A shortage of properties for sale keeps price levels up as we look back to December 2000 for the beginnings of our current boom.

Winter chills are behind us and as we head into spring we also enter the peak selling season for Sydney property.  Weekend auctions already show a surge in listings and record clearance rates, although the number of properties on offer is well below figures at this time last year.

An unseasonably strong late-winter market looks set to flow seamlessly into spring, and there’s every reason to expect the price growth to continue as the weather warms up. 

But for a moment let’s seek out what might be called ‘the dark side’ of property price forecasts, and as usual professor Steve Keen of Kingston University, London can be called on for a negative appraisal of the property market.

You might recall professor Keen achieved some fame a few years ago when he predicted a catastrophic crash in Australian house prices following the GFC and had to walk 225 kilometres from Canberra to Mount Kosciuszko as a result of losing a bet.

The professor now says that Australia's current credit binge will implode as early as 2017, with house prices falling between 40 and 70 per cent, accompanied by a sharp rise in unemployment. 

"We have borrowed ourselves so much to the hilt that we are now dependent on that continuing to rise over time and it simply won't," he told the ABC's The Business. 

However, all indications are that professor Keen will need another pair of hiking boots if he’s made a similar bet this year to the one he made in 2010. 

We now have a situation where there’s still an undersupply of housing and population growth continues. Prices are high and still increasing in most parts of Sydney and auction clearance rates remain at ‘boomtime’ peaks, including the highest clearance rate ever achieved in August.

AMP Capital chief economist Shane Oliver says there’s a serious shortage of housing stock that explains why the clearance rates stay so high: “You can see the sales volumes are down a lot on a year ago, by about 40 per cent.

“That could well be because sellers have done their selling. The last few years have seen record levels of sales and people would have taken advantage of that, so even though now they’re getting better deals … they have already done their selling,” he said.

Investors are back in the market in a big way, borrowing again and stretching investment lending in such a way that banks are concerned that APRA will flex its muscles to return to the regulator’s ten per cent annual growth rate limit, or possibly lower the threshold to seven or even five per cent if borrowing continues at such high levels.

Mortgage Choice chief executive John Flavell said the number of loan applications received by the broker in recent weeks suggested record low interest rates were boosting the mortgage market.

"When you get the cash rate changes, that always takes a little while for the dust to settle, but the dust settled and application volumes are very, very, very strong," Mr Flavell told the Herald’s Clancy Yeates. 

"The market's pretty tight, and everyone's looking for new stock to come onto the market, so when it's there, it's moving quickly and it's getting snapped up.”

Domain’s Dr Andrew Wilson notes that investors remain a key ingredient of our rising housing market, pointing out that the latest Australian Bureau of Statistics residential lending data reports another surge in activity over June for NSW. 

“The prospect of a change to negative gearing has activated investors since May, with a June total of $6.6 billion – the highest monthly result since June last year,” he added.

Foreign investors are still key elements of the buying mix. The Foreign Investment Review Board (FIRB) says in its latest annual report that the value of approvals for foreign investment in Australian real estate increased 75 per cent last financial year to $61 billion, with Chinese buyers accounting for around two-thirds of the applications.

An ANZ Bank research note said that the lower Australian dollar has supported foreign investor demand for Australian housing, although the bank’s economists wrote: “Tighter lending conditions may see this ease.”

The research note also said tighter borrowing criteria and increased taxes on foreign buyers “could see reduced demand from foreign buyers, although as yet there is little hard evidence of this”.

Affordability’s a growing issue

Housing affordability is a hot topic at present. Domain’s Jennifer Duke recently conducted an analysis of the present situation and concluded that, in every capital city with the exception of Sydney, homes were more affordable in 2016 than their 15-year average.

In fact, even in Sydney affordability was improving from 2010 to 2013 until it was quashed by the latest period of rapid price growth. 

As recently as 2012, Sydney’s median house price was $645,000. Just four years later it’s more than $1 million. Domain Group says that every second house owner ‘can now stake the claim of being a property millionaire’.

Just five years ago, only one in six of Sydney’s 600-odd suburbs had a median house price above $1 million. By mid-2016, 323 suburbs had six-figure price tags. 

That’s quite a leap, but looking back a few years we can see the forces taking shape that have now made Sydney Australia’s least affordable city.

Just how unaffordable has Sydney become? Data from real estate research firm CoreLogic shows that NSW has just over 68 per cent of all national suburbs with a median home value of at least $1 million, up from 60 per cent in 2008.

However, BIS Shrapnel senior manager Angie Zigomanis tells us that from December 2000 to December 2003 there was a Sydney property boom that makes 2012 “pale in comparison”.  He reminds us that prices growth in this period was 65 per cent for houses, and people were actually leaving Sydney due to those high prices. 

“At the same time, the government introduced all sorts of development levies into the market, including vendor tax. This hit the market,” he said.

The result that followed was a prolonged time of underbuilding – of providing a lower number of dwellings in the Sydney area that were needed to accommodate a fast-growing population. Land releases slowed and the new layers of development costs either retarded or prevented development.

An ‘Infrastructure Charges Report’ published in 2009 by the Master Builders Association shows that over the four years from 2001/2002 to 2005/2006 developer contributions grew at an average rate of 8.2 per cent a year for each new dwelling. 

By 2009 only 25,000 dwellings were being added to the housing stock in Sydney annually. To give you an idea of just how much of a shortfall this represented, it’s less than half the number constructed in 2015/2016 which still leaves Sydney undersupplied.  

Housing Industry Association figures identify a window of increasing affordability from 2010 to 2013, when housing prices dipped slightly and interest rates were cut, but the pause was short-lived and prices soon began to rise again.

Naturally enough, at that time investors leapt into the property market to take advantage of growing demand for rental accommodation and favourable interest rates. And the more investor activity there was, the higher prices rose.

So, there was only one possible outcome from years of chronic housing undersupply and that was a growing unmet demand that would drive property prices upwards at a rate far higher than could be met by growth in incomes. 

First home buyers still around

First home buyers have reminded us they’re still in the market, albeit in a relatively small way when compared to investors. The number of grants claimed by first home buyers in NSW went up by almost 11 per cent last financial year, according to figures from the Office of State Revenue (OSR).

NSW Treasurer Gladys Berejiklian says the government’s first home owner grants are helping to improve housing affordability: “We have consistently said that supply is the key to putting downward pressure on prices’

"Our policies to encourage the construction of new homes are clearly bearing fruit, with residential building approvals soaring by 10.5 per cent over 2015-16,” she said.

The latest OSR figures show the number of first home owner grants rose by 900 to about 9400. The total value of the grants was $138 million.

Ms Berejiklian’s optimism about increased supply is offset by June figures from the Australian Bureau of Statistics (ABS) showing that new building approvals fell to their lowest total in seven months.

The number of new homes approved by planning authorities fell 2.9 per cent to 18,693 from 19,250 in May, the lowest monthly figures since November 2015. 

The June figures showed the fall in the monthly figure for multi-unit dwellings was 3.4 per cent, while the decline in standalone houses was 2.4 per cent. 
 
The Housing Industry Association sees these figures as indicative of a gradual slowdown of building activity: "Approvals on both the detached house and multi-unit side peaked in mid-2015," HIA senior economist Shane Garrett said. 

"Since then, detached house approvals have glided lower in an orderly manner. The immediate pipeline of new home building work is set to remain very solid, based on this latest approvals update."

Supply shortage continues

There’s clearly a shortage of properties on the market, particularly in the more desirable areas like the lower north shore and the northern beaches. One sign of the times is the median price of a three-bedroom apartment reaching $1 million – a 50 per cent increase over the past five years.

Three-bedroom apartments are the dwellings of choice for people downsizing from detached homes as well as for those who want to buy a family home but can’t afford the $1.5 million for a house.

“This data shows we’re still seeing a considerable demand for higher priced and bigger units in Sydney; there are plenty of buyers out there who are happy to live in a unit but they want a bigger unit even at a higher price,” said Domain Group chief economist Dr Andrew Wilson

BIS Shrapnel associate director Kim Hawtrey says New South Wales will remain undersupplied for some time, although even home building in Sydney would slow down. 

"Sydney is up against an affordability ceiling as well as constraints on site availability; investor demand is cooling, and the city will see a surge in new supply coming on stream over the next one to two years," Dr Hawtrey said.

He said the fall in activity from its current peak would mostly be felt in the higher density segment of the market: “New commencements of multi-residential dwellings are forecast to fall by from around 107,000 currently to just 53,800 by 2019-20."

Rents fall as supply grows

CoreLogic figures show that according to data going back to 1996 rents are falling at their fastest rate on record. However, although rents are falling in most capital cities, Sydney is still the most expensive city to live in, with a median average weekly rent of $595. 

A CoreLogic report noted rental yields had remained at record lows in July and were expected to see a further reduction in the months ahead.

“Renters will continue to have more choice and will likely be able to move into superior rental accommodation for similar or even lower costs.

"However, with capital gains starting to slow, investors may place a renewed focus on maximising their rental returns, which could prove to be difficult given the already soft rental conditions and substantial ramp-up in housing supply."

Citi bank has issued a caution that Australia’s apartment-building boom is nearing its end and warned that housing starts have reached 230,000 this year across Australia, but these will fall to 205,000 next year and to 172,000 in 2018. 

 "Apartment completions lag starts by 1-2 years so the developing oversupply will continue to build into 2017 and 2018 with completions probably doubling across the eastern states," the bank said in a research note.

That bank said that, while Sydney as a whole is less at risk of seeing supply exceed demand, there are some areas of concern, namely the Botany council area, Auburn, Lane Cove and Ryde also at some risk of excess supply that will begin to show up late next year.

In the short term there are no indications of forthcoming marketplace changes that will cause housing values to make any dramatic retracements from boomtime levels. There are, however, a number of signs that some easing will take place.

David and Libby Koch say the market is at an interesting crossroads: “The really good news in our view is our booming major cities are finally showing signs of slowing down... and not crashing.

“And despite a few areas of concern...it looks like there is still enough demand in our two major cities to support prices while annual growth slows to more reasonable levels.

“We believe this is a strong signal that we have simply seen a boom in these markets, not a bubble, and we’re returning to a more ‘normal’ cycle,” say the Koches.

Cameron Kusher of CoreLogic RPData sums up what seems to be the general attitude of property analysts looking at the city’s future: “Tighter lending policies, less offshore investment, record low rental yields, falling rental rates, higher housing supply and stretched housing affordability in Sydney and Melbourne would suggest that a slowing in value growth is imminent. 

“These factors are dynamic and change fairly quickly but CoreLogic is anticipating further slowing of value growth in Sydney and Melbourne throughout the remainder of 2016,” said Mr Kusher.

Sources: 

‘Housing affordability in Sydney was actually improving three years ago – then the boom hit,’ Jennifer Duke, Domain, 17 August 2016
‘Median price for apartment now $1m,’ Jennifer Duke, Sydney Morning Herald, 20-21 August, 2016
‘Real estate: Rents fall across most capital cities in July,’ Thuy Ong, ABC News Online, 10 August 2016
‘Apartment building to collapse 50 per cent says BIS Shrapnel,’ Peter Martin, Sydney Morning Herald, 1 August 2016
‘Australia headed for recession next year, Professor Steve Keen says,’ Elysse Morgan, ABC News Online, 1 August 2016
‘Property investor surge could see regulator step in, economists say,’ Jennifer Duke, Domain, 10 August 2016
‘Sydney’s market booming as spring approaches,’ Dr Andrew Wilson, Domain, 19 August 2016
‘July Property Snapshot Infographic,’ Cameron Kusher, CoreLogic RPData, 16 August 2016
‘NSW first home owner grants reach $138 million,’ Sean Nicholls, Sydney Morning Herald, 11 August 2016
‘June new home approvals fall 2.9pc to seven-month low,’ Michael Bleby, The Australian Financial Review, 3 August 2016
‘David Koch explains what’s good, bad and ugly in the Australian property scene,’ David and Libby Koch, News.com.au, 11 August 2016
‘Number of million-dollar suburbs soars in wake of housing boom,’ Andreea Papuc, Sydney Morning Herald, 5 August 2016
‘Vancouver slaps 15% tax on foreign house buyers in effort to cool market,’ Ashifa Kassam, The Guardian, 3 August 2016
‘Interest rates: Reserve Bank confirms housing slowdown a key factor in cut,’ Michael Janda, ABC News Online, 5 August 2016
‘Why Chinese property buyers are here to stay,’ Frank Chung, News.com.au, 21 August 2016
‘Sydney auction market kept hot by ‘sellers’ conundrum’, Jennifer Duke, Domain, 22 August 2016
‘Sydney spring market opens with record-level buyer energy,’ Dr Andrew Wilson, Domain, 26 August 2016
‘Apartment glut looming in 2017, property downturn imminent, warns Citi,’ Michael Janda, ABC News online, 27 August 2016