The national property market has changed its rate of growth from the strong upwards trend early in the year to a more sedate level mid-year as banks tighten credit and investors and owner-occupiers find it harder to obtain finance for property purchases.
 
Figures compiled by Domain show that property prices have begun to slow across the country, and there are forecasts of sluggish growth in 2017.
 
Sydney property prices nevertheless achieved good gains in the June quarter with both apartment and house prices recovering strength, according to CoreLogic’s monthly house price index.
 
That index showed that in the three months to June property prices surged 6.8 per cent in Sydney, aided by an interest rate cut and an unseasonal rush of investor activity before the end of the financial year.
 
“A lot of the growth was fuelled through April and May, but Sydney’s June growth was exceptional after a moderating trend until early 2016,” CoreLogic’s head of research Tim Lawless said.
 
“We thought last year was the last hurrah, but there has been growth again. However, we’re not back to the frothy times of halfway through [2015] and we’re well below the peak of July last year,” he said.
 
St George Bank senior economist Hans Kunnen said that the strong fundamentals of Sydney’s property market would ensure continued stable growth: “In Sydney, there’s population growth and a previous lack of supply that’s still behind demand.”
 
A report from the PRDnationwide group said the Sydney market’s return to more sustainable prices growth in the first half of 2016 was a promising sign after the rapid price hikes of 2015.
 
PRDnationwide national research manager Dr Asti Mardiasmo said that sentiment toward the market ‘remains positive’: “Consumer confidence (is) the highest since January 2014,” she told News Corp’s Aidan Devine.
 
“This has flow-on effects for the property market, with buyers more willing to borrow capital,” she said.
 
Another positive factor noted by the PRDnationwide report was the strong performance of Sydney’s rental market in the first half of 2016.  It said the city recorded the highest growth (6.7 per cent) in median rent for three bedroom houses and has the lowest vacancy rate of any Australian capital city at 1.7 per cent.
 
Sydney’s auction clearance rates also continued at high levels – mid-70 per cent and above, although at well below the volumes recorded twelve months ago.
 
Director of Auction Services Rocky Bartolotto told Aidan Devine of News Corp that his auction house was experiencing a 30 to 40 per cent drop in the number of properties going under the hammer compared to last year.
 
He also said that for some agents, particularly those in the inner west, the drop in volume has been closer to 50 per cent.
 
The lower number of homes available for sale has discouraged many homeowners from listing their properties. However, the scarcity of offerings has only increased competition among buyers and sale prices are generally above expectations.
 
New home sales decline
 
Housing Industry Association (HIA) statistics show that new home sales fell 6.7 per cent in May as sales of detached houses declined in Australia’s eastern states.
 
Even though multi-unit sales rose 4.9 per cent in the month after a 10.7 per cent fall in April, this rise wasn’t enough to offset the drop in detached houses, and private new home homes sales were down 4.4 per cent overall.
 
HIA chief economist Harley Dale said there was nothing alarming about a reversal in the trend for new home sales: "There is a cyclical downturn ahead for new residential construction activity, as new home sales signal, but the early pull-back will be mild by historical standards."
 
The HIA did issue a cautionary note that some of the high numbers of new apartments being approved may not be constructed.
 
"A key factor to watch is the medium/high density market where the large pipeline of work to be completed and the record pipeline of work approved but not yet commenced sets up a period of unprecedented uncertainty," it said.
 
"Regardless of the relative strength to any trend recovery [in apartment approvals] over the last six months, these lead indicators provide less forward guidance than usual because of the uncertainty surrounding the record pipeline of work approved but yet to commence construction."
 
Urban Taskforce chief executive Chris Johnson said the brakes had been put on lending in Melbourne and Sydney, and warned those buying in these developments to be concerned about financing.
 
“People put 10 per cent down and wait a couple of years until the project is finished to get finance. If by that time the extra 90 per cent is hard to get from the banks, there will be issues settling,” he told Doman.
 
UBS economist Scott Haslem said in the same article that there is some market risk, with forecasts of 10 to 15 per cent falls in some inner city areas where there had been too much apartment construction: “My view is there’s a risk we are overbuilding in some narrow segments of the market, and it’s possible we will see some reasonable price falls in some of those segments.”
 
One big cause of the industry’s concerns about apartment sales is the recent decline of Chinese investor interest in NSW property. This is largely due to the introduction of stamp duty and land tax surcharges by the state government for non-residents buying residential property in NSW. 
 
REA Group chief economist Nerida Conisbee said the slowing of international sales meant there would be less development of new apartments: “Developers need a high pre-sale level; a drop-off in sales to either local investors or offshore investors means development won’t proceed.
 
“You won’t get the same level of completion [as before the restrictions were introduced],” she said.
 
Another problem in recent times is the impact of new borrowing rules on off-the-plan buyers of Australian apartments. According to several mortgage brokers and financiers, thousands of investors who have paid deposits are now having difficulties getting the finance needed to complete their purchases.
 
Scott Kirchner, the manager of Bella Resident in China told the Australian Financial Review that the inability of offshore buyers to access finance was "really starting to bite".
 
"We are reluctant to take on new clients unless they have 100 per cent of the cash for a property," he said, adding that it was getting harder to take money out of China.
 
He said that there was still strong demand for Australian property from Chinese buyers, but many were holding off making purchases until they knew how valuations would be affected by recent Australian restrictions on borrowing.
 
The dream fades for some
 
In literature the ‘great Australian dream’ has always been to own a home, preferably a freestanding house on a quarter-acre block with a backyard and a barbeque. A recent study shows this might only be possible for a minority of the population after this year.
 
As reported in The Australian, the great dream of home ownership will soon reach a tipping point when fewer than half of all Australian adults are expected to own property, according to the University of Melbourne.
 
Data collected by the university’s Melbourne Institute show that the proportion of adults who own their home has fallen from 57 per cent in 2002 to 51.7 per cent in 2014.
 
Professor Roger Wilkins, the deputy director of the Household, Income and Labour Dynamics Australia survey, says that based on trends the national ratio will likely fall below 50 per cent as early as next year.
 
“I don’t think there has been a real decline in people's aspiration to own their own home other than the fact people have just given up on it because it seems unattainable,” he said.
 
The NSW ownership rate, the highest in the nation, has fallen during the period 2002-2014 from almost 67 per cent down to 63 per cent.
 
Meanwhile, housing affordability has worsened over the June quarter, according to the HIA’s Housing Affordability Index which shows that affordability in Sydney dropped 1.6 per cent.
 
The Australian Financial Review’s Su-Lin Tan said this was because a further cut to the cash rate this year had increased housing demand, while uncertainty triggered by a delayed election and world events had increased vendors’ reluctance to sell.
 
In hopes of easing housing unaffordability, the federal government has consistently focused its attention on increasing supply through land releases and boosting roads and rail.
 
“Now this is how you address housing affordability,” Mr Turnbull said during the election campaign. “Housing affordability is the result of there being insufficient supply of housing. You need to have more supply of housing.”
 
The peak body for aspiring property owners, the First Home Buyers Association (FHBA), has criticised the Coalition for its argument that increasing supply will fix the housing affordability problem.
 
“This, we all know, is easier said than done, especially in the near future,” the FHBA said.
 
“We are concerned about the time it will take to work with state and local governments to fast track the supply of land and new housing.”
 
At least industry concerns about negative gearing changes have been mitigated by the confirmation of the Coalition as winners of the July 2 election. Some pundits had forecast that the ALP’s proposed changes would have seen property prices fall by up to 15 per cent and rents rise by six per cent.
 
SQM Research managing director Louis Christopher said that the proposed changes might have made property more affordable but that also meant lower property prices.
 
“While we take the view that negative gearing reform is a good thing, such reform should be done as part of a wider property tax reform,” he said.
 
Forecasts of future trends
 
The Westpac-Melbourne Institute’s Survey of Consumer Sentiment report records how people feel about whether it’s a good time to purchase a home. The survey’s ‘It’s Time to Buy a Dwelling Index’ showed a fall in those believing it was a good time to purchase property - down another 1.8 per cent in July after a 2.7 per cent drop in June.
 
The NAB released its Quarterly Australian Residential Property Survey Q2 2016, concluding that nationally house prices will grow 0.5 per cent, while unit prices will drop 1.5 per cent. 
 
It said Sydney apartments are forecast to drop 1.8 per cent and 1.5 per cent respectively over 2017 and 2018, primarily due to growth in supply.
 
"We have maintained our expectation that the housing market will cool appreciably, despite the near-term strength," it says in the report.
 
"Our average national house price forecast for 2016 has been revised up...Price growth is then forecast to stall while fundamentals [namely wages] begin to catch up."
 
The survey’s 230 property industry respondents included real estate agents, property developers, investors, asset managers, fund managers and valuers.
 
But the picture for the remainder of 2016 is brighter, according to NAB chief economist Alan Oster, who said the national house price growth is estimated at 5.1 per cent while apartments are expected to grow 3.6 per cent.
 
At the same time, BIS Shrapnel’s ‘Residential Property Prospects’ report predicted house prices would drop across most capital cities over the next three years.
 
AMP Capital’s chief economist Shane Oliver was especially negative about apartment prices: “I still think there will be declines of 15 to 20 per cent in the next couple of years,” he said.
 
The ANZ/Property Council survey of property market professionals found that expectations for prices growth and confidence within the industry had both dropped, with only NSW escaping the consequences of an oversupply of housing.
 
The survey concluded that in 2017 the state would have an expected shortage of 41,031 homes, representing only a slight improvement on the current shortage of 53,386 homes.
 
“The oversupply is becoming almost an urban myth, a truism, with no data to support it,” said Domain Group chief economist Andrew Wilson.
 
Foreign buyers, acknowledged as an important driver of prices growth, have increased their market share slightly in NSW to 11.8 per cent from 11.1 per cent in the first quarter, but this is well below the growth rate of 21 per cent in the first quarter of last year. 
 
The Reserve Bank of Australia (RBA) is likely to cut interest rates further, but Eliza Owen, market analyst for Onthehouse.com.au, said that this might not have a significant impact on a slowing housing market.
 
“The impact of low interest rates on the property market has previously been somewhat ‘intercepted’ by regulatory authorities who have attempted to limit home lending to investors and increase capital held by banks.
 
“However, irrespective of interest rates, recent events could still direct investors to property – the historically safe investment market – staving off the downswing for another few months.”
 
Independent property valuation and advisory group Herron Todd White released a report in mid-July which supports the view that prices for Sydney houses and apartments have yet to reach their peak.
 
The report acknowledged that price growth in 2016 was “slower than previous years” but said there had been consistent solid price growth in the ‘value band’ across the metropolitan area due to investor and entry-level owner occupier demand.
 
NAB chief economist Alan Oster said that the continued growth in Sydney had “surprised everyone.”
 
“At the end of last year we expected one per cent [property price] growth, and it’s already at eight per cent,” he said.
 
“Sydney surprised everyone by its strength in the last couple of months,” he said. “The growth will probably continue for a little while,” he said.
 
Dr Shane Oliver, chief economist at AMP Capital agreed, telling Domain’s Jennifer Duke that property prices are unlikely to fall until interest rates start rising, something that’s not likely to happen for some time.
 
“There have been lots of predictions of peaks and reports of property prices falling, but … prices will continue to creep higher into next year,” he concluded.
 
Sources:
 
‘Banks put the brakes on high-rise developers,’ Clancy Yeates, Jennifer Duke, Domain, 30 July 2016
Residex Market Update, Eliza Owen, Onthehouse.com.au, 27 July 2016
‘Frozen loans trigger Australian property funding crisis,’ Angus Grigg and Duncan Hughes, Australian Financial Review, 25 July 2016
‘Oversupply an ‘urban myth': 10 suburbs where apartment prices are surging,’ Jennifer Duke, Domain, 23 July 2016
‘NSW property market in stable condition after making a positive start to 2016, new report claims,’ “Aidan Devine, News Corp Network, 13 July 2016
‘Apartment prices to drop in four capital cities in 2017, NAB survey suggests,’ Jennifer Duke, Domain, 15 July 2016
‘Housing affordability: How the major parties plan to tackle the crisis,’ Dana McCauley, News.com.au, 30 June 2016
‘Federal election 2016: House prices to fall, rents to rise under Labor negative gearing policy,’ James Massola, Jennifer Duke, Domain, 22 June 2016
‘Five graphs that show why Australia’s property price growth is over,’ Jennifer Duke (with AAP), Domain, 14 July 2016
‘House prices to rise faster than expected this year, NAB says,’ Michael Bleby, Australian Financial Review, 15 July 2016
‘Housing affordability has worsened in June quarter: HIA,’ Su-Lin Tan, Australian Financial Review, 19 July 2016
 ‘Low supply of homes for sale helps push Sydney’s auction clearance rate to highest in the country at 79 per cent,’ Aidan Devine, News Corp Network, 11 July 2016
‘New home sales fall for a second month in May: 'Nothing alarming', HIA says,’ Paul Rovere, Australian Financial Review, 29 June 2016
‘NSW real estate: Chinese investors cast their eyes over to western Sydney,’ Alison Cheung, News.com.au, 30 June 2016
‘Property prices continue to surge in 2016, report shows,’ Jennifer Duke, Domain, 1 July 2016
‘RBA Keeps Rates on Hold in July,’ Eliza Owen, Property News, onthehouse.com.au, 5 July 2016
‘Sydney’s house price growth hasn’t peaked yet: Herron Todd White,’ Jennifer Duke, Domain, 6 July 2016
‘The Australian dream: soon, fewer than 50 per cent will own home,’ Rick Morton, The Australian, 20 July 2016