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.
‘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 ConspiracyThu, 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.
‘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 pricesTue, 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.
‘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 UpTue, 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.
‘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.”
‘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 dollarThu, 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.”
‘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 UnderwayMon, 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.
‘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 acceleratesMon, 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.
‘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 confidenceMon, 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.”
‘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 PropertyFri, 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.
‘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 propertySat, 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.
‘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 presentWed, 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."
‘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 PropertySat, 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.”
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."
‘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 ResurgenceThu, 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.
‘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 SpringMon, 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.
‘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 RebirthFri, 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.
‘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 PointWed, 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.
‘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 CutThu, 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.
• ‘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 CutFri, 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.
‘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 GrowingTue, 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.
‘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 ImminentMon, 19 Mar 2012
Expect rates cut, rising prices for Sydney propertyMon, 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”.
‘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 2012Fri, 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.’
‘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 EstateTue, 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.
‘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 2012Wed, 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 2012Tue, 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.
• 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.
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.
‘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 crashSat, 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.”
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.
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.”
‘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 SignalsFri, 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.
‘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.
‘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 longThu, 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.”
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 phaseSat, 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’ll close with his quote from realestate.com earlier in this article: “This is the time to get set for when the next stage of the property cycle moves on, before everyone else gets in.”
Sydney property is still well-pricedSat, 26 Mar 2011
For those viewing the Sydney property market for the first time it can seem that prices are high. And indeed they are, compared to those in major regional centres or even other capital cities such as Adelaide or Brisbane.
Median prices in Sydney remain the highest in the nation; houses are selling at a median price of $588,250 and units are selling at a median price of $452,925. (“Natural disasters dampen national sales in January,” Domain.com, 7 March 2011)
But a look at historical pricing shows that the present price levels of quality Sydney real estate represent genuine value. When demand softens, prices grow increasingly attractive and today’s prices become tomorrow’s bargains.
Sydney has always had its own market parameters, its own geographic price structure, and of course its own price levels. What’s high for Hobart is usually not very high for Sydney.
First, let’s consider the big question. Is Australian real estate overpriced? Prices are really determined by what purchasers are willing to pay, and there has obviously been a slowdown in the Sydney property market with fewer sales at auctions in February and early March.
In January Sydney home values recorded their first quarterly fall since December 2008, with market values down 1.4% per cent over the three months to the end of January. (“Natural disasters dampen national sales in January,” Domain.com, 7 March 2011).
However, in the same article, it was noted that the weak January result was based on a lower-than-normal volume of sales. The market is usually quiet during January and this year real estate buying and selling activity was also affected by uncertainty following the spate of natural disasters in Australia during the month.
The market was further unsettled in February and March when the tragic Christchurch earthquake was followed closely by the unprecedented disaster that befell Japan when a massive earthquake was followed by a deadly Tsunami and fears of nuclear plant meltdowns.
Stronger market ahead
Dr Andrew Wilson is the senior economist for Fairfax-owned Australian Property Monitors. Writing in the Sydney Morning Herald, he forecasts increased buyer activity for the Sydney housing market following a fairly quiet summer.
He points out that the Reserve Bank raised interest rates seven times between October 2009 and November 2010. As well, the Sydney median house price grew by more than 20% per cent from the middle of 2009 to the end of 2010, and housing affordability declined. But conditions now are conducive to a stronger property market in the rest of 2011.
“Economic news continues to be positive. Interest rates appear to be on hold for the short term. Incomes are growing at the fastest rate in two years. The unemployment rate is low and declining. Data also indicates credit card and mortgage debt levels are being reduced.
“Although strong demand was generated by first-home buyers and investors through the lower-price sections of the market last year, expect activity this year to emerge in the mid to upper price levels, particularly in the north shore, eastern suburbs and northern beaches areas.” (“Market set to heat up as weather cools down,” Sydney Morning Herald, 5 March 2011)
Interest rates, that prime determinant of real estate activity, seem to be on hold for the present time. Three of the four big banks have said they expect the RBA will leave interest rates unchanged until the second half of the year.
The cash rate has now held steady at 4.75% since November, and Westpac’s CEO Gail Kelly told ABC television that rates will be on hold for a while. National Australia Bank has forecast the next rate rise to be a 25 basis point increase in the RBA’s cash rate to 5.00% in August.
ANZ’s head of Australian macro-economics, Katie Dean, expects the next interest rate rise in July, noting that the RBA would only act sooner if there are large gains in employment and a strong rebound in retail sales over the next few months. (‘Banks push back rate expectations: second half of the year’, AAP quoted on Domain.com, 8 March 2011)
In the wake of the Japanese disaster, some analysts are already talking about a rate cut of 0.25% in the near future. This would certainly stimulate the anticipated recovery in the Sydney property market.
Prices aren’t unrealistic
So, are Sydney prices really too high? Even the governor of the Reserve Bank thinks housing prices are affordable. RBA governor Glenn Stevens told a business event in London that the ratio between home-buyers' incomes and house prices in Australia is not exceptional.
He said that domestic property values have not increased much in the past year and he is not worried by the present level of house prices in Australia.
"It's quite often quoted - very high ratios of price to income for Australia. But if you get the broadest measures - country-wide price and a country-wide measure of income - the ratio is about 4.5, and it hasn't moved much either way for 10 years.” (“House prices not exceptional”, ABC News online, 10 March 2011)
New buyer clusters are beginning to emerge in Sydney, stimulated by lower priced housing in the outer suburbs.
“According to figures compiled by Residex, 40 suburbs across the west and inner west have recorded a top sale price for a house, unit or block of land since January 1 last year, as have almost a dozen south-western suburbs stretching towards Campbelltown.” (“Sydney property prices hit new record,” The Sunday Telegraph, 13 March 2011)
This quite simply means that buyers, in many cases those who’ve found their savings couldn’t rise quickly enough to reach the level of a deposit on a home in areas close to the CBD, have started looking further afield.
"Affordability means we're moving further out, but we're pushing up costs and creating record prices as we move out," Residex managing director John Edwards concluded.”
Investors, of course, are motivated by considerations beyond those of the first-home buyer, and for them today’s conditions present a number of opportunities.
RP Data’s research analyst Cameron Kusher says that housing affordability is a problem for many would-be buyers who are not in a position to pay the current prices.
"We are expecting with so few first homebuyers active in the market, and obviously affordability an issue as well, that we'll start to see some increases in rental rates," he told ABC News.
"So you may see a return of investors at some point this year, but it'll be a different type of investor. It'll be those chasing rental return rather than those capital gains." (‘Property sales reach 10-year low,’ ABC News, 9 March 2011)
In the same article Housing Industry Association chief economist Harley Dale was quoted, saying that the current undersupply of homes in Australia is set to worsen.
"The signal we're getting from a weak housing finance figure released today is that we're going to see further short-term pressure on rents and on housing affordability as a result of Australia continuing to build considerably fewer homes than we need to," he said.
Rents will keep rising
An interesting report by James Kirby, writing on Domain.com, again posed the question: Are Australian homes really overvalued? He referred to an article in The Economist, a highly regarded UK publication.
“It's quite a call - our house prices are more overvalued than anywhere you'd like to name - Shanghai, Sweden or Switzerland. According to The Economist Australia's home prices are 56.4% overvalued. And that's comfortably above the second-highest figure of 53.7% in Hong Kong.”
But then Kirby points out that The Economist calculated its list of overvalued housing markets based on the ratio of home prices to rents in 20 economies.
“You could simply say Australia tops The Economist list because our average rents are too low - rental yields have remained unchanged at about 4% for many years, though they are beginning to rise.” (“Don't believe the reports on Australian house values,” Domain.com, 6 March 2011)
That’s more good news for investors who, according to Kirby, have been waiting in the wings for some time: “Investors as a proportion of the market have remained unchanged since the GFC while the housing shortage remains virtually static.”
Lending weight to the argument that rents will rise, and keep on rising, is a statement made by Wayne Stewart, President of the Real Estate Institute of NSW.
"Unfortunately, without substantive reform to property investment controls in NSW, the state will continue to suffer from an accommodation availability crisis for the foreseeable future.
"In addition, the new amendments to the Residential Tenancy Act passed by the Keneally government will only result in a further decline in available properties coupled with skyrocketing rents. (“Sydney rental market to tighten,” Domain.com, 4 March 2011)
History will show that governments change quickly but shortages of rental properties endure. This will ultimately lead to higher rents and better returns for investors.
Although the focus now is on improving returns on investment through increased rental rates, it’s only a matter of time before the ongoing shortage of accommodation in Sydney, where demand continues to outstrip supply, delivers investors the benefits of substantial medium- and long-term capital gains as well.
The crystal ball begins to clearWed, 2 Mar 2011
A muddied start to the yearTue, 25 Jan 2011
The full effects of the deadly floods that beset Queensland, Victoria and NSW in the first month of 2011 are as yet impossible to determine, but a massive economic impact is certain.
A lot of capital will be required to rebuild flood-damaged homes, office buildings, roads, bridges and other infrastructure – figures of $30 billion have already appeared in the media and are likely to be conservative.
The funds to pay for this will have to come from somewhere and their redeployment will mean a risk of inflation. What the housing market doesn’t need right now is a rise in inflation that could make the RBA think about raising interest rates.
All these economic disruptions will contribute to a further slowing of the Sydney property market, at least for the first half of 2011. The slowdown, which was already underway, began with the last interest rate rise on Melbourne Cup Day 2010 and had started to show up in such statistics as the November fall of 0.2% in sales of new homes.
Housing Industry Association figures also showed that sales of new homes were down 11% in the three months to November compared to the same period in 2009. (‘Sales for new homes fall a notch’, The Age, 6 January 2011)
Signs of weakness
Until the floods, interest rates seemed poised for a fairly long period of stability. In that same article the HIA’s chief economist, Dr Harley Dale told The Age that he expected inflation would stay in check, taking the pressure off the Reserve Bank for any further interest rate rises.
''Obviously a period of interest rate stability is going to be beneficial to the housing sector and might hopefully prevent a weak 2011 from becoming even weaker.
''But I suspect we will probably see some renewed weakness in housing indicators over the next three to six months as we see the lag impact of the November rate hikes, and as we also continue to struggle with an environment where finance is very hard to obtain,'' he said.
However, there were some encouraging signs at the close of 2010. The last two Sydney auction weeks of the year produced improved clearance rates of 56% on a calendar with a record 2150 properties on offer although there were some suggestions keen vendors had priced their properties with greater flexibility.
Data from Australian Property Monitors showed that Sydney's median house price grew 10% per cent in the year to September 30, but fell 0.5% during the September quarter to $627,124. APM remained optimistic about 2011: ''It is expected that Sydney's median house price will rise well above $650,000 during 2011 and extend the price gap between other capitals.''
In the same article, Louis Christopher, managing director of SQM Research, said that Sydney would outperform other cities but could experience zero price growth or even a fall of up to 4%.
''The market is turning softer,'' he said. ''We still haven't seen the full impact of the interest rate rise in November.''
''We believe that based on these numbers, house prices are likely to fall for all capital cities except probably Hobart and perhaps Sydney for at least the first half of the year.” (‘Last minute vendors beat the calendar and predictions of a selling slump’, Domain, 8 January 2011)
Building approvals stay down
Property developers were already experiencing a slowdown of their own by the end of 2010. Data from the Australian Bureau of Statistics showed the number of approvals to build or renovate houses and apartments fell by around 4% in November, contributing to a 10% decline for the year.
ANZ Bank’s head of property research Paul Braddick told the ABC that interest rates have been the biggest factor behind the downturn in building approvals: "In the past and with rising interest rates developers tend to have less incentive to build because prices have flattened as well."
However Mr Braddick said conditions will improve due to growing demand over the next couple of years.
"But in the more medium-term, I think this is adding to the shortage of dwellings that we are seeing in Australia, so at some point in 2012 or 2013 we'll have to see dwelling approvals pick back up again," he said. (‘Bleak year ahead for property developers’, ABC Online, 6 January 2011)
In a report from Canada’s Scotiabank economist Adrienne Warren said she expected higher interest rates and a slower real estate market for Australia in 2011.
“We anticipate a further slowing in sales and price appreciation in 2011. While Australia’s close trade ties with Asia and resource wealth will continue to underpin a solid pace of domestic activity, higher interest rates will worsen already strained affordability.
“The RBA has recently taken pause, but we expect the resumption of a gradual policy tightening path in 2011, with short-term rates rising an additional 75 basis points by year-end.” (‘Global Real Estate Trends’, Scotiabank, 23 December 2010)
Echoing these sentiments, Former RBA staffer and now HSBC chief economist Paul Bloxham said that the RBA will hold off until the second quarter of 2011 before raising rates, saying he still expects three 25 basis-point rises in the year.
He told the Herald Sun’s Rachel Hewitt that the mining boom will take a lot of spare capacity out of the economy and "...at the same time you can't have a boom in consumption.
"You can't have all these things growing at once, because it will put too much pressure on the economy and inflate the economy - and the way we can deal with that is by managing demand," he said. (‘Interest rate hikes are on the way - it's just a matter of when,’ Herald Sun, 29 December 2010)
RP Data’s national research director Tim Lawless said the RBA’s rate rises of 1.75 percentage points since October 2009 have combined with a ‘wind-down in the market cycle in recent months’ to reduce market activity.
"For 2011, we are likely to see vendor expectations change as slower market conditions come into play," he told News.com.
"Houses will take longer to sell and buyers will be negotiating much harder than they were in 2009."
On the positive side for investors, he said rental rates will continue their rising trend in 2011.
"Over 2011 it is likely that rental growth will at least move back to the historic average of between 6% and 8% on the year," Mr Lawless said.
Australian Property Monitors senior economist Andrew Wilson supported this view, saying strong demand and price growth should resume by mid-year.
"Property prices are anticipated to rise nationally for the year by a modest 3% with Sydney and Perth expected to record the strongest performances," he said.
"Investors will emerge in the marketplace once the floor of the current price cycle becomes apparent, recognising the potential for high relative yields and capital growth." (‘Brakes put on 2011 property prices,’ news.com.au ‘Property,’ 27 December 2010)
In an AAP report, CommSec economist Savanth Sebastian said that increasing rental demand and rising wages would help fuel steady growth in house prices, although demand will be subdued in the first half of 2011 before accelerating in the last two quarters.
‘‘Given the interest rate hikes we’ve had, it’s likely to be a period of consolidation. Later in 2011, rental growth will be a major driver in attracting investors.’’
He expects annual growth of between 5% and 8% in 2011. ‘‘The only caveat is interest rises.’’ (‘Slower house price growth tipped for next year,’ Domain.com, 17 December 2010)
Long term outlook good
Taking a longer term view, the International Monetary Fund (IMF) says that Australia’s house prices could be overvalued by as much as 10% but strong population growth and rising income will continue to support the housing market.
A staff analysis by the IMF found a link between episodes when Australia has a strong terms of trade - the relative performance of exports to imports - and rising house prices.
"The current historically high terms of trade are expected to be long-lasting,'' the report's authors Patrizia Tumbarello and Shengzu Wong said.
"Strong population growth and high real income growth in the wake of record-high commodity prices this year will continue to support house prices.''
The report also said that an insufficient supply of housing is also placing ongoing pressure on house prices.
"The increasing scarcity of land in main urban centres in Australia is an important factor. The fact that such a high proportion of Australia's population lives in two major cities tends to drive up average house prices.'' (‘Overvalued Australian house prices to stay,’ AAP report on News.com, 16 December 2010)
At the year’s end the NSW government released a new ‘master plan’ for Sydney that says the city will have to fit in another 770,000 more homes by 2036. This equates to some 30,000 a year, yet the present rate is barely 15,000 per annum.
The master plan is the first update of the 2005 Metropolitan Strategy, and reveals that Sydney built only 93,000 dwellings, or an average of 18,600 a year, for the past five years. Critics of the plan were easy to find.
Stephen Albin, from the Urban Development Institute of Australia NSW, told the Sydney Morning Herald: ''Delivering on the 70% target for infill will be a monumental challenge and not one (that) government has explained well to the community.''
Aaron Gadiel from the property developer organisation Urban Taskforce said the government had wasted energy rewriting the 2005 plan. ''There is no sign of any convincing implementation strategy [in] this document either.'' (‘Plan reveals city needs 770,000 more homes,’ Sydney Morning Herald, 17 December 2010)
What can be expected
It’s suddenly become a lot harder to make an accurate short-term forecast about the Sydney property market. There’s now a likelihood of increased interest rates sooner than anticipated before mother nature unleashed her waterborne fury.
However, the fundamentals on which to base a longer-term forecast remain and by the end of 2011 we can make an educated guess on what will transpire.
On the subject of interest rates, last month we said: “Barring any nasty and unforeseen economic surprises, the RBA is happy with rates as they are.”
We’ve just had a very nasty and unforeseen economic surprise and the RBA won’t hesitate to act quickly if it suspects inflation’s getting out of control. The banks will no doubt follow suit. The originally-anticipated date of April or May for the next increase is now looking a bit optimistic, and total 2011 rate increases should be in the order of one percent.
Prices will soften in the first half of the year, but will begin to rebound after mid-year when investors feel they are sufficiently attractive. This will be driven by the continuing high rental yields that will outweigh considerations about interest rates.
Housing construction will fall further behind, thanks in part to the diversion of immense building resources to Queensland. The decline in Sydney housing construction will continue throughout 2011 and into 2012, putting upward pressure on dwelling prices.
Auction clearance rates will also slip back during the first half of the year to their levels of early December, 2010 while vendors reassess their pricing intentions in light of a weaker market. Once prices begin to rise after mid-year this situation will reverse itself and buyers will return to the auctions with money to spend.
2011 – What will it bring?Wed, 22 Dec 2010
In real estate, at least, 2010 is going out with more of a whimper than a bang. It’s not unexpected, given a series of interest rate hikes and cutbacks to governmental subsidies for first-home buyers.
To quote the December ‘Residex News’: “Property markets around Australia are showing the effects of successive interest rate rises and economic unpredictability, with virtually no growth in housing median values during the three months to end October.”
Louis Christopher, managing director of SQM Research, provided a bit more detail in The Sun-Herald’s ‘Property Watch’, saying: “The real estate market has indeed slowed to a trickle. It is now safe to state real estate prices in Sydney have slightly fallen in the second half of the year.
“However, due to the surge in the first half, the annual rate of growth for this year has been close to the 8% mark.” (‘House prices will be flat but you can bet on rent rises’, Sun-Herald, 12 December 2010)
As with all previous pauses in activity levels of the property market, this one inspires analysts to speculate on when the pace will pick up again. The first clue came with the Reserve Bank declining the opportunity to raise interest rates one more time in its December meeting.
"The board views this monetary policy setting as appropriate for the economic outlook," said RBA governor Glenn Stevens. The board also said that it felt inflation would remain steady in the short term, indicating no rate rises would be deemed necessary early in the new year.
Even though the Reserve Bank might be temporarily sanguine, in an interview with the ABC, Commonwealth Bank chief economist Michael Blythe cautioned that it won’t last forever.
"[The RBA is] suggesting no great need to rush in with another rate rise," he said. "But with the terms of trade, national income growing strongly, wages growth to pick up further, that still suggests higher rates at some point.
"We have February pencilled in at the moment, but that sounds a little soon and we may have to push that back a bit, sometime in the first half of next year." (‘Interest rates remain on hold,’ ABC News Online, 7 December 2010)
Su lin Ong, senior economist at RBC Capital Markets, told ABC Online’s finance reporter Alicia Barry that the RBA would probably hold off its next rate increase until April.
"The case to hike further needs to be compelling, and amid conflicting data and continued global uncertainty we expect the RBA to stay on the sidelines for several months and anticipate the next hike in Q2."
So, that takes care of interest rates for now. They’re on hold and will stay where they are for the next couple of months at least. Barring any nasty and unforeseen economic surprises, the RBA is happy with rates as they are, and the big four banks aren’t sending any signals of early 2011 rate hikes at this point in time.
The next clue to the real estate industry’s fortunes in coming months has to do with rental rates. ‘Residex News’ tells us: “We are clearly moving into an extended period of rent increases and for investors, this heralds the return of positive gearing - when your rental income is greater than the cost of your loan, and the tenant is paying it off for you.” (‘Residex News’, December 2010)
What other way could rental rates go? As Residex points out, Australia’s capital city populations are growing fast, and every year, 150,000 new households are formed and each needs a home.
If these households can’t afford to purchase a property, and that’s increasingly the case as housing affordability tightens, they need to rent accommodation. Residex statistics show median rate increases as high as 25% and even 33% in the past twelve months.
Clearance rates down
The third clue comes from recent auction clearance rates. Domain’s Jonathan Chancellor outlines the December decline and fall of formerly frenzied property auction activity.
“Sydney's residential auction activity is showing signs of the traditional end-of-year market fatigue. Overburdened with record stock levels, subdued auction clearance rates and prices are the result.
“Saturday's [4 December] 49% clearance rate was the weakest since mid-2008 when the ill winds of the global financial crisis were causing market nervousness.” (‘Sydney market succumbs to end-of-year lethargy’, Domain, 6 December 2010)
The article pointed out that historically, clearance rates in December have been lower than November rates in six of the past eight years. The trend continued the following weekend with a similarly low rate of 48.7%.
We have to go back to October 2003 to see what happened as that year’s property boom came to an end. The success rate dropped from 58% in October 2003, to 48% in November and 42% in December, and it didn't get back to 58% until 2007.
It should be pointed out that buyers attending this year’s auctions are spoilt for choice. This number of properties scheduled for auction this December exceeds last year's record of 1860 properties listed, while the average December volume over the past ten years has been 1360.
Regardless of the reasons behind it, the key indicator of auction clearance rates is definitely declining, even when seasonal factors are taken into account.
The next clue is property prices. This is such a variable Australia-wide that national figures don’t often fit in with what’s happening in Sydney. More accurately, with what’s happening in most of Sydney.
Yvonne Chan, head of research at Australian Property Monitors, gave a cautious indication to Domain’s Jonathan Chancellor that Sydney prices could drop in the short-term.
''Supply is strong, and together with the recent interest rise and the strong dollar, buying is less appealing to both local and overseas purchasers,'' she said.
''Median prices haven't fallen officially, but it's possible the first quarter 2011 figures may show a small decline.'' (‘Sydney market succumbs to end-of-year lethargy’, Domain, 6 December 2010)
The RP Data-Rismark index of capital-city housing values rose 0.3%, seasonally adjusted, in October but showed that Sydney prices were up 0.8%.
Rismark International managing director Christopher Joye sees the market levelling off. In an article published in The Australian, he pointed to signs of "additional price tapering in 2011": properties taking longer to sell; vendors are discounting more; the number of sale listings and relistings has spiked; and auction clearing rates are falling. (‘The high price of punting on property’, The Australian, 27 November 2010)
An AAP story at about the same time quoted another Rismark executive, Rismark International joint managing director Ben Skilbeck, who forecast weakness in home prices in the months ahead due to the impact of a rise in mortgage interest rates after the Reserve Bank of Australia raised the cash rate on Melbourne Cup day. (‘National housing prices set to fall in 2011’, AAP, 30 November 2010)
At least one property market watcher, president of the Real Estate Buyers Agents Association, Byron Rose, thinks that some of the recent slowdown in auction clearance rates and even a drop in property prices have been caused by growing caution in the ranks of property valuers.
"Undervaluing properties creates a situation where sellers have to drop prices to match valuations or where buyers have to make up the shortfall if the contract has gone unconditional, leaving them with little room to manoeuvre,'' he told the Sydney Morning Herald.
He feels many valuers were pre-empting anticipated interest rate increases in their valuations.
"We aren't buying two or three months down the track - we're buying in today's market and properties should be valued in line with what is occurring at the time of purchase."
Mr Rose said the gap between agreed private treaty sale prices and valuations was occurring mainly among certain pricier market segments, mostly in Sydney's eastern suburbs.
But the article concluded this recent trend has not stopped record prices being sought and regularly set across Sydney. (‘It's mind the gap as Sydney sellers lop 6% off spring prices,’ Sydney Morning Herald, 29 November 2010)
Consumers have their say
So, what do consumers think will happen? The Mortgage Choice 2010 Consumer Sentiment Survey results, released in December, provided some interesting conclusions.
“More than half the respondents in both Victoria and NSW/ACT believe property prices will increase in Australia over the next 12 months, and just under a third believe prices will remain stable.”
Even though 80% of respondents agreed with the line of thought that says property is ‘unaffordable’ to at least some degree, they were still prepared to make sacrifices just to be able to purchase property.
“With the desire for property purchases so high, something has got to give and respondents know they will need to make some lifestyle changes. Ninety per cent of those in NSW/ACT and 80 per cent of those in Victoria indicate they will be cutting back on spending to make a property purchase possible.” (‘What will you sacrifice for property?’ Sydney Morning Herald website, 2 December 2010)
Building approvals lag
The final clue is building approvals. An article on the news.com website said that approvals to build new homes showed a surprising surge in October, ending several consecutive months of falls.
“Approvals rose 9.3 per cent to 13,541 units in October, seasonally adjusted, from an upwardly revised 12,388 units in September, the Australian Bureau of Statistics (ABS) said.
“But while the data suggests demand for housing may rebound, the stronger figures may not last because of higher interest rates, economists say.”
According to the ABS data, New South Wales recorded the biggest rise in building approvals with a 14% increase. (‘Building approvals surge...for now’, news.com.au, 30 November 2010)
However, Citigroup Global Markets director Paul Brennan said in the article that NSW apartment approvals helped strengthen the figures and the November interest rate hike could weaken the overall approvals figures for the next few months.
“While overall this was a stronger than expected month I wouldn't be expecting anything exciting on the housing construction front,'' Mr Brennan said. “It looks like it was just a reversal of a large fall back in August.
And this means...
Now, what does all this mean as we enter 2011? Chris Vedelago, property reporter for The Sunday Age, says that it’s hard to be certain about property market forecasts.
“Take any measure of the property market – sales volumes, auction clearance rates, prices – and any influence that acts upon it – interest rates, sentiment, supply – and it seems 10 people can hold 11 wildly divergent theories about what exactly is going on.”
He points to speculation about a housing ‘bubble’ and how those who’ve confidently forecast a bursting of the bubble have been proven wrong more than once.
“There certainly are plenty of structural problems with the current housing sector – particularly in terms of prices and (un)affordability – but even in today's far weaker market conditions we haven't yet experienced the foretold crash.
“Supply isn't horrendously out of whack. The economy is strong and unemployment is low. Population growth is still continuing. Prices are flat or falling, but they haven't fallen off a cliff.” (‘Bubble trouble...How certain are you?’, Domain.com, 30 November 2010)
Dr Andrew Wilson, senior economist for Australian Property Monitors, sees the glass half-full: “Looking ahead, unemployment levels are falling and new jobs are being created. Recent Australian Bureau of Statistics data indicates incomes are rising.
“The city continues to experience population growth. Sydney property will continue to experience a lull in activity into next year but is well positioned to sustain current prices, taking advantage of our strong local economy and returning to growth in the second half of next year.” (‘A sluggish market will pick up next year’, Domain, 27 November 2010)
Writing with the wisdom gained from a couple of weeks more experience, Dr Wilson wrote on December 11: “Investors and owner-occupiers should make the most of the advantageous buying opportunities while they present themselves.
“Expect Sydney's median house price to climb towards $700,000 next year and extend the current price gap between the other capitals.
“Sydney remains the gold standard for housing investment in Australia. Constrained by geographical barriers and chronic shortage of housing stock, the city is unable to satisfy its growing populous. It builds only about 15 per cent of Australia's houses. Demand for rental properties will continue to grow.” (‘Buyers, start your engines – the price is right’, Domain, 11 December 2010)
Some years ago there was a popular cartoon to be found in many real estate offices. It showed a skeleton, sitting in a rocking chair, festooned with cobwebs and the accumulated detritus of many years. The caption read simply: “He was waiting for the price of real estate to come down”.
History shows this doesn’t happen very often, and even when Sydney property prices stall they soon regather strength and head upwards again. This could well be about as close as the market gets to the price of real estate coming down, and it won’t last forever.
Interesting times indeedSat, 20 Nov 2010
In last month’s ‘Market Comment’ we said the odds strongly favoured a rise in the Reserve Bank’s official interest rates, and indeed it happened. We also noted that interest rates have an impact on the property market, and the market has reacted quickly to the RBA’s increase.
The weekend of November 13 the Sydney auction clearance rate fell below 60% with 198 properties sold of 286 on offer – a rate of 58%. This isn’t a huge drop from the 64% clearance rate recorded in September or even the 66% rate recorded in August, but it does show a weakening in activity.
Another indicator is the 1.5% monthly fall in finance for housing investment recorded in September, which indicates that investors may be taking a break from property as higher interest rates have their intended effect.
Although sales volumes might be down, prices aren’t going backwards, according to the Sydney Morning Herald’s Property editor, Jonathan Chancellor.
“Record house price sales are being regularly achieved across Sydney, despite the spring property market shifting from a sellers' market towards a buyers' market.” (‘It's a buyer's market - but some are paying top dollar’, SMH 20 November, 2010)
Continued strength in property prices has made housing affordability another key issue. Residex CEO, John Edwards says that lower levels of affordability will increasingly force people to give up home ownership and become tenants, benefiting landlords.
“The recent RBA interest rate increase, coupled with the banks' margin increases, have moved unaffordability to a new level. For Sydney it is not at its worst position but it is getting very close”. (Residex ‘Market Wrap’, November 2010)
Dr Andrew Wilson, senior economist for Australian Property Monitors, notes that all market indicators aren’t going backwards.
“In better news for the investment industry, the value of investment mortgages for new residences rose 1.7% and has been rising continually for the past 12 months,” he said, noting that new home finance is well below the levels of two years ago. (‘With prices flat, where have all the investors gone?’, Sun-Herald, 14 November 2010)
In the same article, Dr Wilson forecasts an acceleration in Sydney property prices from mid-2011.
“The state of the housing market still presents opportunities for investors to secure property during a lull in growth prices. Prices should, however, start to accelerate mid next year as the effects of predicted strong economic growth are reflected in rising incomes and increased demand.”
JP Morgan economist Ben Jarman told AAP the most recent consecutive monthly improvement in home loans was not unexpected because the data reflected a period of time when the RBA had left interest rates on hold.
"We think home loans have basically stabilised and the upside from here is probably capped by those rising interest rates," Mr Jarman said.
"We think those rate hike reprieves would have been particularly important for households." (‘Home loans stable, rates may cap gains,’ AAP reported on News.com.au, 10 November 2010)
Prices not so inflated after all
A new report suggests that Sydney property prices aren’t as ‘inflated’ as some recent articles in the media have claimed. RP Data’s Property Pulse report says that Sydney property prices went up by only 30% in the past five years - the lowest rate of capital-city increases in Australia.
This is pretty reasonable when across Australia combined property values increased by a total of 41% for houses and 42% for units over the past five years.
An article in the Sydney Morning Herald quotes RP data research analyst Cameron Kusher who says the lack of housing stock in Sydney could drive a major increase in rents, which makes property more attractive to investors.
''At the moment property values are slowing right down but with Sydney having an increase in population there's scope for increase in rents,'' he said.
''I'd certainly suggest we'll see increases above [the consumer price index] for the next 12 months.'' (‘In property prices, Sydney no show pony as Darwin streaks to the lead,’SMH, 12 November 2010)
Investors and homeowners both share similar concerns about interest rates, and the big four banks seem dedicated to getting rates well above their recent historic lows as quickly as possible. If the RBA raises rates by a quarter of a percent, as it just has, the banks have shown they might go a bit higher although not with uniformity.
First to move after Melbourne Cup Day was the Commonwealth Bank, announcing a decision to raise variable mortgage rates by 0.45%. Next came the ANZ Bank that announced a decision to raise its standard variable rates by 39 basis points to 7.80%.
The PM not pleased
After Westpac and NAB followed suit, the reaction from both consumers and the Commonwealth Government has been swift and savage. During a November 12 interview on ABC Television’s ‘Lateline’ the Prime Minister vented her frustrations.
“I was very clear that the conduct of Australian banks in putting up interest rates above and beyond the Reserve Bank movement is unacceptable,” she said.
After hearing the news that all four big banks had raised their interest rates by more than the RBA’s 0.25%, Julia Gillard was even more outraged.
“I would say to the two banks that have moved their interest rates today that there is absolutely no justification for doing so.
“Australians will judge them very harshly for it. I believe people who bank with those banks will judge them very harshly for it. We are determined to increase competition in the banking sector.”
Not that it’s likely the Government’s outrage will be able to hold back the likelihood of further interest rate increases by the RBA. AAP Economist Garry Shilson-Josling, explained why: “The whole idea of rate hikes is to suppress spending.
“When some sectors are hot - as mining is at the moment - then others have to be relatively cold in order to keep the average volume of spending in the economy at the level desired by the RBA.
“And it has been housing's unfortunate role over the years to act as a kind of economic ballast, to be jettisoned when necessary to keep the economy on an even keel.” (‘Data shows housing demand in doldrums,’ AAP, 10 November 2010)
This is borne out by a report on ABC News that says the RBA raised its rates this month because of record high commodity prices and a huge upcoming investment in LNG.
“Debate at the meeting seems to have centred over whether ‘monetary policy was to be conducted in a forward looking way’, or whether recent more subdued domestic economic data should be heeded.
“The bank chose to stay on the front foot because, ‘downside risks to the global economy had still not materialised in any significant way’, while most commodity prices had continued to strengthen to 60-year highs”.(‘China boom forced pre-emptive rate rise,’ ABC News Online report by Michael Janda, 16 November 2010)
Of course the RBA’s actions aren’t based on either short-term statistics or a desire for immediate results. The Reserve Bank is trying to maintain a balance between debt and growth, and the recent slowing in the property market indicates it’s getting what it wants.
Since October 2009, the RBA has raised official cash rate seven times. Over the past twelve months, according to The Veda Advantage Consumer Credit demand report, mortgage credit fell 23.8% in the year to September.
Interviewed by the Herald’s Chris Zappone, Veda Advantage’s head of consumer risk, Angus Luffman said this was very close to levels at the peak of the global financial crisis.
“Mortgage applications have dropped to record levels since the beginning of the year, with demand now at a level similar to that experienced (in) the midst of the GFC,” he said.
“The record decline continues to be measured against the impact of the Government stimulus package for first home buyers which inflated mortgage demand growth last year.” (‘Mortgage applications hit by debt, higher rates,’ SMH, 10 November 2010)
All part of a cycle
So, the Government stimulates the housing sector and as a result, prices rise. As prices rise, the RBA sees inflation nearing its self-imposed 3% upper limit, deems rising property prices a threat to economic stability, and puts the brakes back on. Auction clearance rates are now reflecting this braking effect.
In an interview with the Sydney Morning Herald, JPP Buyer Advocates advocate Catherine Cashmore, said it’s all part of a cycle.
"Investors and second-home buyers are the ones having an effect on the clearance figures," she said.
"They are in no hurry to buy into a market that's attracting negative press which could indicate prices will drop."
"We're in the downward phase of a typical market cycle which won't last perpetually.'' (‘Auction rates sink to two-year lows,’ Sydney Morning Herald, 8 November 2010)
The cyclical nature of the property market can be judged by revisiting our ‘Market Comment’ of 28 July, 2008. The conditions at the time were:
- Demand for housing was strong and growing,
- House prices were falling,
- Rates of new construction were at historic lows,
- Interest rates were beginning to stabilise,
- The uptake of new mortgages was low, and
- Rents were rising.
It took just a year for property prices to show a strong resurgence, despite the effects of the global financial crisis on the world’s economies. Demand for housing, naturally, continued to grow and rates of new construction have remained at critically low levels since then.
Look at conditions today. Stabilising interest rates, slowing price rises, strong demand, and rising rent levels are in the frame as 2010 heads toward the finish line.
It’s unlikely the RBA will play Scrooge and increase interest rates again before Christmas, having surprised the majority of analysts with its November rate hike. The Bank doesn’t meet in January, so February 2011 will probably be the next chance for an increase in the cash rate.
The big four banks have just increased their own ‘prices’ so they will be a bit more likely to deal with investors and try to convince the Commonwealth Government they’re not holding back the Australian economy.
When the Sydney property market pauses, as it seems to be doing right now, it’s a good time for investors to take a serious look at the underlying conditions and see if they can figure out where it’s going.
As we said here in July 2008: “Taking into account all the factors that affect the price of real estate, there may well never be a better time to acquire property than now.”
Sydney property is a sure winnerFri, 29 Oct 2010
There’s one bet for Melbourne Cup Day that’s getting close to a sure thing – a rise in the Reserve Bank’s official interest rate. The odds for a November increase rose substantially after the RBA left the cash rate unchanged at 4.5% in its October meeting, although financial markets still say it’s an even-money wager.
The National Australia Bank’s October quarterly survey certainly expects a rate rise: “After (a) false start in October, RBA likely to increase rates before Xmas ― probably November but timing (is) data dependent (especially labour market and CPI).
“Rates still expected to peak at 5½% by September quarter 2011. Rates likely to stay at this level given likely strength of demand and tightness in labour market.” (NAB Global & Australian Forecasts, 12 October 2010)
Economist Savanth Sebastian from Commonwealth Securities told the Sydney Morning Herald a November rise was likely: "It's probably a bit of a concern that finance for construction of housing fell for the 10th straight month.”
He said he was expecting a rate rise from the RBA in November, because official inflation data is expected to show steady growth in prices in the September quarter.
"They are very unlikely to lift in December because of Christmas sales," he said.
"They don't meet in January, and they well might (lift rates) in February. If they don't raise in November, February will mark nine months without a rate rise." (‘Mixed housing data won't spook RBA’, SMH, 11 October 2010)
However, RBA governor Glenn Stevens seemed to be having an each-way bet in his statement after the meeting when he said that he expected inflation would stay within the RBA’s target band of 2% to 3% in the short term, although he expected rates would eventually have to rise.
‘‘The current stance of monetary policy is delivering interest rates to borrowers close to their average of the past decade. The Board regards this as appropriate for the time being.
“If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.’’ (Statement by Glenn Stevens, 5 October 2010)
RBC Capital Markets economist Su Lin Ong told AAP that the major banks might raise mortgage interest rates independent of the RBA: ‘‘If they do move independently, that could well negate the need for the RBA to move at all this year.’’
She noted that the RBA’s statement saying higher interest rates will be needed to keep inflation within the bank’s medium-term target and interest rates are close to their average of the past decade is nothing new.
‘‘We know rates are going to go up over the next little while, whether it’s next month or the month after really depends on the domestic data run as well as developments offshore,’’ Ms Ong said. (AAP report quoted on Domain.com, 5 October 2010)
At least one index of consumer sentiment has responded to the probability of higher interest rates with a prediction of slower housing price rises, according to an article by Chris Zappone in the Sydney Morning Herald.
“Expectations for house price growth in the year ahead have faltered, as higher interest rates contribute to softer monthly price rises,” the article said.
“The Westpac-Melbourne Institute index, calculated by the share of respondents expecting price rises minus the share expecting price falls in home values, showed that the percentage of consumers tipping price rises over the next year fell to 63 per cent in October.” (‘Consumers less confident about house prices’, 15 October 2010)
However, the survey also showed that price rises are still anticipated. “The October responses to the Westpac survey tipped an average price rise of 2.6% over the next 12 months, from 3.6% in July and 5.7% in April.”
Market stays in positive territory
Sydney auction results on Saturday, 16 October, showed that 206 properties sold of the 292 listed, with a clearance result of 61%. (Australian Property Monitors, 16 October 2010)
This was up from a modest 53% the weekend before the RBA’s announcement and is a pretty robust start to the traditional spring home selling season.
Lower interest rates, even if only temporary, generally have a positive effect on the property market. There is also a good selection of properties on offer to attract buyers into the market.
Louis Christopher, founder of property advisory service SQM Research, told the Herald’s Carolyn Boyd that there were 17,468 houses on the market in Sydney in September and he expected that number to surge to 19,000 in October before peaking at more than 20,000 in November.
He also noted that these figures would be an increase of 14% on October last year and 32% on last November. (‘It's open season as buyers are spoilt for choice’, SMH 9 October 2010)
In the same article the general manager of Australian Property Monitors, Anthony Ishac, said that he expected the auction clearance rate to stick at about 60%: "There's going to be more stock, so it's definitely going to have some impact," he said.
He also noted that this would be less than the clearance rate of 70% per cent during last year's first-home-buyer rush but more than the sub-50% seen during GFC-affected 2008.
First-home buyer loans made up just 15.5% of the market in August, according to data from the Australian Bureau of Statistics. The share is just over half its peak of 28.5% in May 2009.
When interviewed by the Sydney Morning Herald, senior analyst with BIS Shrapnel, Angie Zigomanis, said demand has now bottomed out and he expects first home buyers to re-emerge slowly. (‘It's open season as buyers are spoilt for choice’, SMH 9 October 2010)
Not everyone’s an optimist
Writers at The Australian newspaper have been a bit less enthusiastic about property prices than their colleagues at John Fairfax.
Recent articles have focused on seasonally adjusted figures in the most recent RP Data-Rismark Hedonic Home Value Index that showed capital city property prices fell 1.2% for the three months to August. (‘House prices dip and will fall further’, The Australian, 1 October 2010)
Another article in The Australian forecasts the next generation of homeowners will see none of the house price appreciation that baby boomers have enjoyed, citing a study by the Swiss-based Bank for International Settlements.
The study concluded that the ageing of the Australian population would mean house price increases over the next 40 years will be about 30% less than they would otherwise have been. (‘House prices to ease while capital shrinks for non baby boomers’, The Australian, 20 September 2010)
The study also found that Australian house prices have been the fourth fastest-growing in the world over the past 40 years.
Overseas investors love Australian property
Fourth place globally isn’t so bad. UK online magazine ‘A Place in the Sun’ reports that the Sydney property market is now the fourth most popular investment destination for global property investors, according to a survey by property consultant CB Richard Ellis (CBRE).
Richard Butler, CBRE’s senior managing director in Australia, told the magazine that more overseas investors were attracted to the Sydney property market due to strong stability and transparency in the Australia property market.
CBRE's research also concluded that foreign investors accounted for 42% of all Australian property purchases in the third quarter of 2010. (‘Global investors eye property in Sydney’, Friday, 8 October 2010)
High levels of demand from both overseas and domestic investors will ensure that Sydney property prices will continue to rise, albeit with occasional periods of hesitation.
Business advisory website ‘Smart Company’ quoted SQM Research founder Louis Christopher who believes that state governments and councils should provide initiatives for developers to build in the middle rings of cities, because that's where the shortages are – particularly for Sydney.
"Housing starts are a function of demand. Builders don't go out and build unless they've got demand to start with. The overall market has been slowing up, so I don't think there's an immediate impact on housing prices.
"But when demand does suddenly pick up again, what it means is that you have this fixed supply situation and prices are likely to shift upwards quite quickly when that demand picks up again." (‘Housing Industry Association says housing starts to fall by 4% in 2010-11, shortage and affordability to get worse’, smartcompany.com.au, 7 October 2010)
In a separate interview, Mr Christopher told the Sydney Morning Herald that by Christmas Sydney house prices will have risen 5% for the year, and gain 1% to 2% over spring. He said that the inner ring of Sydney, and particularly the lower north shore, could grow by 7% to 9% by the end of 2010.
Also optimistic is AMP which has predicted an average of 2% to 3% growth over the next six to 12 months. (‘It's open season as buyers are spoilt for choice’, SMH 9 October 2010)
The National Australia Bank's October 2010 quarterly property survey says that recent moderation in house price growth is likely to prove temporary: “Job security, a burgeoning housing shortage and the income effects of the resurgent minerals boom can be expected to lift annual house price growth to around 7% over the next two years.” (NAB Global & Australian Forecasts, 12 October 2010)
And joining the optimists’ chorus is forecaster BIS Shrapnel who compiled a Housing Outlook 2010-2013 survey for QBE. The survey forecasts house-price growth between 9% and 20% in Australian capital cities over the next three years.
"Price growth is forecast to be strongest over the next three years in Perth, Sydney and Adelaide - all experiencing forecast rises of around 20 per cent in median house prices," says the report.
"We expect price rises will be underpinned by a deficiency of dwelling stocks across most capital cities, which in turn will lead to tight vacancy rates and solid rental growth, flowing through to increase investor demand," said QBE chief executive Ian Graham. (‘House prices could jump 20%, forecasts show’, Business Day, 12 October 2010)
Doomsayers are only blowing bubbles
Whenever property prices gather strength for another surge upwards, the inevitable speculation about a housing price ‘bubble’ emerges. Whether the rise in Sydney property prices is 2%, 5% or 9% it’s still an increase that defies any suggestion that there is a ‘price bubble’ in danger of bursting.
Writing in the Sydney Morning Herald’s ‘Business Day’, veteran business journalist James Kirby says people he calls ‘doomsayers’ are drawing the wrong conclusions from market statistics.
He quotes John Wilson, Australian chief executive at Pimco, the world’s biggest bond fund who emphatically states the Australian housing market is no bubble. In support of his position he notes:
The ratio of housing costs to household disposable income (a key indicator of people's ability to finance mortgages) has remained unchanged at 30% for more than a decade.
One-third of Australian housing repayments go on principal, not interest – which represents both a saving and an investment.
Australian household debt figures are high, but that debt relates primarily to bricks and mortar. What's more, the average equity we have in our homes is 60% and that has remained steady. (‘Why home prices are not about to crash and burn’, Business Day, 10 October 2010)
Of course there are economic factors that restrict the price buyers will pay for any property. Addressing the CPA Australia conference in Brisbane, Reserve Bank head of financial stability Dr. Luci Ellis said that lower rental yields will mean there is a limit on how far house prices can go.
Asked if the lower rental yields meant a limit to the rate of price appreciation, Dr Ellis said: "The short and simple answer is - yes". (‘Reserve Bank says property investors could create housing bubble,’ AAP quoted on News.com.au, 6 October 2010)
But if recent market activity is any guide to the future, price falls on quality real estate are highly unlikely and any property price weaknesses will be represented by temporary periods of near-static values, soon followed by a resumption of the historically-proven upwards curve.
Even better than backing a rate rise on Melbourne Cup Day is a bet that Sydney’s housing prices will continue their seemingly unstoppable rise over the coming twelve months.
History shows that when it comes to picking winners, Sydney property is an odds-on favourite.
Spring is the season for growthSat, 18 Sep 2010
More good property news than badThu, 19 Aug 2010
Where Will We Live in the Sydney of 2036?Tue, 3 Aug 2010
Is the Sky about to fall on Sydney House Prices?Wed, 30 Jun 2010
Sydney Property – a few Steps SidewaysWed, 19 May 2010
The real estate market in NSW is slowing gradually with some of the heat coming off Sydney property after a period of record price increases.
The causes of the slowdown include rising interest rates and an often baffling mix of Commonwealth and NSW government policies. For the present time at least, these have outweighed the influence of a chronic housing shortage at a time of unprecedented population growth.
The rate of population growth is of course one of the factors contributing to increasing demand for housing. Forecasting group BIS Shrapnel forecasts a one-off slowing in Australia’s currently high rate of growth, due primarily to a decrease in immigration.
BIS Shrapnel also forecasts that the share of migrants choosing to settle in NSW will decrease due to the high cost of housing and better job opportunities elsewhere. (‘Less migration will slow growth in population’, SMH 17 May 2010)
We think of a high level of employment as ‘a good thing’ and in many respects it is. But it does stimulate inflation, and Australia’s high rate of jobs growth – 235,000 jobs were created in the past year according to an editorial in the Sydney Morning Herald, has the Reserve Bank of Australia worried. (‘Full employment has its challenges’, SMH 17 May 2010)
In the meantime the unemployment rate remained steady at 5.4 percent in April, noting that economists consider a rate of 5 percent to be ‘full employment’ due to the number of people changing jobs or leaving work temporarily.
It’s unlikely that the high rate of jobs growth can continue much longer, especially if immigration programs are scaled back. For the time being, however, employers will have to pay top dollar for skilled workers and that presents challenges for those trying to control inflation.
Housing Loans Drop Again
Australian Bureau of Statistics figures show that the number of housing loans continues to fall as interest rate rises take their toll. The March drop of 3.4 percent was the sixth consecutive monthly decline and the eighth drop in the past nine months.
There’s little doubt that interest rates will continue to rise. An article by Andrew Carswell in the Daily Telegraph (‘Interest rates to nudge double digits’, 14 May 2010) says: “If the Federal Government's optimistic economic forecasts spelled out in its no-frills Budget are fulfilled, homeowners will be paying at least 2 percent more on their current interest rate - or more than 9 percent - within 18 months, economists believe.”
Matthew Circosta, an economist with capital market analysts Moody’s Analytics, told the Herald’s Chris Zappone that the Reserve Bank is trying to avert an asset bubble by raising interest rates, but this has stifled loan demand for the construction of new homes.
"Demand for home loans is plummeting amid rising interest rates, and there appears little light at the end of the tunnel, with borrowing costs raised again in April and May.
"The number of housing finance commitments has declined every month since the Reserve Bank of Australia commenced withdrawing its monetary stimulus from the economy in October." (‘Home loans fall, rate rises bite’, SMH 12 May 2010)
Nevertheless, in the longer-term Sydney will need more housing. A lot more of it, and one of the barriers to its construction is a shortage of available land for development.
Introducing the BioBank
The NSW Government, noted more for its tendency to squeeze blood out of stones rather than helping to create wealth, has its own solution to the shortage of land available for development.
‘BioBanking’, a term that means developers can build on environmentally-sensitive land in Sydney if they pay to protect ‘equivalent’ land elsewhere, aims to provide land for the construction of 180,000 houses over the next 40 years. (‘Swap and chop’, SMH 17 May 2010)
The first of 38 scheduled BioBank projects has gone ahead with the NSW government’s acquisition of 80 hectares (about 200 acres) of grassland near Camden in Sydney’s outer southwest.
Funds for the acquisition were raised from levies on developers, so now it’s their turn to expend their biodiversity credits on Sydney land suitable for development.
It will be interesting to see just how this system works, but it’s the government’s hope that it will help reduce the shortage of land available to developers and thereby stimulate housing construction.
It should be noted that at the same time BioBank is getting underway the same government has introduced a new tax on all property transactions greater than $500,000 in value using as a reason (many have said “excuse”) a previously little-known need to fund greater security in the system of land titles.
Exempting the first $500,000 won’t mean a lot to Sydney vendors. The median Sydney house price in March was $595,745, according to Australian Property Monitors.
This new tax, announced the night of the Federal Budget by Lands Minister Tony Kelly, is progressive and although it adds around $200 to the cost of the average home, it will add about $500,000 to the cost of a commercial development worth $200 million.
In a media release May 12, Glenn Byres, acting executive director of the NSW Property Council, expressed his dislike for the impost: “We now have another tax to sit on top of the highest developer levies in the nation, stamp duty, land tax and other property-related taxes.”
“NSW needs to learn its lesson – you don’t encourage growth and investment by taxing it into submission”, he added.
A Two-tier Market could be Developing
Another bellwether of Sydney housing prices, the auction clearance rate, slipped in mid-May. Figures from Residex show that auction clearance rates dropped by more than 10 percent to 62.5 percent, down from 73.5 percent the weekend before.
High-demand areas however remained above average with the inner west scoring a clearance rate of 84 percent.
In a flashback to the end of the last boom in Sydney house prices, RPData’s research director Tim Lawless sees a two-tier market developing.
“In Sydney the most expensive 20 percent of suburbs have recorded a value gain of 17.5 percent over the past 12 months while the 20 percent most affordable suburbs have recorded a gain of just 7.3 percent.
“Regions such as the lower north shore, inner Sydney and the eastern suburbs have recorded capital gains of more than 20 percent over the past year.” (‘Latest house price figures disguise a two-tier market, Sun-Herald, 16 May 2010)
Tim Lawless says that, because of high housing prices and rising interest rates, we could see prospective first-home buyers moving back into the rental market instead of trying to purchase their own homes.
Even the top tier is feeling the winds of change, according to Jonathan Chancellor, the Sydney Morning Herald’s property editor.
“Sydney's priciest residential listings are languishing unsold as cautious buyers await serious price adjustments from the mostly steadfast sellers.
“Top-end properties are averaging 173 days on the market before sale, double the typical 85 days across Sydney, according to Australian Property Monitors.
“There were 48 house and unit sales above $5 million in the March quarter, only slightly above the low of 42 sales during the trough of the global financial crisis and below the 61 and 72 sales in previous March quarters.” (‘Top homes take double time to sell’, domain.com, 15 May 2010)
What happens next? Australia won’t experience a US-style crash in housing prices, according to Dr Luci Ellis, the RBA's head of financial stability, who says the majority of Australia's housing debt rests with those who can most afford it.
"Our assessment is that the increase in debt has broadly been concentrated in the hands of those generally more able to service it," Dr Ellis told a residential property conference. (‘Reserve says Australian housing crash unlikely, ABC Online, 18 May 2010)
A May 1 Business Day poll on the Sydney Morning Herald’s website asked the question and 14,586 voters responded. 40 percent said ‘prices will fall’; 41 percent said ‘prices will flatten out’; and 20 percent said ‘prices will keep rising’.
The recent amazing rate of increase in Sydney property prices couldn’t last forever, and it now appears that the slowdown that real estate analysts expected is beginning to take shape. It will be gradual, and much to the relief of property owners, it won’t lead to any dramatic falls like those experienced elsewhere.
And Now for Sydney House PricesWed, 21 Apr 2010
In our last column we covered the subject of interest rates and what’s likely to happen over coming months and in the next couple of years.
This month we’ll examine house prices and where they’re going. David Potts, writing in the April 18 issue of Investor in the Sun-Herald, stated what we’ve been saying in this column for the past twelve months: “The growing housing shortage can only help property prices despite rising interest rates.”
The very fact that property prices are rising is in direct opposition to the forecasts of UWS associate professor Steve Keen who on April 15 began his 225 kilometre trek to Mount Kosciuszko after losing a bet that Sydney house prices would fall by 40 percent.
His predictions were somewhat wide of the mark - about 52 percent wide from the latest RP Data statistics that show Sydney’s property prices climbing at an annual rate of 12 percent.
The Sydney Morning Herald’s property editor, Jonathan Chancellor also noted on April 19 that the professor had sold his Surry Hills apartment in 2008 for $540,000 and a similar two-bedroom unit in the same building sold recently for a price that was 8 percent higher.
To be fair to the professor, there are plenty of reasons to suggest that the market’s growth could be going to slow.
The reasons the rate of growth can be expected to take a breather are evident. The government’s home owner’s grant has been reduced and interest rates have been raised. We’ve earlier stated that interest rates will continue rising for a while and agree with professor Keen that these factors may impact property prices.
On the other side of the coin, the rate of new housing construction remains at extremely low levels. The Performance of Construction Index by the Australian Industry Group and the Housing Industry Association fell 4.1 points to 48.7 in March.
This is well below the 50-point level that indicates expansion. Demand is there but where’s the supply to meet it?
Property research authority and NSW managing director of project marketer MLG, Chris Freeman, says the market in Sydney is grossly undersupplied when compared with population growth: ''When you look at dwelling supply against population growth the entire country is undersupplied.''
What is most affected by rising interest rates is construction of new housing. Senior economist with the Housing Industry Association, Ben Phillips, says the strength of the nation's housing recovery is looking shaky.
"Industry hopes for a sustained and necessary recovery are fading under the impact of higher interest rates and continued pressure from credit and land restraints," he told ABC News Online.
Australian Industry Group spokesman Peter Burn also expressed his concerns about a big fall in new orders in the house building and apartment sub-sectors: "That fall comes at a time when there is already a shortage of housing and a growing gap between demand and supply."
The number of home loans has fallen since September, 2009 – down 27 percent in NSW. This prompted the Sydney Morning Herald’s economics correspondent, Peter Martin, to say that “Buyers are deserting the Sydney property market at the rate of 1000 a month.”
He sees real estate prices plateauing for the rest of 2010 in what’s termed an ‘exhausted market’. Echoing this sentiment is David Airey, president of the Real Estate Institute, who is quoted in the same article saying: “This will lead to a slowing of price growth, no question about it.”
Some NSW statistics stand out as signals that we’re about to see real estate prices stabilise. In February the number of first home buyers dropped from 5941 to just 2293. But the question must be asked, how important have first home buyers been to the overall real estate pricing structure?
Taking a long-term view and relating recent activity to historic prices, the impact of the first home buyers will be seen as having created a ‘bubble’ at one end of the spectrum rather than having driven the market.
Their shopping has been in the lower levels of the housing market and has certainly affected the volume of transactions, but not the prices people pay for the mid- to upper-levels of real estate offerings.
Underpinning the continuing strong demand for Sydney real estate is the rush by investors to acquire properties for rental. This is one of the key reasons that auction clearance rates remain high, averaging 71 percent since October, 2009.
Figures from the Australian Bureau of Statistics show that the value of lending to investors in February was well above the levels of a year ago, up by 26 percent. It’s not about the number of the loans; it’s about the total volume of funds borrowed, and as long as interest remains tax-deductible, investors are willing to borrow.
But wait! The sharemarket, on its knees not all that long ago, has rebounded and shares are once again an option for investors to consider as they look at rising real estate prices.
The Investor’s David Potts believes it’s the time to get into shares. When reporting on increases in disposable income and housing affordability, he says: “Even so, the sharemarket looks a better bet for the next year or so than property.”
We disagree. When those same investors see the returns they’ll get from ever-increasing rental rates and recall the advice they heard from their elders about the security of bricks and mortar, they feel a bit less confident about entrusting their funds to companies whose managing directors often earn a few millions more than their shareholders.
Every now and then there’s a slowdown in price growth. Very occasionally there’s even a step backwards. But those backwards steps don’t happen often, and there’s enough experienced investors around to know a ‘buy’ signal when they see it, so the backwards steps don’t last long.
What else could be keeping Sydney’s real estate prices high? One theory comes from director of research at economic forecasting group 4CAST Ray Attrill who noted that '...the rise in activity and prices in the first half of 2009 looks to have been stronger than the acceleration in housing credit and added value of first home buyer incentives alone would suggest, hinting that an increase in overseas demand (for which domestic finance will not have been required - or available) likely had some influence.''
JPMorgan economist Stephen Walters recently told the Sydney Morning Herald’s Chris Zappone that there’s a possibility there are more home buyers entering the market without needing loans. ''Maybe that points to offshore money that's coming into the housing market and could be actually inflating house prices.''
According to the Herald’s April 16 article: “Frustrated would-be home buyers and real estate agents report a rising number of auctions to foreign buyers, with visitors from China being among the overseas investors frequently reported.”
However, in the same article, Moody's Analytics Matt Robinson says he doesn’t believe foreign buyers are the cause of Sydney’s housing price increases: “My scouts in auction rooms suggest it's not foreign buyers, but simply overly exuberant Aussie buyers pushing prices up, at least in Sydney.''
And why shouldn’t Sydney’s would-be homeowners be exuberant? The GFC is a distant memory, or at least hasn’t seemed to affect our lives all that much. NSW may be at the bottom of the employment and economic league tables, but most people who want work are in work, even if it’s only part-time.
It’s all about Sydneysiders wanting to buy housing. They’ll do it regardless of everything from rising interest rates to economic doom and gloom.
A report on AAP News quotes Martin North, managing consulting director of Fujitsu Consulting, who said Australia’s buoyant economy and strong job market have inspired established home owners to invest in property or upgrade their homes as house prices continue to rise.
"There's such pent up demand for property that, even if first home buyers are pretty much excluded from the market because they just can't afford to get in, other sectors of the economy will continue to buy.''
The real factor that will probably cause a gradual slowdown in the rate of increase for Sydney’s real estate prices was pointed out by national president of the Real Estate Institute, David Airey.
Commenting on the RP Data figures showing Sydney prices are rising at an annual pace of 12 percent Mr Airey told the Sydney Morning Herald that we won't have that kind of extraordinary growth continuing: ''If we did, nobody would be able to afford to buy property.
“Plenty of people smarter than me will say Melbourne will be the first to slow, but they've been wrong before. Sydney has a way to go to catch up so its prices might continue to climb for longer.''
Steven Long on ABC Online said that the current trajectory of house prices and household debt is unsustainable.
“The simple maths tells you that real estate ‘values’, for want of a better word, can't keep on outstripping incomes in the way that they are doing. Yet dwelling prices are being driven up by a chronic undersupply, exacerbated by record rates of immigration.”
Although we must accept the simple truth that there are limits to the prices buyers will pay for property, we haven’t reached the level of those limits yet.
In the meantime the Daily Telegraph’s Joe Hildebrand notes that the population of NSW is set to boom.
“Some Sydney suburbs will have their populations double or even quadruple in just 25 years, official NSW documents reveal, as the city hurtles towards a population of six million people by 2036.”
So, it isn’t interest rate rises that will slow housing prices. Nor is it a drop in demand. It’s the prices themselves, and as yet there’s no way of knowing when the increases will begin to slow.
The president of the Real Estate Institute of NSW, Wayne Stewart, puts the situation into perspective: ''The marketplace is driven by supply and demand. It's not driven by interest rates,'' he told Business Day’s Jessica Mahar.
The market forces that drive prices upwards remain in place, with no signs of a serious slowdown. Price growth will probably slow in the second half of 2010, but it will most likely be a temporary slowdown brought about by a pause in the acquisition of rental properties by investors rather than a broad-based pullback of buyers.
The reason why this slowdown will be a temporary feature was pointed out in the Sun-Herald by David Potts; there’s a shortage of property in Sydney and a growing demand for the same thing.
In an article captioned ‘Economists baffled by robust property market’ (SMH 19.4.10) Jonathan Chancellor wrote: “Leading economists are stumped for answers as to what’s happening within the residential property market.”
In reply we’ll give MLG’s Chris Freeman the last word. ''As long as returns are evident for investors, which they certainly appear to be at the moment, prices look to only be heading one way, and with finance approvals for investors up almost 30 per cent over the year in NSW it looks sure to continue.''
The future is on its wayTue, 23 Mar 2010
The new year of 2010 is already 25 percent gone, and it’s given us clear signs of what’s in store for the rest of the year and beyond.
Take interest rate rises. The question isn’t if they’re going to happen, but when they’ll occur and what the increase will be.
Commonwealth Securities chief economist Craig James said the March interest rate rise of 25 basis points would be followed by at least two further rate hikes before the end of the year.
When asked by the Sydney Morning Herald what he thought the increase would be, he said: "Our view is that the cash rate will be somewhere between four and a half and five percent over the second half of the year."
He added: "The best the average person can do is assume that by the end of the year interest rates could be as much as one percentage point higher, which is equivalent to four typical rate rises.”
In its minutes from the March meeting the Reserve Bank said its decision to raise rates was influenced by ‘strongly rising’ house prices, noting that prices were rising strongly for ''for all but the bottom segment of the market''.
This makes it likely that the timing of future rate increases will be based at least in part on how the RBA views the strength of real estate prices. Rising housing prices will influence future increases.
Macquarie Group's interest rate strategist, Rory Robertson, told Melbourne Age economic correspondent Peter Robinson that the RBA’s way of looking at housing prices had changed.
''The Reserve seems to be taking the view if house prices are rising rapidly, rates are too low.
''Some analysts think the bank is actually targeting house prices but I think that it is more that if house prices are rising rapidly it takes it as a sign that the economy is doing well.”
Westpac chief economist Bill Evans said he believed that the Reserve Bank was likely to take a breather from raising rates at 4.5 percent.
He said it would only take another 50 basis point increase to put the standard mortgage rate back to around 7.5 percent, which is its average level over the past decade.
Forward activity in Australian financial markets suggest the Reserve Bank will step up its interest rate increases over coming months with the official cash rate expected to hit 5 percent by the end of the 2010.
Markets are now giving a further rate increase in April a 40 percent chance, up from 24 percent in the first week of March.
Michael Workman, senior economist for the Commonwealth Bank, said each RBA meeting would be considering the need for further increases. ''There are nine more board meetings this year and it looks to be a 50/50 call at each one,'' he said.
The Reserve Bank has already raised interest rates four times since October by a total of 1.00 percentage points.
The big four banks are already showing an appetite for higher rates. On March 23 Gail Kelly, CEO of banking giant Westpac, told the Herald’s Eric Johnston that her company was ‘under pressure’ to raise interest rates further.
According to Ms Kelly, the reason for this pressure came from Westpac’s need to borrow money from overseas for its long-term funding. The article also noted that Westpac already has one of the highest mortgage rates among the big banks with a standard variable rate of 7.01 percent.
The only factor that might impede a steady progression of interest rate increases would be a larger pullback in housing finance than is already anticipated following the end of the first home buyers’ boost and recent rate rises.
Australian Bureau of Statistics figures show that the volume of housing finance commitments for owner-occupied housing fell 7.9 percent in January, seasonally adjusted, to 51,056.
This was in contrast to previous expectations by economists that the number of owner-occupier housing finance commitments would have risen by 2 percent in January.
ABS figures also showed that total housing finance fell by 3.3 percent in January, seasonally adjusted, to $21,159 billion.
Loans to buy established houses nearly halved, sliding from a peak of 19,100 in March to 10,041 in January.
The biggest retreat in was in housing finance for new dwellings which fell 13.2 percent.
ABS statistics show that only 667 NSW residents took out construction loans in January, down from a peak of 1270 in September, 2009 before rates rose and the first home owners' boost was scaled back.
And only 472 loans were issued to buy new houses in NSW, down from almost double that a few months earlier.
Consumer sentiment figures released on March 10 reflected the fall in lending. The proportion of Australians agreeing that ''now is a good time to buy a dwelling'' dropped from 53 percent in December to 42 percent in March.
In September, 2009 before the rate rises and the phasing out of the boost, 62 percent of those surveyed believed it was a good time to buy a house.
RP Data senior research analyst Cameron Kusher told the Sydney Morning Herald that because of the March interest rate rise by the RBA "we will probably see a lesser volume of first-home buyer finance commitments".
Higher interest rates were expected to result in a lower level of property value growth this year, since activity among first-home buyers and investors alike would most likely stall, Mr Kusher added.
"The Reserve Bank has previously indicated that they would like to see the supply of dwellings nationally increase," Mr Kusher said.
"Given this, they would like to see the number of dwelling approvals increasing, as well as the number of housing finance commitments for construction of new dwellings so that the supply of housing continues to increase at a rate commensurate with demand."
Mr Kusher said the Reserve Bank would therefore adopt a "careful, careful" approach when considering the amount and timing of rate increases.
So there’s the future in a nutshell. We have the RBA raising interest rates to somewhere between 4.5 percent and 5.0 percent by the end of 2010. It’s also likely that there will be a series of small increases rather than one or two big ones. (This is an election year, after all!)
The statistics to watch, and which will be watched closely by the Reserve Bank, are those that will indicate homebuyers are deserting the market.
Assistant Reserve Bank Governor Philip Lowe told an urban development conference in Sydney to expect further increases in house prices unless something could be done to ease ''constraints'' holding back the construction of new homes.
''With population growth above average, and growth in the housing stock below average, it is not surprising there has been upward pressure on housing costs.
''If we are to build more dwellings, we need to ensure that planning guidelines and infrastructure provision can accommodate this,'' he said.
If there is a sudden indication of buyer flight from capital city real estate we may see a pause in upwards rate movements while the RBA considers its position. Nevertheless, we have no reason to suspect that rates will go anywhere but up in the foreseeable future.
Fair winds blow for Sydney propertyTue, 23 Feb 2010
About 45 years ago Bob Dylan wrote a song titled ‘Subterranean Homesick Blues’ that contained the immortal lyrics “You don't need a weather man to know which way the wind blows.”
He could have been writing about today’s Sydney property market. Figures released by the Australian Bureau of Statistics in early February showed that the house price index for Sydney rose 5 percent in the fourth quarter of 2009, and was up 12.8 percent from a year earlier.
The Sun-Herald newspaper has just published its annual Property Guide for 2010 and the report’s tone is decidedly upbeat for homeowners.
The report’s author, Kate Farrely, begins by saying: “Combined with the highest buyer sentiment since 1994 for NSW and an unexpected reprieve from a further interest rate hike, the year is off to a sizzling start.”
But how long will the sizzle last? Ms Farrely quotes a senior research analyst at RP Data, Cameron Kusher, who expects at least first-home buyer demand to fall during 2010, yet at present there’s no indication this will have a significant impact on the overall market as any slack is being absorbed by investors and upgraders.
We’re also in for a rise in interest rates, or to be more precise a series of increases during the next twelve months. On February 19, Reserve Bank Governor Glenn Stevens told Parliament’s Economics Committee that he expected the RBA to raise interest rates ‘between two and four more times’ between now and the end of the year.
The timing of these increases as yet remains unknown. JP Morgan chief economist Stephen Walters told the Melbourne Herald-Sun: "Further hikes are coming, that remains clear, but the risk now is that the pause the RBA has embarked on could be longer than we currently expect," he said.
"We are sticking with our call for the next hike to come in April but the next hike even could come as late as mid-year."
Whatever the RBA’s timing might be, the net result for the rest of 2010 will be a rise of around 1 percent. This could possibly affect buyer demand but despite the certainty of future rate increases, borrowing for property remains at high levels.
One reason may be that a return to what the RBA considers a position above ‘emergency’ levels will still leave interest rates lower than when the first impacts of the GFC were being felt in 2008.
Matthew Bell, an economist with Australian Property Monitors, says that “Once we reach 7.5 percent to 8 percent, rates will start altering people’s buying decisions”, and he may be right, but the present rates are well below this and there’s no reason to expect the RBA’s actions to drive rates up to a position near these levels in the next two years.
Let’s return to the Sun-Herald’s Property Guide for a moment. In its pages there are some interesting quotes from several property experts who give their thoughts on 2010 and what it will bring.
Louis Christopher, managing director of SQM Research, says: “Our general growth forecast is between 6 percent and 8 percent.” He does note that any further rationing of credit by the major banks could reduce these figures if owners and investors find it hard to borrow money.
Mark Armstrong, a director of Property Planning Australia, is also bullish about property. “Sydney prices grew by more than 12 percent last year and there’s no doubt we’re going to see the market grow by more than that this year.”
Not everyone is quite so optimistic. RP Data’s Cameron Cusher who was mentioned earlier, believes that “The major influences this year will be the impact of rising interest rates and the removal of the first-home buyer grant boost. These two factors are likely to result in the Sydney market seeing lower levels of property growth than that witnessed during the past twelve months.”
Mr Cusher does see a bright spot in the market’s upper echelons. “Over the next twelve months we believe the upper end of markets in the capital cities will continue to bounce back and should be one of the standout performers in a market that will, overall, reflect slower rates of growth.”
There are some other interesting factors at work that may help explain the ongoing strength of the Sydney property market.
Although many commentators on the market have stated their belief that Sydney housing is becoming unaffordable with a median house price just under $600,000, real estate group Rismark International’s Dwelling Price-to-Income Index found that Australian house prices have not risen relative to disposable household incomes since late 2003.
Rismark’s managing director Christopher Joye, stated: "In contrast to claims that Australian house prices are 7-8x incomes, Rismark's National Dwelling Price-to-Income Index implies that the true ratio across all regions and all property types is around half this estimate.
"This suggests that Australian housing is not as expensive as is commonly believed. It also reconciles with RBA analysis highlighting Australia's internationally low mortgage default and mortgage stress rates," he said.
Upgraders are another contributor to rising property prices. Owners who purchased their first home during the housing boom of 2000 - 2003 have realised real growth in their equity. They now have higher incomes and survived the last series of interest rate rises. Many are now selling their first home and upgrading to a better location or a larger home.
As always, undersupply relative to demand drives prices upwards. BIS Shrapnel senior economist Jason Anderson said in the Australian newspaper that the lack of new building and the influx of migrants had led to a mounting housing shortage.
"We estimate the national shortage will reach about 150,000 dwellings, concentrated in NSW, where there is an 84,000 shortage."
This is positive news for Stockland, the country's largest residential developer, which reported a $214 million profit for the first half of the financial year.
Interviewed in The Australian, Stockland managing director Matthew Quinn said that, although the company's sales were already above the previous residential market peak in 2004, he expected the recovery to be sustainable.
Mr Quinn also said that the undersupply of housing and the return of upgraders and investors would underpin the market.
Spare a bit of sympathy for Professor Steve Keen from the University of Western Sydney who lost his bet after confidently forecasting back in October 2008 that the value of Sydney property was going to drop 40 percent and the fall to the bottom of the trough would take 10 to 15 years to reach.
(We note that at that time we stated: “Our view of Sydney real estate is that prices will continue to stabilise over the next six months, perhaps with further modest decreases but with no dramatic declines... and investors will return to property where they can generate capital gains and rental income with renewed confidence.”)
Although Professor Keen remains defiant about the logic underlying his forecast, he is now repaying his losing bet by walking from Parliament House to Australia’s highest mountain, Mt Kosciousko - a distance of 224km.
Professor Keen begins his walk at 2pm on April 15. He says he’d be delighted to have the companionship of anyone wishing to accompany him. We don’t plan to be there.
The crystal ball is crystal-clearMon, 25 Jan 2010
2010 will be an interesting year in real estate, especially in two areas – property prices and the cost of renting. What happens in the next twelve months will lay the foundation for at least the next three to five years.
Indications are already clear that Sydney property prices will rise and so will weekly rental rates. Equally clear is the likelihood of continuing interest rate increases.
Statistics compiled by Australian Property Monitors show that median rents for houses in Sydney are up by 2.2 percent over the year. This may not sound like much but it’s a statistic that’s going to rise just as certainly as will interest rates.
An interesting study by the influential UK-based magazine The Economist concluded that Australian house prices are overvalued by a factor of 50 percent. Affordability is a growing problem for those wishing to enter the property market, and there’s little in the way of relief to ease their pain.
A shortage of vacant land, combined with high levels of taxes and charges, ensure a continuing decline in new dwelling approvals. Housing Industry Association chief economist Harley Dale summarised the situation in an interview with the Sun-Herald:
"A standard new house-and-land package is more expensive in Sydney than any other capital city," he said.
"Compared to Melbourne, the price differential is in excess of $100,000, and much of that has to do with the fact that taxes and charges are on average higher in Sydney than anywhere else."
The cash-strapped position of government bodies at both the state and local level will ensure that this situation remains unchanged in the foreseeable future.
Just before the end of 2009 the Executive Committee of Australian Business Economists forecast that the Reserve Bank would raise interest rates to rise to a peak of 5.5 percent in 2011. This figure is already looking a bit optimistic with more rate increases likely in early 2010.
An interest rate rise in February would be the first time since the RBA started announcing interest rate moves 20 years ago that the bank has raised rates at four consecutive meetings.
But ICAP economist Adam Carr has no doubts about a February rate rise. ‘‘A February hike is a done deal,’’ Mr Carr told the Sydney Morning Herald.
La Trobe University professor Don Harding explains why: ''The board will look at [the CPI], see there's not much inflation in the system, say that's nice to know, but then say the labour market is getting tight, retail sales are looking strong, any number of indicators are looking strong and we probably think inflation is about to pick up.''
Even if Professor Harding’s expectations of a pre-emptive strike by the RBA aren’t borne out by the February board’s meeting, there’s a good chance that inflationary pressures will continue to grow in the first quarter of 2010 and the Bank’s alarm bells will be ringing.
As Commonwealth Securities economist Savanth Sebastian said in an interview with the Sydney Morning Herald: ''Price pressures, though mild, are once again rising.''
Just how long the ‘mildness’ will last is anyone’s guess, but all the factors that were working to keep inflation under control are fading away as Australia’s economic recovery from an unexpectedly ineffectual Global Financial Crisis gathers momentum.
The numbers tell the story. The national unemployment rate was a seasonally adjusted 5.5 percent in December according to figures from the Australian Bureau of Statistics.
The economy gained 35,200 jobs in December, raising total employment to an all-time high of 10.906 million.
Full-time employment increased by 7,300, while the number of part-time jobs rose by 27,900.
These figures almost guarantee ongoing interest rate increases, but are the people worried? Not much, according to the Westpac-Melbourne Institute consumer sentiment index which rose by 5.6 percent in January 2010 to 120.1 index points from 113.8 in December.
"This is a very strong result," said Westpac chief economist Bill Evans, noting that the index was 33.6 percent higher than a year ago. "The index is seasonally adjusted and therefore takes account of traditional January optimism."
Even share prices on the Australian Stock Exchange had a glow of optimism. ''The share market also supported confidence with a rise of 4.2 percent although petrol prices did increase by a solid 4.4 percent,'' he said.
One of the most telling statistics in the index was that the confidence of those respondents who currently hold a mortgage reached its highest level since 1994.
If those already paying off mortgages aren’t worried about the likelihood of rate increases, there’s a good chance tenants facing increasingly high rentals will see the benefits in opting to purchase property.
John Edwards, CEO of property analyst Residex, said there is only one word that can describe 2009 and that is "remarkable!"
He said that pent up demand and a lack of supply of desired stock drove the Sydney market in a situation where low interest rates provided an acceptable level of affordability.
Mr Edwards noted that Sydney’s capital growth of 10.2 percent was amazing enough, but over the last six months of 2009 achieved 21.4 percent on an annualised basis. He then asked, can this growth continue?
“For the moment it probably will until the Reserve Bank increases interest rates by about 0.5% to 1%, and the skilled immigration slows. This is unlikely to occur in the short term, but will over the next 12 to 18 months.
“Hence, we can expect these current quality rates of growth to continue but be reduced slightly.”
Residex notes that government subsidies for first home buyers removed a number of renters from the market during 2009. These temporary high levels of government subsidies had the effect of raising property prices, but have now been withdrawn.
As John Edwards sees it, those who were unable to take advantage of the grants now face increased prices for both purchasing property and rentals.
“This leads us to the view that towards the middle or end of this year, we will again see rental rates move back into a growth pattern.”
There were however some signs that rising interest rates are making consumers more worried about making some financial commitments. A report by David Uren in the Australian newspaper showed that new borrowing for home renovations, motor vehicles and blocks of land all fell in November.
“Spending on home renovation has been sliding since March last year, with the $465 million borrowed for that purpose in November down by 13.9 percent. Spending on new blocks of land has fallen by 12.7 percent since it peaked in June.”
In the article, Housing Industry Association chief economist Harley Dale said one reason for the fall in spending on renovation was that more people were confident enough to trade up to a new house.
"You would hope to see some sustained turnaround in renovations as general economic fortunes improve and people are more comfortable that house prices are growing in a sustainable way again," he said.
For investors the outlook is still towards property rather than the sharemarket. According to the latest Citibank Australian Wealth Report, most people feel an investment property is the best place to park their money, with 74 percent believing now is a good time to invest in bricks and mortar.
In an interview with The Australian newspaper, Citibank's Andrew de Graaff said that people were willing to lock away their capital in property.
"The perception we got from the survey is people are just wanting to get that sense of security again,'' Mr de Graaff said.
The trends are in place - rising interest rates, rising property values, and rising rates of weekly rentals. Unless something intervenes in the scheme of things, we can expect to see a continuation of this scenario until at least 2013, and for those who own property it’s a very positive outlook.
What a difference twelve months can makeWed, 13 Jan 2010
At the end of 2009 it’s worth glancing back to where we were a year ago as 2008 was drawing to a close.
Looking around now at the Australian economy and especially the thriving Sydney property market it seems hard to believe that just twelve months ago we were preparing for what was termed ‘an economic disaster’.
2009 was set to be a year of great challenges with rising unemployment and a deteriorating Australian economy. In hopes of staving off a full-blown depression the Reserve Bank of Australia had lowered its cash rate to 4.25 percent and there were forecasts the rate would go even lower in the New Year.
The rest is history and a tale of great relief as well. Twelve months after we were facing what seemed like a financial Armageddon the Australian economy was back in the black, although not by a large amount, expanding by 0.2 percent in the three months to the end of September, and by 0.5 percent for the 2009 year.
The RBA, whose policy of lowering cash its cash rate to stimulate the economy proved successful, has already raised its rate from an historic low of 3 percent to its current rate of 3.75 percent and further increases are likely, although perhaps not as soon as might have been expected last month.
Ric Battelino, deputy director of the RBA said on December 17 that “...it would be reasonable to conclude that the overall stance of monetary policy is now back in the normal range, though in the expansionary segment of that range.”
If the RBA sees the current level of interest rates as ‘normal’ it also means that rates are more likely to remain where they are instead of being raised again.
However, Mr Battelino also indicated that because the major banks were raising their interest rates beyond their usual margins borrowers were actually paying more for their loans than in previous periods of relatively low cash rates.
Money is therefore already more expensive which acts as a buffer against inflationary pressures in the eyes of the RBA.
Although the Federal Treasurer, Wayne Swan, has said that the economy will remain reliant on government stimulus during 2010, the housing market could well be affected for a period of time by the end of the Commonwealth’s ‘boost’ to first home buyers’ grants when it comes into effect on December 31.
The Market Intelligence Strategy Centre (MISC) has warned that the scaling back of the first home buyers’ grant will combine with tighter lending criteria from banks and other lenders to cause a fall in the value of mortgages.
It forecasts a $14 billion drop in the value of mortgages written over a twelve month period and says the mortgage market is likely to reach a bottom in the first quarter of 2010.
Although there’s little doubt that the reduction in the first home buyers’ grant will have an effect on sales at the entry level end of the market, at least during the first quarter of the year, there are other factors in play that indicate the Sydney housing market’s strength will continue.
The first is the action at Sydney’s property auctions. The Daily Telegraph reported on December 20 that this December has been the strongest on record with a clearance rate of more than 70 percent. This isn’t bad for a month that’s usually the slowest for clearances.
The next factor to examine is the demand for mortgage funds. Despite rising interest rates there is a boom in lending to people building new homes. Loans issued to fund the construction of new housing rose 9.2 percent in October to a 15-year high following a 9.8 percent rise in September.
It should be noted that the total number of new owner-occupier housing loans fell 1.4 percent in October, and that the first home buyers' share of the market eased to 26 percent, down from 29.5 percent in May.
Talking with the Sydney Morning Herald, Westpac senior economist Andrew Hanlan said: "Demand for housing has surged over the last year, reflecting the very favourable combination of historically low interest rates, government incentives, strong population growth and pent-up demand for housing stock."
If there is any slackening in demand for finance from first home buyers, it may well be picked up by a growing number of builders returning to the market after their self-imposed retreat over the past few years.
Then there’s the affordability factor. John Edwards, CEO of property analysts Residex, has raised an interesting point about Sydney’s residential real estate.
“Although the Sydney housing market has the greatest (and increasing) housing shortage of all our capital cities, this has not always flowed into higher housing prices, due to the Sydney housing market's extreme unaffordability in periods of high interest rates.”
He notes that at these times housing prices are somewhat contained but rents increase instead. However, he adds that the RBA’s lowering of interest rates in the early part of 2009 enabled Sydney’s housing price levels to rise while at the same time rents began to fall.
One of our biggest worries at the start of 2009 was the spectre of unemployment, forecast to hit a peak of 8.5 percent or perhaps even higher by the end of the year. Instead, look what’s happened.
Australia’s unemployment rate is now 5.7 percent and according to the Australian Bureau of Statistics the rate is now trending downwards. NSW added an extra 11,800 jobs between October and November, bringing the state’s jobless rate down from 6.4 percent to 5.98 percent.
Let’s return to interest rates for a moment. The December survey of the executive committee of Australian Business Economists showed the Australian economy bouncing back next year to near-normal growth of 3.2 percent and interest rates peaking in 2011 at 5.50 percent.
The economists also said they expected the Reserve Bank to push up its cash rate from its present 3.75 per cent to 4.75 per cent next year. This would mean an increase in standard variable mortgage rates to more than 7 percent.
Is this figure affordable? A November survey commissioned by mortgage broker Mortgage Choice found that more than one third of Australians plan to buy a property in the next two years despite any concerns they may have about rising interest rates.
Mortgage Choice corporate affairs manager Kristy Sheppard said this would hopefully stimulate more housing construction.
"As a housing market service provider, Mortgage Choice is pleased to see 41 per cent of respondents planning to buy property in the next two years and 43 per cent of them planning on an investment property.”
The survey also showed that found 40 percent of mortgage holders believed they could afford to make repayments at an interest rate of more than 11 percent.
It’s always been possible for changes to happen quickly in the property market, but seldom before have the changes been more sudden or more dramatic.
The end of the first home buyers’ ‘boost’ will impact on the market, but its effects will be mitigated by other factors. Interest rates will pause for a time, but will then increase along a generally predictable path to peak in 2011.
Fears of a fiscal collapse and a massive rise in unemployment have passed, seemingly to be replaced by confidence in most sectors of the economy.
Much has changed in the past twelve months, but our outlook remains the same. Just like Old Man River the Sydney property market will keep right on rolling along, with continuing strong demand for housing and prices that reflect the scarcity of supply.
Gen Y - moving on but not inMon, 30 Nov 2009
A recent housing study commissioned by the Commonwealth Bank found that homeowners aren’t changing addresses as much as they used to, making it harder for those up-and-coming members of Generation Y to purchase real estate.
Economist Craig James, author of the study, noted: “That may be good for the Baby Boomers and Generation X, but if they don’t want to move, and state and territory governments don’t increase housing supply, then it really puts big pressure on Generation Y to find their homes, and at reasonable cost.”
Gen Y faces a few more problems in the current market. In November the Reserve Bank raised interest rates for the second month in a row, up to 3.5 percent. The big four banks weren’t slow to follow suit and quickly hiked up their borrowers’ home loan interest rates to around 5.5 percent.
Despite a bit of verbal opposition from Federal Treasurer Wayne Swan, the banks have made it clear that they’ll raise their loan interest rates whenever they please, which is likely to be whenever the RBA raises its rates.
The RBA is playing their cards close to their chest regarding the timing of future rate increases, but they’ve left no doubt that rates will continue to rise, saying further interest rate increases are "most likely appropriate".
In the Bank’s November statement, RBA Governor Glenn Stevens expressed a mood of optimism. ''With the risk of serious economic contraction in Australia now having passed, the Board's view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.''
In a speech on November 25, Reserve Bank Deputy Governor Ric Battellino said that the domestic economy had held up much better than expected in 2009. "With the economy having only recently entered a new upswing, it is reasonable to assume that we will see this growth extended for a few more years yet," he said.
This optimism is to be expected since the worst effects of the GFC seem to have largely bypassed Australia. The RBA is now looking at economic statistics that indicate financial markets are in much better shape than they were six months ago, and borrowers have easier and less costly access to funds.
Another sign of economic recovery is the brisk action at Sydney’s property auctions. Australian Property Monitors noted that, with just one week remaining in the traditional Spring selling season, 68 percent of properties offered at auction were sold compared to just 43 percent in November a year ago.
That may sound like good news for Gen Y’s would-be homeowners, but it also means there’s a chance for inflation to rear its ugly head and that’s something the RBA clearly wants to prevent. Its main weapon against inflation is the interest rate increase, and the battle is already underway.
Gen Y’s home ownership aspirations will also be impacted by the coming reduction in the first-home owners grant. Already reduced in September to $10,500 for existing homes and $14,000 for new homes, it returns to its original level of $7000 on January 1, 2010.
Steve Martin, President of the Real Estate Institute of Australia, told the Australian newspaper that moving interest rates upwards too soon could spell disaster. “If we have a double whammy with the first home owners boost being wound back in December and rates potentially going up it could very well bring us to a very serious crossroads again.”
As if that’s not enough bad news for Gen Y, more evidence is coming out that indicates the supply of housing in NSW is falling even further behind demand than previously thought.
Speaking to property writer Chris Zappone in the Sydney Morning Herald, the ANZ Bank’s head of property analysis Paul Braddick warned: "The housing industry and the policy authorities face a considerable challenge in the years ahead to deliver an adequate physical supply of housing."
He noted that dwelling completions are forecast to fall below 130,000 in the year ahead, and that we can expect a further "dramatic tightening of the housing demand-supply balance".
Writing in the National Times, Aaron Gadiel, who is chief executive of Urban Taskforce Australia, pointed out that in the financial year ending June 30, NSW accounted for only 23 percent of Australia's building activity, although it has 32 percent of the nation’s population. The effect of this situation on rent levels is predictably upwards.
He writes: “Sydneysiders have already been feeling the pinch of housing shortage. Rents in outer suburban Sydney have gone up by more than 20 percent in the past two years. In the middle-ring suburbs rents have jumped near to 30 percent.”
Compounding the Sydney housing shortage is the fact that much of the construction that has taken place in recent times is apparently not quite what the market wants.
Developers have been pressured by a combination of local and state government regulations into constructing row after row of high-density apartment buildings alongside Sydney’s congested transport corridors. Sales of these high-rise developments have been slower than expected and don’t reflect the huge demand for housing being felt in other sectors of the metropolitan area.
The strength of this demand can be gauged by the rise in the home price index of 4.2 percent in the three months to September. Australian Bureau of Statistics figures show that home prices climbed by 6.2 per cent in the 12 months to September, but most of the gains are in recent months as availability of housing stock dries up.
Immigration is another key contributor to this situation. Expanding migration raised our population growth rate to 2.1 percent in the year to March. This translates into an additional 439,000 people looking for a place to live across Australia.
There is at least one plan to produce housing for Sydney’s expected 40 percent population increase over the next twenty years. A group of major property companies has submitted its Urban Renewal Action Plan to the NSW Government calling for the removal of a number of obstacles to development so that 640,000 new homes could be built.
This comes at a time when the NSW Government is about to announce a review of its own 5-year old Metropolitan Strategy planning document. But plans are one thing and housing construction is quite another.
The ANZ Bank’s Paul Braddick has a medium-term view of the housing supply that’s positive for existing property owners but worrying for those expecting to enter the market in the next few years.
"Unless significant action is taken to remove the structural impediments to housing supply, Australia will face an intractable shortage of housing that will drive a deterioration in housing affordability - both purchase and rental - beyond anything we have ever seen before".
All those years of housing supply falling short of demand have left a widening gap that may not even be bridged by the time Gen Y reaches retirement age.
Sydney market surges aheadMon, 26 Oct 2009
Anyone expecting the Sydney real estate market to pause or even move backwards once the first home buyers grant began its phasing-out will have been sorely disappointed by the incredible strength this market possesses.
Even a somewhat sooner than expected interest rate hike by the Reserve Bank of Australia in early October has had little or no impact. Although small (just a quarter of a percent) the RBA has left little doubt that further increases lie ahead, with at least one more increase in the range of half a percentage point likely before Christmas.
Minutes of the Reserve Bank's last monetary policy board meeting reveal the bank’s perception that low interest rates could lead to economic problems: "Keeping interest rates at very low levels for an extended period could...threaten the achievement of the inflation target over the medium term.
“More generally, very expansionary policy could result in the build-up of other imbalances in the economy, which would ultimately be detrimental to economic growth."
Economic consultants Access Economics say they expect interest rates to reach 5 percent by early 2011. CommSec chief economist Craig James agrees with this line of thought and told the Sydney Morning Herald: "Budding homebuyers need to do their sums. Rates will continue to rise in the next 12-18 months, probably between 1.5 and 2 percentage points."
So, what’s really going to happen in Sydney real estate? As reported in the Sunday Telegraph (25.10.09), Sydney’s median house value has reached its highest-ever level. Figures from market analyst Residex show a rise of $11,000 in the median Sydney value just in the month of September, bringing the median price of a Sydney home to a whopping $610,000.
The RBA will of course take note of this and tweak interest rates a bit at a time to apply the brakes to what it perceives as a massive inflationary price movement. The banks will go along happily with the trend, many of them having already boosted their loan interest rates by slightly more than the RBA’s quarter of a percent.
But will it work? Is there anything to stop the Sydney market’s prices trending upwards? Frankly, we don’t believe there is.
For one thing, it’s not just about interest rates. The historically low 3 percent was a figure set in desperation to offset the impacts of the Global Financial Crisis. The GFC has wrecked the real estate markets in the UK and USA, so what makes Australia different?
First, the state and federal governments made a quick and accurate assessment of the situation and concluded that a stimulus was necessary to stave off the GFC. Not just in the area of real estate, but that was one of the market segments specifically targeted with incentives like low interest rates and packages of grants for buyers. And it worked.
In the 18 months prior to the October rate increase, the RBA dropped its rates by 425 basis points. Properties suddenly became more affordable and as a result thousands of tenants became homeowners.
However, what didn’t happen was construction of new homes; the number of new homes dropped by 25 percent while sales continued to rise.
The most important underlying metric that could have had a genuine impact on rising housing prices – the rate of new home construction, has remained moribund for the past several years.
In 2002 Australia built 173,000 new homes, but this year the figure’s just 124,000. It’s woefully inadequate to meet the demand for new housing, and there’s no turnaround in sight.
Another worry that never materialised was an expectation the GFC would drive unemployment levels up to 9 or 10 percent, cause permanent losses of jobs in a number of key industries, and reduce pressures on wages. It just didn’t work out that way.
Economic consultants Access Economics latest Business Outlook report says that the unemployment rate is likely to peak at just 6.8 percent in the middle of 2010. Instead of cutting jobs Australian employers have wisely elected to reduce hours of work performed by their employees. Finding the human capital needed for the recovery won’t be a huge problem and once again, Donald Horne’s ‘Lucky Country’ has lived up to its name.
Tenants will soon begin to feel the effects of housing shortages. Although rents have stabilised over the past year or so, fewer first home buyers will make the move from renters to owners and competition for rental properties will increase. Analysts forecast rent rises across Sydney from 5 to 15 percent over the coming year.
In the past month the number of vacant rental properties in Sydney's inner suburbs fell slightly to 1.4 per cent while the number of vacant rental properties in outer suburbs rose by 0.1 per cent to 1 per cent.
"These results are a double-edged sword; great news for landlords but grim news for tenants," REINSW president Steve Martin said in a statement to the media.
"The results for Sydney and Newcastle are concerning and show that, despite a low interest rate environment and additional first home buyer and other buyer incentives the rental market remains extremely fragile."
Now, let’s return to our question: What’s really going to happen in Sydney real estate? Five things are certain.
1. Interest rates will increase, probably by at least two percent over the next twelve months.
2. Real estate prices will increase, and the closer the property is to the CBD the greater the increase will be. Rises of 5 to 12 percent are not unlikely.
3. Returns on rental property will increase, by 5 to 15 percent if analysts’ forecasts are accurate.
4. Housing construction will continue to fall short of demand. This situation will persist for at least the next three years based on the housing industry’s forward estimates, although without massive government action the ongoing shortfall is virtually assured for the next decade.
5. Investors who have been burned by the sharemarket will continue to move their capital into property. Smaller investors in particular will avoid property-based funds and opt for direct ownership of rental properties.
In our website’s ‘Market Comment’ section you can see our articles dating back to June, 2008. It’s not really all that long ago, but the world has changed much in this time and Australia has weathered a global economic storm that has had serious consequences for property markets worldwide.
Fads and fashions come and go; today’s olive groves and tree plantations are tomorrow’s economic casualties. The one constant for value has been property, and in particular Sydney real estate.
We are in a rising property market with affordable interest rates. This is an excellent time to purchase a home, to upgrade your residence, or to buy property as an investment. The signals are clear and the time to act is now.
Not much rain on this paradeTue, 6 Oct 2009
Potential property investors have been given some additional motivation by the latest house price data from analysts RP Data-Rismark and BIS Shrapnel.
RP Data-Rismark’s figures showed price gains in all capital cities. Even better was their finding that market growth is happening across all suburbs and not just in those areas most appealing to first home buyers.
Forecasters BIS Shrapnel say that prices will keep going up, accelerating into double digits once the rate of unemployment peaks in 2010/11. There are already signs that unemployment may peak at a much lower level than earlier thought.
If there is any market sector lagging behind the rest, it’s right at the top. Australian Property Monitors found that the number of houses and units sold for more than $1 million in the past six months had declined by 28 percent over the past two years.
Indications are, however, that this is largely due to vendors holding their properties off the market in expectation of rising prices in the near future.
There’s a lot of debate about the likelihood of higher interest rates between now and the end of 2009.
For the moment the Reserve Bank of Australia seems to feel that the better-than-expected unemployment figures – stabilised at 5.8 percent for the past three months – aren’t enough reason to hike rates just yet.
Another factor no doubt causing some angst in the corridors of the RBA is the continuing strength of the property market. Rising prices are usually a signal for rates to be increased.
Sydney's housing prices were up 6.6 percent in the first seven months of 2009 to $537,396, according to RP Data-Rismark’s Home Value Index. However, the market is still responding to the stimulus of the first home owner’s grant which begins to scale back from October 1.
Until the effects of the grant’s reduction from $14,000 to $10,500 for existing properties are known the RBA will probably hold off any decision to raise interest rates.
A growing number of forecasters are predicting the Australian economy will stage a recovery in 2010, albeit a modest one, and a too-early rise in interest rates could imperil this optimistic scenario.
Admittedly there’s little doubt that the RBA will increase its rate from the present record low sometime soon. This is unlikely to have much of an impact on the Sydney property market where rental yields are good and new housing construction is at historically low rates.
And despite several recent strong performances, the Australian share market is still awash with uncertainties about future earnings and the security of invested funds.
When your investment is in bricks and mortar you don’t have to worry about it disappearing into the corporate graveyard. You can choose to live in it or rent it out; with the present low cost of funds it’s possible to adopt either a positive or negative gearing structure depending on your financial position.
In the news recently was the Commonwealth Government’s ‘discovery’ that population growth would be much stronger than previously forecast. By the year 2050 there could be 34 million Australians where there are now just 21 million or so.
Even before this discovery the Housing Industry Association estimated the shortfall between underlying demand and supply of homes to reach 56,600 in 2009. Of an estimated 186,100 homes needed only 129,500 would be built.
The NSW Government’s Metropolitan Strategy, released in 2005, expects that the population of Sydney will grow by about 40,000 people per year. By 2050 Sydney’s population will have rocketed upwards, from the present 4.2 million to a possible 6.9 million.
Estimates for the shortfall in housing construction by 2050 vary widely, but it’s safe to say that unless there is a significant reversal of current building trends there will be massive unmet demand for accommodation throughout the greater Sydney region forty-one years from now.
Signs of unmet demand are already easy to see. Rising rents and property values are two good indicators, and we’re now seeing them across Sydney. What it will be like in 2050 is anybody’s guess, but a future of housing shortages is virtually guaranteed.
So why not buy a home? In the interests of journalistic balance, we’ll present a somewhat differing viewpoint from respected financial writers David and Libby Koch.
Writing in News Limited newspapers, David and Libby Koch say in their September 14 column that renting “...could be more lucrative than buying a home”.
They point out that Australian real estate is defying global trends. Residential property prices are 10-30 percent more expensive than the rest of the world, and a shortage of property has kept rents up.
They rightly say that buyers are faced with high property prices and banks reluctant to do their part in easing the property shortage. Their proposal is to rent a home rather than buy, and invest the capital difference elsewhere.
The Kochs say: “The key to this option is having the discipline to invest (and not spend) the difference between your rent and potential mortgage repayments on a similar property.”
They cite a university study that looked at investing $50,000 in a financial institution and renting a home versus buying a home with a $50,000 deposit.
The study found that buying a home is “...sounder financially, provided there is long-term ownership. It found the financial break-even point for continuous home ownership was 17 years.”
Up to that 17 year point renting could be a better financial alternative because tenants don’t have to pay the up-front establishment costs like stamp duty and legal fees.
It’s an appealing argument for short-term renting but raises the question of where one should invest all that freed-up capital? We know what’s happened in recent times to equity investments, and the performance of many superannuation funds has been badly hit by the GFC.
If, on the other hand, you were to rent a property as your home and were able to fund the purchase of an investment property, it could be financially advantageous. Crunching the numbers could give you an interesting option to consider.
And if you were to acquire a property in Sydney right now, what is likely to happen to its value in the very short term? The Spring Property Guide in the September 19-20 issue of ‘Domain’ in the Sydney Morning Herald has some interesting answers.
The Guide predicts the movement in median prices of housing over the next twelve months, based on figures from Australian Property Monitors. We’ll focus on the Lower North Shore for obvious reasons, but if you want to know about other parts of greater Sydney it’s all in the Guide.
For Neutral Bay and Cremorne the Guide forecasts an increase of 6-9 percent for houses and units. For North Sydney it forecasts an increase of 9-12 percent for houses and units, and for Mosman it sees houses increasing 12-15 percent and units increasing 3-6 percent.
The area’s hotspot is Milsons Point where units are predicted to rise by more than 15 percent, but there are good gains to be had across the Lower North Shore.
If BIS Shrapnel’s forecasts are accurate, these price rises in 2009/10 will be eclipsed in each of the next two financial years. Today’s Sydney real estate prices are without doubt tomorrow’s ‘good old days’ for value.
Lots of news in a new monthThu, 20 Aug 2009
A month is a long time in today’s real estate market. Last month the Reserve Bank left its cash rate at a 49-year low of 3 percent, and RBA Governor Glenn Stevens was sending out messages that the rate would be likely to stay there for a while.
Well-respected ANZ economist, Dr Alex Joiner expressed a similar view: "Given the risks the economy faces going forward we believe interest rates will be on hold at 3 percent until late 2010."
But despite Dr Joiner’s expectations, this month it’s looking increasingly like interest rates will go up before the end of 2009, possibly by a ½ percent or maybe a dash more.
Supporting this is the August 15 warning by the RBA’s Governor that borrowers should be prepared for an eventual 2 percentage points increase in their mortgage repayments.
Not that this is going to have much of an impact on the present Sydney market.
Even before the start of the Spring season which is traditionally the time of year when aspiring vendors put their properties on the market, sales are strong and auction clearance levels are running hot – around 70 percent.
Even better is the news that the value of properties sold in the first weekend of August had risen from $70.4 million at the same time last year to a healthy $96.5 million.
A single weekend does not a market make, we must admit, but the key figures relating to Sydney real estate are trending upwards with no sign of abating just yet.
The Housing Industry Association’s Chief Economist, Harley Dale, said that the latest set of market statistics should remove any concerns about a possible drop in residential real estate such as happened in the USA and the UK.
"Very low variable mortgage rates, the First Home Owner's Grant boost, and attractive deals from volume builders have generated increased new home demand."
Reflecting this demand, the Australian house price index rose 4.2 percent in the June quarter. Sydney had one of the biggest house price index increases, up by 4.9 percent in the quarter.
As always, the amount of price increase varies depending upon the demand in a particular area. The upper north shore was Sydney’s strongest performing district during the June quarter, with house prices rising 8.9 percent.
Prices rose 4.2 percent in Canterbury-Bankstown and 3.1 percent in Sydney’s west. However, there was only modest growth of 1.1 percent in Sydney’s east and 1.7 percent growth in Sydney’s inner west.
AMP Capital Investors chief economist Shane Oliver said that the Australian Bureau of Statistics housing figures could well indicate that the Sydney market has bottomed out.
"It's confirming the information from the private sector surveys, which all suggest that house prices have bottomed out for now and are on their way back up again.”
The Australian economy may not be quite as buoyant as the real estate market. Economic forecaster BIS Shrapnel has forecast falling household incomes, rising employment and a 17 percent decline in business investment over the next year.
However, beyond 2010, BIS Shrapnel predicts a solid recovery with economic growth rising to 4 percent by 2011/2012.
On August 19 Olivier Blanchard, chief economist for the International Monetary Fund (IMF), declared that the global recovery is underway.
“The recovery has started”, he announced, warning however that the recovery will be slow and unpredictable.
Housing affordability remains a concern. In early August the IMF suggested that Australian property prices could be overvalued by as much as 20 percent. This doesn’t mean that a sudden drop of 20 percent in prices is likely anytime soon, if ever.
It’s clear that recent demand for affordable residential real estate has prompted buyers to pay thousands of dollars more than the advertised price for many Sydney properties.
This helps confirm that the actions taken by various governments to stimulate activity in the housing market have been successful, and that prices have been to some degree supported by these actions.
In recent weeks turnover in the middle to lower end of the market has doubled for many Sydney real estate agencies compared with the same time last year.
Many agents have reported stock shortages, prompting the Chairman of one national real estate group to comment in the Australian newspaper: "The stock shortages are as acute as any of us can remember. It has changed to a vendors' market, which was unthinkable six months ago."
There are some indications that the shortage of housing stock is being addressed with Australian building approvals showing their biggest increase in four years thanks to a number of new apartment projects. Approvals rose by 9.3 percent in June, outperforming market expectations of an eight percent increase.
But the housing stock crunch is a long way from over. On an annual basis overall building approvals are down 14.3 percent, and apartment building approvals are 45.7 percent weaker compared with a year earlier.
In this column a year ago we wrote: “Housing supply is short and demand for housing of all types is strong. There is a lag of at least two years before supply can begin to catch up with demand, and in the meantime prices of existing housing will level out and inevitably rise.”
And that’s precisely what happened.
Real estate is still the investor’s friendThu, 23 Jul 2009
As usual lately, news from the real estate market battlefront is mixed. Depending on which segment of the market one examines, the conclusions can range from pessimistic to optimistic and everything in between.
At the very top end the global financial crisis has taken its highest toll. Many of these properties were sold, often for greatly enhanced figures with regard to their previous sale prices, to players in the financial sector - merchant bankers, stockbrokers, currency traders and others whose lifestyles accelerated to match their burgeoning incomes.
Pressures from reduced incomes and margin calls have meant that the number of elite purchasers has dwindled. Until the economic recovery is complete this will be the place where the bargains are greatest – at least in dollar terms.
Elsewhere, in the market sectors with which most householders are more familiar, the news is much better. The reasons for this lie in the other factors that influence prices on the kinds of houses most of us think of when we think of ‘home’.
New construction continues to languish. Nobody has much faith in ‘build it and they will come’ at the present time, although the decline in housing construction does seem to be slowing slightly.
Nevertheless, new housing stock will be in short supply for years to come. The Australian Industry Group/Housing Industry Association Performance of Construction Index (or ‘the Australian PCI’ as it’s more commonly known) fell to 44 points in June, representing the 17th consecutive month of contraction.
Interest rates are still contained. The July meeting of the Reserve Bank of Australia resulted in the RBA leaving its cash rate at 3 percent. This is a 49-year low and analysts are mixed in their outlook for what the bank will do next.
They note the bank has ‘room to move’ and the RBA has suggested it may lower rates again in future. But whether the next move is going to be up or down is still fairly uncertain, and it won’t be a big move whichever way it goes.
Financial markets are predicting the official interest rate will start to move slowly upwards, pricing in a half-percentage point increase to 3.5 per cent by July 2010. Before then we could well see another small rate cut.
The Bank’s governor, Glenn Stevens, allowed himself to become fairly upbeat in early July when he gave his appreciation of global economic conditions.
“The global economy is stabilising, after a sharp contraction in demand during the December and March quarters. Downside risks to the outlook have diminished, with conditions in global financial markets improving this year and action to strengthen balance sheets of key financial institutions under way.”
He was similarly positive in his comments on the real estate sector. “A pick-up in housing credit demand suggests stronger dwelling activity is likely later in the year. House prices are tending to rise.”
That other big competitor for investors’ funds - the share market, is up and down on an almost daily basis, awaiting leads from overseas or some other place where a direction can hopefully be discerned. Profit forecasts are generally down.
Many investors have cashed in what was left of their share holdings and transferred their investment capital into real estate, although a survey by research group CoreData found that seven out of ten retirees had not withdrawn the majority of their invested funds from the market.
Superannuation funds have announced their worst returns since super was introduced with most funds falling in value from thirteen to twenty percent over the past twelve months.
This has to be influencing disappointed investors, especially the baby boomers in their retirement phase, towards the acquisition of real estate to meet their needs for returns on capital. So what do property analysts think?
Alex Joiner, an economist with ANZ Bank, says that investors are likely to be considering re-weighting their portfolios from shares into property because they can buy in an area they know, at a good yield, with low vacancy rates.
Investors also seek capital gains. In its report ‘Residential Property Prospects 2009 to 2012’, researcher BIS Shrapnel concludes that although first-home buyer demand is expected to ease after the end of the Federal Government's grant scheme in December, upgraders and investors will pick up any slack in overall demand.
Matthew Bell, an economist at Australian Property Monitors, agrees. "For Sydney and Melbourne, I expect to see the unit median price grow moderately for the remainder of 2009, with stronger growth in 2010.”
The chief economist at Commonwealth Securities Ltd., Craig James, told the Sydney Morning Herald that the combination of low interest rates, tight rental markets and generous grants to first-home buyers has driven up house prices.
"Sydney and Melbourne dwelling prices are back at record highs while other capital city home prices are not far off peak levels.
"It is a simple case of supply and demand. Demand for homes is being spurred by improved affordability, the fastest population growth in 40 years and weak returns on other assets," he says, also noting the decline in new home construction.
According to property market research firm RP Data, Sydney house values rose by 5.1 percent in the first five months of 2009.
Louis Christopher, managing director of another researcher, SQM, says that we should ‘be careful’ of these figures because they can vary from one month to another, but he admits to being a bit surprised at the strength of the present market.
“These figures suggest that the market is holding up better than we all expected throughout the first and second sectors of the year,” he says.
Well, some of us expected the present conditions. We’ve been bullish on Sydney property for several months, and now we’re certainly not alone.
Without a doubt these are tough economic times and house prices have taken a battering, more in some areas than others.
As the recession enters its next phase, rising unemployment will have some impact on real estate prices. The number of people seeking to buy property may decline somewhat, and economic constraints could force some additional homes onto the market.
Sydney rent levels, reflecting the downward pressures on incomes and a transition of many tenants to homeowner status thanks to grants benefiting first home buyers, are stabilising and not likely to surge in the short- to medium-term.
But it’s no longer a matter of forecasting that housing prices may rise; they are rising across Sydney and have expanded upwards from the lower end of the market into the middle segment.
Even the upper end of the market is strengthening; multimillion dollar sales are starting to happen, although prices are nowhere near the peak of the market a couple of years ago.
Now is a great time to buy property. First home buyers, upgraders and investors are increasingly active, and even parts of Sydney that were formerly trending downwards have stabilised.
Giving appropriate weight to all the factors now at play in the Sydney real estate market, we say that we’ve weathered the storm and from here the only way this market will go is upwards.
Are we really moving forward?Tue, 23 Jun 2009
It might be impolite to say “we told you so”, but we did. Admittedly, there were a few others who also said that real estate would lead the way towards Australia’s economic recovery in 2009, but six months ago there weren’t many willing to go very far out on that limb.
Having given those optimists a bouquet, we’re pleased to say that confidence in ownership of real estate is once again growing, both for property as an investment and also as the best means of providing a roof over our heads.
Across Australia property auction clearance rates have reached the mid 60 percent, and with the exception of the ‘millionaires rows’ at the very top end of the market we’re seeing growth return. The buyers are back with a vengeance.
So it looks like the worst is almost over and we can put those days of plummeting property prices behind us. Well, maybe not everywhere, but in Sydney it’s pretty easy to pick winners from losers.
Start with the Sydney market overall. Property analysts Residex have a way with words so we’ll quote them here: “Our predicted rates of capital growth are moderate with Sydney offering the best outcome.”
It’s not that the days of ten- or twenty-percent annual gains on property have returned, but those times were only a temporary paradise for speculators. For those who are serious about investing or about purchasing a home that will retain its value, today’s market conditions are a reward for patience - for waiting out the downtime.
Let’s give the government some credit where it’s due. The First Home Owners Grant has kept the pot bubbling when everything else, including the share market, was going cold. First home buyers are still borrowing at record levels, taking up 28 percent of the value of all housing loans.
Lower interest rates were the Reserve Bank’s contribution to ensuring the real estate market still had life in it. Rates are now stable and the only concern we have about that end of the business is the reluctance of the four big banks to resume lending at the level sought by the market, but they’re giving signals that they’ll lend more if they can pump up their interest charges a bit as they’ve done recently.
NSW Treasurer Eric Roozendaal has provided us with an incentive to buy a newly-built home with a 50 percent reduction in stamp duty on new homes worth less than $600,000 in the state’s 2009 budget.
This yields a saving of up to $11,245, but be quick. The discount ends December 31, 2009. And it doesn’t apply to homes purchased with the First Home Owners Grant, so the benefits will go mostly to second home buyers and investors.
The acting head of the NSW division of the Property Council of Australia, Angus Nardi, thinks the stamp duty cut, together with other government measures, will have a massive impact on the housing market. "I think the Government has implemented a handful of measures that should bring about a boom in the residential market," he told the Sydney Morning Herald.
He may be right, but both the First Home Owners Grant and the RBA’s rate cuts also have use-by dates. They’ll come to an end as activity in the real estate market is recovering. As Peter Icklow, CEO of property developers Monarch Investments, told the Australian: “First home buyers have had their opportunity. You can’t get $24,000 forever.”
So where do we think the stimulus will come from once the props have been removed? It’s an old story for those who’ve studied economics, but it never fails.
A shortage in supply provides support for prices. If a commodity like housing is in demand because everybody needs a place to live, those who want it have to compete with others who want the same thing. And there’s not a lot of housing stock to meet the demand.
But not everyone wants just a place to live. They want to live in places where there are good sources of public transport, schools, a trip to work as short as possible, access to retailers, and the availability of dining and entertainment amenities.
It is the suburbs that offer these amenities that will be the biggest beneficiaries from the resurgence in the Sydney real estate market. The first home buyers have just about had their day with the bottom end of the market. Now activity is moving up the housing chain.
Australian Property Monitors picked up the indicators of a market shift in the two months from mid-March to mid-April. Not only had auction clearance rates recovered to 2007 levels, but the numbers of properties sold from $700,000 to $2 million were significantly rising.
Property valuer HTW also commented on the growing strength in the ‘middle market’ – properties priced from $600,000 to $900,000 and up to $1.2 million in areas near the CBD: “Commonly we are seeing the natural progression of the first home buyer moving into the next bracket”.
This will have the natural consequence of driving Sydney real estate prices upwards - by how much is the only question. Research firm BIS Shrapnel recently forecast gains of 19 percent over the next three years, although this high rate of growth has been disputed by other analysts who forecast lower rates. Nevertheless, the forecasts all now say “growth” lies ahead.
There are lingering concerns about future rates of unemployment and their effects on the housing market but people with worries about their jobs have already taken themselves out of the market, and activity levels are still rising.
The present state of play clearly indicates that the peak of the crisis has passed. A measure of stability has been restored and both current rental returns and probable rates of future capital growth have real appeal for investors.
The demand for accommodation will continue as population growth, augmented by immigration, drives the quest for family homes, both separate dwellings and home units. All this is happening at a time when construction of new homes has reached a 50-year low.
The Sydney market is once again on the rise, responding to forces that are so familiar we might call them ‘historic’ or even ‘classic’, aided by helpful government support at both state and Commonwealth levels.
Are we really moving forward? Without a doubt, we are!
There's a lot going onMon, 25 May 2009
It’s been years since the property sector has enjoyed as much media coverage as it’s now receiving and, to put it mildly, the signals are mixed. Let’s try to make some sense out of a very complex situation.
We’ve seen that property prices can behave independently of other economic factors such as unemployment and inflation. Thanks largely to a financial stimulus from the federal and NSW governments, at least one segment of the real estate market is booming. This has impacted on a range of key market indicators.
We have to view NSW separately from the rest of Australia as the situation here is not the same as in other states and territories. There’s also the fact that Sydney is a large and diverse market comprised of several smaller localised markets.
So what do the experts say? The RP Data-Rismark national property values indices released in April showed Sydney house prices were up 2.39 percent overall to $565,928, and unit prices up 2.54 percent to $430,413.
But these findings were at variance with those of another prominent property analyst. Australian Property Monitors found that Sydney's median house price fell from $531,111 to $529,926 between December 2008 and March 2009, while the median unit price rose 1 percent from $364,314 to $367,751.
Let’s look ahead. Residex, another property analyst with a unique statistical model it applies to forecast price movements in the property market, said in its May report that Sydney houses are likely to have a higher rate of growth than is predicted for other cities.
“The Sydney prediction looks higher than intuitively seems reasonable, but given supply issues and history, it is a possible outcome. This would place the median value of a Sydney house in 2012 at something more than $700,000.”
Analysts do seem to agree on one thing. For those wanting to purchase a home Sydney is still a buyer’s market, except at the lower end of the scale – properties below around $450,000.
The extension of the Federal Government’s first home owners grant is one of the reasons for this situation. The package of government grants available to first home buyers created a surge in demand for this segment of the market and the number of properties on offer in this price range is decreasing as buyers rush to snap up what they perceive as the last of the bargains. Prices have risen accordingly.
It’s a different story at the top end of the market. A study by property analysts RP Data found that eight Sydney suburbs with a median home price of $1 million or above in February 2008 had dropped off the list of million-dollar suburbs a year later.
Macquarie Bank’s interest strategist Rory Robertson confirmed this, saying that the sharpest rates of price declines have been at the top end of the market. Cashed-up buyers in prestige areas have never had it so good!
In the mid-ground of the property sector sales results for homes priced between $500,000 and $1 million are mixed and largely dependent on their location. This is nothing new, and quality suburbs near the city have always outperformed those further from the CBD.
The point is here that there are properties within 10km of the CBD that commanded prices of more than $1 million just two years ago that are now available for much less. How long will this situation continue?
Property prices are becoming more affordable relative to income. Reserve Bank figures show that a typical Australian home is worth a little more than four times the average household's annual after-tax income, compared to almost six times five years ago.
RBA Governor Glenn Stevens said he believes that this means Australian house prices are not heading for the same kinds of dramatic price falls seen in the US, UK and other countries.
He told the Sydney Morning Herald: "In Australia's case, the ratio of the median dwelling price to average household income has declined quite noticeably since 2003, without a very large absolute decline in housing prices.” But property prices are, as always, just part of the picture.
The RBA concluded in its May meeting that further interest rate cuts weren’t needed as an economic stimulus. Their view, although not saying the worst is over, at least suggests the RBA feels that the downturn is nearing its bottom.
However, the rate of unemployment is a long way from its peak. In April there was a decline in the official unemployment figures, down to 5.4 percent from 5.7 percent in March. Analysts were in general agreement that this was only a statistical blip and that we’re still headed for a figure around 8 percent or above over the next twelve months.
Mortgage interest rates are now at their lowest since the 1960s. Not surprisingly, the RBA noted that personal loans and loans to businesses were still weak, but loans to property buyers continue to increase.
There was more good news for market watchers. Retail sales rose 2.2 percent in March as consumers responded to sales and spent $19.3 billion for the month. Australia’s trade surplus grew to $2.5 billion in March, reflecting a continuing strong demand for Australian resources despite the global economic slowdown.
The Australian share market followed the lead of its US counterpart where stocks surged to their highest levels in months. Australian shares have been bolstered by economic data from China that suggests a recovery in both raw materials purchasing and domestic consumption may be underway.
Which raises the bigger question: When will the world recover from the much talked about Global Financial Crisis? Let’s take a look at one US corporation that may give us an indication.
Cisco corporation makes computer networking equipment. Their leadership position in the global market makes them, in the words of Ken Dulaney, Cisco analyst at Gartner Consulting, "a good bellwether for the economy because they are so dominant in their space."
Cisco chief executive John Chambers said recently: "For the first time in many quarters, many of our global customers are describing business momentum and seeing stabilisation. We are going to be very aggressive this year to position ourselves for the eventual upturn."
How does this relate to real estate prices in Sydney? When the world’s economies recover Australian businesses will recover, manufacturing activity will increase and employment will rise. The return of prosperity will, as always, drive up the price of real estate.
US Federal Reserve head Dr. Ben Bernanke holds the view that 2009 will see the end of the Global Financial Crisis: "We continue to expect economic activity to bottom out, then to turn up later this year," he told a Congressional panel.
It’s still too early to blow the economic all-clear siren. As Gail Kelly, CEO of Westpac said recently, “When the recovery comes, it is likely to be slow." But it has to start somewhere.
As we said earlier, the signals are mixed. Some are positive and some are negative, and some are based on either hope or pessimism without much evidence to show they’re pointing toward a particular direction.
We remain confident that the recovery in the Sydney real estate market is already underway. The eventual termination of the Commonwealth’s ‘boost’ to the first home owners grant will naturally have an impact on sales, but it’s fulfilled its purpose and kept the market ticking over at a time when it would probably otherwise have stalled.
The share market is showing the beginnings of a recovery, although investors are justifiably cautious about trying to pick winners from among listed companies.
At this stage of the proceedings real estate prices remain affordable and interest rates remain low. There’s a good range of properties on offer for those wishing to acquire an investment or simply to upgrade their housing arrangements.
There are also good levels of demand out there for property that’s priced sensibly with regard to its location.
When the global economic recovery is fully underway property prices will respond by rising swiftly. Our recommendation: Now is the time to buy, before all the news is once again good news.
Where to from here?Thu, 23 Apr 2009
The package of grants for first home owners has had a massive impact on the Sydney real estate market, not the least of which has been a contribution to higher house prices.
Back in 2007 before the Rudd government won the Federal election the ALP released a discussion paper that quoted the ANZ Bank’s Chief Economist, Saul Eslake. His statement was: "Anything which puts additional cash in the hands of buyers … results merely in more expensive houses."
Regardless of their pre-election positioning, after the election the Rudd Government increased its first home owners grant and the rest is history.
Last October, the Federal Government doubled the first home owners grant to $14,000 for existing homes and tripled the subsidy to $21,000 for newly built dwellings.
So, despite the worst economic crisis in our history, the lower end of the housing market displayed a Lazarus-like recovery well ahead of other segments of the economy.
As we know, supply and demand have a deeply meaningful relationship. As demand for properties increased – most noticeably for 1- and 2-bedroom units anywhere within cooee of the Sydney CBD, so did the prices people paid to acquire them.
But 2008 Sydney housing prices weren’t nearly as unhealthy as those in the US and UK where owners had seen 20 percent or more of their value slip away.
Across Australia the drop was only around 3 percent in 2008. Housing Industry Association figures since the start of 2009 have shown that Australia’s enjoyed a monthly increase in the sales of new housing; new home sales in New South Wales rose 11.17 percent in February.
The shortage of available homes, estimated at 70,000-80,000 by the HIA, ensures that the price of housing will remain relatively high compared to other markets where housing has been overbuilt and supply exceeds demand.
The Reserve Bank of Australia has weighed into the housing battle with its own economic stimulus of a series of lower interest rates, effectively reducing the costs of property ownership and making ownership of property even more desirable.
Doesn’t all this mean higher prices for real estate generally? To be blunt, not everyone thinks so. Associate Professor of Economics, Steve Keen from the University of Western Sydney has gone on record predicting a fall in housing prices of 20 percent.
Certainly some areas have been hard-hit by price falls, particularly those on the fringe of our capital cities. The Blue Mountains and the Central Coast are two markets that rode upwards on the coattails of the Sydney property boom and fell very quickly once the upward thrust began to weaken.
Even metropolitan area blue-ribbon suburbs have seen some properties that sold for several millions two or three years ago drop a half-million or even more. The first home owners grants don’t have much of an impact on the top end of the market, regardless of where a property’s located.
However, overall industry figures show that across Sydney the market for any well-located apartment selling for between $500,000 and $1 million is strong and getting stronger. Consequently, prices are rising and this trend will continue well into 2010.
In late April 2009 a study released by the Australian Property Institute showed that property professionals believed Sydney’s residential sector would be the first to rise above the recession, and that all categories of property across Australia will be rising in value by 2011.
The president of the API, Robert Hecek, indicated that he believed in Sydney at least we’re nearing the bottom of the downturn.
This ties in with the opinions of market analysts Residex which said in its April report: “The Australia wide trend is encouraging and appears to be presenting as if we have moved past the worst period of correction.”
Residex went on to say: “At last our markets look as if they are moving to moderate growth", pointing out that Sydney was “...further along the adjustment path than some other states.”
Concerns about rising unemployment linger, but there are several economic analysts worldwide who now say the global financial crisis will have less impact and be of a shorter duration than previously thought.
So although nobody’s yet quite brave enough to make a declaration that the Sydney housing market has reached the absolute bottom, it’s hard to find any other way to interpret the present set of economic indicators.
If this isn’t the bottom it’s just below us, and to us the future seems clear. Whether you want to acquire a property for the purposes of investment or to upgrade your present living arrangements, this is the time to start looking for it. Conditions for buyers have never been better.
We live in interesting timesWed, 8 Apr 2009
One of the major developments this past month has been the release of figures from Housing NSW proving that it’s now cheaper on a monthly repayment basis to purchase a property rather than pay rent.
The investor’s favourite – a two bedroom unit, was used to compare sale prices and rentals, and while rents have risen 14.3 percent, prices have fallen by an average 7.2 percent.
NSW Housing Minister, David Borger, summed up the situation: “...21 of the 43 local government areas (LGAs) in Sydney recorded annual [rent] increases of 10 per cent or more, representing over half of the two-bedroom units available in the rental market in Sydney.”
As we’ve mentioned in previous articles, a shortage of rental properties is behind the increase in rental costs. A growing number of prospective tenants chasing a shrinking number of rental properties will always mean growth in rents.
Governments are doing what they can to encourage people to purchase a place of their own. State and federal concessions and grants provide first-home buyers with assistance worth up to $42,000 for a newly built home, and up to almost $32,000 for an established home.
$8 billion of new home loans were taken out in January this year, and at least $2 billion of this went to first-home buyers. However, despite the success of the scheme, the Rudd Government still says it intends to end its first-home buyer's grant when it’s due to expire on June 30.
While the demand for properties is surging, the replacement market isn’t responding quickly enough. Approvals for new homes have continued to drop and monthly building approvals haven’t increased since June, 2008.
January figures showed that new home building approvals were down 3.7 percent, seasonally adjusted, after a 1.9 percent decrease in December, according to the Australian Bureau of Statistics.
BIS Shrapnel figures show that the number of apartments and townhouses abandoned or deferred in Sydney between January and July 2008 was 4072.
More telling is that between August 2008 and January 2009 this figure accelerated to 5326, taking the total of deferred or abandoned apartments and townhouses to nearly 9400.
Incredibly, more homes will be built in Adelaide than in Sydney in 2009. The Daily Telegraph says that an estimated 7300 new dwellings will be built in Sydney this year which is about a third of the homes built in 2003.
An economist quoted in the newspaper said that Sydney rents could rise a further 12 percent in 2009, on top of last year's rise of 8 percent. This will place additional upwards pressure on property values.
Although the Reserve Bank kept interest rates unchanged in its March meeting, many economists are predicting a further cut of at least half a percent in April that will specifically attempt to stimulate the construction sector.
Analyst Anthony Thompson from Westpac Economics expressed a degree of optimism in his bank’s newsletter: "Overall, we still expect approvals to recover over the course of 2009 in response to the RBA's aggressive interest rate cuts and fiscal policy initiatives.”
He then added a note of caution: "But the extent of the continued weakness points to a bigger hole in dwelling construction over the immediate short term and downside risks to the 2009 outlook."
Sydney’s property auction clearance rates have continued strong since the RBA’s last interest rate cut gave investors a signal to buy, although the number of properties sold is significantly lower than at this time a year ago.
Take a look at real estate auctions in Sydney and you’ll see where buyers are focusing their interest. The competition is fierce and results above reserve prices are common.
Investors have the advantage of tax-deductible interest and other outgoings, while private buyers are encouraged by first home buyer’s grants and the state of the rental market. The action at most property auctions is fast and furious when it comes to the 1-bedroom and 2-bedroom units on offer.
But unlike the rest of Australia, New South Wales showed a decrease of 5.8 percent in sales of detached homes. Investors, who have so far been the winners at recent property auctions, prefer units and it shows.
Real estate analysts Residex say that Sydney: “...presents as being the market which is further along the correction phase than others and is definitely trending to positive growth. Our predictive models suggest it has the best potential in the medium term.”
The guarded confidence expressed by Residex is supported by the current mini-boom in property prices in Sydney’s West. Suburbs like Campbelltown and Fairfield have recently attracted so much buyer interest that prices have risen 20 percent in the first three months of 2009 when compared to the same three months in 2008.
You don’t have to go West to find examples of a recovery in the property market. The top price paid in Mosman so far this year has been $13.5 million for ‘Curraweena’, a residence in Clifton Gardens. Nine prestige house sales above $3 million have already taken place in Mosman since the beginning of 2009.
This isn’t to say it’s all roses at the prestige end of the garden. Figures from Australian Property Monitors figures show there are fewer new houses and apartments coming onto the market, particularly at the top end of the price scale.
To understand the present demand we need to look at the players competing in Sydney’s current property market. First, we have the seasoned property investors who always look for quality properties with good rental returns.
Next, we have the more generalised investors who’ve sold out of the tumbling share market and are also chasing something that gives them a return on their investment capital. Property beats wondering whether a dividend of any sort will be paid in 2009.
And increasingly joining the investors are the current tenants, including legions of first-home buyers with thousands of dollars in government grants, who want to escape the rent trap and acquire a home of their own.
First-home buyers, tenants and investors are mainly interested in properties that are priced below the $600,000 level. Properties over $1 million aren’t yet attracting a great deal of interest.
There’s another factor to consider - the spectre of unemployment. Now at a rate of 5.8 percent in NSW, the official outlook is for unemployment to increase to around 8 percent within 12 months.
Economists from investment bank JPMorgan have even forecast the unemployment rate to rise as high as 9 percent by the end of 2010. And in the second week of March the ANZ survey of combined print and online job ads dropped 10.4 percent, the biggest drop on record.
Unemployment, and shorter hours of work in general, will affect the ability of many people to participate in the real estate market. It will force sales of properties and reduce upwards pressure on rental rates.
In earlier times this would’ve been a more significant factor in determining whether the Sydney property market would recover or remain in the doldrums. But these are not like earlier times. They are times we’ve never seen before.
Real estate of all types has acquired a widespread level of desirability we’ve never experienced, for investors, tenants and owner-occupiers. Property affordability is high, while interest rates have reached historic lows.
Market activity is beginning to spread upwards from the lower end of the market into the middle price ranges. We believe that property will be the first sector of the Australian economy to recover from the global economic crisis, and as we see it, the beginnings of this recovery are already happening.
The end or the beginning?Thu, 26 Feb 2009
We’ve been bullish on Sydney property for several months, forecasting an investor-driven recovery that would see funds move from the sharemarket into the real estate market and have a positive impact on property values.
There are already encouraging signs that the predicted recovery is beginning, although only in certain segments of the market. Whether this is a signal that the bottom of the market has been reached is yet to be determined.
Nevertheless there are indications that Sydney property is about to begin a new upwards move in its historical cycle.
First, a bit of background. The total adjustment of 3.75 percent in Reserve Bank interest rates over the past five months represents a reduction of nearly 50 percent from the peak rate of 7.25 percent in March 2008.
Investors who function on borrowed money naturally respond to interest rate cuts as lower interest rates mean a better return on investment. But wait, as the man said on TV; there’s more.
Investors traditionally look for rental properties in the lower price range where capital growth can be achieved at the same time as consistent rental income. They look for low-maintenance properties in established areas served by public transport and other amenities including shops and schools.
Suddenly there’s a competing force out there, looking for exactly the same thing. First home buyers, inspired by lowering interest rates and government grants that can mean up to $21,000 off the cost of their property, are flooding onto the market.
Australian Bureau of Statistics figures show that first-home buyer activity has increased significantly. 14,154 contracts were signed in December, up 21.3 percent on November and showing the highest number since December 2001.
Young couples, with no children but possibly intending to have them in a few years, want to buy a home of their own and get out of paying rent. They aren’t looking for their ‘dream home’ just yet but realise that getting a foot into the property market now is a good way to build up some equity for their next purchase when they move up to something larger.
Auction clearance rates, languishing well below 50 percent in recent months, have skyrocketed upwards, hitting nearly 70 percent in mid-February. The majority of properties that have sold quickly (and at better than reserve prices) have been the objects of spirited bidding from both investors and first home buyers.
Statistics show a market that’s on the move upwards. There are some important factors that could still derail, or at least delay, the speed of this movement and in the interests of realistic analysis must be incorporated into any real estate strategy.
The first is the reluctance being demonstrated by Australia’s big four banks to release loan funds despite having been effectively bailed out of multi-billion dollar holes created by their own lax lending policies during the previous five or so years.
Until the institutional taps open up, the flow of funds to the market will be inadequate to sustain a widespread property market recovery.
The second area of concern is the anticipated rise in unemployment. Official figures estimate an additional 300,000 Australians will lose their jobs, meaning unemployment will rise above 7 percent for the first time in decades.
This will diminish the ability of many workers to pay rent, and remove a high percentage of them from the lists of homeowners as they sell properties to make ends meet.
However, rental rates are already stabilising and there is an ongoing strong demand for rental property of all types thanks to a massive reduction in new home construction over the past three years that shows no signs of ending.
The government is pressuring the banks to be more flexible in their lending practices, and in fact the big banks know that unless they respond to a demand for loan funds their own returns will suffer.
The middle and upper segments of the Sydney market are noticeably not yet participating in the current trend upwards. The multi-million dollar properties at the top of the market, from Palm Beach to the Eastern Suburbs, are being especially heavily discounted from their peak of a few years ago.
Houses in parts of Sydney’s western suburbs that were overbuilt without regard for transport infrastructure are also slow in recovering to anywhere near their temporarily high peak price levels, and this condition is likely to persist for some time.
Despite high auction clearance rates, the total number of properties sold since the start of 2009 is less than half the total sold in the same period of 2008. The market has some way to go before the crucial middle-market properties begin changing hands in large numbers.
Nevertheless, history shows that cycles generally begin at one end of the market and spread outwards to other segments. For investors there’s not much of an option to property.
The sharemarket has continued its downwards trend that began in 2007 and shows no signs of bottoming out. New lows are reached each week and the best the Australian market can do is to follow the leads from Wall Street as share prices flounder in a morass of uncertainty.
As for profits, the reporting season has brought only downgrades and greatly lowered expectations for most of Australia’s blue chips, with a staggering number of formerly ‘big names’ in the hands of administrators or receivers. Or in some cases, sold off to overseas investors at highly discounted rates.
For all the above reasons, Sydney property – in the right areas, retains our recommendation as the best place to place your investment funds.
There is an historic relationship between share values and Sydney property prices. The Sydney property market enjoyed an annual growth rate of nearly 20 percent for the two years following the share market slumps in 1987 and 2000 as investors shifted their funds into property.
As always, successful real estate investing is a matter of geography and timing. But as every student of the Sydney market knows, a recovery has to begin somewhere and it is not usually across the entire market.
Those investors who pick the beginning of the recovery are first in and get the best outcomes. It’s worth taking a serious look at the current market and making up your own mind.
Is this the end of the slump? Probably not yet. But is this the beginning of a new cycle? We’d be very surprised if it isn’t.
Conditions favour investors in today's marketThu, 5 Feb 2009
In previous articles we’ve spoken about the real estate market becoming more favourable for investors. These conditions have continued into the start of 2009.
Australian Property Monitors report that weekly rental prices for Sydney houses rose 16.9 percent in the twelve months to December 2008, and now average $450 per week. APM also noted that weekly rentals for home units had levelled out at $400 per week for the third consecutive quarter.
There are indications that the market is nearing rental price stability, largely as the result of deteriorating economic conditions and the probability of rising unemployment.
However, rental homes within 10 kilometres of the CBD are in short supply with fewer available now than there were three months previously, according to the Real Estate Institute of NSW.
The underlying factors of high demand for rental accommodation coupled with a severe downturn in building activity now serve to make real estate a much more attractive investment than options such as shares.
“Buy low; sell high” is always good in principle, but determining the “low” time in real estate isn’t always easy. However, consider this: Overall, Sydney house prices fell 4.2 percent in the past year. APM figures show the rate of fall slowed to just 0.7 per cent in the December quarter.
Some of the biggest price declines have understandably been in areas that enjoyed the highest rates of growth in the boom times, including the Lower North Shore and the Eastern Suburbs. At current prices the “low” of the cycle can’t be far away!
There is an interesting historic relationship between share values and Sydney property prices that supports this viewpoint. In recent times shares have twice experienced a sharp decline in value – in 1987 and 2000.
After each of these declines in share prices the Sydney property market enjoyed an annual growth rate of nearly 20 percent for the following two years. Investors considered their experiences in the share market, analysed their risks and returned to property for predictable returns and capital growth.
Over the past five years we’ve seen the Sydney market underperforming its long-term average rate of growth by a fairly large margin. There’s every reason to expect that when the next real estate price breakout happens Sydney property will surge.
When will the next surge begin? Interest rates have continued to fall and the Reserve Bank is forecast to reduce the prime rate further in the near future.
The reduced cost of servicing a property investment makes it increasingly attractive and stimulates demand. With stable market conditions, the timing to position yourself for the next surge couldn’t be better.
Choosing the right investment property for your own individual circumstances is a complex decision. Even at this early stage it pays to seek competent, professional advice on what you can afford to invest. Once you have a target acquisition price you can begin to consider properties on offer in the current marketplace.
One of the biggest questions investors face when looking at buying an investment property is: "Where should I buy?" There are no geographic restrictions on the location of an investment property, although many investors prefer to own something in an area with which they’re familiar.
Look at historical data for each location and consider the pattern of capital growth over the previous ten years. You’re seeking long-term capital growth that will add value to your investment over time.
The next question to answer is: “What should I buy?” Houses are a possible answer, although they generally deliver lower rates of return after expenses than apartments. Buying a newer apartment can also be advantageous to your taxation position because of depreciation entitlements.
Look at other properties in the area, consider the amenities available such as shopping and restaurants, and make sure that services including public transport and schools are accessible to the property.
Another question you’ll need to answer once you’ve purchased the property is: “How should it be managed?” You may choose to be your own property manager, in which case you’ll need to know how the professionals do it. Or, you can appoint a professional to look after the management for you.
All decisions regarding an investment property must be made unemotionally and based solely on the facts relating to it as an investment. Get the best advice, purchase the right property for you and you’ll discover what thousands of other property investors have learned – it’s the most dependable long-term investment you will ever make.
Renovate and appreciate in 2009Wed, 21 Jan 2009
If you’ve been thinking about doing some home renovations, this is going to be a great year to have them done. Interest rates are low and likely to get lower, while the general decline in homebuilding activity means there’s a lot more tradespeople available to do the work.
Even better is that the decline in fuel costs has flowed onto the costs of building materials including bricks, concrete and steel, so the raw ingredients for your renovations are likely to cost less than they would have a year ago.
Renovations let you get more enjoyment out of the home you know and love. If you renovate with some forward planning in mind you can even recover some or all of the costs when you eventually sell your home in a few years time.
One big danger associated with home renovations is the possibility of overcapitalizing your piece of real estate. Quite simply, if you spend too much on renovations you may never get it back.
The worst house on the best street in town could add value from renovation, while renovating the best house on the worst street will definitely risk overcapitalizing the property.
It’s not just tradespeople that have time on their hands either. If you want the services of an architect to design your renovation, they’re a lot more available (and affordable) than they were not long ago. It’s a buyer’s market and you’re in charge!
An architect can give you a ‘master plan’ that you can work to in stages, until you eventually have just the home you want without having to make a huge commitment all at one time.
Renovating can be as inclusive as you like. Think about your home and what you’ve always enjoyed about it. Start with the positives and be aware that you want to retain the features you like most. Now, you can think about what you want to change.
The great outdoors is a good place to start. Modern architecture trends towards a blending of outdoor and indoor areas. Buyers see the outdoor areas when they view a home for the first time, and first impressions really do count.
A complete garden makeover can update your whole house, and using Australian natives creates a beautiful garden that’s also drought-resistant and beautiful all year round. Landscape gardeners won’t have as much on their plate in 2009 so you may well be pleasantly surprised at how little it costs to renovate your own bit of outdoor Australia.
Extra bedrooms are another proven way to add value to a home. Modern homes have more and bigger bedrooms than those of twenty or thirty years ago. This means choosing between extra rooms on ground level or adding an extra level, which is a decision an architect can help you make.
According to renovation specialists Archicentre, these are the’ Top 10’ improvements, other than the garden, that you can do to your home:
Adding a deck
An ensuite bathroom
Replacing kitchen cupboards with drawers
Frameless shower screens in bathrooms
More garage storage
A large island bench in the kitchen
Adding a storeroom
Building a built-in barbecue
This is in no particular order, but it’s a good ‘shopping list’ to think about while you’re outlining your renovation project.
There’s also things like an attic conversion that adds usable space to the home without the need to build an extension. Pull-down step ladders give access to space that’s currently unused, and they don’t take up any floor space when they’re retracted.
The most important consideration of all is your lifestyle. Make your home even more enjoyable for you and your family. If you place yourself in the position of a prospective purchaser, you’ll also have a more realistic guide to the renovations that give you pleasure while adding buyer appeal to the property.
A big rule is to not go overboard on anything. Whether it’s the colour of the paint or the style of the light fittings, avoid eccentricities. Stick to the basics, or be prepared to change them when the time arrives to put your home on the market.
Work to a plan. Don’t do a bit here and a bit there. Have an integrated design for your renovated home and work towards it. You may not be able to do everything at once, but have a plan for what you’re going to wind up with.
If you’re not ready to downsize, this is the ideal time to renovate your home. It’s the best way to improve your lifestyle while ensuring you get your money back when you sell the property.
Buy now? Sell now? Why not?Wed, 17 Dec 2008
As 2008 draws to a close, who could have imagined the breadth and depth of the economic disaster now upon the world?
Who would be game to predict the after effects of some of the world’s major financial institutions collapsing, ‘trusted’ funds suddenly finding that billions of dollars have gone missing, and the value of commodities like copper and zinc finding lows not seen in decades?
It’s taken us all by surprise and we must accept that it’s not over yet. 2009 will be a challenging year, with rising unemployment and a decreasing GNP for Australia. And of course, we’re just part of a world in which everyone is facing the same decline in their economic indicators.
The first thing to say is that property is not immune. The Real Estate Institute of Australia’s September quarter median prices showed a downturn in demand on residential property in all Australian capital cities.
It is however interesting to note that Sydney continues to have the most expensive residential property, with a median price of $529,000.
Is the downturn nearing an end? Probably not but there are encouraging signs of an upturn in the making. One is the Reserve Bank’s recent lowering of the cash rate to 4.25 %, and analysts agree it could go even lower early in the new year.
Figures from Australia’s largest mortgage broker, AFG, showed that NSW first home buyers are returning to the market. November's loan approvals were up 113% on August. In the October quarter Sydney house prices gained 0.51 per cent; not a huge rise but at least a step in the right direction.
"The property market has moved through the bottom of its cycle," said RP Data's head of research, Tim Lawless.
Rory Robertson of Macquarie Group said: "Most households are more influenced by mortgage rates than by equity prices, which is the big trauma at the moment." Mortgage rates are dropping and property prices are at least stabilising, but that doesn’t mean the property market’s pain is all over.
But the value of all capital items is falling, from shares to property to structured investment funds. You want security; you want capital gains. Where do you put your money in times like these?
Property prices have generally declined. This is to be expected, even in desirable areas like the lower north shore. "Suburbs that have risen the most (in value) have the most to fall," says Liam O'Hara, senior economist at Australian Property Monitors. "If the economy starts to tank it's the wealthy areas . . . where homeowners are going to take the biggest hit."
But Australian property values fell just 0.8% over the year to October, 2008. In the same period the drop in the value of the typical superannuation fund is something like 39%.
Median Sydney house values have only dropped 2.7% in the past 12 months, while the share market has dropped 40%.
It’s also an interesting time at the real estate auctions. There’s always a fall off of interest at the end of the year, but this year is producing decreased clearance percentage figures, probably because there is a fairly large number of properties on the market while the buyers are holding back for further price drops.
While supply is greater than demand it’s always a good time to buy. It’s also a good time for realistic vendors to sell their property because the buyers in market are serious and not just tyre-kickers.
Prices could drop another 5% or a bit more overall, but choice properties are already being snapped up and investors are actively looking for properties that will provide them with good returns. In fact, a property on the market that doesn’t drop its price for a quick sale could be the best one to consider.
There are some other pieces of good news. ABS statistics showed that the number of home loans for owner-occupied housing rose 1.3% in October, which was the highest level all year.
We must now return to a few basics. In the greater Sydney area sufficient new housing isn’t being constructed to meet the demand caused by immigration and population growth. Buyers are also returning to the market which will increase the demand for housing.
Our investment choices are becoming restricted. Promises of high interest and big returns from hedge funds and other structured investment vehicles have proved illusory. The value of shares listed on the ASX has declined 40% in the last year and their recovery to previous values may take years, if they can acquire the capital they need to survive.
There are several properties now on the market – quality properties with the most desirable features, which are being sold because their owners are financially stressed. The cashed-up prospects attracted to this market are seeking value and genuinely want to make a purchase.
We believe this is one of the best opportunities to buy or sell a quality property. This is a selective market, not a mass market.
There are those who believe economic conditions have never been better. Interest rates are low, property prices are affordable, rental rates are strong, and real estate offers investors an unequalled opportunity to place their funds with low risk and good returns.
Rare times indeed. But no better time to be a vendor or purchaser in these market conditions that we’ve never seen before.
Forecasting without fear - almostSat, 15 Nov 2008
There’s probably never been a more difficult time to produce an economic forecast. With variables that include the Reserve Bank’s future interest rates, the price of petrol and the financial performance of companies listed on the Australian Stock Exchange – let alone the murky depths of global financial markets, accurate forecasting would appear impossible.
Nevertheless, it’s worth giving it a try. Those who correctly anticipate and act on fiscal developments in the coming months will benefit from unparalleled investment opportunities that exist right now, even if they’re difficult to spot in all the clutter.
Prices of Sydney real estate have become more affordable. The median house price is now 6.5 per cent below its March 2004 peak of $568,500. One indication that the bottom is rapidly approaching is that the decline in Sydney’s troubled west and south-west was less than the overall Sydney decline of 3.1 per cent in the past twelve months.
First home buyers are receiving even more incentives to purchase real estate. The NSW Government recently increased its first home owner's grant for those buying new dwellings by $3000, bringing the total of grants for eligible first home buyers to $24,000. At the very least, first home buyers receive $14,000 from the Commonwealth Government for an existing home after the grant level was doubled in October.
Interest rates are falling and there’s an expectation of a further reduction in the RBA’s official rate when the bank’s board meets on December 2. Investors whose fingers were burnt by rapid rises in interest rates in the previous three years now have the option of fixing their interest rates at relatively lower levels, thus removing the concerns caused by unexpected increases.
To quantify the relief property owners have already received, since September the interest cost of a $350,000 variable rate investment loan has been reduced by nearly $550 per month. This reduction could become even greater if the RBA cuts its rates by another 0.75 points, bringing the cash rate down to a historic low of around 4% next year.
A continuing situation of growth in demand for housing and lack of a corresponding growth in supply will inevitably drive prices upwards. Craig James, a financial analyst with Commonwealth Securities Ltd., cautioned that the real estate market could turn around very quickly. "Not only is population growth the fastest in 20 years”, he said, “but the rental market is super-tight and there's an under-supply of new homes."
There are always countervailing factors that could inhibit such a turnaround. Australia’s growth rates are linked with those of our overseas trading partners, especially China’s. As this regional powerhouse economy slows it will certainly have an effect on our own.
If Australia’s economic growth continues to decline and this translates into higher unemployment it will impact upon the demand for property but the Commonwealth Government appears committed to providing whatever fiscal stimulus and monetary policies are needed to stave off recessionary conditions.
Most real estate analysts agree that the Sydney property market is still over-inflated. However, there is no general expectation that prices will experience any further significant reductions. Because supply of new housing stock continues to fail to meet demand, a ‘floor’ has developed that seems likely to represent the new level in the graph of historically-rising real estate prices over decades.
Our view of Sydney real estate is that prices will continue to stabilise over the next six months, perhaps with further modest decreases but with no dramatic declines. Interest rates will continue to fall and demand for rental accommodation will remain at high levels.
Investment options including shares and financial products will remain volatile for at least the next twelve months due to continuing uncertain economic conditions, and investors will return to property where they can generate capital gains and rental income with renewed confidence.
Spring projects around your houseThu, 16 Oct 2008
Ah, spring! The days get longer and the weather gets warmer. This spring do more than just a tidy-up. Here are some projects that every homeowner should do once a year but often doesn’t, and when you’ve finished this list your home will be a much more enjoyable, livable place.
Clean those ceiling light fittings
Look up and count the dead insects in those ceiling fittings, not to mention the dust that collects in them too. For this job you’ll need a sturdy stepladder and a good sense of balance. Take all the glass elements down and wash them before replacing them. Wipe down all the metal components with a soft damp cloth. While you’re doing this, replace any burnt-out globes or fluorescent tubes. Your home will be brighter and look a lot better.
Clean the air conditioning intake filters
Often overlooked, the filters on the air intakes of ducted air conditioning systems can become so clogged with airborne dust they cause the unit to shut down. Most filters can be easily removed and taken outside for a thorough cleaning with a garden hose. Dry them thoroughly before replacing them and using the system again.
The great battery changeover
Go through your home and make a list of everything that has a battery, together with the battery sizes and quantities. You’ll be surprised at how many there are. For starters there’s the doorbell, TV remotes, wall clocks, smoke alarms, backup batteries in alarm clocks, torches and lanterns. Unless you know you’ve just changed a battery in the past six months, replace it.
Clean out the gutters
It’s never fun but it’s best to beat the bushfire season. Clear all your gutters of debris and check for any corrosion or loose fasteners. Use the garden hose to flush out downspouts. Be careful when clearing birds nests or wasp nests; the former can house bird lice and the latter can be very painful.
Clean the kitchen exhaust hood and filter
Most kitchens have a ventilation hood over the stove, and these can trap so much cooking grease that the fan’s efficiency is affected. Remove the filters and wash them thoroughly in a grease-cutting detergent. While you’re there, inspect the light globes and replace any that have burned out.
Check your water heater
Operate the relief valve for at least ten seconds to flush out anything that’s built up in there. Check around the base of the heater for corrosion or leaks. Whether gas or electric, every water heater has a label that tells you the date it was manufactured. If your heater is more than seven years old chances are it needs to have its protective anode replaced, which is a job for your plumber.
Open every window in your home
Most homes have windows that are never opened, and others that aren’t opened except at certain times of the year. Over time these can become stiff or even impossible to open. Go thorough your home, open every window and clean thoroughly around the frame. Oil any hinges and ensure handles turn freely. Vacuum dirt and dead insects from all slides and drainage channels, and while you’re doing this you might as well clean the glass too.
Residential property is still a great investmentMon, 25 Aug 2008
We're now two months into a new financial year and hearing quite a range of opinions about where to invest one’s savings. Many advisors have of late been spruiking cash because they’ve seen the share market plummet and some of the heat go out of the property market.
However, residential property in good locations has always been a more secure buffer against the volatility of the share market than keeping wealth in cash, as well as being a much safer investment than speculating in risky structured investment vehicles like Contracts for Difference or trading futures or currencies.
If prices have softened somewhat, and we can assure you that in places such as the lower North Shore, the Inner West and the Eastern Suburbs there aren’t many properties on the market that will bring less than they did two or three years ago, it only means that we’ve entered a period of stability which presents buying opportunities that weren’t as easy to discern in 2006-2007.
A recent study by property market experts RP Data & Rismark International concluded that Australia’s residential property values had actually held steady during the first five months of 2008. During the same period they point out that the S&P/ASX 200 fell by 10.8%.
Interest rates now appear to have peaked and the Reserve Bank’s sending signals that indicate at least one rate cut before the end of the year. The minutes from their meeting August 5 state: "Less restrictive conditions could soon be called for - otherwise the risk of a deeper and more persistent slowing in the economy would increase. On these considerations, a case could be made for an early reduction in the cash rate."
Even more reassuring for both investors and owner-occupiers considering a property acquisition was the response from the National Australia Bank that it would reduce interest rates by one-quarter percent if the RBA led the way. The ANZ followed suit a couple of days later.
Speaking of investors, they’ll look back on 2008-2009 as the year in which Australia’s immigration reached record levels above 190,000 while according to the ANZ Bank the shortage of housing stock neared 200,000 dwellings. No wonder rental vacancy rates were just 1.5% in capital cities, and that meant landlords had the ability to source quality tenants at good rent levels.
They’ll also remember 2008-2009 as the year petrol prices hit record highs then fell back a little. Not back to where they were a year ago, but certainly a solid retracement from a graph that had indicated $2 a litre by Christmas.
The forces that drive the prices of everything from housing to petrol in one direction can turn just as quickly in the opposite direction, and it’s those who catch the first wave of the change that benefit most.
So, how long will this period of opportunity last? Economist Dr Alex Joiner, of ANZ Economics and Markets Research, quoted on August 9 in the Sydney Morning Herald, said: “We see the next six to 12 months as a period of softness in Sydney - and nationally - but the overall fundamentals will continue to tighten."
As we see it the fundamentals of a strengthening property market are already in place. Price growth will follow from an irresistible combination of growing demand, assisted by lowering interest rates, and restricted supply of housing stock.