The gradual slowdown in the Sydney property market continues, showing few signs of any sudden acceleration that might indicate vendors are heading for the exits. In fact, vendors seem to be adapting well to easing prices and are adjusting their expectations accordingly.

The Financial Review’s Michael Bleby reported that discounts are rising and times on market are growing as key indicators of the slowing conditions.

“The average house discount - the difference between listing price and final sale price - rose to 5.6 per cent in January, up from 5.4 per cent the previous month and 5.3 per cent in January a year earlier, Domain Group's latest State of the Market report shows.

“Discounting has also risen on Sydney units and average days on market for both housing types have also lengthened, to 50 days for houses and to 58 days for units,” he said.

Figures from consultancy SQM Research showed residential listings jumped 19 per cent from January to 31,204 in February. Asking prices of houses in Sydney fell 1.5 per cent and asking unit prices slipped 0.6 per cent.

Buyer’s agent Rich Harvey from propertybuyer.com.au told Domain’s Chris Tolhurst that properties in the outer areas of the western suburbs, the north and southwest had slipped in price but well-located real estate would maintain its value over the long-term.

“The prime areas are still performing quite well; however there has been a general slowdown,” he said.

 “Properties were being sold within 20 days or even a week, and now we are noticing the days on market starting to trend upwards. The buyers that are doing their homework are seeing some good opportunities, but it’s not bargain territory…It is just a natural turn in the cycle and what you’d expect in Sydney: a levelling off of demand,” he said.

Sydney has once again been Australia’s weakest market in February, falling for the fifth month in a row, and is now down by 2.4 per cent in the past three months according to figures from CoreLogic.

CoreLogic's head of research Tim Lawless said the Sydney market has now fallen 3.7 per cent since its peak in July 2016: “This was fuelled by tighter credit policies, particularly focused on investment and interest-only lending, which reduced demand from that part of the market.

"It's not like the Sydney market is crashing - it's more a controlled or managed slowdown, largely due to a reduction of investment in the marketplace." Said Mr Lawless.

In its first Housing Pulse research note for 2018, Westpac said that breaking down mortgage arrears data nationally points to "benign conditions" that are unlikely to lead to distressed sales. In NSW mortgage arrears are the lowest nationally at just 0.8 per cent, well below the state's long-term average of 1.4 per cent.

"Arrears were notably higher in NSW through the 2003-07 tightening cycle peak, highlighting both the higher debt servicing load in the state and a range of market-specific factors," Westpac said.

Alison Cheung, a Sydney-based commercial real estate reporter, identified a developing trend that shows how quickly the players in Sydney’s property market can adjust to changing conditions.

“Older unit blocks in Sydney are seeing a flurry of trading activity, as investors seek assets that fit long-term hold strategies in an uncertain property market. Apartment block owners are sensing the peak of the market and are selling up to take advantage of this stage of the cycle.”

Ms Cheung says that yields for older unit blocks in Sydney are generally about three to five per cent, although investors aren’t as concerned about that as much as they are in getting a stable, long-term income stream.

She quoted Nick Tucksworth from Savills Australia who said there’s been so much growth [in older unit blocks] over the past two or three years that owners realise the prices have just about peaked: “People love them for (their potential to) add value, so they look for rundown blocks, buy them, add value and make good profits. If it’s already refurbished, just park money and take the rents,” he said.

Another quote in the article came from CBRE Research associate Bradley Speers, who said: “The lower yields typically associated with residential assets provide a stable, long-term income stream that will meet investor demand for longer-duration liabilities.”

After several recent years of rapid capital growth, owners are happy to realise the returns on their investment, while new long-term investors are looking for a place to put their money where it will both be secure now and offer future growth opportunities in the years ahead.

The coming undersupply

Economists from Bank of America Merrill Lynch (BAML) have taken a good look at Australia’s capital cities and concluded that, despite our recent burst of unit construction, we can forget about any potential housing oversupply and should instead be thinking about a developing risk of undersupply.

In their recent Australian research note, BAML economists Tony Morriss and Alexandra Veroude say that our moderating property market will lead to fewer housing starts which will then feed into an undersupply situation by 2020.

Their reasoning goes like this: Building approvals peaked in 2015. Assuming a three-year construction period on average, the mass of new buildings will be completed in the coming year. New housing starts will pull back due to moderating house prices, higher rates and climbing construction costs (in terms of both labour and building materials), and today's abundance of new housing will turn into a scarcity by 2020.

Another interesting finding by the BAML economists was that the timing of the now-fading construction boom is going to prevent most existing off-the-plan property transactions from being affected by falling bank valuations.

As the Financial Review’s Patrick Commins wrote: “While property prices have moderated of late, three-quarters of the new apartments scheduled for completion this year are in Melbourne and Sydney, where values have jumped by a fifth since 2015.

“Less chance, then, of bank valuations on the completed property coming in well below what the buyer agreed to pay. Rental vacancy rates are low at 2 per cent in the two cities, another hopeful sign that those who bought to let can expect to find tenants.”

Economists Morriss and Veroude say the current situation of Sydney property, where prices have fallen 3.1 per cent since the market peaked, is now a market ‘in balance’ and will remain so until the undersupply situation develops (around 2020): "Laws of supply and demand suggest that house price pressures would be expected to [again] build from this time."

Interest rates stay down

It’s getting to be a regular feature on our monthly financial calendar – at its March meeting the Reserve Bank once again held rates to their record low 1.5 per cent, making it 19 consecutive months since a movement occurred in either direction. The last change (a small move down) was in August 2016, just after property prices had begun to slow across the country, and there were forecasts of sluggish growth in 2017.

There’s assuredly now a period of sluggish growth in progress, but this suits the other elements of our current economic situation: weak wages growth, weak inflation, and weak business investment. Weaknesses all around, but this time there’s certainly no inclination from the RBA for a rate cut.

RBA Governor Philip Lowe issued a statement after the March meeting that said the Bank expected the Australian economy to grow faster in 2018 than it did in 2017, anticipating some wages growth this year after saying the wages growth rate ‘appeared to have troughed’ and some employers were now finding it hard to hire skilled workers.

Speaking specifically about housing, Dr Lowe said the housing market in Sydney had slowed: “Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas.

“In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years.”

He credited APRA’s supervisory measures and tighter credit standards for containing what he called ‘the build-up of risk in household balance sheets’ and for putting the brakes on an overheated housing market. He also indicated that the RBA was unwilling to raise rates just to solve the overheating as the rest of the economy needed lower interest rates.

In February Dr Lowe told the House economics committee that “it would be a good outcome if we now experienced a run of years in which the rate of growth of housing costs and debt did not outstrip growth in income, as they have in recent years”.

He also told the committee that over time we’ve structured our economy to ensure higher housing prices. “If you asked anyone how a country would deliver high housing prices, you’d find we’ve made all those choices: live in fantastic coastal cities, under-invest in transport, have a liberal financial system, and not want high density”.

He said that, while this has led to high levels of debt, it has also led to high levels of asset prices – including housing, and he said the current situation was “perfectly sustainable”. So, for the immediate future it’s not likely that interest rates will be going anywhere, but if the economy does indeed show the faster growth he expects we may well see interest rates going upwards before the end of 2018.

The winning doomsayer?

We said last month that it would be hard to find a single year without someone in the media mentioning a forthcoming ‘crash’ of the Sydney housing market. It’s only March, yet we could already have this year’s winning fateful forecaster - Harry Dent, a US demographer and financial commentator.

Mr Dent, who apparently predicted the 2008 GFC and consequent economic crash, has now gone into print with predictions of a new global financial crisis.  He says there is a global real estate and stock market “bubble” that has been artificially inflated by central bank money printing policies, and it’s all going to pop within the next five years.

“I’m talking about a second global crisis because we never solved the problems of the first one,” he said. “We have $57 trillion more debt, real estate and stocks are more overvalued. I’m seeing signs. Bitcoin finally crashed, the US stock market looked like it was melting down, I think real estate comes next.”

Because he is currently touring the country to promote his new book ‘Zero Hour’, Mr Dent has provided Australia with its own individual doomsday scenario, saying Australian property prices could crash by up to 50 per cent in the looming global crisis that’s going to be worse than the GFC and possibly even worse than the Great Depression. He’s predicted this catastrophic meltdown will most likely begin between the end of 2018 and early 2020.

It should be noted that Mr Dent incorrectly predicted a 50 per cent wipe-out in Australian property prices in 2014, but he thinks this time that it’s really going to happen: “Your problem is you’ve got the second highest real estate costs compared to income in the world. I see Australia as the best house in a bad neighbourhood, but you can’t escape a global crisis.”

Even our perennial favourite for negative forecasting, Australian economist and author Dr Steve Keen, will find it hard to top Harry Dent for the scope and depth of his ‘crash’ predictions.

Unaffordability won’t go away

Housing affordability continues to plague both governments and first-home buyers, both of which would like to see increased buying opportunities for those who now find Sydney median prices for houses and units beyond their reach.

The costs imposed by state and local governments enforcing zoning restrictions make a significant contribution to unaffordability, according to a recent research paper commissioned by the Reserve Bank.

In the paper, economists Ross Kendall and Peter Tulip say that up to 70 per cent of a home’s value is made up by land, and restrictions on developers add more than $100,000 to the cost of apartments.

NSW Planning Minister Anthony Roberts responded by saying zoning is just one element of housing affordability and that the provision of roads, sewer, power, transport, school, hospitals added to both the supply of housing and to the value of land.

"Liveability is a most important ingredient in the development of communities and that’s why we have strong policies on open spaces and park lands as part of infrastructure," he said.

Housing affordability worsened over the December quarter, according to the latest Adelaide Bank/REIA Housing Affordability Report. Australians now allocate 31.6 per cent of the median family income to loan repayments – an increase of 1.6 per cent over the quarter. The figure for NSW is a whopping 37.8 per cent of the median family income that goes to repay their home loans.

The Guardian’s Greg Jericho says, however, that those measures which would have the best chances of improving affordability – increased housing density, reducing the capital gains tax discount, abolishing stamp duty, and limiting negative gearing – also have the least political appeal.

Mr Jericho suggests reading the Grattan Institute’s latest report on housing affordability, which he describes as “a report that shows the result of 30 years of policy geared towards surging housing prices which has left people increasingly locked out of the market.”

In their report the Grattan Institute’s John Daley and Brendan Coates summarise the state of housing in Australia: “Today, home ownership largely depends on income, and how wealthy your parents are. Housing is contributing to widening gaps in wealth between rich and poor, old and young. Lower income households are spending more of their income on housing and are under more rental stress”.

As Daley and Coates note, “home ownership rates are falling among all Australians younger than 65, especially those with lower incomes”.

They also say that, whereas at the start of the 1980s more than 60 per cent of 25-34-year-olds owned a home across almost all income brackets, that rate has now dropped below 50 per cent for all but the highest income group. The biggest fall has been for those in the bottom 20 per cent of household incomes, where only a fifth of those under 35 own a home, down from nearly two-thirds just a few decades ago.

Greg Jericho says that a big reason affordability has declined so much for those with lower incomes is because the price of the lowest-cost houses and apartments has risen the fastest over the past decade: “From 2003-04 to 2015-16 the prices of the cheapest dwellings have actually risen more than have the most expensive.”

The report concludes there is little hope of reversing the trend of declining affordability unless politicians implement policies that are now politically unpalatable. Daley and Coates note that because “no single level of government owns the challenge of managing population growth in our biggest cities” it means “no government is responsible for the serious consequences of failing to plan for growing populations”.

If supply is indeed the answer to the problem, it would seem we’re finally doing enough to keep up with demand. In the past few years Sydney has added 80,000 new apartments in four years, including 60,000 in inner and middle-ring suburbs. Sydney has been undergoing its biggest-ever housing construction boom, with over 200,000 new homes expected to be completed in the five-year period from the start of 2016 to the end of 2020.

But the Grattan report cautions that “today’s record level of housing construction is the bare minimum needed to meet record levels of population growth driven by rapid migration”.

It also says the current growth in housing isn’t enough to make up for the shortfall created during previous years when not enough new properties were being built: “For much of the decade from 2005 to 2014, annual housing construction was at or lower than the average of the previous 25 years, even though population increase was much higher.”

More Grattan Institute research shows that people want more apartments, townhouses and semi-detached dwellings in established suburbs. 10 years ago, just 38 per cent of Sydney’s housing stock was like this, and now it’s 44 per cent. According to the Institute, 59 per cent of Sydney residents say that it’s the type of housing they want to live in.

Which is fine, but opposition to more development and greater density is growing. A poll published recently by Fairfax Media found that fully two-thirds of residents agree with the statement that “Sydney is full” and any additional development should be done outside the metropolitan area.

Daley and Coates say that governments should do a lot more to address the affordability problem: “The state government should use carrots and sticks to ensure councils help meet the housing needs of a booming Sydney. Where local councils fail to meet housing targets, independent planning panels, or the Greater Sydney Commission, should be given more responsibility for assessing development applications.”

Until this happens, Daley and Coates say we will continue building more housing estates on the city’s urban fringe where land is less costly and fewer objections will come from existing residents. But this housing will be far from jobs and existing infrastructure, and house prices will just keep rising.

We’ll leave the closing statement to Dr Dallas Rogers, from the School of Architecture, Design and Planning at University of Sydney, who told Domain that much more needs to be done to address Australia’s housing affordability dilemma: “We need to revisit urban planning mechanisms such as inclusionary zoning and non-market housing supply measures to address the housing affordability problem.

“We also need to rethink the current approach to addressing the housing affordability problem, which seems to be to build more unaffordable housing and subsidising people to get into an otherwise unaffordable housing market,” Dr Rogers said.

Sources

‘Housing affordability slightly worsens over the December quarter: REIA report,’ Tawar Razaghi, Domain, 7 March 2018
‘Homebuyers are paying a heavy price for zoning restrictions: Reserve Bank,’ Eryk Bagshaw, Sydney Morning Herald, 8 March 2018
‘Australian housing prices slip for fifth straight month, national property report finds,’ David Chau, ABC News Online, 1 March 2018
‘Australian housing stuck between a rock and a hard place,’ Greg Jericho, The Guardian, 6 March 2018
‘Beware what you wish for Sydney,’ John Daley & Brendan Coates, Sydney Morning Herald, 4 March 2018
‘Construction of new housing is not making a huge difference to housing prices,’ Charis Chang, News.com.au, 6 March 2018
‘Financial doomsayer says Australian property prices could crash by 50 per cent in coming global crisis,’ Frank Chung, News.com.au, 28 February 2018
‘Get ready for the next property cycle: Bank of America-Merrill Lynch,’ Patrick Commins, Australian Financial Review, 26 February 2018
‘Housing costs: Young, poor pay the price for NIMBYism, says Grattan,’ RN Breakfast, Michael Janda, ABC Online, 5 March 2018
‘Owners of unit blocks call a peak in the Sydney property market,’ Alison Cheung, Commercial Real Estate, 5 March 2018
‘RBA holds rates at 1.5 per cent in March as it lowers GDP expectations,’ Stephen Letts. ABC News Online, 7 March 2018
‘RBA confirms property boom in Sydney and Melbourne is over,’ James Fernyhough, The New Daily, 7 March 2018
‘Sydney vendors fail to recognise property slowdown,’ Michael Bleby, Australian Financial Review, 6 March 2018
‘Housing risks 'catastrophic': Grattan Institute,’ Peter Martin, Sydney Morning Herald,
4 March 2018
‘Low mortgage arrears shows housing market unlikely to collapse: Westpac,’ Stephen Letts, ABC News Online, 28 February 2018
‘Sydney house prices fall for the first year since 2012,’ Jennifer Duke, Sydney Morning Herald, 1 March 2018
‘Sydney property prices not affected by new stock, parliamentary inquiry hears,’ Sarah Gerathy, ABC News Online, 8 March 2018
‘Sydney posts 70 per cent auction clearance rate off large volume of sales,’ Chris Tolhurst, Domain, 26 February 2018