The May 9 federal budget’s promised ‘housing affordability package’ turned out to be a mixed bag of 15 measures aimed at "reducing pressure on housing affordability".  These measures might bring a bit of relief to low-income tenants, restrict investor lending to some extent, help older Australian downsize their homes, and raise the hopes of some first-home buyers, but are unlikely to have a major impact on Sydney property prices.

The budget left negative gearing and the capital gains tax discount untouched, except for slight capital gains tax changes for foreign buyers and temporary residents. It cracked down on some concessions related to investment housing, as well as tightening allowances for foreign investors.It even got down to the finer details like preventing property investors from claiming a tax deduction for travel to and from properties they own.

Overseas investors will be charged $5,000 if they don't occupy or lease their property for at least six months each year, and will face new capital gains taxes when their properties are sold. Also, developers can’t sell more than 50 per cent of new developments to overseas buyers, although it’s unclear how these strictures will be applied or policed.

First-home buyers have been given a new First Home Super Saver Scheme that will allow first home buyers to funnel some of their income into super accounts at a lower tax rate than normal. This, according to the Government, will help first-home buyers to save a deposit 30 per cent faster.

Older Australians get a new incentive to downsize. From July 1, 2018, if they’re over 65 each Australian will be able to put up to $300,000 from the sale of their family home into super, meaning a couple selling a median-priced home in Sydney can put up to $600,000 into their super before they go shopping for their new home. Unfortunately, they’ll still be paying many thousands of dollars in stamp duty when they purchase a ‘downsized’ property.

Faster growth

The start of this year has seen more astounding growth in Sydney house prices, and there was little in the budget that might stem their upwards trajectory. The rate of annual price growth has now reached 19 per cent and statistics compiled by Domain show the Sydney median house price has now reached $1.15 million.

According to property researcher CoreLogic, house values in Sydney are now growing at their fastest annual rate since 2002.Interestingly, the figures for the first 27 days of April show Sydney house prices declining by 0.1 per cent for the first time since December 2015, but whether this is the start of a trend or just a statistical ‘blip’remains to be seen.

Fairfax journalist Clancy Yeates says the small drop in prices is not a dramatic change and the publicity it received is a sign that things in the housing market are ‘getting out of hand’:“Further complicating things, the figures take in a month that included Easter and the ANZAC Day long weekend, not to mention a regulator crackdown on interest-only home loans.”

Data from Domain show that 78 Sydney suburbs now boast a median house price of $2 million or more. Five years ago the list showed the names of only six suburbs, prompting Domain’s Dr Andrew Wilson to quip: “Two million dollars has become the new $1 million rather quickly.”

However, a recent report, ‘No Place Like Home: The Impact of Declining Home Ownership on Retirement’, by economist Saul Eslake, says that the rate of home ownership in Australia, which peaked at around 73 per cent in the mid-1960s, has fallen to around 68 per cent today.We aren’t the nation of homeowners we used to be.

The report also says the proportion of home owners who own their homes outright has declined even more, from a peak of 61.7 per cent at the 1996 census to 47.9 per cent at the 2011 census.

“We’re creating a city of winners and losers,” said head of Urban and Regional Planning and Policy at the University of Sydney, Professor Peter Phibbs. “There are fewer and fewer options in Sydney for people on middle and lower incomes.”

CoreLogic’s head of research, Dr Tim Lawless, says that a clear divide has emerged between types of property across Australia, with houses growing at a faster rate than units and apartments (13.4 per cent versus 9.8 per cent across all capital cities).

He added that the weaker price growth of units and apartments reflects high levels of new supply in some inner-city suburbs and also suggested that "consumer confidence has been negatively affected by the warnings of a potential unit oversupply".

CoreLogic’s figures also show that dwelling prices in all Australian capital cities except Sydney have grown at a slower pace since the start of the current decade to what was seen between January 2000 and February 2007. According to CoreLogic, prices in Sydney have grown by 78.3 per cent since January 2010, well above the 61.1 per cent increase seen from January 2000 to February 2007.

The peak?

Shane Oliver, AMP’s chief economist, thinks we’ve probably seen “the peak in the momentum” of price growth: "Housing is a central part of the Australian economy and it has a big impact on the economic cycle," he commented.

Global investment banking giant UBS says the Australian market has peaked. The UBS economic team said it usually takes rising interest rates to stop the upward phase of a property cycle, but allows for Sydney’s extended boom to be a bit different.

"While the historical trigger (RBA interest rate hikes) for a housing downturn is missing, mortgage rates are rising, and sentiment of home buying collapsed to a [near] record low," wrote Scott Haslem, George Tharenou and Jim Xu from UBS.

"Hence, we are 'calling the top', but stick to our forecasts for [dwelling construction] commencements to 'correct but not collapse' to 200,000 in 2017 and 180,000 in 2018."

So, as UBS sees it, the fire under the boiler’s about extinguished but there’s enough steam in the vessel to keep things bubbling along for a while. UBS sees the residential building boom topping out at roughly current levels in the second half of this year, before starting to ease off in 2018.

And how about prices? While UBS sees building activity dropping steeply, it does not see prices following the decline: "While we see a sharp correction for activity, which would not be unusual following a prolonged boom, we still don't expect a collapse of prices which would have a broader negative feedback loop for the labour market and economy," the investment bank predicted.

UBS is tipping around seven per cent annual price growth over 2017, down from current levels of around 13 per cent, and zero to three per cent growth next year.

Looking ahead over the next 18 months, Citi bank analysts Paul Brennan, Josh Williamson and Vivian Jang predict a fall of up to seven per cent in house prices. The trio believe that moves by the Australian Prudential Regulation Authority (APRA) to cool the housing market will be more effective than previous attempts, and conclude that a ‘partial correction’ is likely for Sydney.

Compare this to the NAB survey of market professionals in the March quarter which produced forecasts of house price growth in Sydney this year of 10.5 per cent, cooling to 4.9 per cent over 2018. Units were forecast to gain 9.7 per cent in Sydney this year, but then become flat next year.

Then look at the forecast from Michael Matusik, an independent property analyst, who is slightly less optimistic about Sydney saying it’s going up five per cent to 7.5 per cent in the twelve months to March 2018.

The numbers vary when it comes to forecasting the degree of the rise in prices of Sydney property, but there’s general agreement that the only way is still up – with the possible exception of units in some overbuilt metropolitan areas once the additional supply now under construction comes onto the market in 2018.

Louis Christopher, head of SQM Research, says “Our opinion is that the market continues to boom and APRA will likely have to step into the market later this year.”

That bubble again

Is our housing market in a ‘bubble’? It’s hard to say, not least because the definition of a bubble is vague and varies widely, depending on who’s defining it. Dr Timo Henckel, a lecturer at the Research School of Economics, ANU, says we’re in one now.

“There are plenty of arguments why current house prices are exactly where they should be, based on the fundamentals,” he said.

“But in my opinion these explanations do not pass the smell test: double digit increases in house prices, combined with unprecedentedly high household debt (more than 120 per cent of GDP, the third highest in the world) and household debt servicing ratios (also the third highest in the world), make for a precarious situation.”

The ABC’s Ian Verrender also thinks we’re in a bubble, and says: “The problem, as is usually the case with bubbles, is that no-one really wants it to deflate, let alone allow it to burst. The consequences are unthinkable. And all the action so far taken to slow it has failed.”

If there really is a ‘bubble’ out there in the real estate of greater Sydney, the government hopes it’s one that can be gently deflated.  Which is why it’s scrupulously avoiding actions that might cause it to pop with disastrous consequences for owners and investors.

“We are already seeing signs the heat in our housing markets may be coming off, especially in the apartment market,” Treasurer Scott Morrison says in notes seen by Guardian Australia. “Cooling foreign investor interest, due to tougher foreign investment rules implemented by our government and capital outflow restrictions in China, are already having an impact.

As a sign the building boom is nearing its end, March figures from the Bureau of Statistics showed a 13.4 per cent slide in building approvals for dwellings, led by a 22.5 per cent slump in apartment approvals. There was also a 4.3 per cent drop in the detached house sector.

Westpac Bank's Matthew Hassan says the drop was primarily due to the previously booming high-rise apartment sector: "The detail points to a virtual collapse in 'high-rise' approvals, down about 50 per cent month-on-month to the lowest monthly reading since July 2013," he wrote.

Mr Hassan said recent data point towards a faster end to the construction boom than had previously been anticipated: "Overall this is clearly still a very weak update with the pull back in high rise pointing to a more aggressive downturn than previously suggested," he wrote.

Investor lending concerns

Australia’s largest mutual bank, CUA with an $11 billion loans book, has stopped writing new loans for property investors: “In response to continued growth in our investor lending and forward projections of this growth, we’ve taken the decision that we need to temporarily pause new investor lending,” said CUA’s chief operating officer Andy Rigg.

Investors have unquestionably been the drivers of Sydney’s exceptional housing price rises. They come in all types and sizes, from the ‘mum and dad’ investors who buy an investment unit to the professionals who own more than a dozen properties. But most have one aspect in common: they borrow to acquire funds for their investments.

It’s all smooth sailing when prices are rising and investments show a probable profit when the properties are sold. But what happens when prices fall?

Bank of Queensland chief executive John Sutton summed it up when he revealed that some of his competitors were offering maximum loans of up to 30 per cent more than BoQ was prepared to write. He gave the market a timely warning: "This will end in tears."

Claire Moodie at ABC News put together a story for the 7.30 Report about plummeting property prices in Perth that shows what happens when too many property investments are made without adequate consideration about what might happen over time.

When the mining boom was generating high incomes and people in Perth had money to invest they borrowed to grow their funds even more by investing in property. As one would expect, property prices surged and borrowings increased accordingly.

Perth’s median house price peaked in 2014. Since that time, the mining boom has tapered off, unemployment has risen, the cost of living has gone upwards, and property prices have dropped dramatically. Owners and investors are now experiencing housing stresses they never expected.

Perth property valuer Gavin Hegney said there were lessons for policymakers to be learned from developments in Perth: "You probably want to be planning policies now for when the market comes off, and it will come off. What policies then should we implement to soften the blow of the market?”

APRA takes action

The Australian Prudential Regulation Authority (APRA) recently put new controls on interest-only loans and investor lending by banks. APRA chairman Wayne Byers said this would help protect the economy.

"Our objective with these new measures is to ensure lenders are recognising the heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions," he said.

Interest-only loans are seen as riskier than principal and interest loans because once the interest-only period ends, borrowers have to pay both interest and principal in less time. Borrowers also wind up paying more interest over the lifetime of the loan.

However, analysts said that moves by APRA to take some of the heat out of the housing market aren’t enough to deter investors.Morgan Stanley said that APRA’s latest measures would reduce higher-risk lending but wouldn’t “materially slow growth in investment property”.

Macquarie Wealth analysts say APRA’s controls on investor lending and interest-only loans allowed the banks to continue lending but would place constraints on the runaway housing market.Macquarie said that cutting the cap would have destabilised the housing market, noting that settlements on new developments over the next 18 months are estimated to be 5-6 per cent of total loan flows.

Reserve Bank governor Dr Philip Lowe has said he appreciates APRA’s efforts but noted that conditions in housing vary markedly across Australia: "In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining," he said.

"In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for two decades."

He also said that lenders should adjust their loan requirements for current market conditions and that it would be a positive development if the number of interest-only housing loans would decrease.

Another regulatory body, the Australian Securities and Investments Commission (ASIC) said it would start surveillance of interest-only lenders and mortgage brokers who recommend high numbers of interest-only loans.

ASIC chairman Greg Medcraft said ASIC is concerned about a surge in interest-only loans to property buyers — both investors and owner occupiers: "If your repayment is lower because you're only paying interest and you ignore the fact that you will eventually need to pay the principal, that is a concern if you can't afford it," he told ABC News.

ASIC governs non-bank lenders, who have taken a bigger chunk of the home loan market in recent years.ASIC deputy chairman Peter Kell said lenders and mortgage brokers need to ensure that consumers were being provided with home loan products that best meet their needs. 

"Lenders and mortgage brokers need to think twice before recommending that a consumer obtain a more expensive interest-only loan," he said.

It’s not only the investors who’ve raised concerns for APRA and ASIC; it’s also the banks themselves. Banks can make mistakes and those mistakes can cause disruptions for Australia’s financial structure. What happens if a bank makes too many loans with inadequate security and the market crashes? The GFC gave us many examples worldwide, and in simple terms the banks were bailed out by their country’s taxpayers. Remember subprime mortgages?

“Personally, I don’t believe in the doomsday scenario being painted by some,” Ralph Norris, the former Commonwealth Bank chief told The Weekend Australian.

“The banks have sophisticated risk management processes in place today to manage the risk, and in their latest results there hasn’t been any evidence of mortgage stress in their provisioning.”

He says lending will be supported by population growth over the long-term: “The projected strong growth in the population of Australia’s major cities over the next 35 years doesn’t indicate to me that demand is going to be a problem; land release and infrastructure are going to be the inhibiting forces on supply,” Norris says.

But RBA governor Philip Lowe doesn’t agree: “Too many loans are still made where the borrower has the skinniest of income buffers after interest payments,” Dr Lowe said.

ASIC has made agreements with eight major lenders to offer assistance to bank customers who have been given bigger loans than they can manage: "In addition to typical hardship processes, lenders will individually review cases where consumers suffer financial difficulty in repaying their home loans, and determine whether they have been impacted by shortcomings in past lending practices," ASIC noted.

"Where appropriate, consumers will be provided with tailored remediation, which may include refunds of fees or interest."

Not to worry

It’s often said that our national addiction is real estate. We’ve created a superheated property market that has made many millionaires and now has the potential to create a sizeable number of bankrupts if Sydney prices were to collapse.

Jenni Henderson and Wes Mountain from ABC’s ‘The Conversation’ say that Australia could see a property bubble burst due to any of these four scenarios that focus on different ‘tension points’ in Australia's and the global economy:

- Lending tightening, interest rate hikes and mortgage stress

- Underemployment and unemployment creating a slow deflation

- Government intervention failure and market repair, or

- Global crisis

However, RBA's assistant governor economic, Luci Ellis, has given us several reasons why Australians shouldn't be too concerned about the level of the nation's home prices and household debt.Her first was that Australian home prices relative to incomes are pretty much in line with comparable countries. (However, those ‘comparable’ countries include many with possible housing bubbles of their own, including several large cities in New Zealand and Canada.)

Secondly, Dr Ellis argues that Australia's high mortgage debts are relatively safe because the biggest debts tend to be held by higher income households. That’s all fine if the higher incomes result from two people in secure employment. But high incomes can end quickly, and even if one half of a married couple loses their high-paying position their joint financial enterprise can quickly tumble into trouble.

A third argument is that the falling rate of home ownership among younger people (25-34 years old) started before home prices really took off in the mid to late-1990s, and is therefore due to demographic change more than lack of affordable housing for purchase. More likely, though is that this ‘demographic change’ is because younger people have simply given up on getting a home of their own and are holding themselves out of the market until conditions change – like a sudden massive fall in housing prices.

But if there is a sudden drop in property prices, it could mean smart investors dumping their losing properties onto a market that’s populated with first-home buyers and less-knowledgeable investors who’ll pay too much for assets that will soon depreciate. It’s a worrying thought!

At a time of low inflation and low wages growth, the RBA is likely to raise interest rates only very gently, cushioning households from a sudden big hike in interest rates. And the lowering of interest rates in the late 1990s and again after the GFC has increased the amount of debt households can afford to service from a given income.

The magic pudding

It gets almost boring when both the Prime Minister and Treasurer keep lecturing us about the solution to housing unaffordability being ‘supply’.  We need more ‘supply’ to meet demand, they say, until prices finally start to drop. Until then, give developers full rein and let them go for it.

(In case you were wondering, Australia’s 225 federal politicians own a total of 561 declared properties worth an estimated $370 million. Nearly two-thirds of MPs own more than one property, including 18 of the 22 members of federal cabinet.)

To quite a large extent that’s what’s happened already. The building boom in Sydney is the greatest housing volume producer in history and will continue for at least the next two years, albeit at a declining annual rate.

The ABC’s David Taylor says there’s already enough supply to meet the demand: “There are currently 220,000 dwellings under construction. This is forecast to fall to 200,000 this year, and 180,000 in 2018. So, there simply isn't the pent-up demand for new homes that there once was.”

We have lots of supply, yet prices just keep rising. It’s almost like the more we build the higher prices go. In fact, that’s just what’s happening.But because supply is the Coalition’s sacred cow our government doesn’t want to touch negative gearing arrangements or favourable capital gains tax treatment for investors.

Parliamentarians pay scant attention to the criticism levelled at banks’ lending standards by RBA governor Philip Lowe who stated that one of the reasons banks’ investor loans and interest-only loans had climbed so fast was “the taxation arrangements that apply to investment in residential property in Australia.”

Labor shadow treasurer Chris Bowen said Mr Lowe's comments on tax concessions represented a strong intervention by the governor:"The governor doesn't intervene lightly in these debates and I think it just adds to the long list of people who have called this out: that negative gearing is the most generous property tax concession in the world. Combined with the capital gains tax discount [it is] making housing affordability worse," he said.

 

Sources:

‘After the boom: What Sydney can expect when the property party is over,’ Matt Wade, Sydney Morning Herald, 13-14 May 2017

‘Housing peak called by economists as building approvals slide,’ Michael Janda, ABC News online, 9 May 2017

‘Cap on foreign buyers to hit home,’ Simon Johanson and Carolyn Cummins, Sydney Morning Herald Property, 13-14 May 2017

‘Federal Budget 2017: Scott Morrison's fresh start budget comes with fresh pain,’ Michelle Grattan, Sydney Morning Herald, 10 May 2017

‘Rising population won't prevent 7 per cent housing slump, says Citi,’ Mathew Dunckley, Sydney Morning Herald, 4 May 2017

‘House prices: Where are they heading? Crash, correction or more of the same?,’ David Taylor, ABC News online, 3 May 2017

‘Housing slowdown follows 'unsustainable' growth,’ Clancy Yeates, Sydney Morning Herald, 1 May 2017

Markets Live, Sydney Morning Herald (online website), 3 May 2017

‘Scott Morrison says Coalition's policies 'already having an impact' on housing market,’ Gareth Hutchens, The Guardian, 27 April 2017

‘No Place Like Home: The Impact of Declining Home Ownership on Retirement’, by economist Saul Eslake, 23 March 2017

'Whopping: 78 Sydney suburbs pass $2m median house price mark,’ Kate Burke, Domain, 22 April 2017

‘Houses of Parliament: Politicians own an estimated $370m of property,’  Adam Gartrell and Tom McIlroy, Sydney Morning Herald, 22 April 2017

‘Australian house prices aren't growing as fast as they used to, except in Sydney.’ David Scutt, Business Insider, 31 March 2017

‘Four ways an Australian housing bubble could burst, illustrated,’ Jenni Henderson and Wes Mountain, The Conversation, ABC News, 1 May 2017

‘APRA crackdown won't slow investors, analysts say,’ Georgia Wilkins, Sydney Morning Herald, 4 April 2017

‘Perth's housing slump 'a lesson for Sydney and Melbourne,' Claire Moodie, ABC News Online, 27 April 2014

‘Australian house price growth surges to seven-year high,’ Patrick Hatch, Sydney Morning Herald, 4 April 2017

‘ASIC tightens interest-only mortgage lending screws,’ Andrew White, The Australian, 4 April 2017

‘APRA moves to tighten mortgage rules,’ Georgia Wilkins, Sydney Morning Herald, 31 March 2017

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‘Housing market top called by investment bank UBS,’ Michael Janda, ABC News Online, 24 April 2017

‘ASIC joins APRA in interest-only home loan crackdown,’ Georgia Wilkins, Sydney Morning Herald, 3 April 2017

‘No bubble, no pop’: why banks are as safe as houses,’ Richard Gluvas, The Australian, 8 April 2017

‘Banks are still lending too much to property buyers,’ Noel Whittaker, Sydney Morning Herald, 7 April 2017

‘Banks to assist customers disadvantaged by dodgy loan assessments: ASIC,’ Stephen Long, ABC News Online, 4 April 2017

‘House prices: Ideas and solutions range from dangerous to disastrous,’ Michael Janda, ABC News Online, 17 February 2017

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Andrew Robertson and Mark Tamhane, ABC News Online, 4 April 2017

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‘Sydney median house price hits $1.15 million: Buying becoming ‘out of the question,’ Jennifer Duke, Domain, 20 April 2017