Market comment: More homes planned for Sydney but affordability concerns grow

Mon, 12 Dec 2016

Market comment: More homes planned for Sydney but affordability concerns growThe NSW government, having already raked in unprecedented millions in stamp duty from the superheated property market of the past three years, has now announced that something like 200,000 new homes will be built in Sydney over the next five years.

NSW Planning Minister Rob Stokes said that these new homes would be mostly apartments and townhouses, and that development would be focused on Parramatta, Blacktown and the City of Sydney.
 
"While there will continue to be opportunities to buy detached homes on the blocks on the fringes of Sydney,” he said, “there's a real focus on apartments, on terrace houses and on medium-density developments in established areas."
 
Without a great amount of detail about the government’s plans at this stage, he said the government was spending $73.3 billion on infrastructure over the next four years that would "support growth in the right areas".
 
The NSW Government also has plans extending 10 years into the future. The Department of Planning forecasts that an extra 600,000 people will be living in Sydney’s south and far west in the coming decade.
 
The Minister says the city’s future housing needs will be met in thirds. According to ABC News Online’s Jacob Saulwick, the government’s intentions are that one-third of Sydney’s new housing will be built on the outer south-west and north-west fringes of the city; one-third will be spread through the city’s existing suburbs, and one-third will be delivered close to existing public transport in state government led programs.
 
And it’s not all about apartments. In October, the NSW government released the draft of a ‘Medium Density Design Guide’ that it hopes will encourage the construction of new townhouses and terrace style housing.
 
Mr Stokes calls terrace houses in the draft ‘the missing middle’: “What we know is that we’re getting a lot of apartments and high-rise units across Sydney, we’re also getting detached housing on the fringes of Sydney,” Mr Stokes said in an interview with the ABC.
 
“What we are missing out on though is that human scale of development that typifies so many cities overseas and that really is all about terraces.”
 
As News.com.au journalist Julia Corderoy points out, builders would rather construct apartments: “Medium density housing accounts for just 10 per cent of housing approvals in Sydney, with just 5,390 approved in 2015-16.
 
“This is despite there being the potential for almost 280,000 medium density dwellings in Sydney based on current council zoning and planning controls.”
 
This situation could change if apartment sales continue to slow and developers turn to the yet-untapped market for townhouses and terrace houses that represents an unsatisfied demand from young families and recent retirees.
 
Minister Stokes made the news again in late November when he blamed negative gearing tax breaks for reducing housing affordability in Sydney, and said increasing the supply of new dwellings will not make property more affordable.
 
Several property industry figures immediately rebutted the Minister’s position, and Prime Minister Malcolm Turnbull confirmed there are no plans to change the present negative gearing taxation arrangements.
 
Unit construction boom continues
 
CoreLogic’s Cameron Kusher says that at the end of the June 2016 quarter there were 55,682 units under construction across NSW: ““If you look at the long-run averages you can see that the current unit construction boom is unlike anything we’ve ever seen before. The long-run average for units under construction is 16,194 in New South Wales.”
 
Further analysis shows that, if all the approved units are completed, over the next two years unit stock in some regions of Sydney is going to increase dramatically - Strathfield-Burwood-Ashfield will increase by 20.7 per cent, Parramatta unit stock will increase by 19.2 per cent and Auburn by 26.1 per cent.
 
As expected, the building boom is showing signs of slowing, with building approvals falling 8.7 per cent nationally in September as the number of new apartments approved fell to its lowest total in eleven months.  Apartment approvals in NSW experienced a 20 per cent month-on-month decline in September, the biggest fall in over a year.
 
UBS economist Scott Haslem said he wasn’t surprised by these figures as they were anticipated by market analysts: "Nonetheless... the backlog of approvals / commencements implies housing supply will not actually peak until 2018. This will support housing activity throughout 2017 and into early 2018."
 
Price growth unstoppable
 
Domain Group data found Sydney’s median house price has now reached a record $1,068,303, after a 2.7 per cent jump over the September quarter. Investor activity also increased 9.2 per cent in the year to August 2016, said Domain Group chief economist Andrew Wilson.
 
“The growth is raging back into Sydney … we have auction clearance rates in the mid-80 per cent range, and there were two interest cuts in August and May this year,” Dr Wilson said. 
 
Figures from CoreLogic also confirm that home prices in Sydney continue to rise with a 10.6 per cent year-on-year gain to November. This is a price “reacceleration” according to CoreLogic’s research director, Tim Lawless.
 
"Consistently over the past two months we've been seeing Sydney clearance rates above 80 per cent, in fact there's only been one week over the past eight where the clearance rate has dipped only slightly below the 80 per cent mark," he said in an interview with ABC News journalist Gordon Taylor.
 
"So I think we have seen some rebuilding in the housing market on the back of a lower cash rate and lower mortgage rates."
 
He added that the current home price spike is still a significant reduction from the peak growth rate of almost 19 per cent per annum for Sydney property prices in July 2015.
 
Property analysis firm SQM Research believes the “reacceleration” will continue into 2017. Its ‘Property Outlook Report’ forecasts price growth over 2017 of between 11-16 per cent in Sydney.
 
Louis Christopher, head of SQM, said in the report: “What we have noticed in very recent weeks is an acceleration, particularly in the Sydney housing market. Our view is that this acceleration will continue, it will go well into 2017."
 
He does recommend the Reserve Bank of Australia (RBA) and the bank regulator APRA take some action to further tighten lending criteria before 2018: "What we suggest is that it's best to move sooner rather than later because, if there is no action, it could be a large issue in 2018 where potentially a hard landing could play out."
 
Supply shortage to 2018
 
Seeing a potential glut of apartments in parts of Sydney, National Australia Bank has identified some suburbs where buyers will need a minimum 20 per cent deposit to get a home loan from the bank.
 
It has issued a list to brokers of what it calls ‘Group A’ postcodes in rural areas, where lending is capped at 70 per cent of the property’s value, and ‘Group B’ postcodes where an 80 per cent loan-to-value ratio will be required. Sydney’s Chippendale, Waterloo, Haymarket, Carlingford, Parramatta, Barangaroo and Homebush are some of the suburbs on the latter list.
 
Comparison website Canstar editor Justine Davies points out that aspiring property owners can always look outside the ‘Big Four’ banks for a loan: “There are more than 100 home loan lenders in the market, and the vast majority still offer home loans with a deposit of 10 per cent or less.”
 
At least one of the ‘Big Four’ isn’t worried about a glut being caused by the number of apartments now being built in the greater Sydney area. The head of Westpac’s consumer bank, George Frazis, says he is confident that Sydney will still have a shortage of homes over the next two years, and quite possibly longer than that.
 
Although he expects something like 10,000 new apartments to be completed over that time, he said in an interview with Business Day that Westpac has no concerns about its exposure to inner-city units.
 
"We still have a structural shortage of housing in Sydney because of the population growth and the pent-up demand," he said. "Even if we look at what's coming online over the next year or two, we'll still have structural undersupply."
 
He did say that Westpac had “lowered its exposure” to inner-city apartments, but pointed out that the proportion of inner-city apartment loans more than 90 days behind in repayments was lower than the bank’s loan book average.
 
Regardless of whether Westpac has reason for any concern about a possible glut of apartments, CoreLogic figures show that apartment prices in the Sydney CBD have fallen – a 9.1 per cent drop over the past 12 months.
 
One cause of this decline is the change in the attitude of the ‘Big Four’ over the past two years, from one of expansion to the present tightening of loan requirements.
 
REA Group Chief Economist, Nerida Conisbee believes this has been caused by “settlement risk” saying: “Banks are now being restricted on the amount that they are lending, particularly to investors. People have put down deposits two years ago…but [in that time] the banks can change their approach to risk quite significantly.”
 
In some cases, buyers who paid their deposit on an apartment two years ago may now find that their bank won’t lend them the full amount of the balance of the purchase price. That can force the original buyer to sell the property for a lesser amount than they originally agreed to pay.
 
Ms Conisbee told news.com.au journalist Julia Corderoy that at least this offers a glimmer of hope for first-home buyers: “It is fantastic for affordability. People talk about an oversupply and in the same breath an affordability problem, but you kind of have to have an oversupply to lead to affordability.”
 
Another glimmer came from a recent ruling that foreign investors can only purchase new properties. As news.com.au journalist Frank Chung described it: “If an off-the-plan sale falls through, the property will be considered second-hand. This means thousands of foreign buyers will be stopped from picking up the properties, lowering the eventual resale price.”
 
Inevitably there will be some off-the-plan sales that fall through. It may well be only a small percentage of the total number of new units coming onto the market, but property research firm CoreLogic says around 230,000 apartments are due to be completed across all capital cities by 2018 - more than double the annual average sales of apartments over the five years to April 2016.
 
The affordability issue
 
Housing affordability is increasingly being identified as a serious problem for those wanting to acquire a home in Sydney. With prices as high as they are, and no end in sight to the upwards price curve, governments at both state and federal levels are waking up to the fact that would-be buyers – especially those who are younger and earning lower wages, have been priced out of the Sydney market.
 
This also affects those who want to find rental accommodation in Sydney. Rents are broadly based on property prices – the more valuable the property, the higher the cost of renting it.  High prices mean high rent costs, and despite some indications of price falls in CBD units, Sydney is still an extremely expensive city in which to rent an apartment.
 
The answer isn’t just to build more apartments if it’s going to cost over $1 million for a 2-bedroom unit within 20 km of the CBD, nor is it to have apartments built on the city fringe where infrastructure – such as public transport, schools and hospitals is missing or in short supply, and where jobs are hard to find.
 
There are many voices offering a variety of solutions, some of which are practical, at least in theory, and others that are wildly optimistic and impossible to implement. Social housing is often mentioned in the media, but governments at all levels have no plans or funding for constructing large social housing projects in our capital cities.
 
John Daley, CEO of the Grattan Institute, offers his opinions: “New developments on the edge tend to be a long way from where additional jobs are being created. Over half of the net growth in jobs in Melbourne, Sydney and Brisbane in the last five years was within 10km of the CBD.”
 
But the market is clearly showing it doesn’t want this new supply to be ‘inexpensive’ apartments, according to LJ Hooker Head of Research Matt Tiller: “I think at this stage, developers are building what the market demands. They have obviously seen demands for these luxury high-end apartments,” he said.
 
So, even if the problems of housing affordability are easy enough to delineate, their solutions are proving elusive. One thing is clear: no matter how much housing is added to the market in the greater Sydney area, prices will keep rising.
 
Looking forward
 
Looking toward the future, most observers of the Sydney property market can see only blue sky ahead. Despite a slowing of the year-on-year price growth, there’s little doubt that the present upwards price pressures will continue well into 2017.
 
The property market seems to be going its own way, regardless of mixed economic signals – we have a lower jobless rate but falling full-time employment levels, the Australian dollar remains high while inflation and interest rates are at record low levels.
 
Interest rates have suddenly popped back into the news with speculation that the election of Donald Trump in the USA could bring on global conditions that would favour an increase in interest rates.
 
It was only a few weeks ago that both Trump’s election and a rise in interest rates seemed out of the question. Concern about inflation had led the RBA to cut rates twice this year which had the effect of adding strength to the Sydney property market.
 
More recently, financial traders have grown increasingly confident about the Australian economy and are now pricing in a greater than 50 per cent chance of a rate hike in 2017.
 
Westpac’s George Frazis also raised the possibility of higher mortgage interest rates as a result of the recent surge in bond yields: "Obviously, if the yield curve is going up, then that will have an implication for fixed rates, potentially," he said.
 
Westpac is the first major bank to increase interest rates on its fixed rate home loans and investment loans - an increase of 0.6 percentage points to 4.59 per cent in the interest rate for five year loans to investors, and market watchers expect other lenders to follow. 
 
Domain asked three of the city’s most prominent analysts what they thought would happen in the coming year and here’s what they replied:
 
HSBC chief economist Paul Bloxham said there’s likely to be more price increases over the next few months, but it will be single digit rather than double-digit growth on an annualised basis,
 
BIS Shrapnel residential researcher Angie Zigomanis thinks price growth is likely to continue, as investor numbers are looking better and the banks could be loosening some of their criteria for lending.
 
Century 21 chairman Charles Tarbey said he has “bullish prospects” for the market to the end of the year but thinks prices may start to moderate in 2017.
 
Eliza Owen, market analyst for Onthehouse.com.au, sees the market slowing but still strong: “In the NSW market, capital growth, sales and development are still steady, though capital growth in Sydney is lower than the previous year. [More affordable] Western areas of Sydney in particular are being capitalised upon by developers.”
 
And in his October ‘Property Snapshot Infographic’, CoreLogic’s research analyst Cameron Kusher also remained cautiously optimistic, saying: “We are expecting Sydney and Melbourne value growth will remain strong for the remainder of 2016 [but] will probably start to slow throughout 2017 as more supply enters the market.”
 
Sources:
 
‘Forget apartments: We need more townhouses,’ Julia Corderoy, News.com.au, 29 November 2016
‘November Market Update’, Eliza Owen, Residex, 25 November 2016
‘NSW Government should abolish stamp duty and leave negative gearing, real estate industry figures argue,’ Jennifer Duke, Domain, 25 November 2016    
‘Westpac's George Frazis hoses down apartment glut,’ Clancy Yeates, Sydney Morning Herald, 21 November 2016
‘Apartment prices in our CBDs are falling,’ Jill Corderoy, News.com.au, 20 November 2016
‘Sydney set for biggest-ever housing construction boom in 'war against sprawl',’ Virginia Small, ABC News Online, 20 November 2016
‘Where we’ll live’, Jacob Saulwick, ABC News Online, 22 November 2016
‘Home prices continue rising; Sydney, Melbourne, Canberra lead,’ Michael Janda, ABC News Online, 1 November 2016
‘Home prices to keep surging in Sydney, Melbourne over 2017, risk of 2018 bust: SQM Research,’ Michael Janda, ABC News Online, 3 November 2016
‘RBA grapples with uncertain job market, accelerating housing,’ Michael Heath, Bloomberg in Sydney Morning Herald, 15 November 2016
‘Failed off-the-plan apartments ‘second-hand’,’ Frank Chung, News.com.au, 24 October 2016
‘These Australian suburbs could see explosive growth in new apartments in the next 2 years,’ David Scutt, Business Insider, 25 October 2016
‘NAB blacklists loans for properties in ‘risky’ suburbs,’ Dana McCauley, News.com.au, 24 October 2016 
‘Solutions beyond supply to the housing affordability problem,’ John Daley, Joe Hurley, Nicole Gurran, Robin Goodman, Domain, 25 October 2016
‘Strongest Sydney house price growth in a year: Domain Group,’ Jennifer Duke, Domain, 27 October 2016
‘Building approvals fall more than expected in September as apartments slump,’ Michael Bleby, Australian Financial Review, 2 November 2016
‘Demand for luxury apartments signals worrying trend for affordability,’ Julia Corderoy, News.com.au, 28 October 2016