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative.”
RBA’s Stimulus is Working
‘Accommodative’ is a word the Governor has used before in his announcements. It seems to mean the RBA is confident that there are no serious threats on the horizon so it’s okay to relax the cash rate and give the economy a bit of a stimulus.
The first sign the Bank’s rate cuts are achieving its aims is the continuing strength in auction clearance rates, in both Sydney and Melbourne.
Sydney’s weekend auction clearance rate has remained above 60% for the past several weeks which is some 10% above the same time last year.
The number of properties offered for sale has also increased, indicating greater confidence among vendors that realistic prices will be achieved.
Dr Andrew Wilson, senior property analyst for Australian Property Monitors, gives the RBA credit for the gathering strength of the property sector.
“The Reserve Bank’s decision to cut interest rates last week will help housing markets by improving affordability as the banks pass the cut onto their customers.
“Although the decision reflects some concerns over the current direction of the national economy, home buyer and seller confidence continues to rise in Sydney and Melbourne.”
It doesn’t look like interest rates are going to rise anytime soon. An article by Lesley Parker in the Herald’s ‘Money’ section 17 October says the futures market expects the cash rate to fall to 2.5% by May 2013.
She also says there could be a further cut to 2.25% by the second half of next year: “This would be another 1 percentage point off interest rates on top of the 1.5 percentage points already erased in the past year.”
First Home Owner’s Grant Changes
Sydney in particular will benefit from changes to the NSW Government’s first home owner’s grant. The $7000 grant formerly available to all first home owners ended on 1 October and has been replaced with a $15,000 grant available only to first-time owners who buy newly built homes worth up to $650,000.
BIS Shrapnel believes NSW home building will rise from its present inadequate level of 25,000 dwellings a year to nearer 40,000 by the middle of the decade. It also says up to 8,000 extra houses a year will be built as a result of the changes to the first home owner’s grant.
BIS Shrapnel associate director Kim Hawtrey told the Sydney Morning Herald’s economics correspondent Peter Martin that the Commonwealth Government’s 2008 increase to the first home owner’s grant boosted the percentage of first home buyers acquiring newly-built homes from around 15% up to a massive 39%.
''It is likely we will see the same effect here,'' Dr Hawtrey said. ''The state government is loosening planning restrictions and also granting bigger stamp duty concessions. And lower interest rates will soon make housing more affordable.”
He noted that the NSW Office of State Revenue said 37,500 NSW residents took out first home owner grants in 2011-12. If the proportion buying new homes jumps from 17% to 39% an extra 8200 will buy new homes.
“On balance, we think that the state package will help spur home building back towards where it should be.''
Sydney needs more Housing
To give a better idea of how much help is needed, NSW Fair Trading Minister Anthony Roberts said that an additional 140,000 homes will be required by 2016 to correct the state’s housing shortfall.
“This is the reality,” he told guests at the State Library for the launch of his department’s new Tenant’s Rights handbook. “We need 140,000 additional roofs over people's heads in a hurry. This is a problem that will require a whole-of-government solution.”
Meanwhile, Australian capital city home prices are again rising with an across-the-board increase of 1.4% in September, the biggest monthly increase in the past two and a half years, with Sydney posting a 1.5% gain.
RP Data's research director Tim Lawless says these gains are largely due to interest rate cuts.
"It’s no coincidence that housing market conditions bottomed out at the end of May after the Reserve Bank cut the official cash rate by 50 basis points," he said in RP Data’s 2 October report.
"A further cut of 25 basis points in June and the anticipation of further rate cuts in the pipeline appear to have instilled renewed confidence in the housing market which has driven the growth in home values."
Housing Finance Grows
The number of home loans taken out climbed 1.8% in August to reach the highest level since January 2012.
Figures from the Bureau of Statistics show that 45,821 home loans were taken out in August, with a total value of around $13.65 billion in seasonally adjusted terms.
Excluding refinancing, the number of new loans taken out was up 0.6%. If banks can find a way around the push from regulators for stricter standards on lending they could significantly increase this figure.
Findings from the JPMorgan Australian Mortgage Industry Report show that nearly 70% of home refinance loan applications are being declined for reasons of insufficient income or inadequate loan-to-value ratios.
The banks are regularly portrayed in the media as being too rigid in their lending practices but often overlooked is that they work within a highly-regulated environment that often inhibits loans growth in favour of reducing the chance of creating a new housing ‘bubble’.
Writing in Business Day, Chris Zappone quoted 4Cast Ltd economist Celeste Tay who said better housing affordability had combined with lower mortgage rates to create the growth in mortgages for property purchases.
She cautioned that the recent increased levels of demand would settle back to a more measured rate in the longer-term.
‘‘However, against an uncertain domestic picture, in part due to the impending end of the mining boom alongside structural change, we expect lingering household caution will [likely] see a more gradual lift in housing demand.’’
Zappone also quoted JPMorgan economist Ben Jarman who echoed the caution expressed by Ms Tay.
"Those two factors have combined to force marginal buyers in, once the interest rate got low enough,’’ he said, adding that the rise in demand could be short-lived.
"With the credit growth remaining low we don't see the fuel for that much housing market turnover,’’ said Mr Jarman. "We think the lack of traction is going to be one of the reasons the RBA cuts further."
He told Chris Zappone that the overall debt levels of Australian households was a "pretty significant" constraint to further activity in the housing sector.
However, Westpac Bank's economics team believes the upwards trend is more sustainable.
"A modest upward trend in housing finance to owner-occupiers is now apparent. New lending trended 1.2% higher in August, a turnaround from modest trend declines over the first five months of the year," they observed.
"A greater number of first home buyers are likely to enter the market over coming months, in what is the ‘spring season’, encouraged by improved housing affordability underpinned by lower interest rates."
The Sydney real estate market seems to be in a good place at this point in time. Key market indicators are moving upwards, a new government grant structure has come into effect, interest rates are low and if the RBA needs to cut them once more it has the room to do it.
The final quarter of 2012 is set for a big finish to the year as Sydney property enjoys its traditional spring surge upwards.
Sources:
‘Home loans show some strength’, Chris Zappone, Business Day, 15 October 2012
‘Housing finance rises more than expected’, ABC News Online, 15 October 2012
‘As the mining boom ends, the housing boom begins’, ABC News Online, 4 October 2012
‘Home price surge increases Reserve's rate dilemma’, ABC News Online, 2 October 2012
‘Units are being sold faster than they can be replaced on the market’, Michael Matusik, News Limited Network, 15 October 2012
‘NSW needs 140,000 new homes in four years: minister’, Jimmy Thomson, ‘Flat Chat’, 15 October 2012
‘Building bonanza tipped as home grant changes kick in’, Peter Martin, economics correspondent, Sydney Morning Herald, 15 October 2012
‘Statement by Glenn Stevens, Governor: Monetary Policy Decision’, Media Release, Reserve Bank of Australia, 2 October 2012
‘Weekend auction report October 6th’, Dr Andrew Wilson, Domain.com, 27 August 2012
‘A Step in the Right Direction’, Lesley Parker, SMH ‘Money’, 17 October 2012-10-17
‘Lending restrains housing recovery’, Chris Zappone, Sydney Morning Herald, 17 October 2012
‘Extended Mortgage Duration – Are Borrowers Being Locked In, Or Locked Out?’, Australian Mortgage Industry Report Volume 16, JPMorgan, 16 October 2012
Sydney Real Estate Blossoms in Spring
Mon, 10 Sep 2012Economists are getting a fair bit of exposure responding to the media’s requests for comments on the current mixed signals being given out by the Australian economy.
The mining boom is slackening and real unemployment is rising. Australia’s trade deficit is growing yet grain prices are soaring. The retail sector is showing some signs of strength and housing prices are beginning to recover.
Housing construction remains in the doldrums as activity in the building industry reaches its lowest level is many years. Meanwhile, the Reserve Bank sits on its hands for yet another month, leaving its prime rate at 3.5%.
One of the more interesting comments came from business journalist Clancy Yates, writing in the Sydney Morning Herald’s ‘Money’ section.
On 29 August he stated that although most property analysts and economists went along with government figures showing a shortage of 228,000 homes: “...the Bureau of Statistics overestimated Australia's population by about 300,000 people. It had previously thought there were 22.6 million people in mid-2011, but this estimate was cut to 22.3 million a few months ago.”
And because of this, declares Mr Yates, housing demand is not as strong as one would normally expect. He advised his readers to “...treat industry predictions of higher house prices with plenty of scepticism.”
Yates however does conclude: “Even taking the lower figures into account, we probably still aren't building enough affordable homes to keep up with demand.”
Auction Clearance Rates Impressive
This spring will test Mr Yates’ theories. In the first auction of spring the clearance rate was an impressive 63.9%. "It was the highest number of auctions for 10 weeks," said senior economist at Australian Property Monitors, Dr Andrew Wilson.
"With two weeks above 60%, the results confirm the growing momentum in the Sydney housing market."
Anthony Keane, editor of ‘Your Money’ in News Limited papers, commented on what he called a ‘combination of positive forces’ now at work in the spring marketplace: “Low interest rates and inflation, lingering house price weakness and tight rental vacancies are good for investors looking to buy, but real estate experts are split about the likelihood of spring marking a turnaround for property.”
He quoted SQM Research managing director Louis Christopher who said that market conditions are a little better than this time last year "…but it doesn't mean we are going to head into a big property boom.
"If rates stay on hold, that will be conducive to stimulating the housing market, and we are likely to see continued market recovery, but there are many X-factors at play.”
These factors, according to Mr Christopher, include ongoing concerns over the Euro countries’ ability to resolve their economic disasters as well as the repercussions of falling commodity prices.
For a number of years Australians have enjoyed the best of both worlds. As China’s economy powered ahead, demand for our commodities rose and the ‘mining boom’ looked like a permanent part of the financial landscape.
Propped up by the mining industry’s economic activity and a lot of consumer optimism, real estate prices rose steadily if not as dramatically as they did in the mid-2000s. Whether a property was in Bankstown or Elizabeth Bay, owners could count on selling it for more than they’d paid.
Geography and Property Prices
However, in recent times we’ve seen prices soften. Sydney real estate is now stable after slipping a couple of percentage points across the broad market. Of course geography always plays a part in property prices and many areas simply continued to increase in price, albeit at a slower rate.
Real Estate Institute of Australia president Pamela Bennett told Anthony Keane that there are good signs investors are starting to return to the market: "The early indications are that spring should see a return of buyers.
"There is anecdotal evidence of some sales that have been well above reserve. The overall mood for the housing sector at the moment is one of quiet confidence.''
Echoing this feeling, RP Data research analyst Tim Lawless says spring is looking more positive than last year and most economic indicators are stronger now.
"We are seeing properties selling faster now, vendors are discounting their initial asking prices by a lesser amount and auction clearance rates have improved from the lows over the second half of 2011.''
Mr Lawless also says that Sydney has been the most consistent performer amongst the capitals: “Sydney dwelling values have increased over five of the past eight months providing a cumulative capital gain of 1.9% over the year to date."
Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital, said the Sydney market is poised for a recovery.
He notes that average house prices have fallen and so have interest rates, while at the same time incomes have risen ‘modestly’, creating an improvement in affordability that should soon be reflected in higher real estate prices.
“Unfortunately this is all against a constrained long-term backdrop as housing affordability is still by no means fantastic and job insecurity is continuing to weigh. But for now we should see a modest cyclical pick-up, with average prices likely to be up 5% - 7% over the year ahead,” he predicted.
He sees houses outpacing apartments since house prices have declined the most over the past two years, adding that wealthier areas are also likely to be where investors go shopping for bargains in quality properties.
Buyers and Sellers Agree
Stephen Nicholls, Property Editor at the Sydney Morning Herald, also says that things are looking up for Sydney real estate.
“The sun's starting to shine a little brighter on the Sydney property market,” he said. “Home hunters at last Saturday's open homes and auctions - many in short sleeves and even singlets - had a spring in their step.”
He said that Sydney's buyers and sellers seem to be finding a level of agreement. “More often than not, there's a compromise: vendors adjust their over-inflated reserve prices before the hammer falls - or soon after - or keen buyers lift the amount they're willing to pay.”
As evidence he quoted recent Sydney property auction figures showing an auction clearance rate nearly 10% better than on same weekend last year. However, Nicholls believes the shortage of early spring property listings is now the Sydney market's biggest problem.
“With SQM Research reporting there were 10% fewer properties for sale this winter than last, agents around the city are saying there are even fewer new listings going into spring than in other years.”
Economists and journalists can speculate about property prices as much as they like. Demand for real estate in Sydney is rising and now there are concerns about whether there will be enough stock on offer to meet it.
Sources:
‘The only way is up’, Susan Wellings, Domain.com, 25 August 2012
‘Insight: housing shortage’, Clancy Yeates, Business Correspondent, Sydney Morning Herald, 29 August 2012
‘Property's pot of gold for Sydney vendors’, Stephen Nicholls, Domain.com, 2 September 2012
‘Property to spring forth’, Anthony Keane, Your Money editor, News Limited newspapers, 3 September 2012
‘Home prices flatline in August’, Michael Janda, ABC News online, 5 September 2012‘OPINION: Expect a Spring bounce’, Shane Oliver, SMH Opinion, 5 September 2012
‘Why spring's the time to jump into the market', Kylie Davis, national real estate editor, News Limited Network, 1 September 2012
‘Market's on a spring roll’, Stephen Nicholls, Sydney Morning Herald, 1 September 2012
‘Time's right for those ready, willing and able’, Antony Lawes, Sydney Morning Herald, 3 September 2012
‘Spring tipped to mark rebirth of seller market’, Stephen Nicholls, Domain.com, 1 September 2012
Sydney Property Awaits Spring Rebirth
Fri, 17 Aug 2012There was little surprise among property analysts when the Reserve Bank announced after its August meeting that the official interest rate would remain at 3.5%.
RBA Governor Glenn Stevens said once again that monetary settings are 'appropriate'. He also said that the positive effects of previous rate cuts are beginning to show up in economic figures, especially with regard to housing.
"Dwelling prices have firmed a little over the past couple of months, and business credit has over the past six months recorded its strongest growth for several years," he commented.
The RBA is keeping its eye on a number of things at present, and housing is just one of the areas attracting its attention. It sees housing as being one of the more rate-sensitive sectors of the economy that's picking up and looks a lot healthier than it did several months ago.
Interest rates, says the Bank, are now at lower than medium-term averages. Hence, there’s little chance of another rate cut in the near future now that property’s recovering.
ANZ senior economist Justin Fabo told online magazine SmartCompany that this makes sense in the current market: "We've thought the RBA has been in a kind of holding pattern for the past few months, after cutting 125 basis points within six months.
"90 points of that have flowed through to lower mortgage rates, and that's a reasonably short period of time."
Concerns over exchange rate
The RBA acknowledged that when it examines the Australian economy it still sees other areas that are cause for worry.
After the Bank’s August meeting, Governor Stevens said there was "a more subdued international outlook than was the case a few months ago".
He also warned that the Australian dollar’s exchange rate remained ‘high’ and noted that it’s now at its highest level since March, around $US 1.06. This is affecting export performance and has been blamed for several business closures around the country.
A cut in the cash rate would have a weakening effect on the AUD’s exchange rate, which is why futures markets say there’s around a 90% chance that another rate cut will happen before the end of the year, although how big it will be is still a matter for conjecture.
HSBC chief economist Paul Bloxham told the Herald-Sun’s Stephen McMahon that the RBA’s strategy was appropriate and the domestic economy was ‘travelling well’, but international factors could play a part in the next rates move.
"We still expect the global slowdown and possibly the high Australian dollar will see a further RBA cut of 25 points in the fourth quarter," he said.
Housing Industry Association chief economist Harley Dale said the Bank’s decision to leave rates at 3.5% was "widely expected" but it would do little to benefit the construction sector which has just recorded its 26th consecutive month of contraction.
Encouraging Economic Figures
Other economists were more positive in their outlook. CommSec's Craig James noted that the retail sector could afford to be hopeful.
"Consumers are starting to spend again, buoyed by an array of stimulus measures. The stimulus effects will gradually wear off but if they are replaced by a lift in consumer confidence, then the recovery in spending can continue.
"Inflation is below 2%, unemployment is near 5%, economic growth is the fastest of advanced nations and the federal budget deficit is continuing to contract. There is plenty to inspire confidence," he said.
More statistics from the property markets support the ‘glass half full’ view. In July capital city home prices recorded their second consecutive monthly rise, and RP Data-Rismark's capital city home price index rose 0.6%. This came after the small but significant 1% rise in June which ended months of price stagnation.
RP Data’s research director, Tim Lawless, says that Sydney is one of the cities leading the upwards price movements: “The July rise was not as broad-based as the June results, with the month-on-month increase primarily being associated with the Sydney and Melbourne markets,’’ he told Chris Zappone of Business Day, commenting that Sydney prices rose 1.2%.
There’s no doubt the property market is showing a lot of encouraging signs, but few analysts are expecting a return to the ‘boom times’ of the mid 2000s. There’s still a great deal of concern about job security in our two-speed domestic economy, and there are few if any expectations for a quick solution to Europe’s woes.
However, longer-term indicators of a domestic housing recovery are now popping up in industry statistics. Building approvals rose 10.2% per cent in the year to June, and according to the Housing Industry Association’s figures sales of new homes rose 2.8% in June, the third consecutive month of growth.
Sydney’s biggest problem is an ongoing lack of affordability. RP Data’s statistics show the median dwelling price in Sydney in July was $535,000, compared to the national median price of $460,000.
Leith van Onselen is the Chief Economist at Macro Investor, an Australian financial newsletter that is concerned with all forms of investment.
Writing in Business Day, Mr van Onselen said that the recent housing price increases were to be expected because they represented a response to both government spending and monetary policy, but cautioned that we can't yet call this a recovery.
“Without growth in total mortgages, it is very difficult for prices to rise sustainably. And on this score, the Reserve Bank released its credit growth statistics for the year to June and it showed growth still falling.”
He said that either the recovery broadens out and credit will pick up or prices will resume their falls.
“So far there is no evidence of the latter, but if we get a decent economic environment for a quarter two you never know.
“My own view is that the bigger picture of falling commodity prices from a sharply slowing global economy, combined with an ageing population, will outweigh the positives before too long.”
Spring is Almost Here
As we near the traditional ‘Spring Selling Season’, property journalist Carolyn Boyd took a look at the Sydney market for ‘Talking Property’. She quoted Andrew Wilson, the senior economist at Australian Property Monitors, who sees a definite improvement since 2011.
"There's still some quiet areas but I think the prospects for spring are quite optimistic from vendors.
"Leading indicators are quite positive and particularly compared to last spring where the market really did run out of puff," Wilson says.
Journalist Stephen Nicholls, writing on Domain.com says the middle section of Sydney’s property market has already performed well this year.
“The $600,000 to $1 million price range of houses has grown 4.5% for the first half of the year, Australian Property Monitors data shows. House prices in that bracket are up 1.2% over the June quarter.”
Analysts of Sydney real estate are hesitant to declare the market back to full health, yet they are generally relieved to see measurable and broad-based growth returning after a pretty quiet couple of years.
It only took one cold and blustery winter’s day to knock auction clearance rates back into the mid-50s so there’s still a way to go before the downturn can be declared ‘over’, but spring is almost here and it’s been an established tradition for decades that the change of seasons from winter to spring heralds a reinvigoration of the Sydney property market after its annual retreat.
As property writer Jason Clout wrote in the Sydney Morning Herald: “That suggests there are good deals to be had for those brave enough to bet that prices won't fall much further.
“Also, vacancy rates are tight, which means solid rents can be charged on most good properties. Rents rose by 3% on average for both houses and units nationally last year.”
The signs are there - low interest rates, price stability, rising rentals, a sound economy, employment growth and a recovering retail sector - that this spring will be a good one for investors in Sydney real estate.
Sources:
‘RBA rates hold is good news for businesses, economists claim ‘, Patrick Stafford, Smart Company, 8 August 2012
‘RBA's good medicine as interest rates face lengthy pause ‘, Stephen McMahon, Herald-Sun, 8 August 2012
‘House prices rise in July but pace slows’, Chris Zappone, Business Day, 1 August 2012
‘Housing market running on empty’, Leith van Onselen, Business Day, 3 August 2012
‘Predictions for the spring market’, Carolyn Boyd, Talking Property, 31 July 2012
‘Upgraders give prices in market's mid zone a boost’, Stephen Nicholls, Domain.com, 28 July 2012
‘Get things in order – it’s Spring auction season’, Jason Clout, Sydney Morning Herald, 12 August 2012
Sydney Real Estate at the Turning Point
Wed, 18 Jul 2012The current Sydney property market resembles its earlier self in mid-2009. Just like then, depending on which segment of the market is under discussion the opinions can range from pessimistic to optimistic and everything in between.
At that time the GFC had torn through the top end of the market and properties that two years previously had sold for five or six million dollars were losing hundreds of thousands or more when they turned over in ’09.
Headlines trumpeted these losses, but what’s been forgotten is that in the market sectors more familiar to most householders things continued in a more usual fashion.
As now, there was a decline in construction of new housing. But relief was being offered by the Reserve Bank which set its cash rate at 3% in its July 2009 meeting.
And there’s not a lot of difference three years later with the cash rate at a very low 3.5% and a chance of it falling further. The headlines are familiar, but thankfully the cost of money is about where it was in the middle of 2009.
Confidence is the Key
The main difference has to do with consumer confidence. In July 2009 we believed economic conditions were improving. We thought we’d escape the consequences of the GFC and that the Chinese powerhouse would continue to roll ahead at full speed, pulling the Australian economy behind it. Now we’re not so sure.
It’s easy to find reasons to be negative. The Chinese economy is slowing, although still expanding at a healthy rate of 6% this year. The US economic recovery seems to have stalled with little jobs growth, although productivity has risen slightly. And it’s always a shock when long-established Aussie businesses like Darrel Lea chocolates slip into administration and Ford slashes its workforce despite a multimillion dollar handout from taxpayers.
A June survey by the National Australia Bank found that many Australians are worried about their jobs. ‘‘Employment security is now the biggest concern for homebuyers as interest rate concerns recede,’’ said the NAB report.
The release of the report coincides with news that the economy shed 27,300 jobs in June - the biggest monthly drop this year.
People who are worried about their employment status hesitate to take on new financial responsibilities, and therein lies the reason behind the recent slowdown in the Sydney property market. A lack of consumer confidence has been reflected in a lower willingness to borrow money to invest in real estate.
Go back three years and see what happened. By the end of 2009 conditions had changed for the better. The Australian economy was back in the black and expanding rapidly. Having stimulated the economy with rate cuts, the RBA had hiked its rate to 3.75% with more increases likely.
At that time, John Edwards, CEO of property analyst Residex, said there was only one word that could describe 2009 and that word was "remarkable!" He noted that Sydney’s capital growth of 10.2% for the year was amazing enough, but over the last six months of 2009 had achieved 21.4% percent on an annualised basis.
The Sydney market can not only shift dramatically, it can change quickly. From gloom to boom in six months was the transition experienced in 2009. Those who benefit most from this kind of change are those who take advantage of the conditions and acquire property while prices and interest rates are favourable.
Blackstone Buys In
One such investor is the New York-based Blackstone group which has bought $1 billion of Australian property and, according to an article in The Australian by Florence Chong, is expected to buy even more.
“Blackstone, which manages $US48bn in real estate and an equal amount in private equity, likes Australia's low unemployment, low government debt and the link to China, which it believes will continue to enjoy strong long-term growth, according to an industry source.
"A key attraction has been Australia's tightening office vacancies, weak construction activity and a general lack of new supply," the article said.
Admittedly, Blackstone isn’t a typical homebuyer, but its interest in Sydney real estate is worth a bit of analysis. One of its key investments has given it ownership of Sydney’s Goldfields House at Circular Quay.
Blackstone reportedly has planning approval to build 187 apartments on the property, which has been described as "one of the best residential sites in the world". This represents a great vote of confidence in the future of the city’s real estate market by a company that can choose to acquire property anywhere it wishes.
There are growing signs that the Sydney market is ‘bottoming out’ or ‘stabilising’ according to the Real Estate Institute of NSW in an AAP release on News.com.
The Institute notes that the median house price is down $40,000 from the previous financial year and the annual median house price for the 12 months to March dropped by 6.7 %.
However, the latest property update from REINSW found that prices for residential properties in Sydney had stabilised in the three months to March. REINSW CEO Tim McKibbin said that conditions represented a buyer's market.
"If you're sitting and waiting for the market to ease further I frankly can't see that happening," Mr McKibbin told AAP.
"Now is an excellent opportunity for purchasers to be coming into the market."
Like 2009 prices have mainly fallen in the top end of the housing market, with pricing in what he called ‘Sydney's most affordable suburbs’ remaining firm.
Bronwen Gora, the Sunday Telegraph’s property writer says the Sydney property market is “creeping out of the doldrums”. She points out that house prices below $1 million have recovered from the previous year, and Sydney's median house price has bounced back to $620,000 from $582,000 a year ago.
“RP Data figures show units, which are catching up to freestanding houses in value and popularity, have hit a median of $477,500, up from $465,000 last year.
“While Real Estate Institute of NSW figures last week showed the median house price had slumped to $560,000 in the 12 months to March, an autumn rush helped push the figure through the $600,000 barrier, according to RP Data”, said Ms Gora.
Spring to be Turning Point
Another analyst of the Sydney market, RP Data director of research Tim Lawless, said that prices were no longer going backwards but cautions that anyone looking for quick gains in less than three years would be disappointed.
He sees the biggest price increases resulting from young people and families buying properties in the inner city so they can live closer to the CBD.
Rod Cornish, head of real estate strategy at Macquarie Group, sees spring this year as being the real turning point for Sydney property.
"Particularly with two more rate cuts forecast later this year, Sydney home prices will start stabilising then and early into next year," he told Bronwen Gora. He also said he expected to see prices grow in 2013.
"The median price in Sydney is currently only 12% above where it was in March 2004 so it's been very subdued for a little more than eight years, during which time prices have been rising 1.7% per annum."
One of the key factors underlying the growing sense of optimism among property analysts is data from Australian Property Monitors showing unit rentals jumping 4.4% over the June quarter, bringing the median rent for units to $470 which is just under the $500 median rent for houses.
Figures from Australian Property Monitors show that higher rents, together with little or no capital growth, have pushed up yields to more than 5% for an average two-bedroom unit in Sydney.
Good rental income and the security of bricks and mortar are appealing to investors that have been disappointed by the gyrations and non-performance of the share market. Sales of apartments priced below $500,000 are booming across Sydney.
This is the biggest reason why the most recent data from the Australian Bureau of Statistics for the four months to the end of April showed a 6.3% rise in residential investment loans in NSW. Another important indicator, auction clearance rates, is holding firm near the 60% level at the start of the new financial year.
An article by Antony Lawes on Domain.com quoted property analyst and managing director of SQM Research, Louis Christopher, who said demand for accommodation in Sydney is forcing rents up at a higher rate than inflation.
Mr Christopher said that between 2006 and 2011 rents in Sydney increased by 7.4% a year, which was much higher than the long-term trend of 4% to 6%.
''The Sydney housing market, particularly at the middle and lower ends, is a landlords' market and we don't see any evidence that that is about to turn around,'' he told Antony Lawes.
The Sydney market is both cyclical and predictable. It’s at the bottom of a cycle, and using history as a guide, will predictably rise toward the end of this year.
At present, prices are negotiable and interest rates are down. This is one of those turning points that experienced investors will recognise and act upon.
Sources:
‘Flush with $13bn, Blackstone Group scouts for Australian property,’ Florence Chong, The Australian, 12 July 2012
‘Home prices won't keep falling: REINSW,’ AAP report on News.com.au, 28 June 2012
‘Rate cuts making property hot again,’ Browen Gora, The Sunday Telegraph, 8 July 2012
‘Investors quit shares for bricks and mortar,’ Stephen Nicholls, 14 July 2012
‘Buyers spoilt for choice with an increase in listings,’ Karina Barrymore, Herald Sun, 13 July 2012
‘NAB: House prices slide with more to come,’ Jonathan Swan, Business Day, 12 July 2012
‘An age-old debate,’ Antony Lawes, Domain.com, 14 July 2010
Sydney Housing Boosted by NSW Budget and another Rate Cut
Thu, 5 Jul 2012The month of June began with another rate cut from the Reserve Bank of Australia. Although the 25 basis points cut was less than some analysts had expected, it left room for the RBA to make further cuts if the economy needs additional stimulation.
When announcing the Bank’s second cash rate reduction in as many months, RBA governor Glenn Stevens said the ongoing trends in the world economy were unclear and “…could be dampened by slower Chinese growth”.
He also commented that sentiments in Australia’s financial market had deteriorated since the Bank’s previous rate cut despite some indications of recovery in labour market conditions.
“Nonetheless, both households and businesses continue to exhibit a degree of precautionary behaviour, which may continue in the near term,” he said.
Three days later, on 8 June, Mr Stevens addressed the American Chamber of Commerce Internode Business Lunch in Adelaide, delivering his now famous ‘Glass Half Full’ speech.
Expressing his surprise that Australians weren’t more upbeat about their economic prospects, he pointed out this nation’s relative well-being when compared to most other countries and implied we should see the situation as a ‘glass half full’ rather than one on its way to the bottom.
“Unemployment is about 5%. Core inflation is a bit above 2%. The financial system is sound. Our government is one among only a small number rated AAA, with manageable debt. We have received a truly enormous boost in national income courtesy of the high terms of trade.
He added that Australia has experienced one of the biggest resource investment upswings in our history, and that capital spending would rise by another 2 percentage points of GDP over 2012/13, to reach a 50-year high.
Mr Stevens admitted that all the news wasn’t joyous when it came to housing. He noted that the rate of dwelling turnover is about one-third less than it was on average over the previous decade, and about half its peak levels.
However, the RBA’s goal as he defined it would not be to re-create the boom conditions that saw housing prices skyrocket and household debt levels increase. Thrift and a focus on increased productivity will deliver better outcomes in the long term, he said.
So why aren’t Australians seeing the glass as ‘half full’? If they were, the reasoning goes, they’d return to their free-spending ways when it comes to housing. Borrowings would rise and so would housing sales. And of course real estate prices would increase as they always used to.
Media reports lower confidence
Writing in the National Times, Peter Martin says that if you ask Australians about their family finances over the coming year, the answers are so overwhelmingly negative you’d need to go back to 1990 to find feelings so bad.
“Just 18.5% of those surveyed in this month's Westpac-Melbourne Institute consumer survey expect their finances to improve in the year ahead. A much bigger 32.2% expect them to get worse.”
He added that overall Westpac consumer confidence failed to bounce after the June Reserve Bank interest rate cut, climbing just 0.4% to be down 5.6% over the year.
Westpac economist Matthew Hassan thinks anxiety about reporting of current events is part of the explanation for the survey’s findings. He noted that there were special questions in the survey that asked about perceptions of news.
But as John Williamson wrote in his lyrics for ‘Cootamundra Wattle’ back in 1986, “Good news never made a paper sell”. This could be why the Westpac-Melbourne Institute consumer survey unearthed such negativity.
Pick up any newspaper or watch any television news broadcast and there will be reports of concerns about a number of issues. The carbon tax, part of our lives from 1 July onwards, is one of those issues. Another is news from overseas.
Europe’s troubles have been the focus of attention for the world’s media for over a year, and as yet there is no sign of a lasting solution. America’s economic slowdown is another frequently reviewed topic. Wars, famines, and natural disasters can always be found and used to create interest.
The proportion of respondents who found the domestic news positive was dwarfed by the proportion who found it negative, and perceptions of international economic news were even worse.
Housing performance has slowed
So, what will it take to overcome this ‘glass half empty’ outlook? Bruce Jackson, editor of online investment newsletter ‘The Motley Fool’, found five reasons to put the rose-coloured glasses back on:
1. Unemployment is at 5.1%;
2. Interest rates are falling and the RBA cash rate is now at a lowly 3.5%;
3. We have an economy that expanded at an annualised pace of 4.3% in the first quarter;
4. A cut in Chinese interest rates has given the Chinese government more room to stimulate the economy; and
5. We are not Greece or Spain!
He muses that “…our economy is the envy of the world. Yet here we are, moping around as if we’re about to be plunged into GFC II, or worse.”
Jessica Irvine, a journalist with the Sydney Morning Herald, says that Australia's property market is reason why strong growth figures have failed to offset low levels of consumer confidence.
“Housing is the reason Australian households have been limping around like wounded deer, despite our rock-solid mining abs of steel. Housing is our Achilles heel.”
She notes that figures from RP Data-Rismark show Sydney home prices fell by some 3.5% over the year ended May, but adds that “…Sydney's housing boom went bust nearly a decade ago.”
Ms Irvine says that Australian households used to feel the pain of servicing a mortgage was worth it when house prices doubled every decade or so, but this is no longer the case. Because those earlier financial gains are no longer part of the home buying equation we have experienced a ‘deep shift in the nation's mindset’.
Which brings us back to the present. Just what does it take to get the Sydney housing market back on track, even if it’s not running at quite as the same speed as it was before the GFC came into our lives?
NSW budget assists developers
Unlike his Federal counterpart, NSW Treasurer Mike Baird put some sweeteners for homebuyers into his June budget that could well make a positive contribution to the long-declining housing construction industry in this state.
Key housing measures in the budget are:
The First Home Owner Grant will more than double to $15,000 for first-time buyers of new property. From 2014, the grant will drop to $10,000;
First home buyers will continue to be exempt from stamp duty if buying new property. The threshold lifts from $600,000 to $650,000; and
Non-first home buyers will be eligible for a $5000 grant if buying new property.
A negative came in the tradeoff against purchasers of existing housing as the $7000 First Home Owner Grant will be abolished for existing properties. The focus is clearly on stimulating construction of new housing.
Andrew Clennell, the Daily Telegraph’s State Political Editor, analysed the budget’s moves in further detail and said there was another catch on stamp duty.
“Concessions which had been given for properties worth up to $835,000 will now only be available at 100 per cent for properties worth up to $550,000. From $550,000 to $650,000, the concession reduces 1% for each $1000 spent, graduating down to zero.
He also observed that a stamp duty concession for off-the plan apartments and house and land packages will be scrapped in favour of a flat $5000 payment to anyone who buys a newly-constructed home.
“By better targeting incentives, by funding infrastructure and by clearing roadblocks to development, we will stimulate the housing and construction sector which forms such a critical part of the state’s economy,” Mr Baird said in his Budget Speech to the NSW Parliament.
An article in the Sydney Morning Herald’s News Review for June 16-17 quoted Chris Johnson, CEO of the developer group Urban Taskforce, who told a breakfast forum: “These are very positive moves to stimulate the industry with some major incentives for new building.”
Jimmy Thomson, who writes the ‘Flat Chat’ apartment-living advice column in Domain every Saturday, also said the budget was a bonus for the property development industry.
“Sydney needs to build more apartments in a big hurry. In 20 years' time, half the population of the city will need to be living in some sort of strata development, so the new payment scheme is a welcome boost for apartment builders.”
Since at the $650,000 price level there are far more apartments that free-standing homes available on the Sydney market, it can be assumed that the NSW government sees construction of high-density housing as integral to solving the growing housing shortage.
Vikki Campion, writing in the Daily Telegraph, says that Sydney's slower planning process and expensive land costs has stifled growth.
“Latest RP Data reports found apartment values in Sydney rose 2.2% over May to a median $480,000 and rents were found to have risen 4.9% over the past quarter.
“Economists are blaming the GFC's fall in construction in Sydney, as well as a growth of students, young professionals and empty nesters moving in for the demand.”
She quotes BIS Shrapnel senior manager Angie Zigomanis who said: "The continued tight rental market and rising rents are expected to support further investor demand and consequently price growth (in Sydney) over the next two to three years, particularly if economic growth starts to recover and confidence returns.''
Is growth in investor demand likely? An online poll in early June by mortgage provider Loan Market found 51% of respondents were planning to invest in property over the next 12 months, while a further 37% were keen but want to be sure their jobs were secure.
Only 5% of the 786 people surveyed had no plans to buy property, and just 7% said they would rather buy shares.
With at least one more interest rate cut likely before the end of the calendar year, and with Sydney property prices ranging from stable to soft in some areas, investors are set to reap the rewards of growing demand for accommodation and rapidly-rising rental levels.
Glenn Stevens was right. The glass is indeed half full, and investors who put their money into Sydney real estate now will enjoy the ride all the way to the top in the next two to three years.
Sources
• ‘New Homes, new rules…’, Matt Wade and Matthew Moore, Sydney Morning Herald News Review, 16-17 June 2012.
• ‘Get set for an accommodation shortage’, Vikki Campion, The Daily Telegraph, 4 June 2012.
• Speech by Glenn Stevens, Governor, to the American Chamber of Commerce (SA) AMCHAM Internode Business Lunch, Adelaide, 8 June 2012.
• Statement by Glenn Stevens, Governor: Monetary Policy Decision, RBA media release, 5 June 2012.
• ‘Sense of gloom worst since 1990’, Peter Martin, National Times, 14 June 2012
• ‘The Motley Fool’, Bruce Jackson, 12 June 2012.
• ‘Housing proves to be nation's Achilles heel ‘, Jessica Irvine, Sydney Morning Herald Opinion, 8 June 2012.
• ‘The NSW budget at a glance’, SMH.com.au, 12 June 2012.
• ‘Beware the first home buyers' grant - it's a poisoned chalice’, Jimmy Thomson, National Times Opinion, 14 June 2012.
Sydney Property Benefits from Budget, Rate Cut
Fri, 18 May 2012At its May meeting the Reserve Bank of Australia responded to the slowing economy and reduced its cash rate by fifty basis points or one half of a percent. In at least one key indicator for the property market – auction results, the effects were apparent almost immediately.
Sydney auction clearance rates had been lingering around the 50% level for several months. Taken at face value, this wasn’t an indication of anything but a slower market, but analysts had expressed concerns that interest rates were too high and had caused buyers to stay away from recent property auctions.
Since 1 May, the date of the RBA’s cash rate cut, the auction clearance rate has risen. On 5 May it was 61% and then on 12 May the rate was 62%. These are well above the rates for the same time last year.
Are there more rate cuts to come? Financial news source Bloomberg reported that many currency traders expect the next one in June: “Traders are pricing in an 86% chance the RBA will lower the rate to 3.5% next month, swaps data compiled by Bloomberg show, as bets rise that Greece will be forced out of the euro.”
RBA runs out of excuses
In his May statement announcing the rate cut RBA Governor Glenn Stevens as much as admitted the Bank had got its settings wrong: “This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated” was the way he put it.
The RBA has found it expedient to use relatively high interest rates as a bulwark against inflation, targeting a range between 2% and 3%. In recent times the rate of underlying inflation has held steady at close to 2% and what the Bank calls ‘CPI inflation’ has fallen from about 3.5% to just over 1.5%.
Noting that interest rates for borrowers have remained close to their medium-term averages for some time, and that housing prices have slowed since a year ago, the Bank could no longer point to the property market as a source of inflationary pressures.
Add to this a decelerating Chinese economy, a US economy that’s more stagnant than it is stable, and Europe’s ongoing fiscal train wreck, and there’s little reason for the RBA to do anything but prime the pump a little and see if the Australian economy responds. Early indications are that it will.
Another potential source of stimulation for the industry is the Commonwealth Government which released its latest Budget on 8 May. The Housing Industry Association’s senior economist, Andrew Harvey, expressed his disappointment that it contained nothing to stimulate the residential building industry.
“At a time when new home building is in decline in virtually every state and territory, the budget has failed to deliver any new measure to reinvigorate the home building sector, despite the sector’s health being absolutely crucial to a healthy domestic economy,” he said.
Negative gearing unaffected
Even if the Federal Budget may not seem to have carried any news to affect the property market one way or another, two key elements of Treasurer Wayne Swan’s fiscal preparations for next year’s election will become important drivers of the real estate industry in coming months.
The first element is the government’s decision to leave negative gearing alone. There were some pre-Budget fears that the Gillard government might try to remove this tax-effective means of investment as a way to scrape in some extra funds but not this time around, as it turned out.
The second element is the government’s perplexing attack on the superannuation plans of thousands of older Australians by cutting the amount that can be salary-sacrificed into super funds from $50,000 to just $25,000, for the next two years at least. Just as the ‘Baby Boomers’ are working their last few years to stash away as much as they can and stay off the pension, the government has made it harder by $25K next year.
Nicole Pedersen-Mckinnon wrote in the Sydney Morning Herald: “One of the cuts was a two-year delay in the plan to let people 50 and over with less than $500,000 in super keep paying in up to $50,000 a year - halving almost overnight their allowable contributions.”
She continued: “All fiftysomethings will need to review what they pay in and possibly look at tax-effective alternatives such as negative gearing and insurance bonds.”
It may be that trying to get rid of negative gearing was simply too hard for the Budget planners, and that it was much easier to increase the tax take by removing another avenue of tax minimisation instead.
Whatever the government’s reasoning, the result is that negatively gearing a rental property has suddenly become a much more desirable means of creating wealth for those planning their retirement.
Although it’s doubtful that anyone over 50 years of age would need further proof the government can’t keep its hands off the superannuation cash cow, this Budget certainly qualifies as evidence.
And if those same fiftysomethings want any additional reasons to put their money into property rather than packaged investments like funds they should examine the fate of SMSF investors in the failed investment house Trio Capital.
In the words of a Sydney Morning Herald editorial, “…it has been possible under Australian law for thieves to take over an entire investment house which had been soundly run, with the intention of defrauding its clients.”
Compounding the damage done to hundreds of investors, many of whom lost their life savings when Australia’s corporate watchdogs failed in their duties, was the callous decision by Superannuation Minister Bill Shorten to deny them compensation saying they had been “…swimming outside the flags” when they followed the advice given by their licensed financial advisers to invest in the fund.
Had these victims of fraud placed their savings in investment property instead they’d still have assets to generate income for their retirement. Now they have nothing.
Investment property interest grows
Writing on Domain.com, Chris Tolhurst noted that until recently investors have been relatively quiet.
“Bank deposit rates have been high, which has encouraged many potential buyers to bank their funds rather than invest in bricks and mortar.
“Now that deposit rates are heading south on the back of the RBA's cuts to official interest rates since November, it's going to be a lot more tempting for the cashed-up to invest.”
So perhaps it’s not surprising that a recent survey of more than 1000 homeowners found that one in four is interested in acquiring an investment property. The survey, conducted by Galaxy Research, found that 26% of existing homeowners are looking to buy a second property.
There are of course other reasons for being optimistic about Sydney property. Some come from the Australian Bureau of Statistics whose figures show that the unemployment rate in NSW was just 4.9% in April, making this the second-best performing state despite missing out on the much-discussed mining boom. Retail sales in March were also up 1.2% according to the ABS.
Is there more good news about interest rates on the horizon? Residex CEO John Edwards, who had predicted the RBA’s May cut, praised the outcome the next day saying that the interest rate reduction would provide a much-needed boost in consumer confidence.
“Without some form of stimulus, we would have been likely to continue seeing housing values decrease across much of Australia.”
He then added: “Depending on the content of the upcoming Federal Budget and its assessed impact, a further 25 basis point adjustment could come in June”.
Two weeks later he wasn’t betting on an early date for the next rate reduction: “The noise in terms of economic indicators currently being presented suggests things are improving and any further rate cuts are now a little further off.” Time will tell.
Australia’s Treasury Secretary, Martin Parkinson, told a Sydney audience on 15 May that the government still had room to move on interest rates: “To the extent there is weakness across the economy, monetary policy is well-placed to respond, unlike in many other advanced economies,” he said.
Because of growing concerns about the economic meltdown in Europe, the Australian share market continues to plunge to new lows for 2012. The housing industry can now look forward to at least one more interest rate reductions of at least 25 basis points, quite possibly in June, with another reduction likely to follow.
Although the RBA may hold off until the year end economic data has been produced and analysed, Australia’s investors have every reason to seek security in bricks and mortar while interest rates are low and property prices are stable.
Sources:
‘Demand may rise on heels of rate drop’, Chris Tolhurst, Domain.com, 12 May 2012
‘Rates, jobs, house prices all point to revival’, Dr Andrew Wilson, Sydney Morning Herald, 12 May 2012
Statement by Glenn Stevens, Governor: Monetary Policy Decision, Reserve Bank of Australia Media Release, 1 May 2012
‘Federal budget 2012 a lost opportunity to reinvigorate home building sector: HIA’, Jonathan Chancellor, Property Observer.com, 8 May 2012
‘Conditions right for investing’, Sophie Elsworth, News Limited newspapers, 30 April 2012
‘Shock super slug to us all’, Nicole Pedersen-Mckinnon, SMH Money, 13 May 2012
‘RBA well placed to cut rates more: Parkinson,’ Bloomberg in SMH Business, 15 May 2012
Residex Market Wrap – April 2012, John Edwards, 15 May 2012
‘Trio's shadow over super system,’ Sydney Morning Herald, Opinion, 18 May 2012
Sydney Housing Shortage Is Growing
Tue, 17 Apr 2012Sydney property remains a sound investment. A Sydney Morning Herald article by Antony Lawes analysed price growth on Sydney’s north shore and found that over the past ten years the average annual price growth in Neutral Bay was 4.3%, in Mosman was 6.68% and McMahons Point was 8.3%.
Despite a slowdown of real estate activity since 2008, NSW experienced a rise of 5.3% in sales of new homes in 2011, and recent Sydney auction clearance rates hover around the 55% level. Clearly the sky is not falling!
But HIA chief economist Harley Dale told AAP that the housing sector needs more support for a full recovery.
"In a contemporary economic environment where interest rate settings are too high, finance conditions persistently tight, consumer and business confidence too low, and plans to tighten fiscal policy inappropriate, it is hard to envisage a sustained recovery in new home sales in coming months”, he said.
However, at its April meeting the Reserve Bank of Australia once again decided to leave its cash rate unchanged. This time the Bank’s decision has ignited a series of debates on whether or not an interest rate reduction has become essential to Australia’s economic future.
First, at 4.25% the rate is not historically high by Australian standards. The main problem is that, compared to a number of other developed nations in the post-GFC era, Australia’s rate is near the top of the list.
The cash rates of Belgium, Germany, Greece, Canada and France, for example, stand at just 1%. The UK is 0.5% and the USA is 0.25%.
In his statement following the RBA’s Board meeting on 3 April, Governor Glenn Stevens was less than bullish about the global economy.
“Recent information is consistent with the expectation that the world economy will grow at a below-trend pace this year, but does not suggest that a deep downturn is occurring,” he said.
He also pointed out that conditions in Australia posed no particular threats at present, saying: “Interest rates for borrowers remain close to their medium-term average. Credit growth remains modest.”
About housing specifically, he noted: “Housing prices have shown some signs of stabilising recently after having declined for most of 2011, but generally the housing market remains soft.”
As is his usual practice in recent months, Governor Stevens left the door open for a change of some sort at the Board’s May meeting.
“At its next meeting, the Board will have the opportunity to reassess the outlook for inflation, taking into account not only data on demand and output but also forthcoming information on prices.”
The Board’s decision was not a crowd pleaser. In fact, the only cheering to be heard came from retirees whose investments have in recent times shifted away from ‘risky’ areas like shares into cash that’s now deposited in banks earning interest.
Rate cut likely in May
An article by Malcolm Maiden in The Age said the RBA was likely to announce a rate cut at its next meeting 1 May.
“The central bank overestimated the strength of the economy last year, something its governor, Glenn Stevens, acknowledged in mid- March in Hong Kong, when he said growth had come in below trend, at 2.5%.”
Maiden then said next month’s rate cut was ‘almost a no-brainer’: “It won't push inflation beyond the Reserve's 3% ceiling, and economic growth isn't as strong as expected.”
However, the banks can always raise their interest rates independently of whatever the RBA may do. On 13 April the ANZ announced it was raising its mortgage interest rate by six basis points and hinted that Australia’s other major banks may follow suit.
A rate cut is definitely on the wish list of the Australian housing industry. An AAP release on Domain.com pointed out the current weaknesses indicated by the Australian Industry Group/Housing Industry Association performance of construction index.
“[The index] had a reading of 36.2 in March, up 0.6 points from the month before. Readings below 50 indicate contraction.”
The report also said that residential and commercial construction ‘showed significant weakness’ with house building at its lowest level in six months.
“House building showed a reading of 30.3, while apartments were 30.5 and commercial construction was 35.5,” it said.
The AAP report quoted Australian Industry Group director of public policy Peter Burn who said that weaknesses in housing are impacting on other areas of the economy.
"Very weak conditions continue in the house and apartment building and commercial construction sectors, and this is flowing on to a cross-section of service and manufacturing businesses.”
Demand only half-met
There is of course no simple fix for Australia’s growing housing shortage. The figures gathered by the Australian Bureau of Statistics and a number of private organisations all point to the same thing: an industry in crisis.
A new report by a UK housing expert, ‘Homes for All’, found that Australia's housing market is producing only half of the supply needed to meet demand.
The report has been released by the McKell Institute, a body that says it wants to develop policy ideas and encourage public debate.
One of the Institute’s stated goals is: “Making housing more affordable for all Australians, particularly for low income families.”
The report’s co-author, Dr Tim Williams, says that Australians are building 14,000 to 15,000 homes a year when the figure should be more like 40,000.
"We're way off, tens of thousands behind. No wonder there's a pressure on prices," he told News.com.
Dr Williams also noted the impact of the housing shortage on Sydney rent levels: “Rents in Sydney are rising four times faster than inflation.
"The squeezed middle which used to be able to afford to buy now has to rent, pushing lower income renters to find the fewer remaining cheaper lettings and again further out of Sydney to places with the fewest jobs."
This isn’t news to any Sydneysider trying to find rental accommodation. An article by Vikki Campion in the Daily Telegraph said the city’s rental crisis was growing as the population boom puts pressure on housing.
“Real Estate Institute of NSW data shows vacancies in the inner suburbs fell to 1.5%, while the number of properties located up to 25km from the CBD dropped to 2.0%”
The article quoted Real Estate Institute of NSW president Christian Payne who said the market had "gone backwards" in Sydney and Newcastle.
"It is unfortunate that the contraction of the rental market in both those cities last month will only make it harder for many prospective tenants to find a home," Mr Payne said.
"Resolution of this chronic shortage in accommodation won't be achieved in the short term."
Accommodation shortage to last years
There’s no doubt the problem will persist for several years, with consequent and ongoing rises in housing costs, rental rates and shortages of affordable housing.
In so many ways it’s a case of “Build it and they will come”, except the ‘they’ are already here in the form of growing numbers of people seeking places to live.
Although lower interest rates aren’t a panacea for the housing crisis, the great majority of new construction is financed with borrowed funds, and low rates certainly facilitate the process.
Before the RBA’s April meeting Mark Hewitt, general manager of Sales and Operations for mortgage broker Australian Finance Group said: "The best thing the RBA could do to stimulate confidence among buyers and upgraders would be to cut interest rates tomorrow.''
The Housing Industry Association (HIA) and Master Builders Australia also called for a cut in the RBA’s cash rate in the hopes of stimulating construction of new housing, but the Bank remained unmoved.
Unless rates drop, and not just by a token 25 basis points, the housing industry must confront a combination of high but no longer rising real estate prices – a situation that is not encouraging to many prospective buyers.
In March a report by global investment bank JP Morgan and technology group Fujitsu concluded that growth in mortgage lending will continue to slow.
Fujitsu executive director Martin North said there would be no return to the ‘buoyant’ era pre-GFC and mid single-digit growth was the best that could be hoped for over the next decade.
A reduction in the RBA’s cash rate is without doubt one of the most effective ways of supporting the housing industry and all those employed by it. It’s needed now.
Sources:
‘Central Bank Rates,’ BanksDaily.com, accessed 13 April 2012
'Realistic' inner west tops super Saturday sales,’ Stephen Nicholls, Sydney Morning Herald, 2 April 2012
‘New home sales rise,’ AAP Release, 30 March 2012
‘Investors see shares, land a safe bet,’ Geelong Advertiser, 12 April 2012
‘Yes, there are reasons for a rate cut,’ Malcolm Maiden, The Age, 13 April 2012
‘Australian housing construction remains weak,’ AAP Release, Domain.com, 10 April 2012
‘Growing city is in rental crisis as population boom puts pressure on housing,’ Vikki Campion, Daily Telegraph, 31 March 2012
‘Home auctions dip as bidders vanish,’ Sophie Elsworth, News Limited Newspapers, 9 April 2012
‘Building approvals data confirm weakness,’ AAP, 2 April 2012
‘Sluggish the 'new normal' in mortgage lending,’ Stephen McMahon, Herald Sun 29 March 2012
‘Fading lure of north's garden suburbs,’ Antony Lawes, Sydney Morning Herald, 14 April 2012
Indicators Show Sydney Real Estate Rise Imminent
Mon, 19 Mar 2012Expect rates cut, rising prices for Sydney property
Mon, 20 Feb 2012The Sydney real estate market is still awaiting the starting gun after the Reserve Bank decided to leave interest rates on hold in its February meeting.
Dr Andrew Wilson, senior economist for Australian Property Monitors said the RBA’s decision had increased buyer uncertainty.
''Fragile confidence and low housing affordability in the Sydney housing market remains a significant barrier to increased housing market activity in a city that remains clearly Australia's most expensive capital for housing,'' he said.
The president of the Real Estate Institute of Australia, Pamela Bennett, told Domain.com that lower inflation figures were a clear indicator to cut rates.
''We know that first home buyers are starting to return to the property market but another reduction would have assisted in stimulating the lower end of the market and provided a ripple effect to those buyers trading up,'' she said.
In the Sun-Herald’s 2012 Property Guide, St George Bank’s chief economist, Beda Deda acknowledged the market’s slow start to the year but sees a recovery on its way.
“As the rental markets continue to tighten, it will help set the conditions for a recovery to come through in house prices later in the year,” she said, adding that it is likely to be led by owner-occupiers.
Several interesting facts about Sydney
Writing in the Sydney Morning Herald, Tim Lawless, RP Data's national research director, says that the Sydney market has demonstrated resistance to any downturn in the property sector.
He points out that the latest RP Data-Rismark Home Value index shows that Sydney values increased 0.7% in the December quarter and remained virtually flat for the full calendar year, recording a 0.3% decline.
The reasons for this are to be found in what he calls “several interesting facts” that keep Sydney real estate ahead of all other capital cities in Australia.
First, Sydney home values haven’t been overly inflated. In the past 10 years, Sydney home values appreciated just 4.1% a year compared to Melbourne’s 7.1% and Brisbane’s 8.1%.
There’s also the fact that rental vacancies are low and rental demand is high. This is good for landlords because it ensures good returns on investment properties.
An AAP report released 11 February said that rents in Australia's most sought-after suburbs have increased by up to 13% per cent in the last year, including hikes of 11.7% in the Sydney north shore suburb of Cremorne and 11.5% in Surry Hills in inner Sydney.
Higher rents are also a stimulus for tenants to become owners. Housing finance data from the Australian Bureau of Statistics showing first-time buyers now represent about 20% of the overall owner-occupier market.
Another key factor is the under-supply of housing across NSW which the federal government's National Housing Supply Council says accounts for about 40% of the national housing under-supply tally.
The auction clearance rate mid-month lingered just above the 50% mark as ANZ and Westpac surprised the market by announcing small increases in their mortgage interest rates.
One might ask how the banks can justify raising their mortgage interest rates at a time the RBA’s Governor, Glenn Stevens, says that inflation is under control: “CPI inflation has declined as expected, as the large rises in food prices resulting from the floods a year ago have been unwinding.
“Year-ended CPI inflation will fall further over the next quarter or two. In underlying terms, inflation is around 2½ per cent. Over the coming one to two years, and abstracting from the effects of the carbon price, the Bank expects inflation to be in the 2–3% range.”
The RBA did say that if demand conditions weaken materially, the inflation outlook would be supportive of easier monetary policy.
“The Board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth and low inflation”.
The next move in the RBA’s cash rate is therefore much more likely to be downwards, which should save the banks some money. Not that they’re doing all that badly at present.
As Ian Mcilwraith pointed out on smh.com, since 2009 when the National Australia Bank started reporting quarterly figures its profit per day has gone from a shade under $12 million to about $15.2 million - a gain of 27%.
“One last one for the statistics lovers”, he added. “On that basis, NAB is making a profit equivalent to about $62 for every child, woman and man in this country in the quarter - compared with closer to $54 per capita in the same period of 2009”.
Banks’ earnings under pressure
There is, as always, another side of the story. Malcolm Maiden on Domain.com says that banks’ earnings are under pressure from a slump in loan growth.
“Now, with the Reserve's cash rate on hold, their choice is between moving lending rates up nakedly - stripped of the cover of a cash rate cut that allows them to still announce that rates are going down - or holding tight, in a market where funding costs and low loan demand are squeezing earnings”.
If there is a Reserve Bank rate cut in the next month or two, Maiden doesn’t see the banks cutting their own rates to match the RBA.
“If the cash rate does go down next month or in April, the banks will want to hold back part of the cut to defend their own lending and profit margins. Overseas borrowings that account for about 40% of their funding in a normal year cost more than they did six months ago”.
Chris Zappone told readers of the Sydney Morning Herald that evidence is mounting that if banks don't lift rates independent of the RBA they won't be able to make profit on fresh loans at current mortgage rates.
“Mortgage demand growth has slowed to just a third of what it was before the global financial crisis. Beyond the booming mining sector, industries from retailing to car making say they are doing it tough and are less keen to take on new debt until the outlook for the economy brightens”.
Regardless of what Treasurer Wayne Swan may say about how the banks could and should reduce their costs to borrowers, Zappone says there’s little he can do to bring this about.
“The other problem is that the big four banks are so dominant, with more than 80% of the mortgage market between them,” he adds.
JPMorgan economist Ben Jarman told Chris Zappone that the banks' activity would impact consumer behaviour in coming months.
''It does generate a little bit of uncertainty,'' he said. ''You have another channel of uncertainty to think about if you're a potential borrower now''.
Despite this uncertainty, Mr Jarman believes the housing market will remain steady. ''The numbers will stay in the range of modest improvement, but nothing stellar,'' he said.
Average rates of growth expected
Annette Sampson took an exhaustive look at the real estate market for SMH Money, including interviews with several property experts. She turned up some interesting comments, including this one from senior research analyst at RP Data, Cameron Kusher:
''Home values across Sydney have increased at an average annual rate of just 4% over the past 10 years.
“Although we don't expect property values to increase at a rate above inflation, we anticipate Sydney will continue to be one of the better-performed markets, especially considering that when adjusted for inflation, values remain below their 2004 peaks.''
Another interview subject was the head of property and financial system research at ANZ, Paul Braddick. Although not specifically describing his thoughts on the Sydney market, his forecast for Australia is that house prices will fall further in the next six to 12 months but once they have found a floor, prices should start to rise in line with household incomes.
He says that means longer-term growth of about 4% to 5% a year on average, though there will be cycles around that.
The chief economist at AMP Capital Investors, Dr Shane Oliver, told Annette Sampson that historically, prices get ''stuck in a range'' for five to 10 years after they have been pushed to extremes. He told her that research on house prices since 1920 shows they have risen about 3% a year after inflation in the longer term.
There were no forecasts of double-digit growth, but neither were there predictions of price falls across the board. For Sydney especially, the outlook is for continued growth but at a slower rate than that of four and five years ago when the term ‘price bubble’ was often used in the media.
Ian Verrender, writing in ‘Business Day’, says there's little doubt that Australian property is likely to be subdued for at least the next few years.
“As in previous times, the property market appears to be settling in for a prolonged hibernation after a debt-fuelled run-up”.
He says that it’s time for a reality check for those pining for 'the good old days' when we had ‘affordable housing’.
“The truth is that housing was never affordable. All that's changed in recent decades has been a shifting of the equation surrounding supply, demand and price”.
He adds: “It wasn't until our banks discovered cheap offshore credit in the mid-1990s and brought the cash onshore that we suddenly had 'affordable' home loans. But the cheaper credit simply shifted the price of real estate higher”.
Australian Property Monitors’ Dr Andrew Wilson remains a confident proponent of Sydney real estate: “The resilience of the Sydney market reflects the underlying shortage of accommodation in the city, with a chronically tight rental market.
“This year is set to be one of gradual recovery in the Sydney market with median house prices expected to rise by between 3 and 5 per cent over the year”.
He says that first-home buyers will be relatively inactive early in the year due to demand from that group being brought forward before the end of 2011. However, he says that this will be offset by increased activity from “change-up” buyers in the middle price sector of the market and investors in the lower sectors - particularly the unit market.
“Although the prestige market will remain relatively subdued initially, expect some momentum to build through the year on the back of increased activity by aspirational buyers seeking value in quality properties in prestige locations, particularly in the $2 million to $3 million price range”.
Sources:
‘Buyers still wary as clearance rate hovers above 50%,’ Domain.com, 13 February 2012.
‘Agents, vendors hold breath for buyers to brave unchanged lending rates,’ Antony Lawes, Alexandra Smith, Domain.com, 9 February 2012
‘Sydney prices are on firm ground,’ Tim Lawless. Sydney Morning Herald, 5 February 2012.
‘Banks crying poor over mortgage losses,’ Ian Mcilwraith, 8 February 2012.
‘Statement by Glenn Stevens, Governor: Monetary Policy Decision,’ RBA Media Release, 7 February 2012
‘Borrowers await Banks' reaction to RBA decision,’ Malcolm Maiden, Domain.com, 8 February 2012
‘Will ANZ burst the dam of public anger?,’ Chris Zappone, SMH.com, 9 February 2012.
‘Blueprint for wealth,’ Annette Sampson, SMH Money, 1 February 2012.
‘Cautious optimism as sales trend upwards,’ Andrew Wilson, Sydney Morning Herald, 6 February 2012.
‘Don't bet on a property crash,’ Ian Verrender, Business Day, 2 February 2012.
‘NSW rush raises housing loan figures,’ Chris Zappone, Domain.com, 14 February 2012.
‘Rents rise by 13% in sought-after suburbs,’ AAP report on Domain.com, 11 February 2012.
‘Clear skies, growth ahead,’ Property Guide, Sun-Herald, 19 February 2012.
Sydney Property to Recover in 2012
Fri, 27 Jan 2012The New Year has begun with a hangover of sorts that’s holding back good news for those interested in the property market.
The factors besetting real estate values that applied toward the end of 2011 haven’t gone away, and even when their effects diminish it won’t show up in key industry statistics for another two or three months due to the lag between the times metrics are compiled and when they’re reported.
So at present the market is poring over late-2011 statistics looking for clues to what will transpire in the coming twelve months. Of growing interest is the topic of when the much-discussed ‘recovery’ in Sydney property prices will begin.
The first point to make is that Sydney property prices don’t have much ground to make up. In November 2011 house prices were down by just 0.1% and unit prices rose by 0.2%.
Data from Australian Property Monitors show that the national median price for houses over the year to October 2011 fell by just 1% compared with the previous year, and median unit prices managed to rise by 1.2% over the year.
However, median Sydney prices actually rose over the same period – by a miniscule 1% but up nonetheless.
A Year of Correction
2011 is best seen as a year of correction. Housing markets had recorded substantial rates of price growth during 2009 and 2010 that were simply unsustainable over the longer term.
Between January 2009 and June 2010, Sydney's quarterly median house price rose by nearly 20%. This pace couldn’t last forever, and it didn’t; the market has now paused to take a breather.
But if 2011 was a year of correction, will 2012 be a year of recovery?
An AAP media release appearing on the News.com website reported on a Property Council-ANZ Bank survey of 2800 property industry professionals conducted in December 2011.
The survey measured the confidence real estate professionals had about demand from investors for property in each state.
In the survey a score of 100 is rated as ‘neutral’, and states with resource-driven economies understandably scored highest. The Northern Territory, for example scored a booming 145 points to top the list.
Nationally, confidence was up slightly from the 104 points measured in September, to 107 points. NSW slipped from 107 points in September to 105 points in the latest survey.
Property Council chief executive Peter Verwer described the poor performance of the larger, south eastern states as “worrying” but said that In NSW, where people are adjusting to a new government, investors are "starting to get fidgety".
It can also be said that it’s possible investors would be seeking to tap into the high rents being secured from rental properties in those areas affected by high-paying mining activities, and that doesn’t include NSW.
Underlying Strengths remain
Elsewhere there are indications that the Sydney market retains its underlying strengths and that these will create an upturn in property prices not anticipated by the Property Council-ANZ Bank survey results.
The first factor is not exclusive to Sydney, but it nevertheless plays an important part in the price of properties in the city. Interest rates are low and could fall even further.
In its ‘Minutes of the Monetary Policy Meeting’ of 6 December 2011 the Reserve Bank stated: “Looking forward, market expectations were for another reduction in the cash rate at the December meeting, with further reductions anticipated by the middle of the coming year”.
Stable or even decreasing interest rates are always beneficial to the property market and 2012 won’t be a year that demonstrates otherwise, even if the response to the two recent rate reductions has thus far been less enthusiastic than expected.
Next consider the housing supply situation. The National Housing Supply Council, appointed by the Federal Government, has just released its third annual report.
As Crikey’s Canberra Correspondent Bernard Keane said in Business Spectator about the 2011 report, “[It] has provided a corrective to the continuing denialism about Australia’s long-term housing undersupply”.
The council estimates that, over the course of 2009-10, the gap between underlying housing demand and supply widened from about 158,000 dwelling units to about 187,000 units.
The council further estimates that this gap will rise to about 329,000 dwellings by 2015 and blow out to over 600,000 dwellings by 2030. It says that about 40% of the present gap is in NSW and the situation is likely to continue well into the future.
Bernard Keane concluded: “While NSW, led by its capital city Sydney, receives more international migrants than any other state, NSW’s problem isn’t outsized demand, it’s hopelessly inadequate supply”.
Home Loan Approvals Trend Upwards
In the meantime, home loan approvals have been trending upwards, according to an AAP report on the December figures from the Australian Bureau of Statistics.
In the report Nomura chief economist Stephen Roberts said the strongest region for housing finance was NSW, with a 1.3% increase, after a 4.3% increase in September.
He said the growth in NSW was indicative of how home ownership was becoming a favoured option, given rental costs: "Numbers have been climbing in NSW for some time.
"Rents have been quite high, so the economics of buying a house instead of renting are very much in favour.
"It's a market that's climbing back, and it's been helped by the cut in rates."
Figures from the Australian Bureau of Statistics support this line of reasoning. They show that the number of owner-occupier housing loans in NSW rose by 8% over the 10 months ending October 2011 compared with the same period in 2010.
Rismark director Christopher Joye said in the Sydney Morning Herald that he also thinks the home loan approval figures augur well for property values.
"The best proxy for housing demand - the number of new home loans approved for purchasing established properties - has risen robustly every month since its nadir in March," he said.
Dr Andrew Wilson, senior economist for Australian Property Monitors, says that Australian capital city housing markets are set to record growth in median prices over 2012 as the national economy gathers strength.
“The Australian economy is primed to expand strongly on the back of a significant resources boom with the Organisation for Economic Cooperation and Development predicting gross domestic product will increase by 4% over the year,” he said in Business Day.
Writing in the Sunday Telegraph, Mark Bouris said that in the past five years prices paid for Australian property looked like a sideways ‘S’ but that 2012 will see the property market make a comeback.
“Moreover,” he said “property is an asset measured in 10-year cycles and there has not been a decade since the end of World War II where property values have not risen. Modest asset growth will return when you measure it decade by decade – we just won’t see the asset inflation we saw in the 2000s.”
2012 will be the year that the Sydney property market recovers from what will soon be seen as ‘the correction of 2011.’
Sources:
‘Fortune favours the resource rich – survey,’ AAP report on News.com, 12 January 2012
‘Counting eggs before they hatch,’ Chris Vedalgo, The Age, 11 January 2012
‘Surprise lift in home-building approvals, but housing sector still weak,’ AAP report in Herald Sun, 10 January 2012
‘Revelations of a housing disaster,’ Bernard Keane, Business Spectator, 22 December 2011 (updated 3 January 2012)
‘Australia's still raising the real estate roof,’ Andrew Wilson, Business Day, 31 December 2011
‘Capital city house values finally on the up - but only just,’ AAP report on News.com, 30 December 2011
‘Home loan approvals continue upward trend,’ AAP report on News.com, 12 December 2011
‘Your house: Is it over-valued?’ Mark Bouris, The Sunday Telegraph,15 January 2012
Consumer Confidence and Sydney Real Estate
Tue, 20 Dec 2011As the end of 2011 neared the year looked set to finish with a burst of activity in the property market. Two interest rate cuts had set the stage, together with the deadline approaching for the stamp duty concession for first-home buyers for the purchase of established homes.
By mid-November Sydney property auction clearance rates had reached and even exceeded the 55% level, and the median value of houses sold was rising.
Figures from the Bureau of Statistics showed that the number of owner-occupied home loans in NSW rose by 3.9% over September, making that the sixth consecutive monthly rise in the number of home loans.
Dr Andrew Wilson, senior economist for Australian Property Monitors said in the Sydney Morning Herald on 14 November that: “Sydney home buyers appear to be out and about and, with the Bureau of Statistics reporting last week that the state's monthly unemployment fell from 5.4% in September to 5.1% in October, expect confidence in the housing market to continue to improve.”
Confidence however can be a fragile thing. As reported just one month later on 14 December in a News.com article, despite two late-year interest rate cuts consumer confidence has dropped to its lowest level since August as Australians focus on rising unemployment, troubles in Europe and a shaky share market rather than two consecutive rate cuts.
Rate Cuts alone not enough
In the article, Westpac chief economist Bill Evans said the result was surprising, and notable. He told News.com that: “...the history of previous easing cycles shows that rate cuts do not guarantee an improvement in sentiment.
"The likely explanation is that respondents' concerns over the reasons behind the rate cut may overwhelm the perceived benefits of the cut itself.”
Confidence among mortgage holders fell by 9.5%, while sentiment dropped 8.3% for people who own their house mortgage free, he said.
As retailers continue to report disappointing sales in the lead-up to Christmas, they say that one of the key factors affecting shoppers’ behaviour is consumer confidence.
An IBISWorld report in December said that Christmas spending is expected to rise 3.3% from last year, with the average shopper spending $1,213.22 over December to total $27.4 billion.
However the report also pointed out that: “About 36% of Australians intend to spend less this Christmas than they did last year and fewer than 20% are planning to spend more,” the report said.
Buyers are either taking a break or at least cutting down on their spending this Christmas. Even the seemingly-bulletproof Sydney real estate market is quieter than expected.
Dr Andrew Wilson who was so buoyant in mid-November told the Sydney Morning Herald on 10 December: “Spring largely failed to gather any of the usual momentum, with house price growth flat or slightly down.
“Buyer confidence remains fragile and auction clearance rates have fluctuated near the low-50% mark despite relatively large numbers of properties being offered recently by sellers seeking to clear the deals before Christmas”.
Dr Wilson tells us that most market analysts will be glad to see the back of the government’s stamp duty concessions, which he says has simply pushed up prices.
He said that demand-stimulating policies can be problematic and lead to a temporary inflation of the market by drawing forward demand.
So, it may well be that a fall in consumer confidence has combined with the end of a period of stimulated demand to give the market a quieter ending to 2011 than anticipated.
The continuing saga of the European debt crisis is certainly a factor. The wildly-swinging gyrations of the Australian Stock Exchange are a daily reflection of the inability of Europe’s leaders to agree on solutions to their economic problems.
More importantly, they highlight the fluctuating levels of doubt and uncertainty now prevalent in our society. What’s going to happen next?
Plenty of Expert Optimism
Writing in the Property Observer, Christopher Joye, joint managing director of Rismark International, is optimistic.
“With the ability to now get three-year fixed-rate home loans for 5.99%,” he said, “and 6.39% variable-rate loans, there is understandably excitement brewing about the prospect of a recovery in the Australian housing market.
Joye says that if the financial markets are right, and the RBA continues to cut rates in the first half of next year, a very healthy rebound can be expected.
However, he cautions readers to not expect too much too soon: “While I expect housing activity to revitalise by the first quarter of 2012, this will not flow through to the price data until the end of March or April.”
Real estate author Terry Ryder wrote in The Australian on 26 November: “The latest home-finance index confirms that property consumers collectively have everything in their favour but are disinclined to take action. They await some magical signal that it's OK to buy something.”
In the same article Mortgage & Finance Association of Australia chief executive Phil Naylor said consumers are in a position to act when confidence returns: "With a recent interest-rate cut, high savings and low mortgage stress, prospective home buyers are in a relatively good position.
“Reticence about buying property seems linked to the perceived state of the economy, not to the personal financial state of consumers."
In the meantime, over the past year Sydney rents increased by 5.9% for houses and 5.4% for units bringing the weekly rent for a typical Sydney house up to $550 and to $513 for units.
Tim Lawless, RPData’s national research director, says that returns on Sydney investment property are now well above the combined capital city average. “The typical Sydney house is returning 4.4% gross, while units are returning a gross yield of 5.2%.”
Figures from the Australian Bureau of Statistics continue to show that new housing supply is insufficient relative to population growth. The number of dwellings that commenced construction across NSW during the June quarter was just 6696.
This number is 25% lower than the decade average in the state. At the same time rental vacancy rates are running between 1%-1.5%. Sydney is increasingly becoming a landlord’s market.
A long-time monitor of the Sydney property market, Residex CEO John Edwards, has predicted that the city’s house prices will rise 3% per annum over the next five years and 5% per annum over eight years.
"The previous government's failure to ensure adequate housing means, while most markets have a surplus due to decreased migration and a slowing economy, NSW has an underlying housing shortage which is causing growth despite slower sales."
Buyer Confidence is the Key
Dr Andrew Wilson says that, for the short-term at least, buyer confidence will be the key to when Sydney’s property recovery will begin in earnest.
“Latest Australian Property Monitors data shows that the Sydney median house price fell by just 1.6 per cent over the year to September. More encouragingly median unit prices have actually risen by 0.6 per cent over the year to September.”
There’s little doubt that Australians have responded to economic troubles overseas by tightening their belts, increasing their savings and cutting back on expenditures. This mood of frugality has even affected the buying and selling of real estate, giving the Sydney property market a relatively quiet ending to 2011.
Property markets have shown themselves to be cyclical with periods of rising prices and periods of stability. This is one of those times that investors and other would-be property owners look around and see that interest rates are low, prices are generally negotiable, the housing stock on offer is good in both quality and variety, and rental rates are rising.
Too many positive factors are now in place for the buyers’ hesitation to last much longer. With an expectation of further interest rate cuts in the new year, Terry Ryder’s magical signal that it’s OK to buy something has to be on its way.
Sources:
‘Spring surge blooms as home buyers dive in,’ Dr Andrew Wilson on Domain.com, 14 November 2011
‘Consumer confidence down despite rate cut, Westpac survey reveals,’ by Sonja Koremans, News.com.au, 14 December 2011
‘Savvy spending: Shoppers will be choosier this Christmas,’ IBISWorld Special Report, December 2011
'Worst nearly over for Sydney property prices,’ by Vikki Campion, The Daily Telegraph, 1 December 2011
‘Rate cut could be lifeline to slow market.’ Dr Andrew Wilson on Domain.com, 10 December 2011
‘Breathing life into Aussie property,’ Christopher Joye, Property Observer, 24 November 2011
‘It's a race to the bottom when picking property prices, but you'd better hurry,’ HOTSPOTTING, Terry Ryder, The Australian, 26 November 2011
‘2011: Orderly correction no dramatic fall in house prices,’ Dr Andrew Wilson on Domain.com, 27 November 2011
Sydney Real Estate set for Growth in 2012
Wed, 16 Nov 2011As the end of 2011 approaches Sydneysiders can thank their lucky stars that, of all Australian capital cities, theirs has withstood the economic forces that have devalued home prices elsewhere.
One reason is, of course the rush to beat the end of stamp duty concessions. From the start of 2012 most first-home buyers will have to pay full stamp duty on their NSW housing purchases. As a result, the property market is booming.
Next year, the stamp-duty savings will apply only to new homes, including those bought off the plan. This is why in September the number of loans for first-home buyers in NSW leapt by 15.9% compared with October.
The action’s pretty hot at Sydney property auctions too. Auctioneer Peter Baldwin estimates the number of registered bidders at auctions is up by 20% with the number of buyers even higher in the private treaty market. “We're hearing they're paying whatever the asking price is'', he told Domain.com.
Sydney Mornng Herald writer Chris Zappone noted that data from the Australian Bureau of Statistics showed that the number of seasonally adjusted finance commitments for owner-occupied home loans rose by 3.9% over the month of September.
“The number of home loans rose for the sixth straight month in September, with more gains expected to flow through following the recent cut to interest rates.”
As the market had expected, the Reserve Bank cut the cash rate to 4.5% at its Melbourne Cup Day meeting, down from 4.75% where it had rested since November 2010.
Westpac senior economist Matthew Hassan told Chris Zappone that, although the shift by households to pay down debt rather than to gear up further may limit the expansion in the housing sector, there were other factors to consider.
"These forces are offsetting the positives of rising household incomes, relatively low unemployment and a shortage of housing stock," said Mr Hassan.
Property writer Carolyn Cummins said on Domain.com that Sydney’s housing market is set for a rebound in 2012. She quoted Mirvac’s managing director, Nick Collishaw, who said:
''In NSW, the culmination of weak residential activity, solid population growth and greater availability of mortgage finance has resulted in a recovery in dwelling construction. 'The RBA's decision to reduce interest rates by 25 basis points will provide some relief for the sector.''
Ms Cummins also quoted BIS Shrapnel's senior project manager, Angie Zigomanis, who said the decline in land activity in 2010-11 had created a rising undersupply in some markets including Sydney.
“With an improved interest rate outlook and strengthening economic conditions expected in 2011-12, new house and land activity would begin to recover in those markets, where the deficiency would be most pronounced,” he said.
Looking for a ‘glass half empty’ outlook on Sydney housing can be a challenge. Even an article by Nicole Pedersen-McKinnon on News.com entitled ‘Gloomy Property Outlook’ contained these comments.
“The Australian Bureau of Statistics data shows values in our capital cities fell 1.2% in the past quarter, the most in a year, and stand 2.2% below their September 2010 level. Sydney is holding up best, declining just 0.2% in the quarter...”
Quoting a study commissioned by Financial Review Smart Investor, she added: “NSW came out of our study, for which we commissioned Australian Property Monitors to crunch the numbers, relatively well.
“Of the 100 areas that have recorded the biggest gains in the past year - the most resilient to date - 32 are expected to keep growing in real terms (increasing 3% or more) and 24 of these by more than 5%.”
Market watchers may not all agree on the reasons for the continuing resilience of the Sydney property market, nor are their growth predictions uniform, both with regard to the rate of growth and the timing of the next upwards move in housing prices.
The important points on which most property analysts agree are these:
− The Sydney market has weathered the national downturn in property prices with few negative consequences;
− The RBA’s November rate cut has been an effective stimulus for buyers, teamed with the rush to beat the cut-off of the stamp duty concessions’
− Real price growth will begin in early 2012 due a strong domestic economy with wages growth and low unemployment; and
− The growth in demand for housing will continue without any significant increases in supply.
Sydney Real Estate set for Growth in 2012
Tue, 15 Nov 2011As the end of 2011 approaches Sydneysiders can thank their lucky stars that, of all Australian capital cities, theirs has withstood the economic forces that have devalued home prices elsewhere.
One reason is, of course the rush to beat the end of stamp duty concessions. From the start of 2012 most first-home buyers will have to pay full stamp duty on their NSW housing purchases. As a result, the property market is booming.
Writing on Domain.com, property journalist Antony Lawes explains the situation: “At present, first-home buyers pay no stamp duty on properties costing less than $500,000 and receive a discount for properties priced between $500,000 and $600,000.
“This amounts to a saving of $17,990 for a $500,000 house and $22,490 for one worth $600,000.”
Next year, the stamp-duty savings will apply only to new homes, including those bought off the plan. This is why in September the number of loans for first-home buyers in NSW leapt by 15.9% compared with October.
The action’s pretty hot at Sydney property auctions too. Auctioneer Peter Baldwin estimates the number of registered bidders at auctions is up by 20% with the number of buyers even higher in the private treaty market. “We're hearing they're paying whatever the asking price is'', he told Domain.com.
Sydney Mornng Herald writer Chris Zappone noted that data from the Australian Bureau of Statistics showed that the number of seasonally adjusted finance commitments for owner-occupied home loans rose by 3.9% over the month of September.
“The number of home loans rose for the sixth straight month in September, with more gains expected to flow through following the recent cut to interest rates.”
Interest Rate Cut Works
As the market had expected, the Reserve Bank cut the cash rate to 4.5% at its Melbourne Cup Day meeting, down from 4.75% where it had rested since November 2010.
Westpac senior economist Matthew Hassan told Chris Zappone that, although the shift by households to pay down debt rather than to gear up further may limit the expansion in the housing sector, there were other factors to consider.
"These forces are offsetting the positives of rising household incomes, relatively low unemployment and a shortage of housing stock," said Mr Hassan.
Property writer Carolyn Cummins said on Domain.com that Sydney’s housing market is set for a rebound in 2012. She quoted Mirvac’s managing director, Nick Collishaw, who said:
''In NSW, the culmination of weak residential activity, solid population growth and greater availability of mortgage finance has resulted in a recovery in dwelling construction. 'The RBA's decision to reduce interest rates by 25 basis points will provide some relief for the sector.''
Ms Cummins also quoted BIS Shrapnel's senior project manager, Angie Zigomanis, who said the decline in land activity in 2010-11 had created a rising undersupply in some markets including Sydney.
“With an improved interest rate outlook and strengthening economic conditions expected in 2011-12, new house and land activity would begin to recover in those markets, where the deficiency would be most pronounced,” he said.
Auction Clearance Rates Rise
Dr Andrew Wilson, senior economist for the Fairfax-owned Australian Property Monitors, who is usually a ‘glass half full’ observer of Sydney real estate, said in the Sydney Morning Herald on 14 November that home buying in Sydney is increasing, with auction clearance rates rising and a surge in first-home buyer activity.
“Last weekend, 572 properties were listed for auction, the same number as the previous weekend and almost the same as the 588 listed for auction at the same weekend last year.”
He also noted that, with the Bureau of Statistics reporting last week that the state's monthly unemployment fell from 5.4% in September to 5.1% in October, Sydney could expect confidence in the housing market to continue to improve.
Looking for a ‘glass half empty’ outlook on Sydney housing can be a challenge. Even an article by Nicole Pedersen-McKinnon on News.com entitled ‘Gloomy Property Outlook’ contained these comments.
“The Australian Bureau of Statistics data shows values in our capital cities fell 1.2% in the past quarter, the most in a year, and stand 2.2% below their September 2010 level. Sydney is holding up best, declining just 0.2% in the quarter...”
Quoting a study commissioned by Financial Review Smart Investor, she added: “NSW came out of our study, for which we commissioned Australian Property Monitors to crunch the numbers, relatively well.
“Of the 100 areas that have recorded the biggest gains in the past year - the most resilient to date - 32 are expected to keep growing in real terms (increasing 3% or more) and 24 of these by more than 5%.”
Sydney Housing is Resilient
In an AAP media release quoted on News.com, Nomura chief economist Stephen Roberts said he expected the housing sector to improve in the coming months, especially after the RBA’s interest rate cut.
"Already, we've seen housing finance commitments picking up over the last few months," he said.
"This pattern with interest rates is only going to accelerate it as we go ahead.
"We've seem to have gone through the base as far as housing credit is concerned and that will pick up in the next few months, so some of that will come back to home building approvals."
Independent property analyst Mark Amstrong, writing on Domain.com, created an analogy for the Australian property market that relates it to an economic comment by a former Prime Minister.
“Paul Keating once called a downturn the ‘recession we had to have’. Well, the property market correction of 2011 was the correction we had to have.
“However, as we move into 2012 the tuning of vendor expectations and the decision by the Reserve Bank to cut the cash rate by 25 basis points will mark a turning point for the property market.”
Market watchers may not all agree on the reasons for the continuing resilience of the Sydney property market, nor are their growth predictions uniform, both with regard to the rate of growth and the timing of the next upwards move in housing prices.
The important points on which most property analysts agree are these:
− The Sydney market has weathered the national downturn in property prices with few negative consequences;
− The RBA’s November rate cut has been an effective stimulus for buyers, teamed with the rush to beat the cut-off of the stamp duty concessions’
− Real price growth will begin in early 2012 due a strong domestic economy with wages growth and low unemployment; and
− The growth in demand for housing will continue without any significant increases in supply.
Sources:
• Lawes, Antony, ‘Sales soar as cut-off nears,’ Domain.com, 11 November 2011
• Zappone, Chris, ‘Home loans continue to rise,’ Sydney Mornng Herald, 9 November 2011
• Cummins, Carolyn, ‘Sydney ripe for more home building’, Domain.com, 7 November 2011
• Wilson, Andrew, ‘Spring surge blooms as home buyers dive in,’ Sydney Morning Herald, 14 November 2011
• Pedersen-McKinnon, Nicole, ‘Gloomy property outlook,’ News.com Property, 6 November 2011
• Armstrong, Mark, ‘Rate cut brings cheer after dose of market reality,’ Domain.com, 6 November 2011
• AAP media release, ‘Housing sector making a comeback,' News.com, 12 November 2011
Sydney housing or Shares – the Better Investment Choice is?
Tue, 18 Oct 2011An article in the Sydney Morning Herald on 12 October carried the headline: “Houses no longer the best investment.” It’s such an interesting claim that the article by Simon Johanson deserves further exploration.
Simon Johanson is the editor of the online version of The Age, Melbourne’s major Fairfax title. He’s written about real estate for some time including a number of articles about Melbourne’s property market.
“Residential property has been Australia's highest-returning asset class over the past 24 years - eclipsing shares,” he writes “but over the next decade it will be outperformed by commercial property, according to research by ANZ.”
He says the ANZ report, ‘Asset returns: Past, Present and Future’ forecasts that equities will overtake residential property as the strongest performer over the next ten years.
He also notes that the report says owner-occupied housing has made annual average returns of 12% over the 24 years since 1987 even when costs and taxes were factored in.
In fact, he points out that owner-occupied housing had the highest returns, outperforming investment property, in part because of capital gains tax exemptions.
That’s hard to beat, but investor housing was the still next best asset class, according to the report, performing slightly better than equities over the period covered by the report.
Will the share market recover?
The ANZ Bank has concluded in its report that over the next ten years it will be shares, rather than real estate that will be the stronger performer.
To give the bank due credit, it’s one of Australia’s ‘Big Four’ banks and certainly no slouch at interpreting the property market. This could be why ANZ qualified its forecasts saying they were ''very sensitive to assumptions.''
First, it should be noted that the ANZ Bank is talking about its Australia-wide expectations. There are many capital cities other than Sydney that are experiencing weakening property prices after a period of significant increases.
The cyclical nature of the real estate market shows that sudden increases are usually followed by at least a pause in price increases or even a fall in prices – for a while that is.
Writing in Fairfax’s ‘Business Day’ another Fairfax journalist, Antony Lawes dug into the findings of the latest QBE LMI Housing Outlook 2011-2014 report. His article’s headline: ‘Sydney surge in house prices tipped’, summarises QBE’s predictions.
The report, prepared by BIS Shrapnel, says that prices in Sydney will rise 19% in that time and that Sydney's median house price will rise from $644,000 now to $770,000 by June 2014.
The report says the reasons for this pricing performance will be the underlying strength of the Australian economy, stable interest rates in the short term, high immigration and the unending shortage of housing in Sydney.
The QBE LMI report says that first home buyers will re-enter the market in greater numbers in 2012 as the outlook for the economy improves.
Managing Director of BIS Shrapnel, Robert Mellor, is quoted in the article saying that ''Sydney hasn't fallen in a hole and house price growth has been minimal but has held up over the last 12 months.''
He predicts this will jump to about 5% growth in 2011-12 and rise to 7% the year after. It should be noted that BIS Shrapnel forecasts in 2013 growth could start to slow as a result of anticipated higher interest rates.
As for shares, Chris Caton, Chief Economist for BT Financial Group Limited, commented in his column on 5 October: “For the month, the ASX 200 fell by 6.7%, its sixth successive monthly fall. The US share market, as measured by the S&P 500 index, fell by 7.2%.”
He attributes the share market’s worries to “...fear of ‘double dip’ recession in the United States and continued concerns about debt issues, and the state of the economy in Europe”.
He does say he thinks that concerns about a return to recession in the United States are overstated, and that the economic turmoil in Europe will be resolved although he believes the default by Greece on its foreign debt obligations is inevitable.
That’s a lot of uncertainty affecting the share market, to place against the somewhat more sound and predictable factors underlying the Sydney property market. It’s a brave prediction indeed that the ANZ Bank has made.
Sydney housing on the rise
For the present situation in Sydney, look at an article in the Sydney Morning Herald on 12 October titled: ‘Housing steadies: home loans rise again.”
It’s based on an Australian Associated Press release that notes the number of home loans approved in August rose 1.2% to 50,965 and that August was the fifth straight month that housing finance commitments had risen.
The Australian Bureau of Statistics said total housing finance by value rose 1.0% in August, seasonally adjusted, to $20.848 billion.
The housing market may not be booming, but the article quotes JPMorgan economist Ben Jarman who said he still expected the RBA to not change the cash rate from its current 4.75% until at least the middle of 2012.
‘‘You’ve got a lot uncertainty offshore counterbalancing the domestic inflationary situation here and we see the RBA not doing very much for a while.’’
The article also quoted ICAP senior economist Adam Carr who said he expected housing finance data to continue to be strong in the coming months.
‘‘Financial conditions are not too tight, we’ve had an easing in financial conditions (and) lending rates are going sharply lower. Don’t forget the unemployment rate is low and income growth is strong, so the prospects are really good.’’
Rental rates skyrocket
Further support comes from an analysis of Sydney’s rental rates. A 15 October Sydney Morning Herald article titled: ‘Sydney rents rocket by 13 per cent’ found that Sydney rents have risen by as much as 13% per cent in the last year, and tenants are now paying about $60 more a week than they were a year ago.
On the same day Dr Andrew Wilson, senior economist for the Fairfax-owned Australian Property Monitors, wrote in an article on Domain.com: “Sydney unit rentals are...the most expensive of all the capitals at $460 a week.
“Gross yields on rental properties in Sydney have strengthened marginally during the September quarter as stable and rising rentals have been offset by small declines in property values.”
Dr Wilson noted that the yield for Sydney units in the September quarter was 5.03% and for houses was 4.53%. Returns of this sort would be a huge relief to many share market investors who have weathered the recent ASX ups and downs to their cost.
This is an interesting time in Sydney real estate, as described on 9 October in an article by Louis Christopher, managing director of SQM Research on Domain.com.
“Sydney house prices are largely holding ground, but it's still a buyers' market and will remain that way for some time yet. And that is because we have a large number of properties for sale now.”
He says that SQM’s forecast for Sydney remains on track and a bottom to Sydney market prices would come soon. “Next year, we expect house prices to record moderate increases of somewhere between zero and 4%.”
However, he says that conditions could change quickly and prices could rise much sooner. “If the RBA were to cut rates and yet the global economy just makes it through, then we could certainly expect more upside in Sydney.
“Our forecast for dwelling prices would be in the order of 2% to 7% increases for 2012.”
It will be very interesting to see a comparison of the rate of increase of Sydney housing values with that of the share market for the same period. If history is any guide, housing will continue to be the better, more reliable investment.
Sources:
Christopher, Louis ‘There is a lot of choice out there in a buyer's market’ Domain.com, 9 October 2011
Wilson, Andrew ‘Sydney bucks national trend as unit rents rise’, Domain.com, 15 October 2011
Caton, Chris, ‘Caton’s Corner’, October 2011
Lawes, Antony, ‘Sydney surge in house prices tipped’, Business Day, 12 October 2011
‘Housing steadies: home loans rise again’, Sydney Morning Herald, 12 October 2011
‘Units almost as expensive as houses’, News.com.au Property, 13 October 2011
‘Sydney, Perth house prices to rise by 20 per cent’, News.com.au Property, 12 October 2011
Johanson, Simon, ‘Houses no Longer the Best Investment,’ Sydney Morning Herald, 12 October 2011
Doomsayers get it wrong, again!
Tue, 20 Sep 2011The property doomsayers are back. They seem to fade away when economic forecasts become even mildly positive, but once expectations turn downwards there’s an immediate incursion of negativity, accompanied by the now-familiar ‘property crash’ and ‘property bubble’ predictions.
On September 14, Fairfax’s Business Day carried an article by Leith van Onselen titled ‘Australian homes are overpriced, but how much?’ It begins with a mention of surveys by The Economist and Demographia claiming that Australian homes are the most expensive in the English-speaking world.
The principal focus of the article is on affordability. It states that “...no major Australian market could be considered affordable” based on the level of house prices relative to incomes. A ratio of 3.0 times is the benchmark, it says.
The same day, Melbourne’s Herald-Sun ran an article by John Beveridge that showcased the ‘housing prices are about to crash’ theorists, including University of Western Sydney Associate Professor Steve Keen.
In the article, Professor Keen says the claims of an undersupply of housing stock are not supported by evidence; any strength in the market is a ‘distortion’ caused by the variety of stimuli applied by state and federal governments.
The article then referenced British commentator Jeremy Grantham, well-known for his repeated use of the word ‘bubble’ when discussing housing prices in the UK and Australia, who thinks there’ll be a 50% fall in property prices.
Beveridge’s article also reported on American economic forecaster Harry Dent who during a recent visit to Australia predicted a coming economic collapse that will, as the article describes it, take housing prices “back to where they were a decade or more ago.”
Beveridge and Dent are from the UK and USA respectively. In those markets housing prices have indeed crashed, or their bubbles have burst if one wishes to insert ‘bubble’ into the debate.
However, as the article goes on to say, offshore forecasters often make predictions based on their own experiences. If they haven’t experienced the property markets in Australian capital cities, especially that in Sydney, they haven’t experienced a different set of conditions that have kept prices stable through all the economic ups and downs of the past three years.
Australia – a stronger economy
Professor Keen doesn’t have the same set of excuses. He appears unable to see his own country’s current economic strength resulting from commodity exports, leading to relatively low unemployment levels and high wages.
He ignores the favourable taxation treatment of housing, both in terms of capital gains and in the ability of investors to negatively gear their property purchases. And he also seems to have missed the fact that the majority of Australian mortgage indebtedness is held by people who can afford to make the required repayments.
Michael Matusik is the director of independent property advisory Matusik Property Insights. Like Professor Keen he believes there is no shortage of housing supply in Australia; in fact, he’s concerned that we’re building too many houses.
Writing in ‘Business Spectator’ Mr Matusik says that Australia’s population growth has slowed by close to 150,000 in just two years, and as a result, the underlying demand for new housing has dropped from 180,000 starts per annum to around 125,000.
“While dwelling starts are declining, we are now building too much stock,” he concludes.
He does, however, see NSW in a different light from the other states. Although he forecasts an oversupply in Victoria, South Australia, Tasmania and the Northern Territory, he sees Queensland at “equilibrium” and describes NSW as “undersupplied”. This, from a qualified doomsayer!
The doomsayers utter their dismal forecasts, grab a headline or two, and then quickly fade away as the next upwards stage of the property cycle begins. It’s not hard to see that we’re experiencing a lull in the cycle at present and even Sydney property has lost some of its buoyancy.
Interest rates level off
On the brighter side, this lull has contributed to a levelling off of interest rates that looks like lingering into 2012. An AAP article by Jason Cadden published in the Daily Telegraph reported on a survey of twelve economists who were in total agreement that the Reserve Bank will keep the cash rate at 4.75% where it's been since November 2010.
None of the economists surveyed predicted a rate rise before the end of the year; five thought there would be a rate increase in the March quarter of 2012 while three thought rates would be cut in that period.
Stable and relatively low interest rates are one of the property market’s best stimulants. The NSW Treasurer, Mike Baird has found another way to really get things moving.
Mr Baird recently announced that from January 1 first home buyers will once again be paying stamp duty on purchases of existing homes costing over $500,000.
A partial exemption will be available for first home buyers on homes worth between $500,000 and $600,000.
Following the announcement, Sydney auction clearance rates suddenly leapt past the 60% mark and are unlikely to subside before Christmas.
A September 12 story on the News.com website quoted Dr Andrew Wilson, senior economist for Australian Property Monitors, who said that the rush of first home buyers onto the market would cause a rise in prices “at the affordable end of the market.”
The story also quoted Real Estate Institute of NSW president Wayne Stewart who agreed with Dr Wilson about the rush the impending stamp duty impost would cause.
"We have a positive and a stable 12 months ahead,” he said. “We will see a rush on properties in the lower quartile, prices will inflate and we'll see a hangover period after that."
Housing shortage continues
Stephen Nicholls, Property Editor of Domain, commented on the NSW Government’s plans to release 10,000 lots in Sydney’s north-west and south-west over the next four years to help combat the housing shortage.
“The government had already committed to releasing 8000 new lots, so this is effectively a 2000-lot jump,” he wrote.
“The land release figure won't satisfy the property development industry, which had been calling for an increase in Sydney's housing supply to 25,000 new homes a year.”
Louis Christopher, managing director of SQM Research, said in his group’s latest property report that Sydney stood out as a being on track for house price growth of between zero and 4% by the end of 2012, factoring in no interest rate change.
His view is supported by Dr Andrew Wilson who wrote in the Sydney Morning Herald on September 4 that key indicators point to continued stability in the Sydney housing market over spring with a genuine prospect of increased homebuyer activity.
He said that the latest Australian Property Monitors figures confirmed Sydney's resilience in the face of subdued buyer activity so far in 2011.
Dr Wilson pointed out that Sydney's median house price has fallen by just 0.6% cent over the year ending July 2011. According to Dr Wilson, this is a remarkable result given the general national decrease in affordability and buyer confidence over this period.
“Under pressure, confidence in Sydney's housing market has remained firm, reinforcing its Gold Standard status not only within Australia but also increasingly when compared with overseas markets - a factor attracting increasing numbers of international investors.”
The biggest problem for the doomsayers is that they’re outvoted by the experts. Sydney real estate is unique in Australia – and just maybe in the world.
Sources:
‘Economy returns to growth in June quarter,’ Chris Zappone, Melbourne Age
7 September 2011
‘Treasurer's balancing act,’ Sean Nicholls, Sydney Morning Herald, 7 September 2011
‘Build it or lose it: government sets deadline for stamp duty concessions,’ Stephen Nicholls, Domain 6 September 2011
‘Report: House prices to slide further in 2012,’ Chris Zappone, SMH.com
7 September 2011
‘With interest rates on hold, don't give up on the joys of spring,’ Dr Andrew Wilson, SMH 4 September 2011
‘Commonwealth Bank in mortgage pledge as asking price for homes slashed in some states,’ News.com.au 12 September 2011
‘Economists believe the Reserve Bank will hold off on an interest rate rise,’ Jason Cadden, Daily Telegraph from AAP, 2 September 2011
Business Spectator, Michael Matusik, 2 September 2011
‘Australian homes are overpriced, but how much?’ Leith van Onselen, Business Day 14 September 2011
‘The Australian property bubble can withstand greater adversity,’ John Beveridge, Herald Sun 14 September 2011
Sydney housing survives the crash
Sat, 20 Aug 2011Words like ‘crisis’, ‘panic’ and ‘volatility’ have been popular in the media in recent weeks as, for a brief time, it looked as if Global Financial Crisis II was underway.
As share markets around the world settled down after the early August rout it became more apparent that this round of economic uncertainty was yet another consequence of the original GFC – a continuation of the ‘crisis of confidence.’
Future Fund Chairman David Murray warned that the debt crisis affecting the United States and most European countries could take several years to resolve.
He foresees an ongoing series of ‘market shocks’ and continuing investor uncertainty: “The sorting out of that problem is something that could take up to 20 years. As that post crisis environment unfolds we will see continuing events such as we've seen in the past couple of weeks.”
David and Libby Koch in their regular feature on the News.com website said on 8 August that the investment world has changed and it will affect the way people invest for the next ten years.
“For example, a key foundation of borrowing to invest is that strong capital gains will underpin the investment. If those capital gains aren't as strong then negative gearing is less attractive and financiers will be more cautious.”
They see a shift for investors where investing for capital gains is in replaced by investing for what they call “solid, dependable income returns and annuities.”
Investors reconsider
It isn’t surprising that, after a free-fall in global markets followed by an almost Phoenix-like recovery, investors are hesitant to continue placing their faith in shares as dependable long-term investments.
ABC News Online quoted RBS Australia head of trading Justin Gallagher who said the spectacular turnaround on the share market on Tuesday, 9 August was unprecedented.
"I haven't seen this type of volatility and this extraordinary turnaround...this is getting new levels of volatility, even post-GFC days, so it's been an extraordinary day," he told ABC News.
The same report quoted investment bank Morgan Stanley's global strategist Gerard Minack who warned that there could still be further falls ahead for Australian shares.
"If the S&P 500 falls another 20 or 30 percent, it's hard to see why our market wouldn't fall a similar magnitude," he commented.
Naturally, the current economic dramas will impact on Sydney real estate to some degree. Fortunately, not all the effects will be negative.
RBA holds on interest rates
In its meeting on August 2 the Reserve Bank of Australia decided to leave interest rates on hold. This proved to be a prescient move as within a week the Commonwealth Bank of Australia had cut its fixed-rate home loans by 60 basis points and Westpac cut its three-year fixed mortgage rate by 20 basis points.
The banks’ announcements came after the US stock market plunge had elevated existing investor concerns about government debt and the possibility that the economy will enter another recession.
But a month earlier, Westpac economist Bill Evans predicted that rates could be reduced over the next twelve months by 100 basis points, partly as a result of European economic instability.
"The catalyst for the first rate cut is likely to be associated with these European convulsions, but further cuts will be driven by the combined negative impact of European events on confidence and specific domestic issues," Mr Evans said in Westpac’s monthly economic outlook for July.
Housing market pauses
Nationally, housing prices have been softening for some time. Even Sydney prices were virtually flat over the June quarter, and in the month of June, detached new house sales fell 1.8% in New South Wales according to the Housing Institute of Australia JELD-WEN New Home Sales Report.
Speculation about a rate rise had also increased when ABS data showed that the consumer price index (CPI) rose 0.9% in the June quarter, making the annual rate 3.6% - its highest level since 2008.
Speaking just before the latest share market tumble, Jason Anderson, manager of economics in NSW for property researcher MacroPlan Australia, said his view was that the housing market would ‘track sideways.’
“In the past, when share markets have really fallen away, there has usually been a good reason for that such as a wider economic slowdown occurring, and in that context, you usually get rate cuts.”
He also said that if economic uncertainty prompted the RBA to lower the official cash rate it could induce first home buyers to return and support the more affordable end of the market.
Christopher Joye, joint managing director of Rismark International, wrote in his ‘Property Observer’ column on 8 August that investors were probably confused by recent events.
“One minute you are hearing about higher interest rates, the next there is confident talk they will be slashed. The Aussie dollar has fallen more than seven cents from its high last week to have traded as low as 1.0378 US cents in this morning’s markets.”
However, he remained confident about Australia’s economic prospects, noting that the unemployment rate is under 5%, private wages including bonuses grew by 4.1% over the past year, and disposable household incomes rose by even more than this amount.
His confidence is supported by what happened to housing prices during the original GFC when the peak-to-trough fall in Australian home values was just 3-4%.
Before the GFC mortgage rates had reached 9.6% as late as August 2008. After mortgage rates were cut to 5.75% in April 2009, Australian house prices soared by a massive 12.1% by the end of that year.
Thinking long-term
Housing is always best seen as a long-term investment, whereas most sudden economic swings in recent years have been resolved about as quickly as they’ve begun.
Michael Yardney, director of Metropole Property Investment Strategists, says that Australia’s housing market is balanced between ‘positives’ – the market’s strong fundamentals of high demand and short supply, and ‘negatives’ – poor consumer confidence.
“Until some of the uncertainty clears we'll see many home buyers and investors sitting on the sidelines waiting to see how things pan out. They're scared of making a mistake and either buying the wrong property or over-committing to something that could slide in value,” he says.
Mr Yardney points out that property markets have always moved in cycles of rapid upward movements, followed by periods of flat or even negative growth, followed by another move upwards. This, he says, is one of the slower phases in the property cycle.
“The market is correcting, not collapsing,” he concludes.
Interest rates won’t rise and will probably fall, but not by a great deal in the short-term, according to Westpac chief economist Bill Evans, who says the problems in Europe will lead to a cut of a quarter of a percentage point in December.
"A big cut in October is unrealistic, but as growth slows, wage pressures ease and unemployment begins to creep up, the RBA will be forced into action."
NAB chief economist Alan Oster doesn’t believe that there will be significant cuts, saying the RBA will keep its rates on hold at 4.75% until next year.
"The RBA will be sitting on hold for a long time as the economy is running too fast with core inflation outside the bank's target zone," he said.
"Armageddon would need to be coming for the RBA to cut rates by so much so soon."
Nevertheless interest rates even now are historically low, and there’s a good chance they’ll stay that way or even decrease over the next six- to twelve months. Rapid increases in housing prices, like those of 2009, are unlikely to reoccur during this period, but neither are Sydney’s prices likely to tumble.
Investors seeking security and long-term growth have even more reasons to put their money into rental properties. And the family home, if it is the homeowner’s main residence, remains exempt from capital gains tax.
Home affordability, writes Jessica Irvine on SMH.com.au, has actually improved: “The national median house price is now about five times average household disposable income on the Reserve Bank's preferred (but hotly-contested) ratio, down from a peak of nearly six times in the early to mid-2000s.”
Housing is simply the most tax-advantaged investment in Australia, and it’s easier to place one’s confidence in bricks and mortar than in a roller-coaster share market or an even riskier fund that can fall prey to management failures.
“When it comes to being the Lucky Country, we are it,” says Ian Verrender in the Herald’s Weekend Business. “But the frenetic growth of the past 15 years has ended.”
Sources
‘Global debt crisis could last 20 years, warns Future Fund chairman David Murray,’ Joe Kelly from The Australian, 10 August 2011
‘David & Libby Koch: Outlook far from rosy,’ News.com, National Features, 8 August 2011
‘Spectacular share rally on stimulus speculation,’ ABC Online business reporter Michael Janda, 9 August 2011
‘Buyers in the driver's seat,’ Nicole Pederson-mckinnon, SMH Money, 7 August 2011
‘Commonwealth Bank, Westpac cuts fixed-rate home loans,’ Enda Curran, Dow Jones Newswires, 9 August 2011
‘Oz property prices fall for sixth month in a row,’ Property Wire, Premier global property news service, 9 August 2011
‘Hiding in Australia's property hedge,’ Christopher Joye, Property Observer, 8 August 2011
‘A new era for our property markets?,’ Michael Yardney, Property Update, 3 August 2011
‘Home loans show investors shun market,’ SMH Business, 9 August 2011
‘Interest rates cut tipped as stock markets reel,’ Stephen McMahon, Herald Sun, 9 August 2011
‘Ardour starts to cool in our frenzied love affair with bricks and mortar,’ Jessica Irvine, SMH.com.au Opinion, 12 August 2011.
‘Our Lucky Country rating under threat as the dragon tires,’ Ian Verrender, Sydney Morning Herald, 13-14 August 2011
Sydney Real Estate Sends out Signals
Fri, 29 Jul 2011As the world waits to see whether GFC Mark II is about to happen, two of the most important components of the Sydney property market are also making news – interest rates and housing prices.
Interest rates were once again left untouched at 4.75% when the Reserve Bank held its July meeting, which came as a surprise to many economists who had predicted an increase.
RBA Governor Glenn Stevens ascribed the decision to a number of factors: “The global economy is continuing its expansion, but the pace of growth slowed in the June quarter,” he said.
“The supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries have both contributed to the slowing. The banking and sovereign debt problems in Europe have also added to uncertainty and volatility in financial markets over recent months.”
Not long after the RBA’s announcement, Michael Pascoe issued a caution in Business Day that we shouldn’t have been surprised at the RBA’s backflip.
“Yes, the RBA has pulled back from the very bullish forecast it made in early May that Australia's GDP would grow by more than 4% this calendar year, but it's only retreated to 'trend or higher’ - meaning we're still going to do better than we have averaged,” he said.
He went on to point out that in May three of the four big banks' chief economists predicted an official interest rate rise in June.
“They were wrong. Now, one of the four is predicting interest rate cuts, starting in December. My guess is that he's wrong, too.
“Westpac's big call might be termed the David Jones case: all about present consumer confidence at the expense of the macro story. The consumer will rise again. And rates are unlikely to fall.”
Banks Agree to Disagree
Westpac’s ‘Big Call’ came on July 15 when it issued its Interest Rate View and became the first major bank to predict a rate cut over the next twelve months. The bank’s Chief Economist, Bill Evans, said that the RBA will cut the interest rate four times in 2012 to avoid putting the brakes on a fragile economy.
‘‘While the catalyst for the first rate cut is likely to come from offshore we do not expect it to be a one off,’’ he said. ‘‘Interest rates are too high in Australia given the state of the non-mining sectors of the domestic economy and a downward adjustment is required to avert a damaging round of contraction.
‘‘We now expect a sequence of rate cuts beginning with 25 basis points in December 2011 and through 2012 totalling 100 basis points prior to a period of steady rates in 2013.”
As often happens with economists, not all of his colleagues agree with Mr Evans. The Commonwealth Bank’s Craig James told the Sunday Telegraph that the Reserve Bank will leave rates on hold for most of the rest of the year.
"If rates are going to move anywhere, it is still more likely to be up rather than down. It is going to be more a period of stability rather than anything else," he said.
In the same article the ANZ Bank's Ivan Colhoun said interest rates were still more likely to rise but had become "more of an each way bet" with some sectors of the economy performing poorly.
HSBC economist Paul Bloxham told the Telegraph that he believes rates will rise by 25 basis points in the last three months of the year and by half a percent next year: "We expect the Reserve Bank will need to lift interest rates. It might take a little longer than we previously thought, but we still expect the move to be up," he said.
As always there are some hoping for a rate cut. The Australian National Retailers Association says its members would like to see an interest rate drop to restore consumer confidence.
"What we'd definitely like to see is them not go up before Christmas, because there's no doubt that the interest rate increases last year, topped off with one in November, killed Christmas trading dead, and retail in this country will need a strong Christmas," spokesperson Margy Osmond told ABC News.
Differing Viewpoints on Housing Prices
Housing prices in Sydney continue to show signs of weakness. But first, the doom and gloom side of the national housing price forecasts.
Residex CEO John Edwards said in his July 18 Blog: “I can tell you that in the whole time I have been studying the market I have not seen the makings of such a perfect storm.
“The June quarter numbers in some states are the worst recorded for more than 30 years (you would probably have to go back to the 1960s to find worse).”
This respected market analyst does see a flickering of brightness in the gloom: “Our star is Sydney, which is the market that generally points to the future performance of other markets across Australia, and the worst performing capital city, Brisbane, is in trend terms indicating that the worst of its corrections are probably over.”
Tim Lawless, RP Data's national research director, says that the May RP Data-Rismark Home Value Indices results showed that over the past year Sydney has been the only capital city in Australia to record an improvement in home values.
“Across the combined house and unit market, values are up 1%; a far cry from the 12.9% gain recorded over the year to March last year, which marked the peak in the latest growth phase.”
Mr Lawless says that over the month of May Sydney home values remained virtually flat, recording a rise of 0.3% across the combined house and unit market.
“There are several factors that are likely to keep a firm lid on price appreciation in Sydney. We don't expect values to show a material fall; however, the likelihood that Sydney's market will slip into the red on an annual basis over the coming months remains a distinct possibility.”
A supportive view came from Business Day real estate journalist Chris Zappone who reported the results of The National Australia Bank residential property index: “...the survey predicted house prices would drop in all states except Western Australia, where values were forecast to rise by 0.2% over the year. Homes in New South Wales would fall by a modest 0.7%, while South Australian homes would lose 1.7%.”
Writing in the Melbourne Age, Thomas Hunter commented on the city-by-city housing price forecasts in the latest BIS Shrapnel market report.
“The report by BIS Shrapnel...dismisses forecasts of sharp falls in prices over the short to medium term and predicts prices to remain steady through the rest of 2011 with some cities even showing moderate price growth over the two following years".
He quoted Report author Angie Zigomanis who said buyers would return to the market as investment from the mining boom started revving up the economy through 2012.
"The only question mark for us is interest rates. Our forecast is for a half a percent rise later this year, and another half a percent rise in the first-half of next year.
"In an environment that is strengthening, we can probably handle that at current price levels. People have factored those rate rises in, so as the economy picks up people will wade back into the market knowing that there is (sic) a couple of interest rate rises on the horizon."
Sydney buyers do seem to be managing. The auction clearance rate on Saturday, 16 July was a healthy 56%. Of 181 properties on offer, 114 were sold.
Figures from the Australian Bureau of Statistics showed a significant rise in the number of owner-occupied housing loans approved in May.
Property writer Mark Armstrong said in the Sun-Herald that the Baby Boomers, those who largely own their own homes and have low levels of household debt, may want to sell their homes but won’t let them go cheaply.
“So these suburbs have a high percentage of residents who are in the prime position to invest. They borrow money using their home as security to invest for retirement.”
He adds: “While there is no doubt that we are in the middle of a soft property market, by looking deeper into the underlying demographics we will find that some markets may remain a bit more robust during this period.”
Interest rates and housing prices
When it comes to the subjects mentioned at the beginning of this article - interest rates and housing prices, there are many unknowns that affect their values that are currently the subject of major disagreements, even among knowledgeable analysts.
Interest rates could go either way or even stay the same for some time. Although a rate rise is unlikely given the weak global economic conditions, the probability of a fall is equally unlikely unless there are serious economic problems in the Australian economy.
It’s likely to be a very stable period of interest rates for the time being.
Housing prices in Sydney are not as robust as they were a few months ago, but aren’t about to topple in established suburbs. Some prices will slip back towards their levels of a year ago but most analysts don’t foresee much of a decline.
The market will have slight falls in some areas but mostly stable prices in suburbs within 10km of the CBD. Some rises are also possible.
Affordable interest rates and negotiable prices on quality property are just what astute buyers look for in Sydney real estate.
Sources
‘Interest rates to plunge? Don't get your hopes up,’ Michael Pascoe in Business Day, 17 July 2011
‘Economists reject rates drop prediction,’ ABC News, updated 17 July 2011
‘Westpac wrong on interest rates say other major banks,’ Gemma Jones in The Sunday Telegraph, 17 July 2011
Statement by Glenn Stevens, Governor: ‘Monetary Policy Decision,’ Number 2011-15, 5 July 2011
‘Sydney still the leader of the pack,’ Tim Lawless onDomain.com, 3 July 2011
‘House prices to fall over next year: survey,’ Chris Zappone in Business Day, 14 July 2011
‘Interest rate rises loom but home prices 'won't crash,' Thomas Hunter in The Melbourne Age, 27 June 2011
‘Signs of Increased Buyer Activity Emerge’, Sun-Herald, Sunday 17 July 2011
‘Demographics tell a story of robust markets’, Sun Herald, Sunday 17 July 2011
Sydney Housing Prices: Up, Down or Sideways?
Sun, 19 Jun 2011The midpoint of 2011 is here, and there are indications of a weakening Australian economy. How this will affect housing prices across the nation is a hot subject with property analysts, and there is little agreement on how it will impact Sydney prices in particular.
Mark Armstrong is an independent property analyst and advisor who writes the ‘Property Watch’ column in the Sun-Herald. He comments that people who sold a property in 2009 or 2010 probably did pretty well.
“But in the residential property market, like anything else, the good times can’t last forever. The property market is cyclical; that’s what keeps it sustainable.”
He notes that Sydney is now trending towards becoming more of a buyers’ market and says vendors selling property at this time need to be sure the price they set reflects the true market value.
“Remember,” Armstrong advises, “a property is only worth what the market is prepared to pay for it.”
Most Market Signals Remain Positive
Sydney auction results on Saturday, 18 June indicate a stabilising market after earlier concerns that clearance rates were slipping.
The clearance rate of 53% was about the same as the figures for April and May, and the median price achieved of $735,000 was evidence of continuing market strength.
Dr Andrew Wilson, senior economist for Australian Property Monitors, looks at the market statistics and sees prices on their way back up.
“Sydney house prices rose over the April quarter and as auction clearance rates have recently consolidated, homeowners can expect house prices to rise over the May quarter.”
His optimism stems from the latest Australian Property Monitors research findings showing that Sydney house prices rose 1.1% over the April quarter after a drop of 0.6% in the March quarter.
“The biggest contributor to the April rise in house prices came from the top 25% of the market, which increased by 5%.. The upper-middle price sectors rose by 1.7% while the bottom 50% of the market recorded no rise in median house prices over the April quarter.”
Dr Wilson says that economic fundamentals continue to support Sydney housing prices.
“Rising incomes as a consequence of low unemployment and emerging shortages of skilled labour will provide buyers with increased incentive, capacity and confidence in the housing market.”
He notes that Australian Bureau of Statistics figures show that Sydney's April unemployment rate was 5% compared to 5.7% a year ago.
“42,280 jobs have been created over the past year in Sydney and NSW annual private sector incomes have increased by 4%.
“Increased demand for labour will be driven by the unprecedented resources boom driving the through an estimated $380 billion investment in mining over the next five years,” he adds.
A growing population and increased immigration to meet Australia’s skill shortages will continue to strengthen demand for housing. According to the Real Estate Institute of NSW, the rental vacancy rate for suburbs within a 10-kilometre radius of the CBD fell 0.2% to only 0.9% in April.
If there is a significant weakness in the Australian economy it’s that it is overly dependent on the resources sector, according to an ABC News report by finance reporters Alicia Barry and Michael Janda.
They point out that the May National Australia Bank’s monthly business survey shows business conditions are only slightly better than the weak levels recorded in February immediately after the Queensland floods.
“Retail, manufacturing and construction remain subdued, while conditions in the resources sector have outperformed all other industries.”
They quote NAB's head of economics, Rob Brooker who said the strength of the Australian dollar is partly responsible for the dual speed economy.
"It's been affecting manufacturers. Retailers have been struggling, consumers are still very cautious. That seems to be feeding through into wholesale activity as well, and of course the construction industry has been struggling with wet weather for quite some time.
"So, all in all, quite a subdued domestic sector compared with the mining sector at the present time."
Interest Rates on Hold
The Reserve Bank of Australia surprised many analysts by leaving interest rates untouched in their June meeting.
Writing on Domain.com, columnist David Llewellyn-Smith (who co-authored ‘The Great Crash of 2008’ with Ross Garnaut) commented: “The RBA's rates commentary was a significant reversal of the month before.
“The May statement was just about the most hawkish I can remember. Yesterday's was one of the most dovish. So, we find ourselves in a discordant situation in which RBA rhetoric is lurching from one extreme to the other yet those who follow them are the proverbial stopped clocks. What gives?”
Commenting on the latest Westpac-Melbourne Institute survey of consumer sentiment, Westpac chief economist Bill Evans said consumer confidence was strong but households are worried that interest rates will rise soon.
"Interest rates remained on hold for a seventh successive month and the Reserve Bank toned down its strongly hawkish language.
"However, the commentary from the media and our own research indicates that households still expect rates to be rising over the next 12 months."
For the short-term Dr Andrew Wilson says that he expects official interest rates to remain on hold as long as the key measures of economic growth and inflation remain within the Reserve Bank's neutral policy settings.
“Mortgage interest rates and lending costs for new borrowers are currently under downward pressure as competition between banks intensifies as a consequence of dwindling credit growth,” he said.
In Debt but Managing
An interesting set of statistics arose this month with the release on June 3 of survey results showing that Australian homeowners are among the most indebted in the world, but most have no trouble meeting monthly repayments on their mortgages.
Mortgage insurance provider Genworth Financial surveyed nine thousand home owners and aspiring homeowners in eight countries.
Their Genworth International Mortgage Trends Report showed that on average 45% of Australian homeowners' after-tax income goes to pay off debts. This is significantly higher than the average of 38% in the seven other countries surveyed - Canada, India, Ireland, Italy, Mexico, the UK and the US.
"Whether for financial or cultural reasons, Australians are the most relaxed about being highly leveraged, with one in three comfortable borrowing more than 80% of their home's value, the highest proportion of the eight countries surveyed," said Genworth Australia chief executive Ellie Comerford.
Australians also have a higher level of confidence in the domestic economy than the total survey average, with 37% expressing confidence in Australia's prospects, compared to 30% in the other seven countries.
Sources:
‘A buyers’ market still offers chances for the savvy seller’, Property Watch, Sun-Herald, 19 June 2011
‘Sydney house prices on their way back up,’ Andrew Wilson, Sydney Morning Herald, 6 June 2011
‘Personal finance worries darken consumer mood: Westpac-Melbourne Institute survey,’ Geoffrey Rogow, Dow Jones Newswires, 15 June 2011
‘New research shows Australian homeowners among the world's most indebted,’ AAP report on news.com, 9 June 2011
‘Resources outperform weak economy,’ ABC News website, 14 June 2011
Weaker housing prices for some, but not for long
Thu, 26 May 2011Recent house price figures from the Australian Bureau of Statistics indicate that most capital city property markets showed signs of slowing in the March quarter. The ABS reported that prices for established houses in Sydney fell by 1.8% during the March quarter, restricting the annual increase to just 0.8%.
Australian Property Monitors figures for the March quarter show a slightly lower rate of price weakening. APM says that Sydney median prices fell by 0.4% during the quarter. This statistical variation is understandable, given that APM and the ABS use slightly different methods of calculating the median price.
However, as usual with the Sydney market, not everything falls at the same rate. In fact, not all Sydney house prices are falling.
Writing on Domain.com, Dr Andrew Wilson noted that in the past year the top five suburbs in median house price growth were Kensington (30.9%), Westmead (30.7%), North Sydney (28.9%), Lewisham (26.1%), and Neutral Bay (25.2%).
Dr Wilson also notes that Sydney remains the most expensive capital city in which to buy a house or a unit. The March quarter Sydney median house price was $643,713, and for units the median price was $448,585.
So it follows that renting is more expensive in Sydney than any of the other capital cities. Figures from Australian Property Monitors says Sydney's March quarter median weekly asking house rental was $485 – 33% per cent higher than Melbourne's $360.
Dr Wilson leaves us in no doubt about the future of Sydney house prices: “Expect Sydney houses and units to remain prohibitively expensive compared with other capitals, particularly as it clearly has the best prospects of a sustained recovery in prices from the current subdued market conditions being experienced in all Australian capital city housing markets.”
Interest Rate Hikes Expected
There are signs that the Reserve Bank will be raising its interest rate in the near future. A report by Richard Gluyas in The Australian says that the head of the CBA Bank, Ralph Norris, expects “...one or two more increases in official interest rates in the next six months.”
The report also said that Mr Norris is optimistic about conditions between now and the end of the year.
“Notwithstanding present challenges, we continue to expect a gradual improvement in operating conditions through calendar 2011, as the economy recovery strengthens and system credit growth rebounds,” Mr Norris said.
An AAP report in ‘Business Day’ says that even the RBA has suggested rates will go upwards, and fairly quickly. From its minutes of the May 3 board meeting came this statement: “"Members judged that if economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point if inflation was to remain consistent with the medium-term target."
New Home Sales Up
Another sign of what lies ahead is the rising number of new homes sold, which increased for the third month in a row.
An AAP-sourced story in The Australian said that the latest Housing Industry Association (HIA) new home sales report showed the number of new homes sold across Australia increased by a seasonally adjusted 4.3% in March, following a 0.6% rise in February.
The article quoted HIA chief economist Harley Dale, who said there was still a long way to go for new home sales to reach healthy levels.
"The March result for new home sales reflects an ongoing pause in the interest rate hiking cycle and some abatement of the severe weather conditions witnessed in early 2011," Dr Dale said.
The HIA also noted that sales volumes remain low by historic standards, and that the level in March was nearly 1000 sales lower than the average over the past decade. It joined the CBA Bank in forecasting an interest rate rise on the horizon.
"However, it's now apparent that the next move from the Reserve Bank may be early in the third quarter of 2011, and this runs the risk of reversing the upward trend in sales," the report said.
The HIA report said that NSW new home sales were up by a "very encouraging" 13.5% in March, for a 20.7% rise in the first quarter of the year.
"Sales are on somewhat of a barnstorming run in NSW, from an awfully low base," the report said.
Which Way now for House Prices?
Ian Verrender, writing in ‘Business Day’ described the Sydney market as: “More an orderly retreat than a rout. Australian real estate, long the subject of global concern, bears all the symptoms of a market that simply has run out of puff.”
And, if there’s a reason for this retreat, Verrender adds: “But there is every indication Australians have moved beyond infatuation and into a more mature phase in their real estate obsession.”
Domain.com’s Michael McNamara, a property commentator and valuer, tried to sort out the direction of house prices.
“At this stage, the indices show that home owners have simply given back the capital gains they have achieved over the preceding 3 quarters. In short, over the year, national house prices have recorded no meaningful change.”
McNamara notes that finance approvals (a forward indicator of buyer confidence) are declining while at the same time stock levels (properties on the market) have begun to increase.
He says that the number of properties advertised in Sydney (comparing March year on year) have risen from 42K to 46K, or about 9%, and asks whether this growth in supply will team with the fall in demand to further weaken prices.
His conclusion is that the shortfall in demand from the owner-occupier sector will be offset by growing demand for properties from investors.
“Landlords are rubbing their hands together over the last five years’ results; according to SQM research, rental values, in Sydney for example, have climbed at a compound rate of 8.5% per annum, clearly exacerbated by vacancy rates below 1.5%.”
McNamara says that a combination of excellent rental returns, a shortage of rental properties and steady employment levels will pull Sydney prices out of their decline over the next six months.
“Today, yields in Sydney are at 5.4% and rising. There is no glut of accommodation, no rising unemployment. Quite the opposite.”
Journalist Chris Zappone, writing in the Fairfax newspapers ‘Business Day’ column, says the federal government’s decision to lift the overall increase in the permanent migrant intake to 185,000 from 168,700 places, will further strengthen demand.
He quotes St George chief economist Besa Deda who said that boosting immigration "...means more demand for housing and dwelling starts are failing to keep pace with population growth at the moment”.
Ms Deda told Zappone that even without the increase in skilled migration, dwelling starts won't catch up with population growth for the next few years and the housing shortage problem is likely to continue.
Zappone commented that Australia now faces an estimated 200,000 shortfall of houses and apartments, with building approvals continuing at historically weak levels.
Negative Gearing to Stay
This ongoing shortfall in meeting demand for property has a silver lining for investors in that it supports the federal government’s favourable taxation policies for property investors.
Terry Ryder, in his ‘Hotspotting’ column in The Australian, strips away the props for all those advocating an end to negative gearing in the hope it can somehow improve housing affordability.
“There is a growing debate about the reasons for rising property prices, which in itself is rather odd because we all learnt the cause in high school economics. There is strong demand for a commodity that is in relatively short supply. It's that simple.”
He says that the economy is strong, unemployment is falling, wages are rising, Australia’s individual wealth is at record levels and personal debt levels are falling.
“The only outcome of stopping negative gearing will be to create a shortage of rental properties, which will force up rents and make it harder to first-home wannabes to save a deposit - that's what happened the last time it was scrapped.”
Ryder even sees the bright side of rising house prices: “This pattern of rising home values is a good thing for most Australians, because about 70% of households own their homes.
“It's also good for the nation because the value of the family home is the financial imperative by which many Australians fund their retirement.”
Sources
ABS 6416.0 – ‘House Price Indexes: Eight Capital Cities, Mar 2011,’ 2 May 2011
‘Prices are falling - some suburbs still hot,’ Domain.com, 7 May 2011
‘A slight hiccup, but house prices still on the up,’ Sydney Morning Herald, 9 May 2011
‘CBA ready for two official rate rises in next six months: Ralph Norris,’ The Australian, 11 May 2011
‘New home sales on the rise,’ AAP report in The Australian, 5 May 2011
‘Rents underpin property values,’ Domain.com, 10 May 2011
‘Inflation, rates and a deep breath,’ Domain.com, 5 April 2011
‘HIA: Budget worsens housing affordability,’ Sydney Morning Herald, 11 May 2011
‘Scrapping negative gearing won't make housing more affordable,’ The Australian, 5 May 2011
‘Real estate slump will leave banks in pain, too’, Ian Verrender, Business Day, 17 May 2011
‘Interest rate rise coming, RBA warns,’ AAP with Business Day, 17 May 2011
Property market enters new phase
Sat, 23 Apr 2011NSW has a new government with a determination to do something about the high cost of land. It’s too early in the term of the O’Farrell government to know exactly what that ‘something’ will be, but it’s likely to incorporate a release of large tracts of land in western Sydney, combined with an extension of the present rail network.
Long-term it may well work. But it’s going to take a lot of time, effort and capital investment to create sufficient residential land to even begin to meet the demand for property in the Sydney market, and in the shorter term not much will change.
Across Australia, residential land sales have plummeted. The HIA-RP Data Residential Land Report shows that the volume of land sales fell sharply in the December quarter of 2010, with sales down 40.4% per cent compared to the same period the year before.
Housing Industry Association economist Matthew King told ABC News that this situation is the result of ongoing deterioration in new home affordability.
"The sharp drop in the volume of land sales signals a very weak 2011 for new home building," he said.
"Quite apart from the considerable damage wrought by the interest rate hikes of last November, new housing continues to sag under the weight of the excessive cost of serviceable land." (‘Land sales fall to 10-year low,’ ABC News website, 18 April 2011)
The HIA-RP Data Residential Land Report also found that Sydney is still the most expensive place in Australia to buy residential land, with a median value of $269,000, up 3.6% from the year before.
New homes in short supply
Dr Andrew Wilson, senior economist for the Fairfax Media-owned Australian Property Monitors, says that at present there’s little new housing stock coming onto the Sydney market.
“The level of new dwellings coming onto the market continues to be significantly less than that required by the underlying growth in the number of Sydney households.
“Building approvals continue at chronically low numbers with only 738 new houses and 171 new units approved for construction in Sydney in February.” (‘Lacking direction, but slow recovery still favours buyers,’ Domain.com, 11 April 2011)
Dr Wilson also believes that conditions in 2011 will become increasingly favourable for buyers and that a slow but growing recovery in real estate activity will develop.
“Unemployment rates are low and growth in full-time jobs and incomes continues. According to the Australian Bureau of Statistics, the NSW unemployment rate for March fell to 4.8 per cent, which was the lowest figure recorded since June 2008 and indicates an economy close to full employment.
“Jobs growth continues to surge with nearly 100,000 full-time jobs being created over the past year.”
Adding to the recovery will be continuing low interest rates. “With every month passing without a rise in interest rates, buyers become more confident.”
So, what about that ‘price collapse’ we still read about? News Ltd’s realestate.com.au became incredibly bullish when it entered predictive mode about the property market for the rest of 2011.
Prices set to rise
“Prices won’t fall; the market has merely entered a new phase where price growth will be stable. Prices will be supported by an undersupply of new housing, solid population growth, and a well-performing economy with low unemployment and strong income growth.
“In addition to unwavering property prices, this year investors will be privy to hot buying opportunities with potential bargains on offer, improving rental returns and they’ll be able to reap profits by seizing opportunities to renovate.” (‘The Year of Opportunity’, by Curtis Cooper, realestate.com.au, 14 March 2011)
The article quotes Michael Yardney of Metropole Property Investment Strategists, who says the property market is now in a mid cycle slowdown.
“This is the time to get set for when the next stage of the property cycle moves on, before everyone else gets in.
“Think about what growth there’ll be, think about what the demographics will be, how people want to live, where they want to live, how many people there’ll be. They’re the major driving forces of the market, as opposed to the short-term influence of things like interest rates and political issues.”
RP Data senior research analyst Cameron Kusher agrees with Yardney, telling journalist Curtis Cooper that Sydney’s property market will perform better than most other markets in 2011.
“Kusher suggests that 2011 will be the year of the ‘astute investor’ and he says they should be looking for opportunities to enter the market now.
“With fewer buyers around active investors will have more choice and less competition for property and they’ll have time on their side to make a decision.”
The market is definitely much calmer now than in 2009 when it benefited from several factors initiated to counteract the impacts of the global financial crisis - 45 year lows in interest rates, an increased first home buyer’s grant, and temporary reductions in state government fees and charges.
Sydney Auction results on Saturday, 16 April generated a 55% clearance rate with 291 total sales out of 457 properties on offer. Compared to the 71% rate of March, 2009 and 74% in August of the same year this is a relatively tame result.
Rents keep rising
When people don’t buy a house they rent one, but journalist Adele Horin says that Sydney’s weekly rental rates are pushing into higher levels of unaffordability.
“Of the 9400 properties advertised for rent in the Sydney region on a weekend this month only 72 were affordable for people on the age or disability pension or the single-parent payment.” (‘Rental squeeze hits hard as cheaper housing dries up,’ Domain.com, 14 April 2011)
Also writing on Domain.com, Stephen Nicholls provided further details of Sydney’s spiralling rentals.
“The Fairfax-owned Australian Property Monitors issued data this week showing that rents for houses rose 1.4 per cent and rents for apartments rose 2.9 per cent across the city.
“And Anglicare Sydney research revealed that areas once considered good value for renters, such as Blacktown, Campbelltown, Liverpool, Parramatta and Bankstown, now had no affordable properties.” (‘Low prices turn properties into rental gold mines,’ Domain.com, 16 April 2011)
In the same article, Dr Andrew Wilson said that units are growing in popularity.
''There's plenty of incentive, certainly in a low market for an investor to get active,'' he said. ''Especially with units, since they're no longer competing with a lot of first-home buyers.
''One thing that has been keeping them out is that they can get 6% return in the bank, but you will see some nice capital growth with property in Sydney.''
Dr Wilson sees no end to the shortages of accommodation in the foreseeable future.
''There's upward pressure on rentals, and serious movement with units. We're seeing that already and there is no new supply coming, so the savvy investor will be thinking it's the bottom of the market.''
The wrap-up is...
In so many ways it would be a huge relief for everyone living in the Sydney area if the housing plans of the O’Farrell government could be successfully implemented.
With little land available to developers, few new housing starts, a growing population and a shortage of rental accommodation the outcomes are easy to see, and just as hard to live with.
Australia’s leading city has been the unwitting victim of failed planning and uncontrolled population growth, and it’s going to take years to reverse the processes now in place.
Rents will keep rising, real estate prices will continue to escalate, and people will still want to live as close as possible to the business districts of Sydney where they can find employment.
Who will come out ahead? That’s an easy question to answer.
Homeowners won’t be trapped in a never-ending series of rent increases. Those who buy in good locations can live within a reasonable distance of their places of employment, with access to public transport as required.
Owners of rental property can benefit from a secure investment in bricks and mortar, with applicable taxation advantages and an almost ironclad guarantee of increasing returns from higher rentals.
Michael Yardley sums it up so well that we’ll close with his quote from realestate.com earlier in this article: “This is the time to get set for when the next stage of the property cycle moves on, before everyone else gets in.”
Sydney property is still well-priced
Sat, 26 Mar 2011For those viewing the Sydney property market for the first time it can seem that prices are high. And indeed they are, compared to those in major regional centres or even other capital cities such as Adelaide or Brisbane.
Median prices in Sydney remain the highest in the nation; houses are selling at a median price of $588,250 and units are selling at a median price of $452,925. (“Natural disasters dampen national sales in January,” Domain.com, 7 March 2011)
But a look at historical pricing shows that the present price levels of quality Sydney real estate represent genuine value. When demand softens, prices grow increasingly attractive and today’s prices become tomorrow’s bargains.
Sydney has always had its own market parameters, its own geographic price structure, and of course its own price levels. What’s high for Hobart is usually not very high for Sydney.
First, let’s consider the big question. Is Australian real estate overpriced? Prices are really determined by what purchasers are willing to pay, and there has obviously been a slowdown in the Sydney property market with fewer sales at auctions in February and early March.
In January Sydney home values recorded their first quarterly fall since December 2008, with market values down 1.4% per cent over the three months to the end of January. (“Natural disasters dampen national sales in January,” Domain.com, 7 March 2011).
However, in the same article, it was noted that the weak January result was based on a lower-than-normal volume of sales. The market is usually quiet during January and this year real estate buying and selling activity was also affected by uncertainty following the spate of natural disasters in Australia during the month.
The market was further unsettled in February and March when the tragic Christchurch earthquake was followed closely by the unprecedented disaster that befell Japan when a massive earthquake was followed by a deadly Tsunami and fears of nuclear plant meltdowns.
Stronger market ahead
Dr Andrew Wilson is the senior economist for Fairfax-owned Australian Property Monitors. Writing in the Sydney Morning Herald, he forecasts increased buyer activity for the Sydney housing market following a fairly quiet summer.
He points out that the Reserve Bank raised interest rates seven times between October 2009 and November 2010. As well, the Sydney median house price grew by more than 20% per cent from the middle of 2009 to the end of 2010, and housing affordability declined. But conditions now are conducive to a stronger property market in the rest of 2011.
“Economic news continues to be positive. Interest rates appear to be on hold for the short term. Incomes are growing at the fastest rate in two years. The unemployment rate is low and declining. Data also indicates credit card and mortgage debt levels are being reduced.
“Although strong demand was generated by first-home buyers and investors through the lower-price sections of the market last year, expect activity this year to emerge in the mid to upper price levels, particularly in the north shore, eastern suburbs and northern beaches areas.” (“Market set to heat up as weather cools down,” Sydney Morning Herald, 5 March 2011)
Interest rates, that prime determinant of real estate activity, seem to be on hold for the present time. Three of the four big banks have said they expect the RBA will leave interest rates unchanged until the second half of the year.
The cash rate has now held steady at 4.75% since November, and Westpac’s CEO Gail Kelly told ABC television that rates will be on hold for a while. National Australia Bank has forecast the next rate rise to be a 25 basis point increase in the RBA’s cash rate to 5.00% in August.
ANZ’s head of Australian macro-economics, Katie Dean, expects the next interest rate rise in July, noting that the RBA would only act sooner if there are large gains in employment and a strong rebound in retail sales over the next few months. (‘Banks push back rate expectations: second half of the year’, AAP quoted on Domain.com, 8 March 2011)
In the wake of the Japanese disaster, some analysts are already talking about a rate cut of 0.25% in the near future. This would certainly stimulate the anticipated recovery in the Sydney property market.
Prices aren’t unrealistic
So, are Sydney prices really too high? Even the governor of the Reserve Bank thinks housing prices are affordable. RBA governor Glenn Stevens told a business event in London that the ratio between home-buyers' incomes and house prices in Australia is not exceptional.
He said that domestic property values have not increased much in the past year and he is not worried by the present level of house prices in Australia.
"It's quite often quoted - very high ratios of price to income for Australia. But if you get the broadest measures - country-wide price and a country-wide measure of income - the ratio is about 4.5, and it hasn't moved much either way for 10 years.” (“House prices not exceptional”, ABC News online, 10 March 2011)
New buyer clusters are beginning to emerge in Sydney, stimulated by lower priced housing in the outer suburbs.
“According to figures compiled by Residex, 40 suburbs across the west and inner west have recorded a top sale price for a house, unit or block of land since January 1 last year, as have almost a dozen south-western suburbs stretching towards Campbelltown.” (“Sydney property prices hit new record,” The Sunday Telegraph, 13 March 2011)
This quite simply means that buyers, in many cases those who’ve found their savings couldn’t rise quickly enough to reach the level of a deposit on a home in areas close to the CBD, have started looking further afield.
"Affordability means we're moving further out, but we're pushing up costs and creating record prices as we move out," Residex managing director John Edwards concluded.”
Investors, of course, are motivated by considerations beyond those of the first-home buyer, and for them today’s conditions present a number of opportunities.
RP Data’s research analyst Cameron Kusher says that housing affordability is a problem for many would-be buyers who are not in a position to pay the current prices.
"We are expecting with so few first homebuyers active in the market, and obviously affordability an issue as well, that we'll start to see some increases in rental rates," he told ABC News.
"So you may see a return of investors at some point this year, but it'll be a different type of investor. It'll be those chasing rental return rather than those capital gains." (‘Property sales reach 10-year low,’ ABC News, 9 March 2011)
In the same article Housing Industry Association chief economist Harley Dale was quoted, saying that the current undersupply of homes in Australia is set to worsen.
"The signal we're getting from a weak housing finance figure released today is that we're going to see further short-term pressure on rents and on housing affordability as a result of Australia continuing to build considerably fewer homes than we need to," he said.
Rents will keep rising
An interesting report by James Kirby, writing on Domain.com, again posed the question: Are Australian homes really overvalued? He referred to an article in The Economist, a highly regarded UK publication.
“It's quite a call - our house prices are more overvalued than anywhere you'd like to name - Shanghai, Sweden or Switzerland. According to The Economist Australia's home prices are 56.4% overvalued. And that's comfortably above the second-highest figure of 53.7% in Hong Kong.”
But then Kirby points out that The Economist calculated its list of overvalued housing markets based on the ratio of home prices to rents in 20 economies.
“You could simply say Australia tops The Economist list because our average rents are too low - rental yields have remained unchanged at about 4% for many years, though they are beginning to rise.” (“Don't believe the reports on Australian house values,” Domain.com, 6 March 2011)
That’s more good news for investors who, according to Kirby, have been waiting in the wings for some time: “Investors as a proportion of the market have remained unchanged since the GFC while the housing shortage remains virtually static.”
Lending weight to the argument that rents will rise, and keep on rising, is a statement made by Wayne Stewart, President of the Real Estate Institute of NSW.
"Unfortunately, without substantive reform to property investment controls in NSW, the state will continue to suffer from an accommodation availability crisis for the foreseeable future.
"In addition, the new amendments to the Residential Tenancy Act passed by the Keneally government will only result in a further decline in available properties coupled with skyrocketing rents. (“Sydney rental market to tighten,” Domain.com, 4 March 2011)
History will show that governments change quickly but shortages of rental properties endure. This will ultimately lead to higher rents and better returns for investors.
Although the focus now is on improving returns on investment through increased rental rates, it’s only a matter of time before the ongoing shortage of accommodation in Sydney, where demand continues to outstrip supply, delivers investors the benefits of substantial medium- and long-term capital gains as well.
The crystal ball begins to clear
Wed, 2 Mar 2011A muddied start to the year
Tue, 25 Jan 2011The full effects of the deadly floods that beset Queensland, Victoria and NSW in the first month of 2011 are as yet impossible to determine, but a massive economic impact is certain.
A lot of capital will be required to rebuild flood-damaged homes, office buildings, roads, bridges and other infrastructure – figures of $30 billion have already appeared in the media and are likely to be conservative.
The funds to pay for this will have to come from somewhere and their redeployment will mean a risk of inflation. What the housing market doesn’t need right now is a rise in inflation that could make the RBA think about raising interest rates.
All these economic disruptions will contribute to a further slowing of the Sydney property market, at least for the first half of 2011. The slowdown, which was already underway, began with the last interest rate rise on Melbourne Cup Day 2010 and had started to show up in such statistics as the November fall of 0.2% in sales of new homes.
Housing Industry Association figures also showed that sales of new homes were down 11% in the three months to November compared to the same period in 2009. (‘Sales for new homes fall a notch’, The Age, 6 January 2011)
Signs of weakness
Until the floods, interest rates seemed poised for a fairly long period of stability. In that same article the HIA’s chief economist, Dr Harley Dale told The Age that he expected inflation would stay in check, taking the pressure off the Reserve Bank for any further interest rate rises.
''Obviously a period of interest rate stability is going to be beneficial to the housing sector and might hopefully prevent a weak 2011 from becoming even weaker.
''But I suspect we will probably see some renewed weakness in housing indicators over the next three to six months as we see the lag impact of the November rate hikes, and as we also continue to struggle with an environment where finance is very hard to obtain,'' he said.
However, there were some encouraging signs at the close of 2010. The last two Sydney auction weeks of the year produced improved clearance rates of 56% on a calendar with a record 2150 properties on offer although there were some suggestions keen vendors had priced their properties with greater flexibility.
Data from Australian Property Monitors showed that Sydney's median house price grew 10% per cent in the year to September 30, but fell 0.5% during the September quarter to $627,124. APM remained optimistic about 2011: ''It is expected that Sydney's median house price will rise well above $650,000 during 2011 and extend the price gap between other capitals.''
In the same article, Louis Christopher, managing director of SQM Research, said that Sydney would outperform other cities but could experience zero price growth or even a fall of up to 4%.
''The market is turning softer,'' he said. ''We still haven't seen the full impact of the interest rate rise in November.''
''We believe that based on these numbers, house prices are likely to fall for all capital cities except probably Hobart and perhaps Sydney for at least the first half of the year.” (‘Last minute vendors beat the calendar and predictions of a selling slump’, Domain, 8 January 2011)
Building approvals stay down
Property developers were already experiencing a slowdown of their own by the end of 2010. Data from the Australian Bureau of Statistics showed the number of approvals to build or renovate houses and apartments fell by around 4% in November, contributing to a 10% decline for the year.
ANZ Bank’s head of property research Paul Braddick told the ABC that interest rates have been the biggest factor behind the downturn in building approvals: "In the past and with rising interest rates developers tend to have less incentive to build because prices have flattened as well."
However Mr Braddick said conditions will improve due to growing demand over the next couple of years.
"But in the more medium-term, I think this is adding to the shortage of dwellings that we are seeing in Australia, so at some point in 2012 or 2013 we'll have to see dwelling approvals pick back up again," he said. (‘Bleak year ahead for property developers’, ABC Online, 6 January 2011)
In a report from Canada’s Scotiabank economist Adrienne Warren said she expected higher interest rates and a slower real estate market for Australia in 2011.
“We anticipate a further slowing in sales and price appreciation in 2011. While Australia’s close trade ties with Asia and resource wealth will continue to underpin a solid pace of domestic activity, higher interest rates will worsen already strained affordability.
“The RBA has recently taken pause, but we expect the resumption of a gradual policy tightening path in 2011, with short-term rates rising an additional 75 basis points by year-end.” (‘Global Real Estate Trends’, Scotiabank, 23 December 2010)
Echoing these sentiments, Former RBA staffer and now HSBC chief economist Paul Bloxham said that the RBA will hold off until the second quarter of 2011 before raising rates, saying he still expects three 25 basis-point rises in the year.
He told the Herald Sun’s Rachel Hewitt that the mining boom will take a lot of spare capacity out of the economy and "...at the same time you can't have a boom in consumption.
"You can't have all these things growing at once, because it will put too much pressure on the economy and inflate the economy - and the way we can deal with that is by managing demand," he said. (‘Interest rate hikes are on the way - it's just a matter of when,’ Herald Sun, 29 December 2010)
RP Data’s national research director Tim Lawless said the RBA’s rate rises of 1.75 percentage points since October 2009 have combined with a ‘wind-down in the market cycle in recent months’ to reduce market activity.
"For 2011, we are likely to see vendor expectations change as slower market conditions come into play," he told News.com.
"Houses will take longer to sell and buyers will be negotiating much harder than they were in 2009."
Rentals rise
On the positive side for investors, he said rental rates will continue their rising trend in 2011.
"Over 2011 it is likely that rental growth will at least move back to the historic average of between 6% and 8% on the year," Mr Lawless said.
Australian Property Monitors senior economist Andrew Wilson supported this view, saying strong demand and price growth should resume by mid-year.
"Property prices are anticipated to rise nationally for the year by a modest 3% with Sydney and Perth expected to record the strongest performances," he said.
"Investors will emerge in the marketplace once the floor of the current price cycle becomes apparent, recognising the potential for high relative yields and capital growth." (‘Brakes put on 2011 property prices,’ news.com.au ‘Property,’ 27 December 2010)
In an AAP report, CommSec economist Savanth Sebastian said that increasing rental demand and rising wages would help fuel steady growth in house prices, although demand will be subdued in the first half of 2011 before accelerating in the last two quarters.
‘‘Given the interest rate hikes we’ve had, it’s likely to be a period of consolidation. Later in 2011, rental growth will be a major driver in attracting investors.’’
He expects annual growth of between 5% and 8% in 2011. ‘‘The only caveat is interest rises.’’ (‘Slower house price growth tipped for next year,’ Domain.com, 17 December 2010)
Long term outlook good
Taking a longer term view, the International Monetary Fund (IMF) says that Australia’s house prices could be overvalued by as much as 10% but strong population growth and rising income will continue to support the housing market.
A staff analysis by the IMF found a link between episodes when Australia has a strong terms of trade - the relative performance of exports to imports - and rising house prices.
"The current historically high terms of trade are expected to be long-lasting,'' the report's authors Patrizia Tumbarello and Shengzu Wong said.
"Strong population growth and high real income growth in the wake of record-high commodity prices this year will continue to support house prices.''
The report also said that an insufficient supply of housing is also placing ongoing pressure on house prices.
"The increasing scarcity of land in main urban centres in Australia is an important factor. The fact that such a high proportion of Australia's population lives in two major cities tends to drive up average house prices.'' (‘Overvalued Australian house prices to stay,’ AAP report on News.com, 16 December 2010)
At the year’s end the NSW government released a new ‘master plan’ for Sydney that says the city will have to fit in another 770,000 more homes by 2036. This equates to some 30,000 a year, yet the present rate is barely 15,000 per annum.
The master plan is the first update of the 2005 Metropolitan Strategy, and reveals that Sydney built only 93,000 dwellings, or an average of 18,600 a year, for the past five years. Critics of the plan were easy to find.
Stephen Albin, from the Urban Development Institute of Australia NSW, told the Sydney Morning Herald: ''Delivering on the 70% target for infill will be a monumental challenge and not one (that) government has explained well to the community.''
Aaron Gadiel from the property developer organisation Urban Taskforce said the government had wasted energy rewriting the 2005 plan. ''There is no sign of any convincing implementation strategy [in] this document either.'' (‘Plan reveals city needs 770,000 more homes,’ Sydney Morning Herald, 17 December 2010)
What can be expected
It’s suddenly become a lot harder to make an accurate short-term forecast about the Sydney property market. There’s now a likelihood of increased interest rates sooner than anticipated before mother nature unleashed her waterborne fury.
However, the fundamentals on which to base a longer-term forecast remain and by the end of 2011 we can make an educated guess on what will transpire.
On the subject of interest rates, last month we said: “Barring any nasty and unforeseen economic surprises, the RBA is happy with rates as they are.”
We’ve just had a very nasty and unforeseen economic surprise and the RBA won’t hesitate to act quickly if it suspects inflation’s getting out of control. The banks will no doubt follow suit. The originally-anticipated date of April or May for the next increase is now looking a bit optimistic, and total 2011 rate increases should be in the order of one percent.
Prices will soften in the first half of the year, but will begin to rebound after mid-year when investors feel they are sufficiently attractive. This will be driven by the continuing high rental yields that will outweigh considerations about interest rates.
Housing construction will fall further behind, thanks in part to the diversion of immense building resources to Queensland. The decline in Sydney housing construction will continue throughout 2011 and into 2012, putting upward pressure on dwelling prices.
Auction clearance rates will also slip back during the first half of the year to their levels of early December, 2010 while vendors reassess their pricing intentions in light of a weaker market. Once prices begin to rise after mid-year this situation will reverse itself and buyers will return to the auctions with money to spend.
2011 – What will it bring?
Wed, 22 Dec 2010In real estate, at least, 2010 is going out with more of a whimper than a bang. It’s not unexpected, given a series of interest rate hikes and cutbacks to governmental subsidies for first-home buyers.
To quote the December ‘Residex News’: “Property markets around Australia are showing the effects of successive interest rate rises and economic unpredictability, with virtually no growth in housing median values during the three months to end October.”
Louis Christopher, managing director of SQM Research, provided a bit more detail in The Sun-Herald’s ‘Property Watch’, saying: “The real estate market has indeed slowed to a trickle. It is now safe to state real estate prices in Sydney have slightly fallen in the second half of the year.
“However, due to the surge in the first half, the annual rate of growth for this year has been close to the 8% mark.” (‘House prices will be flat but you can bet on rent rises’, Sun-Herald, 12 December 2010)
Rates steady
As with all previous pauses in activity levels of the property market, this one inspires analysts to speculate on when the pace will pick up again. The first clue came with the Reserve Bank declining the opportunity to raise interest rates one more time in its December meeting.
"The board views this monetary policy setting as appropriate for the economic outlook," said RBA governor Glenn Stevens. The board also said that it felt inflation would remain steady in the short term, indicating no rate rises would be deemed necessary early in the new year.
Even though the Reserve Bank might be temporarily sanguine, in an interview with the ABC, Commonwealth Bank chief economist Michael Blythe cautioned that it won’t last forever.
"[The RBA is] suggesting no great need to rush in with another rate rise," he said. "But with the terms of trade, national income growing strongly, wages growth to pick up further, that still suggests higher rates at some point.
"We have February pencilled in at the moment, but that sounds a little soon and we may have to push that back a bit, sometime in the first half of next year." (‘Interest rates remain on hold,’ ABC News Online, 7 December 2010)
Su lin Ong, senior economist at RBC Capital Markets, told ABC Online’s finance reporter Alicia Barry that the RBA would probably hold off its next rate increase until April.
"The case to hike further needs to be compelling, and amid conflicting data and continued global uncertainty we expect the RBA to stay on the sidelines for several months and anticipate the next hike in Q2."
So, that takes care of interest rates for now. They’re on hold and will stay where they are for the next couple of months at least. Barring any nasty and unforeseen economic surprises, the RBA is happy with rates as they are, and the big four banks aren’t sending any signals of early 2011 rate hikes at this point in time.
Rents up
The next clue to the real estate industry’s fortunes in coming months has to do with rental rates. ‘Residex News’ tells us: “We are clearly moving into an extended period of rent increases and for investors, this heralds the return of positive gearing - when your rental income is greater than the cost of your loan, and the tenant is paying it off for you.” (‘Residex News’, December 2010)
What other way could rental rates go? As Residex points out, Australia’s capital city populations are growing fast, and every year, 150,000 new households are formed and each needs a home.
If these households can’t afford to purchase a property, and that’s increasingly the case as housing affordability tightens, they need to rent accommodation. Residex statistics show median rate increases as high as 25% and even 33% in the past twelve months.
Clearance rates down
The third clue comes from recent auction clearance rates. Domain’s Jonathan Chancellor outlines the December decline and fall of formerly frenzied property auction activity.
“Sydney's residential auction activity is showing signs of the traditional end-of-year market fatigue. Overburdened with record stock levels, subdued auction clearance rates and prices are the result.
“Saturday's [4 December] 49% clearance rate was the weakest since mid-2008 when the ill winds of the global financial crisis were causing market nervousness.” (‘Sydney market succumbs to end-of-year lethargy’, Domain, 6 December 2010)
The article pointed out that historically, clearance rates in December have been lower than November rates in six of the past eight years. The trend continued the following weekend with a similarly low rate of 48.7%.
We have to go back to October 2003 to see what happened as that year’s property boom came to an end. The success rate dropped from 58% in October 2003, to 48% in November and 42% in December, and it didn't get back to 58% until 2007.
It should be pointed out that buyers attending this year’s auctions are spoilt for choice. This number of properties scheduled for auction this December exceeds last year's record of 1860 properties listed, while the average December volume over the past ten years has been 1360.
Regardless of the reasons behind it, the key indicator of auction clearance rates is definitely declining, even when seasonal factors are taken into account.
Prices soften
The next clue is property prices. This is such a variable Australia-wide that national figures don’t often fit in with what’s happening in Sydney. More accurately, with what’s happening in most of Sydney.
Yvonne Chan, head of research at Australian Property Monitors, gave a cautious indication to Domain’s Jonathan Chancellor that Sydney prices could drop in the short-term.
''Supply is strong, and together with the recent interest rise and the strong dollar, buying is less appealing to both local and overseas purchasers,'' she said.
''Median prices haven't fallen officially, but it's possible the first quarter 2011 figures may show a small decline.'' (‘Sydney market succumbs to end-of-year lethargy’, Domain, 6 December 2010)
The RP Data-Rismark index of capital-city housing values rose 0.3%, seasonally adjusted, in October but showed that Sydney prices were up 0.8%.
Rismark International managing director Christopher Joye sees the market levelling off. In an article published in The Australian, he pointed to signs of "additional price tapering in 2011": properties taking longer to sell; vendors are discounting more; the number of sale listings and relistings has spiked; and auction clearing rates are falling. (‘The high price of punting on property’, The Australian, 27 November 2010)
An AAP story at about the same time quoted another Rismark executive, Rismark International joint managing director Ben Skilbeck, who forecast weakness in home prices in the months ahead due to the impact of a rise in mortgage interest rates after the Reserve Bank of Australia raised the cash rate on Melbourne Cup day. (‘National housing prices set to fall in 2011’, AAP, 30 November 2010)
At least one property market watcher, president of the Real Estate Buyers Agents Association, Byron Rose, thinks that some of the recent slowdown in auction clearance rates and even a drop in property prices have been caused by growing caution in the ranks of property valuers.
"Undervaluing properties creates a situation where sellers have to drop prices to match valuations or where buyers have to make up the shortfall if the contract has gone unconditional, leaving them with little room to manoeuvre,'' he told the Sydney Morning Herald.
He feels many valuers were pre-empting anticipated interest rate increases in their valuations.
"We aren't buying two or three months down the track - we're buying in today's market and properties should be valued in line with what is occurring at the time of purchase."
Mr Rose said the gap between agreed private treaty sale prices and valuations was occurring mainly among certain pricier market segments, mostly in Sydney's eastern suburbs.
But the article concluded this recent trend has not stopped record prices being sought and regularly set across Sydney. (‘It's mind the gap as Sydney sellers lop 6% off spring prices,’ Sydney Morning Herald, 29 November 2010)
Consumers have their say
So, what do consumers think will happen? The Mortgage Choice 2010 Consumer Sentiment Survey results, released in December, provided some interesting conclusions.
“More than half the respondents in both Victoria and NSW/ACT believe property prices will increase in Australia over the next 12 months, and just under a third believe prices will remain stable.”
Even though 80% of respondents agreed with the line of thought that says property is ‘unaffordable’ to at least some degree, they were still prepared to make sacrifices just to be able to purchase property.
“With the desire for property purchases so high, something has got to give and respondents know they will need to make some lifestyle changes. Ninety per cent of those in NSW/ACT and 80 per cent of those in Victoria indicate they will be cutting back on spending to make a property purchase possible.” (‘What will you sacrifice for property?’ Sydney Morning Herald website, 2 December 2010)
Building approvals lag
The final clue is building approvals. An article on the news.com website said that approvals to build new homes showed a surprising surge in October, ending several consecutive months of falls.
“Approvals rose 9.3 per cent to 13,541 units in October, seasonally adjusted, from an upwardly revised 12,388 units in September, the Australian Bureau of Statistics (ABS) said.
“But while the data suggests demand for housing may rebound, the stronger figures may not last because of higher interest rates, economists say.”
According to the ABS data, New South Wales recorded the biggest rise in building approvals with a 14% increase. (‘Building approvals surge...for now’, news.com.au, 30 November 2010)
However, Citigroup Global Markets director Paul Brennan said in the article that NSW apartment approvals helped strengthen the figures and the November interest rate hike could weaken the overall approvals figures for the next few months.
“While overall this was a stronger than expected month I wouldn't be expecting anything exciting on the housing construction front,'' Mr Brennan said. “It looks like it was just a reversal of a large fall back in August.
And this means...
Now, what does all this mean as we enter 2011? Chris Vedelago, property reporter for The Sunday Age, says that it’s hard to be certain about property market forecasts.
“Take any measure of the property market – sales volumes, auction clearance rates, prices – and any influence that acts upon it – interest rates, sentiment, supply – and it seems 10 people can hold 11 wildly divergent theories about what exactly is going on.”
He points to speculation about a housing ‘bubble’ and how those who’ve confidently forecast a bursting of the bubble have been proven wrong more than once.
“There certainly are plenty of structural problems with the current housing sector – particularly in terms of prices and (un)affordability – but even in today's far weaker market conditions we haven't yet experienced the foretold crash.
“Supply isn't horrendously out of whack. The economy is strong and unemployment is low. Population growth is still continuing. Prices are flat or falling, but they haven't fallen off a cliff.” (‘Bubble trouble...How certain are you?’, Domain.com, 30 November 2010)
Dr Andrew Wilson, senior economist for Australian Property Monitors, sees the glass half-full: “Looking ahead, unemployment levels are falling and new jobs are being created. Recent Australian Bureau of Statistics data indicates incomes are rising.
“The city continues to experience population growth. Sydney property will continue to experience a lull in activity into next year but is well positioned to sustain current prices, taking advantage of our strong local economy and returning to growth in the second half of next year.” (‘A sluggish market will pick up next year’, Domain, 27 November 2010)
Writing with the wisdom gained from a couple of weeks more experience, Dr Wilson wrote on December 11: “Investors and owner-occupiers should make the most of the advantageous buying opportunities while they present themselves.
“Expect Sydney's median house price to climb towards $700,000 next year and extend the current price gap between the other capitals.
“Sydney remains the gold standard for housing investment in Australia. Constrained by geographical barriers and chronic shortage of housing stock, the city is unable to satisfy its growing populous. It builds only about 15 per cent of Australia's houses. Demand for rental properties will continue to grow.” (‘Buyers, start your engines – the price is right’, Domain, 11 December 2010)
Some years ago there was a popular cartoon to be found in many real estate offices. It showed a skeleton, sitting in a rocking chair, festooned with cobwebs and the accumulated detritus of many years. The caption read simply: “He was waiting for the price of real estate to come down”.
History shows this doesn’t happen very often, and even when Sydney property prices stall they soon regather strength and head upwards again. This could well be about as close as the market gets to the price of real estate coming down, and it won’t last forever.
Interesting times indeed
Sat, 20 Nov 2010In last month’s ‘Market Comment’ we said the odds strongly favoured a rise in the Reserve Bank’s official interest rates, and indeed it happened. We also noted that interest rates have an impact on the property market, and the market has reacted quickly to the RBA’s increase.
The weekend of November 13 the Sydney auction clearance rate fell below 60% with 198 properties sold of 286 on offer – a rate of 58%. This isn’t a huge drop from the 64% clearance rate recorded in September or even the 66% rate recorded in August, but it does show a weakening in activity.
Another indicator is the 1.5% monthly fall in finance for housing investment recorded in September, which indicates that investors may be taking a break from property as higher interest rates have their intended effect.
Although sales volumes might be down, prices aren’t going backwards, according to the Sydney Morning Herald’s Property editor, Jonathan Chancellor.
“Record house price sales are being regularly achieved across Sydney, despite the spring property market shifting from a sellers' market towards a buyers' market.” (‘It's a buyer's market - but some are paying top dollar’, SMH 20 November, 2010)
Continued strength in property prices has made housing affordability another key issue. Residex CEO, John Edwards says that lower levels of affordability will increasingly force people to give up home ownership and become tenants, benefiting landlords.
“The recent RBA interest rate increase, coupled with the banks' margin increases, have moved unaffordability to a new level. For Sydney it is not at its worst position but it is getting very close”. (Residex ‘Market Wrap’, November 2010)
Dr Andrew Wilson, senior economist for Australian Property Monitors, notes that all market indicators aren’t going backwards.
“In better news for the investment industry, the value of investment mortgages for new residences rose 1.7% and has been rising continually for the past 12 months,” he said, noting that new home finance is well below the levels of two years ago. (‘With prices flat, where have all the investors gone?’, Sun-Herald, 14 November 2010)
In the same article, Dr Wilson forecasts an acceleration in Sydney property prices from mid-2011.
“The state of the housing market still presents opportunities for investors to secure property during a lull in growth prices. Prices should, however, start to accelerate mid next year as the effects of predicted strong economic growth are reflected in rising incomes and increased demand.”
JP Morgan economist Ben Jarman told AAP the most recent consecutive monthly improvement in home loans was not unexpected because the data reflected a period of time when the RBA had left interest rates on hold.
"We think home loans have basically stabilised and the upside from here is probably capped by those rising interest rates," Mr Jarman said.
"We think those rate hike reprieves would have been particularly important for households." (‘Home loans stable, rates may cap gains,’ AAP reported on News.com.au, 10 November 2010)
Prices not so inflated after all
A new report suggests that Sydney property prices aren’t as ‘inflated’ as some recent articles in the media have claimed. RP Data’s Property Pulse report says that Sydney property prices went up by only 30% in the past five years - the lowest rate of capital-city increases in Australia.
This is pretty reasonable when across Australia combined property values increased by a total of 41% for houses and 42% for units over the past five years.
An article in the Sydney Morning Herald quotes RP data research analyst Cameron Kusher who says the lack of housing stock in Sydney could drive a major increase in rents, which makes property more attractive to investors.
''At the moment property values are slowing right down but with Sydney having an increase in population there's scope for increase in rents,'' he said.
''I'd certainly suggest we'll see increases above [the consumer price index] for the next 12 months.'' (‘In property prices, Sydney no show pony as Darwin streaks to the lead,’SMH, 12 November 2010)
Investors and homeowners both share similar concerns about interest rates, and the big four banks seem dedicated to getting rates well above their recent historic lows as quickly as possible. If the RBA raises rates by a quarter of a percent, as it just has, the banks have shown they might go a bit higher although not with uniformity.
First to move after Melbourne Cup Day was the Commonwealth Bank, announcing a decision to raise variable mortgage rates by 0.45%. Next came the ANZ Bank that announced a decision to raise its standard variable rates by 39 basis points to 7.80%.
The PM not pleased
After Westpac and NAB followed suit, the reaction from both consumers and the Commonwealth Government has been swift and savage. During a November 12 interview on ABC Television’s ‘Lateline’ the Prime Minister vented her frustrations.
“I was very clear that the conduct of Australian banks in putting up interest rates above and beyond the Reserve Bank movement is unacceptable,” she said.
After hearing the news that all four big banks had raised their interest rates by more than the RBA’s 0.25%, Julia Gillard was even more outraged.
“I would say to the two banks that have moved their interest rates today that there is absolutely no justification for doing so.
“Australians will judge them very harshly for it. I believe people who bank with those banks will judge them very harshly for it. We are determined to increase competition in the banking sector.”
Not that it’s likely the Government’s outrage will be able to hold back the likelihood of further interest rate increases by the RBA. AAP Economist Garry Shilson-Josling, explained why: “The whole idea of rate hikes is to suppress spending.
“When some sectors are hot - as mining is at the moment - then others have to be relatively cold in order to keep the average volume of spending in the economy at the level desired by the RBA.
“And it has been housing's unfortunate role over the years to act as a kind of economic ballast, to be jettisoned when necessary to keep the economy on an even keel.” (‘Data shows housing demand in doldrums,’ AAP, 10 November 2010)
This is borne out by a report on ABC News that says the RBA raised its rates this month because of record high commodity prices and a huge upcoming investment in LNG.
“Debate at the meeting seems to have centred over whether ‘monetary policy was to be conducted in a forward looking way’, or whether recent more subdued domestic economic data should be heeded.
“The bank chose to stay on the front foot because, ‘downside risks to the global economy had still not materialised in any significant way’, while most commodity prices had continued to strengthen to 60-year highs”.(‘China boom forced pre-emptive rate rise,’ ABC News Online report by Michael Janda, 16 November 2010)
Of course the RBA’s actions aren’t based on either short-term statistics or a desire for immediate results. The Reserve Bank is trying to maintain a balance between debt and growth, and the recent slowing in the property market indicates it’s getting what it wants.
Since October 2009, the RBA has raised official cash rate seven times. Over the past twelve months, according to The Veda Advantage Consumer Credit demand report, mortgage credit fell 23.8% in the year to September.
Interviewed by the Herald’s Chris Zappone, Veda Advantage’s head of consumer risk, Angus Luffman said this was very close to levels at the peak of the global financial crisis.
“Mortgage applications have dropped to record levels since the beginning of the year, with demand now at a level similar to that experienced (in) the midst of the GFC,” he said.
“The record decline continues to be measured against the impact of the Government stimulus package for first home buyers which inflated mortgage demand growth last year.” (‘Mortgage applications hit by debt, higher rates,’ SMH, 10 November 2010)
All part of a cycle
So, the Government stimulates the housing sector and as a result, prices rise. As prices rise, the RBA sees inflation nearing its self-imposed 3% upper limit, deems rising property prices a threat to economic stability, and puts the brakes back on. Auction clearance rates are now reflecting this braking effect.
In an interview with the Sydney Morning Herald, JPP Buyer Advocates advocate Catherine Cashmore, said it’s all part of a cycle.
"Investors and second-home buyers are the ones having an effect on the clearance figures," she said.
"They are in no hurry to buy into a market that's attracting negative press which could indicate prices will drop."
"We're in the downward phase of a typical market cycle which won't last perpetually.'' (‘Auction rates sink to two-year lows,’ Sydney Morning Herald, 8 November 2010)
The cyclical nature of the property market can be judged by revisiting our ‘Market Comment’ of 28 July, 2008. The conditions at the time were:
It took just a year for property prices to show a strong resurgence, despite the effects of the global financial crisis on the world’s economies. Demand for housing, naturally, continued to grow and rates of new construction have remained at critically low levels since then.
Look at conditions today. Stabilising interest rates, slowing price rises, strong demand, and rising rent levels are in the frame as 2010 heads toward the finish line.
It’s unlikely the RBA will play Scrooge and increase interest rates again before Christmas, having surprised the majority of analysts with its November rate hike. The Bank doesn’t meet in January, so February 2011 will probably be the next chance for an increase in the cash rate.
The big four banks have just increased their own ‘prices’ so they will be a bit more likely to deal with investors and try to convince the Commonwealth Government they’re not holding back the Australian economy.
When the Sydney property market pauses, as it seems to be doing right now, it’s a good time for investors to take a serious look at the underlying conditions and see if they can figure out where it’s going.
As we said here in July 2008: “Taking into account all the factors that affect the price of real estate, there may well never be a better time to acquire property than now.”
Sydney property is a sure winner
Fri, 29 Oct 2010There’s one bet for Melbourne Cup Day that’s getting close to a sure thing – a rise in the Reserve Bank’s official interest rate. The odds for a November increase rose substantially after the RBA left the cash rate unchanged at 4.5% in its October meeting, although financial markets still say it’s an even-money wager.
The National Australia Bank’s October quarterly survey certainly expects a rate rise: “After (a) false start in October, RBA likely to increase rates before Xmas ― probably November but timing (is) data dependent (especially labour market and CPI).
“Rates still expected to peak at 5½% by September quarter 2011. Rates likely to stay at this level given likely strength of demand and tightness in labour market.” (NAB Global & Australian Forecasts, 12 October 2010)
Economist Savanth Sebastian from Commonwealth Securities told the Sydney Morning Herald a November rise was likely: "It's probably a bit of a concern that finance for construction of housing fell for the 10th straight month.”
He said he was expecting a rate rise from the RBA in November, because official inflation data is expected to show steady growth in prices in the September quarter.
"They are very unlikely to lift in December because of Christmas sales," he said.
"They don't meet in January, and they well might (lift rates) in February. If they don't raise in November, February will mark nine months without a rate rise." (‘Mixed housing data won't spook RBA’, SMH, 11 October 2010)
However, RBA governor Glenn Stevens seemed to be having an each-way bet in his statement after the meeting when he said that he expected inflation would stay within the RBA’s target band of 2% to 3% in the short term, although he expected rates would eventually have to rise.
‘‘The current stance of monetary policy is delivering interest rates to borrowers close to their average of the past decade. The Board regards this as appropriate for the time being.
“If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.’’ (Statement by Glenn Stevens, 5 October 2010)
RBC Capital Markets economist Su Lin Ong told AAP that the major banks might raise mortgage interest rates independent of the RBA: ‘‘If they do move independently, that could well negate the need for the RBA to move at all this year.’’
She noted that the RBA’s statement saying higher interest rates will be needed to keep inflation within the bank’s medium-term target and interest rates are close to their average of the past decade is nothing new.
‘‘We know rates are going to go up over the next little while, whether it’s next month or the month after really depends on the domestic data run as well as developments offshore,’’ Ms Ong said. (AAP report quoted on Domain.com, 5 October 2010)
At least one index of consumer sentiment has responded to the probability of higher interest rates with a prediction of slower housing price rises, according to an article by Chris Zappone in the Sydney Morning Herald.
“Expectations for house price growth in the year ahead have faltered, as higher interest rates contribute to softer monthly price rises,” the article said.
“The Westpac-Melbourne Institute index, calculated by the share of respondents expecting price rises minus the share expecting price falls in home values, showed that the percentage of consumers tipping price rises over the next year fell to 63 per cent in October.” (‘Consumers less confident about house prices’, 15 October 2010)
However, the survey also showed that price rises are still anticipated. “The October responses to the Westpac survey tipped an average price rise of 2.6% over the next 12 months, from 3.6% in July and 5.7% in April.”
Market stays in positive territory
Sydney auction results on Saturday, 16 October, showed that 206 properties sold of the 292 listed, with a clearance result of 61%. (Australian Property Monitors, 16 October 2010)
This was up from a modest 53% the weekend before the RBA’s announcement and is a pretty robust start to the traditional spring home selling season.
Lower interest rates, even if only temporary, generally have a positive effect on the property market. There is also a good selection of properties on offer to attract buyers into the market.
Louis Christopher, founder of property advisory service SQM Research, told the Herald’s Carolyn Boyd that there were 17,468 houses on the market in Sydney in September and he expected that number to surge to 19,000 in October before peaking at more than 20,000 in November.
He also noted that these figures would be an increase of 14% on October last year and 32% on last November. (‘It's open season as buyers are spoilt for choice’, SMH 9 October 2010)
In the same article the general manager of Australian Property Monitors, Anthony Ishac, said that he expected the auction clearance rate to stick at about 60%: "There's going to be more stock, so it's definitely going to have some impact," he said.
He also noted that this would be less than the clearance rate of 70% per cent during last year's first-home-buyer rush but more than the sub-50% seen during GFC-affected 2008.
First-home buyer loans made up just 15.5% of the market in August, according to data from the Australian Bureau of Statistics. The share is just over half its peak of 28.5% in May 2009.
When interviewed by the Sydney Morning Herald, senior analyst with BIS Shrapnel, Angie Zigomanis, said demand has now bottomed out and he expects first home buyers to re-emerge slowly. (‘It's open season as buyers are spoilt for choice’, SMH 9 October 2010)
Not everyone’s an optimist
Writers at The Australian newspaper have been a bit less enthusiastic about property prices than their colleagues at John Fairfax.
Recent articles have focused on seasonally adjusted figures in the most recent RP Data-Rismark Hedonic Home Value Index that showed capital city property prices fell 1.2% for the three months to August. (‘House prices dip and will fall further’, The Australian, 1 October 2010)
Another article in The Australian forecasts the next generation of homeowners will see none of the house price appreciation that baby boomers have enjoyed, citing a study by the Swiss-based Bank for International Settlements.
The study concluded that the ageing of the Australian population would mean house price increases over the next 40 years will be about 30% less than they would otherwise have been. (‘House prices to ease while capital shrinks for non baby boomers’, The Australian, 20 September 2010)
The study also found that Australian house prices have been the fourth fastest-growing in the world over the past 40 years.
Overseas investors love Australian property
Fourth place globally isn’t so bad. UK online magazine ‘A Place in the Sun’ reports that the Sydney property market is now the fourth most popular investment destination for global property investors, according to a survey by property consultant CB Richard Ellis (CBRE).
Richard Butler, CBRE’s senior managing director in Australia, told the magazine that more overseas investors were attracted to the Sydney property market due to strong stability and transparency in the Australia property market.
CBRE's research also concluded that foreign investors accounted for 42% of all Australian property purchases in the third quarter of 2010. (‘Global investors eye property in Sydney’, Friday, 8 October 2010)
High levels of demand from both overseas and domestic investors will ensure that Sydney property prices will continue to rise, albeit with occasional periods of hesitation.
Business advisory website ‘Smart Company’ quoted SQM Research founder Louis Christopher who believes that state governments and councils should provide initiatives for developers to build in the middle rings of cities, because that's where the shortages are – particularly for Sydney.
"Housing starts are a function of demand. Builders don't go out and build unless they've got demand to start with. The overall market has been slowing up, so I don't think there's an immediate impact on housing prices.
"But when demand does suddenly pick up again, what it means is that you have this fixed supply situation and prices are likely to shift upwards quite quickly when that demand picks up again." (‘Housing Industry Association says housing starts to fall by 4% in 2010-11, shortage and affordability to get worse’, smartcompany.com.au, 7 October 2010)
In a separate interview, Mr Christopher told the Sydney Morning Herald that by Christmas Sydney house prices will have risen 5% for the year, and gain 1% to 2% over spring. He said that the inner ring of Sydney, and particularly the lower north shore, could grow by 7% to 9% by the end of 2010.
Also optimistic is AMP which has predicted an average of 2% to 3% growth over the next six to 12 months. (‘It's open season as buyers are spoilt for choice’, SMH 9 October 2010)
The National Australia Bank's October 2010 quarterly property survey says that recent moderation in house price growth is likely to prove temporary: “Job security, a burgeoning housing shortage and the income effects of the resurgent minerals boom can be expected to lift annual house price growth to around 7% over the next two years.” (NAB Global & Australian Forecasts, 12 October 2010)
And joining the optimists’ chorus is forecaster BIS Shrapnel who compiled a Housing Outlook 2010-2013 survey for QBE. The survey forecasts house-price growth between 9% and 20% in Australian capital cities over the next three years.
"Price growth is forecast to be strongest over the next three years in Perth, Sydney and Adelaide - all experiencing forecast rises of around 20 per cent in median house prices," says the report.
"We expect price rises will be underpinned by a deficiency of dwelling stocks across most capital cities, which in turn will lead to tight vacancy rates and solid rental growth, flowing through to increase investor demand," said QBE chief executive Ian Graham. (‘House prices could jump 20%, forecasts show’, Business Day, 12 October 2010)
Doomsayers are only blowing bubbles
Whenever property prices gather strength for another surge upwards, the inevitable speculation about a housing price ‘bubble’ emerges. Whether the rise in Sydney property prices is 2%, 5% or 9% it’s still an increase that defies any suggestion that there is a ‘price bubble’ in danger of bursting.
Writing in the Sydney Morning Herald’s ‘Business Day’, veteran business journalist James Kirby says people he calls ‘doomsayers’ are drawing the wrong conclusions from market statistics.
He quotes John Wilson, Australian chief executive at Pimco, the world’s biggest bond fund who emphatically states the Australian housing market is no bubble. In support of his position he notes:
The ratio of housing costs to household disposable income (a key indicator of people's ability to finance mortgages) has remained unchanged at 30% for more than a decade.
One-third of Australian housing repayments go on principal, not interest – which represents both a saving and an investment.
Australian household debt figures are high, but that debt relates primarily to bricks and mortar. What's more, the average equity we have in our homes is 60% and that has remained steady. (‘Why home prices are not about to crash and burn’, Business Day, 10 October 2010)
Of course there are economic factors that restrict the price buyers will pay for any property. Addressing the CPA Australia conference in Brisbane, Reserve Bank head of financial stability Dr. Luci Ellis said that lower rental yields will mean there is a limit on how far house prices can go.
Asked if the lower rental yields meant a limit to the rate of price appreciation, Dr Ellis said: "The short and simple answer is - yes". (‘Reserve Bank says property investors could create housing bubble,’ AAP quoted on News.com.au, 6 October 2010)
But if recent market activity is any guide to the future, price falls on quality real estate are highly unlikely and any property price weaknesses will be represented by temporary periods of near-static values, soon followed by a resumption of the historically-proven upwards curve.
Even better than backing a rate rise on Melbourne Cup Day is a bet that Sydney’s housing prices will continue their seemingly unstoppable rise over the coming twelve months.
History shows that when it comes to picking winners, Sydney property is an odds-on favourite.
Spring is the season for growth
Sat, 18 Sep 2010More good property news than bad
Thu, 19 Aug 2010Where Will We Live in the Sydney of 2036?
Tue, 3 Aug 2010Is the Sky about to fall on Sydney House Prices?
Wed, 30 Jun 2010Sydney Property – a few Steps Sideways
Wed, 19 May 2010The real estate market in NSW is slowing gradually with some of the heat coming off Sydney property after a period of record price increases.
The causes of the slowdown include rising interest rates and an often baffling mix of Commonwealth and NSW government policies. For the present time at least, these have outweighed the influence of a chronic housing shortage at a time of unprecedented population growth.
The rate of population growth is of course one of the factors contributing to increasing demand for housing. Forecasting group BIS Shrapnel forecasts a one-off slowing in Australia’s currently high rate of growth, due primarily to a decrease in immigration.
BIS Shrapnel also forecasts that the share of migrants choosing to settle in NSW will decrease due to the high cost of housing and better job opportunities elsewhere. (‘Less migration will slow growth in population’, SMH 17 May 2010)
We think of a high level of employment as ‘a good thing’ and in many respects it is. But it does stimulate inflation, and Australia’s high rate of jobs growth – 235,000 jobs were created in the past year according to an editorial in the Sydney Morning Herald, has the Reserve Bank of Australia worried. (‘Full employment has its challenges’, SMH 17 May 2010)
In the meantime the unemployment rate remained steady at 5.4 percent in April, noting that economists consider a rate of 5 percent to be ‘full employment’ due to the number of people changing jobs or leaving work temporarily.
It’s unlikely that the high rate of jobs growth can continue much longer, especially if immigration programs are scaled back. For the time being, however, employers will have to pay top dollar for skilled workers and that presents challenges for those trying to control inflation.
Housing Loans Drop Again
Australian Bureau of Statistics figures show that the number of housing loans continues to fall as interest rate rises take their toll. The March drop of 3.4 percent was the sixth consecutive monthly decline and the eighth drop in the past nine months.
There’s little doubt that interest rates will continue to rise. An article by Andrew Carswell in the Daily Telegraph (‘Interest rates to nudge double digits’, 14 May 2010) says: “If the Federal Government's optimistic economic forecasts spelled out in its no-frills Budget are fulfilled, homeowners will be paying at least 2 percent more on their current interest rate - or more than 9 percent - within 18 months, economists believe.”
Matthew Circosta, an economist with capital market analysts Moody’s Analytics, told the Herald’s Chris Zappone that the Reserve Bank is trying to avert an asset bubble by raising interest rates, but this has stifled loan demand for the construction of new homes.
"Demand for home loans is plummeting amid rising interest rates, and there appears little light at the end of the tunnel, with borrowing costs raised again in April and May.
"The number of housing finance commitments has declined every month since the Reserve Bank of Australia commenced withdrawing its monetary stimulus from the economy in October." (‘Home loans fall, rate rises bite’, SMH 12 May 2010)
Nevertheless, in the longer-term Sydney will need more housing. A lot more of it, and one of the barriers to its construction is a shortage of available land for development.
Introducing the BioBank
The NSW Government, noted more for its tendency to squeeze blood out of stones rather than helping to create wealth, has its own solution to the shortage of land available for development.
‘BioBanking’, a term that means developers can build on environmentally-sensitive land in Sydney if they pay to protect ‘equivalent’ land elsewhere, aims to provide land for the construction of 180,000 houses over the next 40 years. (‘Swap and chop’, SMH 17 May 2010)
The first of 38 scheduled BioBank projects has gone ahead with the NSW government’s acquisition of 80 hectares (about 200 acres) of grassland near Camden in Sydney’s outer southwest.
Funds for the acquisition were raised from levies on developers, so now it’s their turn to expend their biodiversity credits on Sydney land suitable for development.
It will be interesting to see just how this system works, but it’s the government’s hope that it will help reduce the shortage of land available to developers and thereby stimulate housing construction.
It should be noted that at the same time BioBank is getting underway the same government has introduced a new tax on all property transactions greater than $500,000 in value using as a reason (many have said “excuse”) a previously little-known need to fund greater security in the system of land titles.
Exempting the first $500,000 won’t mean a lot to Sydney vendors. The median Sydney house price in March was $595,745, according to Australian Property Monitors.
This new tax, announced the night of the Federal Budget by Lands Minister Tony Kelly, is progressive and although it adds around $200 to the cost of the average home, it will add about $500,000 to the cost of a commercial development worth $200 million.
In a media release May 12, Glenn Byres, acting executive director of the NSW Property Council, expressed his dislike for the impost: “We now have another tax to sit on top of the highest developer levies in the nation, stamp duty, land tax and other property-related taxes.”
“NSW needs to learn its lesson – you don’t encourage growth and investment by taxing it into submission”, he added.
A Two-tier Market could be Developing
Another bellwether of Sydney housing prices, the auction clearance rate, slipped in mid-May. Figures from Residex show that auction clearance rates dropped by more than 10 percent to 62.5 percent, down from 73.5 percent the weekend before.
High-demand areas however remained above average with the inner west scoring a clearance rate of 84 percent.
In a flashback to the end of the last boom in Sydney house prices, RPData’s research director Tim Lawless sees a two-tier market developing.
“In Sydney the most expensive 20 percent of suburbs have recorded a value gain of 17.5 percent over the past 12 months while the 20 percent most affordable suburbs have recorded a gain of just 7.3 percent.
“Regions such as the lower north shore, inner Sydney and the eastern suburbs have recorded capital gains of more than 20 percent over the past year.” (‘Latest house price figures disguise a two-tier market, Sun-Herald, 16 May 2010)
Tim Lawless says that, because of high housing prices and rising interest rates, we could see prospective first-home buyers moving back into the rental market instead of trying to purchase their own homes.
Even the top tier is feeling the winds of change, according to Jonathan Chancellor, the Sydney Morning Herald’s property editor.
“Sydney's priciest residential listings are languishing unsold as cautious buyers await serious price adjustments from the mostly steadfast sellers.
“Top-end properties are averaging 173 days on the market before sale, double the typical 85 days across Sydney, according to Australian Property Monitors.
“There were 48 house and unit sales above $5 million in the March quarter, only slightly above the low of 42 sales during the trough of the global financial crisis and below the 61 and 72 sales in previous March quarters.” (‘Top homes take double time to sell’, domain.com, 15 May 2010)
What happens next? Australia won’t experience a US-style crash in housing prices, according to Dr Luci Ellis, the RBA's head of financial stability, who says the majority of Australia's housing debt rests with those who can most afford it.
"Our assessment is that the increase in debt has broadly been concentrated in the hands of those generally more able to service it," Dr Ellis told a residential property conference. (‘Reserve says Australian housing crash unlikely, ABC Online, 18 May 2010)
A May 1 Business Day poll on the Sydney Morning Herald’s website asked the question and 14,586 voters responded. 40 percent said ‘prices will fall’; 41 percent said ‘prices will flatten out’; and 20 percent said ‘prices will keep rising’.
The recent amazing rate of increase in Sydney property prices couldn’t last forever, and it now appears that the slowdown that real estate analysts expected is beginning to take shape. It will be gradual, and much to the relief of property owners, it won’t lead to any dramatic falls like those experienced elsewhere.
And Now for Sydney House Prices
Wed, 21 Apr 2010In our last column we covered the subject of interest rates and what’s likely to happen over coming months and in the next couple of years.
This month we’ll examine house prices and where they’re going. David Potts, writing in the April 18 issue of Investor in the Sun-Herald, stated what we’ve been saying in this column for the past twelve months: “The growing housing shortage can only help property prices despite rising interest rates.”
The very fact that property prices are rising is in direct opposition to the forecasts of UWS associate professor Steve Keen who on April 15 began his 225 kilometre trek to Mount Kosciuszko after losing a bet that Sydney house prices would fall by 40 percent.
His predictions were somewhat wide of the mark - about 52 percent wide from the latest RP Data statistics that show Sydney’s property prices climbing at an annual rate of 12 percent.
The Sydney Morning Herald’s property editor, Jonathan Chancellor also noted on April 19 that the professor had sold his Surry Hills apartment in 2008 for $540,000 and a similar two-bedroom unit in the same building sold recently for a price that was 8 percent higher.
To be fair to the professor, there are plenty of reasons to suggest that the market’s growth could be going to slow.
The reasons the rate of growth can be expected to take a breather are evident. The government’s home owner’s grant has been reduced and interest rates have been raised. We’ve earlier stated that interest rates will continue rising for a while and agree with professor Keen that these factors may impact property prices.
On the other side of the coin, the rate of new housing construction remains at extremely low levels. The Performance of Construction Index by the Australian Industry Group and the Housing Industry Association fell 4.1 points to 48.7 in March.
This is well below the 50-point level that indicates expansion. Demand is there but where’s the supply to meet it?
Property research authority and NSW managing director of project marketer MLG, Chris Freeman, says the market in Sydney is grossly undersupplied when compared with population growth: ''When you look at dwelling supply against population growth the entire country is undersupplied.''
What is most affected by rising interest rates is construction of new housing. Senior economist with the Housing Industry Association, Ben Phillips, says the strength of the nation's housing recovery is looking shaky.
"Industry hopes for a sustained and necessary recovery are fading under the impact of higher interest rates and continued pressure from credit and land restraints," he told ABC News Online.
Australian Industry Group spokesman Peter Burn also expressed his concerns about a big fall in new orders in the house building and apartment sub-sectors: "That fall comes at a time when there is already a shortage of housing and a growing gap between demand and supply."
The number of home loans has fallen since September, 2009 – down 27 percent in NSW. This prompted the Sydney Morning Herald’s economics correspondent, Peter Martin, to say that “Buyers are deserting the Sydney property market at the rate of 1000 a month.”
He sees real estate prices plateauing for the rest of 2010 in what’s termed an ‘exhausted market’. Echoing this sentiment is David Airey, president of the Real Estate Institute, who is quoted in the same article saying: “This will lead to a slowing of price growth, no question about it.”
Some NSW statistics stand out as signals that we’re about to see real estate prices stabilise. In February the number of first home buyers dropped from 5941 to just 2293. But the question must be asked, how important have first home buyers been to the overall real estate pricing structure?
Taking a long-term view and relating recent activity to historic prices, the impact of the first home buyers will be seen as having created a ‘bubble’ at one end of the spectrum rather than having driven the market.
Their shopping has been in the lower levels of the housing market and has certainly affected the volume of transactions, but not the prices people pay for the mid- to upper-levels of real estate offerings.
Underpinning the continuing strong demand for Sydney real estate is the rush by investors to acquire properties for rental. This is one of the key reasons that auction clearance rates remain high, averaging 71 percent since October, 2009.
Figures from the Australian Bureau of Statistics show that the value of lending to investors in February was well above the levels of a year ago, up by 26 percent. It’s not about the number of the loans; it’s about the total volume of funds borrowed, and as long as interest remains tax-deductible, investors are willing to borrow.
But wait! The sharemarket, on its knees not all that long ago, has rebounded and shares are once again an option for investors to consider as they look at rising real estate prices.
The Investor’s David Potts believes it’s the time to get into shares. When reporting on increases in disposable income and housing affordability, he says: “Even so, the sharemarket looks a better bet for the next year or so than property.”
We disagree. When those same investors see the returns they’ll get from ever-increasing rental rates and recall the advice they heard from their elders about the security of bricks and mortar, they feel a bit less confident about entrusting their funds to companies whose managing directors often earn a few millions more than their shareholders.
Every now and then there’s a slowdown in price growth. Very occasionally there’s even a step backwards. But those backwards steps don’t happen often, and there’s enough experienced investors around to know a ‘buy’ signal when they see it, so the backwards steps don’t last long.
What else could be keeping Sydney’s real estate prices high? One theory comes from director of research at economic forecasting group 4CAST Ray Attrill who noted that '...the rise in activity and prices in the first half of 2009 looks to have been stronger than the acceleration in housing credit and added value of first home buyer incentives alone would suggest, hinting that an increase in overseas demand (for which domestic finance will not have been required - or available) likely had some influence.''
JPMorgan economist Stephen Walters recently told the Sydney Morning Herald’s Chris Zappone that there’s a possibility there are more home buyers entering the market without needing loans. ''Maybe that points to offshore money that's coming into the housing market and could be actually inflating house prices.''
According to the Herald’s April 16 article: “Frustrated would-be home buyers and real estate agents report a rising number of auctions to foreign buyers, with visitors from China being among the overseas investors frequently reported.”
However, in the same article, Moody's Analytics Matt Robinson says he doesn’t believe foreign buyers are the cause of Sydney’s housing price increases: “My scouts in auction rooms suggest it's not foreign buyers, but simply overly exuberant Aussie buyers pushing prices up, at least in Sydney.''
And why shouldn’t Sydney’s would-be homeowners be exuberant? The GFC is a distant memory, or at least hasn’t seemed to affect our lives all that much. NSW may be at the bottom of the employment and economic league tables, but most people who want work are in work, even if it’s only part-time.
It’s all about Sydneysiders wanting to buy housing. They’ll do it regardless of everything from rising interest rates to economic doom and gloom.
A report on AAP News quotes Martin North, managing consulting director of Fujitsu Consulting, who said Australia’s buoyant economy and strong job market have inspired established home owners to invest in property or upgrade their homes as house prices continue to rise.
"There's such pent up demand for property that, even if first home buyers are pretty much excluded from the market because they just can't afford to get in, other sectors of the economy will continue to buy.''
The real factor that will probably cause a gradual slowdown in the rate of increase for Sydney’s real estate prices was pointed out by national president of the Real Estate Institute, David Airey.
Commenting on the RP Data figures showing Sydney prices are rising at an annual pace of 12 percent Mr Airey told the Sydney Morning Herald that we won't have that kind of extraordinary growth continuing: ''If we did, nobody would be able to afford to buy property.
“Plenty of people smarter than me will say Melbourne will be the first to slow, but they've been wrong before. Sydney has a way to go to catch up so its prices might continue to climb for longer.''
Steven Long on ABC Online said that the current trajectory of house prices and household debt is unsustainable.
“The simple maths tells you that real estate ‘values’, for want of a better word, can't keep on outstripping incomes in the way that they are doing. Yet dwelling prices are being driven up by a chronic undersupply, exacerbated by record rates of immigration.”
Although we must accept the simple truth that there are limits to the prices buyers will pay for property, we haven’t reached the level of those limits yet.
In the meantime the Daily Telegraph’s Joe Hildebrand notes that the population of NSW is set to boom.
“Some Sydney suburbs will have their populations double or even quadruple in just 25 years, official NSW documents reveal, as the city hurtles towards a population of six million people by 2036.”
So, it isn’t interest rate rises that will slow housing prices. Nor is it a drop in demand. It’s the prices themselves, and as yet there’s no way of knowing when the increases will begin to slow.
The president of the Real Estate Institute of NSW, Wayne Stewart, puts the situation into perspective: ''The marketplace is driven by supply and demand. It's not driven by interest rates,'' he told Business Day’s Jessica Mahar.
The market forces that drive prices upwards remain in place, with no signs of a serious slowdown. Price growth will probably slow in the second half of 2010, but it will most likely be a temporary slowdown brought about by a pause in the acquisition of rental properties by investors rather than a broad-based pullback of buyers.
The reason why this slowdown will be a temporary feature was pointed out in the Sun-Herald by David Potts; there’s a shortage of property in Sydney and a growing demand for the same thing.
In an article captioned ‘Economists baffled by robust property market’ (SMH 19.4.10) Jonathan Chancellor wrote: “Leading economists are stumped for answers as to what’s happening within the residential property market.”
In reply we’ll give MLG’s Chris Freeman the last word. ''As long as returns are evident for investors, which they certainly appear to be at the moment, prices look to only be heading one way, and with finance approvals for investors up almost 30 per cent over the year in NSW it looks sure to continue.''
The future is on its way
Tue, 23 Mar 2010The new year of 2010 is already 25 percent gone, and it’s given us clear signs of what’s in store for the rest of the year and beyond.
Take interest rate rises. The question isn’t if they’re going to happen, but when they’ll occur and what the increase will be.
Commonwealth Securities chief economist Craig James said the March interest rate rise of 25 basis points would be followed by at least two further rate hikes before the end of the year.
When asked by the Sydney Morning Herald what he thought the increase would be, he said: "Our view is that the cash rate will be somewhere between four and a half and five percent over the second half of the year."
He added: "The best the average person can do is assume that by the end of the year interest rates could be as much as one percentage point higher, which is equivalent to four typical rate rises.”
In its minutes from the March meeting the Reserve Bank said its decision to raise rates was influenced by ‘strongly rising’ house prices, noting that prices were rising strongly for ''for all but the bottom segment of the market''.
This makes it likely that the timing of future rate increases will be based at least in part on how the RBA views the strength of real estate prices. Rising housing prices will influence future increases.
Macquarie Group's interest rate strategist, Rory Robertson, told Melbourne Age economic correspondent Peter Robinson that the RBA’s way of looking at housing prices had changed.
''The Reserve seems to be taking the view if house prices are rising rapidly, rates are too low.
''Some analysts think the bank is actually targeting house prices but I think that it is more that if house prices are rising rapidly it takes it as a sign that the economy is doing well.”
Westpac chief economist Bill Evans said he believed that the Reserve Bank was likely to take a breather from raising rates at 4.5 percent.
He said it would only take another 50 basis point increase to put the standard mortgage rate back to around 7.5 percent, which is its average level over the past decade.
Forward activity in Australian financial markets suggest the Reserve Bank will step up its interest rate increases over coming months with the official cash rate expected to hit 5 percent by the end of the 2010.
Markets are now giving a further rate increase in April a 40 percent chance, up from 24 percent in the first week of March.
Michael Workman, senior economist for the Commonwealth Bank, said each RBA meeting would be considering the need for further increases. ''There are nine more board meetings this year and it looks to be a 50/50 call at each one,'' he said.
The Reserve Bank has already raised interest rates four times since October by a total of 1.00 percentage points.
The big four banks are already showing an appetite for higher rates. On March 23 Gail Kelly, CEO of banking giant Westpac, told the Herald’s Eric Johnston that her company was ‘under pressure’ to raise interest rates further.
According to Ms Kelly, the reason for this pressure came from Westpac’s need to borrow money from overseas for its long-term funding. The article also noted that Westpac already has one of the highest mortgage rates among the big banks with a standard variable rate of 7.01 percent.
The only factor that might impede a steady progression of interest rate increases would be a larger pullback in housing finance than is already anticipated following the end of the first home buyers’ boost and recent rate rises.
Australian Bureau of Statistics figures show that the volume of housing finance commitments for owner-occupied housing fell 7.9 percent in January, seasonally adjusted, to 51,056.
This was in contrast to previous expectations by economists that the number of owner-occupier housing finance commitments would have risen by 2 percent in January.
ABS figures also showed that total housing finance fell by 3.3 percent in January, seasonally adjusted, to $21,159 billion.
Loans to buy established houses nearly halved, sliding from a peak of 19,100 in March to 10,041 in January.
The biggest retreat in was in housing finance for new dwellings which fell 13.2 percent.
ABS statistics show that only 667 NSW residents took out construction loans in January, down from a peak of 1270 in September, 2009 before rates rose and the first home owners' boost was scaled back.
And only 472 loans were issued to buy new houses in NSW, down from almost double that a few months earlier.
Consumer sentiment figures released on March 10 reflected the fall in lending. The proportion of Australians agreeing that ''now is a good time to buy a dwelling'' dropped from 53 percent in December to 42 percent in March.
In September, 2009 before the rate rises and the phasing out of the boost, 62 percent of those surveyed believed it was a good time to buy a house.
RP Data senior research analyst Cameron Kusher told the Sydney Morning Herald that because of the March interest rate rise by the RBA "we will probably see a lesser volume of first-home buyer finance commitments".
Higher interest rates were expected to result in a lower level of property value growth this year, since activity among first-home buyers and investors alike would most likely stall, Mr Kusher added.
"The Reserve Bank has previously indicated that they would like to see the supply of dwellings nationally increase," Mr Kusher said.
"Given this, they would like to see the number of dwelling approvals increasing, as well as the number of housing finance commitments for construction of new dwellings so that the supply of housing continues to increase at a rate commensurate with demand."
Mr Kusher said the Reserve Bank would therefore adopt a "careful, careful" approach when considering the amount and timing of rate increases.
So there’s the future in a nutshell. We have the RBA raising interest rates to somewhere between 4.5 percent and 5.0 percent by the end of 2010. It’s also likely that there will be a series of small increases rather than one or two big ones. (This is an election year, after all!)
The statistics to watch, and which will be watched closely by the Reserve Bank, are those that will indicate homebuyers are deserting the market.
Assistant Reserve Bank Governor Philip Lowe told an urban development conference in Sydney to expect further increases in house prices unless something could be done to ease ''constraints'' holding back the construction of new homes.
''With population growth above average, and growth in the housing stock below average, it is not surprising there has been upward pressure on housing costs.
''If we are to build more dwellings, we need to ensure that planning guidelines and infrastructure provision can accommodate this,'' he said.
If there is a sudden indication of buyer flight from capital city real estate we may see a pause in upwards rate movements while the RBA considers its position. Nevertheless, we have no reason to suspect that rates will go anywhere but up in the foreseeable future.
Fair winds blow for Sydney property
Tue, 23 Feb 2010About 45 years ago Bob Dylan wrote a song titled ‘Subterranean Homesick Blues’ that contained the immortal lyrics “You don't need a weather man to know which way the wind blows.”
He could have been writing about today’s Sydney property market. Figures released by the Australian Bureau of Statistics in early February showed that the house price index for Sydney rose 5 percent in the fourth quarter of 2009, and was up 12.8 percent from a year earlier.
The Sun-Herald newspaper has just published its annual Property Guide for 2010 and the report’s tone is decidedly upbeat for homeowners.
The report’s author, Kate Farrely, begins by saying: “Combined with the highest buyer sentiment since 1994 for NSW and an unexpected reprieve from a further interest rate hike, the year is off to a sizzling start.”
But how long will the sizzle last? Ms Farrely quotes a senior research analyst at RP Data, Cameron Kusher, who expects at least first-home buyer demand to fall during 2010, yet at present there’s no indication this will have a significant impact on the overall market as any slack is being absorbed by investors and upgraders.
We’re also in for a rise in interest rates, or to be more precise a series of increases during the next twelve months. On February 19, Reserve Bank Governor Glenn Stevens told Parliament’s Economics Committee that he expected the RBA to raise interest rates ‘between two and four more times’ between now and the end of the year.
The timing of these increases as yet remains unknown. JP Morgan chief economist Stephen Walters told the Melbourne Herald-Sun: "Further hikes are coming, that remains clear, but the risk now is that the pause the RBA has embarked on could be longer than we currently expect," he said.
"We are sticking with our call for the next hike to come in April but the next hike even could come as late as mid-year."
Whatever the RBA’s timing might be, the net result for the rest of 2010 will be a rise of around 1 percent. This could possibly affect buyer demand but despite the certainty of future rate increases, borrowing for property remains at high levels.
One reason may be that a return to what the RBA considers a position above ‘emergency’ levels will still leave interest rates lower than when the first impacts of the GFC were being felt in 2008.
Matthew Bell, an economist with Australian Property Monitors, says that “Once we reach 7.5 percent to 8 percent, rates will start altering people’s buying decisions”, and he may be right, but the present rates are well below this and there’s no reason to expect the RBA’s actions to drive rates up to a position near these levels in the next two years.
Let’s return to the Sun-Herald’s Property Guide for a moment. In its pages there are some interesting quotes from several property experts who give their thoughts on 2010 and what it will bring.
Louis Christopher, managing director of SQM Research, says: “Our general growth forecast is between 6 percent and 8 percent.” He does note that any further rationing of credit by the major banks could reduce these figures if owners and investors find it hard to borrow money.
Mark Armstrong, a director of Property Planning Australia, is also bullish about property. “Sydney prices grew by more than 12 percent last year and there’s no doubt we’re going to see the market grow by more than that this year.”
Not everyone is quite so optimistic. RP Data’s Cameron Cusher who was mentioned earlier, believes that “The major influences this year will be the impact of rising interest rates and the removal of the first-home buyer grant boost. These two factors are likely to result in the Sydney market seeing lower levels of property growth than that witnessed during the past twelve months.”
Mr Cusher does see a bright spot in the market’s upper echelons. “Over the next twelve months we believe the upper end of markets in the capital cities will continue to bounce back and should be one of the standout performers in a market that will, overall, reflect slower rates of growth.”
There are some other interesting factors at work that may help explain the ongoing strength of the Sydney property market.
Although many commentators on the market have stated their belief that Sydney housing is becoming unaffordable with a median house price just under $600,000, real estate group Rismark International’s Dwelling Price-to-Income Index found that Australian house prices have not risen relative to disposable household incomes since late 2003.
Rismark’s managing director Christopher Joye, stated: "In contrast to claims that Australian house prices are 7-8x incomes, Rismark's National Dwelling Price-to-Income Index implies that the true ratio across all regions and all property types is around half this estimate.
"This suggests that Australian housing is not as expensive as is commonly believed. It also reconciles with RBA analysis highlighting Australia's internationally low mortgage default and mortgage stress rates," he said.
Upgraders are another contributor to rising property prices. Owners who purchased their first home during the housing boom of 2000 - 2003 have realised real growth in their equity. They now have higher incomes and survived the last series of interest rate rises. Many are now selling their first home and upgrading to a better location or a larger home.
As always, undersupply relative to demand drives prices upwards. BIS Shrapnel senior economist Jason Anderson said in the Australian newspaper that the lack of new building and the influx of migrants had led to a mounting housing shortage.
"We estimate the national shortage will reach about 150,000 dwellings, concentrated in NSW, where there is an 84,000 shortage."
This is positive news for Stockland, the country's largest residential developer, which reported a $214 million profit for the first half of the financial year.
Interviewed in The Australian, Stockland managing director Matthew Quinn said that, although the company's sales were already above the previous residential market peak in 2004, he expected the recovery to be sustainable.
Mr Quinn also said that the undersupply of housing and the return of upgraders and investors would underpin the market.
Spare a bit of sympathy for Professor Steve Keen from the University of Western Sydney who lost his bet after confidently forecasting back in October 2008 that the value of Sydney property was going to drop 40 percent and the fall to the bottom of the trough would take 10 to 15 years to reach.
(We note that at that time we stated: “Our view of Sydney real estate is that prices will continue to stabilise over the next six months, perhaps with further modest decreases but with no dramatic declines... and investors will return to property where they can generate capital gains and rental income with renewed confidence.”)
Although Professor Keen remains defiant about the logic underlying his forecast, he is now repaying his losing bet by walking from Parliament House to Australia’s highest mountain, Mt Kosciousko - a distance of 224km.
Professor Keen begins his walk at 2pm on April 15. He says he’d be delighted to have the companionship of anyone wishing to accompany him. We don’t plan to be there.
The crystal ball is crystal-clear
Mon, 25 Jan 20102010 will be an interesting year in real estate, especially in two areas – property prices and the cost of renting. What happens in the next twelve months will lay the foundation for at least the next three to five years.
Indications are already clear that Sydney property prices will rise and so will weekly rental rates. Equally clear is the likelihood of continuing interest rate increases.
Statistics compiled by Australian Property Monitors show that median rents for houses in Sydney are up by 2.2 percent over the year. This may not sound like much but it’s a statistic that’s going to rise just as certainly as will interest rates.
An interesting study by the influential UK-based magazine The Economist concluded that Australian house prices are overvalued by a factor of 50 percent. Affordability is a growing problem for those wishing to enter the property market, and there’s little in the way of relief to ease their pain.
A shortage of vacant land, combined with high levels of taxes and charges, ensure a continuing decline in new dwelling approvals. Housing Industry Association chief economist Harley Dale summarised the situation in an interview with the Sun-Herald:
"A standard new house-and-land package is more expensive in Sydney than any other capital city," he said.
"Compared to Melbourne, the price differential is in excess of $100,000, and much of that has to do with the fact that taxes and charges are on average higher in Sydney than anywhere else."
The cash-strapped position of government bodies at both the state and local level will ensure that this situation remains unchanged in the foreseeable future.
Just before the end of 2009 the Executive Committee of Australian Business Economists forecast that the Reserve Bank would raise interest rates to rise to a peak of 5.5 percent in 2011. This figure is already looking a bit optimistic with more rate increases likely in early 2010.
An interest rate rise in February would be the first time since the RBA started announcing interest rate moves 20 years ago that the bank has raised rates at four consecutive meetings.
But ICAP economist Adam Carr has no doubts about a February rate rise. ‘‘A February hike is a done deal,’’ Mr Carr told the Sydney Morning Herald.
La Trobe University professor Don Harding explains why: ''The board will look at [the CPI], see there's not much inflation in the system, say that's nice to know, but then say the labour market is getting tight, retail sales are looking strong, any number of indicators are looking strong and we probably think inflation is about to pick up.''
Even if Professor Harding’s expectations of a pre-emptive strike by the RBA aren’t borne out by the February board’s meeting, there’s a good chance that inflationary pressures will continue to grow in the first quarter of 2010 and the Bank’s alarm bells will be ringing.
As Commonwealth Securities economist Savanth Sebastian said in an interview with the Sydney Morning Herald: ''Price pressures, though mild, are once again rising.''
Just how long the ‘mildness’ will last is anyone’s guess, but all the factors that were working to keep inflation under control are fading away as Australia’s economic recovery from an unexpectedly ineffectual Global Financial Crisis gathers momentum.
The numbers tell the story. The national unemployment rate was a seasonally adjusted 5.5 percent in December according to figures from the Australian Bureau of Statistics.
The economy gained 35,200 jobs in December, raising total employment to an all-time high of 10.906 million.
Full-time employment increased by 7,300, while the number of part-time jobs rose by 27,900.
These figures almost guarantee ongoing interest rate increases, but are the people worried? Not much, according to the Westpac-Melbourne Institute consumer sentiment index which rose by 5.6 percent in January 2010 to 120.1 index points from 113.8 in December.
"This is a very strong result," said Westpac chief economist Bill Evans, noting that the index was 33.6 percent higher than a year ago. "The index is seasonally adjusted and therefore takes account of traditional January optimism."
Even share prices on the Australian Stock Exchange had a glow of optimism. ''The share market also supported confidence with a rise of 4.2 percent although petrol prices did increase by a solid 4.4 percent,'' he said.
One of the most telling statistics in the index was that the confidence of those respondents who currently hold a mortgage reached its highest level since 1994.
If those already paying off mortgages aren’t worried about the likelihood of rate increases, there’s a good chance tenants facing increasingly high rentals will see the benefits in opting to purchase property.
John Edwards, CEO of property analyst Residex, said there is only one word that can describe 2009 and that is "remarkable!"
He said that pent up demand and a lack of supply of desired stock drove the Sydney market in a situation where low interest rates provided an acceptable level of affordability.
Mr Edwards noted that Sydney’s capital growth of 10.2 percent was amazing enough, but over the last six months of 2009 achieved 21.4 percent on an annualised basis. He then asked, can this growth continue?
“For the moment it probably will until the Reserve Bank increases interest rates by about 0.5% to 1%, and the skilled immigration slows. This is unlikely to occur in the short term, but will over the next 12 to 18 months.
“Hence, we can expect these current quality rates of growth to continue but be reduced slightly.”
Residex notes that government subsidies for first home buyers removed a number of renters from the market during 2009. These temporary high levels of government subsidies had the effect of raising property prices, but have now been withdrawn.
As John Edwards sees it, those who were unable to take advantage of the grants now face increased prices for both purchasing property and rentals.
“This leads us to the view that towards the middle or end of this year, we will again see rental rates move back into a growth pattern.”
There were however some signs that rising interest rates are making consumers more worried about making some financial commitments. A report by David Uren in the Australian newspaper showed that new borrowing for home renovations, motor vehicles and blocks of land all fell in November.
“Spending on home renovation has been sliding since March last year, with the $465 million borrowed for that purpose in November down by 13.9 percent. Spending on new blocks of land has fallen by 12.7 percent since it peaked in June.”
In the article, Housing Industry Association chief economist Harley Dale said one reason for the fall in spending on renovation was that more people were confident enough to trade up to a new house.
"You would hope to see some sustained turnaround in renovations as general economic fortunes improve and people are more comfortable that house prices are growing in a sustainable way again," he said.
For investors the outlook is still towards property rather than the sharemarket. According to the latest Citibank Australian Wealth Report, most people feel an investment property is the best place to park their money, with 74 percent believing now is a good time to invest in bricks and mortar.
In an interview with The Australian newspaper, Citibank's Andrew de Graaff said that people were willing to lock away their capital in property.
"The perception we got from the survey is people are just wanting to get that sense of security again,'' Mr de Graaff said.
The trends are in place - rising interest rates, rising property values, and rising rates of weekly rentals. Unless something intervenes in the scheme of things, we can expect to see a continuation of this scenario until at least 2013, and for those who own property it’s a very positive outlook.
What a difference twelve months can make
Wed, 13 Jan 2010At the end of 2009 it’s worth glancing back to where we were a year ago as 2008 was drawing to a close.
Looking around now at the Australian economy and especially the thriving Sydney property market it seems hard to believe that just twelve months ago we were preparing for what was termed ‘an economic disaster’.
2009 was set to be a year of great challenges with rising unemployment and a deteriorating Australian economy. In hopes of staving off a full-blown depression the Reserve Bank of Australia had lowered its cash rate to 4.25 percent and there were forecasts the rate would go even lower in the New Year.
The rest is history and a tale of great relief as well. Twelve months after we were facing what seemed like a financial Armageddon the Australian economy was back in the black, although not by a large amount, expanding by 0.2 percent in the three months to the end of September, and by 0.5 percent for the 2009 year.
The RBA, whose policy of lowering cash its cash rate to stimulate the economy proved successful, has already raised its rate from an historic low of 3 percent to its current rate of 3.75 percent and further increases are likely, although perhaps not as soon as might have been expected last month.
Ric Battelino, deputy director of the RBA said on December 17 that “...it would be reasonable to conclude that the overall stance of monetary policy is now back in the normal range, though in the expansionary segment of that range.”
If the RBA sees the current level of interest rates as ‘normal’ it also means that rates are more likely to remain where they are instead of being raised again.
However, Mr Battelino also indicated that because the major banks were raising their interest rates beyond their usual margins borrowers were actually paying more for their loans than in previous periods of relatively low cash rates.
Money is therefore already more expensive which acts as a buffer against inflationary pressures in the eyes of the RBA.
Although the Federal Treasurer, Wayne Swan, has said that the economy will remain reliant on government stimulus during 2010, the housing market could well be affected for a period of time by the end of the Commonwealth’s ‘boost’ to first home buyers’ grants when it comes into effect on December 31.
The Market Intelligence Strategy Centre (MISC) has warned that the scaling back of the first home buyers’ grant will combine with tighter lending criteria from banks and other lenders to cause a fall in the value of mortgages.
It forecasts a $14 billion drop in the value of mortgages written over a twelve month period and says the mortgage market is likely to reach a bottom in the first quarter of 2010.
Although there’s little doubt that the reduction in the first home buyers’ grant will have an effect on sales at the entry level end of the market, at least during the first quarter of the year, there are other factors in play that indicate the Sydney housing market’s strength will continue.
The first is the action at Sydney’s property auctions. The Daily Telegraph reported on December 20 that this December has been the strongest on record with a clearance rate of more than 70 percent. This isn’t bad for a month that’s usually the slowest for clearances.
The next factor to examine is the demand for mortgage funds. Despite rising interest rates there is a boom in lending to people building new homes. Loans issued to fund the construction of new housing rose 9.2 percent in October to a 15-year high following a 9.8 percent rise in September.
It should be noted that the total number of new owner-occupier housing loans fell 1.4 percent in October, and that the first home buyers' share of the market eased to 26 percent, down from 29.5 percent in May.
Talking with the Sydney Morning Herald, Westpac senior economist Andrew Hanlan said: "Demand for housing has surged over the last year, reflecting the very favourable combination of historically low interest rates, government incentives, strong population growth and pent-up demand for housing stock."
If there is any slackening in demand for finance from first home buyers, it may well be picked up by a growing number of builders returning to the market after their self-imposed retreat over the past few years.
Then there’s the affordability factor. John Edwards, CEO of property analysts Residex, has raised an interesting point about Sydney’s residential real estate.
“Although the Sydney housing market has the greatest (and increasing) housing shortage of all our capital cities, this has not always flowed into higher housing prices, due to the Sydney housing market's extreme unaffordability in periods of high interest rates.”
He notes that at these times housing prices are somewhat contained but rents increase instead. However, he adds that the RBA’s lowering of interest rates in the early part of 2009 enabled Sydney’s housing price levels to rise while at the same time rents began to fall.
One of our biggest worries at the start of 2009 was the spectre of unemployment, forecast to hit a peak of 8.5 percent or perhaps even higher by the end of the year. Instead, look what’s happened.
Australia’s unemployment rate is now 5.7 percent and according to the Australian Bureau of Statistics the rate is now trending downwards. NSW added an extra 11,800 jobs between October and November, bringing the state’s jobless rate down from 6.4 percent to 5.98 percent.
Let’s return to interest rates for a moment. The December survey of the executive committee of Australian Business Economists showed the Australian economy bouncing back next year to near-normal growth of 3.2 percent and interest rates peaking in 2011 at 5.50 percent.
The economists also said they expected the Reserve Bank to push up its cash rate from its present 3.75 per cent to 4.75 per cent next year. This would mean an increase in standard variable mortgage rates to more than 7 percent.
Is this figure affordable? A November survey commissioned by mortgage broker Mortgage Choice found that more than one third of Australians plan to buy a property in the next two years despite any concerns they may have about rising interest rates.
Mortgage Choice corporate affairs manager Kristy Sheppard said this would hopefully stimulate more housing construction.
"As a housing market service provider, Mortgage Choice is pleased to see 41 per cent of respondents planning to buy property in the next two years and 43 per cent of them planning on an investment property.”
The survey also showed that found 40 percent of mortgage holders believed they could afford to make repayments at an interest rate of more than 11 percent.
It’s always been possible for changes to happen quickly in the property market, but seldom before have the changes been more sudden or more dramatic.
The end of the first home buyers’ ‘boost’ will impact on the market, but its effects will be mitigated by other factors. Interest rates will pause for a time, but will then increase along a generally predictable path to peak in 2011.
Fears of a fiscal collapse and a massive rise in unemployment have passed, seemingly to be replaced by confidence in most sectors of the economy.
Much has changed in the past twelve months, but our outlook remains the same. Just like Old Man River the Sydney property market will keep right on rolling along, with continuing strong demand for housing and prices that reflect the scarcity of supply.
Gen Y - moving on but not in
Mon, 30 Nov 2009A recent housing study commissioned by the Commonwealth Bank found that homeowners aren’t changing addresses as much as they used to, making it harder for those up-and-coming members of Generation Y to purchase real estate.
Economist Craig James, author of the study, noted: “That may be good for the Baby Boomers and Generation X, but if they don’t want to move, and state and territory governments don’t increase housing supply, then it really puts big pressure on Generation Y to find their homes, and at reasonable cost.”
Gen Y faces a few more problems in the current market. In November the Reserve Bank raised interest rates for the second month in a row, up to 3.5 percent. The big four banks weren’t slow to follow suit and quickly hiked up their borrowers’ home loan interest rates to around 5.5 percent.
Despite a bit of verbal opposition from Federal Treasurer Wayne Swan, the banks have made it clear that they’ll raise their loan interest rates whenever they please, which is likely to be whenever the RBA raises its rates.
The RBA is playing their cards close to their chest regarding the timing of future rate increases, but they’ve left no doubt that rates will continue to rise, saying further interest rate increases are "most likely appropriate".
In the Bank’s November statement, RBA Governor Glenn Stevens expressed a mood of optimism. ''With the risk of serious economic contraction in Australia now having passed, the Board's view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.''
In a speech on November 25, Reserve Bank Deputy Governor Ric Battellino said that the domestic economy had held up much better than expected in 2009. "With the economy having only recently entered a new upswing, it is reasonable to assume that we will see this growth extended for a few more years yet," he said.
This optimism is to be expected since the worst effects of the GFC seem to have largely bypassed Australia. The RBA is now looking at economic statistics that indicate financial markets are in much better shape than they were six months ago, and borrowers have easier and less costly access to funds.
Another sign of economic recovery is the brisk action at Sydney’s property auctions. Australian Property Monitors noted that, with just one week remaining in the traditional Spring selling season, 68 percent of properties offered at auction were sold compared to just 43 percent in November a year ago.
That may sound like good news for Gen Y’s would-be homeowners, but it also means there’s a chance for inflation to rear its ugly head and that’s something the RBA clearly wants to prevent. Its main weapon against inflation is the interest rate increase, and the battle is already underway.
Gen Y’s home ownership aspirations will also be impacted by the coming reduction in the first-home owners grant. Already reduced in September to $10,500 for existing homes and $14,000 for new homes, it returns to its original level of $7000 on January 1, 2010.
Steve Martin, President of the Real Estate Institute of Australia, told the Australian newspaper that moving interest rates upwards too soon could spell disaster. “If we have a double whammy with the first home owners boost being wound back in December and rates potentially going up it could very well bring us to a very serious crossroads again.”
As if that’s not enough bad news for Gen Y, more evidence is coming out that indicates the supply of housing in NSW is falling even further behind demand than previously thought.
Speaking to property writer Chris Zappone in the Sydney Morning Herald, the ANZ Bank’s head of property analysis Paul Braddick warned: "The housing industry and the policy authorities face a considerable challenge in the years ahead to deliver an adequate physical supply of housing."
He noted that dwelling completions are forecast to fall below 130,000 in the year ahead, and that we can expect a further "dramatic tightening of the housing demand-supply balance".
Writing in the National Times, Aaron Gadiel, who is chief executive of Urban Taskforce Australia, pointed out that in the financial year ending June 30, NSW accounted for only 23 percent of Australia's building activity, although it has 32 percent of the nation’s population. The effect of this situation on rent levels is predictably upwards.
He writes: “Sydneysiders have already been feeling the pinch of housing shortage. Rents in outer suburban Sydney have gone up by more than 20 percent in the past two years. In the middle-ring suburbs rents have jumped near to 30 percent.”
Compounding the Sydney housing shortage is the fact that much of the construction that has taken place in recent times is apparently not quite what the market wants.
Developers have been pressured by a combination of local and state government regulations into constructing row after row of high-density apartment buildings alongside Sydney’s congested transport corridors. Sales of these high-rise developments have been slower than expected and don’t reflect the huge demand for housing being felt in other sectors of the metropolitan area.
The strength of this demand can be gauged by the rise in the home price index of 4.2 percent in the three months to September. Australian Bureau of Statistics figures show that home prices climbed by 6.2 per cent in the 12 months to September, but most of the gains are in recent months as availability of housing stock dries up.
Immigration is another key contributor to this situation. Expanding migration raised our population growth rate to 2.1 percent in the year to March. This translates into an additional 439,000 people looking for a place to live across Australia.
There is at least one plan to produce housing for Sydney’s expected 40 percent population increase over the next twenty years. A group of major property companies has submitted its Urban Renewal Action Plan to the NSW Government calling for the removal of a number of obstacles to development so that 640,000 new homes could be built.
This comes at a time when the NSW Government is about to announce a review of its own 5-year old Metropolitan Strategy planning document. But plans are one thing and housing construction is quite another.
The ANZ Bank’s Paul Braddick has a medium-term view of the housing supply that’s positive for existing property owners but worrying for those expecting to enter the market in the next few years.
"Unless significant action is taken to remove the structural impediments to housing supply, Australia will face an intractable shortage of housing that will drive a deterioration in housing affordability - both purchase and rental - beyond anything we have ever seen before".
All those years of housing supply falling short of demand have left a widening gap that may not even be bridged by the time Gen Y reaches retirement age.
Sydney market surges ahead
Mon, 26 Oct 2009Anyone expecting the Sydney real estate market to pause or even move backwards once the first home buyers grant began its phasing-out will have been sorely disappointed by the incredible strength this market possesses.
Even a somewhat sooner than expected interest rate hike by the Reserve Bank of Australia in early October has had little or no impact. Although small (just a quarter of a percent) the RBA has left little doubt that further increases lie ahead, with at least one more increase in the range of half a percentage point likely before Christmas.
Minutes of the Reserve Bank's last monetary policy board meeting reveal the bank’s perception that low interest rates could lead to economic problems: "Keeping interest rates at very low levels for an extended period could...threaten the achievement of the inflation target over the medium term.
“More generally, very expansionary policy could result in the build-up of other imbalances in the economy, which would ultimately be detrimental to economic growth."
Economic consultants Access Economics say they expect interest rates to reach 5 percent by early 2011. CommSec chief economist Craig James agrees with this line of thought and told the Sydney Morning Herald: "Budding homebuyers need to do their sums. Rates will continue to rise in the next 12-18 months, probably between 1.5 and 2 percentage points."
So, what’s really going to happen in Sydney real estate? As reported in the Sunday Telegraph (25.10.09), Sydney’s median house value has reached its highest-ever level. Figures from market analyst Residex show a rise of $11,000 in the median Sydney value just in the month of September, bringing the median price of a Sydney home to a whopping $610,000.
The RBA will of course take note of this and tweak interest rates a bit at a time to apply the brakes to what it perceives as a massive inflationary price movement. The banks will go along happily with the trend, many of them having already boosted their loan interest rates by slightly more than the RBA’s quarter of a percent.
But will it work? Is there anything to stop the Sydney market’s prices trending upwards? Frankly, we don’t believe there is.
For one thing, it’s not just about interest rates. The historically low 3 percent was a figure set in desperation to offset the impacts of the Global Financial Crisis. The GFC has wrecked the real estate markets in the UK and USA, so what makes Australia different?
First, the state and federal governments made a quick and accurate assessment of the situation and concluded that a stimulus was necessary to stave off the GFC. Not just in the area of real estate, but that was one of the market segments specifically targeted with incentives like low interest rates and packages of grants for buyers. And it worked.
In the 18 months prior to the October rate increase, the RBA dropped its rates by 425 basis points. Properties suddenly became more affordable and as a result thousands of tenants became homeowners.
However, what didn’t happen was construction of new homes; the number of new homes dropped by 25 percent while sales continued to rise.
The most important underlying metric that could have had a genuine impact on rising housing prices – the rate of new home construction, has remained moribund for the past several years.
In 2002 Australia built 173,000 new homes, but this year the figure’s just 124,000. It’s woefully inadequate to meet the demand for new housing, and there’s no turnaround in sight.
Another worry that never materialised was an expectation the GFC would drive unemployment levels up to 9 or 10 percent, cause permanent losses of jobs in a number of key industries, and reduce pressures on wages. It just didn’t work out that way.
Economic consultants Access Economics latest Business Outlook report says that the unemployment rate is likely to peak at just 6.8 percent in the middle of 2010. Instead of cutting jobs Australian employers have wisely elected to reduce hours of work performed by their employees. Finding the human capital needed for the recovery won’t be a huge problem and once again, Donald Horne’s ‘Lucky Country’ has lived up to its name.
Tenants will soon begin to feel the effects of housing shortages. Although rents have stabilised over the past year or so, fewer first home buyers will make the move from renters to owners and competition for rental properties will increase. Analysts forecast rent rises across Sydney from 5 to 15 percent over the coming year.
In the past month the number of vacant rental properties in Sydney's inner suburbs fell slightly to 1.4 per cent while the number of vacant rental properties in outer suburbs rose by 0.1 per cent to 1 per cent.
"These results are a double-edged sword; great news for landlords but grim news for tenants," REINSW president Steve Martin said in a statement to the media.
"The results for Sydney and Newcastle are concerning and show that, despite a low interest rate environment and additional first home buyer and other buyer incentives the rental market remains extremely fragile."
Now, let’s return to our question: What’s really going to happen in Sydney real estate? Five things are certain.
1. Interest rates will increase, probably by at least two percent over the next twelve months.
2. Real estate prices will increase, and the closer the property is to the CBD the greater the increase will be. Rises of 5 to 12 percent are not unlikely.
3. Returns on rental property will increase, by 5 to 15 percent if analysts’ forecasts are accurate.
4. Housing construction will continue to fall short of demand. This situation will persist for at least the next three years based on the housing industry’s forward estimates, although without massive government action the ongoing shortfall is virtually assured for the next decade.
5. Investors who have been burned by the sharemarket will continue to move their capital into property. Smaller investors in particular will avoid property-based funds and opt for direct ownership of rental properties.
In our website’s ‘Market Comment’ section you can see our articles dating back to June, 2008. It’s not really all that long ago, but the world has changed much in this time and Australia has weathered a global economic storm that has had serious consequences for property markets worldwide.
Fads and fashions come and go; today’s olive groves and tree plantations are tomorrow’s economic casualties. The one constant for value has been property, and in particular Sydney real estate.
We are in a rising property market with affordable interest rates. This is an excellent time to purchase a home, to upgrade your residence, or to buy property as an investment. The signals are clear and the time to act is now.
Not much rain on this parade
Tue, 6 Oct 2009Potential property investors have been given some additional motivation by the latest house price data from analysts RP Data-Rismark and BIS Shrapnel.
RP Data-Rismark’s figures showed price gains in all capital cities. Even better was their finding that market growth is happening across all suburbs and not just in those areas most appealing to first home buyers.
Forecasters BIS Shrapnel say that prices will keep going up, accelerating into double digits once the rate of unemployment peaks in 2010/11. There are already signs that unemployment may peak at a much lower level than earlier thought.
If there is any market sector lagging behind the rest, it’s right at the top. Australian Property Monitors found that the number of houses and units sold for more than $1 million in the past six months had declined by 28 percent over the past two years.
Indications are, however, that this is largely due to vendors holding their properties off the market in expectation of rising prices in the near future.
There’s a lot of debate about the likelihood of higher interest rates between now and the end of 2009.
For the moment the Reserve Bank of Australia seems to feel that the better-than-expected unemployment figures – stabilised at 5.8 percent for the past three months – aren’t enough reason to hike rates just yet.
Another factor no doubt causing some angst in the corridors of the RBA is the continuing strength of the property market. Rising prices are usually a signal for rates to be increased.
Sydney's housing prices were up 6.6 percent in the first seven months of 2009 to $537,396, according to RP Data-Rismark’s Home Value Index. However, the market is still responding to the stimulus of the first home owner’s grant which begins to scale back from October 1.
Until the effects of the grant’s reduction from $14,000 to $10,500 for existing properties are known the RBA will probably hold off any decision to raise interest rates.
A growing number of forecasters are predicting the Australian economy will stage a recovery in 2010, albeit a modest one, and a too-early rise in interest rates could imperil this optimistic scenario.
Admittedly there’s little doubt that the RBA will increase its rate from the present record low sometime soon. This is unlikely to have much of an impact on the Sydney property market where rental yields are good and new housing construction is at historically low rates.
And despite several recent strong performances, the Australian share market is still awash with uncertainties about future earnings and the security of invested funds.
When your investment is in bricks and mortar you don’t have to worry about it disappearing into the corporate graveyard. You can choose to live in it or rent it out; with the present low cost of funds it’s possible to adopt either a positive or negative gearing structure depending on your financial position.
In the news recently was the Commonwealth Government’s ‘discovery’ that population growth would be much stronger than previously forecast. By the year 2050 there could be 34 million Australians where there are now just 21 million or so.
Even before this discovery the Housing Industry Association estimated the shortfall between underlying demand and supply of homes to reach 56,600 in 2009. Of an estimated 186,100 homes needed only 129,500 would be built.
The NSW Government’s Metropolitan Strategy, released in 2005, expects that the population of Sydney will grow by about 40,000 people per year. By 2050 Sydney’s population will have rocketed upwards, from the present 4.2 million to a possible 6.9 million.
Estimates for the shortfall in housing construction by 2050 vary widely, but it’s safe to say that unless there is a significant reversal of current building trends there will be massive unmet demand for accommodation throughout the greater Sydney region forty-one years from now.
Signs of unmet demand are already easy to see. Rising rents and property values are two good indicators, and we’re now seeing them across Sydney. What it will be like in 2050 is anybody’s guess, but a future of housing shortages is virtually guaranteed.
So why not buy a home? In the interests of journalistic balance, we’ll present a somewhat differing viewpoint from respected financial writers David and Libby Koch.
Writing in News Limited newspapers, David and Libby Koch say in their September 14 column that renting “...could be more lucrative than buying a home”.
They point out that Australian real estate is defying global trends. Residential property prices are 10-30 percent more expensive than the rest of the world, and a shortage of property has kept rents up.
They rightly say that buyers are faced with high property prices and banks reluctant to do their part in easing the property shortage. Their proposal is to rent a home rather than buy, and invest the capital difference elsewhere.
The Kochs say: “The key to this option is having the discipline to invest (and not spend) the difference between your rent and potential mortgage repayments on a similar property.”
They cite a university study that looked at investing $50,000 in a financial institution and renting a home versus buying a home with a $50,000 deposit.
The study found that buying a home is “...sounder financially, provided there is long-term ownership. It found the financial break-even point for continuous home ownership was 17 years.”
Up to that 17 year point renting could be a better financial alternative because tenants don’t have to pay the up-front establishment costs like stamp duty and legal fees.
It’s an appealing argument for short-term renting but raises the question of where one should invest all that freed-up capital? We know what’s happened in recent times to equity investments, and the performance of many superannuation funds has been badly hit by the GFC.
If, on the other hand, you were to rent a property as your home and were able to fund the purchase of an investment property, it could be financially advantageous. Crunching the numbers could give you an interesting option to consider.
And if you were to acquire a property in Sydney right now, what is likely to happen to its value in the very short term? The Spring Property Guide in the September 19-20 issue of ‘Domain’ in the Sydney Morning Herald has some interesting answers.
The Guide predicts the movement in median prices of housing over the next twelve months, based on figures from Australian Property Monitors. We’ll focus on the Lower North Shore for obvious reasons, but if you want to know about other parts of greater Sydney it’s all in the Guide.
For Neutral Bay and Cremorne the Guide forecasts an increase of 6-9 percent for houses and units. For North Sydney it forecasts an increase of 9-12 percent for houses and units, and for Mosman it sees houses increasing 12-15 percent and units increasing 3-6 percent.
The area’s hotspot is Milsons Point where units are predicted to rise by more than 15 percent, but there are good gains to be had across the Lower North Shore.
If BIS Shrapnel’s forecasts are accurate, these price rises in 2009/10 will be eclipsed in each of the next two financial years. Today’s Sydney real estate prices are without doubt tomorrow’s ‘good old days’ for value.
Lots of news in a new month
Thu, 20 Aug 2009A month is a long time in today’s real estate market. Last month the Reserve Bank left its cash rate at a 49-year low of 3 percent, and RBA Governor Glenn Stevens was sending out messages that the rate would be likely to stay there for a while.
Well-respected ANZ economist, Dr Alex Joiner expressed a similar view: "Given the risks the economy faces going forward we believe interest rates will be on hold at 3 percent until late 2010."
But despite Dr Joiner’s expectations, this month it’s looking increasingly like interest rates will go up before the end of 2009, possibly by a ½ percent or maybe a dash more.
Supporting this is the August 15 warning by the RBA’s Governor that borrowers should be prepared for an eventual 2 percentage points increase in their mortgage repayments.
Not that this is going to have much of an impact on the present Sydney market.
Even before the start of the Spring season which is traditionally the time of year when aspiring vendors put their properties on the market, sales are strong and auction clearance levels are running hot – around 70 percent.
Even better is the news that the value of properties sold in the first weekend of August had risen from $70.4 million at the same time last year to a healthy $96.5 million.
A single weekend does not a market make, we must admit, but the key figures relating to Sydney real estate are trending upwards with no sign of abating just yet.
The Housing Industry Association’s Chief Economist, Harley Dale, said that the latest set of market statistics should remove any concerns about a possible drop in residential real estate such as happened in the USA and the UK.
"Very low variable mortgage rates, the First Home Owner's Grant boost, and attractive deals from volume builders have generated increased new home demand."
Reflecting this demand, the Australian house price index rose 4.2 percent in the June quarter. Sydney had one of the biggest house price index increases, up by 4.9 percent in the quarter.
As always, the amount of price increase varies depending upon the demand in a particular area. The upper north shore was Sydney’s strongest performing district during the June quarter, with house prices rising 8.9 percent.
Prices rose 4.2 percent in Canterbury-Bankstown and 3.1 percent in Sydney’s west. However, there was only modest growth of 1.1 percent in Sydney’s east and 1.7 percent growth in Sydney’s inner west.
AMP Capital Investors chief economist Shane Oliver said that the Australian Bureau of Statistics housing figures could well indicate that the Sydney market has bottomed out.
"It's confirming the information from the private sector surveys, which all suggest that house prices have bottomed out for now and are on their way back up again.”
The Australian economy may not be quite as buoyant as the real estate market. Economic forecaster BIS Shrapnel has forecast falling household incomes, rising employment and a 17 percent decline in business investment over the next year.
However, beyond 2010, BIS Shrapnel predicts a solid recovery with economic growth rising to 4 percent by 2011/2012.
On August 19 Olivier Blanchard, chief economist for the International Monetary Fund (IMF), declared that the global recovery is underway.
“The recovery has started”, he announced, warning however that the recovery will be slow and unpredictable.
Housing affordability remains a concern. In early August the IMF suggested that Australian property prices could be overvalued by as much as 20 percent. This doesn’t mean that a sudden drop of 20 percent in prices is likely anytime soon, if ever.
It’s clear that recent demand for affordable residential real estate has prompted buyers to pay thousands of dollars more than the advertised price for many Sydney properties.
This helps confirm that the actions taken by various governments to stimulate activity in the housing market have been successful, and that prices have been to some degree supported by these actions.
In recent weeks turnover in the middle to lower end of the market has doubled for many Sydney real estate agencies compared with the same time last year.
Many agents have reported stock shortages, prompting the Chairman of one national real estate group to comment in the Australian newspaper: "The stock shortages are as acute as any of us can remember. It has changed to a vendors' market, which was unthinkable six months ago."
There are some indications that the shortage of housing stock is being addressed with Australian building approvals showing their biggest increase in four years thanks to a number of new apartment projects. Approvals rose by 9.3 percent in June, outperforming market expectations of an eight percent increase.
But the housing stock crunch is a long way from over. On an annual basis overall building approvals are down 14.3 percent, and apartment building approvals are 45.7 percent weaker compared with a year earlier.
In this column a year ago we wrote: “Housing supply is short and demand for housing of all types is strong. There is a lag of at least two years before supply can begin to catch up with demand, and in the meantime prices of existing housing will level out and inevitably rise.”
And that’s precisely what happened.
Real estate is still the investor’s friend
Thu, 23 Jul 2009As usual lately, news from the real estate market battlefront is mixed. Depending on which segment of the market one examines, the conclusions can range from pessimistic to optimistic and everything in between.
At the very top end the global financial crisis has taken its highest toll. Many of these properties were sold, often for greatly enhanced figures with regard to their previous sale prices, to players in the financial sector - merchant bankers, stockbrokers, currency traders and others whose lifestyles accelerated to match their burgeoning incomes.
Pressures from reduced incomes and margin calls have meant that the number of elite purchasers has dwindled. Until the economic recovery is complete this will be the place where the bargains are greatest – at least in dollar terms.
Elsewhere, in the market sectors with which most householders are more familiar, the news is much better. The reasons for this lie in the other factors that influence prices on the kinds of houses most of us think of when we think of ‘home’.
New construction continues to languish. Nobody has much faith in ‘build it and they will come’ at the present time, although the decline in housing construction does seem to be slowing slightly.
Nevertheless, new housing stock will be in short supply for years to come. The Australian Industry Group/Housing Industry Association Performance of Construction Index (or ‘the Australian PCI’ as it’s more commonly known) fell to 44 points in June, representing the 17th consecutive month of contraction.
Interest rates are still contained. The July meeting of the Reserve Bank of Australia resulted in the RBA leaving its cash rate at 3 percent. This is a 49-year low and analysts are mixed in their outlook for what the bank will do next.
They note the bank has ‘room to move’ and the RBA has suggested it may lower rates again in future. But whether the next move is going to be up or down is still fairly uncertain, and it won’t be a big move whichever way it goes.
Financial markets are predicting the official interest rate will start to move slowly upwards, pricing in a half-percentage point increase to 3.5 per cent by July 2010. Before then we could well see another small rate cut.
The Bank’s governor, Glenn Stevens, allowed himself to become fairly upbeat in early July when he gave his appreciation of global economic conditions.
“The global economy is stabilising, after a sharp contraction in demand during the December and March quarters. Downside risks to the outlook have diminished, with conditions in global financial markets improving this year and action to strengthen balance sheets of key financial institutions under way.”
He was similarly positive in his comments on the real estate sector. “A pick-up in housing credit demand suggests stronger dwelling activity is likely later in the year. House prices are tending to rise.”
That other big competitor for investors’ funds - the share market, is up and down on an almost daily basis, awaiting leads from overseas or some other place where a direction can hopefully be discerned. Profit forecasts are generally down.
Many investors have cashed in what was left of their share holdings and transferred their investment capital into real estate, although a survey by research group CoreData found that seven out of ten retirees had not withdrawn the majority of their invested funds from the market.
Superannuation funds have announced their worst returns since super was introduced with most funds falling in value from thirteen to twenty percent over the past twelve months.
This has to be influencing disappointed investors, especially the baby boomers in their retirement phase, towards the acquisition of real estate to meet their needs for returns on capital. So what do property analysts think?
Alex Joiner, an economist with ANZ Bank, says that investors are likely to be considering re-weighting their portfolios from shares into property because they can buy in an area they know, at a good yield, with low vacancy rates.
Investors also seek capital gains. In its report ‘Residential Property Prospects 2009 to 2012’, researcher BIS Shrapnel concludes that although first-home buyer demand is expected to ease after the end of the Federal Government's grant scheme in December, upgraders and investors will pick up any slack in overall demand.
Matthew Bell, an economist at Australian Property Monitors, agrees. "For Sydney and Melbourne, I expect to see the unit median price grow moderately for the remainder of 2009, with stronger growth in 2010.”
The chief economist at Commonwealth Securities Ltd., Craig James, told the Sydney Morning Herald that the combination of low interest rates, tight rental markets and generous grants to first-home buyers has driven up house prices.
"Sydney and Melbourne dwelling prices are back at record highs while other capital city home prices are not far off peak levels.
"It is a simple case of supply and demand. Demand for homes is being spurred by improved affordability, the fastest population growth in 40 years and weak returns on other assets," he says, also noting the decline in new home construction.
According to property market research firm RP Data, Sydney house values rose by 5.1 percent in the first five months of 2009.
Louis Christopher, managing director of another researcher, SQM, says that we should ‘be careful’ of these figures because they can vary from one month to another, but he admits to being a bit surprised at the strength of the present market.
“These figures suggest that the market is holding up better than we all expected throughout the first and second sectors of the year,” he says.
Well, some of us expected the present conditions. We’ve been bullish on Sydney property for several months, and now we’re certainly not alone.
Without a doubt these are tough economic times and house prices have taken a battering, more in some areas than others.
As the recession enters its next phase, rising unemployment will have some impact on real estate prices. The number of people seeking to buy property may decline somewhat, and economic constraints could force some additional homes onto the market.
Sydney rent levels, reflecting the downward pressures on incomes and a transition of many tenants to homeowner status thanks to grants benefiting first home buyers, are stabilising and not likely to surge in the short- to medium-term.
But it’s no longer a matter of forecasting that housing prices may rise; they are rising across Sydney and have expanded upwards from the lower end of the market into the middle segment.
Even the upper end of the market is strengthening; multimillion dollar sales are starting to happen, although prices are nowhere near the peak of the market a couple of years ago.
Now is a great time to buy property. First home buyers, upgraders and investors are increasingly active, and even parts of Sydney that were formerly trending downwards have stabilised.
Giving appropriate weight to all the factors now at play in the Sydney real estate market, we say that we’ve weathered the storm and from here the only way this market will go is upwards.
Are we really moving forward?
Tue, 23 Jun 2009It might be impolite to say “we told you so”, but we did. Admittedly, there were a few others who also said that real estate would lead the way towards Australia’s economic recovery in 2009, but six months ago there weren’t many willing to go very far out on that limb.
Having given those optimists a bouquet, we’re pleased to say that confidence in ownership of real estate is once again growing, both for property as an investment and also as the best means of providing a roof over our heads.
Across Australia property auction clearance rates have reached the mid 60 percent, and with the exception of the ‘millionaires rows’ at the very top end of the market we’re seeing growth return. The buyers are back with a vengeance.
So it looks like the worst is almost over and we can put those days of plummeting property prices behind us. Well, maybe not everywhere, but in Sydney it’s pretty easy to pick winners from losers.
Start with the Sydney market overall. Property analysts Residex have a way with words so we’ll quote them here: “Our predicted rates of capital growth are moderate with Sydney offering the best outcome.”
It’s not that the days of ten- or twenty-percent annual gains on property have returned, but those times were only a temporary paradise for speculators. For those who are serious about investing or about purchasing a home that will retain its value, today’s market conditions are a reward for patience - for waiting out the downtime.
Let’s give the government some credit where it’s due. The First Home Owners Grant has kept the pot bubbling when everything else, including the share market, was going cold. First home buyers are still borrowing at record levels, taking up 28 percent of the value of all housing loans.
Lower interest rates were the Reserve Bank’s contribution to ensuring the real estate market still had life in it. Rates are now stable and the only concern we have about that end of the business is the reluctance of the four big banks to resume lending at the level sought by the market, but they’re giving signals that they’ll lend more if they can pump up their interest charges a bit as they’ve done recently.
NSW Treasurer Eric Roozendaal has provided us with an incentive to buy a newly-built home with a 50 percent reduction in stamp duty on new homes worth less than $600,000 in the state’s 2009 budget.
This yields a saving of up to $11,245, but be quick. The discount ends December 31, 2009. And it doesn’t apply to homes purchased with the First Home Owners Grant, so the benefits will go mostly to second home buyers and investors.
The acting head of the NSW division of the Property Council of Australia, Angus Nardi, thinks the stamp duty cut, together with other government measures, will have a massive impact on the housing market. "I think the Government has implemented a handful of measures that should bring about a boom in the residential market," he told the Sydney Morning Herald.
He may be right, but both the First Home Owners Grant and the RBA’s rate cuts also have use-by dates. They’ll come to an end as activity in the real estate market is recovering. As Peter Icklow, CEO of property developers Monarch Investments, told the Australian: “First home buyers have had their opportunity. You can’t get $24,000 forever.”
So where do we think the stimulus will come from once the props have been removed? It’s an old story for those who’ve studied economics, but it never fails.
A shortage in supply provides support for prices. If a commodity like housing is in demand because everybody needs a place to live, those who want it have to compete with others who want the same thing. And there’s not a lot of housing stock to meet the demand.
But not everyone wants just a place to live. They want to live in places where there are good sources of public transport, schools, a trip to work as short as possible, access to retailers, and the availability of dining and entertainment amenities.
It is the suburbs that offer these amenities that will be the biggest beneficiaries from the resurgence in the Sydney real estate market. The first home buyers have just about had their day with the bottom end of the market. Now activity is moving up the housing chain.
Australian Property Monitors picked up the indicators of a market shift in the two months from mid-March to mid-April. Not only had auction clearance rates recovered to 2007 levels, but the numbers of properties sold from $700,000 to $2 million were significantly rising.
Property valuer HTW also commented on the growing strength in the ‘middle market’ – properties priced from $600,000 to $900,000 and up to $1.2 million in areas near the CBD: “Commonly we are seeing the natural progression of the first home buyer moving into the next bracket”.
This will have the natural consequence of driving Sydney real estate prices upwards - by how much is the only question. Research firm BIS Shrapnel recently forecast gains of 19 percent over the next three years, although this high rate of growth has been disputed by other analysts who forecast lower rates. Nevertheless, the forecasts all now say “growth” lies ahead.
There are lingering concerns about future rates of unemployment and their effects on the housing market but people with worries about their jobs have already taken themselves out of the market, and activity levels are still rising.
The present state of play clearly indicates that the peak of the crisis has passed. A measure of stability has been restored and both current rental returns and probable rates of future capital growth have real appeal for investors.
The demand for accommodation will continue as population growth, augmented by immigration, drives the quest for family homes, both separate dwellings and home units. All this is happening at a time when construction of new homes has reached a 50-year low.
The Sydney market is once again on the rise, responding to forces that are so familiar we might call them ‘historic’ or even ‘classic’, aided by helpful government support at both state and Commonwealth levels.
Are we really moving forward? Without a doubt, we are!
There's a lot going on
Mon, 25 May 2009It’s been years since the property sector has enjoyed as much media coverage as it’s now receiving and, to put it mildly, the signals are mixed. Let’s try to make some sense out of a very complex situation.
We’ve seen that property prices can behave independently of other economic factors such as unemployment and inflation. Thanks largely to a financial stimulus from the federal and NSW governments, at least one segment of the real estate market is booming. This has impacted on a range of key market indicators.
We have to view NSW separately from the rest of Australia as the situation here is not the same as in other states and territories. There’s also the fact that Sydney is a large and diverse market comprised of several smaller localised markets.
So what do the experts say? The RP Data-Rismark national property values indices released in April showed Sydney house prices were up 2.39 percent overall to $565,928, and unit prices up 2.54 percent to $430,413.
But these findings were at variance with those of another prominent property analyst. Australian Property Monitors found that Sydney's median house price fell from $531,111 to $529,926 between December 2008 and March 2009, while the median unit price rose 1 percent from $364,314 to $367,751.
Let’s look ahead. Residex, another property analyst with a unique statistical model it applies to forecast price movements in the property market, said in its May report that Sydney houses are likely to have a higher rate of growth than is predicted for other cities.
“The Sydney prediction looks higher than intuitively seems reasonable, but given supply issues and history, it is a possible outcome. This would place the median value of a Sydney house in 2012 at something more than $700,000.”
Analysts do seem to agree on one thing. For those wanting to purchase a home Sydney is still a buyer’s market, except at the lower end of the scale – properties below around $450,000.
The extension of the Federal Government’s first home owners grant is one of the reasons for this situation. The package of government grants available to first home buyers created a surge in demand for this segment of the market and the number of properties on offer in this price range is decreasing as buyers rush to snap up what they perceive as the last of the bargains. Prices have risen accordingly.
It’s a different story at the top end of the market. A study by property analysts RP Data found that eight Sydney suburbs with a median home price of $1 million or above in February 2008 had dropped off the list of million-dollar suburbs a year later.
Macquarie Bank’s interest strategist Rory Robertson confirmed this, saying that the sharpest rates of price declines have been at the top end of the market. Cashed-up buyers in prestige areas have never had it so good!
In the mid-ground of the property sector sales results for homes priced between $500,000 and $1 million are mixed and largely dependent on their location. This is nothing new, and quality suburbs near the city have always outperformed those further from the CBD.
The point is here that there are properties within 10km of the CBD that commanded prices of more than $1 million just two years ago that are now available for much less. How long will this situation continue?
Property prices are becoming more affordable relative to income. Reserve Bank figures show that a typical Australian home is worth a little more than four times the average household's annual after-tax income, compared to almost six times five years ago.
RBA Governor Glenn Stevens said he believes that this means Australian house prices are not heading for the same kinds of dramatic price falls seen in the US, UK and other countries.
He told the Sydney Morning Herald: "In Australia's case, the ratio of the median dwelling price to average household income has declined quite noticeably since 2003, without a very large absolute decline in housing prices.” But property prices are, as always, just part of the picture.
The RBA concluded in its May meeting that further interest rate cuts weren’t needed as an economic stimulus. Their view, although not saying the worst is over, at least suggests the RBA feels that the downturn is nearing its bottom.
However, the rate of unemployment is a long way from its peak. In April there was a decline in the official unemployment figures, down to 5.4 percent from 5.7 percent in March. Analysts were in general agreement that this was only a statistical blip and that we’re still headed for a figure around 8 percent or above over the next twelve months.
Mortgage interest rates are now at their lowest since the 1960s. Not surprisingly, the RBA noted that personal loans and loans to businesses were still weak, but loans to property buyers continue to increase.
There was more good news for market watchers. Retail sales rose 2.2 percent in March as consumers responded to sales and spent $19.3 billion for the month. Australia’s trade surplus grew to $2.5 billion in March, reflecting a continuing strong demand for Australian resources despite the global economic slowdown.
The Australian share market followed the lead of its US counterpart where stocks surged to their highest levels in months. Australian shares have been bolstered by economic data from China that suggests a recovery in both raw materials purchasing and domestic consumption may be underway.
Which raises the bigger question: When will the world recover from the much talked about Global Financial Crisis? Let’s take a look at one US corporation that may give us an indication.
Cisco corporation makes computer networking equipment. Their leadership position in the global market makes them, in the words of Ken Dulaney, Cisco analyst at Gartner Consulting, "a good bellwether for the economy because they are so dominant in their space."
Cisco chief executive John Chambers said recently: "For the first time in many quarters, many of our global customers are describing business momentum and seeing stabilisation. We are going to be very aggressive this year to position ourselves for the eventual upturn."
How does this relate to real estate prices in Sydney? When the world’s economies recover Australian businesses will recover, manufacturing activity will increase and employment will rise. The return of prosperity will, as always, drive up the price of real estate.
US Federal Reserve head Dr. Ben Bernanke holds the view that 2009 will see the end of the Global Financial Crisis: "We continue to expect economic activity to bottom out, then to turn up later this year," he told a Congressional panel.
It’s still too early to blow the economic all-clear siren. As Gail Kelly, CEO of Westpac said recently, “When the recovery comes, it is likely to be slow." But it has to start somewhere.
As we said earlier, the signals are mixed. Some are positive and some are negative, and some are based on either hope or pessimism without much evidence to show they’re pointing toward a particular direction.
We remain confident that the recovery in the Sydney real estate market is already underway. The eventual termination of the Commonwealth’s ‘boost’ to the first home owners grant will naturally have an impact on sales, but it’s fulfilled its purpose and kept the market ticking over at a time when it would probably otherwise have stalled.
The share market is showing the beginnings of a recovery, although investors are justifiably cautious about trying to pick winners from among listed companies.
At this stage of the proceedings real estate prices remain affordable and interest rates remain low. There’s a good range of properties on offer for those wishing to acquire an investment or simply to upgrade their housing arrangements.
There are also good levels of demand out there for property that’s priced sensibly with regard to its location.
When the global economic recovery is fully underway property prices will respond by rising swiftly. Our recommendation: Now is the time to buy, before all the news is once again good news.
Where to from here?
Thu, 23 Apr 2009The package of grants for first home owners has had a massive impact on the Sydney real estate market, not the least of which has been a contribution to higher house prices.
Back in 2007 before the Rudd government won the Federal election the ALP released a discussion paper that quoted the ANZ Bank’s Chief Economist, Saul Eslake. His statement was: "Anything which puts additional cash in the hands of buyers … results merely in more expensive houses."
Regardless of their pre-election positioning, after the election the Rudd Government increased its first home owners grant and the rest is history.
Last October, the Federal Government doubled the first home owners grant to $14,000 for existing homes and tripled the subsidy to $21,000 for newly built dwellings.
So, despite the worst economic crisis in our history, the lower end of the housing market displayed a Lazarus-like recovery well ahead of other segments of the economy.
As we know, supply and demand have a deeply meaningful relationship. As demand for properties increased – most noticeably for 1- and 2-bedroom units anywhere within cooee of the Sydney CBD, so did the prices people paid to acquire them.
But 2008 Sydney housing prices weren’t nearly as unhealthy as those in the US and UK where owners had seen 20 percent or more of their value slip away.
Across Australia the drop was only around 3 percent in 2008. Housing Industry Association figures since the start of 2009 have shown that Australia’s enjoyed a monthly increase in the sales of new housing; new home sales in New South Wales rose 11.17 percent in February.
The shortage of available homes, estimated at 70,000-80,000 by the HIA, ensures that the price of housing will remain relatively high compared to other markets where housing has been overbuilt and supply exceeds demand.
The Reserve Bank of Australia has weighed into the housing battle with its own economic stimulus of a series of lower interest rates, effectively reducing the costs of property ownership and making ownership of property even more desirable.
Doesn’t all this mean higher prices for real estate generally? To be blunt, not everyone thinks so. Associate Professor of Economics, Steve Keen from the University of Western Sydney has gone on record predicting a fall in housing prices of 20 percent.
Certainly some areas have been hard-hit by price falls, particularly those on the fringe of our capital cities. The Blue Mountains and the Central Coast are two markets that rode upwards on the coattails of the Sydney property boom and fell very quickly once the upward thrust began to weaken.
Even metropolitan area blue-ribbon suburbs have seen some properties that sold for several millions two or three years ago drop a half-million or even more. The first home owners grants don’t have much of an impact on the top end of the market, regardless of where a property’s located.
However, overall industry figures show that across Sydney the market for any well-located apartment selling for between $500,000 and $1 million is strong and getting stronger. Consequently, prices are rising and this trend will continue well into 2010.
In late April 2009 a study released by the Australian Property Institute showed that property professionals believed Sydney’s residential sector would be the first to rise above the recession, and that all categories of property across Australia will be rising in value by 2011.
The president of the API, Robert Hecek, indicated that he believed in Sydney at least we’re nearing the bottom of the downturn.
This ties in with the opinions of market analysts Residex which said in its April report: “The Australia wide trend is encouraging and appears to be presenting as if we have moved past the worst period of correction.”
Residex went on to say: “At last our markets look as if they are moving to moderate growth", pointing out that Sydney was “...further along the adjustment path than some other states.”
Concerns about rising unemployment linger, but there are several economic analysts worldwide who now say the global financial crisis will have less impact and be of a shorter duration than previously thought.
So although nobody’s yet quite brave enough to make a declaration that the Sydney housing market has reached the absolute bottom, it’s hard to find any other way to interpret the present set of economic indicators.
If this isn’t the bottom it’s just below us, and to us the future seems clear. Whether you want to acquire a property for the purposes of investment or to upgrade your present living arrangements, this is the time to start looking for it. Conditions for buyers have never been better.
We live in interesting times
Wed, 8 Apr 2009One of the major developments this past month has been the release of figures from Housing NSW proving that it’s now cheaper on a monthly repayment basis to purchase a property rather than pay rent.
The investor’s favourite – a two bedroom unit, was used to compare sale prices and rentals, and while rents have risen 14.3 percent, prices have fallen by an average 7.2 percent.
NSW Housing Minister, David Borger, summed up the situation: “...21 of the 43 local government areas (LGAs) in Sydney recorded annual [rent] increases of 10 per cent or more, representing over half of the two-bedroom units available in the rental market in Sydney.”
As we’ve mentioned in previous articles, a shortage of rental properties is behind the increase in rental costs. A growing number of prospective tenants chasing a shrinking number of rental properties will always mean growth in rents.
Governments are doing what they can to encourage people to purchase a place of their own. State and federal concessions and grants provide first-home buyers with assistance worth up to $42,000 for a newly built home, and up to almost $32,000 for an established home.
$8 billion of new home loans were taken out in January this year, and at least $2 billion of this went to first-home buyers. However, despite the success of the scheme, the Rudd Government still says it intends to end its first-home buyer's grant when it’s due to expire on June 30.
While the demand for properties is surging, the replacement market isn’t responding quickly enough. Approvals for new homes have continued to drop and monthly building approvals haven’t increased since June, 2008.
January figures showed that new home building approvals were down 3.7 percent, seasonally adjusted, after a 1.9 percent decrease in December, according to the Australian Bureau of Statistics.
BIS Shrapnel figures show that the number of apartments and townhouses abandoned or deferred in Sydney between January and July 2008 was 4072.
More telling is that between August 2008 and January 2009 this figure accelerated to 5326, taking the total of deferred or abandoned apartments and townhouses to nearly 9400.
Incredibly, more homes will be built in Adelaide than in Sydney in 2009. The Daily Telegraph says that an estimated 7300 new dwellings will be built in Sydney this year which is about a third of the homes built in 2003.
An economist quoted in the newspaper said that Sydney rents could rise a further 12 percent in 2009, on top of last year's rise of 8 percent. This will place additional upwards pressure on property values.
Although the Reserve Bank kept interest rates unchanged in its March meeting, many economists are predicting a further cut of at least half a percent in April that will specifically attempt to stimulate the construction sector.
Analyst Anthony Thompson from Westpac Economics expressed a degree of optimism in his bank’s newsletter: "Overall, we still expect approvals to recover over the course of 2009 in response to the RBA's aggressive interest rate cuts and fiscal policy initiatives.”
He then added a note of caution: "But the extent of the continued weakness points to a bigger hole in dwelling construction over the immediate short term and downside risks to the 2009 outlook."
Sydney’s property auction clearance rates have continued strong since the RBA’s last interest rate cut gave investors a signal to buy, although the number of properties sold is significantly lower than at this time a year ago.
Take a look at real estate auctions in Sydney and you’ll see where buyers are focusing their interest. The competition is fierce and results above reserve prices are common.
Investors have the advantage of tax-deductible interest and other outgoings, while private buyers are encouraged by first home buyer’s grants and the state of the rental market. The action at most property auctions is fast and furious when it comes to the 1-bedroom and 2-bedroom units on offer.
But unlike the rest of Australia, New South Wales showed a decrease of 5.8 percent in sales of detached homes. Investors, who have so far been the winners at recent property auctions, prefer units and it shows.
Real estate analysts Residex say that Sydney: “...presents as being the market which is further along the correction phase than others and is definitely trending to positive growth. Our predictive models suggest it has the best potential in the medium term.”
The guarded confidence expressed by Residex is supported by the current mini-boom in property prices in Sydney’s West. Suburbs like Campbelltown and Fairfield have recently attracted so much buyer interest that prices have risen 20 percent in the first three months of 2009 when compared to the same three months in 2008.
You don’t have to go West to find examples of a recovery in the property market. The top price paid in Mosman so far this year has been $13.5 million for ‘Curraweena’, a residence in Clifton Gardens. Nine prestige house sales above $3 million have already taken place in Mosman since the beginning of 2009.
This isn’t to say it’s all roses at the prestige end of the garden. Figures from Australian Property Monitors figures show there are fewer new houses and apartments coming onto the market, particularly at the top end of the price scale.
To understand the present demand we need to look at the players competing in Sydney’s current property market. First, we have the seasoned property investors who always look for quality properties with good rental returns.
Next, we have the more generalised investors who’ve sold out of the tumbling share market and are also chasing something that gives them a return on their investment capital. Property beats wondering whether a dividend of any sort will be paid in 2009.
And increasingly joining the investors are the current tenants, including legions of first-home buyers with thousands of dollars in government grants, who want to escape the rent trap and acquire a home of their own.
First-home buyers, tenants and investors are mainly interested in properties that are priced below the $600,000 level. Properties over $1 million aren’t yet attracting a great deal of interest.
There’s another factor to consider - the spectre of unemployment. Now at a rate of 5.8 percent in NSW, the official outlook is for unemployment to increase to around 8 percent within 12 months.
Economists from investment bank JPMorgan have even forecast the unemployment rate to rise as high as 9 percent by the end of 2010. And in the second week of March the ANZ survey of combined print and online job ads dropped 10.4 percent, the biggest drop on record.
Unemployment, and shorter hours of work in general, will affect the ability of many people to participate in the real estate market. It will force sales of properties and reduce upwards pressure on rental rates.
In earlier times this would’ve been a more significant factor in determining whether the Sydney property market would recover or remain in the doldrums. But these are not like earlier times. They are times we’ve never seen before.
Real estate of all types has acquired a widespread level of desirability we’ve never experienced, for investors, tenants and owner-occupiers. Property affordability is high, while interest rates have reached historic lows.
Market activity is beginning to spread upwards from the lower end of the market into the middle price ranges. We believe that property will be the first sector of the Australian economy to recover from the global economic crisis, and as we see it, the beginnings of this recovery are already happening.
The end or the beginning?
Thu, 26 Feb 2009We’ve been bullish on Sydney property for several months, forecasting an investor-driven recovery that would see funds move from the sharemarket into the real estate market and have a positive impact on property values.
There are already encouraging signs that the predicted recovery is beginning, although only in certain segments of the market. Whether this is a signal that the bottom of the market has been reached is yet to be determined.
Nevertheless there are indications that Sydney property is about to begin a new upwards move in its historical cycle.
First, a bit of background. The total adjustment of 3.75 percent in Reserve Bank interest rates over the past five months represents a reduction of nearly 50 percent from the peak rate of 7.25 percent in March 2008.
Investors who function on borrowed money naturally respond to interest rate cuts as lower interest rates mean a better return on investment. But wait, as the man said on TV; there’s more.
Investors traditionally look for rental properties in the lower price range where capital growth can be achieved at the same time as consistent rental income. They look for low-maintenance properties in established areas served by public transport and other amenities including shops and schools.
Suddenly there’s a competing force out there, looking for exactly the same thing. First home buyers, inspired by lowering interest rates and government grants that can mean up to $21,000 off the cost of their property, are flooding onto the market.
Australian Bureau of Statistics figures show that first-home buyer activity has increased significantly. 14,154 contracts were signed in December, up 21.3 percent on November and showing the highest number since December 2001.
Young couples, with no children but possibly intending to have them in a few years, want to buy a home of their own and get out of paying rent. They aren’t looking for their ‘dream home’ just yet but realise that getting a foot into the property market now is a good way to build up some equity for their next purchase when they move up to something larger.
Auction clearance rates, languishing well below 50 percent in recent months, have skyrocketed upwards, hitting nearly 70 percent in mid-February. The majority of properties that have sold quickly (and at better than reserve prices) have been the objects of spirited bidding from both investors and first home buyers.
Statistics show a market that’s on the move upwards. There are some important factors that could still derail, or at least delay, the speed of this movement and in the interests of realistic analysis must be incorporated into any real estate strategy.
The first is the reluctance being demonstrated by Australia’s big four banks to release loan funds despite having been effectively bailed out of multi-billion dollar holes created by their own lax lending policies during the previous five or so years.
Until the institutional taps open up, the flow of funds to the market will be inadequate to sustain a widespread property market recovery.
The second area of concern is the anticipated rise in unemployment. Official figures estimate an additional 300,000 Australians will lose their jobs, meaning unemployment will rise above 7 percent for the first time in decades.
This will diminish the ability of many workers to pay rent, and remove a high percentage of them from the lists of homeowners as they sell properties to make ends meet.
However, rental rates are already stabilising and there is an ongoing strong demand for rental property of all types thanks to a massive reduction in new home construction over the past three years that shows no signs of ending.
The government is pressuring the banks to be more flexible in their lending practices, and in fact the big banks know that unless they respond to a demand for loan funds their own returns will suffer.
The middle and upper segments of the Sydney market are noticeably not yet participating in the current trend upwards. The multi-million dollar properties at the top of the market, from Palm Beach to the Eastern Suburbs, are being especially heavily discounted from their peak of a few years ago.
Houses in parts of Sydney’s western suburbs that were overbuilt without regard for transport infrastructure are also slow in recovering to anywhere near their temporarily high peak price levels, and this condition is likely to persist for some time.
Despite high auction clearance rates, the total number of properties sold since the start of 2009 is less than half the total sold in the same period of 2008. The market has some way to go before the crucial middle-market properties begin changing hands in large numbers.
Nevertheless, history shows that cycles generally begin at one end of the market and spread outwards to other segments. For investors there’s not much of an option to property.
The sharemarket has continued its downwards trend that began in 2007 and shows no signs of bottoming out. New lows are reached each week and the best the Australian market can do is to follow the leads from Wall Street as share prices flounder in a morass of uncertainty.
As for profits, the reporting season has brought only downgrades and greatly lowered expectations for most of Australia’s blue chips, with a staggering number of formerly ‘big names’ in the hands of administrators or receivers. Or in some cases, sold off to overseas investors at highly discounted rates.
For all the above reasons, Sydney property – in the right areas, retains our recommendation as the best place to place your investment funds.
There is an historic relationship between share values and Sydney property prices. The Sydney property market enjoyed an annual growth rate of nearly 20 percent for the two years following the share market slumps in 1987 and 2000 as investors shifted their funds into property.
As always, successful real estate investing is a matter of geography and timing. But as every student of the Sydney market knows, a recovery has to begin somewhere and it is not usually across the entire market.
Those investors who pick the beginning of the recovery are first in and get the best outcomes. It’s worth taking a serious look at the current market and making up your own mind.
Is this the end of the slump? Probably not yet. But is this the beginning of a new cycle? We’d be very surprised if it isn’t.
Conditions favour investors in today's market
Thu, 5 Feb 2009In previous articles we’ve spoken about the real estate market becoming more favourable for investors. These conditions have continued into the start of 2009.
Australian Property Monitors report that weekly rental prices for Sydney houses rose 16.9 percent in the twelve months to December 2008, and now average $450 per week. APM also noted that weekly rentals for home units had levelled out at $400 per week for the third consecutive quarter.
There are indications that the market is nearing rental price stability, largely as the result of deteriorating economic conditions and the probability of rising unemployment.
However, rental homes within 10 kilometres of the CBD are in short supply with fewer available now than there were three months previously, according to the Real Estate Institute of NSW.
The underlying factors of high demand for rental accommodation coupled with a severe downturn in building activity now serve to make real estate a much more attractive investment than options such as shares.
“Buy low; sell high” is always good in principle, but determining the “low” time in real estate isn’t always easy. However, consider this: Overall, Sydney house prices fell 4.2 percent in the past year. APM figures show the rate of fall slowed to just 0.7 per cent in the December quarter.
Some of the biggest price declines have understandably been in areas that enjoyed the highest rates of growth in the boom times, including the Lower North Shore and the Eastern Suburbs. At current prices the “low” of the cycle can’t be far away!
There is an interesting historic relationship between share values and Sydney property prices that supports this viewpoint. In recent times shares have twice experienced a sharp decline in value – in 1987 and 2000.
After each of these declines in share prices the Sydney property market enjoyed an annual growth rate of nearly 20 percent for the following two years. Investors considered their experiences in the share market, analysed their risks and returned to property for predictable returns and capital growth.
Over the past five years we’ve seen the Sydney market underperforming its long-term average rate of growth by a fairly large margin. There’s every reason to expect that when the next real estate price breakout happens Sydney property will surge.
When will the next surge begin? Interest rates have continued to fall and the Reserve Bank is forecast to reduce the prime rate further in the near future.
The reduced cost of servicing a property investment makes it increasingly attractive and stimulates demand. With stable market conditions, the timing to position yourself for the next surge couldn’t be better.
Choosing the right investment property for your own individual circumstances is a complex decision. Even at this early stage it pays to seek competent, professional advice on what you can afford to invest. Once you have a target acquisition price you can begin to consider properties on offer in the current marketplace.
One of the biggest questions investors face when looking at buying an investment property is: "Where should I buy?" There are no geographic restrictions on the location of an investment property, although many investors prefer to own something in an area with which they’re familiar.
Look at historical data for each location and consider the pattern of capital growth over the previous ten years. You’re seeking long-term capital growth that will add value to your investment over time.
The next question to answer is: “What should I buy?” Houses are a possible answer, although they generally deliver lower rates of return after expenses than apartments. Buying a newer apartment can also be advantageous to your taxation position because of depreciation entitlements.
Look at other properties in the area, consider the amenities available such as shopping and restaurants, and make sure that services including public transport and schools are accessible to the property.
Another question you’ll need to answer once you’ve purchased the property is: “How should it be managed?” You may choose to be your own property manager, in which case you’ll need to know how the professionals do it. Or, you can appoint a professional to look after the management for you.
All decisions regarding an investment property must be made unemotionally and based solely on the facts relating to it as an investment. Get the best advice, purchase the right property for you and you’ll discover what thousands of other property investors have learned – it’s the most dependable long-term investment you will ever make.
Renovate and appreciate in 2009
Wed, 21 Jan 2009If you’ve been thinking about doing some home renovations, this is going to be a great year to have them done. Interest rates are low and likely to get lower, while the general decline in homebuilding activity means there’s a lot more tradespeople available to do the work.
Even better is that the decline in fuel costs has flowed onto the costs of building materials including bricks, concrete and steel, so the raw ingredients for your renovations are likely to cost less than they would have a year ago.
Renovations let you get more enjoyment out of the home you know and love. If you renovate with some forward planning in mind you can even recover some or all of the costs when you eventually sell your home in a few years time.
One big danger associated with home renovations is the possibility of overcapitalizing your piece of real estate. Quite simply, if you spend too much on renovations you may never get it back.
The worst house on the best street in town could add value from renovation, while renovating the best house on the worst street will definitely risk overcapitalizing the property.
It’s not just tradespeople that have time on their hands either. If you want the services of an architect to design your renovation, they’re a lot more available (and affordable) than they were not long ago. It’s a buyer’s market and you’re in charge!
An architect can give you a ‘master plan’ that you can work to in stages, until you eventually have just the home you want without having to make a huge commitment all at one time.
Renovating can be as inclusive as you like. Think about your home and what you’ve always enjoyed about it. Start with the positives and be aware that you want to retain the features you like most. Now, you can think about what you want to change.
The great outdoors is a good place to start. Modern architecture trends towards a blending of outdoor and indoor areas. Buyers see the outdoor areas when they view a home for the first time, and first impressions really do count.
A complete garden makeover can update your whole house, and using Australian natives creates a beautiful garden that’s also drought-resistant and beautiful all year round. Landscape gardeners won’t have as much on their plate in 2009 so you may well be pleasantly surprised at how little it costs to renovate your own bit of outdoor Australia.
Extra bedrooms are another proven way to add value to a home. Modern homes have more and bigger bedrooms than those of twenty or thirty years ago. This means choosing between extra rooms on ground level or adding an extra level, which is a decision an architect can help you make.
According to renovation specialists Archicentre, these are the’ Top 10’ improvements, other than the garden, that you can do to your home:
Adding a deck
An ensuite bathroom
Walk-in wardrobes
Replacing kitchen cupboards with drawers
Frameless shower screens in bathrooms
More garage storage
A large island bench in the kitchen
Adding a storeroom
Building a built-in barbecue
A pergola
This is in no particular order, but it’s a good ‘shopping list’ to think about while you’re outlining your renovation project.
There’s also things like an attic conversion that adds usable space to the home without the need to build an extension. Pull-down step ladders give access to space that’s currently unused, and they don’t take up any floor space when they’re retracted.
The most important consideration of all is your lifestyle. Make your home even more enjoyable for you and your family. If you place yourself in the position of a prospective purchaser, you’ll also have a more realistic guide to the renovations that give you pleasure while adding buyer appeal to the property.
A big rule is to not go overboard on anything. Whether it’s the colour of the paint or the style of the light fittings, avoid eccentricities. Stick to the basics, or be prepared to change them when the time arrives to put your home on the market.
Work to a plan. Don’t do a bit here and a bit there. Have an integrated design for your renovated home and work towards it. You may not be able to do everything at once, but have a plan for what you’re going to wind up with.
If you’re not ready to downsize, this is the ideal time to renovate your home. It’s the best way to improve your lifestyle while ensuring you get your money back when you sell the property.
Buy now? Sell now? Why not?
Wed, 17 Dec 2008As 2008 draws to a close, who could have imagined the breadth and depth of the economic disaster now upon the world?
Who would be game to predict the after effects of some of the world’s major financial institutions collapsing, ‘trusted’ funds suddenly finding that billions of dollars have gone missing, and the value of commodities like copper and zinc finding lows not seen in decades?
It’s taken us all by surprise and we must accept that it’s not over yet. 2009 will be a challenging year, with rising unemployment and a decreasing GNP for Australia. And of course, we’re just part of a world in which everyone is facing the same decline in their economic indicators.
The first thing to say is that property is not immune. The Real Estate Institute of Australia’s September quarter median prices showed a downturn in demand on residential property in all Australian capital cities.
It is however interesting to note that Sydney continues to have the most expensive residential property, with a median price of $529,000.
Is the downturn nearing an end? Probably not but there are encouraging signs of an upturn in the making. One is the Reserve Bank’s recent lowering of the cash rate to 4.25 %, and analysts agree it could go even lower early in the new year.
Figures from Australia’s largest mortgage broker, AFG, showed that NSW first home buyers are returning to the market. November's loan approvals were up 113% on August. In the October quarter Sydney house prices gained 0.51 per cent; not a huge rise but at least a step in the right direction.
"The property market has moved through the bottom of its cycle," said RP Data's head of research, Tim Lawless.
Rory Robertson of Macquarie Group said: "Most households are more influenced by mortgage rates than by equity prices, which is the big trauma at the moment." Mortgage rates are dropping and property prices are at least stabilising, but that doesn’t mean the property market’s pain is all over.
But the value of all capital items is falling, from shares to property to structured investment funds. You want security; you want capital gains. Where do you put your money in times like these?
Property prices have generally declined. This is to be expected, even in desirable areas like the lower north shore. "Suburbs that have risen the most (in value) have the most to fall," says Liam O'Hara, senior economist at Australian Property Monitors. "If the economy starts to tank it's the wealthy areas . . . where homeowners are going to take the biggest hit."
But Australian property values fell just 0.8% over the year to October, 2008. In the same period the drop in the value of the typical superannuation fund is something like 39%.
Median Sydney house values have only dropped 2.7% in the past 12 months, while the share market has dropped 40%.
It’s also an interesting time at the real estate auctions. There’s always a fall off of interest at the end of the year, but this year is producing decreased clearance percentage figures, probably because there is a fairly large number of properties on the market while the buyers are holding back for further price drops.
While supply is greater than demand it’s always a good time to buy. It’s also a good time for realistic vendors to sell their property because the buyers in market are serious and not just tyre-kickers.
Prices could drop another 5% or a bit more overall, but choice properties are already being snapped up and investors are actively looking for properties that will provide them with good returns. In fact, a property on the market that doesn’t drop its price for a quick sale could be the best one to consider.
There are some other pieces of good news. ABS statistics showed that the number of home loans for owner-occupied housing rose 1.3% in October, which was the highest level all year.
We must now return to a few basics. In the greater Sydney area sufficient new housing isn’t being constructed to meet the demand caused by immigration and population growth. Buyers are also returning to the market which will increase the demand for housing.
Our investment choices are becoming restricted. Promises of high interest and big returns from hedge funds and other structured investment vehicles have proved illusory. The value of shares listed on the ASX has declined 40% in the last year and their recovery to previous values may take years, if they can acquire the capital they need to survive.
There are several properties now on the market – quality properties with the most desirable features, which are being sold because their owners are financially stressed. The cashed-up prospects attracted to this market are seeking value and genuinely want to make a purchase.
We believe this is one of the best opportunities to buy or sell a quality property. This is a selective market, not a mass market.
There are those who believe economic conditions have never been better. Interest rates are low, property prices are affordable, rental rates are strong, and real estate offers investors an unequalled opportunity to place their funds with low risk and good returns.
Rare times indeed. But no better time to be a vendor or purchaser in these market conditions that we’ve never seen before.
Forecasting without fear - almost
Sat, 15 Nov 2008There’s probably never been a more difficult time to produce an economic forecast. With variables that include the Reserve Bank’s future interest rates, the price of petrol and the financial performance of companies listed on the Australian Stock Exchange – let alone the murky depths of global financial markets, accurate forecasting would appear impossible.
Nevertheless, it’s worth giving it a try. Those who correctly anticipate and act on fiscal developments in the coming months will benefit from unparalleled investment opportunities that exist right now, even if they’re difficult to spot in all the clutter.
Prices of Sydney real estate have become more affordable. The median house price is now 6.5 per cent below its March 2004 peak of $568,500. One indication that the bottom is rapidly approaching is that the decline in Sydney’s troubled west and south-west was less than the overall Sydney decline of 3.1 per cent in the past twelve months.
First home buyers are receiving even more incentives to purchase real estate. The NSW Government recently increased its first home owner's grant for those buying new dwellings by $3000, bringing the total of grants for eligible first home buyers to $24,000. At the very least, first home buyers receive $14,000 from the Commonwealth Government for an existing home after the grant level was doubled in October.
Interest rates are falling and there’s an expectation of a further reduction in the RBA’s official rate when the bank’s board meets on December 2. Investors whose fingers were burnt by rapid rises in interest rates in the previous three years now have the option of fixing their interest rates at relatively lower levels, thus removing the concerns caused by unexpected increases.
To quantify the relief property owners have already received, since September the interest cost of a $350,000 variable rate investment loan has been reduced by nearly $550 per month. This reduction could become even greater if the RBA cuts its rates by another 0.75 points, bringing the cash rate down to a historic low of around 4% next year.
A continuing situation of growth in demand for housing and lack of a corresponding growth in supply will inevitably drive prices upwards. Craig James, a financial analyst with Commonwealth Securities Ltd., cautioned that the real estate market could turn around very quickly. "Not only is population growth the fastest in 20 years”, he said, “but the rental market is super-tight and there's an under-supply of new homes."
There are always countervailing factors that could inhibit such a turnaround. Australia’s growth rates are linked with those of our overseas trading partners, especially China’s. As this regional powerhouse economy slows it will certainly have an effect on our own.
If Australia’s economic growth continues to decline and this translates into higher unemployment it will impact upon the demand for property but the Commonwealth Government appears committed to providing whatever fiscal stimulus and monetary policies are needed to stave off recessionary conditions.
Most real estate analysts agree that the Sydney property market is still over-inflated. However, there is no general expectation that prices will experience any further significant reductions. Because supply of new housing stock continues to fail to meet demand, a ‘floor’ has developed that seems likely to represent the new level in the graph of historically-rising real estate prices over decades.
Our view of Sydney real estate is that prices will continue to stabilise over the next six months, perhaps with further modest decreases but with no dramatic declines. Interest rates will continue to fall and demand for rental accommodation will remain at high levels.
Investment options including shares and financial products will remain volatile for at least the next twelve months due to continuing uncertain economic conditions, and investors will return to property where they can generate capital gains and rental income with renewed confidence.
Spring projects around your house
Thu, 16 Oct 2008Ah, spring! The days get longer and the weather gets warmer. This spring do more than just a tidy-up. Here are some projects that every homeowner should do once a year but often doesn’t, and when you’ve finished this list your home will be a much more enjoyable, livable place.
Clean those ceiling light fittings
Look up and count the dead insects in those ceiling fittings, not to mention the dust that collects in them too. For this job you’ll need a sturdy stepladder and a good sense of balance. Take all the glass elements down and wash them before replacing them. Wipe down all the metal components with a soft damp cloth. While you’re doing this, replace any burnt-out globes or fluorescent tubes. Your home will be brighter and look a lot better.
Clean the air conditioning intake filters
Often overlooked, the filters on the air intakes of ducted air conditioning systems can become so clogged with airborne dust they cause the unit to shut down. Most filters can be easily removed and taken outside for a thorough cleaning with a garden hose. Dry them thoroughly before replacing them and using the system again.
The great battery changeover
Go through your home and make a list of everything that has a battery, together with the battery sizes and quantities. You’ll be surprised at how many there are. For starters there’s the doorbell, TV remotes, wall clocks, smoke alarms, backup batteries in alarm clocks, torches and lanterns. Unless you know you’ve just changed a battery in the past six months, replace it.
Clean out the gutters
It’s never fun but it’s best to beat the bushfire season. Clear all your gutters of debris and check for any corrosion or loose fasteners. Use the garden hose to flush out downspouts. Be careful when clearing birds nests or wasp nests; the former can house bird lice and the latter can be very painful.
Clean the kitchen exhaust hood and filter
Most kitchens have a ventilation hood over the stove, and these can trap so much cooking grease that the fan’s efficiency is affected. Remove the filters and wash them thoroughly in a grease-cutting detergent. While you’re there, inspect the light globes and replace any that have burned out.
Check your water heater
Operate the relief valve for at least ten seconds to flush out anything that’s built up in there. Check around the base of the heater for corrosion or leaks. Whether gas or electric, every water heater has a label that tells you the date it was manufactured. If your heater is more than seven years old chances are it needs to have its protective anode replaced, which is a job for your plumber.
Open every window in your home
Most homes have windows that are never opened, and others that aren’t opened except at certain times of the year. Over time these can become stiff or even impossible to open. Go thorough your home, open every window and clean thoroughly around the frame. Oil any hinges and ensure handles turn freely. Vacuum dirt and dead insects from all slides and drainage channels, and while you’re doing this you might as well clean the glass too.
Residential property is still a great investment
Mon, 25 Aug 2008We're now two months into a new financial year and hearing quite a range of opinions about where to invest one’s savings. Many advisors have of late been spruiking cash because they’ve seen the share market plummet and some of the heat go out of the property market.
However, residential property in good locations has always been a more secure buffer against the volatility of the share market than keeping wealth in cash, as well as being a much safer investment than speculating in risky structured investment vehicles like Contracts for Difference or trading futures or currencies.
If prices have softened somewhat, and we can assure you that in places such as the lower North Shore, the Inner West and the Eastern Suburbs there aren’t many properties on the market that will bring less than they did two or three years ago, it only means that we’ve entered a period of stability which presents buying opportunities that weren’t as easy to discern in 2006-2007.
A recent study by property market experts RP Data & Rismark International concluded that Australia’s residential property values had actually held steady during the first five months of 2008. During the same period they point out that the S&P/ASX 200 fell by 10.8%.
Interest rates now appear to have peaked and the Reserve Bank’s sending signals that indicate at least one rate cut before the end of the year. The minutes from their meeting August 5 state: "Less restrictive conditions could soon be called for - otherwise the risk of a deeper and more persistent slowing in the economy would increase. On these considerations, a case could be made for an early reduction in the cash rate."
Even more reassuring for both investors and owner-occupiers considering a property acquisition was the response from the National Australia Bank that it would reduce interest rates by one-quarter percent if the RBA led the way. The ANZ followed suit a couple of days later.
Speaking of investors, they’ll look back on 2008-2009 as the year in which Australia’s immigration reached record levels above 190,000 while according to the ANZ Bank the shortage of housing stock neared 200,000 dwellings. No wonder rental vacancy rates were just 1.5% in capital cities, and that meant landlords had the ability to source quality tenants at good rent levels.
They’ll also remember 2008-2009 as the year petrol prices hit record highs then fell back a little. Not back to where they were a year ago, but certainly a solid retracement from a graph that had indicated $2 a litre by Christmas.
The forces that drive the prices of everything from housing to petrol in one direction can turn just as quickly in the opposite direction, and it’s those who catch the first wave of the change that benefit most.
So, how long will this period of opportunity last? Economist Dr Alex Joiner, of ANZ Economics and Markets Research, quoted on August 9 in the Sydney Morning Herald, said: “We see the next six to 12 months as a period of softness in Sydney - and nationally - but the overall fundamentals will continue to tighten."
As we see it the fundamentals of a strengthening property market are already in place. Price growth will follow from an irresistible combination of growing demand, assisted by lowering interest rates, and restricted supply of housing stock.
Property - a look ahead
Mon, 28 Jul 2008House prices slow as rates steady
Sat, 7 Jun 2008