The old year’s behind us and the new year will bring changes, but one thing that isn’t about to change is the price growth of Sydney property. As News.com’s Julia Corderoy put it at the end of 2016: “It has been a hell of a year for the Australian property market.”
 
The 2017 ANZ/Property Council Survey asked property professionals for their opinions about the likelihood of price growth in the future. The Council’s NSW executive director Jane Fitzgerald told Domain that the state is in a good position to start the year: “NSW had a strong 2016 and the next 12 months are looking positive with high expectations for growth, investment and hiring across the state,” she said.
 
SQM Research managing director Louis Christopher has also predicted a strong Sydney housing market, with forecasts of 11 to 16 per cent for the 2017 calendar year:
“This year could be a repeat of 2015,” he told Domain. “The first two quarters will be strong.”
 
A note of caution came from Angie Zigomanis, senior manager of research house BIS Shrapnel, who sees continuing growth in 2017 but said: “We won’t get price growth forever … we still think things will start to ease back again in 2018.”
 
Moody's Analytics economist Emily Dabbs said Sydney property prices had grown 11 per cent in 2016 and her company’s data indicates the strong price growth we saw in 2016 will continue into 2017.
 
"We haven't really seen a significant decline in prices in Sydney for quite some time, and it's very unlikely to be that way, just because of the amount of demand that there is in the city," she said.
 
Nationally, figures from Domain show that the median house price increased by 3.7 per cent over the three months ending November to a new record spring high of $774,799. The national unit price also rose by 3.2 per cent to $550,150.
 
The national house price is now 6.1 percent higher than that recorded over spring 2015 with the national unit price increasing by 4.2 percent over the past year.
 
Sydney has been Australia’s standout price performer for some time, with prices rising by a massive 67 per cent over the current growth cycle that commenced in June 2012.
 
The Sydney median house price increased by 4.9 percent over the three months of spring to a record high of $1,106,415 – an increase of 7.4 per cent over the past year.
 
In December, the auction market boomed, sharply reversing the previous trend of lower auction numbers compared to 2015 at the same time. There were 2463 weekend listings over the month of December compared to 1936 listed over December 2015.
 
The December weekend auction total was also the highest ever recorded for that month exceeding the previous record of 2421 set in 2014.
 
Domain Group chief economist, Dr Andrew Wilson, says that Sydney house prices can be expected to increase by 4 per cent in 2017 “…with the increasingly likely stimulatory impact of lower official interest rates offset by higher mortgage rates set by banks.”
 
He says that unit prices can also be expected to continue to rise although at a lower annual rate than houses. He estimates a rise of 3 per cent as the result of higher levels of new apartment stock entering the marketplace.
 
CoreLogic's head of research Tim Lawless said the relative weakness of units compared to houses is the result of a surge in supply that demand isn’t keeping up with.
 
"We are already seeing quite a divergence in the growth rates in the marketplaces where unit supply is looking problematic," he told the ABC.
 
Mr Lawless said that while there is the possibility of some substitution between houses and units if apartment prices continue to fall in relative terms, there aren’t many options for those wanting to buy a stand-alone house.
 
"We aren't seeing a great deal of new detached housing development and greenfield development at the outskirts of the cities; the current building boom is all about high-rise developments."
 
In 2017 the price growth will be noticeably stronger in some areas than it is in others. The days of buying just any property as long as it’s somewhere in Sydney are pretty much behind us, and the new year’s crop of buyers will be more selective.
 
Simon Cohen, co-founder of buyer’s agency Cohen Handler, says that family homes on the lower north shore are still a “great investment” in the north, while anything near the new light rail in Sydney’s east is worth considering.
 
“The hottest property types in the east and inner-city areas are two or three-bedroom apartments, as there [has been] an abundance of downsizers selling in 2016 but wanting to remain in the area,” said Mr Cohen.
 
Building construction slows
 
We can look at the numbers of building permits issued in NSW and get some idea of what sort of construction industry activity levels to expect over the next two years.
 
More than 31,000 new homes were built in Sydney in the 12 months to October 2016 - the highest annual number of new homes in over four decades, according to new data released by the NSW Department of Planning. But end-of-year figures show the numbers of development applications and approvals are trending downwards.
 
NAB senior economist David de Garis told ABC News that the large decline in apartment approvals at the end of 2016 indicated a faster and stronger slowdown in construction than had been expected.
 
"[Recent] building approvals point to real risks now that the dwelling activity cycle over the next one to two years will now likely be softer than previously expected unless demand and finance soon come to the rescue," Mr de Garis said.
 
"Against the now clearer decline in the apartment development pipeline, approvals for "alterations and additions" (the renovation market), picked up this month, though even there the trend is negative."
 
Approvals in NSW were down 19 per cent in figures released by the Australian Bureau of Statistics in November, and Sydney’s position as the driving force in apartment construction is under threat.
 
RBC Capital Markets' chief economist Su-Lin Ong says she expects the strong construction activity concentrated in east coast apartments will peak next year: “Most striking is the weakness in approvals for private apartments in New South Wales over the last three months, with monthly approvals running at around half their previous pace."
 
Ms Ong told ABC News that the figures indicate the housing cycle will peak in mid-2017 and that the Reserve Bank will make at least one more rate cut early this year.
 
One ongoing question is: “Are we building too many units in Sydney?” Fitch Ratings have compared Australia to Ireland, Spain and Great Britain and concluded we do not appear to currently be building more housing than it needs to match population growth, with 0.57 homes completed per extra person.
 
Australia is currently building enough new homes for each one to house 1.75 people, where the fairly long-term average household size has been 2.6.
 
Less global in nature but certainly relevant is a 2016 report by BIS Shrapnel that concluded Sydney is still suffering from an undersupply of housing.
 
BIS managing director Robert Mellor said in the report: “It’s so severe we won’t see an oversupply in Sydney in the next four years. A downturn in Sydney between 2004 and 2012 was so severe, basically only in the last 12 months we’ve started to see construction move above the level of demand.”
 
Affordability skewed by tax
 
Both the State and Federal governments have expressed their concerns about how hard it is for ‘ordinary’ Australians to buy a home, particularly in Sydney.
 
Prime Minister Malcolm Turnbull told The Daily Telegraph that councils are taking too long to approve development applications and that this is fuelling Sydney’s high housing prices.
 
“We’re not asking people to compromise on planning standards, but it shouldn’t take you 18 months to get a DA if in other cities it can take you six months,” he said.
 
Housing affordability also remains a major concern of the Property Council of Australia. According to the council, stamp duty is just one of the areas in need of urgent reform with the typical buyer in NSW forking out an average of $40,000.
 
The council has a good point. Jacob Saulwick, writing in the Sydney Morning Herald, tells us that about 12 per cent of NSW government revenue comes from taxes charged when individuals and companies buy property.  Almost 8.5 per cent of revenue comes from taxes charged on residential stamp duty; residential stamp duty increased by 19 per cent in 2014-15, and by 13.4 per cent in 2015-16.
 
However, NSW Treasurer Gladys Berejiklian insists that housing affordability can only be corrected by increasing the supply of housing: "Tackling housing affordability remains a major priority for the NSW government and we believe the best thing our government can do is to help deliver more houses to put downward pressure on prices," Ms Berejiklian said in her government’s half-yearly budget review.
 
Professor Peter Phibbs, head of urban and regional planning at the University of Sydney, disagrees. He says that NSW "has done everything right" by supporting an increase in housing supply, but there is no evidence it had done anything to improve affordability.
 
"It will help, and we should do it," he says. "But we're at 40-year highs [in building completions] and it hasn't generated any significant benefit."
 
The Daily Telegraph says that Sydney’s high prices are creating “real estate refugees’’ who have to leave the city and migrate north to find affordable housing: “Home buyers are now spending almost half their income on mortgage payments, with Sydney homes costing 10 times more than the average annual wage.”
 
Coalition MP and federal member for Bennelong, John Alexander chaired a 20-month long enquiry during 2015 and 2016 that looked for ways to help genuine buyers – the ‘owner-occupiers’ rather than investors, own their own homes.
 
Because the Coalition is committed to a position of not changing the current capital gains tax and negative gearing rules, this leaves little room for other options to be considered.
 
Treasurer Scott Morrison has outlined the federal  government’s position: "It is the Government's view that the mum and dad investors, who actually provide the capital for the nation's rental housing stock, if we were to withdraw that, then that has the only outcome of increasing rents," Mr Morrison said.
 
Mr Alexander’s enquiry considered such mechanisms as making continuing adjustments to the ability of banks to lend to investors, and allowing workers to divert the 9.5 per cent of wages now going into superannuation towards paying off a home loan.
 
But to date no clear direction has emerged from the enquiry’s findings. In fact, the enquiry was unable to make any recommendations to the government for reform of the present situation.
 
"The committee notes that rates of home ownership and investment in housing have remained broadly steady for many decades and that the current price cycle in the housing market across the nation overall is not inconsistent with historical trends," the enquiry’s report said.
 
Committee chairman David Coleman fell back on the argument that there is no structural problem with housing affordability and supply should be boosted as appropriate.
 
Grattan Institute chief executive John Daley told the Sydney Morning Herald: "They cannot be serious. It's laughable. There's clearly a housing affordability problem for younger households."
 
Mr Daley added that housing data showed home ownership rates for people under 55 and for low-income Australians are "falling like a stone".
 
And it’s not being caused by foreign buyers. A recent study by two Treasury officials concluded that the impact of foreign buyers on Sydney property prices is relatively small.
 
A working paper by Treasury officials Chris Wokker and John Swieringa said that compared to the average quarterly increase in property prices of around $12,800 in Sydney and Melbourne, foreign demand increases prices by between $80 and $122 on average.
 
“Foreign demand has accounted for only a small proportion of the increase in property prices in recent years,” the paper concluded.
 
But it’s not like investors are leaving the scene, according to The Guardian’s Greg Jericho: “It is now five years since the RBA began cutting rates in November 2011. In that time there has been a veritable surge in the housing investment that has helped fuel economic growth,” he writes.
 
“So strong has been the growth of dwelling investment in NSW that while in total NSW accounts for just under a third of all such investment in Australia, it has accounted for 61% of the growth in that investment in the past five years.”
 
Soon, there could even be a rush of Americans who aren’t sure they want to live under a Trump administration looking for new homes in Sydney, according to the Financial Review’s Su-Lin Tan.
 
“Aside from apartments, ‘fleeing’ Americans [are] also looking for ‘traditional Australian homes’ in Sydney's eastern suburbs and most were willing to spend between $3 million to $5 million.”
 
She quotes Raine & Horne's Ric Serrao who said he received the number of inquiries from America that he normally has all year in just six weeks after Mr Trump won the US election.
 
"In my market [in Sydney’s eastern suburbs] we normally get 10 to 15 inquiries all year. We have had 12 to 15 since the election," he said.
 
Clearly, the opportunities for further growth in property prices that are offered by Sydney more than any other capital city are too good to be overlooked by investors who’ve already done well and will simply continue doing what they’ve been doing in 2017.
 
Interest rates TBA
 
Although there are several conflicting forecasts already being made for interest rates this year, it would be a brave economist indeed who would bet their own house on a percentage of increase or decrease until we gain an idea of just how the election of Donald Trump will affect US financial markets.
 
The new US President has said he will slash taxes on business and expend massive amounts on infrastructure and the military, financed in no small means by deficit spending. The US GDP will most likely rise, as will the national debt. But nobody really knows what it means for interest rates.
 
Steve Keen, economics professor at London’s Kingston University, thinks Trump’s first term will see a sharp acceleration in US growth – to perhaps 4 per cent a year.
 
(Although he hates being reminded of it, we should mention that this is the same professor Keen who in 2010 made a 225-kilometre trek to Mount Kosciuszko after losing a bet he made in 2008 that Sydney house prices would fall by 40 per cent.)
 
But whatever happens, it will affect interest rates in Australia. The Guardian’s Lindsay David believes that Trump’s policies could be inflationary for Australia’s economy: “The post-Trump election bounce in US bond yields has already fed into an increase in borrowing costs in Australia” he wrote.
 
“Rising bond yields mean that the government or banks have to pay a higher yield (interest rate) to borrow money because the market is starting either to demand greater reward for risk – or to combat real economy inflation in a nation that has its banking and household sectors already highly leveraged.”
 
Although that national description can be applied to Australia, most Australian economists are still betting – in print, on at least one rate cut early this year. However, the OECD is predicting the Reserve Bank will start to increase rates late in 2017 as the economic recovery strengthens and housing prices blow out.
 
"This is not completely crazy," said Paul Dale from Capital Economics, in an interview with the Sydney Morning Herald. He points to a stronger-than-expected housing market, a weaker Aussie dollar, and Trump's surprise victory contributing to a spike in Australia's key commodity prices as well as a six per cent rise in equity prices.
 
However, Mr Dale also says the RBA is "almost guaranteed to leave interest rates on hold" following the surprisingly big fall in construction work in the third quarter of 2016, a concern over deterioration in the labour market and still-soft wages growth.
 
The major banks have already begun to raise their variable interest rates on new and existing loans. The increases are small, but they are being applied without any increase in the RBA’s rate and despite a general belief among most economists that rates will not increase in the short-term.
 
"We consider a range of factors when we set interest rates, such as what is happening in the economy, the market, and regulatory requirements. This includes when changes need to come into effect," a NAB spokeswoman told the Herald’s Clancy Yeates.
 
Macquarie economist James McIntyre is predicting a base case of two RBA cuts in the first half of 2017, taking the cash rate to a new record low of one per cent.
 
"The recent data flow suggests that the RBA will be presented with weaker-than-expected economic growth, and potentially lower inflation, when it meets in February," he told a briefing in Sydney.
 
The RBA has been counting on continued strength in home building to offset the lingering drag from a slump in commodities prices and mining activity.
 
"Total approvals are still relatively high but the speed at which they are rolling over is a real surprise," said Shane Oliver, chief economist at AMP, quoted in a Reuters release.
 
"It already looks like the economy lost momentum in the third quarter and now residential investment could turn into a drag on growth [in 2017]. That only underscores our call for another rate cut."
 
Meanwhile, the RBA has been resisting further easing following cuts in August and May that took the cash rate to an all-time low of 1.5 per cent.
 
Government policymakers argue that the drag from a slowdown in mining investment has almost passed, and a revival in prices for key commodity exports in recent months indicates a rise in national income is about to happen.
 
Mortgage Choice chief executive John Flavell told News.com.au that the possibility of a rate hike became far more likely when the US Central Bank announced it would increase its benchmark short-term interest rate in December.
 
“The [US] Central Bank said the recent progress of the economy gave them the impetus they needed to increase the Federal Funds rate by 25 basis points to 0.75%,” he said.
 
“The Bank also indicated that the Federal Funds rate could rise by a further 75 basis points throughout 2017 — through three separate rate increases.
 
“This announcement, combined with the fact that many of Australia’s lenders have started to raise rates across their suite of home loan products, would suggest a cash rate increase by the Reserve Bank of Australia is now more of a possibility than not in 2017,” he told News.com.au.
 
There are some safe bets for 2017: Sydney housing prices will remain on their upwards trajectory, the rate of prices growth for detached houses will be higher than the rate for units, auction clearance rates will stay robust, some parts of Sydney will strongly outperform others, and investors will continue to acquire property thanks to the taxation advantages they enjoy.
 
But interest rates remain uncertain. At its last board meeting of 2016, the Reserve Bank said that conditions in the established housing market have strengthened in recent months.
 
“In Sydney and Melbourne, housing price inflation had picked up and auction clearance rates were at high levels,” the RBA’s December 6 board meeting minutes declared.
 
This could mean the RBA is setting up conditions for a rate rise in early in the new year. But don’t try to be brave and bet your house on interest rates going up, going down or even staying the same in 2017. It’s very much a case of ‘To Be Advised’.
 
Sources:
 
‘Expected house price growth in 2017 could spell trouble for Sydney,’ Jennifer Duke, Domain, 13 January 2017
‘Sydney real estate: Home values DOUBLE in eight years, buyers forced to migrate north,’ The Daily Telegraph, 3 January 2017
‘Wealthy Americans eye Sydney property to escape Trump,’ Evan Vucci, Australian Financial Review, 1 January 2017
‘Steve Keen: rebel economist with a cause,’ Patrick Commins, Sydney Morning Herald, 5 January 2017
‘NSW Treasury braces for Sydney property market slowdown,’ Jacob Saulwick, Sydney Morning Herald, 12 December 2016
‘Year in review: A look back on the big stories affecting the real estate industry in 2016,’ Kate Jones, Domain, 29 December 2016
‘Economists predicted house prices would stabilise in 2016, but the opposite happened,’ Gareth Hutchens, The Guardian, 4 January 2017
‘Property 2017: Gold Coast set to boom, but still no end in sight for Sydney,’ Julia Corderoy, News.com.au, 25 December 2016
‘Record number of homes built in Sydney, but it's still unaffordable,’ Lisa Visentin, Sydney Morning Herald, 22 December 2016
‘As Australia's housing bubble gets bigger, the Reserve Bank prepares to blame Trump,’ Lindsay David, The Guardian, 1 December 2016
‘Apartment approvals crash as building cycle rolls over,’ Stephen Letts, ABC News Online, 30 November 2016
‘Sydney property prices show no signs of slowing down in 2017, while other major cities ease up,’ David Taylor, ABC News Online, 30 November 2016
‘Malcolm Turnbull's big chance to be the new Menzies and help first home buyers,’
Peter Martin, Sydney Morning Herald, 1 December 2016
'It's laughable': Government slammed for housing affordability probe that proposes no changes’, Michael Koziol, Sydney Morning Herald, 18 December 2016
‘Spring house prices surge – Sydney and Melbourne still booming,’ Dr Andrew Wilson, Domain, 18 December 2016
‘Housing affordability: ‘Red tape’ to blame for property crisis,’ Daily Telegraph, 27 December 2016
‘Sydney auction market ends year on record high,’ Dr Andrew Wilson, Domain, 20 December 2016
‘Housing supply and demand in balance: Fitch,’ Michael Janda, ABC News Online, 30 November 2016
‘Rate hike? A cut is far more likely, economists say,’ Zac Crellin, Sydney Morning Herald, 1 December 2016
‘Australia home building boom fast turning to rubble,’ Wayne Cole, Reuters, 30 November 2016
‘House prices tick higher but unit values fall,’ Michael Janda ABC News Online, 1 December 2016
‘Study: Foreign buyers lift prices between $80 and $122 on average per quarter,’ AAP on Domain, 2 December 2016
‘Investors are back: the uneven housing market, interest rates, and what the RBA can do,’ Greg Jericho, The Guardian, 14 December 2016
‘Are we headed for a housing crash — or not?,’ Charis Chang, News.com.au, 4 December 2016
‘Speedy rate hikes protect bank margins,’ Clancy Yeates, Sydney Morning Herald, 11 December 2016