The latest – and greatest, Sydney property boom has now been with us for half a decade, and in that time prices have rocketed upwards by an average of $100,000 each year. In so many ways, things will never be the same again.

Prices are so high that for many would-be buyers they’re unaffordable. Who in 2012 would have thought the median Sydney home would ever change hands for $1.15 million? Indeed, who in 2012 would have thought that 78 Sydney suburbs could possibly have a median price of $2 million or more?

Domain’s Jennifer Duke summed up the dimensions of what’s happened to Sydney housing prices in recent times: “In 2012, the median house price was $646,000. Today, it is $1.15 million and the city’s population is largely split between property millionaires and perennial renters.

“Despite the record number of cranes in the sky and new apartment blocks in once suburban enclaves, the affordable options for new buyers have largely vanished.”

And what a cultural shift this has meant for Sydney siders. We’re now building more apartments than houses, and rental rates are now so high that hopeful tenants with average incomes are virtually locked out of many parts of the city.

‘Rentvesting’, where tenants invest in property while renting elsewhere, is a growing phenomenon, and the traditional ratio of investors to homeowners has shifted from 30/70 to “more like 60/40” according to BIS Economics managing director Robert Mellor.

He warned that there will be huge “social and economic consequences” for Sydney siders: “There will be a massive reduction home ownership by the under-35 age group. The look and feel of the city is changing dramatically. The next five or six years after the price growth will be critical to see what the future will look like.”

That bubble again

The ABC’s business editor, Ian Verrender, sees a bubble developing in more than just the Sydney property market. He says the problem for central bankers in Europe and Japan is that the bubbles they have formed — in property, stock and bond markets — are entirely of their own making.

“Since 2008, when the financial crisis was threatening to destroy capitalism, central banks have been manufacturing [money] by the petabyte (or whatever measurement is appropriate).  The problem is, most of that created cash has been used — not for productive purposes, but for speculation.”

Although he points the finger at easy credit being behind the world’s various asset bubbles, he still sees property as being a critical element in the problem: “The real problem for the Australian economy, courtesy of the deluge of cheap cash flooding the globe, has been in real estate,” he says.

Sydney’s housing prices are overvalued by 14 per cent and Melbourne’s by 8 per cent, but the bubble will deflate, not burst, according a report by advisory group KPMG Economics quoted in The Australian.

KPMG chief economist Brendan Rynne predicted Sydney’s residential market would fall faster than Melbourne’s in the next few years, but this was likely to be “gradual rather than a collapse in the median dwelling price”.

“Whether the current Sydney and Melbourne housing prices constitute a bubble is a matter for debate, but we estimate that short-term factors have pushed median dwelling prices above their long-term equilibrium prices by about 14 per cent and 8 per cent respectively,” Mr Rynne said.

David Levy, an American economist and author and chairman of economic consultancy Jerome Levy Forecasting Center in New York, says that Australia’s housing bubble is ‘extraordinary’: "Australia will go through a contained depression – the RBA and rest of the government will not let its banking system collapse – but it will still be a relatively tumultuous process."

AMP's chief economist Shane Oliver told the Sydney Morning Herald he agrees: "I'm not in the camp that says the economy will crash.  To get that we need higher interest rates and/or higher unemployment, and I don't think we will see that."

Dr Oliver does see house prices decreasing from their current peaks, with house prices falling 5 to 10 per cent and apartments falling more, by 15 to 20 per cent over the next two years. Maybe not a ‘crash’, but it would most certainly be a significant retracement.

What affordability?

Sydney house prices have risen so quickly over the past five and half years since the RBA began cutting interest rates that the problem of housing affordability is now almost impossible to solve.

The Guardian’s Greg Jericho says that during that period Sydney housing prices have grown at a rate that bears no relation to what has happened elsewhere in the economy: “The latest residential housing price data released…by the ABS showed that in the past year Sydney house prices grew by 14.4 per cent – the fastest in the nation.”

He also notes that NSW accounts for 41 per cent of the total Australian housing stock’s valuation, despite the NSW economy accounting for just 32 per cent of Australia’s GDP and population.

Advisory firm KPMG Economics says that Sydney’s housing prices are overvalued by 14 per cent, about the same as the rise in prices in the 12 months to March 2017.Using a method of calculation other than Domain’s it says Sydney’s median prices are expected to peak around $980,000 in the 2019 financial year, up from $880,000 in June 2016, and then gradually ease to between $930,000 and $950,000 by mid-2021, according to KPMG’s Housing Affordability report.

Will government actions to improve housing affordability work? Greg Jericho thinks not: “At this point, things are so dire in Sydney housing, that I can’t see policies such as those proposed in the NSW budget, to cut stamp duty for houses up to $650,000 and to increase the construction of homes, doing anything more than tinkering around the edges.”

Property prices in ‘affordable areas’ were expected to jump following the changes to first-home buyer stamp duty concessions that started July 1. There were even tales of vendors holding off accepting offers to take advantage of the expected increase in demand.

As it turned out, the entire Sydney market reversed a weak trend noted in the previous month and prices again resumed their upwards movement. Auction clearance rates remained in the 70 per cent levels and any concerns of a massive surge in either direction proved unfounded. 

For those who espouse the theory that a looming housing surplus will be a cure for Sydney’s affordability problem, there’s at least one analysis that shows a surplus of housing in Sydney is a long way off.

ABC business reporter Michael Janda quoted Philip Soos of LS Economics who says that Sydney is the one city in Australia that has few worries about an oversupply of housing.

"I would say that Sydney, given that it has the highest rent-to-income ratio and also has the highest rent growth at the moment, is probably the most supply constrained," he observed.

BIS Oxford Economics, an economic consultant to some of Australia's largest property and building materials firms, has conducted its own analysis and doesn't see a huge national housing oversupply at the moment, nor does it see much of an undersupply, except perhaps in Sydney.

However, there’s growing acceptance of the idea that Sydney’s housing prices may well decline from their present highs, but the decline won’t be great and in any case, won’t be enough to make housing ‘affordable’ for average wage-earners.

Following from that is the argument that a percentage of all new housing should be deliberately conceived as housing that will be affordable, whether for purchasers or for tenants. But how could this be achieved?

An Urban Taskforce report released exclusively to The Daily Telegraph found that planning rules including those applying to ceiling heights, sunlight and floor sizes add $157,200 to the price of the average $750,000 two-bedroom, two-bathroom apartment in Sydney.

The report, by Sydney Planners HDC, architects Turner Studio and quantity surveyor John Ferrarin, found that rules requiring an extra 10sqm floor size for a two-bedroom unit add $100,000 alone to the sale price.

Urban Taskforce chief executive Chris Johnson has called on the NSW government to amend its planning laws to Melbourne standards for new projects that will contribute to housing affordability.

“The NSW standards are from well-meaning planners wanting big apartments that get lots of sunshine but these amenities come at a cost that is forcing many purchasers out of the market,” Mr Johnson said.

Foreign buyers react

At least the federal and state governments can point to one successful policy related to ‘solving’ the housing affordability crisis. Recent announcements of changes that penalise foreign buyers are getting a lot of notice from overseas investors, according to global news service Reuters.

“My phone never stopped, I charged my phone three times, no kidding – overseas clients, overseas agents, my channels in China,” said Shan Lin, a Sydney-based estate agent who deals mostly with Chinese-based investors.

“They definitely feel the pressure. They say, ‘Shan, look, I will not consider investing in Australia or investing in Sydney’.”

Incidentally, a Credit Suisse report found that foreigners account for a quarter of new housing sales in New South Wales, with Chinese investors the biggest buying group by far.

Also quoted in Reuters, Sutono Pratiknya, a Sydney-based sales consultant, said the changes sent a clear signal to his overseas investors they were not welcome: “We used to do five property tours a month, picking up a dozen investors from the airport and showing them our latest offering. Now, there’s nothing.”

“It seems like the tax increases are never-ending,” said Esther Yong, a director of Chinese property agencies Sodichan and ACproperty. “I have buyers who were looking at Australian property and agents in China convinced them to buy in the U.K. instead.”

This slowing of demand might be a success from the governments’ point of view, but there were already signs of the market beginning to cool well before the legislative changes were announced.

“The fact is that a lot of developments hinge on foreign investment,” said David Bare, the NSW executive director at the Housing Industry Association. “Applying these measures when the market is starting to cool is going to have a much greater effect than it might’ve 12 or 18 months ago.”

Even as house prices keep rising, one important indicator is starting to head in the opposite direction. Sydney’s auction clearance rates have now dropped below 80 per cent in recent weeks, with the figure falling below 70 per cent on four occasions.

There’s no denying that tighter lending rules are beginning to have a noticeable effect on home loans to investors, with lending to property investors growing at its slowest rate in nine months -  which is still equivalent to an annual rate of fifteen per cent, but a contraction nonetheless.Seasonally adjusted figures released by the Australian Bureau of Statistics show that the value of investor loans contracted 1.4 per cent in May following a 2.5 per cent fall in April.

As a consequence, owner-occupiers continued to grow in their percentage of total loan activity, with the value of loans to this group up 2.9 per cent - the fourth consecutive month owner-occupier lending has grown. First home buyers' share of the market was also rising, up to 14 per cent of total mortgage commitments from 13.8 per cent in April.

JP Morgan's Henry St John told ABC News that the noticeable slowdown in investor lending was likely to soon become a drag on prices: "The private measures of house price growth suggest some moderation is already taking place, although it is too early to assess the full impact that these measures are having”, he said.

Hans Kunnen of Compass Economics has a short explanation for the cause: “Each nudge up in house prices knocks a few more buyers out of the market,” he told Domain. He also said that falling auction clearance rates could be put down to “buyer fatigue and APRA induced rate hikes”.

The dream is over

Perhaps it’s not surprising that new research commissioned by the publicly listed mortgage broking firm Mortgage Choice found that more than 60 per cent of Australians believe only the wealthy can achieve the “Great Australian Dream” of home ownership.

Home ownership is taking a battering. Australian Bureau of Statistics data shows that the home ownership rate in Australia decreased to 67 per cent in 2011 from 68.9 percent in 2006. The national home ownership rate averaged 69.2 percent from 1966 until 2011, reaching an all-time high of 71.4 per cent in 1966 and a record low of 67 per cent in 2011.

Figures from Domain tell us the nationwide home ownership rate dropped 1.5 per cent to 65.5 per cent between 2011 and 2016.   In Sydney, the ownership rate has dropped three per cent according to Grattan Institute fellow Brendan Coates: “Home ownership rates have fallen in [Sydney] by three per cent, more than double the pace of the decline seen nationwide,” he said.

The ‘Great Australian Dream’ study found that more prospective home buyers are willing to compromise in their property choices. Apartment ownership is now increasing in acceptability for those who previously wanted a free-standing house.

Mortgage Choice chief executive John Flavell told Domain’s Chris Tolhurst this was evidence that apartments were becoming a popular property option among Australians: “While some buyers are choosing to purchase apartments for the lifestyle options they offer, a lot of people are seeing them as a cheaper way into the market. From the data, it is clear that Australians are keen to use a variety of purchasing strategies in order to achieve their property ownership goals.”

After the fall

What might happen if those wishing housing prices were lower suddenly got their wish? A housing downturn might not have many benefits for anybody, least of all those wanting prices to fall.

Economist Saul Eslake crunched some numbers and came up with a few surprises. First, how about a $50,000 drop in prices: “It certainly wouldn't make much difference to anyone's ability to purchase with the price at the median currently in excess of a million," he said.

Wouldn’t a price fall put lots of properties on the market as owners dumped their former investments?  Mr Eslake said Australia isn’t like America where this would be a possible outcome.

"It's never going to be rational for Australians ... in a position where they owe more on their property than their property is worth to walk away from a mortgage in this country," Mr Eslake told ABC News.   "History shows, Australians will go to considerable lengths to avoid putting themselves in that position."

He said the consequences of a sudden property price drop could well include greatly reduced consumer spending, leading to increased rates of unemployment and greater restrictions on borrowing for housing purchases.

The head of the School of Economics at the University of Sydney, Professor Colm Harmon, cited his experience in Ireland during the GFC when housing prices collapsed: "The idea that some big shock is needed is wrong. The Irish experience is one where prices started to fall before the shock."

He said that as consumer confidence in Ireland fell, so did prices. Figures out last year from Ireland's statistics office showed a 54 per cent drop in prices from 2007 to 2013.

Fortunately for most of us, indications at present are that Sydney prices will decline but not drastically over the next couple of years, and most of the gains made by property owners in Australia’s biggest city over the past five years will be retained. However, it’s sadly obvious that affordable options for new buyers are unlikely to reappear.

Sources:

‘Blowing bubbles: The new world economic order,’ Ian Verrender, ABC News online, 4 July 2017

‘Who would move to Sydney? The harbour city has priced itself out of reach,’ Greg Jericho, The Guardian, 4 July 2017

‘Housing surplus raises real estate crash risks,’ Michael Janda, ABC News, 4 July 2017

‘Almost two-thirds of Australians see home ownership as something for the wealthy, survey finds’ Chris Tolhurst, Domain, 19 June 2017

‘What does a housing slump actually look like?,’ Jessica Haynes, ABC News online, 6 June 2017

‘The aftermath of the boom: How five years of soaring prices has changed Sydney,’ Jennifer Duke, Domain, 25 June 2017

‘Sydney real estate: Strict planning rules add thousands to apartment prices, new report reveals,’ Annabel Hennessy and Christ Harris, The Daily Telegraph, 19 June 2017

‘The aftermath of the boom: How five years of soaring prices has changed Sydney,’ Jennifer Duke, Domain, 25 June 2017

‘Sydney property prices ‘14pc too high’, Melbourne’s 8pc,’ Business Review, The Australian, 21 June 2017

‘Sydney prices to jump ‘overnight’ as first-home incentives kick in: experts,’ Jennifer Duke, Domain, 24 June 2017

‘Housing affordability: NSW Treasury documents offer no relief to Sydney home hunters,’ Greg Miskelly and Michael McKinnon, ABC News online, 19 June 2017

‘Census 2016: The Australian cities where home ownership declined the most,’ Nicole Frost, Domain, 28 June 2017

‘Property investor lending continues to slow as mortgage repricing bites.’ Stephen Letts, ABC News online, 12 July 2017

‘Census 2016: Properties stand idle as home ownership sinks to a 60-year low,’ Peter Martin, Sydney Morning Herald, 28 June 2017

‘Sydney housing market enters ‘new phase’ as auction clearance rates head south,’ Jennifer Duke, Domain, 27 June 2017

‘Are Chinese investors turning their backs on Australia after the foreign buyer tax hike?,’ Jonathan Barrett and Tom Westbrook, Reuters, 14 June 2017

‘House prices showing signs of cooling as impact of apartment boom hits,’ Stephen Letts, ABC News online, 21 June 2017

‘Sydney property prices ‘14pc too high’, Melbourne’s 8pc,’ Business Review, The Australian, 21 June 2017