Spring selling season begins as the Sydney property market settles

As we enter the spring selling season there are signs that buyers are reducing their budgets and sellers are revising down their expectations from the highs of 2021 to meet the market. More new homes are being listed for sale and listings are 26.4 per cent higher than the same period last year, when Sydney was in lockdown. 

Sydney’s auction clearance rate has also improved for the fourth week in a row, reaching above 60 per cent for the first time since April. Domain estimates that about one-third of properties that fail to sell at auctions are now exchanging in the eight weeks that follow, some at prices higher than the best offers received at the auctions.

The Reserve Bank’s clear focus on reducing inflation mean that both buyers and vendors have to adapt to the consequences of the RBA’s record burst of interest rate increases. These consequences include the steepest monthly prices drop in 39 years in August, when home values across Australia fell 1.6 per cent with Sydney down 2.3 per cent according to CoreLogic’s figures. 

This was the fifth consecutive monthly fall for the Sydney market, reducing the median value by $114,000 to $1.3 million. "It's just a sign of how extraordinary the increases in interest rates have been, as well as buyers being dissuaded because of higher cost of living and lower consumer sentiment," CoreLogic's Eliza Owen told The Business on ABC-TV.

The ABC’s Ian Verrender says the RBA is likely to start scaling back both the rate and size of interest rate increases: “The RBA now is at the point where it needs to exercise caution. If it continues to slam mortgage holders and business owners with rapid fire rate hikes, it may find by Christmas that it has overstepped the mark and may need to reverse course,” he said.

“Whether [the current] trend can be maintained is highly uncertain as the intent behind rapid rate hikes is to throttle growth and wind back demand, which then impacts jobs. The economy already is slowing rapidly. Housing prices are dropping at a rate of knots, particularly across the eastern states, which will lead to what's known as a ‘negative wealth effect’. If everyone feels poorer, they'll spend less.”

BresicWhitney director Shannan Whitney said both buyers and sellers have adjusted to the downturn since the market turned earlier this year, prompting more new listings and improved clearance rates: “We’re in for an uncertain spring. It’s driven by a little bit of uncertainty in where we are in the rates cycle – the uncertainty on lending rates, on buyers’ decision-making, which flows through to confidence around values,” Whitney said.

It’s interesting to note that in Sydney, dwelling values for the top quarter of the market – properties priced above about $1,637,000 – dropped 6.3 per cent over the three months to July. The middle of the market fell 3.6 per cent, by comparison, while values at the lowest quarter dropped 1.7 per cent, according to figures from Domain.

These figures also showed that Sydney houses sold for an average discount of 6.7 per cent to their original asking price over the three months to July, data for private treaty sales shows. That equates to a discount of almost $104,000 for a house first advertised at the city’s median price of about $1.55 million.

Apartments sold for an average of 6.4 per cent less than they were initially advertised for, which was the largest discount since the pandemic-affected June quarter of 2020. On a unit first priced at the median of about $791,000, that is a price cut of more than $50,000.

Good profits are still being realised for some lucky sellers, as indicated by PropTrack results. They show that sellers in Seaforth netted a median profit of $1.54 million, closely followed by Double Bay where the median profit was $1.495 million, Hunters Hill with a median profit of $1.39 million, West Pennant Hills with $1.33 million, Pymble with a median profit of $1.26 million, Woollahra and North Bondi with $1.233 million and $1.224 million, and Avalon Beach and Belrose with median profits of $1.13 million and $1.1 million respectively.

PropTrack senior economist Paul Ryan told news.com.au the reasons for these substantial gains: “The first and most obvious reason is that price growth has been really strong over the last two years, that has fuelled a lot of profits. But also, recent sellers have held their properties for longer than is typical. It isn’t the case that people who bought during the pandemic are reassessing their lifestyle sea- or tree-change.”

Overall, PropTrack’s Home Price Index shows a national decline of 1.66 per cent in prices since March, with some regions having much sharper falls than others.

“As repayments become more expensive with rising interest rates, housing affordability will decline, pushing prices further down,” PropTrack senior economist Eleanor Creagh said. “We are perhaps reaching a point where vendor price expectations have lowered after several months of price falls in some parts of the country, so more properties are clearing at auction.”

Domain CEO Jason Pellegrino told the ABC’s The Business program that there has been "a tempering of the overall heat" in the market: "Prices have started to decline, listing activity has started to temper as well," he said. "We are looking at a return to more seasonal patterns and more average listing volumes and market activity over the course of the next 12 months."

Mr Pellegrino said the recent downturn indicated the market was stabilising and returning to normal. "We are moving back towards average market conditions where there is a good balance between demand and supply," he said.

"Over the last six months, we have seen an increase in demand for apartments, for example, over houses, and apartment pricing has outperformed housing." he said. "That is reducing what a year ago was the largest gap between house and apartment pricing." 

Sydney auctioneer Tom Panos said that there had been a “settling in the market” and people are accepting the new values: “The market has already been repositioned in most areas by 10 per cent, even 15 per cent, some markets even 20 per cent. But realistically, we’re probably going to see another softening of around five, 10 per cent. We’re close to the bottom I think.”

First-home buyers are the most noticeable casualties of rising interest rates despite the falling prices of housing stock. Figures from the Australian Bureau of Statistics show that the number of first home loans was down 10.7 per cent in July and down almost 36 per cent from a year ago. 
The number of first-home buyers is now about where it was in mid-2019 and is expected to fall further as rises in the costs of servicing a loan outweigh the falls in housing prices.

However, social researcher Geoff Brailey from McCrindle Research sees some bright possibilities for population growth in the near future, based on the Labor Government’s intention to raise the level of skilled immigration with a forecast target of between 180,000 to 200,000 new arrivals per year.

He said many migrants would be looking for affordability in family-friendly areas with good schools in the middle rings and outer suburbs of our major cities: “Having a prestigious property with a big backyard is not just a traditional Australian dream, it’s a global dream to have that aspirational lifestyle,” he said.

“People want to have that quality lifestyle. They might start in an apartment for the first couple of years, but then look for that prestigious property.”

Martin North of Digital Finance Analytics also sees the possibilities to come from the government’s drive to overcome skills shortages: “People who come with greater skills also sometimes tend to come with more ability to purchase a home.

“Some of those people do think about buying quite quickly, and they tend to gravitate towards off-the-plan or new developments in outer suburbs. The majority of people coming from overseas are looking at big houses, substantial houses with lots of land.”

Market movements

Domain has analysed the past three decades of data and found that in previous property booms house prices on average rose 32.7 per cent across the combined capital cities while the upturn on average lasted 33 months. Our recent pandemic boom lasted 21 months and prices rose 33.6 per cent from trough to peak. Looking back a bit further, the boom in the early 2000s lasted 42 months and prices went up 76.4 per cent.

Domain’s chief of research and economics Dr Nicola Powell said the upswings have been longer than the downturns, while the downturns have been shorter and smaller: “Australians have this view that property prices go through these wild upswings and downturns when actually when you put it into perspective of historical performance … capital cities go through periods of strong growth and quite often prices surge but when we get to the downturn, it’s minor in comparison,” she said.

There have only been four periods where house prices across the combined capitals declined annually since the early 1990s, and all downturns stopped at less than 10 per cent before rising again. However, Christopher Joye of Sydney-based Coolabah Capital says this time the fall is more dramatic: “In Sydney, house prices are falling at a 19-20 per cent annualised rate based on the last three months' of data. Nationally, dwelling values are shrinking at a circa 12.4 per cent annual rate, although this has accelerated in more recent times.”

The big four banks all have their own perspective on where interest rates will go and how housing prices will react to the rises. ANZ's economists say the RBA will raise its cash rate target to 3.35 per cent before end of 2022, which would drive typical variable mortgage interest rates up to around 6 per cent.

"We expect capital city prices to fall 18 per cent over the balance of 2022 and 2023, before a 5 per cent gain in 2024 as mortgage rates fall; the biggest factor driving prices lower is reduced borrowing capacity, not a rise in forced sales" said ANZ senior economists Felicity Emmett and Adelaide Timbrell.

The Commonwealth Bank's economists are expecting a decline of at least 15 per cent in housing prices, even if the RBA cash rate only reaches CBA's forecast of 2.6 per cent.

Westpac senior economist Matthew Hassan has forecast an 18 per cent downturn for Sydney by the end of 2023: “The housing downturn that began at the start of the year has accelerated and broadened over the last three months,” he said.

Shane Oliver, AMP Capital chief economist, says there will be steeper declines in house values in the next six to nine months than we’ve already seen: “Our base case is for prices to fall 20 per cent top to bottom, assuming the interest rate will peak at 2.6 per cent, but there is a risk that it could go up to 3 per cent and above, which will trigger sharper price declines,” Dr Oliver said

His timeframe for these declines has now been shortened: “We’ll probably see the worst of the price declines later this year or early next year, and for values to bottom out probably around the September quarter next year, so price falls would be deeper, but we may get to the bottom faster. I was originally thinking the top to bottom falls could drag out into 2024, but it now looks like it could be as short as 12 months.”

He also sees a slower recovery than those seen in earlier market falls: “We’re unlikely to go back to record low interest rates and therefore the recovery may be a more gradual one compared to, say, the last 30 or 40 years, and may take longer than 20 months before prices reach a new high. I think we’ll probably go through a couple of years where prices rise between 5 and 10 per cent,” he said.

CoreLogics’ daily home value index (HVI) shows that Sydney housing values peaked in mid-February, then have fallen by 5.9 per cent. This is a much faster rate of decline than in the 2017-2019 downturn when, after the same number of days since the market peak in 2017 housing values were down just 2.9 per cent.

“Looking at the decline phases historically using monthly data, this is the fastest rate of decline over the first six months of a downturn since at least the early 1980s when CoreLogic’s HVI commenced,” Tim Lawless, CoreLogic’s research director told the Australian Financial Review.

“Sydney’s decline trend started off fairly mild. However, the May rate hike was a clear inflection point in the market, causing the pace of decline across Sydney home values to noticeably steepen and diverge from earlier decline trends.”

Exceptional prices

As always, there are some exceptions to cyclical price trends and waterfront homes are selling for ever-increasing premiums. Waterfront properties now cost more than twice the price of their landlocked counterparts and in the last quarter Sydney’s waterfront homes reached a premium level of 121 per cent, up from 95 per cent in 2019. 

Some eye-watering prices for Sydney waterfront homes achieved recently as quoted in Domain are: In Point Piper, a waterfront five-bedroom house with a boathouse and deepwater berth sold for $45 million this year, in Watsons Bay, a doer-upper on the beachfront sold for $27 million in November, a three-bedroom waterfront home in Birchgrove, with a private jetty, sold for $8,115,000 in April, and another Birchgrove home with a mooring and Harbour Bridge views recently sold for $9.75 million, up about 60 per cent from its 2018 sale price.. 

Nationally, waterfront homes sold for a premium of 81 per cent, with harbour-front homes having the highest premium at 116 per cent, topping coastal homes without beach access (89 per cent), riverfront (68 per cent), and beach homes (65 per cent) when compared with properties 1.6 kilometres away from the nearest body of water. 

There have however been falls recorded in some popular coastal regions, including Byron Bay and the Sunshine and Gold Coasts. House and unit values in some of these expensive sea- and tree-change areas have fallen by as much as 4.5 per cent over the past three months, as shown by new data from CoreLogic.

CoreLogic’s latest Regional Market Update shows that regional values overall recorded their first quarterly fall since August 2020, as NSW and Queensland were at the top of regional property downturns. House values in the Richmond-Tweed region of NSW that includes Byron Bay slipped 4.5 per cent while unit values were down 3.8 per cent in the three months to July.

CoreLogic economist Kaitlyn Ezzy said regional areas were showing a drop in values similar to what has already happened in the capital cities: “The regional areas are now showing a similar pattern to what was happening in the capitals a couple of months ago, especially in the more expensive regional areas [which normally lead a downturn].”

She said interest rate rises had made people rethink their decisions to buy: “The pandemic really pushed people’s decisions about making a tree- or sea-change forward, but now sales in general are falling because a lot of buyers are hesitant to buy,” she said.

Renters hit by rises

A shortage of properties available for rental is causing soaring rents and crowded inspections for those hoping to find an affordable rental property in a location that meets their needs. Figures from PropTrack from the June quarter found that the number of renters per property listed on realestate.com.au had risen 28 per cent year-on-year, while the number of new rental listings was 13.8 per cent below the decade average.

Rental prices in Sydney where the rental listings fell 21 per cent in the past year showed an annual increase of six per cent; the median weekly rental price for a Sydney house is now $620 and for a unit it’s $500. Higher interest rates and increases in other charges such as land tax will put pressure on owners to raise rents further as existing tenancies expire.

Regional Australia Institute chief economist Dr Kim Houghton said short-term letting changes would acutely affect small and undersupplied regional rental markets that were sensitive to shifts in the number of rentals on offer.

“Partly it’s about scale,” Houghton told Domain. “There has been an undersupply in building approvals in the last five to 10 years. We were coming off a period of general underinvestment; that’s partly why the rental market tightened so fast – there wasn’t huge supply to begin with.”

He said converting long-term rentals into short-term leases would worsen an already tight rental market, leaving many regional areas unable to attract essential workers in industries such as hospitality and aged care because they could not house them.

Research conducted by Impact Economics and Policy, a group of expert economists and policy specialists with experience working for government, non-for-profits and big four consulting firms, found the surge in prices and rents is making it much more difficult for regional areas to attract workers.

The research concluded: “A lack of affordable and secure housing options limits the ability of workers to easily move between regions and undermines the efficiency of the labour market. The crisis in our rental market is not only producing large rent increases in regional areas, but it is also impacting labour mobility.”

Impact Economics and Policy economist Dr Angela Jackson told Domain that although landlords may use the excuse of higher mortgage rates as the reason for raising rents, the availability of rental properties is the real driver: “Higher interest rates might be used as an excuse, but that’s not the reason driving higher rents. 

“The reality is the market has tightened significantly, and they can increase their rents, so they do.You would think there would be this relationship between house prices and rents but that just doesn’t hold – it’s about the supply of rental housing,” she said.

Domain uses a calculation of the “vacancy rate” to show the proportion of estimated rental stock that is vacant over a month. A vacant rental property is one that’s on the market for longer than 21 days. The Domain Rental Report shows that the number of rental listings has fallen dramatically over the past twelve months once Covid restrictions were lifted and the international border was reopened, and is now at 0.9 per cent, its lowest point on record.

Not helping the situation is that some landlords have shifted their properties from the long-term rental market into the short-stay market as the economy reopened and tourism returned. A new term has entered the property market that describes these properties that are occupied for only a part of the time - ‘Zombie homes’ is a new term for holiday houses or investment properties such as those listed on Airbnb that can earn big profits for their owners without being available for full-time rental.

Zombie homes were identified by the 2021 census that revealed over one million ‘unoccupied’ properties across Australia. Census night was on August 10, 2021 – a Tuesday, which meant many properties that were available for weekend rentals and had been occupied a few days before that night showed up as ‘unoccupied’. 

First National Real Estate CEO Ray Ellis outlined the benefits for owners of this type of home using a property in an area popular with holidaymakers as an example: “It’s a lot easier to take your investment property out of the full-time rental mix and put it into the short-term rental mix which is basically Airbnb or weekend accommodation.

“If you could get $800 a week by having someone there full-time but you can get $1000 for a Saturday and Sunday, and don’t have to go through all the extra legislation requirements, you’ll do it, because you’re making the same return,” he said.

In a recent report from the Australia Institute, Professor Andrew Scott from Deakin University says Australia has a clear shortage of housing for people on low incomes: "The number of low-income private renter households in rental stress — paying more than 30 per cent of their income on rent — has doubled since the mid-1990s to now exceed 700,000 households."

Stamp duty revisited

High property prices mean higher stamp duty costs are applied to purchases, and with growing restrictions on the amount homebuyers can borrow, there’s a renewed focus on the possibility of doing away with stamp duty and trading it for some other source of government income – usually envisaged as a broad-based land tax on all properties, beginning January next year.

In the New South Wales Budget handed down on 21 June 2022, the State Government announced plans to make stamp duty optional for eligible first-home buyers from January 2023. This is consistent with its policy for the abolition of stamp duty introduced in its 2020 Consultation Paper which recommended a broad-based land tax to be phased in as a replacement.

The term “broad-based” means it is applied to all land, whether it’s the land under a family home or the land under an income-producing apartment block. It could well be a deductible item against income when calculating the federal income tax, but for the state government it’s a source of income that’s inescapable.

The Henry Tax Review and the federal Productivity Commission are just two of the many proponents of a land tax, so how might this work? It already applies to some landowners in every state where a tax based on the value of the land, not including any structures built on it, is calculated according to a set formula and paid to the state government. But these are not broad-based taxes and are applied only on property that is above the land tax threshold. All principal places of residence are exempt, and other exemptions and concessions may apply.

Replacing an unpopular stamp duty with a tax spread across all property in the state might be a good idea from the government’s revenue-raising viewpoint, but there’s one huge problem preventing a shift from stamp duty to a land tax: introducing it would generate an immediate forceful and negative response from existing homeowners who would react harshly against the demand for payment of a new and expensive annual tax on their properties.

NSW premier, Dominic Perrottet, who continues to advocate for a land tax, has estimated that up to 50 per cent of NSW properties will be paying an annual property tax within approximately 20 years and that stamp duty will be completely phased out by approximately 2050. His initial scale of land tax was a base of $400 plus 0.3 per cent of the unimproved land value, making a new annual impost of $3,400 on a property valued at $1 million. 

Just imagine how that would be received by the owners of just over 3 million occupied private dwellings across NSW identified in the 2021 census. No politician appreciates a harsh reception to its policies from taxpayers and this is guaranteed for any government courageous enough to introduce a new annual tax across the state. We’ll continue to monitor this subject as it’s definitely not going away, and it looks like the process is about to begin, albeit in a small way, in January 2023.

Sources:

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