A federal election’s on its way but Sydney property still powers ahead. Investors stage a last-minute rush as interest rates drop and a unit glut looms.
 
The federal election is underway and with several weeks to go we might expect the Sydney property market to grind to a halt until after the polls close on July 2. But that’s not what’s happening.
 
Domain Group senior economist Andrew Wilson noted that the number of auction listings and the price outcomes have softened from the boom times of last year: “The ABS revealed…that Australia is possibly entering into a deflationary environment and to have house prices booming in this context is counter-intuitive,” he said.
 
But as part of a national trend, ?dwelling values in Sydney continued to rise, although at a rate that’s behind their strong performance in the first half of last year.
 
"Housing is getting a lot more prominence in the election campaign than it has previously," David Cannington, a senior economist at Australia & New Zealand Banking Group, told Bloomberg.
 
"The election uncertainty certainly weighs on consumer confidence and home buyer sentiment and that along with softness in the market is having an effect."
 
CoreLogic RP Data research director Tim Lawless said the price growth rate is now about half last year’s figure: "The annual rate of growth in Sydney peaked at 18.4 per cent in July last year and has since moderated back to 8.9 per cent over the most recent 12-month period."
 
However, Mr Lawless said that in April Sydney dwelling prices rose 2.4 per cent for the month, supported by mortgage rates at historic lows, high levels of investment and the government’s current supportive taxation policies. This follows a gain of 3.9 per cent over the first quarter of the calendar year.
 
The last weekend in May, Sydney recorded a median auction price of $1,270,000. This was higher than the $1,110,000 recorded the previous weekend, but also 7.6 per cent higher than the $1,180,000 recorded on the same weekend last year.
 
CoreLogic RP Data senior research analyst Cameron Kusher said the market was expected to slow in the second half of this year: “We don’t think it’s going to hold or continue but over the last three months after a pretty weak last quarter of last year [there] seems to be a renewed level of confidence,” he said.
 
There are also signs that investors are becoming more active after a brief pause while they considered the implications of possible changes to negative gearing and capital gains taxation arrangements.
 
The latest ABS lending finance data showed a solid rise in residential investor activity, with investor loans increasing by 30 per cent in March to a total of $5.5 billion, the highest monthly total since September 2015.
 
Westpac Bank, Australia’s biggest lender to property investors, has lowered the deposit required and raised the maximum loan-to-valuation ratio for investor loans in a reversal of 2015’s tightened lending conditions.
 
Otto Dargan, managing director of Homeloanexperts.com.au, said the earlier tightening had gone too far: "A lot of the lenders have realised that the reduced borrowing power for investors was too harsh," he told the Sydney Morning Herald.
 
Auction clearance rates ranging from the mid-70s and even in the low 80s have been achieved in the current pre-election rush as investors try to beat any changes to the taxation system that might eventuate after July 2.
 
However, Housing Industry Association (HIA) figures Sales of new homes in NSW dropped during April, with units losing more than houses. The HIA’s New Home Sales Report showed that the number of sales of new homes in March had fallen 8.1 per cent overall.
 
Of course there are always ‘experts’ willing to predict a future drop in Australia’s housing prices. The latest is London-based Capital Economics whose chief economist, Paul Dales, has forecast a fall of 10 per cent over 2019 and 2020.
 
"We suspect that the catalyst will be interest rates, although that trigger won't be pulled until 2018 at the earliest,” he said, while predicting a 4.5 per cent increase in 2016 and a 2.5 per cent increase in 2017.
 
Stock shortages appear
 
The number of houses listed for sale across Sydney is about 20 per cent down overall on the figure this time last year, and there are now shortages of housing stock in several key areas of the Sydney market.
 
According to Dr Andrew Wilson, that represents a shortage of about 30,000 listings this year.
 
“And for April, they were down around 6 per cent from March. Those fewer listings are certainly part of what’s generating strong price growth in many areas, particularly in the eastern suburbs, the lower north shore and the northern beaches.”
 
Mathew Tiller, head of research at LJ Hooker says that strong demand for property, low interest rates and investor demand have created a high level of competition to buy properties.
 
“So while, traditionally, you’ve always been told not to buy a property until you sell yours, now that’s turned around, and people are wanting to buy before they sell because they’re not confident they’ll find a good property to buy. That’s having a knock-on effect throughout the market.”
 
The prestige end of the market is especially hard-hit by a shortage of ‘trophy homes’, according to an article in Domain.
 
“The number of high-end properties in the slightly more affordable prestige market throughout the eastern suburbs and north shore have also dried up leaving agents dumbfounded at the dramatic turnaround in activity levels compared with the boom-time turnover of previous years,” the article said.
 
More rate cuts to come?
 
The RBA lowered the official cash rate to 1.75 per cent in May, saying in its official statement that the drop was the result of lower than expected inflation, low consumer sentiment and a downward trend in house price growth.
 
Although inflation is often seen as an economic negative, when it’s low or dropping the RBA can lower interest rates in hopes of encouraging borrowing and stimulating spending.
 
In 2015 housing prices increased rapidly while wages growth was at a near standstill. This meant that purchasers had to spend more of their incomes to service housing debt instead of spending on consumer purchases such as appliances, entertainment and groceries.
 
Inflation data from the Australian Bureau of Statistics has highlighted a slowing Australian economy, with the annual figure now below the RBA’s target rate of two the three per cent.
 
The Commonwealth Bank has predicted that interest rates will hit further historical lows of 1.25 per cent this year, with cuts of 25 basis points in August and also in November.
 
CommBank chief economist Michael Blythe said the RBA's Statement on Monetary Policy in May showed a higher level of concern than had been expected: "The RBA now expects inflation to only limp back to the bottom of the RBA's 2 per cent to 3 per cent target band by mid-2018," he said in a note to investors.
 
JP Morgan economist Tom Kennedy said the recent low wage rises had supported rapid jobs growth, but he predicted the RBA would cut interest rates further to stop low inflation from becoming entrenched.
 
Chief market strategist at IG, Chris Weston agreed, saying a cash rate of 1.25 per cent is very possible: "There's every possibility we could get two rate cuts this year, and I don't think they're going out on too much of a limb," he said.
 
Morgan Stanley strategists Chris Nicol and Daniel Blake added their forecasts to the mix, issuing a note to clients saying the Reserve Bank of Australia will cut the official cash rate to 1 per cent by the first half of 2017.
 
Apartment numbers keep growing
 
As towers of apartments continue to rise into the skylines of Australia’s capital cities an increasing number of property analysts are asking the question: “Are there too many new units being built?”
 
Herald Money columnist Nicole Pedersen-McKinnon describes a possible outcome: “It's widely considered that in Australia there will soon be an apartment glut – and subsequent price fall. The effect is probably already captured in the borrowing figures. If we look at new dwellings only, loan amounts are down 15 per cent in NSW.”
 
CoreLogic research analysts Tim Lawless and Cameron Kusher released a New Settlement Risk Report which looks at the number of units due to settle over the next six, 12, 18 and 24 months.
 
It said that across the combined capital cities there are 92,102 new units set for completion over the next 12 months. That figure is expected to rise to a massive 231,129 new units during the next two years.
 
Mr Kusher says these numbers represent a challenge for the market: “The large volume of new stock, coupled with an ever-growing supply of existing stock means that historic high levels of unit settlements are due to occur over the next two years in most cities.”
 
In the meantime units have recovered some lost ground, according to Residex: “Units in the Sydney market increased a significant 1.26% over the April quarter, following losses in January. The median Sydney unit is now at a historic high of $695,000” it said in its latest Market Update.
 
The City of Sydney Council has expressed alarm over the NSW government’s planning for inner city apartments that will result in population densities ‘seen only in pockets of New York or Hong Kong’.
 
The council’s chief executive officer, Monica Barone, told the Sydney Morning Herald: “Given available public information we expect to see as many as 10 or more buildings over 30 storeys on the Waterloo Estate with others up to 20 storeys."
 
However, Mr Kusher noted that Sydney’s new unit supply is geographically diverse, with a large number of new units under construction in outer suburban areas including Parramatta, Strathfield, Auburn and Kogarah-Rockdale.
 
“In some respects this spreads some of the risk around the city rather than other cities where new supply is much more centralised,” Mr Kusher said.
 
New constraints on foreign buyers
 
Three of the four major banks have placed restrictions on lending to foreign property buyers. Westpac, ANZ and the Commonwealth Bank now require proof of identity, proof of employment, possession of Australian residency and deposits of at least 30 per cent of the value of the property.
 
This comes at a time when the National Australia Bank’s residential property index shows a significant drop in foreign buyers in NSW; they have started to look for investment opportunities elsewhere, most likely because Sydney prices are so high that getting a satisfactory return on investment is becoming a challenge.
 
Mortgage One Australia mortgage consultant Michael Khoury said he had received several calls from developers who expressed concerns about whether buyers who have purchased ‘off the plan’ would be able to get a mortgage on settlement day.
 
“With restrictions on bringing money in and lending restrictions [in Australia] a lot of these sales will fall over in the next 12 months.”
 
However, director of Chinese property portal ACProperty, Esther Yong said that offshore Chinese buyers aren’t big risk takers and most would have sufficient cash to cover any problems with funding.
 
In a separate move that also targets foreign purchasers, from July buyers and sellers of real estate in NSW will have to prove their residency and citizenship status to the state government before a sale is completed.
 
Foreign buyers will have to provide details of their citizenship and visas, as well as getting clearance from the Foreign Investment Review Board. The Australian Taxation Office will match data provided by the NSW government to ensure foreign buyers have paid a $5000 fee for any property sold for less than $1 million, and $10,000 for properties sold for over $1 million.
 
Housing affordability worries
 
The unaffordability of housing is once again in the news following the release of a report by Anglicare Australia that showed a single person on the dole would have to search 3,590 advertised properties before they found one they could afford and that was appropriate for their level of income.
 
This brought out in the media a number of proposed solutions including one that’s been promoted by some journalists and even an editorial in the Sydney Morning Herald following a March report from the independent McKell Institute that the present high rates of stamp duty were raising housing costs and should be replaced by a broad-based tax on all property.
 
The report’s estimated $5250-a-year “reasonable and fair” impost on the state’s 2.8 million households would put something in the order of $14.7 billion into the government’s coffers in the first year. Unfortunately, it could also have several negative impacts on the housing market and make a major contribution to housing unaffordability.
 
It’s likely that rents would rise as landlords recouped the additional annual expense from tenants. Homeowners would have to find another $5250 in their household budgets, on top of existing mortgage payments, and people would hesitate to build a new home if it’s going to immediately start costing them an extra $5250 each year.
 
And because purchasing a house would automatically incur an ongoing debt of $5250 each year the number of buyers would predictably decline, along with dwelling values. Not a good outcome just to do away with stamp duty.
 
Negative gearing and capital gains
 
The Reserve Bank of Australia has expressed concern about negative gearing and the tax concession for capital gains. This has great importance to the housing market because loans to investors account for 46 per cent of all money lent for housing according to a report in the Sydney Morning Herald.
 
The RBA says that any change that discouraged negative gearing might be "a good thing" for financial stability. That has added fuel to the fires now raging between the two major parties over the future of the system that now operates and provides favourable conditions for property investors.
 
Labor has promised a massive overhaul to the country’s negative gearing and capital gains tax regime that it says will save $32 billion over 10 years. The Coalition on the other hand has said that the changes proposed by the ALP would cause "a massive shock" to the property market and says it will leave existing tax arrangements alone.
 
The Greens have even gone a step further. Greens leader Richard Di Natale said he would abolish the capital gains tax discount altogether.
 
The battle lines are drawn but we’ll have to wait for the outcome of the July 2 election before we have any clear indications of what lies ahead for these two contentious but important financial topics.
 
In the meantime, Domain executive editor Stephen Nicholls thinks investors will outbid first home buyers in the rush to acquire properties before the election: “My bet is that the investor will come out on top, or certainly push the price higher for first home buyers.
 
“After all, the opportunity to get those tax breaks could go out the window if they hold off until next winter.”
 
Sources
 
‘Sales of new homes took a dive during April according to the Housing Industry Association,’ Michelle Hele, News.com.au, 30 May 2016
‘Chilly end to Sydney autumn auction market as rates slide,’ Dr Andrew Wilson, Domain, 30 May 2016
‘Morgan Stanley tips RBA to cut rates to 1pc, ASX at 4800,’ Vanessa Desloires, Business Day, 25 May 2016
‘Market Update,’ Eliza Owen, Onthehouse.com.au, 29 May 2016
‘Westpac lowers deposit hurdle for property investors,’ Clancy Yeates, Business Day, 24 May 2016
‘FOMO among investors could reignite the Sydney property boom,’ Stephen Nicholls, Domain, 21 May 2016
‘Monthly mortgage payments fall $254 in five months,’ Nicole Pedersen-McKinnon, SMH Money, 19 May 2016
‘Federal election 2016: low wage growth sparks bleak outlook,’ David Uren, The Australian, 19 May 2016
‘House prices rise in April with Sydney top,’ Robert Harley, Australian Financial Review, 2 May 2016
‘Bullish housing data from CoreLogic RP Data a ‘big surprise’, say experts,’ Jennifer Duke, Domain, 2 May 2016
‘RBA Cuts Rates in May,’ Eliza Owen, Property News, Onthehouse.com.au, 5 May 2016
‘Westpac withdraws from real estate lending to foreigners,’ Elysse Morgan, ABC News Online, 28 April 2016
‘Sydney house auction market rises as interest rates and taxes are cut,’ Dr Andrew Wilson, Domain, 6 May 2016
‘Foreign buyers leaving Victoria, NSW in favour of Queensland, NAB data shows,’ Kirsten Robb, Domain, 20 April 2016
‘Chinese buyers to reach new record in 2016, but pain ahead: report,’ Jennifer Duke, Domain, 7 May 2016
‘Foreign buyer crackdown as new identity rules applied to Sydney property market,’ Kirsty Needham, Sun-Herald, 15 May 2016
‘Interest rates will fall further Commonwealth Bank economists predict,’ Liz Hobday, ABC Online, 16 May 2016
‘Property buyers prepared to close the deal before the hammer falls,’ Sue Williams, Domain, 3 May 2016
‘Sydney’s trophy home market fast grinding to a halt,’ Lucy Macken, Ingrid Fuary-Wagner, Domain, 8 May 2016
‘Election 2016: Reserve Bank worried about negative gearing, capital gains tax concessions,’ Peter Martin, James Massola, Sydney Morning Herald, 9 May 2016
‘Boom to bust: how many is too many apartments for our big cities?,’ Kirsten Craze, News.com.au, 13 May 2016
‘Roger Montgomery sees apartment oversupply sending property prices south,’ Jessica Sier, Business Day, 16 May 2016
‘April Property Snapshot Infographic,’ Cameron Kusher, Core Logic, 13 May 2016
‘Sydney auction market soars as investors stage a comeback,’ Domain, Dr Andrew Wilson, 16 May 2016
 ‘One Out Of Every 3,591 Properties Affordable For Single Person On The Dole,’  Max Chalmers, The Insider, 21 April 2016
‘Stamp duty should be in the state government's sights,’ Sean Nicholls, Sydney Morning Herald, 14 May 2016
‘Clover Moore alarmed by Waterloo apartment plans that dwarf Singapore's squeeze,’ Leesha McKenny and Jacob Saulwick, Sydney Morning Herald, 17 May 2016
‘Election 2016: Sydney house market stalls as poll jitters sideline sellers,’ Narayanan Somasundaram, Bloomberg release in Business Day, 19 May 2016
‘House prices to fall by 10 per cent, say Capital Economics,’ Stephen Cauchi, Business Day, 23 May 201