Market comment: An election, a Brexit – what’s next for Sydney property?

Mon, 4 Jul 2016

Market comment: An election, a Brexit – what’s next for Sydney property?A shortage of prestige properties and a loosening of banks’ credit restrictions keep property prices rising, despite concerns about unit numbers.

It’s certainly been an interesting end to the 2015/2016 financial year. First came the Brexit on June 23 with its repercussions that will affect the world’s financial markets for some time. Then on July 2 came the Australian federal election.

The outcome of the election will mean, if promises made prior to the election are kept, no changes to negative gearing or to the current taxation treatment of capital gains. This will be good news for property investors who benefit from both.

But a new problem has arisen that’s causing headaches for both investors and the top end of property buyers. There was a 6.7 per cent decline in the number of sales of detached homes in May which wasn’t enough to offset a 4.9 per cent rise in the number of multi-unit sales.

It seems that owners have decided to hold onto their properties and not sell into the current mini-boom that’s seen auction clearance rates climb back into the high-70 and 80 per cent levels.

As Antony Lawes, Domain editor describes it: “The property drought is most severe in higher-priced, inner-ring suburbs, especially on the north shore and northern beaches where some agents are reporting up to 70 per cent fewer listings than this time last year.”

Domain Group’s chief economist Andrew Wilson compiled data on the total number of listings for the first four months of each year going back to 2011, which show that listings in the eastern suburbs, lower north shore and the northern beaches when compared with previous years have dropped dramatically.

“Lower listing numbers are clearly a result of what was an astonishing year last year, where there was a bonanza of buying and selling,” he said. “It’s still very much a sellers’ market in the inner-suburban, higher-priced areas.”

The Raine & Horne network conducted its own analysis of current market conditions and found listings have dropped by 68 per cent on the northern beaches this year compared with 2015, and 31 per cent on the north shore.

Head of SQM Research Louis Christopher also said his data showed fewer listings in the inner-ring areas this year compared with 2015: “The economy is moving along quite well at the moment so affluent home owners have no reason to sell; their businesses are doing okay.”

There are a few indications that investors are losing some of their lust to acquire Sydney property.

Australian Bureau of Statistics (ABS) figures released in early June showed a significant five per cent drop in investment housing loans. The total value of investor finance came to $11.291 billion. At the same time the value of owner-occupier loans was a much higher $20.702 million.

First-home buyers showed a bit of a recovery with their share of total finance commitments improving from 14.2 per cent to 14.4 per cent. However, when investor and owner-occupier lending are combined, the value of total housing loans for April was a decline of 1.8 per cent from the previous month.

This led some economists to forecast another interest rate reduction from the Reserve Bank (RBA) that could rekindle inflation and in so doing keep the value of the Australian dollar under control once the initial effects of the Brexit have worn off.

After having surged 8.5 per cent in May, the Westpac-MI index of consumer confidence slipped back one per cent in June. Although optimists still outnumber pessimists, one element of the survey has continued to fall since June 2014.

The survey’s question about whether this is ‘time to buy a dwelling’ fell another 2.7 per cent from the May figure and is now 7.4 per cent down since the start of 2016. It’s also down 14.4 per cent from its score two years ago. However, the separate ‘house price expectations’ index rose by a further 3.6 per cent taking it to its highest level since September last year.

“Both buyer sentiment and price expectations are still well below the readings seen a year ago but have shown a clear firming from the weak levels in early 2016, the RBA’s May rate cut clearly a supporting factor,” Matthew Hassan, senior economist at Westpac commented.

Banks loosen the restraints

In the past year housing investor credit growth fell from a peak of 11 per cent a year in 2015 to just 6.5 per cent after the banking regulator restricted growth in this market to a maximum 10 per cent a year.

AMP Capital chief economist Dr Shane Oliver said that APRA's 10 per cent cap appeared "quite excessive in the scheme of things" when compared with the much slower growth in household incomes.

A note published in mid-June by credit rating agency Moody’s noted that house prices are pushing up again and banks have returned to chasing property investors.

"While some of the newer activity can be explained by investors bringing forward ahead of the July 2, 2016 federal election, there is evidence that bank appetite for investor lending is returning after a period of tighter underwriting," the note said.

Westpac, Australia’s biggest lender to landlords, has begun allowing customers to include tax benefits from negative gearing in their loan assessments, and started to accept smaller deposits from investors.

The Bank of Queensland recently raised its maximum loan to valuation ratio (LVR) for investors to 90 per cent, up from 80 per cent, which allows investors to acquire property with smaller deposits.

"Banks don't want to miss the market," chief executive of Mortgage Choice, John Flavell told Business Day’s Clancy Yeates.

"If the market has come off a bit for investors, and it has done, then you can turn around and moderate your policies and your pricing to get your loan growth up towards your cap.”

However, a report from Macquarie analysts says that lending standards in parts of the mortgage market are likely to tighten further in the longer term: "While the changes implemented by banks appear to be prudent, we expect further tightening in lending standards over time.

"This would likely result in further pressure on housing prices and credit availability, which would ultimately result in ongoing pressure on housing volume growth," the report said.

Too many towers?

The Organisation for Economic Co-operation and Development (OECD) warned in June that a sharp rise in apartment construction could lead to a "dramatic and destabilising" fall in Australian property prices.

The Reserve Bank (RBA) had previously raised concerns of an apartment glut, and forecaster BIS Shrapnel described it as "an accident waiting to happen".

A June 3 article in Business Day outlined the core of the problem: “Failed settlements are cropping up as a major concern, especially at a time when the banks are tightening credit, meaning buyers who paid a 10 per cent deposit two years ago and are relying on a 90 per cent loan to fill out the rest of the purchase, may now have to pay more.”

But S&P analyst Sharad Jain said that Australia’s ‘big four’ banks had only limited exposure to the apartment building boom, as “…a large share of these units [are] funded by cashed-up developers or overseas banks.”

Sydney’s vacancy rate increased slightly during May, and some parts of the city are showing early stages of an oversupply issue after years of a building boom.

Economists from UBS Group compiled a report that showed why concerns about the number of apartments now being built won’t go away. In terms of sheer quantity, the number of multi-storey apartments under construction has more than doubled in the past few years, and nearly tripled since 2010.

A research study by Jones Lang LaSalle showed that about 61,000 new apartments will have been completed across the city of Sydney from 2015 to 2017. This compares with 44,500 completions from the period 2012 to 2014.

Eliza Owen, market analyst for Onethehouse.com.au, says this is part of a shift that began some time ago: “Most strikingly, the number of high-rise units began outperforming detached housing approvals from March 2011. The salience of this phenomenon increased around the beginning of the 2013 housing boom.”

Sydney had an apartment vacancy rate increase of 0.2 per cent to 2.2 per cent over the month, according to Domain Group senior economist Andrew Wilson, but he said there wouldn’t be a Sydney-wide oversupply problem.

HIA executive director NSW David Bare agreed, saying that over 2015/2016, new dwelling starts were likely to increase 7.6 per cent across the state, followed by a 9.9 per cent decline in 2016/2017 and another expected drop the year after.

“While residential building activity may be at the peak of the cycle, it’s important not to lose sight of the bigger picture,” Mr Bare said. “Ensuring supply meets underlying demand over the long term is critical to housing a growing NSW population and improving housing affordability.”

Ratings agency S&P Global have recently completed a report on real estate investment trusts and say it is unlikely that there will be a sharp drop in property prices.

"However, a scenario of the early 1990s where unemployment reached 11 per cent would place households under severe financial stress," said S&P analysts Craig Parker and Graeme Ferguson in their report.

UBS economists say they only predict a "moderation" not a "downturn," in prices as long as interest rates remain low. They also noted that the official figures on average house prices, including apartments, have been more resilient this year than many analysts had expected.

Interestingly, according to figures compiled by Mortgage Choice, 82 per cent of NSW investors chose to purchase an established investment property in 2015.

“Despite the fact that there is an increasing number of new properties — including new apartment blocks — coming onto the property market, it would seem as though the majority of investors feel as though an established dwelling would best suit their needs,” Mortgage Choice CEO John Flavell told News Limited’s Kirsten Craze.

“They want to invest in a property that has the potential to deliver strong capital growth and rental yields. And looking at the data, it would appear the majority of investors believe an established dwelling will help them to do just that,” he said.

Surcharge for foreign buyers

The NSW Government, still two years away from its next election, has decided a good way to offset any possible decrease in stamp duty collections will be to add an extra four per cent stamp duty surcharge on foreign buyers beginning June 2016. These buyers will also be hit with an extra 0.75 per cent land tax impost, if payable, from the start of 2017.

NSW Treasurer Gladys Berejiklian said the surcharges would not deter foreign investors: "These new measures will ensure NSW's property market continues to be an attractive destination for international investors while making sure that we are able to fund vital services into the future."

After Victoria's announcement of similar tax changes for foreign investors last year, Real Estate Institute of NSW president Malcolm Gunning had urged NSW not to impose similar taxes as "foreign investors would simply decide to invest somewhere else".

This is borne out by Greville Pabst, chairman of Victorian valuation and advisory firm WBP Property Group, who said: “In recent months the Victorian Government announced they were making significant changes to stamp duty for foreign buyers. What they’ve done is they’ve added an additional 7 per cent stamp duty for foreign buyers of property.

“On a million-dollar purchase that’s $120,000 of stamp duty — that’s quite a consideration on that investment, isn’t it?  Some of my investor clients I’ve had in Malaysia and Singapore are now looking at Melbourne and saying they’ll shut the door on Melbourne,” Mr Pabst said.

The impacts of the NSW surcharges are expected to be felt at the top end of the Sydney property market. Sydney Sotheby’s International director Michael Pallier said: “I don’t think the market will collapse but there will be ripples felt throughout the sector.”

One of these ‘ripples’ came when Digital advertising company REA Group reported a 25 per cent drop in Chinese visitors to its Chinese language property website Myfun.com.

Gavin Norris, Head of Australia for Chinese property portal Juwai.com, said that for Chinese buyers the advantages of buying property in Australia have until now outweighed the hurdles that they have to go through.

“However there’s a breaking point. In the medium term there are larger forces at play that overcome the new charges, but we seem to be heading in that direction,” Mr Norris told Domain.

Foreign Investment Review Board figures show that Chinese investment in Australian real estate has more than quadrupled over the past two years, from around $6 billion in 2012-13 to $24 billion in 2014-15.

Monika Tu, whose Sydney-based property agency specialises is catering for the Chinese buyer market, said international house hunters were factoring the extra land tax into their property search and reducing their budgets.

“The market is still here; there are Chinese buyers who have a visa and children are at school, and they really want to buy here but these changes do create a lot of uncertainty,” she said.

Looking ahead

There was a small drop in Sydney home prices of 0.7 per cent in the March quarter, but in the three months to June, property prices surged 6.8 per cent upwards according to CoreLogic’s monthly house price index.

JP Morgan economist Tom Kennedy said the fall in March was the result of a change in the dynamics of the property market, brought on by the rapid expansion in the number of apartments.

“This looming supply expansion is expected to exert downward pressure on price growth over the next few years, particularly in Melbourne and Sydney where the expansion has been most pronounced,” he said.

HSBC economists Paul Bloxham and Daniel Smith also expect the property market to cool further over coming quarters: “Tight prudential settings, a significant boost to housing supply and recently increased state taxes on foreign buyers are set to weigh on housing price growth,” they said in an AAP release.

Since mid-2012, Sydney prices have risen by 57 per cent, but Mr Bloxham said that nationally housing prices would only grow four to five per cent in 2016 and slow to somewhere from zero to five per cent in 2017.

Tim Lawless, CoreLogic Director of Research, Asia Pacific, says that compared to other states Sydney has been relatively sheltered from the downturn in the resources sector. Benefits have also come from having a healthy services sector and positive population inflows, but the boom days are definitely over.

“The cumulative effects of tighter lending conditions, more expensive mortgage rates for investors and lower yields, as well as natural affordability constraints and higher levels of new housing supply, is likely to continue to impact the Sydney housing market resulting in a further slowdown over the year.”

The latest NAB survey of residential property developers, owners, agents and investors concluded house prices will rise slightly, but apartment prices will drop as both local investors and foreign buyers reduce their levels of participation.

Credit rating agency Moody's has also repeated its belief that there's a growing chance of a "correction" in house prices - a fall of about 10 per cent it said is possible, though it also said a more "gradual adjustment" is the most likely outcome.

Most market-watchers are still confident that Sydney property prices will continue their upwards trajectory over the next four years, albeit with perhaps a slight dip or two along the way.

A survey of 20 economists and property experts by financial comparison website Finder.com.au found that 35 per cent believed property prices would rise 10 per cent by 2020, and a further 30 per cent expected increases closer to five per cent.

Finder’s spokesperson Bessie Hassan said: “While there was concern about a ‘housing bubble’ or unsustained growth for some time, we’ve now seen a correction phase where the property market has softened yet is likely to go up again.”

Sources

‘Property prices continue to surge in 2016, report shows,’ Jennifer Duke, Domain, 1 July 2016
‘NSW real estate: Chinese investors cast their eyes over to western Sydney,’ Alison Cheung, News.com.au, 30 June 2016
‘Housing affordability: How the major parties plan to tackle the crisis,’ Dana McCauley, News.com.au, 30 June 2016
‘New home sales fall for a second month in May: 'Nothing alarming', HIA says,’ Michael Bleby, Australian Financial Review, 29 June 2016
‘WESTPAC: Australians are feeling confident, but the RBA's still likely to cut interest rates,’ David Scutt, Business Insider, 15 June 2016
‘No sharp correction to house prices coming but debt risk growing, says S&P,’ Patrick Hatch, The Age, 15 June 2016
‘These charts show why some experts fear an apartment glut,’ Clancy Yeates, Business Day, 14 June 2016
‘NSW Budget 2016: Foreign property buyers in NSW to be hit with stamp duty and land tax hikes,’ Sean Nicholls, Sydney Morning Herald, 14 June 2016
‘Cracks emerging in Sydney’s apartment rental markets: report,’ Jennifer Duke, Domain, 14 June 2016
‘May Property Snapshot Infographic,’ Tim Lawless, CoreLogic, 9 June 2016
‘House price growth raises risks to banks: Moody's,’ Clancy Yeates, Business News, 9 June 2016
‘Housing investment loans hit two-year low as rules bite,’ Jeff Whalley, Herald Sun, 9 June 2016
‘Is the heat going to come out of the housing market now investors are backing off?’
Kirsten Craze, News.com.au, 8 June 2016
‘Property experts expect up to 10 per cent house price growth by 2020,’ Jennifer Duke, Domain, 7 June 2016
‘If the Sydney property market is booming again, why doesn’t anyone want to sell?,’ Antony Lawes, Domain, 4 June 2016
‘Market Update: Oversupply Fears Rise as LVRs Drop,’ Eliza Owen, Onthehouse.com.au, 3 June 2016
‘OECD warns Australian property prices facing 'dramatic and destabilising' demise,’ Business Day, 3 June 2016
‘Off-the-plan apartments are under the spotlight as prices slump,’ Kirsten Craze, News.com.au, 2 June 2016
‘Australian capital city home prices fall for first time since third-quarter 2012,’ AAP release in The Guardian, 22 June 2016
‘HSBC: property price growth to halve in 2016,’ Jessica Sier, Business Day, 21 June 2016
‘More tightening in mortgage lending likely: Macquarie analysts,’ Clancy Yeates, Business Day, 21 June 2016
‘Foreign-buyer stamp-duty charge unsettles luxury-home market,’ Jen Melocco, Domain, 22 June 2016
‘Property investors are going for old over new,’ Kirsten Craze, News.com.au, 26 June 2016