A new Premier, two new Ministers and new record pricesWed, 15 Feb 2017
The former NSW Premier Mike Baird has retired from politics, for the time being at least, and the new Premier is former Treasurer Gladys Berejiklian. As often happens in politics, changes at the top can impact on those below, and former Planning Minister Rob Stokes has been replaced by Anthony Roberts, who is also Minister for Housing.
Mr Stokes, who has a PhD in planning law, had initiated a reform of the state's planning system but disagreed with the Coalition’s stance of making no changes to the current negative gearing and capital gains taxation arrangements.
This isn’t to say he hadn’t supported the supply side of the equation. The numbers of new dwellings in Sydney have already exceeded previous targets set by the NSW government, and the latest plan developed under the auspices of Mr Stokes aims for 700,000 new homes over the next 20 years to keep up with population growth.
But new NSW treasurer, Dominic Perrottet, has his own take on solutions to housing affordability: "You don't get into politics to stay still," he told the Sydney Morning Herald. "You get into politics to reform. And that's what I will do."
In 2016, when he was finance minister, Mr Perrottet advocated replacing stamp duty on residential property with a broad-based land tax. However, this was quickly rejected by then-Treasurer Ms Berejiklian who continues to favour growth in housing supply as a pricing lever.
Furthermore, the new Premier has made it clear that she has no intention of working to scrap negative gearing, telling the Australian Financial Review: “Negative gearing is a Federal issue”.
Ms Berejiklian did say that improving housing affordability would be one of her top priorities, and that she intends to establish a comprehensive review to look for solutions to unaffordability, including ‘seeking advice from outside the bureaucracy’.
One of those on the outside is Nicholas Proud, chief executive of PowerHousing which represents community housing cooperatives, who does not agree with the official policy positions of both the state and federal governments that creating additional supply is the answer to housing unaffordability.
"The New South Wales Premier's prioritising housing affordability reflects the reality that despite record supply, there are growing waiting lists for public housing and there are renters, first home buyers, owner-occupiers as well as key workers that are struggling to cover housing costs.”
Another doubter is Domain Group’s chief economist Dr Andrew Wilson who said: "Record levels of new dwelling construction and surging investor activity in Sydney and Melbourne have as yet failed to ease imbalances in these markets. Increased supply is being offset by strong demand generated from high levels of migration and relatively low numbers of first-home buyers."
The Sydney Morning Herald’s Jessica Irvine came up with a wish list of proposed solutions to housing affordability that included scrapping negative gearing and removing special capital gains tax treatment – definitely off the Premier’s list of possible answers to the problem.
Also on her list, and sure to be unpopular with just about every Sydney homeowner, are: taxing increases in the value of the family home, axing stamp duty and implementing a broad-based land tax on all housing (the methodology favoured by NSW Treasurer Perrottet), and ‘value capture’ through taxing homeowners on the increase in the value of their properties when local infrastructure makes an area more desirable.
As our new Premier well knows, it would be political suicide for any government to imagine they could top up their coffers by coming up with new taxes on family homes. If there is a win-win solution to housing affordability it’s yet to be identified, but it’s at least encouraging to know that the Ms Berejiklian is making the issue a priority.
Rents rise with prices
Domain figures for the December quarter showed that rising rental costs are making life difficult for tenants seeking accommodation in Sydney. Rents crept upwards in the quarter, increasing returns for investors and requiring tenants to make ever-higher weekly payments.
House rents in Sydney rose 1.9 per cent from September to a median asking weekly rent of $540. Sydney's gross rental yield on houses rose 1.1 per cent to 3.4 per cent in December and 1 per cent to 4.04 per cent on units.
“Sydney’s house rent is a concerning result and for those wanting a house there’s no relief from rent stress yet,” said Domain’s Dr Andrew Wilson.
However, in the month of December the cost of renting an apartment in Sydney actually fell – the first fall recorded in the past two years. The median asking rent for apartments, which is the figure advertised to tenants, fell by one per cent to $520 a week in December according to Domain Group’s Rent Report. But despite the fall, apartment rents are still two per cent higher over the year.
Dr Wilson says rental markets across Sydney are still very expensive: “Up until this quarter apartment rents seemed to be catching up to houses. This [weakening for apartments] might now become a broader trend, but we’ll have to wait for more data to see whether it continues.”
Domain’s Jennifer Duke tells us that despite Sydney’s rental properties being the smallest in the country, singles are being forced into house-sharing arrangements due to high rental costs.
“The cost of renting a one-bedroom apartment in Sydney’s CBD is now $645 a week, a room-by-room breakdown of rental advertisements by tenant advocacy company Don’t Rent Me found.”
Real Estate Institute of NSW chief executive Tim McKibbin says we may have reached the point where people can’t afford to pay higher rents: “People just can’t afford the Sydney market, especially as wages aren’t keeping pace with the increases in property prices. There has to be a point where people can’t afford to keep going up with rent as well.”
It’s interesting to note that vacancy rates crept slightly upwards over 2016 in Sydney, up from 1.7 per cent in December 2015 for houses to 2.1 per cent. The apartment vacancy rate increased from 2.1 per cent in 2015 to 2.3 per cent over 2016.
It may sound illogical but the flood of new units coming onto the market in some parts of Sydney seems to be raising the costs of renting rather than reducing them according to the latest report from the New South Wales Tenants' Union.
The union's research and advocacy officer, Leo Patterson Ross, said rents are growing faster for apartments than houses, even in places like Rockdale and Lane Cove where large numbers of new apartments are being built.
"That's because these are new dwellings, so they're replacing older, less pricey stock and that brings the average and the median prices up," he said.
In the July to September quarter, the median unit rent lodged with the bond board was $525 a week, eclipsing the median $520 a week rent lodged for housing leases.
High property prices close to the city and somewhat easier prices in outlying areas have been driving growth in a relatively new trend – ‘rentvesting’.
Rentvesting is when those who don’t want to move a long way from town just so they can afford to buy a property choose instead to rent in their suburb of choice and buy an investment property elsewhere.
Finance broker and founder of resources site Rentvesting.com.au, Peter Mastroianni, says that Sydney will lead the way into rentvesting over the next twelve months.
“People are realising the benefits of letting their investment strategy do the heavy lifting for them,” he said.
“Our population is increasing, it’s ageing, people want to live in metro areas, and there is more higher-density living as well, as more people live on their own. These factors will continue to drive housing trends moving forward.”
Although there are no official statistics that show how many tenants are also investors, a recent survey by Mortgage Choice revealed a significant rise in the number of those using this strategy to buy property.
The survey found that in 2014, about 20 per cent of investors were ‘rentvestors’, and by 2016, just two years later, a third of the investors surveyed came into that category.
The wisdom of hindsight
Only now are we starting to ask: “How did house prices get so high?” There are a number of reasons, but the first three mentioned are usually interest rates, negative gearing and capital gains taxation.
CoreLogic's research director Tim Lawless says that the price increases in the south-east cities are due to a resurgence of property investors: "The pace of investment credit growth has really picked up. This has been a consistent factor in the marketplace since May last year and, of course, that coincided with the first round of the latest interest rate cuts."
Domain’s Dr Andrew Wilson lays the blame at the Reserve Banks’ doorstep: "Lower interest rates were the overarching stimulus for prices growth in 2016, with official cuts in May and August clearly revitalising housing markets," he said.
CBA senior economist Michael Workman says that the Federal Government's series of income tax cuts in the early to mid-2000s helped keep affordability stable for first home buyers, but since then it has deteriorated significantly.
He says negative gearing and the capital gains tax discount are the key factors encouraging investors to continue to pour funds into the housing market: "Investors will continue to be a significant influence on housing prices in 2017 and onwards until federal tax laws favouring leveraged housing investment are reformed.
"The Federal Government controls some of the significant demand factors for housing markets, namely population growth via migration and the spectrum of tax and foreign investment policies that significantly inflate demand for existing and new housing.”
The Annual Demographia International Housing Affordability Survey examines more than 400 cities in nine countries including the United States, United Kingdom, Australia and Canada. According to Demographia's latest survey, Australia's "urban containment policies," are the cause of Australia’s housing unaffordability.
(Urban containment policies are defined as those that target the growth of the urban sprawl by encouraging greater density in existing housing areas rather than opening up new sites.)
The report's co-author, Hugh Pavletich, notes that of the 7.7 million people who reside in NSW more than 4.8 million live in the greater Sydney area: "There is not enough decentralisation in Australia; state and local governments have lost the control of their costs and their capacity to finance infrastructure properly," he said.
Pricing’s upwards trajectory
There are at least two major players in the house price calculation business, and their numbers don’t always tally. Domain Group figures show that Sydney’s median house price rose to a new record of $1,123,991 in the December quarter. This would represent a rise of 4.7 per cent and would be the fastest quarterly increase in a year and a half.
The biggest rival to Domain is CoreLogic, who say the median price of a house in Sydney is $991,000, some $132,000 less than the Domain calculation. Each data provider has its own methodology for calculating their figures and each will tell you theirs is ‘accurate’.
Another calculation of home values is compiled by Residex who use a ‘repeat sales index’ as the basis of their price figures. According to the Residex repeat sales index, Sydney house prices were 3.1 per cent higher over the December quarter, making them 7.1 per cent higher over the calendar year.
Residex also identified a substantial second-half bounce in capital gains across the Sydney market for both houses and units. The repeat sales index showed the unit market gains increasing by 2.3 percent over the December quarter, growing by 7.4 per cent over the calendar year.
Regardless of the difference in analytical outcomes, all major data providers agree that Sydney housing prices are still rising, and that there has been a re-acceleration of prices in the second half of last year. There’s also a near-uniform agreement that prices are going to continue heading up throughout 2017, although probably not at a very fast pace.
The Commonwealth Bank’s economists are among those forecasting a modest slowdown. The bank’s senior economist Michael Workman said house price increases will slow to five per cent in Sydney with apartments weaker.
"The 20-year low in national wages growth of two per cent is a significant impediment to many households' ability to service more mortgage debt," he wrote in a note to investors.
CoreLogic's research director Tim Lawless told the ABC that he also expects a lower rate of home price growth this year than last.
"There are some factors that could dampen the rate of capital gains across the marketplace later this year," he said.
"Affordability of course is one of those, very high supply levels coming through the unit market is another factor, mortgage rates starting to edge a little bit higher and potentially some sort of regulatory response to start to dampen the level of investment demand [are other factors]."
The National Australia Bank also sees house prices rising this year. The bank's economists make an assumption that interest rates will fall further and are predicting a 4.5 per cent rise in Sydney house prices. However, they predict a lower rate of just one per cent for apartments due to the number of new units that will be completed in 2017.
"While fundamentals in the Sydney market still look relatively good, such strong price gains cannot continue indefinitely – especially since prices have outpaced average incomes, and the housing stock is expanding," NAB economists said.
Business Day’s Simon Johanson reported the findings of the BusinessDay Scope economic survey which represents the consensus view of 27 leading economists, academics, consultants and money managers.
“Australia's property prices are likely to keep rising this year before slowly losing momentum and going backwards,” he said.
“The panel's average forecasts are for an increase in Sydney prices of 4.9 per cent (after 15.5 per cent in 2016).”
Capital Economics' Paul Dales, who took part in the survey, says that the growth rate of 2016 won't be sustained: "Both housing markets will experience a gradual slowdown in house price inflation generated by the combination of tightening lending standards and rising mortgage rates [after 2017]," he said.
“House prices won't fall sharply this year as mortgage rates will stay low by historical standards and the unemployment rate is unlikely to rise.”
The panel polled for the BusinessDay Scope survey also agreed that the Reserve Bank would make at least one cut in the interest rate during 2017. Paul Dales said he expects the bank to leave the cash rate at 1.5 per cent until the middle of the year, then to cut it twice in the second half to just one per cent.
Richard Robinson of BIS Shrapnel is forecasting one interest rate cut to 1.25 per cent in the second half of the year, while RBC Capital Markets’ head of Australian research Su-Lin Ong said she expects a cut in the cash rate, but cautioned that the RBA might decide otherwise if it saw a surge in investor loans and home prices.
Time to sell?
Spring has a reputation for being the property market’s peak selling season. This spring certainly gave the NSW treasury a financial windfall as the amount of residential stamp duty flowing into the government’s piggybank hit new monthly records in November and December, as shown by Office of State Revenue figures.
The NSW government raked in $730 million from residential property transfers in December alone – about $100 million more than the previous December, while November's total of $718 million was up by $123 million compared with the year before.
However, if you’re concerned about missing out on the market’s ‘peak’ and thinking that was in spring, new statistics from CoreLogic will bring you some relief. Based on the average number of sales by month and season over the last 30 years, autumn is the season that beats all the others.
CoreLogic records show that 27 per cent of all sales over the last three decades have been transacted in March, April and May. Historically the most popular month is March.
Spring is only the second most popular time to buy residential property. 26 per cent of sales take place in September, October and November. Winter is next with 25 per cent of sales, and summer captures last place with 22 per cent of all property sales.
Must be something about the summer holidays!
‘Rentvesting: The strategy for first-home buyers that’s ‘creating a city of landlords,’
Jennifer Duke, Domain, 11 February 2017
‘NSW Treasurer Dominic Perrottet: 'I don't think it's fair that my generation is going to foot the bill,' Sean Nicholls and Matt Wade, Sydney Morning Herald, 11 February 2017
‘Residex Market Update,’ Tim Lawless, CoreLogic, 5 February 2017
‘Affordability blow: Sydney house prices top $1.1m, rents rise, Domain says,’ Gabriele Charotte, Australian Financial Review, 24 January 2017
‘Dear Premier Gladys Berejiklian: Here are 11 ways to improve housing affordability,’
Jessica Irvine, Sydney Morning Herald, 24 January 2017
‘House prices rise, affordability expected to worsen despite property slowdown later this year: CBA,’ Michael Janda, ABC News Online, 1 February 2017
‘Home prices will rise, don't expect a crash: economists,’ Simon Johanson, Business Day, 3 February 2017
‘Sydney, Melbourne house prices to keep rising in 2017, says NAB,’ Clancy Yeates, Sydney Morning Herald, 24 January 2017
‘Sydney has the second least affordable housing in the world: study,’ Latika Bourke, Sydney Morning Herald, 24 January 2017
‘Sydney housing: New survey paints dire picture for Harbour City's middle-income earners,’ Danuta Kozaki and Riley Stuart, ABC News Online, 24 January 2017
‘Australia's economic malaise comes down to dreadful decisions,’ Stephen Koukoulas, The Guardian, 24 January 2017
‘Autumn is the most popular time to buy property, not Spring,’ Julia Corderoy, News.com.au, 23 January 2017
‘Anthony Roberts, Brad Hazzard take key roles in Gladys Berejiklian reshuffle,’ James Robertson, Sydney Morning Herald, 29 January 2017SW
‘Treasurer Scott Morrison looks to United Kingdom for housing affordability solution,’ Dana McCauley, News.com.au, 23 January 2017
‘Sydney rental prices climbing due to new apartments flooding market, tenants' union says,’ Sarah Gerathy, ABC News Online, 1 February 2017
‘Sydney, Melbourne house prices to keep rising in 2017, says NAB,’ Clancy Yeates, Sydney Morning Herald, 24 January 2017
‘Value of rent assistance declines as rents climb faster than inflation,’ Gareth Hutchens, The Guardian, 24 January 2017
‘One step forward, two steps back as rents slip in Sydney’s apartment market: Domain Group,’ Jennifer Duke, Domain, 24 January 2017
‘Sydney’s one-bedroom apartment rents squeezing singles into share houses,’ Jennifer Duke, Domain, 2 February 2017
‘Sydney's tale of two suburbs: new analysis shows the wide spread of development,’ James Robertson, Sydney Morning Herald, 6 February 2017
‘Investor home loans the fly in the ointment for RBA board,’ Peter Martin, Sydney Morning Herald, 6 February 2017