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Market Comment

Sydney property to see further growth as units outperform houses

Thu, 17 Aug 2017
July 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 2017

The 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 2017

It’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 2017

The 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 2017

It 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 2017
It’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 2017
The 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 2016

The 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 2016


The ‘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 2016


There’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 2016
A 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 2016
The 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 2016
A 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 2016
A 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 2016
Housing 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 2016
Some 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 2016

The 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 2016

As 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 2016

By 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 2015

As 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 2015

The 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 2015

There 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 2015
 
More 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 2015

The 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 2015

Predicting 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 2015

Property 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 2015
 
While 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 2015


Sydney’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 2015
 
When 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 2015
  
A 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 2015
 
Just 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 2014

At 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 2014
 
Christmas 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 2014


Many 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 2014


For 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 2014
 
Even 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 2014


When 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 2014
Interesting 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 2014
 
Geoffrey 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
‘Sydney leads way as property fires up after holiday break,’ News.com.au, 5 May 2014
‘RBA Keeps Promise, Holds Rates’, Loan Market media release, 6 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 2014


The 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 2014

The 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 2014


New 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 2014


A 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 2013
As 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 2013
The 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 2013

The 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 2013

The 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 2013
The 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 2013

Housing 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 2013

A 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 2013

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. 
 
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 2013

The 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 2013
Despite 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 2013
There 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 2013
Although 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 2012
The 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 2012
There 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 2012
The 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 2012
Economists 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 2012
There 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 2012
The 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 2012
The 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 2012
At 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 2012
Sydney 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 2012
The first quarter of 2012 ends without a hoped-for reduction in interest rates from the Reserve Bank of Australia. While the cash rate lingers at a reasonably low 4.25%, RBA Governor Glenn Stevens seems satisfied with things as they are.
 
On 6 March Mr Stevens said: “With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy remained appropriate for the moment”.
 
He noted that although the world economy will grow at a below-trend pace this year, this does not mean a deep downturn is occurring. The US economy is expanding “moderately” and equally modest is the slowing of growth in China.
 
In a near repeat of his comments in February, he added that if demand conditions weakened materially, the inflation outlook would provide scope for an easing of monetary policy.
 
Housing affordability improves

Supporting the RBA’s stand, an article by Daniel Wills in the Adelaide Advertiser pointed out that housing affordability was improving in all states except South Australia.
 
“In the December quarter, required monthly loan repayments on a home in Adelaide increased by $97 to $2742. That compares with cuts in required payments in Brisbane ($233), Perth ($169), Sydney ($155) and Melbourne ($75).
 
“Housing Industry Association senior economist Andrew Harvey said the national improvement in affordability was driven by interest rate cuts and wage increases.”
 
As a sidebar to the interest rates issue, there are growing indications that the Big Four banks are unlikely to pass on the full amount of any interest rate cut even if the RBA finally does lop off 25 basis points or so.
 
An AAP release appearing in the Financial Review quoted Greg Evans, The Australian Chamber of Commerce and Industry director of economics and industry policy, who outlined his concerns.
 
“There are fears the big banks won't pass on the reduction in full to their customers as they face increased funding costs in overseas capital raising markets.
 
"There may be cost of funds issues but overall it reflects that banks are more concerned about how they appear to analysts and how they appear to shareholders," Mr Evans said.
 
"They are less concerned, because of the lack of competitive pressures, how they appear to their customers and borrowers."
 
Auction clearance rates steady

Most Australian capital cities experienced falls in real estate values during 2011. An interest rate cut, it is felt, will be the stimulus to get the markets back into positive territory. Sydney values, however, remained virtually unchanged.
 
Louis Christopher, managing director of SQM Research, told business news website Smart Company that the Sydney auction clearance rates have remained relatively steady although the number of listings is smaller than at this time last year.
 
He said that most of the activity is being recorded in the lower-to-mid range property areas, while the prestige end of the housing market was noticeably slower.
 
“We’re seeing activity still in the middle area, and the lower area. They’re doing better due to the fact they’re more affordable.”
 
A Business Day article on 16 March explored the situation at the top end of the market.
 
It noted that property analysts RP Data recorded 225 suburbs with median property values in excess of $1 million in 2010. However, by the end of 2011 that figure had declined to 194.
 
In 2011 seven of the top 10 most expensive suburbs in Australia were in Sydney, only two were in Melbourne, and one was in Perth.
 
RP Data analyst Cameron Kusher said that a combination of factors was behind last year’s decline, including “debt shy households and a slowing jobs market.”
 
‘‘It’s concentrated more in top-tier suburbs because since the financial crisis people aren’t getting the same sort of bonuses in the banking and finance sector as they used to before 2008,’’ Mr Kusher told Business Day.
 
However, showing that every cloud does indeed have a silver lining, real estate portal RealestateVIEW.com.au surveyed 1475 consumers across Australia at the end of February.
 
The portal’s general manager Petra Sprekos said the results of the survey showed that more people were looking to buy properties priced above $1 million.
 
She also said that the percentage of buyers in the top end of the market had more than tripled, rising to 4.0 per cent in 2012 from 1.2 per cent in 2011, suggesting that buyers wanted to take advantage of cooling prices for higher-quality properties.
 
Signs of increasing buyer activity

Writing in the Sydney Morning Herald, on 18 March Dr Andrew Wilson, senior economist for Australian Property Monitors, said there were encouraging signs of increased buyer activity in the Sydney Market.
 
“Buyer sentiment has improved since the end of 2011 and although clearance rates are still below the results recorded at the same time last year, such comparisons are problematic as market conditions have changed since then.”
 
Dr Wilson points out that the lower number of properties listed at weekend auctions could be the result of vendors preferring to sell by private treaty.
 
He also noted that in January this year there were 15,009 owner-occupied home loans approved – the second-highest monthly number since October 2009 and 16.5% higher than the number for January last year.
 
Another indication that things are looking up comes from another long-term observer of Sydney property who has come up with his own lead indicator of the housing market.
 
John Edwards, CEO and founder of Residex, says that sales of his company’s Residex Predictions Reports give him a good indication of future real estate market activity.
 
“Residex Predictions Reports are purchased once an investor has made a decision to look for property to buy. This is the starting point,” he says.
 
 “The changing pattern in report sales can give us an insight as to what we might expect to occur in about six to nine months time, not what is currently happening.”
 
Mr Edwards believes that investor activity is a lead indicator in housing markets because “...investors have a tendency to follow markets more closely and be more opportunistic than general home buyers.”
 
Residex report sales have dramatically increased since mid-2011, indicating to Mr Edwards that the housing market is about to start moving forward as activity increases.
 
His lead indicator (Prediction Report Sales Index) suggests we are about three plus months away from any Australia-wide pickup.
 
Sources:

‘Property sales steady as buyers aim at the affordable end of the market,’ Patrick Gifford, Smart Company, 5 March 2012
 
‘Statement by Glenn Stevens, Governor: Monetary Policy Decision,’ Reserve Bank of Australia Media Release, 6 March 2012
 
‘Predictions lead market performance,’ John Edwards, Residex, 15 March 2012
 
‘Signs of life emerge in Sydney housing market,’ Dr Andrew Wilson, Domain.com.au, 29 February 2012
 
‘Repayment cost rises defy trend,’ by Daniel Wills, The Adelaide Advertiser, 2 March 2012
 
‘Real estate's top end doing it tough,’ Business Day, 16 March 2012
 
‘House sales fall as buyers dry up, according to RP Data,’ Michelle Hele, The Courier-Mail, 7 March 2012
 
‘Homebuyers dropping out of market,’ AAP Release on News.com.au, 8 March 2012
 
‘Banks should pass rate cuts fully: ACCI,’ Australian Financial Review, 6 February 2012
 


Expect rates cut, rising prices for Sydney property

Mon, 20 Feb 2012
The 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 2012
The 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 2011
As 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 2011
As 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 2011
As 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 2011
An 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 2011
The 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 2011
Words 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 2011

As 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 2011

The 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 2011

Recent 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 2011

NSW 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&r