Market comment: Sydney Housing Boosted by NSW Budget and another Rate CutThu, 5 Jul 2012, Andrew Croll The month of June began with another rate cut from the Reserve Bank of Australia. Although the 25 basis points cut was less than some analysts had expected, it left room for the RBA to make further cuts if the economy needs additional stimulation.
When announcing the Bank’s second cash rate reduction in as many months, RBA governor Glenn Stevens said the ongoing trends in the world economy were unclear and “…could be dampened by slower Chinese growth”.
He also commented that sentiments in Australia’s financial market had deteriorated since the Bank’s previous rate cut despite some indications of recovery in labour market conditions.
“Nonetheless, both households and businesses continue to exhibit a degree of precautionary behaviour, which may continue in the near term,” he said.
Three days later, on 8 June, Mr Stevens addressed the American Chamber of Commerce Internode Business Lunch in Adelaide, delivering his now famous ‘Glass Half Full’ speech.
Expressing his surprise that Australians weren’t more upbeat about their economic prospects, he pointed out this nation’s relative well-being when compared to most other countries and implied we should see the situation as a ‘glass half full’ rather than one on its way to the bottom.
“Unemployment is about 5%. Core inflation is a bit above 2%. The financial system is sound. Our government is one among only a small number rated AAA, with manageable debt. We have received a truly enormous boost in national income courtesy of the high terms of trade.
He added that Australia has experienced one of the biggest resource investment upswings in our history, and that capital spending would rise by another 2 percentage points of GDP over 2012/13, to reach a 50-year high.
Mr Stevens admitted that all the news wasn’t joyous when it came to housing. He noted that the rate of dwelling turnover is about one-third less than it was on average over the previous decade, and about half its peak levels.
However, the RBA’s goal as he defined it would not be to re-create the boom conditions that saw housing prices skyrocket and household debt levels increase. Thrift and a focus on increased productivity will deliver better outcomes in the long term, he said.
So why aren’t Australians seeing the glass as ‘half full’? If they were, the reasoning goes, they’d return to their free-spending ways when it comes to housing. Borrowings would rise and so would housing sales. And of course real estate prices would increase as they always used to.
Media reports lower confidence
Writing in the National Times, Peter Martin says that if you ask Australians about their family finances over the coming year, the answers are so overwhelmingly negative you’d need to go back to 1990 to find feelings so bad.
“Just 18.5% of those surveyed in this month's Westpac-Melbourne Institute consumer survey expect their finances to improve in the year ahead. A much bigger 32.2% expect them to get worse.”
He added that overall Westpac consumer confidence failed to bounce after the June Reserve Bank interest rate cut, climbing just 0.4% to be down 5.6% over the year.
Westpac economist Matthew Hassan thinks anxiety about reporting of current events is part of the explanation for the survey’s findings. He noted that there were special questions in the survey that asked about perceptions of news.
But as John Williamson wrote in his lyrics for ‘Cootamundra Wattle’ back in 1986, “Good news never made a paper sell”. This could be why the Westpac-Melbourne Institute consumer survey unearthed such negativity.
Pick up any newspaper or watch any television news broadcast and there will be reports of concerns about a number of issues. The carbon tax, part of our lives from 1 July onwards, is one of those issues. Another is news from overseas.
Europe’s troubles have been the focus of attention for the world’s media for over a year, and as yet there is no sign of a lasting solution. America’s economic slowdown is another frequently reviewed topic. Wars, famines, and natural disasters can always be found and used to create interest.
The proportion of respondents who found the domestic news positive was dwarfed by the proportion who found it negative, and perceptions of international economic news were even worse.
Housing performance has slowed
So, what will it take to overcome this ‘glass half empty’ outlook? Bruce Jackson, editor of online investment newsletter ‘The Motley Fool’, found five reasons to put the rose-coloured glasses back on:
1. Unemployment is at 5.1%;
2. Interest rates are falling and the RBA cash rate is now at a lowly 3.5%;
3. We have an economy that expanded at an annualised pace of 4.3% in the first quarter;
4. A cut in Chinese interest rates has given the Chinese government more room to stimulate the economy; and
5. We are not Greece or Spain!
He muses that “…our economy is the envy of the world. Yet here we are, moping around as if we’re about to be plunged into GFC II, or worse.”
Jessica Irvine, a journalist with the Sydney Morning Herald, says that Australia's property market is reason why strong growth figures have failed to offset low levels of consumer confidence.
“Housing is the reason Australian households have been limping around like wounded deer, despite our rock-solid mining abs of steel. Housing is our Achilles heel.”
She notes that figures from RP Data-Rismark show Sydney home prices fell by some 3.5% over the year ended May, but adds that “…Sydney's housing boom went bust nearly a decade ago.”
Ms Irvine says that Australian households used to feel the pain of servicing a mortgage was worth it when house prices doubled every decade or so, but this is no longer the case. Because those earlier financial gains are no longer part of the home buying equation we have experienced a ‘deep shift in the nation's mindset’.
Which brings us back to the present. Just what does it take to get the Sydney housing market back on track, even if it’s not running at quite as the same speed as it was before the GFC came into our lives?
NSW budget assists developers
Unlike his Federal counterpart, NSW Treasurer Mike Baird put some sweeteners for homebuyers into his June budget that could well make a positive contribution to the long-declining housing construction industry in this state.
Key housing measures in the budget are:
The First Home Owner Grant will more than double to $15,000 for first-time buyers of new property. From 2014, the grant will drop to $10,000;
First home buyers will continue to be exempt from stamp duty if buying new property. The threshold lifts from $600,000 to $650,000; and
Non-first home buyers will be eligible for a $5000 grant if buying new property.
A negative came in the tradeoff against purchasers of existing housing as the $7000 First Home Owner Grant will be abolished for existing properties. The focus is clearly on stimulating construction of new housing.
Andrew Clennell, the Daily Telegraph’s State Political Editor, analysed the budget’s moves in further detail and said there was another catch on stamp duty.
“Concessions which had been given for properties worth up to $835,000 will now only be available at 100 per cent for properties worth up to $550,000. From $550,000 to $650,000, the concession reduces 1% for each $1000 spent, graduating down to zero.
He also observed that a stamp duty concession for off-the plan apartments and house and land packages will be scrapped in favour of a flat $5000 payment to anyone who buys a newly-constructed home.
“By better targeting incentives, by funding infrastructure and by clearing roadblocks to development, we will stimulate the housing and construction sector which forms such a critical part of the state’s economy,” Mr Baird said in his Budget Speech to the NSW Parliament.
An article in the Sydney Morning Herald’s News Review for June 16-17 quoted Chris Johnson, CEO of the developer group Urban Taskforce, who told a breakfast forum: “These are very positive moves to stimulate the industry with some major incentives for new building.”
Jimmy Thomson, who writes the ‘Flat Chat’ apartment-living advice column in Domain every Saturday, also said the budget was a bonus for the property development industry.
“Sydney needs to build more apartments in a big hurry. In 20 years' time, half the population of the city will need to be living in some sort of strata development, so the new payment scheme is a welcome boost for apartment builders.”
Since at the $650,000 price level there are far more apartments that free-standing homes available on the Sydney market, it can be assumed that the NSW government sees construction of high-density housing as integral to solving the growing housing shortage.
Vikki Campion, writing in the Daily Telegraph, says that Sydney's slower planning process and expensive land costs has stifled growth.
“Latest RP Data reports found apartment values in Sydney rose 2.2% over May to a median $480,000 and rents were found to have risen 4.9% over the past quarter.
“Economists are blaming the GFC's fall in construction in Sydney, as well as a growth of students, young professionals and empty nesters moving in for the demand.”
She quotes BIS Shrapnel senior manager Angie Zigomanis who said: "The continued tight rental market and rising rents are expected to support further investor demand and consequently price growth (in Sydney) over the next two to three years, particularly if economic growth starts to recover and confidence returns.''
Is growth in investor demand likely? An online poll in early June by mortgage provider Loan Market found 51% of respondents were planning to invest in property over the next 12 months, while a further 37% were keen but want to be sure their jobs were secure.
Only 5% of the 786 people surveyed had no plans to buy property, and just 7% said they would rather buy shares.
With at least one more interest rate cut likely before the end of the calendar year, and with Sydney property prices ranging from stable to soft in some areas, investors are set to reap the rewards of growing demand for accommodation and rapidly-rising rental levels.
Glenn Stevens was right. The glass is indeed half full, and investors who put their money into Sydney real estate now will enjoy the ride all the way to the top in the next two to three years.
• ‘New Homes, new rules…’, Matt Wade and Matthew Moore, Sydney Morning Herald News Review, 16-17 June 2012.
• ‘Get set for an accommodation shortage’, Vikki Campion, The Daily Telegraph, 4 June 2012.
• Speech by Glenn Stevens, Governor, to the American Chamber of Commerce (SA) AMCHAM Internode Business Lunch, Adelaide, 8 June 2012.
• Statement by Glenn Stevens, Governor: Monetary Policy Decision, RBA media release, 5 June 2012.
• ‘Sense of gloom worst since 1990’, Peter Martin, National Times, 14 June 2012
• ‘The Motley Fool’, Bruce Jackson, 12 June 2012.
• ‘Housing proves to be nation's Achilles heel ‘, Jessica Irvine, Sydney Morning Herald Opinion, 8 June 2012.
• ‘The NSW budget at a glance’, SMH.com.au, 12 June 2012.
• ‘Beware the first home buyers' grant - it's a poisoned chalice’, Jimmy Thomson, National Times Opinion, 14 June 2012.