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Market Comment

Sydney property sees tighter credit, falling prices, rising mortgage rates

Sun, 15 Jul 2018

The end of the 2017-18 financial year has come with a wealth of statistical data about house prices, and the property market experts are poring over the numbers to make their predictions for the balance of 2018 and beyond.

Their conclusions are broadly that house prices in Sydney have dropped about four to five per cent since their peak and will slip further before the end of the year, by at least another two per cent or possibly more. Because these are ‘average’ figures, it really means that some parts of Sydney will fall more than others, and as always, some parts of the city will defy the trend and rise.

According to figures from ANZ Research, in Sydney’s CBD and inner south house prices have fallen by 13.6 percent since their peak in June last year, while Ryde and the inner west have seen falls of just over 10 percent since August and March 2017 respectively.

On the city’s North Shore, property values have fallen by 8.7 percent, while the Northern Beaches have recorded a 7.5 percent drop since June last year. The inner south west, Parramatta, Blacktown and the Baulkham Hills/Hawkesbury regions, have all recorded falls of between 5.9 and 6.8 percent.

"Tighter finance conditions and less investment activity have been the primary drivers of weaker housing market conditions, and we don't see either of these factors relaxing over the second half of 2018," CoreLogic head of research Tim Lawless said in a Reuters release.

He said the pullback in demand was due to a combination of tougher rules from regulators, lenders and tighter borrowing standards resulting from findings of widespread malpractice on loans and financial advice by the Banking Royal Commission.

BIS Oxford Economics is one of several experts predicting a further slowing of the housing sector in its new report ‘Residential Property Prospects 2018 to 2021.’ The report says that house prices will fall by another two per cent over the 2018-19 financial year, and the median price will remain below its peak of June 2017 for the next three years before modest rises in 2020-21.

The report also said that apartment prices, previously supported by investor demand, will show a decrease of four per cent in the financial year just ended, and fall a further three per cent in 2018-19.  

The report’s author, Angie Zigomanis, who is Senior Manager – Residential Property at BIS Oxford Economics, told Domain’s Allison Worrall that the chance of a major price correction was being lessened by low interest rates and a relatively stable economic environment. Nevertheless, there’s no doubt a correction is happening.

The report’s view of an Australia-wide property price correction has been echoed by Macquarie Bank, UBS, AMP, Capital Economics and the ANZ Bank, among others. Although they agree that weakness in housing prices will continue for some time, they differ in their estimates of both the amount and the duration of the decline.

Deloitte financial services partner James Hickey described the slowdown as a healthy pullback from unsustainable levels of recent years: "When placed into perspective, the strong lending growth of the 2013 to 2016 period was never going to be sustainable in the long term," Mr Hickey said. "The market recognises the need to take stock and find a new sustainable base for the long term."

ANZ Bank has recently predicted Sydney property prices will drop about 10 per cent from their late-2017 highs, while AMP chief economist Shane Oliver sees an even greater drop of 15 per cent top-to-bottom. Macquarie Bank’s economists Justin Fabo and Ric Deverell say that Sydney prices will fall ten per cent overall, but that “despite almost daily negative headlines in the mainstream media, the rate of adjustment has also been relatively orderly.”

Credit is the key

The ANZ Bank admitted that the decline in Sydney house prices had outgrown its earlier expectations. ANZ senior economist Daniel Gradwell said the rate of price decline had recently accelerated in Sydney and previous forecasts that the market would have "stabilised" by now have been revised.

"Additional headwinds are possible, such as the shift away from interest only loans," he said. "There could also be further tightening of credit as the impact of the current regulatory focus on mortgages flows through into lender behaviour. All of this suggests that the fall in house prices will be quite a bit larger than we previously expected, with recovery coming later."

The ANZ Bank’s June housing update said the present price cycle is being driven by tighter credit rather than higher interest rates: “Higher interest rates in 2019 are expected to be an additional headwind, though rate hikes will only occur if the housing market has broadly stabilised.

"We note that Australia has had six previous episodes of declining housing prices since 1980, with the peak-to-trough range of 2½ per cent to 8 per cent. Nearly all previous corrections occurred following interest rate rises, a drag unlikely to be repeated anytime soon in this cycle."

At its July meeting the Reserve Bank left the cash rate on hold at its record low of 1.5 per cent for the 23rd consecutive month. The RBA board had earlier noted that loan approvals to investors and owner-occupiers had eased, consistent with a decline in demand for credit as well as with lenders tightening their own requirements.

"Falls in housing prices in Melbourne had been concentrated in inner-city areas, whereas the declines in Sydney had been more widespread," the board said. It also noted that housing prices were still 40 per cent higher in Sydney and Melbourne than at the beginning of 2014, and auction clearance rates in Sydney and Melbourne had fallen to their lowest levels in a number of years.

The RBA’s head of economic analysis, Dr Alex Heath said that she expected demand for housing to remain strong overall because population growth was also likely to remain strong: "Housing price growth has been strong until recently in Sydney and Melbourne, where population growth has been strong," Dr Heath told a conference at the Urban Development Institute of Australia in Wollongong on Thursday.

"Given that housing accounts for around 55 per cent of total household assets, we are paying close attention to these developments," she added.

The ABC’s David Chau points out that Sydney has seen prices rise by 85 per cent since 2013, with investors driving prices to record highs: “In 2013 a Sydney house typically cost about $650,000 while today the average house in Sydney will set buyers back about $1.2 million.

“Its median house price hit a peak of $1.2 million in June 2017 and has since declined (to $1.1 million) due to the banks' tighter lending policies, mandated by the Australian Prudential Regulation Authority (APRA),” he said.

On the positive side, the Westpac Melbourne Institute index of consumer sentiment recently indicated that home buyer demand is recovering from its recent low. The number of consumers who say now is a good time to buy a home has risen substantially in the past year.

The index has recovered from its low point of 90 in May 2017 to 105.7 this June. A reading of 100 means equal numbers of pessimists and optimists.

This index is still below long-term averages, but it is now clearly ahead of last year's lows. And the sharpest increase in sentiment has been in NSW, the least affordable market. Deloitte Access Economics director Michael Thomas told AAP that Australia’s residential market was still largely supported by solid underlying demand.

“Taken together with the outlook for interest rates, slowing house price growth moderating the prospect of further capital gains, (and) restrictions on lending such as on interest-only loans and loans to investors as well as to lending to foreign investors, we expect a period of moderation rather than an abrupt adjustment,” Mr Thomas said.

Today’s falling prices are strongly influenced by the availability of credit. Banks are not willing to lend as much as they were a few years ago; they are more closely scrutinising how much money borrowers need to live on, and as a result are taking longer to approve loans.
This is largely because the royal commission into the financial services sector has sent a chill through the banking sector, and bank lending practices have become the subject of particular scrutiny. This has had a dramatic impact on lending standards.

UBS analyst Jonathan Mott told the Herald’s Clancy Yeates that he estimated if banks assumed more realistic living expenses, the maximum amount they would lend customers would be about 30 to 40 per cent less than today. This would cause housing credit growth to come to a near standstill.

Four in 10 loan applicants, including borrowers financing existing property loans, are now being rejected because lenders have increased their scrutiny of applicants’ capacity to service a loan, according to analysis by Digital Finance Analytics.

However, despite the banks’ tightening their loan requirements, the Commonwealth Bank's chief economist Michael Blythe is optimistic that the market won't see a major drop from current levels. The factors that historically drive large downward moves in housing, including rising unemployment and rising interest rates, are "either not present or still a fair way off," he said.

RBA rates stable, but…

According to the Financial Review survey of leading economists covering the final three months of fiscal 2018, the Reserve Bank of Australia is not expected to hike interest rates until 2019 at the earliest. This is a significant change from three months ago, when economists had been forecasting two interest rate hikes in that period.

The economists surveyed also felt that Australia's population growth will continue to support demand for housing: "Strong population growth is preventing house prices from declining too far," commented Stephen Roberts at Laminar Capital.

But another economists’ survey has a different opinion. The BusinessDay Scope survey is Australia's longest running and is compiled from forecasts of 26 leading Australian economists. 23 of the 26-person panel expect interest rates to climb by the middle of 2019. Four of them said rates would rise more than once.

The Reserve Bank isn’t the only institution that can raise mortgage rates. Citigroup forecasts that the rising cost of funding will force Australia’s major banks to increase their mortgage interest rates, saying it expects the banks to begin lifting their mortgage rates by an average of eight basis points by September.

Until the global financial crisis, Australia’s retail banks took their cues to raise or lower their lending rates from the Reserve Bank's interest rate cycle. But Citi now says that Australia’s banks are likely to raise mortgage rates out-of-cycle to the RBA due to higher wholesale funding costs as well as the regulatory pressures resulting from the banking Royal Commission.

JP Morgan's chief economist Sally Auld says that the political cost of raising interest rates wouldn’t be "too high" for the big four banks: "What that [view] ignores is the fact that they're businesses with a clear commercial imperative; at the end of the day, they care about their margins and preserving it," she said.

They have to "make a call on whether the political heat they'll get is any worse than the cost to margins of not lifting rates," she added.

The ANZ Bank's chief executive Shayne Elliott told ABC's The Business last month that banks may have no choice but to raise their mortgage interest rates independent from the RBA’s prime rate settings: "The reality is we have to run our business. As long as we make decisions responsibly, ethically, looking at all the stakeholders, we'll make decisions as appropriate for the time."

BoQ's acting head of retail banking, Anthony Rose outlined the principal reason for out of cycle rate hikes: "Funding costs have significantly risen since February this year and have primarily been driven by an increase in 30 and 90-day BBSW (bank bill swap rate) along with elevated competition for term deposits," he said.

Interest-only loans

One fly in the housing price ointment is the need for home owners with interest-only loans to roll them over to principal plus interest.  It’s estimated by the RBA that over the next three years 200,000 interest-only home loans worth something like $360 billion will need to be refinanced, meaning higher monthly mortgage repayments that borrowers might find difficult.

Interest-only loans became popular in Australia largely because of the country’s negative gearing taxation benefits. Property analyst Pete Wargent told news.com.au that a major driver of these loans was the ability to claim a tax deduction on the interest paid: “It’s smart investing from a tax efficiency point of view but the issue is that so many people are doing it.”

By 2015, interest-only loans had grown to almost 40 per cent of Australia’s outstanding housing credit. While there’s a great deal of debate on just how much this massive refinancing will affect property prices, at least the Sydney market has risen substantially since the period in which these interest-only loans were made. 

The federal government, the Reserve Bank and the Australian Prudential Regulation Authority (APRA) became concerned about possible consequences of these loans in 2017. They took action to limit them to a maximum of 30 per cent of all mortgage loans, as well as encouraging lenders to make interest rates higher on these loans.

Interest-only loans have now fallen by almost 60 per cent since APRA’s limits on them began in March 2017. "The outstanding stock of [interest-only] loans has now slumped $93 billion year-on-year [-16 per cent] with interest only-loans making up 31 per cent of all mortgages, down from 39 per cent a year ago," UBS analysts wrote in a note to clients.

UBS economist George Tharenou told ABC News that, although the switch from interest-only to principal and interest (P&I) loans was a modest 0.1 per cent, or $1.6 billion, of nominal income across the economy, it hit individual borrowers harder: "For individual households the [around] 35 per cent increase in repayments is significant.

"With $120 billion of interest-only loans expected to mature every year for the next three years, this is likely to remain a modest negative for consumption, but the larger risk is from 'stressed selling' as some households struggle to meet the higher repayments" Mr Tharenou said.

"The kind of nightmare scenario is where a lot of people need to sell at once, and that's when you see a kind of fire sale mentality, and could see very significant downward pressure on prices," said Professor Richard Holden from the University of New South Wales Business School.

Chinese investors pull back

Chinese investments in Australian property have been important drivers of prices for Sydney houses and apartments as well as land for development. However, recent changes to investment regulations by authorities in Australia and China have seen Australia’s share of China’s global spend fall 11 per cent to $US10.3 billion ($13.5b) in 2017, according to a report by KPMG and the University of Sydney.

The NSW Treasury had been warned in an expert’s report that imposing new taxes on foreign investors could have a "large negative impact" on investment in Sydney's real estate. The warning also suggested that the new taxes would have little impact on Sydney's house prices because foreign investors account for just 5 per cent of residential sales.

The Foreign Investment Review Board’s (FIRB) latest annual report shows that approvals for residential purchases by non-Australians fell by 67 per cent over the 2015/2016 financial year because of the combination of state-based taxes, increased fees and tighter capital controls.

In 2017, the Australian government increased fees for foreign buyers applying to buy property by 10 per cent, and last year NSW also doubled its stamp duty surcharge from 4 per cent to 8 per cent for foreign buyers. Treasury data revealed by the ABC shows that in June 2017 foreign buyers purchased 4,000 homes in a race to sign contracts and avoid the eight per cent duty. In July, when the new tax took effect sales fell to just 70.

From this year foreign investors will also pay an annual two per cent land tax on their properties. However, Michael Zhang, head of JLL’s China Desk in Australia says that Australian real estate is still a ‘key destination for Chinese capital’.

“There has been a notable shift in the scale and type of investment into Australian real estate. Investors and developers are becoming more selective in acquisitions, with mandates increasingly geared towards higher quality investment assets and well-located sites with less planning risk.’’

The FIRB report shows that Sydney has remained the number-one destination for all commercial real estate capital, which was mainly residential development (44 per cent), offices (30 per cent) and mixed-use sites (9 per cent) deals in 2017.

Greenland Australia managing director Sherwood Luo says that while Thailand, Vietnam and Japan are growing competitors to Australia for Chinese capital in the field of residential development, Australia remains a strategic investment destination because it is “a very stable and transparent environment”.

This year's NSW government’s budget papers acknowledged that foreign investment is falling, predicting just 2,000 foreign purchases in 2018-19. When questioned about the falling levels of foreign investment, a Treasury spokesperson said the market impact was "relatively small", adding that commercial operations were not affected.


‘RBA paying 'close attention' to house price falls,’ Reuters and AAP, Sydney Morning Herald, 5 July 2018
Home prices fall for ninth month as tighter lending bites,’ Reuters, Sydney Morning Herald, 2 July 2018
‘Australia’s house prices to remain flat over 2018-19 financial year, BIS Oxford Economics report tips,’ Allison Worrall, Domain, 25 June 2018
‘Are economists saying the Sydney and Melbourne markets are going bust? Not really,’ Chris Kohler, Domain, 25 June 2018
‘Fall in house prices is 'quite a bit larger' than expected, says ANZ,’ Clancy Yeates, Sydney Morning Herald, 6 June 2018
‘Brisbane, Perth, Canberra to lead property price rises as Sydney slows, analysts say,’ David Chau, ABC News online, 25 June 2018
‘Sydney, Melbourne house prices tipped to fall 10 per cent,’ Melanie Beeby, Sydney Morning Herald, 19 June 2018
‘Why this house price slump is different from the last one,’ Clancy Yeates, The Age, 20 June 2018
‘Top economists turn more bearish on property prices,’ Sarah Turner, Australian Financial Review, 2 July 2018
‘Rate rise an even-money bet as inflation gets up off the floor,’ Peter Martin,
The Age, 30 June 2018

‘Why you should prepare for a mortgage shock,’ Leith van Onselen, Unconventional Economist. 3 July 2018
‘Big four banks face mounting pressure to lift interest rates,’ David Chau, ABC News online, 28 June 2018
‘Chinese investors now after smaller, higher-quality real estate in Australia: report,’ Meredith Booth, Commercial Real Estate, 12 June 2018
‘Chinese developers here to stay, unperturbed by government measures to cool foreign buying,’ Tawar Razaghi, Domain, 25 June 2018
‘NSW Treasury warned higher foreign investment taxes would have 'negative' impact,’ Greg Miskelly, ABC News online, 30 June 2018
‘Fears of housing 'fire sale' as interest-only loans roll into principal plus interest,’ Liz Hobday, ABC News online, 21 June 2018
‘Investor lending falls almost $100 billion in 12 months as property market softens,’ Stephen Letts, ABC News online, 24 June 2018
‘Australia’s cooling property market unlikely to lift in near future,’ Stuart Condie, AAP, 5 July 2018
‘The Sydney suburbs where house prices are set to plunge,’ Lara Pearce, News.com.au, 19 June 2018


What went up has now come down, but for how long?

Thu, 14 Jun 2018

To read reports in the daily press, it sounds like some sort of disaster has befallen the Sydney property market: “Auction clearance rates down, asking prices down, times on market up, investor lending falls,” and if we weren’t comparing our present numbers to those of the recent three years of boom conditions we might be more concerned.

Which is not to say that there are many signs of buyers experiencing the FOMO (Fear of Missing Out)that they might have felt in 2016. The ANZ Bank even admitted it had underestimated the extent of the slide in Sydney housing prices. In a June research report ANZ senior economist Daniel Gradwell predicted further weakness ahead for the housing market, before it starts stabilising later this year.

"Weakness in Australia’s housing market has persisted longer than we expected, and the rate of decline in prices has recently accelerated. This weakness is challenging our previous view that prices would stabilise and then recover somewhat to finish the year in positive territory," he said.

He commented that there were several factors to blame for the fall in housing prices, including the shift away from interest-only loans and tightening of credit in the wake of the royal commission. While obviously things aren’t as good as they were last year, Mr Gradwell said it was important to note that “these movements pale in comparison to previous cycles”. In other words, the sky hasn’t fallen and isn’t about to.

Further reassuring is his belief that our strong population growth and record low interest rates will directly influence and lift housing prices. This will mark the beginning of a new price cycle, commencing at a point much higher than the previous upswing.

Some aspects of Sydney’s real estate market are consistent, year after year and cycle after cycle. Level blocks in the inner suburbs with potential for development generally do well, as do renovated properties in good locations. Properties in the prime markets of the north shore, the city, the eastern suburbs and the inner west remain sought-after.

Domain’s Chris Tolhurst tells us that most people instinctively try to buy in the best location they can afford: “They recognise that this purchasing strategy gives them the best chance of maximising capital growth and the least chance they will watch a property drop in value.”

The most prominent features since the boom’s demise have been more realistic asking prices and slightly longer times on market as buyers become more selective in their searches. The Agency’s Scott Thornton says the market’s now in a good place: “If the property is priced correctly, it will sell. The buyers are too well-educated now to pay ridiculous prices. If you are not in line with the market place, buyers will not engage with you.”

Admittedly, Sydney has experienced some of the worst price drops of all Australian capitals, with the current average sale price 4.2 per cent lower than this time a year ago. Sydney dwelling prices slipped by 0.2 per cent in May, and 0.9 per cent in the last three months.

Nationally, the value of investor housing loans slumped a seasonally-adjusted 9 per cent in the month and now sits at $10.88 billion –  its lowest level since January 2016, according to Australian Bureau of Statistics data, while the value of owner-occupier loans fell 1.9 per cent.

Chris Kohler, writing in Domain, says that first-home buyers haven’t retained the momentum they displayed in this year’s first quarter: “The return to form seen from first-home buyers stalled in March, after stamp duty discounts and exemptions saw a jump in activity from the group in late 2017 and early 2018.”

He said that the number of first-home buyer loans written – as a percentage of total owner occupier loans – fell to 17.4 per cent in March from 17.9 per cent a month earlier.

But economist and blogger Jason Murphy says there’s some good news in recent figures that show few Aussies are defaulting on their mortgage loans: “The rate of non-performing loans is under 1 per cent. We have not got to a crisis point where many people are forced to sell into a falling market, which could cause a rapid collapse.”

Domain Group data shows the average days on market fell 9.2 per cent in the year to February to 227 days, down from250 days the year before. Discounting also fell to 11.5 per cent in the same 12 months, from 12.2 per cent two years earlier. 'That suggests either improved market conditions at the high end or vendors pricing more appropriately,’’ Domain data scientist Dr Nicola Powell said.

And there’s one segment of the market that always seems to be run by its own set of rules. Some of Sydney’s wealthiest residents are popping the corks on their bottles of Moet, with new data showing homes in the ultra-prestige category - $10 million or more, are selling faster than a year ago.

Foreign buyers scarce

The rush of foreign buyers to acquire Sydney property is, for the most part, over. Figures from Swiss multinational bank UBS showed there were 13,198 approvals for foreigners to purchase residential real estate last financial year totalling $25.2 billion worth of investment.

This according to UBS was a 65.2 per cent decrease in the value of investment, from a peak of $72.4 billion in approvals and 40,149 applications a year earlier. Figures from the Foreign Investment Review Board (FIRB) confirm that approvals for foreign buyers to acquire residential property fell by 67 per cent in the last financial year.

"The reduction in approvals reflects investor reaction to the introduction of FIRB application fees in 2015, which has changed investor behaviour by encouraging applications only for properties they intend to acquire," the FIRB report said."Investors now have an incentive to apply only when they have a high certainty of purchasing."

The pullback by foreign investors wasn’t a great surprise given moves by state and federal governments that increased charges on foreign purchasers while removing some of their previous favourable tax treatment as well as placing a cap on sales of new developments.  These moves followed a series of Chinese government actions aimed at reducing capital outflows into foreign investments.

A recent survey by UBS of 3400 mainland Chinese citizens showed a clear drop in Chinese buying intention from the boom year of 2016, with their interest shifting to other Pacific neighbours including Thailand, Vietnam and Japan.

However, a prime factor in reducing overall Chinese interest in foreign investment, the capital controls introduced by the central government to stem capital outflows, may not be as long-lasting as was at first thought, according to Carrie Law, chief executive of Chinese property website Juwai.com’

“China’s capital controls have worked,” she told Domain. “Today, China’s foreign reserves are up, the Yuan is stronger, the flow of money out of the country has been reduced, and fears of a devaluation have virtually disappeared. But they have succeeded without having to make it impossible for ordinary Chinese families to buy property overseas.

She says the environment in China is changing and buyers are beginning to anticipate a time, perhaps later this year, when investing overseas again becomes easier: "Chinese buying enquiries for Australian property in March were 5.7 per cent higher than the month before and in April they were 22.3 per cent higher."

Interest rates avoid the brink

It’s hard to remember how long it’s been since the RBA’s prime rate dropped down to 1.5 per cent, (it was August 2016) and even harder to believe it’s stayed there so long (22 months). About the only thing on which most – but not quite all - economists agree is that the RBA’s next move will be up.

Having experienced such low interest rates for so long it’s hard to believe that there was ever a time when interest rates were so high they were a worry. Yet 29 years ago in June 1989 the standard variable mortgage rate hit 17 per cent and remained there through to March 1990.  And together with high interest rates we also had a high rate of inflation – 6.8 per cent, in fact.

RBA board member Ian Harper stresses that the Bank’s current policy settings are the “best thing the bank can do for encouraging confidence and stability”. He also adds that when it comes to determining the official interest rate settings house prices won’t be the determining factor.

Speaking to the Wall Street Journal, Mr Harper, who is Dean of Melbourne Business School, said that the direction of house prices simply wouldn’t matter, at least in his opinion, if other circumstances aligned for a rate rise.“The bank will raise interest rates when it has a basis for doing that — because inflation is starting to pick up,” he told the WSJ.

Harper says what’s happening in the broader Australian economy matters most, particularly the outlook for wages growth given its implications for inflationary pressures: “From my perspective, as somebody who has an input into the setting of monetary policy, what matters is what is happening right across the economy,” he said.

So, with annual wages growth of around 2 per cent – a far cry from the 3.5 per cent level that could bring underlying inflation back to the midpoint of the RBA’s target range of 2-3 per cent, unemployment of 5.6 per cent poses no threat to the 5 per cent level which might increase wage pressures.

(Just for the purposes of comparison, in the five years from 1989 to 1994, male full-time earnings rose 22 per cent, or 4.4 per cent per annum – more than double the current rate.)

Not all that long ago the sudden rises in house prices across Australia were causing murmurs of alarm within the RBA, with fears of “inflation” seeming to make a rate rise inevitable. But it never came due to concerns about other areas of the economy.

And now? With falling housing prices, low inflation, low wages growth and unemployment at acceptable levels (except for those unemployed, of course), it looks like interest rates will simply stay where they are for many more months ahead.

Tax idea won’t go away

In 2017 we reported that the federal Parliamentary Budget Office had costed a proposal by The Greens to abolish stamp duty and replace it with a broad-based land tax. The purported purpose of implementing this national broad-based land tax would be to replace over $19 billion in revenues raked in by state and territory governments in stamp duties on property purchases.

At the time the Grattan Institute said it would be politically difficult to deliver but was generally regarded as a ‘good policy’. Yes, it could indeed be ‘politically difficult’, as the Grattan Institute estimated that to replace stamp duty revenue with a broad-based tax would probably require a tax of ‘about $6 for each $1000 of unimproved land value’.

As we said in April 2017: “For your reasonably average Sydney family home with an unimproved land value of $900,000 the land tax would be around $5,400 – about the same as the current rate of land tax in NSW for properties that aren’t principal places of residence.” All homeowners would be affected and have to pay the new tax.

This ‘good policy’ tax won’t go away. Two years later it’s still being floated as the solution to numerous government revenue worries, and now we find a new headline in the daily press: “Australia stands to gain $24.3 billion every year in GDP from 2047 if state governments phased out stamp duty replacing it with a broad-based land tax.”

Infrastructure Australia’s ‘Making Reform Happen’ paper which brought this tax to the surface once more made the case for major reforms to “better deliver infrastructure including land use to prepare for the ‘profound change’ Australia will face as the population is projected to grow to more than 30 million people by 2031.”

In a Domain article about the paper, IA’s chief executive Philip Davies said in this new iteration revenue generated from switching taxes would come about from ‘productivity benefits’ rather than homeowners’ direct tax contributions. It would be levied, for example, on gains in land value from land is rezoned or when a new train station is announced.

And in this latest proposal, the annual levy of this hypothetical tax for someone in Sydney would supposedly work out to between $1500 and $2000 on a median-priced house, according to the Infrastructure Australia report which appears to misinterpret the 2016 Grattan Institute calculations. However, regardless of how it’s calculated, the broad-based land tax is an idea too lucrative to disappear from government’s list of ‘possibles’ for new taxes. And it would be just as distorting to the property market as it would be beneficial to housing purchasers by removing stamp duty on purchases.

As the Domain article concluded: “Mr Davies acknowledged that there might be negative community perception around broad-based land tax, but it was up to the states and territories to prove a compelling narrative to inform the community and industries that the current system was broken.”

Build-to-rent rises again

In August 2017 we mentioned the idea of build-to-rent as having great potential for creating affordable housing once the apartment-building frenzy of the recent property boom faded away.  Now it’s back in the news.

Build-to-rent envisages developers building large clusters of apartments at affordable rental levels. While this sounds like a reasonable idea, it doesn’t enable developers to benefit from deposits in the traditional build-to-sell model; some sort of government support would probably be required.

Tim Graham, global sales director of foreign investment facilitator Investorist, says it’s already beginning to happen here: “If we talk about Australia, the [bigger players like the] Meritons are the only ones doing it well,” he told Domain. “It comes down to the land cost and the development outcomes here. It’s also just a big cultural change.”

He also said he believes that promoting investment in build to rent could help bring more cash into the country.

Affordable housing group PowerHousing Australia chief executive Nicholas Proud said there is a key question for our housing market: “Can an affordable housing build-to-rent component play a larger role to maintain steady supply in the coming years?'”

The build-to-rent concept is supported by Phil Ruthven AM, founder of IBISWorld who has established a reputation as a futurist. He says we should adopt the leasing model that’s common in Europe, wherein tenants take out long term leases of five to 10 years or even longer. They also have greater rights and control over how they fit out, decorate and use the home.

“For years I’ve been advocating that it’s better to lease than to own a home — but I don’t mean renting, which is unstable, short-term and limiting,” he told news.com.au.“Renting is very degrading, in a sense, compared to leasing. We have to change our rental rules — they are backwards in Australia currently; it’s antediluvian.

“Less than half of people in Germany own their own home … because with leases you can paint the bloody house purple if you want; the owner might say to return it to the original condition at the end, but it’s a two-way deal with more flexibility.”

Backyard dream ends

The days of the backyard are ending and there’s not much hope for a reversal of the process now in progress. Population densities are increasing while the size of new houses grows, and at the same time older houses are being bulldozed to make way for towers of apartments.

So, what happened to a city like Sydney where backyard cricket and a swimming pool for the kids were once elements of a homeowner’s dream that’s now rapidly shifting into the realm of impossibility? One way of looking at it is to understand that we are increasingly getting short of time for tending large gardens.

Researchers at Swinburne University asked 2000 people in 2016 in Melbourne and Sydney’s middle ring suburbs to describe the home they aspired to. As you might expect, nearly 60 per cent of respondents said they wanted a detached house and yard.

60 per cent sounds like a substantial number, but it’s nowhere near the 90 per cent in the early 1990s who said they wanted a big backyard. The house stayed popular, but the additional space on the block for a garden wasn’t nearly as important.

Jane Fitzgerald, the Property Council of Australia’s (PCA) NSW executive director, told news.com.au: “I don’t think the great Australian dream is dead, but I think it’s different now. Sure, when Generation Y get to 40 they might want a quarter acre block, but that choice is being delayed by most people and what they are doing now is choosing apartment living.”


‘As our cities become denser, the great Australian backyard is paying the price,’ Benedict Brook, news.com.au, 3 June 2018
‘Build to rent could fix Australia’s foreign investment, affordable housing problems: experts,’ Jim Malo, Domain, 30 May 2018
‘Buyers are too well-educated’: Sydney house hunters seek safe haven suburbs as clearance rate tumbles,’ Chris Tolhurst, Domain, 14 May 2018
‘Clearance rate falls as market cools down,’ TawarRazaghi, Domain, 13 May 2018
‘Fall in housing prices will be ‘quite a bit larger than expected’,’ Natalie Wolfe, news.com.au, 7 June 2018
‘Foreign buyers of Australian real estate plummet, Foreign Investment Review Board figures show,’ Lucy Macken and TawarRazaghi    . Domain, 29 May 2018
‘Foreign property investment plummets as tougher regulations bite,’ Stephen Letts, ABC News online, 30 May 2018
‘The fear of missing out for buyers has gone’: Sydney auction clearance rates continue to nosedive,’ Chris Tolhurst, Domain, 3 June 2018
‘Futurist and author Phil Ruthven on what‘s in store for jobs, housing and standards of living,’ Alexis Carey, news.com.au, 2 June 2018
‘House prices set to tumble after buyers flee,’ Jason Murphy, news.com.au, 31 May 2018
‘Housing market posts first annual drop in 6 years, driven by Sydney and Melbourne,’ David Chau, ABC News Online, 2 June 2018
‘Housing slump’: Mortgage lending plunges, further weakness expected,’ Chris Kohler, Domain, 11 May 2018
‘Replacing stamp duty with broad based land tax could increase revenue to $11.2 billion by 2047, new report shows,’ TawarRazaghitwitter, Domain, 4 June 2018
‘Why Australia's governments, banks and economy don't want 'affordable' housing,’ Ian Verrender, Sydney Morning Herald, 28 May 2018
‘RBA's Ian Harper says if rates need to rise, 'who cares what’s happening to house prices'
David Scutt, Business Insider Australia, 28 May 2018
‘Interest rates are lower than ever. So why is owning a home harder than ever?,’ Greg Jericho, The Guardian, 5 June 2018
‘Lending to Australian housing investors plunged by over a billion dollars in March,’ David Scutt, Business Insider, 11 May 2018
‘Sydney’s best places to bag a property bargain this winter,’ Stephen Nicholls, news.com.au, 4 June 2018
‘Sydney’s wealthy dodge market correction,’ Lucy Macken, Sydney Morning Herald, 13 May 2018
‘Warning signs on housing, but are we cautious enough?,’ Jason Murphy, news.com.au, 30 May 2018
Housing slide ‘larger than expected’, Clancy Yeates, Sydney Morning Herald, 8 June 2018


Sydney property sets world record, then steps back

Thu, 17 May 2018
Interesting news from Domain: Australian house prices recently set a world record after gaining 6556 per cent in 55 years, according to calculations from the Bank of International Settlements and referenced by UBS, with growth averaging 8.1 per cent each year during that period.

The report added that prices had doubled every nine years, and that it was the longest upswing in the world during that period without a “downswing” – a downswing was defined as a sustained price decrease of three years.

The media have recently been repeating themselves about Sydney property. “The housing boom is over” they often say, and rightly so. Investors are withdrawing from their previous high levels of activity, and vendors are finding that expectations of ever higher prices for their properties can be overly optimistic.

Other indicators – namely auction clearance rates, time-on-market, numbers of properties sold, and property lending figures all say the same thing. Yes, the Sydney property boom is behind us. But a return to normal conditions is what we’re now seeing, and the chances of going from boom to bust are miniscule.

As the New Daily’s Michael Pascoe wrote: “The fall in Sydney and Melbourne auction clearance rates over the weekend is a gift for writers of scary headlines. Before they get too excited, keeping some perspective paints it as part of a return to something more like normal – not heralding the constantly-predicted crash”.

Cooley Auctions' auctioneer Damien Cooley told the Financial Review’s Su-Lin Tan: "Things are changing and the market is not as good as it was, but it's a very fair market." He’s right. A fair market is just what we’re looking at, and while clearance rates remain in the 60 per cent levels, quality properties continue to achieve above-reserve prices at auctions.

But across the board prices are softening. Property advisory firm SQM Research has revised its Sydney price estimate forecast to between -4 per cent and zero per cent growth this year, from a previous estimate of between 4 per cent and 8 per cent.

It says that moves by the Australian Prudential Regulation Authority (APRA) to strengthen mortgage markets are weighing on the national property market: “This action, predominantly targeted at property investors, has triggered a decline in demand for residential property.”

The recent tightening of credit restrictions by banks and other financial institutions is reminiscent of the year 2015 when APRA announced a 10 per cent cap on the growth rate of banks’ loans to investors – a situation that affected prices for a period but was gradually relaxed.

Foreign investors, particularly those from China, have largely pulled out of the Sydney market, but this has opened up opportunities for first-home buyers and owner-occupiers who have been quick to take advantage of the stock of new apartments on offer.

2018 Budget impacts

Despite repeated concerns about housing affordability, the federal government’s 2018 budget, which it must be remembered doesn’t come into effect until it’s been passed by the Senate, offered little that will affect the property market - nothing on negative gearing and nothing on capital gains tax reductions.

This was a bit surprising after a study presented to the Reserve Bank of Australia concluded that almost 75 per cent of households could own their own homes if the current negative gearing policy was abolished, and house prices would soften by 1.2 per cent while rents would rise “only marginally”.

The paper, by Melbourne University department of economics researchers Yunho Cho, Shuyun May Li, and Lawrence Uren, found that eliminating negative gearing would lead to an overall welfare gain of 1.5 per cent of gross domestic product.

However, as News.com.au’s Liz Burke puts it: “Though housing affordability is frequently cited as a major concern for young Australians and a top financial issue, prospective property owners have apparently been forgotten by the Government.”

A cutback on tax incentives for vacant land was one of the few property-related measures in the budget, which means property owners will no longer be able to claim tax deductions for expenses such as council rates and maintenance costs for vacant land. The changes will take effect from July 2019.

At present, property owners can claim deductions on land they never intended to make an income from while ‘banking’ the land, hoping to sell it later and make a windfall profit when property prices have increased.

Under the government’s new tax settings, property owners would be able to claim deductions only after a property had been constructed on the land, the property had received approval to be occupied, and the property was available for rent.

The government hopes this will curb the popularity of land banking, which has the effect of tying up land that could otherwise be used for housing or other development. The measure is expected to add $50 million to the government’s income in 2020-21 and 2021-22.

Urban Development Institute of Australia’s national executive director, Kirk Coningham expressed concerns about the measure: “We know that it can take seven to ten years to bring house and land packages to the market in Sydney, so to be punished for the slow processing would be one big concern we would have.”

Lance Cunningham, national tax director at BDO in Australia, told Domain’s Kate Burke that denying vacant land holders from making normal deductions appears to be an attempt to stop developers holding onto land long term.

“I think it’s really aimed at property developers holding lots of land because they think they can perhaps get better profits in the future,” he said. “To try and free up some of the land for housing.”

Another housing-related twist in the budget was the government’s offering homeowners over 65 a ‘reverse mortgage’ worth up to $11,799 per year, meaning that anyone over the retirement age can now access equity in their homes without selling them.

This scheme based on the previous Pension Loans Scheme addresses the problems faced by many older Australians who have their wealth tied up in property and have little access to extra cash when needed. The rise in life expectancy also places financial pressures on retirees who can’t really know how many years they’ll be able to stay in their own homes.

The importance of this facility is shown by Grattan Institute figures which show that Australians between the age of 65 and 74 are $480,000 wealthier in real terms than households of that age bracket 12 years ago, but most would have to sell their homes to access some or all of that money.

An interest rate of 5.25 per cent will apply to the loans. This rate is unchanged since the Pension Loans Scheme was introduced in 1997 and is typically about 0.5 per cent below the rate offered by most banks.

The plan would improve the outlook for retirement-age homeowners, noting that a Grattan Institute report on housing affordability found that the over 65s are the only group of Australians with an increasing rate of home ownership.

“Retirees who have paid off the mortgage are insulated from rising housing costs, a substantial safety net if they exhaust their retirement savings,” said the report, which written by chief executive John Daley and Australian Perspectives Fellow Brendan Coates.

Medium-density popular

The NSW government recently introduced a new medium-density housing code, although some councils are resisting its implementation due to concerns about overcrowding.

NSW Planning Minister Anthony Roberts announced the new housing code in April, saying that low-rise medium-density housing is the “missing part” of housing stock between traditional free-standing homes and apartments.

The code permits homeowners and developers to divide blocks into terraces and dual occupancy dwellings, or to create what are being called “manor houses” in which a single building houses three or four dwellings. Development approvals would be managed using a complying development process that is supposedly faster and cheaper than existing approval processes.

This is a response to an important shift in the marketplace shown by growing demand for medium-density housing. Medium-density is a category that includes townhouses, terrace houses and three-bedroom apartments – suitable for downsizing older homeowners or young families looking for low maintenance properties that suit their time-poor lifestyles.

Knight Frank’s Michelle Ciesielski, head of residential research, told the Herald’s Carolyn Cummins that in 2013 the volume of medium-density development sites in Australia was $152.8 million, but by the end of 2017, the volume had increased to $1.1 billion.

“The shift towards low-maintenance living has only just begun, with an aging population in downsizing mode, more first-time buyers and an increasing trend in time-poor communities,'' Ms Ciesielski said.

She said her company’s analysis was that the portion of three-bedroom apartments being built is expected to increase by 42 per cent for higher density projects now under construction, and for those due for completion in the next four years.

There’s a measurable shift in the market occurring between the prices of apartments and detached houses. CoreLogic’s data shows that capital city detached house values grew at an average annual rate of 7.3 per cent over the past five years and unit values grew by a lesser 5.5 per cent over the same period.

“Despite the surge in unit construction over recent years, the past 12 months has seen unit values continue to trend higher, up 1.9 per cent, compared with a 1 per cent fall in house values,” CoreLogic head of research, Tim Lawlesssaid.

Some experts have said the mix of tighter lending restrictions, first-home buyer incentives and a flood of new apartments were the reason for the drop in house prices.

“[People who would have normally bought houses] may be thinking there’s better value in units, buying something brand new, close to the city usually on a good transport line,” AMP Capital’s chief economist, Dr Shane Oliver told Domain’s TawarRazaghit.

“Perhaps [that switch] in favour of units over houses has helped absorb the supply, which has put a dent in demand for houses,” he said.

Commonwealth Bank economist Kristina Clifton told The Guardian’s Gareth Hutchins that unit prices may be holding up better because they tend to be located in the larger capital cities, where population growth is strong, and close to public transport.

“Also, unit prices didn’t rise as quickly as house prices during the boom years,” she said.

Choosy at the top

Selling agent Jack Fontana says the market at the top has ‘definitely shifted’: “There are buyers but they’re cautious and picky. They’re looking for the suitable property, especially at that high end.

“It is not a two to three-year purchase for them but something that is long term. They want to make sure that the home is right, and the position is right, and if it is a waterfront, a lot of them do want the private jetty.”

The top end of the market is alive and well, as was demonstrated at a recent auction for a new-build five-bedroom house in Hunters Hill. The property attracted pre-registrations from five families; three of them made bids, driving the home to an under-the-hammer sale price of $5.8 million - $700,000 up on the $5.1 million reserve.

“We had over 150 groups through during the campaign, 60 of them on the first Saturday the property was open for inspection,” said the selling agent Paul Cavarra from McGrath Hunters Hill.

“The final price eclipsed the price point where everyone thought it would end up, that’s for sure,” he added.

The president of the Real Estate Institute of NSW, Ms Leanne Pilkington, said agents were finding it harder to get buyers to make purchase decisions because Sydney’s market has eased.

“Twelve months ago, the buyers were really fuelling the price growth because there was huge demand. They are not as willing to pay that premium right now, so I would say the market is cooling.

“It is not as if everyone is throwing offers on the table – that is not the way a market like this works.”

Tenants feel rent pressures

The Anglicare Rental Affordability Snapshot surveyed all the private rentals available in Australia over one weekend in March.It found a 28 per cent increase in supply across Sydney's rental market has failed to push down prices, and less than 1 per cent of properties in Sydney's market could be considered "affordable".

Rental properties are considered "affordable" if they cost up to 30 per cent of a person's income.

Anglicare's head of research and advocacy Susan King said an increase in supply has not helped low income earners, and there needs to be an increase in public housing: "Even though there are 28 per cent more listings available it hasn't translated to increased affordability," she said.

Long-term underinvestment in public housing, treating homes as an investment vehicle, massive tax concessions for homeowners and continually rising property prices have put the entire housing system under stress, Laurence Troy from the UNSW City Futures Research Centre told the Herald’s Nigel Gladstone.

“People who are pushed out of the home ownership market into private rentals with relatively good incomes put inflationary pressure on rents that are able to be charged,” Dr Troy said.

“Then at the bottom end [of the housing market] you have people that are pushed out of public housing into the private rental market because essentially that’s the only option, but they’re in a worse position because the rental market is under significant strain.”

However, CoreLogic's head of research Cameron Kusher said that Sydney’s rental yield of 3.2 per cent was below the median yield across the country of 3.68 per cent, and that Sydney had its weakest first quarter since 2009.

Mr Kusher forecasts that the capital cities (except for Hobart) will continue to experience slowing rental growth over the coming quarters.

The RBA’s position

Market-watching economists say that Australia’s cooling housing market will add to the case for rates to remain on hold even longer. But after 21 months of unchanging interest rates we’re beginning to get a bit edgy about the RBA making a move in either direction. We know a change will come, but nobody can say when.

In April the Bank issued a warning that as many as 1.5 million mortgage holders will face sharply higher payments over the next four years as interest-only loans convert to principal and interest loans. warned.Bank officials described the switchover an “area of potential concern”.

The warning comes two days after Reserve Bank Governor Philip Lowe said that the next move in official interest rates would most likely be up, and that it would “come as a shock to some people”.

Critics of the RBA say the Bank should be clearer about when rates are likely to change, what their direction will be, and what could be the magnitude of the change. This is called “forward guidance” and is provided by other central banks as a reinforcement of economic policy.

During a recent telecast of “The Conversation” on ABC News, participants used the example of the US Federal Reserve Bank announcing in 2008, when the cash rate was at zero, that “…weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time”.

This kind of communication influences the public's expectations about the future course of US monetary policy, and effectively advises consumers and businesses to expect an expansionary monetary policy for some time. It givespeople more information about the strategy the Reserve will take with rates, rather than simply providing forecasts about its expectations of future economic conditions.

In Australia it seems the RBA is concerned that record low interest rates, accelerating asset prices and a growing appetite for risk could be laying the groundwork for a sharp correction across financial markets.

In its latest Financial Stability Review the RBA said that strong global economic conditions over the past six months suggest asset prices have surged because investors "see little chance of adverse outcomes".

The RBA warned that a rise in interest rates from rising inflation could catch investors by surprise and lead to what it calls a "disruptive and lasting correction in a broad range of markets.”

The Bank commented that investors have taken on more risk in recent years which makes them more susceptible to large losses if there was a generalised fall in asset prices.

"This could be triggered by a sharp rise in interest rates in the absence of stronger economic growth arising from, for instance, a jump in realised or expected inflation or a change in investors' risk appetite."

However, for the time being the RBA believes tougher regulatory measures and a strengthening in lending standards have sufficiently helped to moderate housing market conditions in Australia, and in the absence of more definitive “forward guidance” we can expect things to stay as they are for the foreseeable future.


‘Federal Budget 2018: Property owners sitting on vacant land targeted in budget measures,’ Kate Burke, Domain, 8 May 2018
‘Every homeowner over 65 offered reverse mortgage to unlock home’s equity,’ Chris Kohler, Domain, 8May 2018
‘Sydney house prices are set to drop. And it’s nothing to fear,’ Michael Pascoe, The New Daily, 30 April 2018
‘Prepare for sharply higher mortgage payments, Reserve Bank warns investors,’ Peter Martin, The Age, 14 April 2018
‘How the Budget affects housing affordability,’ Liz Burke, News.com.au, 9 May 2018
‘Sydney, Melbourne housing boom is over, auction clearance rates show,’ Su-Lin Tan, Australian Financial Review, 18 March 2018
‘Investors making way for owner-occupiers in housing sector,’ Carolyn Cummins, Sydney Morning Herald, 25 April 2018
‘House price forecasts slashed in all but three capital cities,’ Chris Kohler, Domain, 7 May 2018
‘Sydney prestige sellers slash prices at weekend auctions as investors target apartments,’ Chris Tolhurst, Domain, 8 April 2018
‘Sydney auction clearance rate drops below 60 per cent as market turns,’ Chris Tolhurst, Domain, 29 April 2018
‘Annual capital city home values fall for the first time since 2012,’ Gareth Hutchens, The Guardian, 1 May 2018
‘RBA should be clearer about when and how interest rates will change,’ Efrem Castelnuovo, Bruce Preston and Giovanni Pellegrino, ‘The Conversation’, ABC News Online, 19 March 2018
‘RBA warns a sharp rise in interest rates could lead to disruptive and lasting market corrections,’ Peter Ryan, ABC News Online, 14 April 2018
‘Sydney renters paying $582 a week, while Darwin and Hobart enjoy best rental yields,’ David Chau, ABC News Online, 18 April 2018
‘Supply increase makes no impact on Sydney's rental market as tenants struggle to pay,’ Kathleen Calderwood, ABC News online, 30 April 2018
‘Sydney property boom blows poor towards public housing,’ Nigel Gladstone, Sydney Morning Herald, 2 April 2018
‘As Australia’s house prices fall, watch the bottom pickers start to emerge,’ Chris Kohler, Domain, 26 April 2018
‘House prices in Sydney drop 2.6 per cent over March quarter: Domain Group data,’ TawarRazaghit, Domain, 26 April 2018
‘Home ownership would rise if negative gearing is scrapped, study says,’ Ben Doherty, The Guardian, accessed 29 April 2018
‘Cash rate on hold as house prices to fall ‘5 per cent this year, another 5 per cent next year,’ Frank Chung, News.com.au, 2 May 2018
'Bulldozers in every street': NSW govt facing suburban revolt over new housing code,’ Andrew Taylor, Sydney Morning Herald, 30 April 2018

A tale of trillions, softening price rises and intergenerational theft

Wed, 18 Apr 2018
In case you’ve ever wondered just how much Australia’s housing market is worth, a new report from the Australian Bureau of Statistics (ABS) tells us – a whopping $6.87 trillion. In fact, just between September and December 2017 it grew by almost $93 billion, but it’s the details of that fourth-quarter that make for interesting reading.

Even though the national annual average residential property gained 1 per cent in the December quarter, Sydney house prices slipped into negative territory, prompting CommSec senior economist Ryan Felsman to tell Domain’s Suzanne White: “The rebalancing of the Aussie housing market continues…and the slowdown in residential building construction is becoming evident – especially in NSW.”

In previous articles we’ve mentioned the somewhat complex methodology used by CoreLogic to compile its Hedonic Home Value Index, a measurement which tracks price movements down to the ABS Statistical Area 4 level. Using figures from CoreLogic’s index, Moody’s Analytics has forecast further house price falls for Sydney, but interestingly not for apartments.

Moody’s says house values across Sydney will decline 4.2 per cent in 2018 before recovering in 2019:“Incomes in NSW have increased faster than the national average and underpin some of the recent gains in home values. However, housing values have risen even faster and are overvalued relative to equilibrium value. Therefore, Moody’s Analytics expects a correction across NSW.”

Geography will play a part in Moody’s forecast drop. “House values in the City and Inner South region are forecast to fall by 10.1 per cent in 2018 to be the worst-performing statistical areas in Sydney,” the group says.

“For the Eastern Suburbs … our forecast [looks for a] 9.3 per cent decline in values in 2018 and a further 3.9 per cent decline in 2019, which would bring house values back to their level in 2016.”

Moody’s says house prices will also fall by more than the city-wide average in the Inner West, Ryde, North Sydney and Hornsby in the year ahead. However, according to Moody’s, apartment prices will make a moderate gain of 0.3 per cent due to ongoing demand.

“Apartments are expected to also slow but not as sharply with a 0.3 per cent expansion expected in 2018, down from the 9.8 per cent growth in 2017.”

The good news is that Moody’s thinks the downturn won’t be long-lasting: “By 2019, the correction is expected to have largely passed, with house and apartment values forecast to increase by 0.9 per cent and 1.6 per cent, respectively,” it says.

CoreLogic head of research Tim Lawless said that Sydney's property market was already showing signs of solidifying, with the 0.3 per cent monthly fall its slowest rate of decline since late 2017.

“If the trend towards an improving rate of decline persists, the Sydney housing market
may have already moved through its peak rate of decline," Mr Lawless told Reuters.

There is an ‘elephant in the room’ that could impact the prices of Sydney property in 2018-19, and that’s the Hayne inquiry into bank industry misconduct, including mortgage lending practices. The findings of this Royal Commission could result in a further tightening of lending laws that would make mortgage finance more difficult to obtain.

UBS economists George Tharenou and Carlos Cacho wrote a note to their clients which said mortgage borrowing limits could fall by as much as 35 per cent if higher living expenses were fully factored into lending calculations. This would reduce borrowers’ repayment capacity, hitting first-home buyers and lower income borrowers hardest.

UBS has already predicted house prices would sit between flat and -3 per cent year-on-year in 2018 and 2019 but warned a credit tightening scenario would see larger price falls.

The Hayne Royal Commission is expected to submit an interim report no later than 30 September 2018 and will provide its final report by 1 February 2019. ??

Another elephantine factor awaiting resolution is in the warning issued by the RBA which delivered the unwelcome news that around 30 per cent of all outstanding national mortgage debt will be subject to conversion from interest-only to principal and interest repayments over the next four years.

"Liaison with the banks suggests that there is a small share of borrowers who have not accumulated prepayments despite having had their loan for some time and may have little margin for unexpected increases in living expenses or income falls," the RBA said.

There are presently 1.46 million outstanding interest-only mortgages. A ‘small share’ of these, say just one or two per cent, would still mean many thousands of property owners would experience a degree of mortgage stress.

Is the RBA worried? Not yet. In its statement the Bank said: “"The share of borrowers who cannot afford higher P&I repayments and are not eligible to alleviate their situation by refinancing is thought to be small.”

Apartment construction slows

There’s been a significant drop-off in apartment construction which reduced the number of buildings approved across the country in February, according to the latest ABS data. Industry experts predict this trend to continue as more developers delay commencing projects and tighter lending standards for investors coincide with a flood of new apartments going onto the market.

 AMP chief economist Shane Oliver said there were still a record number of cranes on our skylines, but it won’t last: “You’ve got falling [property] prices in Sydney, and rising levels of unit supply, eventually the number of cranes across Sydney…will start to come down.”

“As supply impacts at a time of tighter lending standards I think more developers [will decide] to start delaying projects,” he added.

Housing Industry Association senior economist Shane Garrett said the dramatic fall in the number of apartments and high-density dwellings came at a time of near-record construction volumes. High-rise apartments had been especially affected, with the number of units approved for buildings four storeys or higher over the year to February down 15 per cent on the previous year.

Mr Garrett said approvals have yet to bottom out, predicting that won’t happen until about mid-2019: “The thing that worries us … is that if fewer new apartments are being built it represents a risk to supply … and that could have unfavourable outcomes, in terms of acceleration of property prices and rents.”

One group that wants more apartments in Sydney is the Urban Taskforce a group that represents the development industry. It says it’s concerned that the Greater Sydney Commission’s recently-announced ‘Region Plan’ hasn’t said how it would ensure that medium-to-high density apartment living will be given planning certainty.

By 2036, the Commission’s plan forecasts that Sydney's residents will see a city develop with “little change in the outward spread [of housing but an] increase in intensity of development within existing centres and the existing urban area”.

Chris Johnson, CEO of the Urban Taskforce, says there is significant tension in the community about the planned increase in intensity of development: "The language in the GSC's plan is about more diverse housing and about a mix of house types, presumably leaving the actual mix to council plans.”

Mr Johnson told the Sydney Morning Herald’s James Robertson that leaving the determination of the plans open could expose them to political pressure from MPs concerned about “stopping the squeeze”.

Group buying to save

One purchasing methodology that might give purchasers a better deal on apartments – or possibly even houses, is group buying. Although not a new idea, the current high prices in eastern capitals have made group buying an attractive option for those interested in acquiring property.

It’s essentially buying in bulk – a group of people who are looking to buy a similar type of investment organise themselves, often with a specialist property agent, to negotiate lower prices for something like off-the-plan apartments in a single building, or perhaps units in multiple buildings that have a common owner.

Buyer’s agent Nathan Birch, co-founder of BInvested.com.au, explains that developers often need to pre-sell a number of properties before they can secure finance to begin development.

“A lot of legwork, marketing and promotion go into finding and securing these buyers ahead of the build. Some developers have seen us as an easy outlet for removing all the stress and pain from doing large marketing campaigns,” he told Nila Sweeny from Property Market Insider.

He says that if a significant number of buyers come to the developer with a proposal to purchase units or blocks of land in a development they can often secure property well below market value.

This sounds logical, and in theory it should work out to be a win-win situation for both purchasers and developers, but there are possible ways to lose as well. Fees from buyer’s agents can be high, and there can also be problems with some would-be purchasers getting finance. Due diligence of both the property developer and the intending purchasers is essential to ensure the deal goes ahead with favourable outcomes for all parties.

Intergenerational theft?

A range of housing affordability measures at state and federal levels have been implemented in the past year. There have been a variety of stamp duty exemptions and discounts, first-home buyer grants and a federal “super scheme” that allows first-home buyers to save for a house deposit by making extra contributions into their superannuation.

However, a study by the Australian Housing and Urban Research Institute concluded that most of the government’s housing expenditure continued to be heavily skewed towards wealthy homeowners rather than new first-home buyers.

Former Liberal leader John Hewson recently was quoted in the media with a statement that governments had “kicked the issue of housing affordability down the road for decades,” and labelled the result “intergenerational theft”.

Dr Hewson was adamant that successive governments had failed to develop a national strategy to solve the problem and the issue has now become a crisis: “Problems don’t get solved … they get kicked down the road, and when you kick issues like housing affordability down the road or budget repair down the road, or climate change down the road, you are stealing from the next generation who are just going to be left to try and solve those problems.”

He argued that broad-based tax reform is needed and that housing-related tax concessions such as those on negative gearing should be grandfathered and capital gains concessions that benefit investors should be capped over time.

Dr Hewson said with a whole generation of Australians locked out of the housing market, the result of the next election could hinge on the country’s youth: “The youth of Australia underestimate how much political influence they can have if they work together.”

Economist Ross Gittins, a regular contributor to the Sydney Morning Herald, agrees with Dr Hewson that the solution for younger generations lies in generating more pressure at the ballot box.

“The feds failed to limit the growth in demand (by limiting immigration and fixing the tax system), while the states did too little to increase supply (by discouraging the building of new homes on the outskirts and by permitting a first-in-best-dressed mentality by people in inner and middle-ring suburbs).

“Why are they allowing the proportion of home owners to decline? Because most things they could do to genuinely help first home buyers would come at the expense of existing home owners, who have more votes than the youngsters,” he said.

Liberal MP John Alexander says that Australia’s housing market must be recalibrated towards home ownership. This requires ensuring that wage earners who aspire to be owner-occupiers are competing in the market against other wage earners, not investors.

His preferred solution is to give the Reserve Bank of Australia (RBA) the power to adjust the tax deductibility of housing. As an example, he said the RBA could decide that investors could only deduct 70 per cent of the cost of their borrowings.

Mr Alexander has also announced his own scheme to attract private investment in affordable housing. He wants to create an Australian Housing Trust in which investors can buy shares that will finance affordable housing.

Under his plan, renters could reduce their rent by becoming part-owners of in the properties they occupy eventually becoming full owners in what he terms an “equity mortgage.”

Interest(ing) times

We have now had record low RBA interest rates for a record length of time, and no signs of an impending change to the situation.  About the only movement is the growing distance between now and the time the market expects the next rate change to take place.

At the end of January, the market was predicting a rise in rates to 1.75 per cent in November 2018. Currently it’s anticipating a rise to 1.75 per cent by June 2019. This is largely due to a continued slowing in housing price growth, high debt levels and weak wages growth.

AMP Capital’s Shane Oliver said: “high business confidence, strong jobs growth and the RBA’s own growth and inflation forecasts argue against a rate cut, but risks around consumer spending, weak wages growth and inflation, the slowing Sydney and Melbourne property markets and the still too high $A argue against a rate hike.”

Housing finance is definitely taking a backward step. In January this year the level of housing finance was 1.5 per cent below what it was 12 months earlier - the first annual fall since August 2016. Clearly, the fall in housing finance is being driven by a decrease in investor finance.

But another significant factor that’s holding back housing finance volumes is the slowing prices for established houses. In September 2017, the average price across all capital cities for established houses was 9.3 per cent above where it was 12 months earlier; in December 2017 this had fallen to growth of just 5.6 per cent.

As always, Sydney generates its own, unique statistics. Since December 2011, established house prices in Sydney have grown by 83 per cent, whereas average full-time earnings in NSW over the same period grew just 17.5 per cent. The price growth strength was based on investors and progressively lower interest rates, but with new rules limiting investors and interest rates most likely at their lowest point, the housing boom is all but over.

Mathew Tiller of LJ Hooker told News.com’s Sophie Foster that housing markets across the country remained active with listings increasing and auction clearance rates just below the long-term average.

“More properties on the market for sale has provided more choice for buyers and when combined with the moderation of investor demand has led to a slowdown in price growth. In weighing up these variables, it is likely that the RBA will keep the cash rate at the record low of 1.5 per cent over the short-term.”

Also in agreement were Noel Whittaker of QUT who said “housing not rising - markets wobbly - no reason to move”, and Clement Tisdell of the UQ School of Economics who said he agreed with: “No reason for a change.”

There is, of course, a possibility that the banks themselves could raise mortgage interest rates, thereby causing a countering reaction from the RBA. Ian Verrender from ABC News Online says that between them, the big four banks hold about 80 per cent of all Australian mortgages.

“Our banks have borrowed around $700 billion on offshore markets and watched on in glee as we've ploughed that into real estate, pushing prices to the heavens, forcing new entrants to borrow even more.

“Real estate has become their dominant business, comprising up to 60 per cent of their total loan books.

“If we do see our banks pushing the button on a series of mortgage hikes in coming months, the RBA will have no option but to hack into its already record low of 1.5 per cent just to keep the economy on track.”

With that possibility and the forthcoming interim report of the Hayne Royal Commission due in September, we’re assured of interesting times ahead!


‘RBA flags dangers of $480b in interest-only loan resets over the next four years,’ Jacob Greber & Jonathan Shapiro, Financial Review, 14 April 2018
‘House prices predicted to keep falling, but Melbourne and Sydney units to take biggest hit,’ Michael Janda, ABC News Online, 11 April 2018
‘What’s next for Australian property prices? 3 economic heavyweights make their case,’ Chris Kohler, Domain, 9 April 2018
‘RBA should be clearer about when and how interest rates will change,’ Efrem Castelnuovo, Bruce Preston and Giovanni Pellegrino, ‘The Conversation’, ABC News Online, 19 March 2018
‘Australia's property market is now worth almost $6.9 trillion - a record high,’ Suzanne White, Domain, 21 March 2018
‘Group Buying: How Does it Work and What Are the Hidden Traps You Need to Be Aware of,’ Nila Sweeney, Propertymarketinsider.com.au, 23 March 2018
‘Moody's tips house price 'correction' across NSW,’ David Scott, Sydney Morning Herald, 19 March 2018
‘Australia’s housing affordability crisis ‘intergenerational theft’: John Hewson,’ TawarRazaghi, Domain, 26 March 2018
‘Who is to blame for the housing crisis and how to fix it,’ Ross Gittins, Sydney Morning Herald, 14 March 2018
‘John Alexander on why Australia's housing market risks 'grotesque' inequality,’ Paul Karp, The Guardian, 25 March 2018
‘The housing boom is over – and the RBA isn't busting to raise rates,’ Greg Jericho, The Guardian, 22 March 2018
‘The pullback of investors off the back of tighter lending restrictions is also taking its toll,’ Kate Burke, Domain, 2 April 2018
‘The number of cranes dotted across city skylines is set to fall with a decline in building approvals for apartments,’ Kate Burke, Domain, 4 April 2018
‘Why Sydney needs more apartments,’ James Robertson, Sydney Morning Herald, 19 March 2018
‘RBA to sit on 1.5pc cash rate with economy “not strong enough” to handle a rise,’ Sophie Foster, News.com.au, 2 April 2018
‘RBA should be clearer about when and how interest rates will change,’ Efrem Castelnuovo, Bruce Preston and Giovanni Pellegrino, ‘The Conversation’, ABC News Online, 19 March 2018
‘Sydney, Melbourne property prices continue to slide,’ Reuters, Sydney Morning Herald, 3 April 2018


Sydney property in 2018: no hurry, few worries

Wed, 14 Mar 2018
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.


‘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

Sydney property enters the slow lane – for now

Fri, 16 Feb 2018
In the ten years since our Market Comment began, it would be hard to find a single year without someone in the media mentioning a forthcoming ‘crash’ of the Sydney housing market. Even if times are good, the doomsayers will often forecast a dire ending.

And if times are bad, too often there’s a focus on the negatives and warnings of how much worse it could become. However, during those ten years the market has resolutely made its way upward – sometimes faster than other times but, in the long-term, always ending up ahead.

Current market indicators show that Sydney’s house price growth has virtually stopped, falling to a 15-month low as a combination of lending restrictions, increased building supply and first-home buyer concessions take effect.

Sydney leads what is an Australia-wide property price pullback, down 2.1 per cent for the December 2017 quarter and finishing the year 2.2 per cent below the market’s peak in August last year. Scarcely a sparkling performance, but not an unexpected one according to CoreLogic’s Tim Lawless.

"We're likely to see lower to negative growth rates across previously strong markets, more cautious buyers, and ongoing regulator vigilance of credit standards and investor activity," he said. "There's going to be a negative growth rate, probably most similar to the 2000 to 2003 [time period] when prices fell by about seven per cent."

While a seven per cent fall equates to a sizeable sum for Sydney’s average million-dollar plus properties, it still represents a small fraction of the 75 per cent growth in prices over the past five years. And it may not even happen.

One of the most consistently objective, analytical property market watchers during this time has been the ABC’s Michael Janda whose comments have been quoted many times in this column. It was therefore a bit of a surprise to see his by-line in an article captioned: “Australian housing crash is a possibility that should worry us all” on 18 January this year.

The article, however, proved to be an interesting discussion of just how difficult forecasting the future can be, and of how the worst possible ending can never be ruled out, just as we must also say there’s always a chance for a splendid, rewarding outcome. It’s all about the multitude of variables that affect every economy, and nobody can say with any certainty precisely how those variables will impact something as significant as housing prices twelve months down the track.

Mr Janda references Steve Keen whom we’ve mentioned before in these pages. Dr Keen is noted for his consistently negative position on housing prices, forecasting falls of ten, twenty or an even greater percent when asked his thoughts on the year ahead. He’s also famous for his walkup Mt Kosciusko after losing a bet on house prices with economist Rory Robertson. But is there anybody who can say exactly what’s going to happen next?

In June 1942 Japanese submarines breached a wartime defence boom erected across Sydney Harbour, surfacing to shell such iconic Sydney suburbs as Bondi, Rose Bay and Woollahra. Naturally, this had a somewhat negative effect on Eastern Suburbs property prices.

However, according to contemporary reports, by October 1942 auction prices for eastern suburbs flats and houses had recovered and once again compared favourably to Neutral Bay or Strathfield. Whatever panic selling had taken place was quickly over and, despite the continuation of the Second World War on Australia’s doorstep, property prices returned to their contemporary normal.

So, what could happen in today’s economy that might help realise Dr Keen’s perennially gloomy forecasting? Another attack by Japanese submarines is unlikely, but Michael Janda does list some possible causes of a serious Sydney property price correction: rising interest rates, rising unemployment or a falling population. He notes that Ireland, Spain and the US all experienced property price crashes during the GFC; it’s also worth noting that it didn’t happen here.

There are factors in play right now that will no doubt ensure a continued cooling of the Sydney property market, among them: a flood of new apartment buildings coming onto the market, a possible interest rate rise later this year, a tightening of bank loan restrictions, additional costs imposed on overseas buyers, and a pullback of investors from the market. The end of a five-year boom is apparent, but it’s happening in a very orderly fashion.

We’re entering the slow lane for sure. But a crash – no!

Future slowing

A new Fairfax Media Scope economic survey conducted among a panel of 26 of Australia’s leading economists paints an overall unexciting picture for Australia’s economy in the near future. The panel forecasts economic growth of just 2.7 per cent, a growth in living standards of 1.8 per cent, Sydney housing prices to slip by 0.9 per cent, and negligible wages growth. The panel also sees further falls in housing investment as well as in Sydney housing prices.

JP Morgan economist Henry St John told the Sydney Morning Herald there is a "close relationship" between lending to property investors and house prices: "The final housing finance report for 2017 was unambiguously weak, corroborating some of the price adjustment seen in the Sydney and Melbourne property markets through December and January," he said.

Figures from ABS show that the number of loans to people buying a home to live in fell by 2.3 per cent in the month of December, while the value of approvals to people intending to buy their property for an investment fell by 2.6 per cent in the month.

Steven Anthony of Industry Super Australia even says there is a 30 per cent chance of a recession within the next two years: “This current housing boom is easily the greatest in the history of our major capital cities, and history shows that the deepest recessions tend to follow real estate busts,” he said.

“The key risk to the domestic economy in 2018 and 2019 is depressed spending on the back of a property slump in eastern Australia combined with record household debt and rising borrowing costs.”

However, most of the panel indicated a ‘steady as she goes’ situation wherein modest economic growth happens alongside a mild fall in housing prices, due primarily to little or no wages growth.

When it comes to the chance of a recession in the next couple of years, University of Tasmania’s Saul Eslake - quoted frequently in this column as a proven forecaster of economic developments in Australia, had this to say: “Recessions are the result either of a policy mistake, or an external shock.

“There is no compelling reason to think that policy-makers have made, or are about to make, a mistake of the sort that could precipitate a recession. My estimate of a one-in-six chance of a recession reflects my assessment of the probability of an external shock, most likely emanating from policy mistakes in the United States."

Interest rates stay low

Interest rates have remained at their record low 1.5 per cent after the RBA’s February board meeting decided the present level was “continuing to support the Australian economy.”

In other words, things are cruising alright at this time and nothing’s screaming out for an immediate rate hike or cut. But Credit Suisse disagrees, saying the RBA’s forecasts for the economy are ‘too optimistic’.

The Bank thinks the economy would benefit from additional stimulation delivered by a combination of lower rates and tax cuts, saying that the rate of household saving is too low.
IFM Investors chief economist Alex Joiner agrees, saying: “It’s evident from the Reserve Bank’s own forecasts that they’ve been too optimistic on household consumption for too long, and have consistently had to revise their forecasts lower,”

So, is a rate cut at all likely to happen? NAB chief economist Alan Oster doesn’t think so. He told Domain: “The chance of getting more rate cuts is virtually zero,” he said, adding that another rate cut would “just fire up the housing market again”.

Australian economists are in general agreement that the next interest rate move will be upwards with an average rate forecast of 1.7 per cent, and most expect at least one hike late in 2018. It’s likely that Credit Suisse will be overruled by RBA Governor Philip Lowe who clearly feels an upwards move would be in the right direction, but not just yet.

A flipping good year

Something new has been added to the real estate literature this year. CoreLogic has just released its first ‘Property Flipping Report’ – a document that conducts a national analysis of properties that were bought and re-sold within a short time for a profit in 2017.

That’s what ‘flipping’ is all about. CoreLogic’s research measures ‘flips’ within one year of purchase and those within two years of purchase. This first report also tracks national trends over the past 20 years and its findings will be of interest to all property investors or those who would like to invest in property but just haven’t yet.

Nationally, 2017 was a good year for flipping. Almost nine in ten flipped properties made a profit. To break it down a bit, for properties re-sold within one year of purchase 89.1 per cent were profitable; for properties re-sold within one to two years of purchase 89.9 per cent made a profit.

The highest rate of flipping was in Sydney where 6.8 per cent of property sales over 2017 were flips between one and two years of ownership. 94.3 per cent of these were profitable. Only 5.7 per cent of flips made a loss. Regional NSW didn’t perform badly either, recording 94.5 per cent of flips as profitable, and just 5.5 per cent were unprofitable.

Interestingly, Westpac’s latest Home Ownership Report found that Australian women are considerably more active than men in planning some sort of real estate transaction over the next five years, and it’s not just buying a home (although women outpace men in this area by 28 per cent to 20 per cent).

16 per cent of women plan to buy an investment property, while only 13 per cent of men have this intention, and when it comes to planning the sale of a property women outpace the men by 17 per cent to 14 per cent. And to really show who values home ownership, 43 per cent of female first home buyers said they strongly believed that ‘owning your own
home is a reflection of your success in life’, compared with just 22 per cent of men.

Westpac’s head of women’s markets Felicity Duffy said she expected to see a spike in home loan applications from women over the next five years: “They’re taking matters into their own hands and increasingly investing in property as a potential way to secure their financial futures.”

Foreign buyers retreat

The share of foreign buyers in Australian housing markets continued to fall in the fourth quarter of 2017, dropping to a six-year low of 8.4 per cent in new property markets and a five-year low of 5.5 per cent in the established housing market.

This isn’t surprising as recent policy changes in NSW mean that foreign investors are charged 8 per cent of the purchase price in stamp duty, double the previous level. The Chinese government has also continued to tighten its rules on offshore investing, successfully dampening demand.

According to research conducted by Credit Suisse, Chinese buyers accounted for as much 87 per cent of foreign property investment in NSW between January and June 2017. Foreign buyers, the majority of whom are Chinese, are expected to account for around 18 per cent of residential sales in NSW in the three months to March 2018.

A recent article in the Australian Financial Review highlighted problems for foreign investors that have also affected major developers. The article said: "Government taxes and credit restrictions have started to hit foreign buyer demand for residential property so hard in Australia that major developers are either pulling out of the apartment market altogether or, like Meriton's Harry Triguboff, are left grappling with Chinese investors who can't settle on pre-sold apartments."

In an interview, Mr Triguboff agreed that many Chinese investors have put down deposits on units, but he insists their inability to settle isn’t leading to a correction in the market. "So now we have to resell them – there is another problem. And everyone thought that the Australian buyer would come in when the prices started coming down – they haven't – I knew they wouldn't – it wouldn't make any sense if they did," he said.

And the reason Australian buyers haven’t rushed in to fill the vacuum? According to Harry Triguboff: "The problem with Australians is they are very slow," he told the AFR. "They ask their lawyer, they ask their financial adviser, they ask their family, they ask everybody. The Chinese don't ask anybody, they come off the plane, buy their unit and go."

If that’s the case, it’s just a matter of time before Aussies step up to purchase those units that Chinese investors no longer want. However, it would be most unlikely that Australian buyers would simply accept the original prices as they ones they’d have to pay. Expect to see some aggressive discounting and ‘special offers’ in the coming months.

Canada’s foreign buyers hit

A Reuters analysis of data compiled by Statistics Canada (equivalent to our ABS) found that foreign buyers have driven up the price of property in that country’s two largest housing markets, Vancouver and Toronto.

Not surprisingly, public debate about foreign investment in Canada has surged, with locals saying price increases of 60 per cent in Vancouver and 40 per cent in Toronto over the past three years have kept them out of the market.

With echoes of recent developments in Sydney property, Reuters’ number-crunching found that in Toronto the average value of a detached home built in 2016-2017 and owned by a non-resident is C$1.7m - 48.7 per cent higher than C$1.1m for residents. In Vancouver the difference was less, but still a solid 40.6 per cent. (The Australian dollar buys about 98 Canadian cents.)

Jane Londerville, a real estate professor at the University of Guelph in Southern Ontario, said that the data shows that foreign buyers tend to focus on the most affluent neighbourhoods: “If the goal is to get a couple million dollars out of their country and put it in a very safe, calm economy, you might as well buy a C$2m house,” she said.

In response, in 2016 Vancouver imposed a 15 per cent ‘foreign buyers’ tax, followed by a similar impost in Toronto in 2017.  This has resulted in a slowdown of purchases by foreign buyers in both markets, although local analysts say the cooling may be only temporary.

Negative gearing debate

Australia’s federal politicians have already started gearing up for the next election and one subject – negative gearing, is sure to be on the table for vigorous consideration. Liberal governments generally support negative gearing, arguing that it helps to increase the supply of housing and increased supply will (eventually) result in a reduction in the costs of housing.

The other side of politics says that negative gearing unfairly favours the wealthy over those without sufficient capital to invest in property and castigates taxation policies that discount taxes on capital gains made from property investments.

A recent Melbourne University research project by researchers Yunho Cho, Shuyun May Li and Lawrence Uren concluded that eliminating negative gearing entirely would lead to an overall welfare gain of 1.5 per cent of GDP, which would make three quarters of the population better off.

According to the project’s findings, renters and owner-occupiers would be the biggest beneficiaries. Biggest losers would be landlords, especially those who are young, high earners. Another interesting conclusion was that thirty per cent of rental properties would be freed up and bought by Australians who would have otherwise have rented.

Perhaps even less certain is the finding that renters would benefit because, although rents would climb by 2.4 per cent, the government would be in a position to compensate them with the extra $2 billion it would make in increased tax revenue.

A bit more veracity can be attributed to advice given to treasurer Scott Morrison by Australian treasury officials in early 2016 that said the ALP’s policies to restrict capital gains: “…could introduce some downward pressure on property prices in the short term, particularly if the commencement of the policy coincides with a weaker housing market. In the long term, increases in taxation on rental property could have a relatively modest downward impact on property prices."

And, as for the impact on property prices if negative gearing is abolished, Treasury said: “'Overall, price changes are likely to be small.”

In 2016 then NSW planning minister Rob Stokes presented the moral case against tax write-offs like negative gearing: “We should not be content to live in a society where it’s easy for one person to reduce their taxable contribution to schools, hospitals and other critical government services – through generous federal tax exemptions and the ownership of multiple properties – while a generation of working Australians find it increasingly difficult to buy one property to call home.”

However, respected economist Saul Eslake said that politicians will never scrap negative gearing for one simple reason, and it all comes down to votes: “On average, about 100,000 people successfully become home buyers in every given year. They would obviously like the government to do things to make housing cheaper, more affordable for them,” he told ABC’s 7.30.

“There are over two million people who own at least one investment property, and the last thing they want a government to do is make housing cheaper and more affordable for people who don’t currently own housing.

“Even the least intelligent of our politicians can do that maths: 100,000 people who want cheaper housing versus two million people who want housing to get more expensive.”

The battle will rage to the next federal election, due sometime in 2019, but property owners needn’t be concerned over much about the outcome of this particular debate. The Grattan Institute, an independent think-tank, estimated that halving the capital gains discount, and phasing out negative gearing after a decade, would only reduce house prices by a maximum of two per cent.


‘Housing investor loans slumped by 10 per cent in 2017,’ Clancy Yeates, Sydney Morning Herald, 9 February 2018
‘9 in 10 Australian Properties Are "Flipped" For A Profit,’ CORELOGIC, 29 January 2018
‘A Bill market - meet the forecaster who owned 2017,’ Peter Martin, Sydney Morning Herald, 3 February 2018
‘Australian housing crash is a possibility that should worry us all,’ Michael Janda, ABC News online, 18 January 2018
‘When Sydney’s beachside property came with a view of a barbed wire fence,’ Marea Donnelly, History writer, The Daily Telegraph, 17 June 2016
‘Axing negative gearing would boost economy and home ownership, RBA conference paper finds,’ Peter Martin, Sydney Morning Herald, 13 January 2018
‘Government negative gearing claims contradicted by official advice, FOI reveals,’ Dan Conifer and Michael McKinnon, ABC News online, 8 January 2018
‘Why we shouldn't be too scared of dramatic house price drop predictions,’ Michael Pascoe,
Sydney Morning Herald, 15 January 2018

‘Dismal, but no disaster. How the BusinessDay economic panel sees 2018,’ Peter Martin, Sydney Morning Herald, 3 February 2018
‘The jig’s up for Coalition’s negative gearing lies – and apologists in the media,’ Rob Burgess, The New Daily, 9 January 2018
‘NSW and Victoria’s property decline sees other states shine,’ Chris Kohler, Sydney Morning Herald, 2 February 2018
‘Foreign buyers are dropping out of the Australian property race,’ Chris Kohler, Domain, 11 January 2018  
 ‘Why rate and tax cuts should be on table in 2018 – Credit Suisse,’ Chris Kohler, Domain, 15 January 2018
‘Sydney property prices tipped to fall 10 per cent in 2018,’ Jennifer Duke & James Robertson, Sydney Morning Herald, 3 January 2018
‘Girl power driving property market: report finds more women than men buying homes,’
Elizabeth Tilley and Samantha Landy, The Courier-Mail, 3 February 2018
‘Only way is up: Brace for a rate rise this year, most economists say,’ Eryk Bagshaw, Brisbane Times, 2 February 2018
‘Sydney, Melbourne house prices have one-in-five chance of correction: JP Morgan,’ Michael Janda, ABC News online, 27 January 2018
‘Simple reason negative gearing will never be scrapped,’ AAP release on News.com.au, 17 January 2018
‘House prices fall in Sydney’s inner west, lower north shore and northern beaches,’ TawarRazaghi, Domain, 1 February 2018


What’s going to happen to Sydney Property in 2018?

Tue, 16 Jan 2018

As the new year gets underway and we start writing ‘2018’ where ‘2017’ used to be, Sydney property owners and would-be owners would naturally be interested to know what events will shape the city’s property market over the next twelve months.

We are once again reminded by concerns about property prices that property investments are always best viewed as long-term activities. The ‘quick killing’ isn’t very common when it comes to bricks and mortar, although it’s also clear that many astute investors have done exceptionally well over the past five years of our greatest-ever property boom.

As the Herald’s Jennifer Duke says: “Typically, property prices have been known to double in Australia every seven to 10 years in capital cities after a strong market cycle. So, home owners who stay put for lengthy periods should see their property value increase in the long run, irrespective of short-term hiccups.”

It’s a certainty that the next twelve months won’t provide more of the kind of capital gains that we’ve become used to since 2012. However, there are most certainly gains to be enjoyed, even if the overall market isn’t booming, and a number of trends are already becoming apparent that will determine events in the year ahead.

Price rise reversals

The first and most talked-about trend is that Sydney prices have stalled and even, in some parts of the greater Sydney area, gone backwards. They’re following the national trend that now shows housing prices down 2.1 per cent for the final quarter of 2017 and 2.2 per cent below the market’s last peak in August.

HSBC’s chief economist for Australia, Paul Bloxham, says house prices in Sydney have been growing at low double-digit annual rates over the past five years, but during the past six months Sydney prices have fallen: “A hard landing is possible, but we believe this would require a negative shock from abroad and a sharp rise in the unemployment rate,” Mr Bloxham said.

“We do not see a significant local housing imbalance and view Australia as having had a housing boom rather than having a housing bubble.”

Treasurer Scott Morrison said the Federal Government deserved credit for the market’s gradual cooling, thereby avoiding a potential ‘crash’: "What we have seen is a fall off a very high pace of dwelling investment," Treasurer Scott Morrison told reporters in Canberra.

"I'm encouraged by what I'm seeing in the housing sector. You'll be aware of the measures we took early in the year which have had the desired effect of cooling the more enthusiastic investor parts of the market, particularly in Sydney and Melbourne,” he said.

However, there are many reasons for this price reversal and most of them are the result of actions taken by four of the market’s biggest players: The Reserve Bank, The Australian Prudential Regulation Authority (APRA), The Australian Securities and Investments Commission (ASIC), and the major Australian banks.

If you think there’s been a lot of pressure applied by these sources to bring the five-year property boom that began in 2012 to a controlled ending, you’re right. For some time, Australian governments at federal and state levels have expressed serious concerns about skyrocketing housing costs and consequent high levels of household indebtedness, most especially the costs of servicing housing loans.

The Herald’s Elizabeth Knight gave much of the credit to APRA: “APRA seems (to date) to have successfully employed ‘macroprudential’ measures, which essentially put checks on bank lending and curb the rate of growth in interest-only loans and investor loans. In response banks started to increase the interest rates for these borrowers, which had the effect of cooling demand,” she wrote.

Capital Economics' Paul Dales also gives credit to APRA for creating the conditions that ended five years of price rises: “"The cut in the supply of credit to investors and the rises in investor loan rates caused by APRA's new rules in March that triggered this slowdown will probably continue to weigh on the market [in 2018].

"They [the housing markets] are also more exposed to further falls in prices, as our house price to income ratios suggest prices there are well above their sustainable level,” Mr Dales told ABC News.

Two senior ANZ Bank economists, Daniel Gradwell and Joanne Masters, said in a recent report that they expect further slowdowns in house price growth in 2018. “APRA’s tightening on investor borrowing and interest-only loans has resulted in higher interest rates for those borrowers, and lowered demand for housing,” they wrote.

“Weaker auction results point toward further slowing as we move into 2018. Our forecast that the RBA will increase interest rates [in 2018] will also work to lower price growth. But if the RBA doesn’t tighten, then prices will likely slow less than we forecast. Importantly, there is still nothing to suggest to us that prices are going to enter widespread declines.”

Interest rate moves

Interest rates, particularly those applied to mortgages for property purchases, are critical factors in property pricing. Years of record low prime rates have encouraged borrowing, and both homeowners and investors have gleefully borrowed as much as they could. This is fine until interest rates rise and some borrowers find they struggle to afford the higher repayments.

Earlier fears of a price ‘bubble’ and warnings of a property disaster to come seem to have been calmed and we’re now seeing a soft landing rather than a sudden broad-based selloff and crash. But there are still some areas of concern – such as the large number of apartments yet to come onto the market as well as some parts of Sydney losing their previous degrees of sales appeal, but overall, we seem to be on the right track.

Interest rates won’t stay where they are forever and once they move it will most likely be upwards. After taking over the top job at the RBA in 2016, governor Philip Lowe left us in no doubt he wouldn’t be cutting rates further. When he said that easing wasn't in the national interest, the Bank’s easing cycle came to an abrupt end.

CoreLogic’s head of research Tim Lawless says the RBA would probably keep interest rates on hold during 2018, with lower rates unlikely because they would counter the controlled slowdown in the housing market, while any rise would stifle household consumption and business investment.

"Regulators and policy makers will be encouraging households who hold high levels of debt to reduce their exposure while rates remain low," he said in an AAP release.

Mr Lawless also said that the next move in interest rates was more likely to be up, not down.

But some banks have already raised their mortgage rates for investors, and many analysts feel it won’t be too long before the RBA hikes its prime rate from 1.5 per cent to at least 1.75 per cent or possibly two per cent. Increases will be small and incremental rather than dramatic, but with more than 300 Sydney suburbs forking out over $30,000 per year in mortgage repayments it won’t take much of an interest rate increase to create some financial stresses.

What’s the monthly cost of an interest rate increase? The average new housing loan in Sydney is somewhere in excess of $600,000 according to mortgage broker AFG. But let’s say the loan is an older one for ‘just’ $400,000. ME Bank head of loans Patrick Nolan told Domain: “[Higher RBA rates] mean repayments will also increase, typically $50 for every 25 basis point rise on a $400,000 loan.” So, an increase from 1.5 per cent to two per cent will cost an extra $100 a month or $1200 a year on what has become a relatively small mortgage amount.

Some Sydney residents will have it even tougher when interest rates begin to go upwards. Data from the 2016 Census show that seven harbourside and northern beaches suburbs have median annual home loan repayments of more than $50,000 per annum. These suburbs are Dawes Point ($62,400 a year), Duffys Forest ($60,000 a year), Whale Beach ($57,200), Clontarf ($52,000), Linley Point ($52,000), Longueville ($52,000) and Balgowlah Heights ($51,500).

There was a bit of good economic news in the latest Census data. Despite booming property prices and few signs of wage and salary growth, the share of Sydney households devoting more than 30 per cent of their incomes to repayments - a generally-accepted definition of the point where mortgage stress kicks in – fell from 12 per cent of households in the 2011 Census to 8.4 per cent of households in the 2016 Census.

First-home buyers return

Investors’ interest is cooling as prices are now so high that their chance of getting a reasonable return on capital is becoming difficult. This opens a gap that is now seeing a return of first-home buyers to the Sydney market.

Whereas investors have previously had taxation advantages that encouraged property investments, it’s the first-home buyers that now feel empowered by NSW government stamp duty concessions and competitive interest rates on offer from banks.  There’s also a growing selection of new apartments on the market with more to come over the next two years as projects reach completion.

A Perth-based property expert, Geoff Baldwin, says that a price slowdown that could assist first-home buyers is ‘absolutely’ coming for Sydney: “In Sydney prices are just crazy and the closer to the CBD you get the crazier they become. It won’t come back to an affordable point but my prediction is there will be a 10 per cent drop in prices, especially for high-density apartment prices over the next few years.”

Capital Economics’ Paul Dales noted that Sydney’s population growth, even at present rates, would only boost housing prices if the extra demand wasn’t met with additional construction: "However, in recent years the number of new homes built has far exceeded the number required by the growing population. This overbuilding is much greater for apartments than houses," he said.

The Guardian’s Greg Jericho also commented on the drop in Sydney apartment prices: “In the September quarter the average price of apartments fell by 1.4 per cent - the biggest quarterly fall for six years – while established house prices fell 1.3 per cent.

“It means that both elements of the Sydney housing market are mostly moving together – with the annual growth of both being down on where it was six months ago.”

Mr Jericho wrote that one of the beneficiaries of the lower growth in apartment prices has been first-home buyers.

He said that research conducted by the Reserve Bank had found the average number of bedrooms in affordable housing in Sydney has declined over the past 20 years, due mostly to apartments now being smaller.

“But it also found that while the average distance from the CBD of affordable houses has increased over the past 20 years – in Sydney from slightly over 40km to a touch less than 60km – the distance from the CBD of affordable apartments has remained relatively stable.

Curbs on foreign investors

New Australian laws concerning empty houses and apartments will have implications for many foreign investors that have purchased property here but choose to leave their properties unoccupied.

In November 2017, federal Parliament passed legislation giving the Australian Taxation Office (ATO) the power to fine foreign investors up to $5500 a year if they allow their properties to remain empty, plus up to $52,500 for failing to lodge the paperwork required.

News.com’s Frank Chung quoted UNSW professor Hal Pawson who explained how authorities might be able to identify empty properties: “Lack of reliable data on empty homes is a major problem in Australia,” Prof Pawson wrote in The Conversation.

“In 2014, an analysis of water usage data by Prosper Australia estimated that about 82,000 homes in Melbourne were vacant — about half the Census figure. Applying a similar ‘conversion factor’ to Sydney’s Census numbers would indicate around 68,000 speculative vacancies.”

An ATO spokesperson said that foreign investors would be required to lodge an annual vacancy fee return which will consist of an online declaration and payment system. If there are doubts about the validity of the vacancy fee return, the ATO would check the claim through “tax return data, immigration data and information from electricity and other utility providers”.

“If the foreign investor claims that they have rented the dwelling or made it available for rent then the ATO can check against the data detailed above as well as lease and real estate agent agreements, internet searches and records of rental tenancies authorities,” she said.

“If the foreign investor claims the dwelling is rented, but this is through short-term leases of less than 30 days, even if this totals over six months ... the foreign owner will still need to pay the vacancy fee as the law requires leases to be of a residential nature of at least 30 days duration.”

If fees and charges accumulate and remain unpaid, a hold can be placed over the property so that unpaid amounts are recouped when the property is sold: “The Treasurer can also have a property sold to recoup unpaid fees if required. The ATO expects that the severity of the penalties for non-lodgement will encourage foreign investors to lodge the vacancy fee return.”

Stamp duties or…

One big contributor to Sydney’s high housing prices has been the state government’s stamp duty on all property transactions. Over time, what was once a troublesome but vaguely affordable tax, usually financed within a mortgage as part of the overall purchase transaction, has become a crippling impost that has begun to limit people’s options for such things as purchasing a larger property for a growing family or for older couples downsizing after retirement.

In 1997, when the median house price in Sydney was $234,361, stamp duty would have been the equivalent in today’s dollars of $10,916. Jump ahead 20 years to 2018 and the stamp duty cost for a median Sydney house will be somewhere north of $50,000.

“We talk about bracket creep with income tax, but this is the biggest bracket creep you could ever see,” BDO National Tax Director Lance Cunningham told Domain’s Chris Kohler.

“The state governments have just been sitting there watching the house prices [and stamp duty] go up.”

Mr Kohler gave another example that is simply eye-watering. “Let’s say a couple who live and work in Sydney find out their family is about to grow – all of a sudden, their home is looking a bit small and they decide they need another bedroom and bathroom.

“The bank would have no concern lending to an upgrading owner-occupier couple like this, but if the house they wanted was worth $2 million – pretty standard for a family home within an hour of Sydney – the stamp duty would land at $105,490.”

Stamp duty is understandably unpopular, except with the NSW government for which it’s the source of around 11 per cent of total revenues. And with housing sales and prices in a downturn after five years of boom time, this ‘river of gold’ is under serious threat.

Joanne Seve, a Sydney lawyer and specialist in state-based taxes, told the Herald’s Jennifer Duke that the predicted market decline would be "really bad news for NSW revenue" – even more than just the projected $650 million in stamp duty revenue.

"It will also affect future projections of land tax revenue in NSW [which are based on a three-year average]," she said, noting that Land tax is worth about $3 billion to the state on top of around $9 billion in stamp duties.

But what could the government do to replace such an unpopular but lucrative form of taxation?

One answer to this question keeps popping up from time to time, but is usually quickly rejected by politicians who don’t want to be seen to be supporting something that would anger almost every homeowner in the state – a broad-based land tax applied to all properties.

In March last year the federal Parliamentary Budget Office costed a proposal by The Greens to abolish stamp duty and replace it with a broad-based land tax. The proposal was supported by the Grattan Institute which said it would be politically difficult to deliver but was generally regarded as a ‘good policy’.

Nationally, stamp duties bring in over $19 billion in revenues to state and territory governments. The Grattan Institute estimated that to replace this revenue with a broad-based tax would probably require a tax of ‘about $6 for each $1000 of unimproved land value’.

So, for your reasonably average Sydney family home with an unimproved land value of $900,000 the land tax would be around $5,400 – about the same as the current rate of land tax in NSW for properties that aren’t principal places of residence. Add to this figure whatever rates are applied by your local council, and it’s a big hit to household budgets.

What introduction of the broad-based tax would achieve is simple – elimination of stamp duty on property transactions. In theory, housing prices would therefore decrease, thereby making property more affordable and lowering real estate values generally. But at the same time rents would increase and it would be necessary for all homeowners to come up with several thousands of dollars more to hand over to the government each year.

This could very easily be seen as a solution that’s much worse than the problem it’s intended to solve!

Nevertheless, with a new year ahead and a state election just over a year away we may once again see the proposal for a broad-based land tax resurface. At least we can be certain of two things: governments will want more revenues, and stamp duty will remain unpopular.

So, what’s going to happen?

Prices for Sydney property have weakened and will continue slowing in 2018. Experts expect some areas to experience price falls of from three to eight per cent, although the most popular suburbs will continue to show moderate gains.

Interest rates have stabilised and won’t be falling further. The RBA will eventually increase the prime rate, probably towards the end of 2018 and then only by 25 or perhaps 50 basis points.

With a large number of apartments underway but yet to be completed across the greater Sydney area, and only a much smaller number of new houses to be constructed, price falls for apartments are sure to be higher than those for free-standing properties.

Investors will find it harder to get a suitable return on their Sydney property investments and will increasingly look outside Sydney to invest in both residential and commercial property. The interest of foreign investors will undoubtedly shift elsewhere as restrictions on them in NSW and Victoria are toughened.

First-home buyers’ activities will continue to increase as investors withdraw, although their continued participation will depend largely on government support in crucial areas like stamp duty concessions.

Watch for moves to replace stamp duties with broad-based property taxes, perhaps by a reduction in the former coinciding with the introduction of a ‘moderate’ BBT as a beginning of the process. It’s already happening in the ACT.

We’ve seen the end of one Sydney property cycle and the beginning of another. There won’t be a ‘crash’ but a gradual reduction in prices will happen, eventually followed by a return to prices growth.

As we said over six years ago, in this forum on 29 July 2011, just before the property boom of the last five years began: “Housing prices in Sydney are not as robust as they were a few months ago, but aren’t about to topple in established suburbs. Some prices will slip back towards their levels of a year ago, but most analysts don’t foresee much of a decline.

“The market will have slight falls in some areas but mostly stable prices in suburbs within 10km of the CBD. Some rises are also possible. Affordable interest rates and negotiable prices on quality property are just what astute buyers look for in Sydney real estate.”

And so we see another cycle about to begin.


‘Real estate 'boom is over' as most experts tip property price weakness in 2018,’ Michael Janda, ABC News online, 3 January 2018
‘Foreign buyers are dropping out of the Australian property race,’ Chris Kohler, Domain, 11 January 2018
‘Sydney property prices tipped to fall 10 per cent in 2018,’ Jennifer Duke & James Robertson, Sydney Morning Herald, 3 January 2018
‘House prices in Australia's capital cities are threatening 'negative growth' in 2018,’ David Scutt, Business Insider, 2 January 2018
‘For most, predicted downturn will be little more than a blip,’ Jennifer Duke, Sydney Morning Herald, 3 January 2018
‘Real estate 'boom is over' as most experts tip property price weakness in 2018,’ Michael Janda, ABC News online, 3 January 2018
‘Two things to watch in 2018 - interest rates and house prices,’ Elizabeth Knight, Sydney Morning Herald, 27 December 2017
‘Five property market trends to expect in 2018,’ Chris Kohler, Domain, 19 December 2017
‘Foreign cash driving top-end house prices in Vancouver and Toronto,’ Reuters in the Sydney Morning Herald, 23 December 2017
‘Sydney's biggest mortgage bills: how your suburb compares,’ Matt Wade, Sydney Morning Herald, 18 August 2017
‘Australia’s housing boom is almost over, says HSBC chief economist Paul Bloxham,’ AAP in Domain, 12 December 2017
‘High-density living: the rise of Sydney's 'vertical families',’ Matt Wade, Sydney Morning Herald, 11 December 2017
‘Real estate experts expect house prices to fall in Sydney, but don’t expect a bargain any time soon,’ Alexis Carey, News.com.au, 30 December 2017
‘Will the end of the housing boom come with a bang or a whimper?’ Greg Jericho, The Guardian, 14 December 2017
‘Criminal sanctions are available for false statements’: ATO tools up for empty house crackdown,’ Frank Chung, News.com.au, 23 December 2017
‘RBA chief faces his biggest task yet in 2018,’ Bloomberg in the Sydney Morning Herald, 19 December 2017
‘Home sales rise while Sydney leads price dip,’ AAP in the Sydney Morning Herald, 18 December 2017
‘House prices expected to fall in 2018: CoreLogic,’ AAP in the Sydney Morning Herald, 23 December 2017
‘House prices off the boil, but will population growth keep things simmering?,’ Stephen Letts, ABC News Online, 12 December 2017
‘Mid-year budget update: Housing investment rates to fall, raising prospect of long-term downturn,’ Eryk Bagshaw, Sydney Morning Herald, 19 December 2017
‘Property News,’ Cameron Kusher, CoreLogic, Onthehouse.com, 7 December 2017
‘Soaring stamp duty: How the tax system is urging millions of homeowners to renovate,’ Chris Kohler, Domain 17 December 2017

Owner-occupiers step up as investors step back

Fri, 15 Dec 2017

Over the past five years we’ve become used to investors dominating the Sydney property market, but new restrictions on loans to investors have decreased their previous levels of activity and have even started to influence property price rises.

Cameron Kusher, senior research analyst at CoreLogic, says that at their peak in May 2015, investors accounted for 54.8 per cent of new mortgage demand.  Noting that investor demand is now slowing, and Sydney dwelling values are also falling, he believes that NSW is the state that will feel the greatest effects from the investor slowdown.

“Over the past five years, dwelling values nationally have increased by 39.3 per cent, largely driven by Sydney and Melbourne where values have increased by a much larger amount.  Similarly, over the most recent five years investors have committed to housing finance commitments totalling $695.6 billion. 

“With investor demand continuing to reduce due to tighter credit conditions, low yields and affordability constraints, it is reasonable to expect that this will have the greatest impact on NSW housing markets followed by those in Victoria.” 

It’s been a great party, but the latest Housing Outlook Report for 2017-20, produced by BIS Oxford Economics for insurer QBE, agrees that higher interest rates and lower loan-to-value ratios for investor lending have reduced the capacity for investors to enter the market or pay higher prices, and it looks like the party balloons are now being deflated.

September saw a 7.8 per cent decline in commercial lending. New lending commitments, which include housing, personal, commercial and lease finance, experienced their largest decline in nine months.

Home loans to owner-occupiers were also down, but only by 2.1 per cent in seasonally adjusted terms to $20.7 billion, according to the Australian Bureau of Statistics (ABS).

In Sydney, over the past five years property prices have averaged an annual increase of more than 11 per cent, but this year the rate of increase is now around five per cent and it even fell by about one per cent between September and November. First-home buyers are starting to re-enter the market but their ability to fund the former rate of price increases that was investor-driven is doubtful.

Domain’s Nicole Frost reported that a mix of stamp duty concessions, tighter lending to investors and lower interest rates are the biggest factors in the return of first-home buyers:“First-home buyers now make up 24.5 per cent of the owner-occupier market, excluding refinancing, thanks to increases across all states and territories,” she wrote.

Perhaps it’s not surprising that 37 per cent of Australians want lower house prices, according to a survey of 1500 Australians by ME Bank. It’s interesting to note that 24 per cent of those surveyed own a home and 20 per cent have an investment property. Amazingly, the answer to the question of why would they want lower prices is simple:“to help address the housing affordability issue”.

Not only have we now reached price levels that are unaffordable; even homeowners feel that housing prices have become unfair, according to ME Bank’s general manager of home loans Patrick Nolan.

“Traditionally Australians fall into two camps when it comes to property prices: owners, who want them to rise, and non-owners, who want them to fall,” Mr Nolan said. “But with high prices disrupting the dream of home ownership and the benefits that brings, views are changing.”

Some relief from high prices is already being felt; CoreLogic figures show that prices in Sydney slipped 0.7 per cent in November, dragging annual growth down to 5 per cent from 7.7 per cent the month before and almost 19 per cent early in the year. But buyers shouldn’t start looking for a fire sale as Sydney remains the most expensive property market by far.

Another sure indicator of a slowing market is the falling rate of Sydney property auction clearances. According to Domain’s Daniel Butkovich, in November one in six sellers called off their intended auction ahead of time, and just over half of homes offered at auction were sold.

Sydney auctioneer Damian Cooley said the high number of properties withdrawn before auction was due to an expectation in the market that conditions would improve in 2018:

“Some vendors are prepared to take the risk that the market will be better in the new year, and they’re happy to take their property off the market.

“The first quarter will tell us a lot. People will be watching the market to see how it performs,” he added.

Propertybuyer CEO Rich Harvey told Domain that he believes the pendulum is finally swinging towards buyers: “We have noticed across the board the last couple of weeks a general softening, which is great for us as buyers’ agents,” says Mr Harvey. “The intensity and the heat has really come out of the market which works in our favour.”

AMP Capital chief economist Shane Oliver said buyers no longer had a “fear of missing out”, (or ‘FOMO’) which has until recently been a big driver of the auction market: “I think the sentiment around the property market is a lot weaker than it was two years ago. Buyers can afford to take their time, they can be more considered about what they’re buying.”

Interest rates poised

An important factor influencing borrowing by investors is growing concern about a possible interest rate increase. Tim Lawless, head of research at CoreLogic, says borrowers should exercise caution: "Household budgets are already thinly stretched," he told the Sydney Morning Herald. "Household balance sheets will be tested when interest rates eventually start to rise.”

A recent UBS report raised the issue of an alarming proportion of what it called 'liar loans' currently in the Australian banking system.  These are the $500 billion of loans that were made based on factually incorrect borrower information. In other words, borrowers’ ability to make loan repayments aren’t as good as their statements indicated, casting some doubt on their ability to keep up with payments if interest rates increase.

Bloomberg’s Chris Bourke says that Australian households are seriously indebted which is causing the Reserve Bank (RBA) some concerns: “It reckons the financial system is well-placed to withstand any shocks, but isn't so confident [about] consumers.

“That puts it out of step with developed-world peers that are incrementally tightening policy, with RBA Governor Philip Lowe this week making clear local interest rates aren't going anywhere soon.”

So at least for now, interest rates look like staying where they are. Mr Lowe’s comments when he recently spoke in Sydney indicated economic conditions aren’t right for rate rises, and that we’ll be seeing more low wages growth and therefore low inflation.

Not that the RBA is giving away any clues of its own as to what its longer-term future direction might be. At its November meeting it again left the cash rate at 1.5 per cent where it has been since August 2016.

But rate rises are starting to happen in other parts of the world, gaining back some of what was lost after interest rates were slashed following the GFC in 2009. The global economy is showing signs of health after years of shaky performances and the central banks of countries in Europe and North America are slowly raising their prime rates with a close watch on what the effects might be.

There’s a growing feeling in the financial community that eventually the RBA’s next rate move will be an increase. It’s likely to be a small one, followed by a ‘wait and see’ period while its impacts are analysed. But it will bring no joy to many investors who have taken out large mortgages to fund their expectations of making large capital gains that are now less likely.

Investment firm Watermark Funds Management said the most concerning part of the Australian housing market is the ‘extreme’ level of mum and dad investors in residential property. If their properties don’t rise and give them a profit, they are at risk of being unable to meet other financial commitments.

Watermark noted that the proportion of new mortgages taken out by non-professional property investors in Australia is 35 per cent, which is about three times higher than the US, UK and Canada.

Supply and prices grow

For years governments at both state and federal levels have been selling the fable that the way to reduce the cost of housing is through the mechanism of increased supply. Build more housing and the price will come down, it’s been said.

Even the Prime Minister has supported this belief. In May 2016 Malcolm Turnbull told us: "Now this is how you address housing affordability. Housing affordability is the result of there being insufficient supply of housing. You need to have more supply of housing."

However, the past five years of rapid growth in housing construction across Sydney have also seen rapid and unrelenting growth in property prices. Supply has increased, most certainly, but so have prices, causing more than a little embarrassment to many politicians. A recent study by analysts from the Australian National University (ANU) has confirmed that the myth of “more supply, lower prices” is fundamentally incorrect.

The ANU report by academics Ben Phillips and Cukkoo Joseph concluded that while increasing housing supply has ‘some benefits’ it is ‘unlikely in isolation to create affordable housing’ in Australia.

"If, as this report suggests, housing in Australia is not in short supply, then we need to find alternative explanations for house-price growth – such explanations would direct policy in applying levers capable of affecting housing affordability," the report said.

The report's co-author, economist Ben Phillips, told the Herald’s Matt Wade that the behaviour of property prices at the regional level in Australia ‘has nothing to do’ with the usual underlying fundamentals of housing demand, including population growth.

"Housing is an asset and assets don't always reflect the fundamental underlying value – it's not like the demand for ice cream or bananas," he said.

Dwellings get smaller

After so many years of building ever-larger McMansions, the tide has turned, and Australians are beginning to reduce the average size of their homes. This, according to Chris Pash from Business Insider, is because the increased building of apartments means people are living in smaller dwellings.

When broker CommSec analysed data from the Australian Bureau of Statistics, it found the average new home is 189.8 square metres, down 2.7 per cent over 2016 and the smallest since 1997. But averages can be deceptive. The average new free-standing house in 2016-17 was 233.3 square metres, more than 11 per cent bigger than 20 years ago and 30 per cent bigger than 30 years ago.

The shrinking average size of new homes is because apartments are now being built in record numbers. In 2010 about 27 per cent of all homes built were apartments. Today this figure has increased to 47 per cent of all new homes and this percentage is still rising. A statistical side effect of this shift in construction emphasis is that the size of the average household – the number of people per dwelling, has decreased. But this could change.

The 2017 Sydney Lifestyle Study, commissioned by Urban Taskforce Australia, found a rapid growth in the number of couples with children who live in apartments – so-called ‘vertical families.’ Their number leapt from 65,000 families in 2011 to more than 87,000 in 2016, while single-parent families now comprise 8 per cent of all those living in high-density accommodation.

CommSec economist Craig James told Business Insider: “More Generation Ys have been looking to move out of home and take ownership of accommodation more appropriate to their needs.

“The question is whether household size continues to fall over the next few years or whether higher home prices acts to stall demand, again prompting greater co-habitation of dwellings.”

But not everyone can meet their accommodation needs with an apartment. There’s been a construction boom in Sydney’s outer suburbs where a free-standing house can still be constructed at a much lower cost than closer to the CBD.

Domain’s Tom Westbrook says demand for new homes on the edges of Sydney is ‘running harder than tradesmen can lay bricks’: “The construction rush driven by more people moving to the outer suburbs has helped reverse a downward trend in building approvals.

“House approvals touched an 18-month high of 9,929 in September, unexpectedly prolonging a boom many thought was winding down.”

He says that borrowing to buy finished new homes hit a 38-year peak in September: “The monthly rate of building loan creation is also cantering at 6,400 – harking back to the boom-time borrowing rates of three years ago.

“Private-home construction approvals rose for a seventh straight month in September, enough to turn back a downtrend in overall approvals, as some of the country’s around 230,000 annual migrants built homes for themselves.”

Chinese interest continues

There’s apparently no way of diminishing the interest of Chinese investors wanting to acquire property in Australia.

Data from the Foreign Investment Review Board (FIRB) show that in 2015–2016, 40,100 property purchases by foreign buyers were approved, valued at $72.4 billion. Chinese purchasers were the majority of those buyers.

It’s also estimated by FIRB that ‘foreign activity’ made up 15 to 20 per cent of all new housing transactions in NSW during 2015-2016.

The Chinese government has seriously toughened regulations covering the ability of its citizens to invest in property overseas, and according to real estate firm Cushman & Wakefield and Real Capital Analytics, mainland China’s third quarter outbound real estate investment dropped 51 per cent to $US 2.5 billion – its lowest total since 2013.

However, Australia remains a popular destination for these funds, capturing $US 783 million in the September quarter. The Chinese government has recently designated overseas real estate investment as a ‘limited’ category, but not a ‘prohibited’ one, and approximately $US 1.2 billion was invested in Australia in the first three quarters of 2017.

There’s little doubt that Chinese investment in Australia is going to be affected by the new regulations and that a drop will be experienced across all sectors, from hotels and offices to residential property developments.

The Reserve Bank of Australia's (RBA) head of financial stability, Jonathan Kearns, told the Sydney Morning Herald that foreign buyers accounted for about 10 to 15 per cent of new construction, or about five per cent of total housing sales and around one-quarter of newly built apartments.

"Many foreign buyers come from China, seemingly around three-quarters," Dr Kearns said in a speech to an Australia-China property conference.

"Purchases of new properties by foreign buyers have eased over the past year, reportedly because of stricter enforcement of Chinese capital controls and tighter access to finance for foreign buyers."

Dr Kearns said the RBA is monitoring loans for property development, particularly in the commercial and apartment sectors where rapid growth in lending by foreign institutions such as Asian banks has been a major factor driving up property prices.

Joe Morello, principal of NWC Finance, says Chinese developers and investors are using non-bank lenders and other sources to acquire urgent short-term finance for projects now underway: “There is strong demand for short term, low doc finance to alleviate the emergencies created by last-minute withdrawal of support and we expect this trend to continue throughout the 2018 financial year.

“Many companies are finding ways to get around the Chinese controls through purchasing and funding development of foreign real estate through offshore financial institutions and investing through Hong Kong,” he said.

Is build-to-rent the answer?

There’s ample evidence that high property prices in Sydney have caused a growing number of people to become tenants instead of homeowners. Ernst & Young estimate that currently 31 per cent of all households in Australia rent their accommodation.

The increase in demand for rental accommodation parallels the growth in recent years in the percentage of properties that are owned by investors, and rents are steadily increasing across the metropolitan area.

Adam Hirst, general manager capital allocation at developers Mirvac, says that apartment living is becoming a ‘lifestyle’ choice for many millennials, young families and downsizers: “There are currently 2.5 million rental homes in Australia and we see that growing in the next few years with purpose-built apartment buildings for the rental market.

“It’s well-established overseas but, in Australia, it’s a new form of housing and there’s a lot of excitement around it.”

Mr Hirst is talking about a relatively new concept in property development that has recently received significant attention from governments, both state and federal. This is the concept of build-to-rent in which developers invest in apartment blocks that are intended for long-term rental instead of resale.

The present system of taxation benefits for investors in Australia has to date encouraged ownership of property as a means of getting a return on capital, but it has also led to much of our housing stock becoming unaffordable. While the market’s been heated for the past five years, it’s now cooling and returns to investors are falling.

Large developers including Mirvac and Grocon are holding discussions with governments in NSW and Victoria to explore the possibilities for institutional investors to channel their funds into build-to-rent housing.

Some concessions from state and federal governments, it is felt by proponents, would be needed to ensure there was a meaningful level of investment that would help meet the growing need for rental accommodation, and governments have already indicated their interest in finding solutions to the growing problem of housing unaffordability.

Scott Langford of St George Community Housing, told Domain that Australia is seeing a 'structural shift in the Australian market to allow more people to rent': “The rate of increase of rents over the past 10 years has been a lot higher than other asset classes like retail, industrial and office. And in a low interest rate environment, we’re seeing real structural change…Home ownership isn’t likely to be the norm in the future.”

Building to rent has already met with some success in the UK, US, Japan and Europe where many families have chosen to live in rental accommodation rather than trying to acquire a property of their own.

A lifetime of tenancy may now seem alien to Australians, but the Property Council of Australia’s chief executive, Ken Morrison, told The Guardian that it’s a well-established way of putting a roof over people’s heads in many other countries and needs to be considered here.

“It’s a recognition that people are renting for longer or renting for their entire lives,” he said. “The institutional investors want continued income; the renter wants a stable place to live.”

Build-to-rent offers something for both sides of the housing equation.


 ‘High-density living: the rise of Sydney's 'vertical families',’ Matt Wade, Sydney Morning Herald, 11 December 2017

‘One in six Sydney homeowners withdrew homes from auction in November,’ Daniel Butkovich, Domain, 10 December 2017

‘ANZ finds foreign buyers own up to 400,000 Australian homes,’ Phillip Lasker and Michael Janda, ABC News Online, 9 December 2017

‘Experts predict build-to-rent revolution coming to Australia,’ Sue Williams, Domain, 5 December 2017

‘One quarter of home owners ‘happy’ to see property prices fall: survey,’ Chris Kohler, Domain, 29 November 2017

‘‘Sydney's housing market trumped by Canberra and Hobart,’ David Chau, ABC News online, 3 December 2017

Home prices stall as Sydney hits an air-pocket,’ Reuters, 1 December 2017

‘Down and up? Place your bets on house prices and interest rates,’ Elizabeth Knight, Sydney Morning Herald, 30 November 2017

‘Chinese property investors still call Australia home,’ Carolyn Cummins, Sydney Morning Herald, 14 November 2017

‘Property prices at a turning point - or the pause that refreshes,’ John Collett, Sydney Morning Herald, 15 November 2017

‘Starting to bite’: Lending clampdown slows property investors,’ Christian Edwards, Domain, 13 November 2017

‘Sydney leading market slowdown but buyers still paying top dollar for knock-downs at auctions,’ Kate Farrelly, Domain, 12 November 2017

‘Build-to-rent plan could put Australian residential property sector back on the boil,’ Anne Davies, The Guardian, 19 November 2017

‘RBA says Chinese buyers go cool on Australian homes,’ Reuters in the Sydney Morning Herald, 20 November 2017

‘Housing supply alone won't fix the affordability crisis, modelling shows,’ Matt Wade, Sydney Morning Herald, 20 November 2017

‘The apartment boom has driven average Australian home sizes to a 20-year low,’ Chris Pash, Business Insider, 20 November 2017

‘Are Investors Driving A Market Slowdown?,’ Cameron Kusher, CoreLogic, 23 November 2017

‘Fringe benefits: Home demand in outer Australian cities prolong building boom,’ Tom Westbrook, Domain, 16 November 2017

‘Australia faces housing hangover twice the size of the GFC subprime era,’ Chris Bourke , Sydney Morning Herald, 24 November 2017

‘China's foreign capital rules start to bite,’ Joe Morello , Sydney Morning Herald, 25 November 2017

‘Mum and dad investors have Australia teetering on the edge of a housing crash, report warns,’ Sue Lannin, ABC News online, 1 December 2017

‘Australian first-home buyers back in September quarter, with a surge in NSW,’ Nicole Frost, Domain, 6 December 2017

Interest rates stable but property price growth slows

Mon, 13 Nov 2017

One month of negative growth in the Sydney property market has been followed by a second monthly fall, and by an announcement from CoreLogic that home prices have dropped 0.6 per cent in the past quarter. Not a disastrous result, true, but confirmation of a price trend that’s likely to be with us for quite a while.

"Seeing Sydney listed alongside Perth and Darwin, where dwelling values have been falling since 2014, is a significant turn of events," said Tim Lawless, CoreLogic’s head of research. "The slowdown in the pace of capital gains can be attributed primarily to tighter credit policies, which have fundamentally changed the landscape for borrowers.”

“Additionally, interest-only borrowers and investors are facing premiums on their mortgage rates which are likely to act as a disincentive, especially for investors who are generally facing low rental yields on investment properties,” he added. 

In October global investment bank UBS sent a note to its clients saying the Sydney housing boom is ‘officially over’. The authors of the note – George Tharenou and Carlos Cacho, said: “There is now a persistent and sharp slowdown unfolding” after 55 years of unprecedented growth during which home values have risen by more than 6500 per cent.

Just over the past five years Sydney home prices have gone up 74 per cent; a remarkable rate but also an unsustainable one. It’s also true that since 1955 (UBS went back a long way for its starting date) that there have been both good years of price growth as well as not-so-good years in which prices have contracted. The property market is cyclical and periods of boom and bust are historical features.

Regardless, in the present cycle Sydney home prices have now been slowed by banks applying tighter lending rules for property investors while raising home loan interest rates at the same time. Other factors, including a huge increase in the number of units coming onto the market and restrictions on foreign investors, have also played a part in causing the downturn.

The speed of the downturn over the past five months has come as a bit of a surprise to Messrs. Tharenou and Cacho who admitted “the cooling may be happening a bit more quickly that even we expected,” before they reduced their 2017 growth forecast from seven per cent to five per cent.

Another factor that will further affect the rate of ‘cooling’ is the extremely high – and still growing, price of residential land in Sydney. According to the latest HIA-CoreLogic Residential Land Report the price of residential land in Sydney has reached a record high of $1051 a square metre, setting a new benchmark for land values. The report also noted that in the past 10 years, Sydney land prices have increased 83 per cent.

Housing Industry Association (HIA) senior economist Shane Garrett told the Sydney Morning Herald "the speed at which land price is increasing is a concern as it compounds the housing affordability problem".

Also quoted in the Herald, CoreLogic's commercial research analyst Eliza Owen said "record-high lot prices over the past five quarters are likely to have contributed to worsening affordability and influenced the unprecedented level of high density developments under construction".

Analysts are divided in their forecasts about what’s likely to happen in Sydney’s property market over the next 12 months. SQM Research predicts that Sydney’s prices will remain mostly static until mid-2018, and then price growth will rebound in the second half of the year.

The McGrath Network in its 2018 report says that although we appear to be through the peak of the boom, the strength of the demand for residential housing has separated Sydney from the rest of Australia: “A strong economy, rising population and chronic shortage of housing coupled with low mortgage rates is keeping property prices rising. We expect this to continue over the next few years, albeit at a slower pace.”

AMP Capital's Head of Investment Strategy and Chief Economist, Dr Shane Oliver isn’t quite so optimistic. He sees a continued slowing of the market leading to a five to ten per cent decline in prices in the next 12 to 18 months.

“I suspect there is more downside to come in Sydney going forward, but it doesn’t necessarily mean the market will be going down in a straight line. The big issue is the apartments and the complication in Sydney is that those apartments are going up all over the place,” said Dr Oliver.

Some areas better than others

There are some interesting – and growing, disparities in the pattern of property prices across the greater Sydney area.

Property investors have been hit by tighter lending restrictions and higher bank interest rates, and the results of these changes are becoming apparent. Figures from the Australian Bureau of Statistics (ABS) show that investor loans are down six per cent on 2016, while loans to first-home buyers are up 30 per cent on last year.

J.P. Morgan economist Henry St John told ABC News that mortgage lending was gloomy in September: "Investor lending was unambiguously weak in September, and provides further evidence that Augusts' modest uptick against the trend was more noise than anything else," he said, saying there was a ‘bearish trend’ in investor lending.

However, while some higher-priced markets close to the CBD have experienced price declines, prices in Sydney’s south-west still climbed 5.3 per cent in the September quarter. Across the greater Sydney area, five regions made price gains: The Central Coast, the Blue Mountains, the South West, the West and the Northern Beaches all came out ahead.

Some parts of Sydney have experienced more than their fair share of price falls, most notably those suburbs affected by major infrastructure projects like WestConnex. Data from Domain Group shows that prices in the formerly red-hot suburbs of Haberfield and St Peters have dropped in the past six months by 17.2 per cent and 9.2 per cent respectively.

Domain data scientist Dr Nicole Powell explained: “It’s the unknown, people are unsure of what the WestConnex will do to that area, that’s the key that will influence whether buyers will purchase and that will inevitably impact prices.”

But a Sydney Motorway Corporation spokesman told Domain that the situation would improve when the work is finished: “The community outcomes will be overwhelmingly positive once the project is complete – more than 18 hectares of new parklands and active transport links across the inner west will be created, including at the site of the old Alexandria Landfill which is being cleaned up to enable community use for the first time in decades.”

Neighbouring suburbs have also felt the impacts of WestConnex. While most other suburbs in the inner west performed well, Lilyfield, sited between Haberfield and Rozelle, experienced a fall in the median house price of 4.9 per cent despite not being directly affected by the construction work.

Other parts of Sydney are expected to ultimately benefit from infrastructure projects. The NSW government is developing a $20 billion Metro scheme that will build a new train network across the Sydney metropolitan area to link the Parramatta and Sydney CBDs. The planned Metro stations will be commercial hubs that can include apartments, offices and even hotels in some locations.

Sydney Metro program director Rodd Staples said work would begin on the Sydney Metro Northwest project in the first half of 2019: "Sydney Metro is more than just a world-scale public transport project – it's a defining city-building opportunity.

"This is an opportunity to build on the revitalisation Sydney Metro brings, creating truly landmark places and developments that showcase world's-best practice for transit-oriented developments."

The Metro will also provide investors with opportunities to share in the growth resulting from the development of new office space and residential complexes in ‘revitalised’ suburbs along the route from Sydney’s west to the city.

As well, some suburbs in the northern districts are enjoying a ‘new normal’ of $2 million to $3 million median prices, according to Northern District Times writer Shayne Collier: “Gladesville has a current median price of $1.95 million, and has been forecast to surpass $2 million ($2,009,037) in January [2018]. Neighbouring suburb, Hunters Hill, has a current median price of $2.855 million; it is predicted to rise above $3 million ($3,017,266) in February,” he wrote.

The estimated median prices were assessed by looking at CoreLogic RP Data sales data and trends over the last three years.

Giving up the dream

A recent report from the Australian Institute of Health and Welfare showed that a higher percentage of people in Eastern European countries like Hungary and the Czech Republic own their own home than Australians. The surprising report also showed home ownership for young Australians has fallen by more than one-third in the past 25 years.

Up to 35 per cent of Australians have given up on buying a home of their own, according to a new study from Finder.com.au. The findings also show that more than one in 10 Aussies have abandoned hope of ever owning any property.

However, the national survey of 2,010 people found that almost two thirds (65 per cent) of Australians surveyed still possessed a dream of home ownership, although 27 per cent of those respondents said they’d have to compromise on the property size or location to ensure they were able to purchase a home.

Owen Thompson, from Ontheouse.com.au, says that when it comes to housing affordability, Australia consistently ranks as one of the least affordable countries in the world, as is shown in the latest Demographia International Housing Affordability Survey.

“The latest data does nothing to dispel this stark reality, with the annual Demographia International Housing Affordability Survey stating that our five capital cities rank within the top 20 least affordable cities anywhere. According to the Demographia research, Australia also ranks in the top three of unaffordable national markets, with only Hong Kong and New Zealand being less affordable.”

Mr Thompson says that of the 54 Australian property markets identified by Demographia, 33 are rated as ‘severely unaffordable’ while 14 are regarded as ‘seriously unaffordable’. (In other words, 47 markets out of 54, or 77 per cent of property markets across Australia are too expensive for most people wanting to buy a home.)

“The actual rate of Australian property price increases is also referred to, with Demographia stating that Sydney’s median multiple has risen 60 per cent since the first survey was conducted in 2004. It also adds that for the past two years, Sydney has represented the poorest housing affordability ever recorded outside Hong Kong.”

Bessie Hassan, a money expert at finder.com.au, says the possible consequences of Sydney’s housing unaffordability are ‘sobering’: “Many Aussies are disenchanted with the homeownership dream, believing property is unattainable. Many are accepting the idea of long-term renting - however, not building up equity or having the security of a home could be problematic later in life,” she said.

It’s certainly not getting any easier. The latest CoreLogic Housing Affordability Report found the cost of buying a house currently takes 7.2 times the annual income of a typical household, up from 4.2 times the annual income 15yearsago and that home ownership is becoming the privilege of high-income earners who are being forced to assign ever-increasing levels of expenditure to mortgage servicing.

Herald journalist Matt Wade posed the question: “House price growth in Sydney and Melbourne now appears to be slowing, so can we expect anxiety over housing to fade?”

He doubts that it will: “Economic modelling published recently by the Australian Housing and Urban Research Institute found more than 1.3 million Australian families are in ‘housing need’. About 60 per cent of them are existing households that require rental support. The remaining 40 per cent are people who would have formed households if not for housing affordability constraints.”

Apartments the solution for some

Apartments continue to gain in popularity as Sydney now has one apartment for every two houses and is heading for equality between the numbers of apartments and free-standing homes within the next 20 years, according to property agents Laing & Simmons.

“Put simply, affordability and availability are responsible for Sydney's apartment boom,” says an article in Laing & Simmons ‘Property News’.

“With house prices rising consistently over the last few years - even as the amount of available stock has gone down - we've entered a state of high demand and low supply. This is fantastic news for anybody looking to sell a property in Sydney, but it can make things challenging for buyers, particularly first-home buyers.”

The article says that new developments have meant more areas of high-density living where property is affordable and not too far from the city centre: “Of course, apartments aren't suited to every type of lifestyle, but there are plenty of Sydneysiders, particularly young people, for whom an apartment is a realistic and sensible first step on the property ladder.”

Ben Graham at News.com.au says that we are entering a new era of high-rise apartment buildings and the Australian dream of home ownership is set to change forever.

“Startling new projections show a glut of apartments is likely to see unit prices fall in the majority of Aussie cities, which is good news for young people wanting to live close to the action and where they work. But, the same report released by QBE Insurance…shows house prices are expected to surge in our major cities over the next three years,” he said.

The QBE report he refers to also says that Sydney ‘bucks the trend in projections’ with house prices expected to fall by around 0.2 per cent and apartments to see a drop of around four per cent by 2020.

QBE Lenders’ Mortgage Insurance CEO Phil White says in the report that units now account for 46 per cent of all residential construction across the country: “We need to be building around 190,000 homes a year to keep up,” he said. “Last year, Australia built around 215,000. That’s a good year, but we have to keep it up.”

Georgia Sedgmen, an associate town planner at Tract Consultants, told Domain that over half of the apartment population was born overseas: “In many other parts of the world, the traditional 'dream' of owning a house isn't such a big deal. People from Asia and Europe are more likely to have grown up in apartments, they find it quite unusual that people aspire to own a detached dwelling. That's a very Australian idea," she said.

Approvals for blocks of new units will be the only way Sydney councils will meet their targets for housing supply set by the Greater Sydney Commission over the next five years. Councils will have to provide for almost 200,000 more dwellings by 2021, despite community concerns about housing density and the provision of more transport and infrastructure.

The Greater Sydney Commission was established in 2015 as an independent body to develop a long-term planning strategy for Sydney. Its revised plans, released in late October, estimate the city will need about 725,000 extra homes over the next 20 years.

The Chinese puzzle

An interesting piece of research was recently conducted by the economics and equity teams from global financial giant Credit Suisse that found strong correlations between Chinese capital flows and Sydney property prices. It concluded that movements in China’s capital markets impacted property demand in Sydney about twelve months later.

ABC News reported that modelling by Credit Suisse found that Chinese capital flows and real interest rates have predicted roughly three-quarters of the variation in NSW property transfers since 2010.

"Over the past few months, the Sydney housing market has not only cooled down, but has arguably turned cold," Credit Suisse wrote. "Over the past year, Chinese capital flows have fallen considerably, in part reflecting the impact of stricter capital controls. This fall foreshadows weakness in NSW housing demand in the year ahead."

Commenting on the Credit Suisse findings, Stephen Letts from ABC News said that in recent months, preliminary auction clearance rates have drifted lower to 60-65 per cent from around 75 per cent a year ago. Revised auction clearance rates that account for late reported results have even dipped below 60 per cent.

Credit Suisse noted: "This is a significant development because recent RBA analysis suggests that a 60 per cent clearance rate is typically the break-even point for house price inflation. In other words, house prices tend to fall when the clearance rate is below 60 per cent."

Credit Suisse said the Reserve Bank was in a difficult position because the drying up of offshore investment poses ‘a very big risk’ to the economy: "We believe that the RBA will need to cut rates further to deal with the housing market slowdown in train," it noted.

Rate cuts ahead?

But will the Reserve Bank cut rates further after seven years of reducing rates to a level that is now historically low? Domain’s Chris Kohler did a ring around and got some differing opinions.

“In terms of the broader outlook, it’s a rabble. ANZ chief economist Richard Yetsenga is calling for hikes next year, Credit Suisse and independent economist Stephen Koukoulas say cuts make more sense, while UBS and Westpac reckon the RBA should stay on the sidelines for the foreseeable future,” he said.

The ANZ Bank says rates need to rise in 2018. It believes inflation is no longer the ‘guiding light’ for the RBA and the Board will be considering several other factors in making rate decisions.

Westpac chief economist Bill Evans sees the RBA continuing to sit on its hands and keep rates unchanged: “Even though the market is now predicting a rate hike next year, it’s been our view for a couple of years that rates are going to remain on hold for 2017 and 2018.”

UBS, who are firm in their position that the property boom is over, say that tighter lending regulations are working, and the RBA will most likely wait until mid-2018 to see how things go before heading in a new direction.

Writing for the ‘Your Mortgage’ website, property journalist Michael Mata quoted the Credit Suisse report which argues that cooling house prices may lead to interest rates cuts: “We understand that policy needs to be set on what is known, rather than what is unknown, and Chinese capital flows are a very big unknown because of the absence of high-quality and timely data,” the Credit Suisse report said.

“But the issue for us is that the recent shift down in Chinese capital flows is having a visible, negative impact on house prices and consumer spending now,” said Mr Mata.

Meanwhile, New Zealand is tackling its own housing crisis with new legislation that bans foreign buyers from purchasing existing homes. Writing in The Guardian, journalist Richard Partington said the results of the restrictions would be closely watched by other countries, including Australia.

“The country [New Zealand] has become a hotspot for wealthy Americans seeking an escape from political upheaval elsewhere, viewed as a stable nation with robust laws and far from potential conflict zones,” he said. “Global financiers have been increasingly snapping up properties in the country.”

However, The Guardian’s article noted that of the 48,603 property transfers registered by the NZ government in the three months to June, just three per cent were buyers with an overseas tax residency: “The bulk of those buyers were Chinese, followed by Australians. Tax residents of the UK, US and Hong Kong were also among the biggest buyers of property.”


‘Property market softens as investors exit, allowing first home buyers a foot in the door,’ Stephen Letts, ABC News online, updated 12 November 2017

‘Rise and fall: A closer look at Sydney’s shifting unit prices across its regions,’ Nicola Powell, Domain, 10 November 2017

‘Australia's world record housing boom is 'officially' over, UBS says,’ Miriam Steffens with AAP, Sydney Morning Herald, 2 November 2017

‘House prices fall dramatically in Sydney suburbs affected by WestConnex project,’ Dan F Stapleton, Domain, 28 October 2017

‘Sydney Metro stations to include office, residential and hotels,’ Carolyn Cummins, Sydney Morning Herald, 1 November 2017

‘Buyers holding the cards as Sydney’s auction clearance rate slips below 65 per cent,’

Chris Tolhurst, Domain 29 October 2017

‘Sydney house prices continue to fall in October,’ Frank Chung, News.com.au, 1 November 2017

‘Over a third of Aussies reckon they’ll never afford a house,’ Ben Graham, News.com.au, 27 October 2017

‘Sydney property goes cold as 'Chinese capital flows fall',’ Stephen Letts, ABC News Online, 1 November 2017

‘Property News,’ Laing & Simmons, 30 October 2017

‘Seven years since an RBA rate hike, is another on the way?,’ Chris Kohler, Domain, 3 November 2017

‘How Australia’s Housing Affordability Compares With Other Countries,’ Owen Thomson, Onthehouse.com.au, 27 October 2017

‘High-rise future predicted as apartment prices tipped to drop,’ Ben Graham, News.com.au, 25 October 2017

‘New Zealand to ban foreign buyers snapping up existing homes,’ Richard Partington, The Guardian, 26 October 2017

‘Sydney property market outperformed by Melbourne and Hobart, national housing report finds,’ David Chau, ABC News Online, 1 November 2017

‘Suburb set to hit $2 million or $3 million medians,’ Shayne Collier, Northern District Times, 25 October 2017

‘Commission holds firm on housing targets for Sydney councils,’ Lisa Visentin, Sydney Morning Herald, 27 October 2017

‘Melbourne land values surge while Sydney tops $1000 a square metre,’ Nicole Lindsay, Sydney Morning Herald, 24 October 2017

‘Housing affordability: QBE report predicts apartment prices to fall, gives hope for first-home buyers,’ David Taylor, ABC News online, 25 October 2017

‘Growth Conditions Remain Flat on a National Basis While Sydney Values Fall,’ Tim Lawless, CoreLogic, 2 November 2017

‘Housing volumes could plummet and prices tank, Citi says,’ Stephen Letts, ABC News Online, 27 October 2017

McGrath Report 2018, The McGrath Network, November 2017

‘From boom to gloom: how rising house prices have become a worry,’ Matt Wade, Sydney Morning Herald, 5 November 2017


Special report: 2012-2017 - Anatomy of a property boom

Fri, 20 Oct 2017

We’ve experienced five years of a property boom that’s unprecedented in this city’s history. It’s dramatically increased real estate values across the metropolitan area and made asset-rich millionaires of almost everyone who owns a freestanding house within 20km of the CBD. And now it’s ending. But how did it start and what drove it along the way?


Early in the year a Sydney Morning Herald article by Domain’s editor Antony Lawes analysed price growth on Sydney’s north shore and concluded that over the previous ten years the average annual growth in Neutral Bay was 4.3 per cent, and in Mosman was 6.68 per cent. Solid, but nothing too dramatic.

There had been a slowdown of real estate activity since 2008 resulting from the Global Financial Crisis, but NSW had experienced a modest rise of 5.3 per cent in sales of new homes in 2011, while Sydney auction clearance rates hovered around the 55 per cent level.

Housing Industry Association chief economist Harley Dale told AAP that the housing sector needs more support for a full recovery: "In a contemporary economic environment where interest rate settings are too high, finance conditions persistently tight, consumer and business confidence too low, and plans to tighten fiscal policy inappropriate, it is hard to envisage a sustained recovery in new home sales in coming months,” he said.

At its April meeting the Reserve Bank of Australia decided to leave its cash rate unchanged at 4.25 per cent, igniting a series of debates on whether an interest rate reduction had become essential to Australia’s economic future. The Governor of the Reserve Bank, Glenn Stevens, pointed out that conditions in Australia posed no particular threats at present, saying: “Interest rates for borrowers remain close to their medium-term average. Credit growth remains modest.”

Australia’s growing housing shortage was in the news. A report by a UK housing expert, ‘Homes for All’, found that Australia's housing market was producing only half of the supply needed to meet demand. The report’s co-author, Dr Tim Williams, said that Australians are building 14,000 to 15,000 homes a year when the figure should be more like 40,000.

By mid-year there were increasing signs that the Sydney market was ‘bottoming out’ or ‘stabilising’ according to the Real Estate Institute of NSW in an AAP release on News.com.

The Institute noted that the state’s median house price was down $40,000 from the previous financial year and the annual median house price for the 12 months to March had dropped by 6.7 per cent.

However, a later property update from REINSW found that prices for residential properties in Sydney had stabilised in the three months to March. Prices had mainly fallen in the top end of the housing market, with pricing in more ‘affordable’ suburbs remaining firm.

Later in the year, Bronwen Gora, the Sunday Telegraph’s property writer said the Sydney property market was “creeping out of the doldrums”, noting that house prices below $1 million had recovered from the previous year, and Sydney's median house price had bounced back to $620,000 from $582,000 twelve months earlier.

At year’s end, the RBA said there was no danger of another housing boom like the market experienced in the 1990s, although various economic indicators were looking slightly more optimistic. The Bank’s head of economic analysis Jonathan Kearns told an Australian Business Economists’ lunch that conditions were right for a rise in the cost of housing: ‘‘We are not seeing declines in income growth or a significant increase in unemployment, so the strength in earnings and incomes for households is still going to be quite reasonable and certainly sufficient to support an increase in housing construction.’’

The Australian Bureau of Statistics reported that house prices rose in Sydney during the September quarter and that annual price growth had returned nationally for the first time since March 2011. Lower interest rates had made borrowing cheaper, and it appeared that some confidence was gradually returning to the market with auction clearance rates rising above 60 per cent.


The new year began with standard variable mortgage costs at their lowest level in two years.

Economists at NAB revised their interest rate outlook and forecast the official cash rate to fall to 2.25 per cent by December. NAB's chief economist Alan Oster even forecast three separate 25-basis-point rate cuts in 2013.

Senior economist at Australian Property Monitors, Dr Andrew Wilson, said he expected prices nationally to grow between 3 per cent and 5 per cent: “2013 should continue to build on the modest gains of the past year, however the forthcoming federal election and the likelihood of a protracted campaign may result in some uncertainty among homebuyers and sellers, with confidence already low,” he said.

Savanth Sebastian, an economist in Sydney with Commonwealth Securities, said that migration was at a 3 ½ year high which meant more homes would be built, but rental yields would be the real driver of growth: “Because vacancy is back under 2 per cent rents will go up, and then people look at the yield on those properties and say 'well, this home should be worth more'."

There was certainly no flood of new home building threatening those holding current housing stock. Australian Bureau of Statistics figures showed that new homes under construction fell for the third straight year in the 12 months to 30 June, and building approvals dropped for a second straight year in the twelve months to 31 October.

However, the number of residential building approvals rose 2.9 per cent from a low base in November, according to the Australian Bureau of Statistics. The figures suggested a modest recovery was underway in the housing sector, although almost all the growth was in approvals for multiunit properties.

The 25 basis points interest rates cut announced by the Reserve Bank after its May meeting came as a surprise to most economic forecasters.  In the RBA's quarterly Statement on Monetary Policy, the Bank emphasised that the Australian dollar had remained high while inflation at its present rate posed few concerns.

However, the RBA did note that a reversal of its recent easing of monetary policy could be required if "dwelling prices rise more quickly than assumed, spurred by low interest rates.”

Master Builders Australia chief economist Peter Jones told ABC News that it was unusual for rate cuts to take so long to have an impact: "It's a little bit of a hangover from the financial crisis - this aversion to debt and lack of confidence in things like global economic developments, some uncertainty at home as we go through structural change. It is a little bit unusual, but it does look like interest rates are starting to improve the situation."

By August the Sydney property market was accelerating at a pace that hadn’t been seen for years, powered by lower interest rates, high levels of buyer demand, and a noticeable lack of housing stock. The second weekend in August, Sydney recorded an 83.8 per cent auction clearance rate with record levels of buyer activity despite a surge in property listings. This was the highest clearance rate recorded for the year and the fifth consecutive weekend with clearance rates above 80 per cent.

RP Data research director Tim Lawless said that by including rental yields in the company’s housing market outlook, some clarity could be provided as to why investors were becoming so active. The RP Data-Rismark Accumulation Index, which factors in both capital gains and gross rental yields, was up 9.4 per cent over the year. Meanwhile, a typical capital city dwelling was selling in just 45 days compared with 59 days at the same time a year ago.

By the end of the year the word ‘bubble’ was again being mentioned. Simon Johanson, Property Editor for The Age, said that we were experiencing the start of a boom but not a bubble, according to the economists he’d spoken with. He noted that capital city values peaked in September above the previous high set in 2010, and Sydney's prices were up 5.2 per cent over the September quarter.

There was a glimpse of what was to come when new home sales hit a two-and-a-half year high in November, driven largely by sales of new apartments, mostly off the plan. Nationally, sales of new apartments rose by 21 per cent, with Asian investors helping to drive nearly 11,000 sales for the year.

Commonwealth Securities economist Craig James firmly denied a bubble existed: ''Rather than a 'bubble', couldn't it just be that home prices are lifting from a low base in response to very favourable influences such as super-low interest rates? That is the sensible view, and also the right view,'' he said.


As 2014 began, analysts looked back at 2013 and saw that Sydney had Australia's highest median home value growth with an impressive rate of 14.5 per cent, according to RP Data-Rismark figures.

Senior research analyst at RP Data, Cameron Kusher told the Herald's Christina Zhou that the principal drivers of this growth were the RBA’s cuts to the cash rate and investors putting more of their funds into property: "The combination of lower interest rates and the fact that property has become a little bit more affordable has lured buyers back into the market," he said.

Mr Kusher said the middle and prestige segments of the Sydney property market were the best performers in 2013: “The middle market has seen values rise by 15.3 per cent over the year and the top end of the market has seen value growth of 15 per cent.”

So remarkable was Sydney’s price growth that it was even commented on in the Wall Street Journal, one of the USA’s most influential financial newspapers. WSJ Journalist James Glynn wrote that Sydney had some of the most expensive property in the world and raised the prospect that the market was ‘overheated’.

Data from the Housing Industry Association showed that since the end of 2013, units were the main source of sales growth. HIA figures showed that sales rose 7.5 per cent in November with multi-unit dwellings up 30.5 per cent and detached homes rising just 3.6 per cent. The HIA's chief economist Harley Dale told Michael Janda from ABC News that this surge could continue: "The upward momentum evident in new home sales since the closing stages of 2012 continued late last year – that is a good sign for residential construction activity in 2014."

ABS figures showed that in NSW building approvals for non-detached dwellings such as units outnumbered detached house approvals in every month of 2013, reflecting a shift to apartments as the primary form of new residential development.

Senior manager at BIS Shrapnel, Angie Zigomanis, told Domain’s Toby Johnstone that growth prospects would be mixed in 2014 and that he expected Sydney’s growth rate to be more subdued after the high levels of activity in the year just ended: “Sydney will see solid growth - might be more the five to six per cent range rather than the double digits,” he said.

Dr Andrew Wilson of Australian Property Monitors also saw a slower year ahead. “Sydney house price growth in 2014 will likely be half that of [2013] at best with most of that recorded in the first part of the year,” he said.

However, the Sydney market wasn’t about to slow down and by April the new ‘boom’ was in full swing. RP Data said half of Australia's capital cities were at record property price levels, with Sydney the most expensive at 15.8 per cent above its previous peak. Despite this, auction clearance rates were still steaming ahead. The first Sydney auctions in April brought a new record of ten consecutive weeks of clearance rates above 80 per cent. The median house price was $1.12 million and the median apartment price was $706,500.

Just twelve months before this the clearance rate was 66 per cent and the average house price was $890,000 while apartments averaged $591,000.  As Dr Andrew Wilson of Australian Property Monitors commented: “We are heading into uncharted territory in the Sydney market...”

By August even seasoned followers of Sydney's property trends were finding it hard to believe the strength of the real estate market. Figures from the Australian Bureau of Statistics showed that Sydney property prices rose by 3.1 per cent over the June quarter and by 15.6 per cent over the past year. One record after another was overtaken.

Writing in Australian Property, economist Leith van Onselen expressed his thoughts about real estate activity in the city he calls 'investor central': "The speculator frenzy that has engulfed Sydney’s housing market continues to reach absurd proportions, with today’s Lending Finance data for June, released by the ABS, once again smashing all records, with both the value and proportion of mortgages going to New South Wales investors surging to another all-time high."

In December, the Organisation for Economic Cooperation and Development (OECD)

warned that the low rate-driven, investor-led rise in housing credit was a serious risk to financial and economic stability: "House price increases are encouraging construction and consumption, but are also a concern in that a sharp reversal could cut aggregate demand."


With warnings about an overheated property market regularly featuring in mainstream media, the year began with a feeling that much of what would happen in the next twelve months would be a continuation of what took place in 2014, although there were some new factors in play which could make 2015 a somewhat different year from its predecessor.

Peter Kouilzos, an Australian lecturer and author who specialises in property valuation and economics, summarised the previous year’s outcomes. He noted that at the beginning of the year Sydney had 22 per cent fewer properties for sale than 12 months previously, and prices had nowhere to go but upwards: "There was not as much property for sale so there were relatively high numbers of prospective purchasers at your home opens and auctions. During the year, the time to sell a house in Sydney fell from 29 days to 26 days."

There was confidence that interest rates would remain low which would support housing price growth, and oil prices were unlikely to rise which would also reduce pressures on the average Aussie's cost of living. But wages growth had slowed and was hardly sufficient to offset inflation. In many sectors wages were going backwards. Despite the often-expressed claim that this would encourage employers to add more workers to their payrolls, rising unemployment figures suggested that this belief was somewhat flawed.

Housing supply started to rise. Over the next 12 to 18 months a record supply of stock would enter the market, predictably leading to forecasts of a reduced growth of home prices and lower increases in rental rates.

Writing in the Daily Telegraph, Aidan Devine said Sydney's home price boom was about to reach its conclusion: "CPM Realty research has predicted total price growth of between 5 and 7 per cent over the year, echoing earlier BIS Shrapnel and CommSec forecasts of up to 7 per cent growth — a slowdown from the 12.4 per cent spike to the median house price over 2014."

By the middle of the year speculation about a ‘bubble’ was again rife. Australia's top economic bureaucrat, treasury secretary John Fraser, told a Senate estimates committee hearing: "When you look at the housing price bubble evidence, it's unequivocally the case in Sydney."

Reserve Bank Governor Glenn Stevens told members of the Economic Society of Australia that he too had concerns about soaring property prices: “What is happening in housing in Sydney I find acutely concerning for a host of reasons, many of which are not to do with monetary policy,” he told the audience. “I think some of what’s happening is crazy, but we [the RBA] have a national focus and so that just increases the complexity.”

There was growing recognition that there are downsides to skyrocketing housing prices, including that more and more first-home buyers were being priced out of the market. The Australian Prudential Regulatory Authority (APRA) asked Australia's biggest lenders to cut back on risky practices in investment lending.

RBA deputy governor Philip Lowe says these efforts were influencing bank lending practices: "In the past couple of weeks, you have seen a number of banks say they are requiring larger deposits for investor loans and offering smaller discounts on interest rates, smaller rebates and are requiring higher serviceability levels.”

In Sydney, the undersupply of housing stock was expected to continue driving the market, according to BIS Shrapnel senior manager of residential Angie Zigomanis. He said Sydney's growth may slow over the next 12 months, but it would be rising interest rates that would slow Sydney down, not an oversupply of homes: "In Sydney, it might take three to four years [for supply to catch up with demand], but there is the possibility that it might not fully catch up if something like rising interest rates choke off demand first," Mr Zigomanis told Domain's Jennifer Duke.

However, in mid-October the auction clearance rate dropped to 65.1 per cent - the lowest clearance rate in three years. AMP Capital chief economist Shane Oliver said the poor result was caused by Westpac’s move to lift mortgage rates by 0.2 per cent: “The bottom line is that buyers are worried that the Westpac move is a sign of things to come,” Dr Oliver said.

The feeling that the latest property cycle had peaked was picked up in the “time to buy a dwelling” index published by Westpac and the Melbourne Institute. The index had fallen by 11 per cent over the previous year and was then 30 per cent below its September 2013 peak. More tellingly, in Sydney the index had reached its lowest point since the survey began in 1975.

For the previous three years a shortage of homes for sale had been an important driver of Sydney’s property price rises, but supply was finally beginning to catch up with demand.

This was demonstrated by two statistics in the McGrath Report for 2015. The first was that by August stock availability was only 5 per cent lower than it was in August 2014. The latest statistics also showed that stock levels were 4.7 per cent higher than at the same time last year.

2015 ended with a widespread belief that the boom was slowing towards an end. Reserve Bank economists Marion Kohler and Michelle van der Merwe released a paper titled 'Long-run Trends in Housing Price Growth,' noting that over the previous 30 years housing prices had risen across Australia by an average of just 7.25 per cent a year, but the increase had been anything but uniform. During the past decade price growth was relatively moderate until the last three years when it rose dramatically, fuelled by heavy borrowing.


Last year kicked off with a lot of introspection, giving market watchers confidence that the boom was going to continue coasting slowly to an end. We had become accustomed to double-digit growth in property values, to auction clearance rates northwards of 80 per cent, to on-market times dropping to be measured in days rather than weeks, and to a growing number of investors snapping up properties that were expected to be sources of capital gains more than rental returns. And all this aided by the lowest interest rates in living memory.

Was it going to last forever? Of course not. Sydney’s median house price dropped 3.1 per cent over the December quarter 2015, the first drop since June 2012, according to the Domain House Price Report. Eliza Owen, market analyst from Onthehouse.com.au said it had been a pretty good ride until it came to a halt: “The upswing in the current cycle lasted almost two years and, in real dollar terms, the median house price increased by approximately $375,000.”

Stephen Nicholls, executive editor at the Sydney Morning Herald, called it “the house price correction Sydney has long needed”: “Prices had risen so much – an extraordinary 52.6 per cent over three years. The 14.8 per cent growth last year was beyond everyone’s expectations. House prices can’t keep going up at those sorts of rates forever,” he said.

By May, it seemed there could no longer be any doubt that Australia’s housing boom was over and growth would be returning to more sustainable levels. “Sydney’s median house price falls below $1 million” was the way the Sydney Morning Herald headlined the story, and statistics from Domain Group did indeed show a March quarter drop of 1.5 per cent to $995,804. Across Sydney, that is.

Looking at a bit more detail we see that houses in the lower north shore, city and east, and northern beaches continued to show gains, albeit lower than the same time in the previous year. As the article pointed out: “House prices fell in five out of nine regions, remained flat in the south west and grew in the city and east, and northern beaches by 7.4 per cent and 1.9 per cent respectively.”

Figures from CoreLogic RP Data also confirmed the general slowdown, showing annual home price growth down to its slowest rate in 31 months. Its index of home prices for the combined capital cities rose 0.2 per cent in March, compared to February when prices increased by 0.5 per cent.

But Spring brought with it a return to price growth that brought unexpected sunshine to the property market. Weekend auctions showed a surge in listings and record clearance rates, although the number of properties on offer was well below figures at the same time last year.

Domain’s Dr Andrew Wilson noted that investors remained a key ingredient of the rising housing market, pointing out that Australian Bureau of Statistics residential lending data reported another surge in activity over June for NSW. “The prospect of a change to negative gearing has activated investors since May, with a June total of $6.6 billion – the highest monthly result since June last year,” he added.

A shortage of properties on the market became evident, particularly in the more desirable areas like the lower north shore and the northern beaches. One sign of the times was the median price of a three-bedroom apartment reaching $1 million – a 50 per cent increase over five years. “This data shows we’re still seeing a considerable demand for higher priced and bigger units in Sydney; there are plenty of buyers out there who are happy to live in a unit but they want a bigger unit even at a higher price,” said  Dr Wilson

BIS Shrapnel associate director Kim Hawtrey said New South Wales would remain undersupplied for some time, although even home building in Sydney would slow down:

"Sydney is up against an affordability ceiling as well as constraints on site availability; investor demand is cooling, and the city will see a surge in new supply coming on stream over the next one to two years," Dr Hawtrey said.

CoreLogic’s Cameron Kusher said that over the past 12 months house prices had outperformed unit prices across Australia: “House values have increased by 7.2 per cent compared to a 5.5 per cent rise in unit values. With a record pipeline of units under construction we would expect that growth in unit values will continue to underperform that of houses for the foreseeable future.”

Mr Kusher said that compared to [2015] there was a low volume of fresh stock for sale, with Sydney’s offerings down nearly 21 per cent on the previous year: “The low level of new stock becoming available for sale appears to have been a key driver of the ongoing strength in the Sydney and Melbourne housing markets over recent months.”

By November the NSW government was working on the next generation of new housing for Sydney, announcing plans for something like 200,000 new homes to be built over the next five years. NSW Planning Minister Rob Stokes said that these new homes would be mostly apartments and townhouses, and that development would be focused on Parramatta, Blacktown and the City of Sydney: "While there will continue to be opportunities to buy detached homes on the blocks on the fringes of Sydney,” he said, “there's a real focus on apartments, on terrace houses and on medium-density developments in established areas."

Meanwhile, despite a marked slowing of property markets in other capital cities, Sydney’s boom refused to die. CoreLogic’s Cameron Kusher said that at the end of the June 2016 quarter there were 55,682 units under construction across NSW: ““If you look at the long-run averages you can see that the current unit construction boom is unlike anything we’ve ever seen before. The long-run average for units under construction is 16,194 in New South Wales.”

Further analysis showed that, if all the approved units are completed, over the following two years unit stock in some regions of Sydney would increase dramatically - Strathfield-Burwood-Ashfield will increase by 20.7 per cent, Parramatta unit stock will increase by 19.2 per cent and Auburn by 26.1 per cent.

At the end of 2016 there were some safe bets for 2017: Sydney housing prices would remain on their upwards trajectory, the rate of prices growth for detached houses would be higher than the rate for units, auction clearance rates would stay robust, some parts of Sydney would strongly outperform others, and investors would continue to acquire property thanks to the taxation advantages they enjoy.


This year began with mixed expectations. The 2017 ANZ/Property Council Survey asked property professionals for their opinions about the likelihood of price growth in the future. The Council’s NSW executive director Jane Fitzgerald told Domain that the state is in a good position to start the year: “NSW had a strong 2016 and the next 12 months are looking positive with high expectations for growth, investment and hiring across the state,” she said.

A note of caution came from Angie Zigomanis, senior manager of research house BIS Shrapnel, who sees continuing growth in 2017 but said: “We won’t get price growth forever … we still think things will start to ease back again in 2018.”

Moody's Analytics economist Emily Dabbs said Sydney property prices had grown 11 per cent in 2016 and her company’s data indicates the strong price growth we saw in 2016 will continue into 2017: "We haven't really seen a significant decline in prices in Sydney for quite some time, and it's very unlikely to be that way, just because of the amount of demand that there is in the city," she said.

More than 31,000 new homes were built in Sydney in the 12 months to October 2016 - the highest annual number of new homes in over four decades, according to data released by the NSW Department of Planning. But end-of-year figures show the numbers of development applications and approvals were trending downwards.

Once more, worries about a bursting bubble surfaced in the media. Even the OECD issued a biennial assessment that warned of an impending ‘rout’ in Australian house prices, saying both prices and household debt have reached ‘unprecedented highs’. In the OECD’s own words: “A continued rise of the market, fuelled by both investor and owner-occupier demand, may end in a significant downward correction that spreads to the rest of the economy."

"There is some need to tighten lending conditions for some Australian housing markets in terms of geographical areas and dwelling types," Housing Industry Association chief economist Harley Dale told The Australian Financial Review’s Michael Bleby.

"However, a blanket tightening of lending conditions – as now seems to be emerging again – is the wrong policy and risks damaging Australia's financial stability. That is the very opposite to the ideal outcome authorities want to achieve."

By April, some housing market analysts were calling for the end of the current housing boom to commence later in the year.  BIS Oxford Economics managing director Robert Mellor told the Building Industry Prospects conference in Sydney that house prices would drop by five per cent over the next two years.

“Given that price growth over the last 12 months has been much greater than we would have anticipated six or 12 months ago, we now expect price declines probably between 2017 and 2019 somewhere in the order of 5 per cent in the detached housing market in Sydney,” he said.

But other analysts saw 2017 as yet another year of price rises, followed by a slowing market in 2018. SQM Research managing director Louis Christopher said it was likely prices would rise by 11 to 16 per cent by the end of 2017, adding: “Next year is questionable … we could see some storm clouds in 2018,” he told Domain’s Jennifer Duke.

And property prices continued to rise as the first half of the year rushed by. Auction clearance rates remained high and good numbers of properties were on offer in Sydney each weekend – even delivering a record number of sales for a June auction, well ahead of the corresponding weekend in 2016. Median prices were also well ahead of the same weekend last year, something like 17 per cent higher.

In July, the entire Sydney market reversed a weak downwards trend 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. The monthly rate of growth in home prices fell around one per cent – from 3.1 per cent to 2.1 percent according to CoreLogic statistics. But Sydney’s property market has continued to produce record prices, with the median house price now $1.18 million, according to data from Domain released in late July.

Unit prices grew at twice their growth rate during the June quarter, which was a clear indication that apartment supply is still lagging behind demand. As a result, Sydney apartment prices jumped 3.2 per cent in the June quarter to $757,991, as shown in the latest Domain ‘State of the Market Report’.

As we head towards the end of the year we seem to be experiencing a ‘measured slowdown’ that is enabling our greatest-ever Sydney property boom to end gradually without causing any massive economic disruption. And to say the boom is ending is not to suggest prices growth is over – not by any means.

Sydney is the only capital city to show an increase in approvals in medium and low-density housing, rising by 11.6 per cent in the year to March. Over the five years to June 2017 medium-density stock grew by 14.7 per cent to a total of 860,423 dwellings while the state’s population grew by 8.1 per cent to 7.5 million. There’s plenty of stock available to supply the market for at least the next two years.

Commonwealth Bank economist Kristina Clifton told the Herald’s Eryk Bagshaw that she believed the latest residential construction cycle had peaked: "We think the downturn will be gradual, and we expect an extended plateau where residential construction activity remains at a high level over 2017 and into 2018," she said.

The demand for housing isn’t going away but it is decreasing, and developers are scaling back their activities. UBS economist Scott Haslem told the Herald’s Clancy Yeates that there won’t be a crash but "One would anticipate that we will get a meaningful correction in the next couple of years in the number of cranes that you will see on the horizon."

The 2012-2017 Sydney property boom happened as the result of a once-in-a-lifetime combination of many factors: taxation rules that favour investors, availability of new housing stock, accessibility to adequate capital from domestic and international sources, low interest rates, support from overseas buyers, a willingness by governments to allow rapid and often unpopular development, the popularity of property auctions and a widespread desire among Australians to own their own homes.

Now conditions are returning to what, for Sydney is normal. Rich Harvey, a buyer’s agent from propertybuyer.com.au came up with a good analogy when he said anybody waiting for “dramatic price falls in in-demand areas such as the lower north shore and the inner west” is not going to see them.

“The market is like a car driving forward: the foot has come off the accelerator but it hasn’t been taken completely off and there is still forward momentum. And in certain high-demand suburbs prices will continue to hold up very well. Demand may drop, but prices aren’t dropping, that’s for sure.”





No more double-digit growth, but growth nevertheless

Mon, 18 Sep 2017

As evidence that Sydney’s recent property boom is ending, the latest figures from CoreLogic confirmed that dwelling values in August were flat across the country: “As for Sydney, its housing values slowed to just 0.3 per cent in the last three months, and has been consistently easing since October last year.”

"If the current trends continue, by the end of the year we could see dwelling values across Australia's two largest housing markets, Sydney and Melbourne, trend lower as they move through their cyclical peaks," said CoreLogic's head of research Tim Lawless.

Domain’s Jennifer Duke said Sydney was entering this year’s Spring selling season ‘with a whimper rather than a bang’: “While the beginning of the year started out very similarly to the booming auction market of 2016, with seven in 10 homes selling under the hammer, this season is on a very different trajectory compared to last spring.”

Ms Duke asked five top Australian economists for their forecasts of Sydney’s property price growth (or otherwise) over the next twelve months. Not surprisingly, each had their own view of where the market will go. In fact, the only point of agreement between the five was that the days of double-digit price growth are behind us.

Three of the five expect prices to fall. AMP Capital’s chief economist, Shane Oliver, sees a seven per cent decline over the next twelve months. He says official interest rates may stay unchanged but the banks will continue to hike mortgage rates on interest-only loans to investors as well as tightening loan requirements.

“This, along with a surge in the supply of units, will likely result in falls in unit prices and a slowing in home price gains,” he told Ms Duke, adding that there will also be a cooling of demand from offshore buyers.

Market Economics’ Stephen Koukoulas expects a two per cent price drop resulting from increased supply of properties as well as tighter loan controls by banks: “Throw all these things into the melting pot and it appears as though the long-overdue cooling in Sydney and Melbourne is poised to happen,” he said.

The third economist predicting a drop is BIS Oxford Economics’ managing director Robert Mellor. He expects a one per cent decline in apartment prices due to “a substantial reduction in investor demand from local and offshore buyers”.

However, two of the five economists were more optimistic when asked for their forecasts and didn’t foresee any dramatic problems of apartment oversupply. HIA chief economist Shane Garrett believes there will be a significant fall in home building, with apartment starts falling by 18.4 per cent in 2017-18 compared to 2016-17, and house starts falling 14 per cent over the same period.

“We see the downturn in the new dwelling starts as arising from a few factors, particularly the tougher regime around foreign investor participation in the property market and tighter financing conditions on the domestic investor side,” he told Jennifer Duke.

Compass Economics’ Hans Kunnen also had a positive outlook for Sydney’s unit market, saying he expected a ‘strong growth trajectory’ in the order of 5-10 per cent, citing population growth and good economic activity levels as the drivers: “While pockets of oversupply may occur … there is also likely to be reasonable demand and access to finance.”

Apartments abound

Apartments now comprise 28 per cent of housing in Sydney. While most of this high-density construction has been in and around the inner city, even suburbs in the west and northwest have concentrations of apartment towers undreamt of just a few years ago.

In 2016 Australia built more apartments than houses, and this trend is likely to continue. Developers build for investors, and between the two of them they’ve certainly done a lot to catch up with a perceived construction shortfall as immigration pumps thousands of new residents into the city of Sydney every year.

The continuing growth of Sydney property prices and an increasing number of renters have rekindled an interest in medium density developments in NSW. Bankwest’s Housing Density Report found that development approvals for units, townhouses and semi-detached houses grew almost six per cent in the year to March 2017, in contrast to a national drop of 6.5 per cent in medium density approvals.

In fact, Sydney is the only capital city to show an increase in approvals in medium and low-density housing, rising by 11.6 per cent in the year to March. Over the five years to June 2016 medium-density stock grew by 14.7 per cent to a total of 860,423 dwellings while the state’s population grew by 8.1 per cent to 7.5 million.

Some Sydney suburbs have experienced so much apartment-building in recent times that banks are beginning to ask purchasers for higher deposits when buying units in certain postcodes.

A report by the Daily Telegraph’s Aidan Devine found that global lender Citi has identified 34 Sydney postcodes that it considers ‘blackspots’ with a risk of apartment oversupply that could lead to a possible reduction in property values. These include the area around Sydney airport, Parramatta, Chatswood, Ryde, Sydney Olympic Park and parts of the Hills district.

This means that, for a unit costing $900,000 – the median price for an apartment in places like St Leonards, Waterloo or Chatswood, a purchaser would have to come up with a 35 per cent deposit of around $315,000. Add to this figure another $35,000 for stamp duty and a minimum amount of $350,000 would have to be available to finance the balance of the purchase price.

A typical ‘blackspot’ suburb is one in which a number of new apartment buildings have been constructed, and where there are additional high-rise projects approved and/or underway. AMP Capital and NAB have also followed Citi’s lead and raised their deposit requirements for those Sydney suburbs believed to have oversupply risks.

BIS Oxford Economics analyst Angie Zigomanis told Aidan Devine that an oversupply could be ‘catastrophic’ for some housing markets. He said it could push down property prices and cause recent buyers to have mortgages worth more than the value of their properties. With something like 25,500 new apartments to be completed this year in Sydney, areas with high concentrations of new units, including the Sydney CBD, are the most likely to be affected.

However, Urbis associate director Alex Stuart noted that over the last quarter, Sydney had recorded the highest number of apartment sales of all capital cities, slightly down on sales a year ago with an unchanged average selling price ago of $1.16 million.

"From our surveyed sample, [Sydney] apartment sales and prices all look healthy," he said, noting that one-bedroom, no car park apartment sales had risen to 28 per cent of all sales.

No cliff ahead

Property research group CoreLogic believes that when the August property market figures for Sydney are analysed they’ll show a plateauing of prices or perhaps even a slight drop. The firm’s head of research, Tim Lawless, says prices won’t ‘fall off a cliff’: "Sydney has been gradually cooling since November last year, auction clearance rates have started slowing...all signs the market is cooling," he said.

He added that there would be fluctuations in Sydney house prices as the market starts to soften, but history shows price corrections in Sydney have never exceeded 10 per cent. "Six months down the track, you will see a consistent decline in the housing market; the question is what will be the difference between the peak and trough," he told the AFR’s Su-Lin Tan.

Prices have now risen to a point where people on average incomes find it difficult to purchase a property or rent one that’s a reasonable distance from their place of work.

But even with the winter cold putting somewhat of a dampener on the auction market, prices stayed high despite a reduction in auction clearance rates that kept them near or below 70 per cent. Domain’s Chris Tolhurst wrote: “In the first half of the year, many auctions of A-grade properties within 20 kilometres of the CBD drew offers from eight or more bidders, a ratio that has now slipped to one to four bidders.”

This trend was also noticed by Domain’s Dr Andrew Wilson, who said: “Inner-suburban, higher priced regions continue to generally produce the best suburban results in Sydney, but clearance rates in those areas are now consistently lower than recorded over autumn and the early winter market.”

And prices keep rising. Rich Harvey, a buyer’s agent from propertybuyer.com.au said anybody waiting for “dramatic price falls in in-demand areas such as the lower north shore and the inner west” is not going to see them.

“The market is like a car driving forward: the foot has come off the accelerator but it hasn’t been taken completely off and there is still forward momentum. And in certain high-demand suburbs prices will continue to hold up very well. Demand may drop, but prices aren’t dropping, that’s for sure.”

Bubble deflating

There are still concerns about a property ‘bubble’ somehow popping and causing a massive crash in property prices. ABC’s ‘Four Corners’ program foresees this kind of calamity resulting from borrowers over-leveraging themselves on property and getting hit by a sudden interest rate rise that pushes their repayments beyond affordable levels. The resulting forced sales, said the program, would cause the bubble to burst and prices to crash.

There are a couple of problems with this scenario that make it relatively unlikely, despite property price bubbles in other countries causing a fair amount of economic mayhem. The first thing to note is that Australia has never had one of these bubbles burst as has happened in the US, Ireland and Spain.

Our property price cycles traditionally end by flattening out and entering a period of price stagnation. Australians tend to keep up with their mortgage requirements until they become absolutely impossible, rather than walking away when they’re merely difficult.

Our banks have generally been tougher than their overseas counterparts on mortgage requirements, asking for higher deposits and avoiding ‘low-doc’ loans to risky borrowers. The Australian Prudential Regulation Authority (APRA) and the Reserve Bank have kept watchful eyes on the property market and have tightened up mortgage conditions considerably over the past year, meaning that deposits are generally enough to cover any price falls that might occur.

This isn’t to say that prices in some parts of NSW and even in greater Sydney can’t slip. It’s likely that some areas where apartment construction is rampant will be oversupplied and asking prices will have to be reduced for corporate vendors to remain competitive.

Prices in Sydney were flat in August after a rise of 1.4 per cent in July. CoreLogic’s Tim Lawless said that the rolling three-month price rise in Sydney has fallen to 0.3 per cent from its 2016 peak of 3.7 per cent in the three months to last November.

Domain’s Jessica Irvine summed up the current situation, saying that we have no other option than to trust that banks and mortgage brokers have composed their loans in such a way that the inevitable rises in borrowing rates can be met by the borrowers.

“Absent a rise in the jobless rate, which has been falling recently, it's hard to see where the trigger for forced property sales would come from. In times of price weakness, home owners tend to just sit on their properties, keeping volumes low and price falls capped,” she concluded.

A big industry

Housing construction is a major industry, making up some five or six per cent of Australia’s economy. Over the past five years we’ve had a housing construction boom that peaked in 2016 at a rate of 250,000 new homes per annum, the majority of those being high-rise apartments. This also created thousands of jobs and a massive demand for building materials – all good to have at a time mining investment was decreasing.

The Australian Bureau of Statistics estimates that every $1 million spent on residential construction generates 17 full-time jobs. "The number of new residential building approvals had stepped down since 2016 and members noted that, if approvals remained at current levels, construction activity could also begin to decline," the RBA board said in its August statement.

We’re already seeing signs of building activity cooling down. The demand for housing hasn’t gone away but it is decreasing, and developers have scaled back their activities. UBS economist Scott Haslem told the Herald’s Clancy Yeates that there won’t be a crash but "One would anticipate that we will get a meaningful correction in the next couple of years in the number of cranes that you will see on the horizon."

There will still be a significant number of new properties coming onto the market during this period of contraction, leading to what Haslem calls ‘moderation in house price growth’. He also sees house prices stabilising in 2018 while rent increases will slow due to a greater number of available rental properties.

Commonwealth Bank economist Kristina Clifton told the Herald’s Eryk Bagshaw that she believed the latest residential construction cycle had peaked: "We think the downturn will be gradual, and we expect an extended plateau where residential construction activity remains at a high level over 2017 and into 2018," she said.

Building and construction activity is slowing, but the latest ABS data showed a fall of 1.7 per cent in July nationally which was less than analysts had forecast. Another surprise was the gain of 9.3 per cent in all sectors of construction work during the June quarter, although the ‘other dwellings’ category which includes apartment blocks fell 6.7 per cent.

Mortgage Choice, one of Australia’s biggest mortgage brokers, sees a decrease in demand for interest-only loans developing as banks find it easier to meet APRA’s cap on interest-only lending.

This could lead to a period in which banks won’t have to further tighten their credit policies, and higher premiums for interest-only loans could come to an end, according to Mortgage Choice chief executive John Flavell: "My feeling is there's room to kind of wind some of that back a little bit," he said.

In the meantime, Westpac and CBA, Australia’s two largest banks, say they will comply with APRA’s cap on interest-only lending. Westpac said interest-only loans made up 44 per cent of new lending in the June quarter, down from 52 per cent in March, and it was "on track" to be below the 30 per cent cap in the September quarter.

Chinese puzzle

When it comes to Sydney property the ‘elephant in the room’ is really a tiger. Figures from Knight Frank show that Chinese companies bought 38 per cent of all the residential property development sites sold in Australia last year, spending $2.4 billion.

The average size of property development sites sold to Chinese companies in Australia last year was 21,045 square metres, an 18-fold increase from four years ago, according to the company’s report.

Based in Beijing, Dalian Wanda’s Australian businesses include a $1 billion Australian apartment project at Circular Quay in Sydney. Shanghai-based DahuaGroup last year spent $400 million in Sydney to buy multiple suburban sites to develop as master planned estates. Investments on this scale have had a major impact on development in Sydney.

But this flow of funds could diminish or even dry up afterChina's National Development and Reform Commission’s recent declaration that the property sector was "not the real economy" and companies investing in overseas real estate could be harming China's financial stability by increasing capital outflows.

Officially, the property restriction is on deals worth more than $US1billion, but The Brisbane Courier-Mail has reported that the Beijing government’s already widening the restraints with Chinese nationals transferring cash to Australia having to sign statements declaring the funds were not for real estate.

Australia’s new suite of property taxes on overseas investors has also had a dampening effect on Chinese demand for Sydney property. David Wang, the vice-general manager of international sales at Chinese agency 5i5j, told the Australian Financial Review that sales of Australian property had dropped 80 per cent in Julyand he's expecting an equally poor result in August.

Despite the introduction of new taxes, NAB chief economist Alan Oster told ABC News its residential property survey for the June quarter showed the share of foreign buyers in new property markets had increased from 10.8 per cent to 11.6 per cent over the quarter: "I think, ultimately, crackdowns on capital [outflow] will cause an impact, but at the end of the day, there's a lot of money that's already been brought out," he said.


‘Stern tests ahead for softer Sydney market,’ Dr Andrew Wilson, Domain, 7 September 2017

‘Apartment sales tumble as projects, funding dries up, Urbis figures show,’ Larry Schlesinger, Australian Financial Review, 6 September 2017

‘Hobart is 'best performing' property market as Sydney's growth slows, CoreLogic figures show,’ David Chau, ABC News Online, 1 September 2017

‘Market has lost its energy’: Sydney entering spring selling season with a whimper,’ Jennifer Duke, Domain, 1 September 2017

‘Flat August: Has the heat gone out of housing market?’ Reuters in Sydney Morning Herald, 2 September 2017

‘Sydney property prices: Citi reveals postcodes where buyers need 35 per cent deposits,’ Aidan Devine, Daily Telegraph, August 10 2017

‘Soaring Sydney property prices, growing population raises demand for smaller properties,’ AAP release in Sydney Morning Herald, 16 August 2017

‘Soaring Sydney property prices, growing population raises demand for smaller properties,’ AAP release in Sydney Morning Herald, 16 August 2017

‘What now for Sydney property prices? Five economists give their predictions,’ Jennifer Duke, Domain, 17 August 2017

‘Sydney house prices expected to flatline and even decline in August: Corelogic,’ Su-Lin Tan, Australian Financial Review, 28 August 2017

‘The problem with property doomsayers,’ Jessica Irvine, Sydney Morning Herald, 28 August 2017

‘Sydney auction clearance rate falls below 70 per cent as west lags behind,’ Chris Tolhurst, Domain, 21 August 2017

‘Apartment-building boom tipped to run out of puff,’ Clancy Yeates, Sydney Morning Herald, 22 August 2017

‘No further crackdown for interest-only customers: Mortgage Choice,’ Clancy Yeates, Sydney Morning Herald, 24 August 2017

‘Australian dollar eyes US80c as ABS data surprises,’ AAP release in Sydney Morning Herald, 30 August 2017

‘RBA warns construction activity could start to decline,’ Eryk Bagshaw, Sydney Morning Herald, 15 August 2017

‘New investment rules to curb China's foreign acquisition binge,’ Kirsty Needham, Sydney Morning Herald, 21 August 2017

‘Chinese property agents report sharp drop in demand for Australia,’ Angus Grigg and Matthew Cranston, Australian Financial Review, 15 August 2017

‘Sting in Dragon’s tail for Chinese buyers clears path for bargain hunters,’ Sophie Foster, News.com.au, 22 August 2017

‘Up to half of Chinese buyers leave apartments vacant,’ Simon Johanson, Sydney Morning Herald, 23 August 2017


Sydney property to see further growth as units outperform houses

Thu, 17 Aug 2017
July auction figures showed that, as expected,Sydney's housing market continues to slow. The monthly rate of growth in home prices fell around one per cent – from 3.1 per cent to 2.1 percent according to CoreLogic statistics.

National valuers Herron Todd White say that Sydney's five-year property boom for houses and units is running out of steam as lenders' demands for bigger deposits and higher borrowing costs begin to take effect.

"Sydney has property at a price point to suit many. But entry level pricing might not always suit the first home buyer's lifestyle aspirations, " said Kim Quick, NSW residential director.

Commenting on the findings by CoreLogic that over half of the mortgage demand for Sydney property in the month of April was from investors, Mrs Quick said: "It stands to reason that this important segment has had much influence on the overall position of the market."

Slowing though it is, Sydney’s property market continues to produce record prices, with the median house price now $1.18 million, according to data from Domain released in late July. Market analysts were somewhat surprised to see that unit prices grew at twice their growth rate during the June quarter, which was a clear indication that apartment supply is still lagging behind demand.

Sydney apartment prices jumped 3.2 per cent in the June quarter to $757,991, while houses grew by 1.6 per cent to $1,178,417, as shown in the latest Domain ‘State of the Market Report’.

BIS Shrapnel senior manager residential Angie Zigomanis was one of those surprised by recent unit price growth, saying it was “higher than expected” due to former house buyers opting for apartments: “The indicators are still solid for Sydney, it is still under-supplied and we don’t see the market tipping into over-supply despite the building [boom].”

The ABC’s Michael Janda said that recent housing construction data shows an apparent decline in demand:“ABS data [in July] showed a 2.4 per cent fall in the value of construction work done, led by a 4.4 per cent slide in new residential building and a 5.1 per cent slump in renovations and additions. This reinforces the downward trend in building approvals, which are off almost 20 per cent over the past year.”

He quoted the Australian economics team at global bank UBS that has already called the top of the property boom and sees the number of new homes across Australia dropping to around 170,000 at the end of 2018.

However, despite a slowing market there are very few analysts tipping anything like a price crash in the next year or two. A Fairfax media team of Jessica Irvine, Matt Wade and Ross Gittins concluded that we are unlikely to see a massive fall in prices unless there’s an economic recession or a large spike in joblessness.

The team felt it was more likely that the Sydney market will experience a period of price weakness. Matt Wade warned that this could have an impact on consumer spending and confidence:  "It may not be a crash, but even a period of stagnation can hamper the economy."

Alan Oster, NAB's chief economist, also believes the Australian housing market is entering a cooling phase after several years of very strong growth: "Affordability will be a major constraint" on the property market, particularly if weak wage growth persists and banks continue to tighten lending,” he said.

The NAB forecasts that house price growth will remain strongest along the eastern seaboard this year - with Sydney to see solid (but slower) price growth:  "These trends will broadly continue into 2018, with growth in Sydney and Melbourne returning to more sustainable levels," the bank noted.

The bank also said it expects Sydney units to do “relatively well” this year, but has lowered its earlier forecast on how much housing prices would increase due to "record levels" of apartment construction and moves to limit foreign demand for housing.

Writing in the Sydney Morning Herald, Bloomberg Gadfly columnist Nisha Gopalan warned that Sydney will soon feel the effects of a Chinese buyer withdrawal from the market: “Reflecting tighter regulations, China overseas direct property investment could drop 84 per cent to $US1.7 billion ($2.15 billion) this year and about another 15 per cent to $US1.4 billion in 2018, according to Morgan Stanley,” said Ms Gopalan.

“A strengthening yuan, along with China's One Belt One Road initiative that needs funding, will see many property deals dry up.”

BIS Oxford Economics managing director, Robert Mellor, agreed saying: “Overseas investors are now facing significantly higher taxes as well as maybe there's still restrictions upon funds being able to come into the country from overseas, or overseas investors being able to get local funds."

Changing preferences

A new survey conducted by online marketplace ServiceSeeking found that one out of three Australians no longer has the ‘dream’ of owning their own home.

ServiceSeeking chief executive Jeremy Levitt told Domain that rising house prices are changing Australian culture: ““Housing prices and living costs are higher than ever, making it more difficult for younger generations to buy a home. The whole perception of home ownership and its importance in our lives has changed.”

Meanwhile, a June survey from Mortgage Choice found that two thirds of Australians consider home ownership to be ‘something for the wealthy’. However, an earlier survey from the same company found that 86 per cent wanted to own real estate, and that an apartment was considered the ‘most likely’ type of property.

Between 2011 and 2016 greater Sydney added 64,300 flats and apartments to the city’s housing stock. They now form 28.1 per cent of all dwellings in the area. This trend is set to continue with about 70 per cent of all dwellings constructed in Sydney in 2016 classed as medium- and high-density.

So rapid has the rate of apartment construction been that Sydney now has more than 100 suburbs where at least half of the population lives in a flat or an apartment. The apartment-density crown goes to Sydney Olympic Park where 99.6 per cent of respondents to the 2016 census said they lived in a flat or apartment on census night.

This puts them just over the Sydney CBD (99.4 per cent) and Haymarket (99.3 per cent). In fact, there were 15 suburbs where 90 per cent or more of the residents said they lived in a flat or an apartment. 41 Sydney postcodes sited more than 10km from the CBD have 50 per cent or more of their populations living in a flat or apartment.

The ‘affordability barrier’

The shift to higher-density living is due to a number of factors, such as wanting to find proximity to employment, public transport, education, and of course affordability. A Reserve Bank paper published in June said the median prices for apartments are about 30 per cent cheaper than detached houses. 

Compass Economics chief economist Hans Kunnen told Domain’s Jennifer Duke that it was likely home buyers were opting for apartments instead of houses due to what he called the ‘affordability barrier’.

“People just can’t afford to buy a house … supply has been strong but demand is clearly stronger,” Mr Kunnen said, adding that he expects the trend of stronger apartment growth to continue for the next six to nine months.

Social researcher Mark McCrindle told the Sydney Morning Herald’s Matt Wade that a growing share of Sydney families with young children is choosing to live in a high-rise building rather than move to a detached house.

"That final ceiling for denser urban living is being broken as parents raise their children through the schooling years in apartments. We've seen that in Europe, we've seen that in some parts of North America and we've certainly see it right across Asia but we haven't really seen it in Australia. So, we are approaching new terrain there."

One interesting development in Sydney’s fast-changing housing mix is that for the first time ever it costs as much to rent an apartment in Sydney as it does to rent a house. The latest Domain ‘State of the Market’ report found that the median rental cost for both types of accommodation is $550 per week.

And even though we’ve built record numbers of apartments in recent years, rents rose $20 per week over the June quarter – a statistic that prompted Tenants Union of NSW senior policy officer Ned Cutcher to say we’ve been building the wrong kind of apartments.

“Development is driven by what investors want rather than what households need,” he said.

“Higher priced apartments are being built where traditionally affordable homes were, at increasing densities and this is what you get.”

Real Estate Institute of NSW president John Cunningham said that many older-style inner and middle-ring houses have been redeveloped into more expensive apartments, and now the majority of rental houses are older homes in the middle-ring and new housing estates on the fringe.

“There’s a massive shortage of houses leaving families no choice,” he told Domain’s Jennifer Duke.

Interest rates stay low

One market factor that always has the potential to affect both investors and owner-occupiers is a rise in interest rates. It has to come sometime – it always does, but at this point there’s no way of forecasting when it might happen.

The chief economist of UBS in Australia, George Tharenou, said home prices would remain flat next year, but “if you did have a combination of the RBA starting to raise interest rates on an outlook which is getting better, based on better jobs [numbers] and it intersects with a timing that foreign demand [for housing] is now starting to fall and banks continue to reprice mortgage rates you are running the risk of having a harder landing for the housing market."

ABC journalist and economist Ian Verrender, shared these concerns: “"A house price boom borrows growth from the future, and both NSW and Victoria will have to pay back some of that in the years ahead as today's housing prices gradually reconnect with reality."

The ABC’s Michael Janda’s conclusions were that, if everything that could go wrong does so suddenly in this year, consumers will spend less and unemployment will rise: “If people did start losing their jobs, they would be unable to meet their mortgage repayments, thus defaulting, causing losses for the banks, and with forced property sales driving prices even lower with the danger of a downward spiral.”

A July report from Deloitte Access Economics said that interest rates didn’t need to rise by much before it created "mortgage stress" in inner-city suburbs. "Interest rates are now a massively more potent weapon for slowing the Australian economy than they've ever been before," the report said.

"The Reserve Bank knows that, and so it will be taking baby steps as it increases the cost of capital once again."

Riki Polygenis, National Australia Bank's head of Australian economics says the RBA is unlikely to raise interest rates this year: "The RBA will still be wary of choking off the gradual recovery we're seeing through the non-mining economy, and they'd also prefer a lower currency," she said.

"So, rate hikes are still some way off and we don't actually have them pencilled in until 2019, with some chance of it being a bit earlier in the back half of 2018."

The California crisis

In case you hadn’t heard, California’s currently going through what is called there a ‘full-fledged housing crisis’ that has some similarities to the current situation in Sydney.  Median housing costs are high and there’s a serious lack of affordable housing for middle-class families.

As the New York Times described it: “The median cost of a home here is now a staggering $500,000, twice the national cost. Homelessness is surging across the state.”

In Sydney, we wouldn’t consider a $500,000 median price ‘staggering’ by any means, even when converted to Australian dollars, but for Californians it can mean living in caravans or commuting two hours each way to get to work. It also means that the state has to make a lot of urgent changes to even begin solving its housing problems.

For years the state has resisted the pressures of development. Governments of local communities, the equivalent of our local councils, have knocked back projects they felt were ‘out of character’ with their neighbourhoods, leading to a serious shortfall in new housing construction. The state’s government is now considering ways to intervene and get more of these projects approved and urgently underway.

Issi Romem, chief economist of San Francisco-based BuildZoom, a company that helps homeowners find builders, says: “To accommodate all those people you need to build a lot, and the state’s big metro areas haven’t [built much] since the early ’70s. To catch up, cities would need to build housing in a way that they haven’t in two generations.”

A rapid catch-up in housing construction is, of course, precisely what’s been happening in Sydney and yet, despite an unprecedented construction boom of our own we still have the same high median prices and a lack of affordable housing. Increasing supply isn’t the answer to everybody’s housing problems.

The NSW government is looking at a housing affordability plan that might enable people now locked out of the Sydney market to lease affordable housing on a long-term basis. NSW treasurer Dominic Perrottet said he’s establishing a working group that will consider ways to implement a ‘build to rent’ sector of property development in this state.

The ‘build-to-rent’ industry, already working successfully in some parts of the US and manyEuropean countries including Germany and Denmark, is where large investors or institutions build blocks of apartments to be leased on a long-term basis. Each apartment cluster is managed by a single corporate landlord.

 "Australians are renting in greater numbers and for longer periods. With this evolution comes the need for greater housing choice, housing diversity and improved security of tenure for renters," Mirvac chief executive Susan Lloyd-Hurwitz told the Australian Financial Review.

"Build to rent can provide secure, quality, long-term and professionally-managed rental accommodation in key urban locations providing people with this choice and security,” she said.

Who knows? The next economic cycle for Sydney property might just be driven by investment opportunities in affordable housing that would once again stimulate construction and lead to another boom that history shows is likely to happen almost as soon as the current one is over.


‘NSW government to establish a build-to-rent property sector,’ Su-Lin Tan, Australian Financial Review, 12 August 2017

‘Plan could see renters settled for decades,’ James Robertson, Sydney Morning Herald, 12-13 August 2017

‘Sydney, Melbourne house price growth slows over month,’ AAP release in Sydney Morning Herald, 24 July 2017

'It All Adds Up' podcast episode 6: Five myths about the housing market busted,’ Fairfax media podcast, Sydney Morning Herald, 27 July 2017

‘The Cost of a Hot Economy in California: A Severe Housing Crisis,’ Adam Nagourney and Conor Dougherty, New York Times, 17 July 2017

‘Sydney apartment rents catch up with houses as experts raise doubts about ‘supply solution’, Jennifer Duke, Domain, 20 July 2017

‘High density Sydney: How your suburb rates, according to the 2016 census,’ Matt Wade, Sydney Morning Herald, 19 July 2017

‘Housing market sentiment falls in every state: NAB survey,’ David Chau, ABC News online, 14 July 2017

‘If disaster does strike, here’s how to get out unscathed,’ Jason Murphy, News.com.au, 5 August 2017

‘Housing market 'powder keg' could blow if interest rates rise,’ Michael Janda,
ABC News online, 18 July 2017

‘Sydney house prices jump again, but ‘days of double-digit growth are over’, Jennifer Duke, Domain, 20 July 2017

‘House price growth to slow further but not crash: UBS,’ Clancy Yeates, Sydney Morning Herald, 17 July 2017

‘Home ownership not a priority for one in three: Rising prices ‘changing Australian culture,’

Jennifer Duke, Domain, 9 August 2017

‘Sydney house and unit markets 'starting to decline' as tougher lending bites,’ Duncan Hughes, Financial Review, 7 August 2018

‘That whoosh? It's the Great Chinese Property Pullback,’ Nisha Gopalan , Sydney Morning Herald, 8 August 2017

‘Residential construction heading for 31pc three-year collapse,’ Michael Janda, ABC News online, 10 August 2017

The boom retreats, the bubble deflates, and a dream ends

Tue, 18 Jul 2017

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 Sydneysiders. 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 Sydneysiders: “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 surpluswill 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 Jandaquoted 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 10sq m 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, SutonoPratiknya, 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.


‘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

A package, a hit on overseas buyers, a bubble and a peak

Wed, 14 Jun 2017

It’s been a big month for Sydney property. One important development was the Berejiklian government’s release of a package of measures intended to improve housing affordability, clearly favouring first home buyers over investors in a softening market.

When Premier Gladys Berejiklian first came to power in January this year she said housing affordability was ‘the biggest issue people have across the state’: "I want to make sure that every average, hard-working person in this state can aspire to own their own home," she said.

Making her announcement of the new housing affordability package, Ms Berejiklian said her government was doing everything it can to level the playing field for first home buyers. She indicated the measures would cost the State Government an estimated $1.2 billion, but added that a new surcharge on foreign investors would offset some of the increased costs.

The measures that come into effect on July 1 include:

Stamp duty for first home buyers on existing and new homes up to $650,000 will be abolished;

There will be stamp duty discounts for properties worth up to $800,000;

No stamp duty will be charged by banks on lenders’ mortgage insurance if it is required for first home buyers with limited deposits;

The foreign investor surcharge, introduced last year, will be doubled from four to eight per cent on stamp duty;

Overseas buyers will pay an additional two per cent surcharge on land tax (up from 0.75 per cent);

To help first home buyers compete with investors, the government will remove stamp duty concessions for properties bought off the plan; and

The government has scrapped a $5000 grant to all purchasers of new homes and reduced eligibility for a $10,000 first home owners grant.

NSW treasurer Dominic Perrottet told ABC News that the thresholds for stamp duty and concessions had been carefully considered: "The median price in Sydney is $700,000 for an apartment. We believe this is an incredibly generous package and one that provides great support for first home owners."

Figures from industry research firm CoreLogic show that over the past 12 months 45.4 per cent of dwellings sold in NSW had a price tag of $650,000 or less, and 58 per cent had a price tag of $800,000 or less. That’s across all of NSW, but just within the Sydney metropolitan area only 25.8 per cent of sales in the past year were under $650,000.

The government noted that in recent years the number of first home buyers has been declining as investor numbers grow. According to the Australian Bureau of Statistics, first homebuyers made up just eight per cent of owner-occupier mortgage commitments in March, well below the long-term average of 17 per cent.

(However, figures released by the Australian Bureau of Statistics also show home loans to investors as a proportion of all loans fell 1.25 per cent in March to 48 per cent, down from a high of over half of all home loans in January.)

Other measures in the state government’s package targeted increased supply of housing, including allowing councils to borrow more money for infrastructure at reduced interest rates to accelerate rezoning around new developments.

"The State Government will support up to $500 million in additional borrowing by councils by halving the cost of borrowing for eligible projects through infrastructure subsidies," said housing minister Anthony Roberts.

“The Government will also boost the use of independent panels for Sydney councils to ensure development applications were dealt with swiftly."

The minister also said that approvals for ‘well-designed’ terraces, town houses and dual-occupancy dwellings would be fast-tracked by expanding the code for complying developments.The government promised $3 billion in infrastructure funding to accelerate delivery of housing, and unveiled proposals to streamline planning.

Overall, the government estimates its changes to stamp duty will save first home buyers around $25,000 for most purchasers, and if applied in full the total package could equate to more than $34,000 in savings.

Not everyone agrees

The NSW government’s announcement received criticism from many housing industry experts who cautioned that the contents of the housing package could increase demand and therefore push up prices.

CoreLogic says that removing or reducing the transactional costs for first homebuyers is likely to provide both positive and negative consequences as it is “widely accepted that policies aimed at stimulating demand tend to push prices higher”.

CoreLogic’s head of research Tim Lawless told News.com’s Frank Chung:“Abolishing stamp duty for first home buyers is likely to create some headaches for eligible buyers who have recently entered into contracts. Additionally, we can expect first home buyer activity to stall before surging higher on July 1 2017. The long-term outcome may be self-defeating due to higher demand pushing up prices.”

Professor Peter Phibbs, head of Urban and Regional Planning and Policy at the University of Sydney, said the government’s measures were based on a desire for "political popularity"and could leave behind "an enduring legacy of sustaining house price inflation".

"We've got a 30-year history in Australia of giving first home owners more money, and it only adds to the price”, he said. "If you were really trying to help first home buyers, you'd try to supply some stock that is affordable."

A May 19 article in Domain, reporting on a study on housing supply, pointed out another problem that the government’s price limitations fail to address: “The study shows 80 per cent of new unit approvals were in the top 20 per cent of local government areas with the highest unit prices.

“This is while 80 per cent of new house approvals were in the top 40 per cent of local government areas with the highest house prices. There is very little new supply in areas where house prices are lower, where households on low to moderate incomes can afford to live.”

A new report by the Australian Housing and Urban Research Institute and the Bankwest Curtin Economics Centre also says thatmost growth in housing supply has been in the upper price range.

The report concluded that “most new housing stock in Sydney is in the middle to high price range and fails to improve housing affordability by ‘trickling down’ to lower prices for those on low incomes.”

The report also noted that “housing tax preferences and asset test concessions” such as negative gearing and the capital gains tax concession “increase the demand for housing by encouraging the accumulation of savings in housing wealth”.It said these helped fuel house prices by adding to demand, in turn making “supply-side reform even more important” if governments are unwilling to curb the concessions.

Even former Reserve Bank of Australia governor Glenn Stevens, who advised the NSW government on the housing affordability package, gave it only qualified support. He said the government must try to increase supply and not rely too heavily on "demand side" subsidies that inflate house prices.

In his report on the package, Mr Stevens warned of the risks in slugging foreign home buyers at a time when the real estate market appeared to be slowing: "One area for caution might be demand side measures like taxing foreigners. If foreign purchasers are slowing down anyway, we may not want to push them down further," he said.

Hitting foreign buyers

The impact of overseas buyers on the NSW housing market is a matter for lively debate. Foreign citizens accounted for about 11 per cent of home purchases across NSW in the September quarter last year, according to NSW government data.

It’s generally acknowledged that strong demand for Sydney property from overseas buyers has been a significant contributor to the city’s ever-rising prices. A May survey for the ABC program ‘The Conversation’ found that Sydneysiders are seriously concerned about foreign investors pushing up the cost of housing.

The Conversation’s researchers Dallas Rogers, Alexandra Wong and Jacqueline Nelson asked 900 Sydney residents over 18 years of age for their opinions on foreign investment in the property market and found a majority said they believed foreign investors should not be allowed to buy residential real estate in Sydney.

The most commonly nominated driver of house prices (64 per cent of respondents) was ‘foreign investors buying housing’, and more than three in four participants (78 per cent) agreed with the statement "foreign investment is driving up housing prices in greater Sydney".

For a number of reasons, clouting foreign buyers with additional costs on their property purchases might at first glance seem a good idea.First, it would raise money that can be used to subsidise local first home buyers and reduce their purchasing costs. Secondly, it might deter some overseas purchasers, thereby reducing competition for property in general and taking some of the upwards pressure out of the market many analysts see as ‘overheated’.

But it’s not that simple. The Urban Development Institute of Australia (UDIA) warned that the increase in taxes on foreign buyers could ultimately raise prices because developers rely on pre-sales, largely to overseas buyers, to raise the capital needed to start construction.

This is supported by Domain’s Jennifer Duke who said: “Despite the promises of a ‘beautiful new lifestyle’ and ‘high quality fitments throughout’ in their finished products, the focus of developers is always on pre-sales to ensure a project goes ahead.”

UDIA NSW says any resulting drop in the number of foreign buyers could lead to projects being cancelled, thereby worsening Sydney’s undersupply crisis: “You can’t expect to make things cheaper by increasing the tax on it,” UDIA NSW chief executive Steve Mann told News.com’s Frank Chung.

“Australian buyers won’t benefit from reduced competition if there’s fewer properties being built and sold. Every percentage point makes a difference in the development industry. Even though foreign buyers are only 11 per cent of the market, that could be enough to prevent thousands of new homes being built for Australians.”

Chinese investors are already beginning to leave the Melbourne property market, according to Ming Li, a real estate agent in that city’s eastern suburbs who specialises in selling Australian property to Chinese investors.

"The Melbourne apartment market is cooling down," he told ABC News’ Emily Stewart."It is kind of [an] oversupplied market, and the Chinese investors are losing their interest in buying an apartment in Melbourne. The capital gains return is so low."

He said that another reason for the downturn relates to the Chinese government's restrictions on its citizens' ability to move money offshore: "The Chinese government's new policies only allow Chinese individuals to transfer about $US50,000 overseas, per head per year; if it is more than that amount, they need to submit [an] application to authorities, and it becomes harder and harder."

There are some fairly important changes to Australia’s federal legislation in the May budget that also impactforeign buyers - as of July 2017, anyone whose home sells for $750,000 or more will have to submit a clearance certificate proving they are not a foreign investor or face having an increased 12.5 per cent of the sale price withheld from the seller and given tothe AustralianTaxation Office.

New laws in effect from July 1 this year will also require the sellers of property to prove they are Australian citizens when selling a home worth $750,000 or more. This new law is expected to affect 60 per cent of the property market Australia-wide, yet few vendors know about this new requirement.And it’s going to affect a high percentage of property transactions. An analysis of Sydney auction data from a recent weekend by Domain Group found that only 44 of 836 properties sold for less than the threshold amount.

Australian housing bubble

A growing number of mainstream economists and government policymakers are now acknowledging that Australia has some kind of housing bubble.According to economist Philip Soos: "There certainly is a housing bubble in Australia. Since 1996, we've seen housing prices inflate above all known fundamentals, such as GDP, inflation, income, rents and population growth."

Australians are holding more debt than ever before, he said: "Australia has accumulated the world's second highest household debt to GDP ratio at 123 per cent and rising.All countries that have a ratio above 100 per cent have experienced or are currently experiencing a housing bubble."

Citigroup Inc. chief economist Willem Buiter said Australia is experiencing a "spectacular housing bubble" which needs to be addressed with tougher regulatory measures: "It had better be focused on immediately, to try and tether a soft housing landing," Buiter said. "Clearly if these things are not managed well they can be a trigger for a cyclical downturn."

And even if they haven't used the word ‘bubble, analysts such as Chris Richardson and Shane Oliver have clearly inferred people would be making a very brave decision to buy property now, especially in Sydney with its sky-high prices.

Some respected analysts have already gone public with predictions of how far the market could tumble if the bubble should actually burst.  Most agree that the worst-case scenario would be something like a 10-15 per cent drop, which would really just wipe out gains from the past twelve months or so.

The ABC’s Michael Jandahas offered his own set of circumstances that could lead to the long-awaited bubble burst:

Australia’s record household debt has now reached around 189 per cent of incomes and more than 123 per cent of GDP;

An increase in interest rates, especially if combined with tightened lending standards;

An increase in costs resulting from a falling Australian dollar; and

An increase in unemployment.

He also notes that anything generating a sudden number of forced sales could start a cascade of falling prices as vendors cut prices to quit unprofitable investments, such as happened in the US, Ireland and Spain and more recently in Western Australia: “Economic cycles are great on the way up, but the spiral back down can be very painful, especially in markets with low liquidity where the adjustment can take years, not days or months” says Mr Janda.

Is the peak behind us?

With an underperforming economy and the prospect of negative economic growth over the March quarter increasingly likely, together with the likelihood of further mortgage rate increases from the major banks, additional stimulus from the Reserve Bank from an official rate cut in the next few months remains a possibility.

Meanwhile, auction clearance rates remain high and good numbers of properties are on offer in Sydney each weekend – even a record number of sales for a June auction, all well ahead of the corresponding weekend in 2016. Median prices are also well ahead of the same weekend last year, something like 17 per cent higher.

But not all indicators are positive for further strong price rises. During the first week of June figures from CoreLogic show that Sydney prices declined by 0.1 per cent after falling 0.5 per cent the week before. The decline over the month of May was 1.3 per cent. These aren’t massive falls by any means, but are a change from several months of consecutive increases.

CoreLogic's head of research Cameron Kusher cautioned against calling this ‘an end to the property boom’: "We haven't called the peak of the market yet. We want to see more data, we don't want to jump in too early," Mr Kusher said.

St George senior economist Janu Chan said in a Bloomberg article: "It appears that a perfect storm of factors have dented confidence in housing, and led to some heat coming out of the market. Nonetheless, we do not expect widespread large-scale price falls given that interest rates are expected to remain low, and absent a spike in unemployment."

Greg Jericho, writing in The Guardian, says that no state in Australia had more building approvals this April than in the same month last year: “The latest construction data, which saw a 0.7 per cent fall in the March quarter, has some economists thinking the [next set of] GDP figures could show the economy went backwards in the first 3 months of this year.

“And the latest building approval figures…certainly do nothing to suggest work in the building sector is flourishing. In the past year approvals for private sector houses have fallen eight per cent and for apartments and flats, 19.7 per cent,” he said.

Angie Zigomanis, BIS Oxford Economics property analyst, expressed a similar outlook: "If you look at apartment approvals, which is a bit of a reflection on apartment off-the-plan demand, they peaked 18 months ago, and [now] they have started to slow,”he said

He said prices had peaked, but that predictions of a sharp fall were wrong: "We think prices can be justified by population growth, interest rates, demand and employment growth," he said. "In some ways, prices are priced to perfection.In the next two to three years, we don't see a big shock which will push prices down."

ANZ’s Chief Executive Officer Shayne Elliott said home prices in Sydney are “very inflated” in an interview with Bloomberg Television.  However, when asked whether a crash is looming, Elliott replied it was “a really low probability, but it is certainly something we stress test a lot, and think about.”

S&P Global Ratings director Sharad Jain said his base case for the housing market is an "orderly unwind" of house prices he outlined at The Australian Financial Review Banking and Wealth Summit in April: "We still maintain our base case expectation that the unwinding of these imbalances will be orderly, and we think that will be either a slowdown growth rate of property prices or a very mild decline in property prices. That is our base case."

Journalist Michael Pascoe is a contributing editor to ‘Business Day’. He recently looked at the Australian housing market and concluded: “It looks like the housing supply side is correcting before prices fall off a cliff. The regulators' efforts to curtail investor and lender enthusiasm is likely to end up supporting prices by preventing oversupply.”

The editor of the monthly report from property monitor Residex also sees an easing but nothing in the way of a crash: “My view is that conditions in Sydney and Melbourne will continue to moderate due to less demand from investors, affordability barriers, and an overall weakening in housing related sentiment as well as the disincentive of higher mortgage rates and stricter credit policies from Australian banks.”

John McGrath, founder of the McGrath real estate advisory business, dismissed concerns of a property "bubble" saying in his weekly column in the ‘Switzer Daily’ that he has seen such talk "time and time again over 30 years and the 'doom and gloom' predictions simply haven't eventuated".

In his opinion, the pace of growth in property prices will slow down but not stop - prices will keep growing but at a lesser rate per year: "We have a minor correction, where the market will do as it has done before and give back about half of the prior year's growth, so that would be around five per cent," he said.

"Neither scenario is cause for panic. If the boom is indeed over."


‘Australian house prices ‘very inflated’, ANZ chief executive Shayne Elliott says,’ Emily Cadman, Domain, 7 June 2017

‘Sydney, Melbourne home price falls pause,’ AAP and Business Day, 6 June 2017

‘First home buyers to have edge over investors under NSW housing affordability package,’  Sarahm Gerathy, ABC News online, 2 June 2017

‘Housing affordability package benefiting NSW first home buyers to be announced,’ Brigid Glanville, ABC News online, 1 June 2017

‘Premier Gladys Berejiklian announces housing affordability reforms,’ Sean Nicholls, Sydney Morning Herald, 1 June 2017

‘NSW housing package ‘may push up prices’,’ Frank Chung, News.com.au, 2 June 2017

‘Chinese investors pull out of Melbourne apartment market,’ Emily Stewart, ABC News online, 26 May 2017

‘Berejiklian's full housing tax break: about 25pc of Sydney properties, analysis shows,’ Lisa Visentin, Sydney Morning Herald, 3 June 2017

‘NSW slugs foreigners to help first home buyers,’ Geoff Winestock, Australian Financial Review, 1 June 2017

‘Sydneysiders blame foreign investors for high housing prices: survey,’ Dallas Rogers, Alexandra Wong and Jacqueline Nelson, ABC News online, 31 May 2017

‘Foreign’ until proven otherwise: ‘Subtle’ 2017 budget change affects thousands of sellers,’ Jennifer Duke, Domain, 3 June 2017

‘Strong results for Sydney auction market with late surge in listings for big May weekend,’ Dr Andrew Wilson, Domain, 22 May 2017

‘What will sink the housing market and drown property investors?,’ Michael Janda, ABC News online, 30 May 2017

‘House prices in Australia's big cities fell again in May,’ David Scutt, Business Insider Australia, 30 May 2017

‘House prices go into reverse for first time in 18 months,’ Emily Cadman , Sydney Morning Herald, 1 June 2017

‘How quickly talk changes: from ever-booming house prices to fears of a hard landing,’ Greg Jericho, The Guardian, 1 June 2017

‘Home prices ease across capital cities,’ Prashant Mehra, Australian Associated Press, 22 May 2017

‘Get used to your commute: data confirms houses near jobs are too expensive,’ Rachel Ong, Christopher Phelps, Gavin Wood, Steven Rowley, Domain, 19 May 2017

‘John McGrath bursts property bubble 'myth',’ Carolyn Cummins, Sydney Morning Herald, 1 June 2017

‘Increased housing at top end not 'trickling down' to help poor, report finds,’ Paul Karp, The Guardian, 18 May 2017

‘Residex Repeat Sales Index Hints at Easing Housing Market Conditions in April,’ Residex Report, CoreLogic, 4 June 2017

‘House price risk hits small banks,’ James Frost, Australian Financial Review, 23 May 2017

‘Have we finally reached 'peak' house prices in Sydney and Melbourne?’ Richard Holden, The Conversation, 2 June 2017

‘Doom and gloom: Property market scaremongers need to pipe down,’ Michael Pascoe, Sydney Morning Herald, 3 June 2016

‘Developers stuck in ‘limbo land’ as record supply fails to deliver affordability,’ Jennifer Duke, Domain, 17 May 2017

‘Stop building apartments for investors and start building for future generations,’ Jennifer Duke, Domain, 29 March 2017

‘Sydney has biggest ever June auction Saturday with 789 homes bid on,’ Dr Andrew Wilson, Domain, 5 June 2017

More price rises, investor worries and the magic pudding of supply

Tue, 16 May 2017

The May 9 federal budget’s promised ‘housing affordability package’ turned out to be amixed 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 tighteningallowances 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 medianhouse 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 inAustralia, 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 Verrenderalso 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 toany 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 boringwhen 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.



‘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

‘Chainsaw or scalpel? Scott Morrison hits back at call to curb investor tax breaks,’ James Massola, Sydney Morning Herald, 5 April 2017

‘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

‘Stop building apartments for investors and start building for future generations,’ Jennifer Duke, Domain, 29 March 2017

‘There's no housing bubble - unless you're in Sydney or Melbourne,’ Michael Pascoe , Sydney Morning Herald, 7 April 2017

‘Housing bubbles: What economics has to say about the 'b' word,’ Timo Henckel, ABC News Online, 4 April 2017

‘Real estate: Australian banks must learn lessons of US sub-prime crisis, warns ASIC boss,’

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

‘Why our regulators are losing sleep over housing,’ Ian Verrender, ABC News online, 3 April 2017

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



Housing affordability is in the news and on the table

Mon, 24 Apr 2017

It seems like everyone wants to improve housing affordability but none of the major players who might be able to do something about it want to take the first steps towards actually achieving it. There’s little question something has to be done, but what is it?

As National Australia Bank chief economist Alan Oster told the Herald’s Eryk Bagshaw, housing prices have literally gone through the roof: "The housing markets in Sydney and Melbourne continue to defy belief," said Mr Oster.

He’s right. Figures released in late March from CoreLogic show that since January 1, 2017 Sydney house prices have gone up another 5.3 per cent, with auction clearance rates continuing in the 80+ per cent bracket and median prices above $1.3 million.

A NAB analysis found that median dwelling prices have climbed up to nine times higher than gross household incomes in Sydney.  Investor demand is often cited as the main cause of the ever-increasing prices: “In the year to January lending to property investors climbed 27 per cent. Investors borrowed $13.8 billion that month, more than the $13.6 billion that was lent to owner-occupiers. Of the $13.8 billion, only $1.2 billion was for building new homes,” commented Peter Martin in the Sydney Morning Herald.

It's property price growth that outstrips wages growth that make homes overpriced, according to Paul Dales, Capital Economics' chief economist for Australia & New Zealand: "With household income per employee having stagnated in the fourth quarter of last year, the rise in prices has made housing look even more overvalued. When compared to the average ratio to disposable income per employee between 1990 and 2015, housing now appears to be 44 per cent overvalued."

Another clue to the source of the ongoing strength of Sydney’s property prices comes from arecent reportfrom Credit Suisse analysts Hasan Tevfik and Peter Liu which shows that 25 percent of all NSW property sales are now to an overseas buyer.

80 per cent of these foreign buyers are classified as Chinese and are from mainland China, Hong Kong, Macau and Taiwan. The paper says this ‘makes sense’ because, while Australian housing is probably at the peak of its cycle, it's still cheaper to buy an apartment in Sydney than buying an apartment in China's major cities.

The end is in sight

Some housing market analysts are already calling for the end of the current housing boom to commence later this year.  BIS Oxford Economics managing director Robert Mellor told the Building Industry Prospects conference in Sydney that house prices would drop by five per cent over the next two years.

“Given that price growth over the last 12 months has been much greater than we would have anticipated six or 12 months ago, we now expect price declines probably between 2017 and 2019 somewhere in the order of 5 per cent in the detached housing market in Sydney,” he said.

Other analysts see 2017 as yet another year of price rises, followed by a slowing market in 2018. SQM Research managing director Louis Christopher said it was likely prices would rise by 11 to 16 per cent by the end of 2017, adding: “Next year is questionable … we could see some storm clouds in 2018,” he told Domain’s Jennifer Duke.

Domain Group’s chief economist Andrew Wilson said it was difficult to predict even six months into the future, given the present uncertain economic outlook. However, he also said that it is likely prices “will stagnate” in the second half of 2017

AMP Capital chief economist Shane Oliver told The Australian’s Daniel Palmer that the housing market is now “expensive on all metrics”. He expects a price retreat of five to 10 per cent in the housing market once the RBA starts raising rates with falls of up to 20 per cent for unit prices in Sydney.

Mr Oliver also said, in another interview with Philip Baker from the Australian Financial Review, that he didn’t expect rate hikes to begin until 2018: "To see a general property crash – say a 20 per cent plus average price fall – we need to see one or more of the following: a recession – which looks unlikely; a surge in interest rates – but rate hikes are unlikely until 2018 and the RBA will take account of the greater sensitivity of households to higher rates; and property oversupply – this would require the current construction boom to continue for several years," says Oliver.

The Melbourne Institute of Applied Economic and Social Research began its consumer confidence survey in 1974. One of its key questions is: “What is the wisest place to put your savings?” and gives options including bank deposits and paying down debt.

Real estate is traditionally one of its most popular answers. In September 2015 28 per cent of respondents nominated real estate, which was the highest score for any asset class; in March this yearthe score had dropped to just 11.6 per cent – the lowest score ever recorded for this asset class.

Westpac chief economist Bill Evans said the result showed a clear increase in risk aversion: "Consumers are saying: yes, we expect [real estate] prices to rise, but we are a little cautious. There is no doubt there is nervousness about the sustainability of the prices."

Maintain the status quo

The federal government has until now steadfastly ruled out any changes to the current negative gearing and capital gains taxation arrangements. Despite the likelihood that these are the principal economic drivers of investors’ property-buying frenzy, they have been ‘off the table’ as the government looks elsewhere for solutions.

As Ross Gittins, the Herald’s economics editor describes the lack of willingness for an all-out effort on housing affordability: “Our problem in Australia isn't so much fake news as fake government – governments that, lacking the courage to implement controversial solutions to problems, just create the pretence of solving them.”

The Turnbull government still insists that increasing supply is the best mechanism to reduce the cost of housing. "The key to having more affordable housing is to build more housing and so the argument against demand side measures in isolation is that all you do is, is pump up the market," Malcolm Turnbull told ABC radio.

The Commonwealth has even handballed the problem to the states, saying it’s up to each state and territory to solve the problem by rejigging things like stamp duty and releases of land for development. It also wants to see the processes of development applications speeded up.

But pressure is growing on the Turnbull government to do something about sky-high housing prices, especially in Sydney and Melbourne. The promised ‘housing affordability package’ in the next federal budgetcould show a change of heart, maybe even with tweaks to negative gearing and a possible reduction in the capital gains tax discount rate. We’ll know more after May 9.

Victorian treasurer Tim Pallas recently tried to shift some of the responsibility back to the federal government, saying:  "We believe the Commonwealth government needs to play a more active role in increasing land supply across the country.

“We would like to work with the Commonwealth on an audit of federal land to identify opportunities to increase the supply of housing within the urban growth boundary," he said, hinting that some Defence properties in Victoria could be converted to housing estates.

RBA treads carefully

Truly in the classic position of being ‘between a rock and a hard place’, The Reserve Bank is concerned that if it lowers interest rates to stimulate economic activity, which would help intending owner-occupiers to afford a property of their own, it would also stimulate investors who would most likely use their leverage to further disadvantage the first-home buyers who are already a threatened species.

But the RBA also knows that an increase in its cash rate would quickly be passed on to most Australian households, thereby raising the chance of increasing housing stress and decreasing spending on consumer goods.

Herald columnist Michael Pascoe says the RBA and the Australian Prudential Regulatory Authority (APRA) aren’t specifically interested in housing prices and the concerns of first-home buyers: “Their concern is whether lending for housing has gone crazy to the extent of potentially damaging banks in the event of a downturn – thus the regulators might not limit their efforts to investors if they fail to get adequate traction.”

Author and financial adviser Noel Whittaker outlines the consequences of a rate hike: “Any increase in interest rates would mean mortgage repayments would rise, putting pressure on household budgets; also, people buying properties would find it harder to qualify for a loan.

“These factors combined would put downward pressure on property but, of course, the effect on an individual property would depend on its location and price range. The pressure would be less for investors as the interest on their loans is tax-deductible.”

The RBA has also expressed concerns that any actions taken that led to a fall in housing prices might also trigger an economic slump. The Bank’s assistant governor (financial system) Michelle Bullock said there was a danger in the general assumption that prices would always rise: "What happens if things turn down, will the slump be bigger than it would otherwise be?"

A too-rapid or too-strong decline in prices could cause overstretched investors to get out of the market at ‘fire sale’ prices, leaving other owners owing more than their properties are worth. First-home buyers would benefit, and tenants could possibly get rent reductions, but for investors and existing homeowners this could be an economic disaster, especially if it happens at a time such as now when full-time employment is falling and income growth is sluggish.

"There is some need to tighten lending conditions for some Australian housing markets in terms of geographical areas and dwelling types," Housing Industry Association chief economist Harley Dale told The Australian Financial Review’s Michael Bleby.

"However, a blanket tightening of lending conditions – as now seems to be emerging again – is the wrong policy and risks damaging Australia's financial stability. That is the very opposite to the ideal outcome authorities want to achieve."

But what can we do?

The decisions of several previous governments limit the field of options available to the present federal administration. At present, it’s investors who get the immediate benefits from housing through their ability to negatively gear properties and from a 50 per cent discount on capital gains when the properties are sold.

Owner-occupiers get their biggest and about only break through their family homes being exempt from capital gains as well as from the pension assets test. Politicians are unlikely to make any drastic changes to the status quo, fearing political repercussions from voters that might be affected if the rules of the game shift against them.

An editorial in the Sydney Morning Herald cautioned that “Harsh measures to improve affordability now might spark a crisis of confidence and exacerbate price falls,” but added “Still, some measures are worthwhile if introduced slowly”.

Here’s a summary of the measures to improve housing affordability now under active consideration:

Shared home equity

One suggestion that could be appealing to housing policymakers is neither new nor costly to the public purse. It’s called ‘Shared home equity’ and was the result of a report by the Menzies Research Centre commissioned by the Howard government in 2003.

In this scheme the government, which could be either state or federal, or a participating institution takes a 25 per cent equity share in private homes. The payoff comes when the property is eventually sold and could be something like 40 percent of any price increase. These contracts could be ‘bundled’ and sold to other long-term investors such as superannuation funds.

Shared home ownership schemes have been trialled for several years in South Australia. A report by the University of Adelaide analysed ten years of data and concluded that suburbs with shared equity schemes enjoyed an 8 per cent rise in levels of home ownership compared to similar areas in NSW and Victoria

Among the many positive outcomes of these schemes are lower costs to the incoming purchaserof a home and the creation of a new class of asset for investors. By making housing more affordable it could also contribute to rising prices, but in theory at least it will increase the number of potential purchasers and make life a bit easier for first-home buyers.

Capital gains amnesty

It’s possible some sort of hybrid scheme may be introduced at the federal level through a capital gains ‘amnesty’ for a set period of time. Investors could sell their investment properties and instead of a 50 per cent discount receive either a higher discount rate or even a full exemption from capital gains tax if the sale takes place by a specific date.

However, given the federal government’s reticence to do away with any tax income unless it’s replaced from some other source, it would be hard to find a way to finance such a scheme without making some other sector of the housing industry more expensive and that would only lead to increased housing costs.

Introduce a land tax

Doing away with stamp duties and replacing any lost revenues with a broad-based land tax is another option that’s gaining favour in some sectors. The Henry Tax Review in 2009 gave some of the reasons why: “People who move house frequently are whacked with much more stamp duty than people who tend to stay put. So they experiment with staying put, driving longer distances [and] clogging up roads.

“They renovate rather than move, or buy bigger houses than they need in case they run out of room. Older Australians put off downsizing in order to put off stamp duty.”

Stamp duty in NSW works out at something like $40,000 on the purchase of an average home, and land tax adherents say this could easily be replaced by an annual tax on all properties.

In theory, this would reduce the cost of purchasing a home and ‘encourage’ (i.e. force) older homeowners to downsize, thereby adding to the supply of family homes on the market. Those senior citizens who’ve sold their family homes would then move into apartments, conveniently helping to reduce the oversupply that’s anticipated in a couple of years.

If you’re wondering how much tax the average homeowner would have to cough up each year, Grattan Institute fellow Brendan Coates told ABC News that stamp duty accounted for $19 billion nationwide each year and new land taxes would have to match that revenue.

"To do that you're probably talking about a tax on unimproved land value of about $6 for each $1,000 of unimproved land value," he said. “In Sydney, you would be looking a little north of $3,000."

It’s no wonder John Daley, the chief executive of the Grattan Institute, said: "When you talk about tax reform, this is far and away the biggest prize on offer. It would generate billions of dollars in annual returns to the NSW budget while also relieving federal government spending over a 15-year-period.”

The downside for homeowners is that this would add an extra expense – and not a small one either, that would have to be paid annually by all those who already are paying off mortgages, as well as raising the cost of renting property for all tenants – two very important political negatives as Greg Jericho notes in The Guardian.

“It’s a big ask. Only the ACT has gone down the land tax route. Stamp duty is a big money spinner for state governments, but it is a tax that you choose to pay. A land tax hits everyone and even if done in a staggered manner as is the case in the ACT, it’s a tough political sell.”

Let’s let the Herald’s Noel Whittaker have the last word on this topic: “The ACT liked the concept so much that they've already implemented it – well, at least partly. You guessed it: they've introduced land tax on the family home, but retained stamp duty on purchases.

“There have been numerous reports in the press about protests by Canberra home owners who've seen their cost of home ownership rise by more than 40 per cent,” said Mr Whittaker.

Use super for deposit

A great deal of media coverage has been given to the idea of allowing first-home buyers to access their superannuation for a deposit on a property. This has even been extended to the possibility of allowing employers’ superannuation contributions to be directed to mortgage repayments while homebuyers are employed.

The first problem with this is that it would simply add to demand for housing and stimulate price increases without contributing to supply. It would also mean greatly reduced amounts of capital invested in superannuation funds, thereby reducing retirement incomes and increasing the number of age pension recipients.

The ABC’s Michael Janda says allowing superannuation funds to be used for housing deposits would facilitate intergenerational theft:“Allowing first home buyers to access their super for a deposit will create a fresh pool of buyers.

“We could be left with thousands of formerly investment apartments in the hands of first home buyers, just as Australia's big cities enter a widely-acknowledged apartment glut. The smart boomers will walk away with the biggest profits, having been in the market the longest, while recent younger buyers will be left with more housing debt than equity and no superannuation either.”

A DIY approach

There is of course always the option for the federal government to build its own social housing, but columnist Michael Pascoe doesn’t think the Commonwealth’s commitment will go to that extent: “Treasurer Scott Morrison has foreshadowed the May budget will include an improved financing mechanism for social housing, but odds are that it will fall a long way short of what's required to address the bigger affordability crisis.

“It's unlikely to even balance the diminished role states have chosen to play in public housing over recent decades.”

Queensland University economist Cameron Murray is even more critical: "If you want more housing, you build it. Instead, governments tweak the funding settings for social housing, tweak rules about town planning, buy equity in homes, and provide cash gifts to home buyers."

Bond aggregator favoured

And finally, another idea that would help community housing providers develop rental homes for people struggling to locate affordable accommodation is to create an Affordable Housing Finance Corporation (AHFC).

A proposal by the Australian Housing and Urban Research Institute for an AHFC was submitted to state and federal governments last December and the federal government has said it will create a taskforce to investigate the plan.

The institute's proposal is for the AHFC to source capital from the bond market so it can provide longer-term, low-interest loans to the community housing sector than are now available. The Corporation would distribute the money to community housing groups who would develop and manage the rental accommodation.

This type of financing is called a ‘bond aggregator’ and has already been established in the UK with some success. At a March 24 meeting in Canberra with federal treasurer Scott Morrison and all state and territory treasurers it was agreed to take the ‘bond aggregator’ concept “to the next level”.

However, Mr Morrison reiterated his party’s position that the key factor in the housing affordability problem is supply, and the states can improve this with better planning and zoning regulations. He also made it clear that the federal government will not provide funding to the states for any tax changes, including such imposts as stamp duty.

Mark Bouris, columnist and chairman of Yellow Brick Road, sums up the problems anyone faces when attempting to tackle the vexed problem of housing affordability: “In the end, property markets are driven by supply, demand and the cost of debt. Any measure that doesn't address these factors in a sustained fashion has little chance of succeeding.”

While we wait

One way or another, tens of thousands of new apartments will be added to Sydney’s housing stock over the next couple of years. There’s one consequence of all this rapid development of high-rise housing that is only now being admitted, with the solutions many years ahead.

Liberal NSW Planning Minister Brad Hazzard introduced what he called ‘Urban Activation Precincts’ in 2014, despite concerns from a number of councils and residents that were affected. Three years later these have become ‘priority precincts’ and their number is now increasing.

Priority precincts are Sydney suburbs, primarily those in close proximity to the existing and planned rail network, targeted for high-rise development. This development has gone ahead at an unprecedented rate, replacing older free-standing houses or small apartment buildings with new apartment blocks up to 23 storeys high, and massively increasing the population of communities like Macquarie Park and Epping.

The problem? Vital infrastructure – schools, roads, healthcare facilities, parks, water and sewerage provisions, communications (think of the NBN)  and energy supply are lagging far behind and struggling to catch up. It’s going to take many years before residents of these new ‘priority precincts’ enjoy such attributes as open parklands and primary and high schools for the children of thousands of families who will live in them.

Planning and Housing Minister Anthony Roberts announced in March that the state government is looking at increasing the number of ‘priority precincts’.He’s also admitted to the Northern District Times that he and Ryde MP Victor Dominello “have been busy doing what we can with respect to retrofitting the infrastructure — which is a lot more expensive than having a good plan from the beginning”.

And what about housing affordability? It now seems it was never part of anyone’s plan.


‘Don't bet the house on solving the affordability crisis,’ Mark Bouris, Sydney Morning Herald, 26 March 2017

‘The Bank of Mum and Dad is just generational self-interest to keep house prices high,’ Ross Gittins, Sydney Morning Herald, 28 March 2017

‘House prices jump 3.7 per cent since start of year,’ AAP Release on Sydney Morning Herald online, 27 March 2017

‘Chinese buyers to prop up Australian housing market: Credit Suisse,’ Myriam Robin, Sydney Morning Herald, 24 March 2017

‘Politics ensures Reserve Bank's housing pushback already failing,’ Michael Pascoe, Sydney Morning Herald, 23 March 2017

‘Rate cuts dismissed as house prices ‘defy belief’,’ Daniel Palmer, The Australian, 16 March 2017

‘Parliamentary Budget Office costs plan to abolish stamp duty in favour of broad-based land tax,’ Henry Belot, ABC News Online, 18 March 2017

‘Priority: better planning,’ Ben Graham, Northern District Times, 22 March 2017

‘Can budget 2017 fix housing affordability? Here are seven options,’ Greg Jericho, The Guardian, 17 March 2017

‘Home ownership 8 per cent higher in suburbs with shared equity schemes, study shows,’     ErykBagshaw& James Massola, Sydney Morning Herald, 24 March 2017

‘Australian housing markets 'defy belief' but bank warns against knee-jerk policy reactions,’

ErykBagshaw, Sydney Morning Herald, 16 March 2017

‘A shared home equity scheme will put roofs over more people's heads,’ Peter Martin, Sydney Morning Herald, 8 March 2017

‘Can budget 2017 fix housing affordability? Here are seven options,’ Greg Jericho, The Guardian, 17 March 2017

‘Adopt US model of tax deductions for homeowners, not investors,’ Daryl Dixon, Sun-Herald, 19 March 2017

‘House price shock: governments get serious,’ Editorial, Sydney Morning Herald, 18 March 2017

‘How would rising interest rates affect property prices?,’ Noel Whittaker, Sydney Morning Herald, 16 March 2017

‘Confidence in housing collapses to lowest level in 40 years: survey,’ ErykBagshaw and Peter Martin, Sydney Morning Herald, 16 March 2013

‘December quarter house price growth accelerated: ABS,’ Michael Bleby, Australian Financial Review, 21 March 2017

‘Superannuation for housing deposits would facilitate intergenerational theft,’ Michael Janda, ABC News Online, 16 March 2017

‘Fall in home ownership threatens to sink Australia's retirement system,’ Gareth Hutchens, The Guardian, 23 March 2017

‘Land tax: Parliamentary Budget Office costs plan to kill off stamp duty,’ ErykBagshaw, Sydney Morning Herald, 18 March 2017

‘Push to increase foreign stamp duty in NSW as more foreigners than first-home owners buying homes,’ AAP on Domain, 14 March 2017

‘Overvalued but no property crash on the horizon,’ Philip Baker, Australian Financial Review, 16 March 2017

‘Treasurer Scott Morrison pushes crackdown on investor loans amid house price concerns,’    ErykBagshaw& James Massola, Sydney Morning Herald, 25 March 2017


Is 2017 the year we reach ‘peak price’?

Wed, 15 Mar 2017
It’s a bit like watching a play where you know something about the plot but you don’t know how long the performance will last. Sydney’s housing prices continue to achieve record heights, and it’s logical to expect a retracement at some point; history tells us this, but just when will it happen?
Look at the cast onstage. The 45 to 54-year olds have two thirds of their total wealth in the form of housing, and for the 55 to 64-year olds the figure is about 60 per cent. While the older cast members are comfortable, the younger actors from generations X and Y are envious with low levels of home ownership and a choice of either playing the part of tenants the rest of their lives or of taking on the stresses of dealing with large amounts of mortgage debt.
Now add a new sub plot from the Organisation of Economic Co-operation and Development (OECD). This august body has just issued its latest biennial assessment that warns of an impending ‘rout’ in Australian house prices and says both prices and household debt have reached ‘unprecedented highs’.
In the OECD’s own words: “A continued rise of the market, fuelled by both investor and owner-occupier demand, may end in a significant downward correction that spreads to the rest of the economy."
The audience won’t want to leave its seats until the final curtain so they can see how it all turns out.
The OECD survey also says that in real terms Australian house prices have climbed to 250 per cent of their level in the 1990s, with much of the increase taking place in the past few years, "straining affordability, especially for first-time buyers in Sydney".
And it’s ‘housing prices’, plural, that deserve consideration. First there’s the price of houses – detached or semi-detached structures on their own block of land. Then there’s the price of apartments – a self-contained unit that occupies part of a building that contains other apartments. And there are a dozen other variables to consider including geographic location, proximity to the CBD, school catchment areas and so on.
For our purposes we’ll stick to the ‘median’ prices of houses and apartments as generally recognised by the Australian Bureau of Statistics (ABS) and the principal statistical compilers in the property industry. Even then, as we’ve noted before, there are variances in the methodologies used to calculate ‘median’ prices, but sooner or later we anticipate the ‘peak price’ of houses and apartments will be reached.
Cameron Kusher, CoreLogic’s senior research analyst, gives us a summary that puts the whole Sydney property market into perspective: “At the end of 2016, looking at both houses and units, 20.5 per cent of Sydney suburbs had a median value of less than $600,000 compared to 38.5 per cent of suburbs having a median value of at least $1 million. 
“To further highlight deteriorating housing affordability in Sydney, [only] 34.6 per cent of suburbs had a median [apartment]value of less than $600,000 at the end of 2016.”
He also commented that more Sydney suburbs have a median house value of $2 million than a median value under $600,000: “If you are earning a relatively low income in Sydney and are looking to buy a house or unit, you are competing for a rapidly declining pool of housing stock across the city.”
Irrational exuberance
Recently, after yet another frenetic weekend of sales activity, Domain Group chief economist Dr Andrew Wilson declaredthat we are now in “uncharted waters”.
“The amount of bidders and competition out in the Sydney market today…truly confirms what we’re all seeing – this is a hot market. The big question is where will prices go? I’m not sure buyers have capacity to keep pushing up prices.”
Lucia Stein from ABC News had this to say: “House prices can't keep rising forever. At some point, everyone will just calm down and refuse to pay way too much for a tiny place that isn't even in the area they really wanted to live.”
She quoted RMIT property economics professor Chris Eves who reminded us that it’s normal for housing prices to rise and fall.
"One of the things that sets Australia apart is that there are sectors that are currently oversupplied [too many houses] and there is potential that there won't be much market demand for those types of properties, which could lead house prices to fall," he says.
She also quoted LF Economics property economist David Lindsay who says we’re “in a pit of irrational exuberance.”
Mr Lindsay says we have a ‘speculative, credit-fuelled housing bubble’ and warns that the housing market isn’t bulletproof: “A lot of people thought the housing market was invincible and it could only go up, and one day it crashed and it burned a lot of people, and the financial system along with it."
Ms Stein’s conclusion is that when there are fewer people buying properties and supply continues to grow, prices will start to go down: “Eventually prices will reach a point where people won't buy and then you will see a slowdown in growth. But this might not happen for some time and, as Mr Eves suggests, what it means for first-time homebuyers is that they may be renting for the foreseeable future.”
The ABC’s Ian Verrender says that real estate is ‘baked into the Australian psyche’: “All up, Australians are in hock to the tune of more than $1.4 trillion on housing. That's a hell of a lot of debt just to keep the wind and rain out. Of that, more than half a trillion is on loan to property investors.”
He says that modern economies are geared to growth: “At the micro level, profits, wages and taxes all ideally should steadily increase, feeding into a moderate inflation rate and modest rises in asset prices that feeds into an expanding economy.
“Governments and central banks will do almost anything to avoid a bubble bursting, which is why no-one is serious about housing affordability. In the ensuing policy vacuum — and with the tax system geared to turbocharge prices — the Government and the Reserve Bank are praying for a moderate but relatively quick property market slump; a minor correction and a plateauing in national prices at the lower levels.”
But does this mean we’re in a bubble? Westpac boss Brian Hartzer doesn’t think so. He says in his opinion a housing bubble is fuelled by credit, but says: “I don’t think that’s what’s happening in Sydney or Melbourne.”
He told a House of Representatives economics committee that what’s happening to prices is the result of severe supply constraints running into a significant increase in demand from foreign buyers.
“There has been a significant ramp-up in construction and a big chunk of that has probably been targeting overseas buyers whose desire for the nature of the property isn’t necessarily the quality local buyers would want,” he told the hearing in Canberra.
Herald columnist Harold Mitchell poses a good question: “Why are we so concerned about owning our own property anyway?
“The great German economy has 60 per cent of residents renting their home. They don't feel the need to buy a property because the clever German government controls the rental market so that a family can securely lease a home for decades.”
Mr Mitchell says we need to change something soon: “It's plain we are letting our kids down, our country and now our grandkids. None of them are going to have the opportunity we had unless we have the courage to make some tough decisions soon. Reforming negative gearing would be good start.”
Investors take the lead
In the first quarter of 2017 there’s little doubt prices growth is being fuelled by investors. First home buyers represented just one out of seven housing loans taken out in December while the latest figures from ABS tell us that investors accounted for more than half – 57 per cent, of all housing loans. A growing number of would-be homeowners are giving up their aspirations and becoming long-term tenants, which only encourages more investors to acquire rental properties.
Sydney prices growth shows no signs of weakening. News Limited’s journalist Julia Corderoy tells us that CoreLogic’s Home Value Index shows house prices have risen an astounding 18.4 per cent from their levels a year ago.
“This is the highest annual growth rate in 14 years — since the 12 months ending December 2002 when the housing boom of the early 2000s started to slow. Over the past five years, Sydney house prices have surged 75 per cent,” she writes.
CoreLogic’s head of research, Tim Lawless, ascribes this growth to investors chasing capital gains on their property: “It clearly is not about the yield because yields are at record lows in Sydney. Investors are willing to sacrifice the cashflow on their property and are buying to secure future capital gains it would seem,” he told Ms Corderoy.
These are clearly good times for investors. Interest rates are low, prices keep rising, and those with existing properties can leverage those properties to borrow and acquire new ones.
The Australian Prudential Regulation Authority (APRA) tried to arrest rampant investor demand in late 2014 by imposing a cap on how many investor loans Australian banks could settle. Banks responded by raising interest rates and deposit requirements for investors, but the strategy hasn’t worked.
Martin North, financial services analyst and principal of Digital Finance Analytics told News.com.au that he thinks fiscal policy has failed and interest rates are too low: “I believe we have a major question as to whether what has been done is the right stuff. I think we should stand back and question where to from here? I don’t think just keeping a growth limit and doing nothing more is a strategy which is going to work.”
The state’s new Planning Minister Anthony Roberts, who has promised to deliver a government policy on housing affordability in the ‘very near’ future, recently declared that if you can get into the Sydney housing market you are then “pretty well set for the rest of your life”.
Mr Roberts also commented that Sydney is an international city: "And as such we are paying international prices for homes.”
He has a good point. The Knight Frank Wealth Report for 2017 tells us that the super-rich people of the world like what they see in Australia and are coming here in increasing numbers.  The report states that of all the people worth $US30 million or more in net assets, termed ultra-high-net-worth individuals (UHNWI), over 70 per cent will invest in Sydney and Melbourne property over the next 10 years.
And then there are the plain high-net-worth individuals, (HNWI) with a net worth of over $US1 million, excluding their primary residence. Michelle Ciesielski?, Knight Frank's director, residential research, Australia, says the latest figures show that Sydney has seen an annual net inflow of 4000 HNWIs.
"Sydney is at the top of the list for the highest net inflows of HNWIs globally, with the inflow representing growth of 4 per cent of the HNWI population already based in the city," Ms Ciesielski told the Sydney Morning Herald.
She said that historically low levels of homes listed for sale, strong population and tourism growth, continued investor appetite, rebounding foreign investment and a slow approval process which restricts new development have driven Sydney’s house price growth well ahead of other cities.
It might bereassuring to know we live in a country that’s viewed by others as “offering a fiscal and political ‘safe haven’ as well as quality of life”, but it also means that domestic property buyers will be competing with relatively wealthy buyers from overseas who may only have to pay what for them is a small premium to get the Sydney property they desire.
We might mention that Australian businessman Dick Smith has gone into print blaming immigrants for high house prices, declaring that the "enormous population increase" makes it impossible for young families to buy their first home.
"All of our problems are from this unbelievable population increase,” he says. “You can't drive in Sydney at the moment. The housing prices are enormous.”
Pollies’ affordability solutions
He’s certainly right about one thing: Higher housing prices do make housing less affordable, and affordability remains a huge problem for politicians and economists. In June 2015, the former treasurer Joe Hockey said that Australians wanting to buy their first home should "get a good job that pays good money".
And in February this year federal Victorian MP Michael Sukkar, Assistant Minister to the Treasurer, who has been delegated the task of finding solutions to the country's housing affordability problems, said a "highly paid job" is the "first step" to owning a home.
Not surprisingly, there are thousands of hopeful first-home buyers out there who don’t find such simplistic statements helpful to resolving their problems with unaffordability.They also question why the government has repeatedly rejected suggestions to curb negative gearing and capital gains concessions.
In March, Reserve Bank Governor Philip Lowetold a Standing Committee on Economics that altering negative gearing and the capital gains tax would take some heat out of the housing market, at least in the short term.
"It's likely it would reduce investment demand for a while, and if you have less demand for a while, you'd have lower prices and that would take the heat off housing market,” he said, noting that these kinds of taxation measures are outside the RBA’s authority.
Dr Lowe admits the Reserve Bank now finds itself in a difficult position. It could cut interest rates to stimulate the economy, but this would further fuel real estate prices. Or, it could raise interest rates to take some heat out of property prices, but this could also create serious problems for those with high levels of household debt.
The RBA’s March meeting left interest rates untouched and the Bank’s post-meeting statement commented that there had been a recent increase in borrowing by investors which would have the effect of adding to rental housing stock and lowering rent rises.
“In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years,” it said. “Growth in rents is the slowest for two decades.”
But this could be wishful thinking. The most recent appointee to the RBA’s board, high-profile businesswoman Carol Schwartz, told The Australian newspaper thatNSW’s strong economy supported by infrastructure investment was sustaining housing prices in Sydney.
“Unless there is a major global event, I can’t see what will bring it to an end,” said Ms Schwartz, who is also a director of the country’s biggest residential developer Stockland.
Also wary of international economic fluctuations is Greville Pabst, the executive chairman of valuers and buyers’advocate WBP Property Group. Mr Pabst expects Sydney house prices to continue their upwards trajectory: “I don’t see a correction this year, barring global events,” he said.
The Herald’s Peter Hartcher says much has happened on the demand side of the housing market in recent years as interest rates have fallen and the population has grown:“But no serious change has been made to address the supply side. The lopsided nature of the market, with rising demand and inelastic supply, has exaggerated price rises.”
Credit must therefore go to property developer Mirvac for their innovative ‘Right Start’ initiative that targets Sydney’s affordability crisis.
Mirvac’s General Manager of NSW Residential and Major Projects, Toby Long, told News.com.au’s Julia Corderoy that Sydney’s high prices have reached the point where a generation of young people face the prospect of never owning their own home.
“We’ve been looking at affordability for some time trying to find ways to give first homebuyers an opportunity to get into the Sydney market. We were looking at the pain points and two of the biggest pain points first home buyers have is not having the opportunity and then not being able to save up that 10 per cent deposit.”
As a way to overcome these ‘pain points’, Mirvac’s Pavilions development,a proposed 690 apartment project at the gateway to Sydney Olympic Park, will offer 60 of its lowest price apartments exclusively to firsthomebuyers, giving them priority over investors and owners of other homes.
In addition, first home buyers will be able to purchase the apartments, priced from $575,000 to $749,000, with just a 5 per cent deposit - about half the usual deposit requirement.
The remaining five per cent of the deposit can be paid in two annual instalments of 2.5 per cent. By the time the apartment reaches settlement when the development is completed in 2020, the first homebuyer will have the full deposit.
However, the NSW Government has ambitious plans for another 10,000 homes to be built at Olympic Park over the next decade, but so far only 3 per cent of these are to be designated as ‘affordable properties rented below market rates’.
So open the curtains and let the play begin. There’s drama aplenty as the dispossessed youths take on their elders in a battle over family castles. See the barons in Canberra and Macquarie Street fight their wars of words without reaching any meaningful conclusions, and beware of the foreign hordes that lie just without, poised to invade and capture the locals’ territory for themselves.
And amazingly the prices of dwellings in the kingdom of Sydney, from manor houses to the smallest cottages, continue to elevate skywards. The play’s the thing, the ending is still out of sight, and the drama’scertainly not over yet.
‘Westpac ‘putting customers first’,’ Colin Brinsden and Mary Silk AAP, News.com.au, 8 March 2017
‘Increased pressure on Federal Budget to use taxes to help first-home buyers,’ Malcolm Farr, News.com.au, 7 March 2017
‘Bank of mum and dad: Parents' property key to children's wealth,’ Thuy Ong, ABC News
Online, 3 March 2017
‘Annual growth in Sydney house prices the strongest in 14 years,’ Julia Corderoy, News.com.au, 1 March 2017
‘Sydney, Melbourne property now affordable – if you are ultra-rich,’ Carolyn Cummins, Sydney Morning Herald, 2 March 2017
‘Buy property in Sydney and you're 'pretty well set for life': Housing Minister Anthony Roberts,’ Jacob Saulwick, Sydney Morning Herald 24 February 2017
‘Rise and rise of house prices showing no signs of slowing down,’ Turi Condon and Sam Buckingham-Jones, The Australian, 2 March 2017
‘RBA's Philip Lowe takes aim at negative gearing, questions global race to cut corporate taxes,’ Thuy Ong, ABC News Online, 26 February 2017
‘A manifesto for Generation Rent,’ Jessica Irvine, Sydney Morning Herald, 22 February 2017
‘House prices: When will we get to the point that we just say NO?’ Lucia Stein, ABC News Online, 2 March 2017
‘More Sydney suburbs have a median house value of $2 million than a median value under $600,000, Cameron Kusher, CoreLogic, 23 February 2017
‘Coalition MP tasked with housing affordability says 'highly paid job' is 'first step' to home ownership,’ Latika Bourke, Sydney Morning Herald, 21 February 2017
‘The government is missing the opportunity to solve the housing crisis,’ Peter Hartcher, Sydney Morning Herald, 25 February 2017
‘Major apartment development to offer first homebuyers dibs,’ Lisa Corderoy, News.com.au, 27 February 2017
‘Immigrants to blame for high house prices, businessman Dick Smith claims,’ Michael Koziol, Sydney Morning Herald, 22 February 2017
‘Housing affordability: How did we get here, and do first-time buyers ever stand a chance?
Analysis,’ Ian Verrender, ABC News, 20 February 2017
‘Australia must face some home truths about housing affordability,’ Harold Mitchell, Sydney Morning Herald, 24 February 2017
‘First home buyers: Treasurer Scott Morrison vows to tackle runaway house prices,’ Peter Hartcher, Sydney Morning Herald, 21 February 2017
‘OECD warns of 'rout' in house prices if investors head for the doors,’ Peter Martin, ABC News Online, 3 March 2017

A happy New Year for Sydney property in 2017

Sat, 14 Jan 2017
The old year’s behind us and the new year will bring changes, but one thing that isn’t about to change is the price growth of Sydney property. As News.com’s Julia Corderoy put it at the end of 2016: “It has been a hell of a year for the Australian property market.”
The 2017 ANZ/Property Council Survey asked property professionals for their opinions about the likelihood of price growth in the future. The Council’s NSW executive director Jane Fitzgerald told Domain that the state is in a good position to start the year: “NSW had a strong 2016 and the next 12 months are looking positive with high expectations for growth, investment and hiring across the state,” she said.
SQM Research managing director Louis Christopher has also predicted a strong Sydney housing market, with forecasts of 11 to 16 per cent for the 2017 calendar year:
“This year could be a repeat of 2015,” he told Domain. “The first two quarters will be strong.”
A note of caution came from Angie Zigomanis, senior manager of research house BIS Shrapnel, who sees continuing growth in 2017 but said: “We won’t get price growth forever … we still think things will start to ease back again in 2018.”
Moody's Analytics economist Emily Dabbs said Sydney property prices had grown 11 per cent in 2016 and her company’s data indicates the strong price growth we saw in 2016 will continue into 2017.
"We haven't really seen a significant decline in prices in Sydney for quite some time, and it's very unlikely to be that way, just because of the amount of demand that there is in the city," she said.
Nationally, figures from Domain show that the median house price increased by 3.7 per cent over the three months ending November to a new record spring high of $774,799. The national unit price also rose by 3.2 per cent to $550,150.
The national house price is now 6.1 percent higher than that recorded over spring 2015 with the national unit price increasing by 4.2 percent over the past year.
Sydney has been Australia’s standout price performer for some time, with prices rising by a massive 67 per cent over the current growth cycle that commenced in June 2012.
The Sydney median house price increased by 4.9 percent over the three months of spring to a record high of $1,106,415 – an increase of 7.4 per cent over the past year.
In December, the auction market boomed, sharply reversing the previous trend of lower auction numbers compared to 2015 at the same time. There were 2463 weekend listings over the month of December compared to 1936 listed over December 2015.
The December weekend auction total was also the highest ever recorded for that month exceeding the previous record of 2421 set in 2014.
Domain Group chief economist, Dr Andrew Wilson, says that Sydney house prices can be expected to increase by 4 per cent in 2017 “…with the increasingly likely stimulatory impact of lower official interest rates offset by higher mortgage rates set by banks.”
He says that unit prices can also be expected to continue to rise although at a lower annual rate than houses. He estimates a rise of 3 per cent as the result of higher levels of new apartment stock entering the marketplace.
CoreLogic's head of research Tim Lawless said the relative weakness of units compared to houses is the result of a surge in supply that demand isn’t keeping up with.
"We are already seeing quite a divergence in the growth rates in the marketplaces where unit supply is looking problematic," he told the ABC.
Mr Lawless said that while there is the possibility of some substitution between houses and units if apartment prices continue to fall in relative terms, there aren’t many options for those wanting to buy a stand-alone house.
"We aren't seeing a great deal of new detached housing development and greenfield development at the outskirts of the cities; the current building boom is all about high-rise developments."
In 2017 the price growth will be noticeably stronger in some areas than it is in others. The days of buying just any property as long as it’s somewhere in Sydney are pretty much behind us, and the new year’s crop of buyers will be more selective.
Simon Cohen, co-founder of buyer’s agency Cohen Handler, says that family homes on the lower north shore are still a “great investment” in the north, while anything near the new light rail in Sydney’s east is worth considering.
“The hottest property types in the east and inner-city areas are two or three-bedroom apartments, as there [has been] an abundance of downsizers selling in 2016 but wanting to remain in the area,” said Mr Cohen.
Building construction slows
We can look at the numbers of building permits issued in NSW and get some idea of what sort of construction industry activity levels to expect over the next two years.
More than 31,000 new homes were built in Sydney in the 12 months to October 2016 - the highest annual number of new homes in over four decades, according to new data released by the NSW Department of Planning. But end-of-year figures show the numbers of development applications and approvals are trending downwards.
NAB senior economist David de Garis told ABC News that the large decline in apartment approvals at the end of 2016 indicated a faster and stronger slowdown in construction than had been expected.
"[Recent] building approvals point to real risks now that the dwelling activity cycle over the next one to two years will now likely be softer than previously expected unless demand and finance soon come to the rescue," Mr de Garis said.
"Against the now clearer decline in the apartment development pipeline, approvals for "alterations and additions" (the renovation market), picked up this month, though even there the trend is negative."
Approvals in NSW were down 19 per cent in figures released by the Australian Bureau of Statistics in November, and Sydney’s position as the driving force in apartment construction is under threat.
RBC Capital Markets' chief economist Su-Lin Ong says she expects the strong construction activity concentrated in east coast apartments will peak next year: “Most striking is the weakness in approvals for private apartments in New South Wales over the last three months, with monthly approvals running at around half their previous pace."
Ms Ong told ABC News that the figures indicate the housing cycle will peak in mid-2017 and that the Reserve Bank will make at least one more rate cut early this year.
One ongoing question is: “Are we building too many units in Sydney?” Fitch Ratings have compared Australia to Ireland, Spain and Great Britain and concluded we do not appear to currently be building more housing than it needs to match population growth, with 0.57 homes completed per extra person.
Australia is currently building enough new homes for each one to house 1.75 people, where the fairly long-term average household size has been 2.6.
Less global in nature but certainly relevant is a 2016 report by BIS Shrapnel that concluded Sydney is still suffering from an undersupply of housing.
BIS managing director Robert Mellor said in the report: “It’s so severe we won’t see an oversupply in Sydney in the next four years. A downturn in Sydney between 2004 and 2012 was so severe, basically only in the last 12 months we’ve started to see construction move above the level of demand.”
Affordability skewed by tax
Both the State and Federal governments have expressed their concerns about how hard it is for ‘ordinary’ Australians to buy a home, particularly in Sydney.
Prime Minister Malcolm Turnbull told The Daily Telegraph that councils are taking too long to approve development applications and that this is fuelling Sydney’s high housing prices.
“We’re not asking people to compromise on planning standards, but it shouldn’t take you 18 months to get a DA if in other cities it can take you six months,” he said.
Housing affordability also remains a major concern of the Property Council of Australia. According to the council, stamp duty is just one of the areas in need of urgent reform with the typical buyer in NSW forking out an average of $40,000.
The council has a good point. Jacob Saulwick, writing in the Sydney Morning Herald, tells us that about 12 per cent of NSW government revenue comes from taxes charged when individuals and companies buy property.  Almost 8.5 per cent of revenue comes from taxes charged on residential stamp duty; residential stamp duty increased by 19 per cent in 2014-15, and by 13.4 per cent in 2015-16.
However, NSW Treasurer Gladys Berejiklian insists that housing affordability can only be corrected by increasing the supply of housing: "Tackling housing affordability remains a major priority for the NSW government and we believe the best thing our government can do is to help deliver more houses to put downward pressure on prices," Ms Berejiklian said in her government’s half-yearly budget review.
Professor Peter Phibbs, head of urban and regional planning at the University of Sydney, disagrees. He says that NSW "has done everything right" by supporting an increase in housing supply, but there is no evidence it had done anything to improve affordability.
"It will help, and we should do it," he says. "But we're at 40-year highs [in building completions] and it hasn't generated any significant benefit."
The Daily Telegraph says that Sydney’s high prices are creating “real estate refugees’’ who have to leave the city and migrate north to find affordable housing: “Home buyers are now spending almost half their income on mortgage payments, with Sydney homes costing 10 times more than the average annual wage.”
Coalition MP and federal member for Bennelong, John Alexander chaired a 20-month long enquiry during 2015 and 2016 that looked for ways to help genuine buyers – the ‘owner-occupiers’ rather than investors, own their own homes.
Because the Coalition is committed to a position of not changing the current capital gains tax and negative gearing rules, this leaves little room for other options to be considered.
Treasurer Scott Morrison has outlined the federal  government’s position: "It is the Government's view that the mum and dad investors, who actually provide the capital for the nation's rental housing stock, if we were to withdraw that, then that has the only outcome of increasing rents," Mr Morrison said.
Mr Alexander’s enquiry considered such mechanisms as making continuing adjustments to the ability of banks to lend to investors, and allowing workers to divert the 9.5 per cent of wages now going into superannuation towards paying off a home loan.
But to date no clear direction has emerged from the enquiry’s findings. In fact, the enquiry was unable to make any recommendations to the government for reform of the present situation.
"The committee notes that rates of home ownership and investment in housing have remained broadly steady for many decades and that the current price cycle in the housing market across the nation overall is not inconsistent with historical trends," the enquiry’s report said.
Committee chairman David Coleman fell back on the argument that there is no structural problem with housing affordability and supply should be boosted as appropriate.
Grattan Institute chief executive John Daley told the Sydney Morning Herald: "They cannot be serious. It's laughable. There's clearly a housing affordability problem for younger households."
Mr Daley added that housing data showed home ownership rates for people under 55 and for low-income Australians are "falling like a stone".
And it’s not being caused by foreign buyers. A recent study by two Treasury officials concluded that the impact of foreign buyers on Sydney property prices is relatively small.
A working paper by Treasury officials Chris Wokker and John Swieringa said that compared to the average quarterly increase in property prices of around $12,800 in Sydney and Melbourne, foreign demand increases prices by between $80 and $122 on average.
“Foreign demand has accounted for only a small proportion of the increase in property prices in recent years,” the paper concluded.
But it’s not like investors are leaving the scene, according to The Guardian’s Greg Jericho: “It is now five years since the RBA began cutting rates in November 2011. In that time there has been a veritable surge in the housing investment that has helped fuel economic growth,” he writes.
“So strong has been the growth of dwelling investment in NSW that while in total NSW accounts for just under a third of all such investment in Australia, it has accounted for 61% of the growth in that investment in the past five years.”
Soon, there could even be a rush of Americans who aren’t sure they want to live under a Trump administration looking for new homes in Sydney, according to the Financial Review’s Su-Lin Tan.
“Aside from apartments, ‘fleeing’ Americans [are] also looking for ‘traditional Australian homes’ in Sydney's eastern suburbs and most were willing to spend between $3 million to $5 million.”
She quotes Raine & Horne's Ric Serrao who said he received the number of inquiries from America that he normally has all year in just six weeks after Mr Trump won the US election.
"In my market [in Sydney’s eastern suburbs] we normally get 10 to 15 inquiries all year. We have had 12 to 15 since the election," he said.
Clearly, the opportunities for further growth in property prices that are offered by Sydney more than any other capital city are too good to be overlooked by investors who’ve already done well and will simply continue doing what they’ve been doing in 2017.
Interest rates TBA
Although there are several conflicting forecasts already being made for interest rates this year, it would be a brave economist indeed who would bet their own house on a percentage of increase or decrease until we gain an idea of just how the election of Donald Trump will affect US financial markets.
The new US President has said he will slash taxes on business and expend massive amounts on infrastructure and the military, financed in no small means by deficit spending. The US GDP will most likely rise, as will the national debt. But nobody really knows what it means for interest rates.
Steve Keen, economics professor at London’s Kingston University, thinks Trump’s first term will see a sharp acceleration in US growth – to perhaps 4 per cent a year.
(Although he hates being reminded of it, we should mention that this is the same professor Keen who in 2010 made a 225-kilometre trek to Mount Kosciuszko after losing a bet he made in 2008 that Sydney house prices would fall by 40 per cent.)
But whatever happens, it will affect interest rates in Australia. The Guardian’s Lindsay David believes that Trump’s policies could be inflationary for Australia’s economy: “The post-Trump election bounce in US bond yields has already fed into an increase in borrowing costs in Australia” he wrote.
“Rising bond yields mean that the government or banks have to pay a higher yield (interest rate) to borrow money because the market is starting either to demand greater reward for risk – or to combat real economy inflation in a nation that has its banking and household sectors already highly leveraged.”
Although that national description can be applied to Australia, most Australian economists are still betting – in print, on at least one rate cut early this year. However, the OECD is predicting the Reserve Bank will start to increase rates late in 2017 as the economic recovery strengthens and housing prices blow out.
"This is not completely crazy," said Paul Dale from Capital Economics, in an interview with the Sydney Morning Herald. He points to a stronger-than-expected housing market, a weaker Aussie dollar, and Trump's surprise victory contributing to a spike in Australia's key commodity prices as well as a six per cent rise in equity prices.
However, Mr Dale also says the RBA is "almost guaranteed to leave interest rates on hold" following the surprisingly big fall in construction work in the third quarter of 2016, a concern over deterioration in the labour market and still-soft wages growth.
The major banks have already begun to raise their variable interest rates on new and existing loans. The increases are small, but they are being applied without any increase in the RBA’s rate and despite a general belief among most economists that rates will not increase in the short-term.
"We consider a range of factors when we set interest rates, such as what is happening in the economy, the market, and regulatory requirements. This includes when changes need to come into effect," a NAB spokeswoman told the Herald’s Clancy Yeates.
Macquarie economist James McIntyre is predicting a base case of two RBA cuts in the first half of 2017, taking the cash rate to a new record low of one per cent.
"The recent data flow suggests that the RBA will be presented with weaker-than-expected economic growth, and potentially lower inflation, when it meets in February," he told a briefing in Sydney.
The RBA has been counting on continued strength in home building to offset the lingering drag from a slump in commodities prices and mining activity.
"Total approvals are still relatively high but the speed at which they are rolling over is a real surprise," said Shane Oliver, chief economist at AMP, quoted in a Reuters release.
"It already looks like the economy lost momentum in the third quarter and now residential investment could turn into a drag on growth [in 2017]. That only underscores our call for another rate cut."
Meanwhile, the RBA has been resisting further easing following cuts in August and May that took the cash rate to an all-time low of 1.5 per cent.
Government policymakers argue that the drag from a slowdown in mining investment has almost passed, and a revival in prices for key commodity exports in recent months indicates a rise in national income is about to happen.
Mortgage Choice chief executive John Flavell told News.com.au that the possibility of a rate hike became far more likely when the US Central Bank announced it would increase its benchmark short-term interest rate in December.
“The [US] Central Bank said the recent progress of the economy gave them the impetus they needed to increase the Federal Funds rate by 25 basis points to 0.75%,” he said.
“The Bank also indicated that the Federal Funds rate could rise by a further 75 basis points throughout 2017 — through three separate rate increases.
“This announcement, combined with the fact that many of Australia’s lenders have started to raise rates across their suite of home loan products, would suggest a cash rate increase by the Reserve Bank of Australia is now more of a possibility than not in 2017,” he told News.com.au.
There are some safe bets for 2017: Sydney housing prices will remain on their upwards trajectory, the rate of prices growth for detached houses will be higher than the rate for units, auction clearance rates will stay robust, some parts of Sydney will strongly outperform others, and investors will continue to acquire property thanks to the taxation advantages they enjoy.
But interest rates remain uncertain. At its last board meeting of 2016, the Reserve Bank said that conditions in the established housing market have strengthened in recent months.
“In Sydney and Melbourne, housing price inflation had picked up and auction clearance rates were at high levels,” the RBA’s December 6 board meeting minutes declared.
This could mean the RBA is setting up conditions for a rate rise in early in the new year. But don’t try to be brave and bet your house on interest rates going up, going down or even staying the same in 2017. It’s very much a case of ‘To Be Advised’.
‘Expected house price growth in 2017 could spell trouble for Sydney,’ Jennifer Duke, Domain, 13 January 2017
‘Sydney real estate: Home values DOUBLE in eight years, buyers forced to migrate north,’ The Daily Telegraph, 3 January 2017
‘Wealthy Americans eye Sydney property to escape Trump,’ Evan Vucci, Australian Financial Review, 1 January 2017
‘Steve Keen: rebel economist with a cause,’ Patrick Commins, Sydney Morning Herald, 5 January 2017
‘NSW Treasury braces for Sydney property market slowdown,’ Jacob Saulwick, Sydney Morning Herald, 12 December 2016
‘Year in review: A look back on the big stories affecting the real estate industry in 2016,’ Kate Jones, Domain, 29 December 2016
‘Economists predicted house prices would stabilise in 2016, but the opposite happened,’ Gareth Hutchens, The Guardian, 4 January 2017
‘Property 2017: Gold Coast set to boom, but still no end in sight for Sydney,’ Julia Corderoy, News.com.au, 25 December 2016
‘Record number of homes built in Sydney, but it's still unaffordable,’ Lisa Visentin, Sydney Morning Herald, 22 December 2016
‘As Australia's housing bubble gets bigger, the Reserve Bank prepares to blame Trump,’ Lindsay David, The Guardian, 1 December 2016
‘Apartment approvals crash as building cycle rolls over,’ Stephen Letts, ABC News Online, 30 November 2016
‘Sydney property prices show no signs of slowing down in 2017, while other major cities ease up,’ David Taylor, ABC News Online, 30 November 2016
‘Malcolm Turnbull's big chance to be the new Menzies and help first home buyers,’
Peter Martin, Sydney Morning Herald, 1 December 2016
'It's laughable': Government slammed for housing affordability probe that proposes no changes’, Michael Koziol, Sydney Morning Herald, 18 December 2016
‘Spring house prices surge – Sydney and Melbourne still booming,’ Dr Andrew Wilson, Domain, 18 December 2016
‘Housing affordability: ‘Red tape’ to blame for property crisis,’ Daily Telegraph, 27 December 2016
‘Sydney auction market ends year on record high,’ Dr Andrew Wilson, Domain, 20 December 2016
‘Housing supply and demand in balance: Fitch,’ Michael Janda, ABC News Online, 30 November 2016
‘Rate hike? A cut is far more likely, economists say,’ Zac Crellin, Sydney Morning Herald, 1 December 2016
‘Australia home building boom fast turning to rubble,’ Wayne Cole, Reuters, 30 November 2016
‘House prices tick higher but unit values fall,’ Michael Janda ABC News Online, 1 December 2016
‘Study: Foreign buyers lift prices between $80 and $122 on average per quarter,’ AAP on Domain, 2 December 2016
‘Investors are back: the uneven housing market, interest rates, and what the RBA can do,’ Greg Jericho, The Guardian, 14 December 2016
‘Are we headed for a housing crash — or not?,’ Charis Chang, News.com.au, 4 December 2016
‘Speedy rate hikes protect bank margins,’ Clancy Yeates, Sydney Morning Herald, 11 December 2016

More homes planned for Sydney but affordability concerns grow

Mon, 12 Dec 2016

The NSW government, having already raked in unprecedented millions in stamp duty from the superheated property market of the past three years, has now announced that something like 200,000 new homes will be built in Sydney over the next five years.

NSW Planning Minister Rob Stokes said that these new homes would be mostly apartments and townhouses, and that development would be focused on Parramatta, Blacktown and the City of Sydney.
"While there will continue to be opportunities to buy detached homes on the blocks on the fringes of Sydney,” he said, “there's a real focus on apartments, on terrace houses and on medium-density developments in established areas."
Without a great amount of detail about the government’s plans at this stage, he said the government was spending $73.3 billion on infrastructure over the next four years that would "support growth in the right areas".
The NSW Government also has plans extending 10 years into the future. The Department of Planning forecasts that an extra 600,000 people will be living in Sydney’s south and far west in the coming decade.
The Minister says the city’s future housing needs will be met in thirds. According to ABC News Online’s Jacob Saulwick, the government’s intentions are that one-third of Sydney’s new housing will be built on the outer south-west and north-west fringes of the city; one-third will be spread through the city’s existing suburbs, and one-third will be delivered close to existing public transport in state government led programs.
And it’s not all about apartments. In October, the NSW government released the draft of a ‘Medium Density Design Guide’ that it hopes will encourage the construction of new townhouses and terrace style housing.
Mr Stokes calls terrace houses in the draft ‘the missing middle’: “What we know is that we’re getting a lot of apartments and high-rise units across Sydney, we’re also getting detached housing on the fringes of Sydney,” Mr Stokes said in an interview with the ABC.
“What we are missing out on though is that human scale of development that typifies so many cities overseas and that really is all about terraces.”
As News.com.au journalist Julia Corderoy points out, builders would rather construct apartments: “Medium density housing accounts for just 10 per cent of housing approvals in Sydney, with just 5,390 approved in 2015-16.
“This is despite there being the potential for almost 280,000 medium density dwellings in Sydney based on current council zoning and planning controls.”
This situation could change if apartment sales continue to slow and developers turn to the yet-untapped market for townhouses and terrace houses that represents an unsatisfied demand from young families and recent retirees.
Minister Stokes made the news again in late November when he blamed negative gearing tax breaks for reducing housing affordability in Sydney, and said increasing the supply of new dwellings will not make property more affordable.
Several property industry figures immediately rebutted the Minister’s position, and Prime Minister Malcolm Turnbull confirmed there are no plans to change the present negative gearing taxation arrangements.
Unit construction boom continues
CoreLogic’s Cameron Kusher says that at the end of the June 2016 quarter there were 55,682 units under construction across NSW: ““If you look at the long-run averages you can see that the current unit construction boom is unlike anything we’ve ever seen before. The long-run average for units under construction is 16,194 in New South Wales.”
Further analysis shows that, if all the approved units are completed, over the next two years unit stock in some regions of Sydney is going to increase dramatically - Strathfield-Burwood-Ashfield will increase by 20.7 per cent, Parramatta unit stock will increase by 19.2 per cent and Auburn by 26.1 per cent.
As expected, the building boom is showing signs of slowing, with building approvals falling 8.7 per cent nationally in September as the number of new apartments approved fell to its lowest total in eleven months.  Apartment approvals in NSW experienced a 20 per cent month-on-month decline in September, the biggest fall in over a year.
UBS economist Scott Haslem said he wasn’t surprised by these figures as they were anticipated by market analysts: "Nonetheless... the backlog of approvals / commencements implies housing supply will not actually peak until 2018. This will support housing activity throughout 2017 and into early 2018."
Price growth unstoppable
Domain Group data found Sydney’s median house price has now reached a record $1,068,303, after a 2.7 per cent jump over the September quarter. Investor activity also increased 9.2 per cent in the year to August 2016, said Domain Group chief economist Andrew Wilson.
“The growth is raging back into Sydney … we have auction clearance rates in the mid-80 per cent range, and there were two interest cuts in August and May this year,” Dr Wilson said. 
Figures from CoreLogic also confirm that home prices in Sydney continue to rise with a 10.6 per cent year-on-year gain to November. This is a price “reacceleration” according to CoreLogic’s research director, Tim Lawless.
"Consistently over the past two months we've been seeing Sydney clearance rates above 80 per cent, in fact there's only been one week over the past eight where the clearance rate has dipped only slightly below the 80 per cent mark," he said in an interview with ABC News journalist Gordon Taylor.
"So I think we have seen some rebuilding in the housing market on the back of a lower cash rate and lower mortgage rates."
He added that the current home price spike is still a significant reduction from the peak growth rate of almost 19 per cent per annum for Sydney property prices in July 2015.
Property analysis firm SQM Research believes the “reacceleration” will continue into 2017. Its ‘Property Outlook Report’ forecasts price growth over 2017 of between 11-16 per cent in Sydney.
Louis Christopher, head of SQM, said in the report: “What we have noticed in very recent weeks is an acceleration, particularly in the Sydney housing market. Our view is that this acceleration will continue, it will go well into 2017."
He does recommend the Reserve Bank of Australia (RBA) and the bank regulator APRA take some action to further tighten lending criteria before 2018: "What we suggest is that it's best to move sooner rather than later because, if there is no action, it could be a large issue in 2018 where potentially a hard landing could play out."
Supply shortage to 2018
Seeing a potential glut of apartments in parts of Sydney, National Australia Bank has identified some suburbs where buyers will need a minimum 20 per cent deposit to get a home loan from the bank.
It has issued a list to brokers of what it calls ‘Group A’ postcodes in rural areas, where lending is capped at 70 per cent of the property’s value, and ‘Group B’ postcodes where an 80 per cent loan-to-value ratio will be required. Sydney’s Chippendale, Waterloo, Haymarket, Carlingford, Parramatta, Barangaroo and Homebush are some of the suburbs on the latter list.
Comparison website Canstar editor Justine Davies points out that aspiring property owners can always look outside the ‘Big Four’ banks for a loan: “There are more than 100 home loan lenders in the market, and the vast majority still offer home loans with a deposit of 10 per cent or less.”
At least one of the ‘Big Four’ isn’t worried about a glut being caused by the number of apartments now being built in the greater Sydney area. The head of Westpac’s consumer bank, George Frazis, says he is confident that Sydney will still have a shortage of homes over the next two years, and quite possibly longer than that.
Although he expects something like 10,000 new apartments to be completed over that time, he said in an interview with Business Day that Westpac has no concerns about its exposure to inner-city units.
"We still have a structural shortage of housing in Sydney because of the population growth and the pent-up demand," he said. "Even if we look at what's coming online over the next year or two, we'll still have structural undersupply."
He did say that Westpac had “lowered its exposure” to inner-city apartments, but pointed out that the proportion of inner-city apartment loans more than 90 days behind in repayments was lower than the bank’s loan book average.
Regardless of whether Westpac has reason for any concern about a possible glut of apartments, CoreLogic figures show that apartment prices in the Sydney CBD have fallen – a 9.1 per cent drop over the past 12 months.
One cause of this decline is the change in the attitude of the ‘Big Four’ over the past two years, from one of expansion to the present tightening of loan requirements.
REA Group Chief Economist, Nerida Conisbee believes this has been caused by “settlement risk” saying: “Banks are now being restricted on the amount that they are lending, particularly to investors. People have put down deposits two years ago…but [in that time] the banks can change their approach to risk quite significantly.”
In some cases, buyers who paid their deposit on an apartment two years ago may now find that their bank won’t lend them the full amount of the balance of the purchase price. That can force the original buyer to sell the property for a lesser amount than they originally agreed to pay.
Ms Conisbee told news.com.au journalist Julia Corderoy that at least this offers a glimmer of hope for first-home buyers: “It is fantastic for affordability. People talk about an oversupply and in the same breath an affordability problem, but you kind of have to have an oversupply to lead to affordability.”
Another glimmer came from a recent ruling that foreign investors can only purchase new properties. As news.com.au journalist Frank Chung described it: “If an off-the-plan sale falls through, the property will be considered second-hand. This means thousands of foreign buyers will be stopped from picking up the properties, lowering the eventual resale price.”
Inevitably there will be some off-the-plan sales that fall through. It may well be only a small percentage of the total number of new units coming onto the market, but property research firm CoreLogic says around 230,000 apartments are due to be completed across all capital cities by 2018 - more than double the annual average sales of apartments over the five years to April 2016.
The affordability issue
Housing affordability is increasingly being identified as a serious problem for those wanting to acquire a home in Sydney. With prices as high as they are, and no end in sight to the upwards price curve, governments at both state and federal levels are waking up to the fact that would-be buyers – especially those who are younger and earning lower wages, have been priced out of the Sydney market.
This also affects those who want to find rental accommodation in Sydney. Rents are broadly based on property prices – the more valuable the property, the higher the cost of renting it.  High prices mean high rent costs, and despite some indications of price falls in CBD units, Sydney is still an extremely expensive city in which to rent an apartment.
The answer isn’t just to build more apartments if it’s going to cost over $1 million for a 2-bedroom unit within 20 km of the CBD, nor is it to have apartments built on the city fringe where infrastructure – such as public transport, schools and hospitals is missing or in short supply, and where jobs are hard to find.
There are many voices offering a variety of solutions, some of which are practical, at least in theory, and others that are wildly optimistic and impossible to implement. Social housing is often mentioned in the media, but governments at all levels have no plans or funding for constructing large social housing projects in our capital cities.
John Daley, CEO of the Grattan Institute, offers his opinions: “New developments on the edge tend to be a long way from where additional jobs are being created. Over half of the net growth in jobs in Melbourne, Sydney and Brisbane in the last five years was within 10km of the CBD.”
But the market is clearly showing it doesn’t want this new supply to be ‘inexpensive’ apartments, according to LJ Hooker Head of Research Matt Tiller: “I think at this stage, developers are building what the market demands. They have obviously seen demands for these luxury high-end apartments,” he said.
So, even if the problems of housing affordability are easy enough to delineate, their solutions are proving elusive. One thing is clear: no matter how much housing is added to the market in the greater Sydney area, prices will keep rising.
Looking forward
Looking toward the future, most observers of the Sydney property market can see only blue sky ahead. Despite a slowing of the year-on-year price growth, there’s little doubt that the present upwards price pressures will continue well into 2017.
The property market seems to be going its own way, regardless of mixed economic signals – we have a lower jobless rate but falling full-time employment levels, the Australian dollar remains high while inflation and interest rates are at record low levels.
Interest rates have suddenly popped back into the news with speculation that the election of Donald Trump in the USA could bring on global conditions that would favour an increase in interest rates.
It was only a few weeks ago that both Trump’s election and a rise in interest rates seemed out of the question. Concern about inflation had led the RBA to cut rates twice this year which had the effect of adding strength to the Sydney property market.
More recently, financial traders have grown increasingly confident about the Australian economy and are now pricing in a greater than 50 per cent chance of a rate hike in 2017.
Westpac’s George Frazis also raised the possibility of higher mortgage interest rates as a result of the recent surge in bond yields: "Obviously, if the yield curve is going up, then that will have an implication for fixed rates, potentially," he said.
Westpac is the first major bank to increase interest rates on its fixed rate home loans and investment loans - an increase of 0.6 percentage points to 4.59 per cent in the interest rate for five year loans to investors, and market watchers expect other lenders to follow. 
Domain asked three of the city’s most prominent analysts what they thought would happen in the coming year and here’s what they replied:
HSBC chief economist Paul Bloxham said there’s likely to be more price increases over the next few months, but it will be single digit rather than double-digit growth on an annualised basis,
BIS Shrapnel residential researcher Angie Zigomanis thinks price growth is likely to continue, as investor numbers are looking better and the banks could be loosening some of their criteria for lending.
Century 21 chairman Charles Tarbey said he has “bullish prospects” for the market to the end of the year but thinks prices may start to moderate in 2017.
Eliza Owen, market analyst for Onthehouse.com.au, sees the market slowing but still strong: “In the NSW market, capital growth, sales and development are still steady, though capital growth in Sydney is lower than the previous year. [More affordable] Western areas of Sydney in particular are being capitalised upon by developers.”
And in his October ‘Property Snapshot Infographic’, CoreLogic’s research analyst Cameron Kusher also remained cautiously optimistic, saying: “We are expecting Sydney and Melbourne value growth will remain strong for the remainder of 2016 [but] will probably start to slow throughout 2017 as more supply enters the market.”
‘Forget apartments: We need more townhouses,’ Julia Corderoy, News.com.au, 29 November 2016
‘November Market Update’, Eliza Owen, Residex, 25 November 2016
‘NSW Government should abolish stamp duty and leave negative gearing, real estate industry figures argue,’ Jennifer Duke, Domain, 25 November 2016    
‘Westpac's George Frazis hoses down apartment glut,’ Clancy Yeates, Sydney Morning Herald, 21 November 2016
‘Apartment prices in our CBDs are falling,’ Jill Corderoy, News.com.au, 20 November 2016
‘Sydney set for biggest-ever housing construction boom in 'war against sprawl',’ Virginia Small, ABC News Online, 20 November 2016
‘Where we’ll live’, Jacob Saulwick, ABC News Online, 22 November 2016
‘Home prices continue rising; Sydney, Melbourne, Canberra lead,’ Michael Janda, ABC News Online, 1 November 2016
‘Home prices to keep surging in Sydney, Melbourne over 2017, risk of 2018 bust: SQM Research,’ Michael Janda, ABC News Online, 3 November 2016
‘RBA grapples with uncertain job market, accelerating housing,’ Michael Heath, Bloomberg in Sydney Morning Herald, 15 November 2016
‘Failed off-the-plan apartments ‘second-hand’,’ Frank Chung, News.com.au, 24 October 2016
‘These Australian suburbs could see explosive growth in new apartments in the next 2 years,’ David Scutt, Business Insider, 25 October 2016
‘NAB blacklists loans for properties in ‘risky’ suburbs,’ Dana McCauley, News.com.au, 24 October 2016 
‘Solutions beyond supply to the housing affordability problem,’ John Daley, Joe Hurley, Nicole Gurran, Robin Goodman, Domain, 25 October 2016
‘Strongest Sydney house price growth in a year: Domain Group,’ Jennifer Duke, Domain, 27 October 2016
‘Building approvals fall more than expected in September as apartments slump,’ Michael Bleby, Australian Financial Review, 2 November 2016
‘Demand for luxury apartments signals worrying trend for affordability,’ Julia Corderoy, News.com.au, 28 October 2016

Sydney property is past peak growth but it’s not over yet

Mon, 31 Oct 2016

The ‘Great Australian Dream’ may be over but prices growth in Sydney is sustained by strong demand while affordability remains a concern for first-home buyers.
The media love a good disaster, which is why every so often there’s a headline about an impending property price collapse, often predicted by an overseas ‘expert’ or even an Australian analyst who’s not getting his or her desired share of media attention. The words ‘crash’ and ‘bubble’ are familiar in such articles.
It’s not just the tabloid media that likes to push the ‘bubble’ button. Global asset manager UBS even has a ‘Global Real Estate Bubble Index’ report which recently analysed residential property prices in 18 financial centre cities around the world, with Vancouver, London and Stockholm at the top of the list and Sydney in fourth place.
Using a methodology developed by the US Federal Reserve Bank of Dallas, UBS found the real house price to disposable income ratio per capita had risen to its highest point since the survey started in 1985 and showed Australian house values had moved about seven per cent above previous peaks in 2003, 2007 and 2010.
"A change in macroeconomic momentum, a shift in investor sentiment or a major supply increase could trigger a rapid decline in house prices," the UBS report said, concluding that: "Investors in overvalued markets should not expect real price appreciation in the medium to long run."
Morgan Stanley went a step further. The firm’s analysts issued a research note that forecasts a national housing oversupply of about 100,000 dwellings will develop by 2018. It believes the RBA will be forced to cut interest rates even more in the second half of 2017 – to a new record low of one per cent.
Journalist Clancy Yeates, writing in the Sydney Morning Herald, commented on recent media reports about homes selling for big premiums above their reserve prices and auction clearance rates at or above record levels: “When you consider prices have already surged 60 per cent in Sydney and 40 per cent in Melbourne in the last four years, it can start to look a bit ‘bubbly’, says Mr Yeates.
He looked at the results of Westpac’s October survey which shows consumers are getting cautious about housing. Their responses to the question: “is this a good time to buy a dwelling”, are about evenly-divided between pessimists and optimists.  With interest rates at historic lows this came as a surprise.
It does help explain why banks’ approvals for new home loans are showing signs of declining. With a high number of rental apartments due to come onto the market over the next couple of years, rents are likely to also decline and that makes renting a more attractive option to buying.
52 months of growth
This column has a focus on the greater Sydney area where prices have most certainly gone skywards in recent times. It must be remembered that property is always a long-term asset in a market that has experienced cycles of ‘bust’ and ‘boom’ many times.
Domain Group data shows that Sydney’s median house price is now at a record $1,068,303, after a 2.7 per cent jump over the September quarter. Naturally, after 52 continuous months of property price growth, we wonder what’s coming next in the mix.
CoreLogic head of research Tim Lawless told News.com.au that the last time the market had experienced such a long period of growth was during the housing boom between 2000 and 2004 but conditions aren’t the same in 2016.
“More and more segments of the marketplace just simply can’t be involved in the market because they can’t either scrape together a 20 per cent deposit because prices are so high or they simply can’t service a mortgage, despite the very low mortgage rates because the buy-in price is quite substantial,’’ Mr Lawless said.
However, in 2016 we can see some definite parallels with the boom of 2004. An independent consultant, Shane Lee, investigated the situation regarding apartment oversupply in the Eastern states.
"We saw this (oversupply) in 2004 and a sharp correction in prices," Mr Lee told ABC News Online’s Stephen Letts.  "Over 18 months to two years we saw apartment values fall 15 to 20 per cent in Sydney."
At that time, when there was a resources boom in Western Australia and Queensland, property investment followed the flood of workers to the resource rich states and apartments in Sydney became vacant.
Combined with rising interest rates, this caused a halt in Sydney apartment construction and we’re just now getting back to filling the vacuum created by the undersupply.
Lots of apartments, but not many houses. In fact, according to an article by Julia Corderoy on News.com.au: “The latest Metropolitan Housing Monitor statistics released by the NSW Government show just 35 detached houses were built in the inner-city Sydney local government area in 2016. This compares to the 2836 multi-unit dwellings completed.”
From GFC to stability
In the past two years, we’ve seen a period of price stabilisation following the recovery from the Global Financial Crisis – an economic event so significant that just the initials ‘GFC’ bring memories of widespread financial losses.  But that was really a crisis of 2008-2009 – long enough ago for our property market to have not just recovered but to have made amazing gains.
We’re now in a time of ‘unprecedented uncertainty’ according to Michael Bleby of the Australian Financial Review. As he describes it: “A record year for Australia’s volume home builders raises concerns that the country’s largest-ever housing construction cycle has peaked.”
The Australian Bureau of Statistics (ABS) keeps a close watch on the housing situation and their figures clearly show that house price growth is slowing. Statistics from CoreLogic show that growth in Sydney slowed to just 0.8 per cent in September.
Another factor in the housing cycle, particularly in metropolitan Sydney, is the serious decrease in affordability; housing is too expensive. The situation is especially dire for first-home buyers who are the most talked-about victims of the housing market’s high prices. 
Domain’s chief economist, Dr Andrew Wilson said the current strong auction market has predictably translated to higher prices which please sellers: “Potential first-home buyers, however, will not welcome higher prices that will act to offset the benefits of current record-low interest rate and a highly competitive lending environment.”
In fact, a recent revision in statistics collection methods by the ABS found that numbers of first-home buyers were even lower than previously reported. An ABC News Online article by reporter Thuy Ong revealed the original ABS numbers showed that 14.1 per cent were first-home buyers nationally in July 2016, but that has been revised lower to 13.2 per cent. In New South Wales that figure drops to 8 per cent.
"I think it reinforces what a lot of people think and that first home buyers are really struggling in the market at the moment," said Cameron Kusher, head of research at CoreLogic.
Also reported by ABC News Online, research by Deutsche Bank's chief Australian economist Adam Boyton shows it would take a 25 per cent decline in Sydney home prices to bring the size of the deposit required back the average level of the past 20 years.
 "The more pressing affordability issue has less to do with mortgage repayments in our view, but more to do with the ability of those that have not enjoyed the most recent run-up in prices to enter the market," said Mr Boyton.
More supply not the answer
In a lunch-time address to the Urban Development Institute of Australia in Sydney, Federal Treasurer Scott Morrison dismissed suggestions that cheap credit is causing an investor-driven housing bubble in Australia. He outlined a major push by the Turnbull government to increase supply and help first home buyers own their own home.
He said the federal government will focus on focus on “how state governments can do away with planning rules that stop, or delay, new houses being built” to increase the supply of housing in areas where housing is unaffordable.
However, Domain’s Jennifer Duke says simply adding more housing to the Sydney area won’t solve the affordability problem: “An additional 30,000 homes were built in Sydney in the last financial year, the most building activity since the city’s 2000 Olympic Games”, she writes.
“In 2015-2016, 30,191 new houses and apartments were completed, up 10 per cent year-on-year…This compared to 30,520 new homes built in 1999-2000, when builders were rushing into the market before the introduction of GST in July 2000.”
As any first-year economics student knows, prices won’t go up unless there are purchasers for the goods or services, and in this case investors and overseas buyers have come to the party and picked up almost everything on offer. There is so much demand for Sydney property that estate agents are finding it hard to meet the demand of potential buyers on their books.
CoreLogic says that its figures show that fewer than 20,000 dwellings are for sale across Sydney, which is less than half the number listed five years ago. Ken Jacobs, who owns a luxury property agency in Double Bay, says there aren’t even enough $5 million houses on the market. "There's more inquiry than actual properties available," said Jacobs
Auction clearance rates have never been higher and there’s a real ‘Fear of Missing Out’ (or FOMO as it’s known) among property buyers that has underwritten the recent rises in auction sales results.
Why aren’t sellers rushing onto the market to profit from high prices? Newtown agent Duncan Gordon told Domain’s Stephen Nicholls the answer is simple: “People haven’t got a choice of somewhere to move to so why would they sell … a lot of those who are selling have a high motivation – death, divorce or investors cashing in for retirement.”
For a time, it seemed the construction of new apartments would satisfy the demand. Australia’s biggest construction firms – Meriton, Brookfield Multiplex and Mirvac, planned for towers of apartments in Sydney and Melbourne with confidence they’d sell off the plan.  But times change and the ‘big three’ are now cutting back on starts of new projects.
This has opened a door of opportunity for smaller builders like Newcastle-based MJH Group who’ve just moved into eighth place in the builders’ rankings. Their managing director, Andrew Helmers, says that greenfield developers can still keep volumes rising if they’re willing to cut their profit expectations.
“The prices have to come off,” Mr Helmers told the Australian Financial Review. “The peak of the market was about Fathers’ Day last year, [but] it’s still a land of opportunity for any agile builder in my view.”
A possible bit of good news for first-home buyers was raised in The Australian by journalist Frank Chung, who said a ruling by the tax office could place some apartments purchased off-the-plan off limits to overseas investors.
Mr Chung said that if an off-the-plan sale falls through, the property will be considered second-hand, meaning that foreign buyers will be stopped from purchasing those properties, thereby lowering the eventual resale price.
If a significant number of off-the-plan apartment purchase failures eventuates as some analysts believe is beginning to happen, this could create buying opportunities for local purchasers to acquire them at less than their original prices.
Return to terrace houses
One of the factors now dampening demand is the acceptance by the generations that followed the Baby Boomers that the ‘Aussie dream’ of a quarter-acre block in suburbia is beyond their reach. NSW Planning Minister, Rob Stokes, says we need to change our cultural views: “In 1975 … Sydney was a homogenous sprawl of terracotta roofs. To buy a house it cost four times the average salary – today, the same home costs at least 12 times the average salary,” he said.
One possible solution currently being floated in the media is a return to terrace houses that could fit five dwellings into a typical 800 square metre block. Frasers Property Australia’s Residential NSW general manager Nigel Edgar, says there is already strong demand for terraces and townhouses.
“For Sydney to cope with its population growth, there needs to be more options on the market,” he told Domain. “At the moment we’ve got two peak strategies for new development, either greenfield land or apartments and there needs to be much more variety than that.”
NSW Planning Minister, Rob Stokes says it’s possible that new terrace housing could be on the market in as little as 12 months: "This is very much pointing to what the Sydney of the future might look like," he said. "There will continue to be a lot of detached housing stock ... but it is very clear we need a greater diversity in housing types."
Upwards ever upwards
Urban Taskforce chief executive Chris Johnson disagrees, saying that more medium-density housing was unlikely to solve Sydney’s future housing needs: “My worry is that if people aren’t realistic to say that we do need taller buildings as part of a mix and need a reasonable number of them, we’re going to struggle,” he said.
“Where is the available land? If we don’t seriously address land usage through height we’re just going to run into big problems.”
But investors are critically important elements of demand in the present market, and just building more towers of apartments doesn’t necessarily mean that they’re going to be seen as good investment propositions. Scott Phillips, the Motley Fool's director of research, says property investors should think carefully about borrowing to acquire an investment unit just because of the old saying: “They’re not making any more land”.
“That's spot on”, he says, “but they're sure as hell making more units. And more units, and more units. Some are saying that'll precipitate a crash, but even if it doesn't, that's going to put - to use the pollies favourite phrase - 'downward pressure' on prices.”
According to figures from CoreLogic, an extra 2857 units are expected to be completed in Sydney’s inner city in the 12 months to April 2017.
The Reserve Bank of Australia (RBA) recently issued a warning that some off-the-plan unit buyers were having problems settling on their purchases. It identified the risk that off-the-plan buyers may not be able to settle because the banks could value the properties at less than the contract price, and noted that Sydney would have 10,000 new units over the next two years.
“In part they are correct but the RBA is overplaying it a little,” said Louis Christopher of property research group SQM Research.
“They say growth has moderated and yes, up until the first half of the year, but there are many indicators particularly Sydney that says the market is accelerating again. The oversupply is not enough to create an almighty crash.”
Chris Richardson of Deloitte Access Economics says that property could become a bad investment choice ‘over coming decades’. He told the Australian Financial Review that a combination of falling apartment prices and rising interest rates will lead to tough times ahead for property investors.
"In some pockets, you would absolutely expect that by 2019 those inner-city apartments would be selling between 10 and 15 per cent lower in price than today", he said. “That's always the way, as booming housing prices starts to get old, the last people through the door are the ones who end up getting hurt."
Dr Nigel Stapledon of the UNSW Business School said he didn’t think it would be quite so dramatic: “Quite a high number of units are under construction and will be fed into the market in the next year or two, so there’s a pipeline of work which is unusual,” he said.
“It’s still going to be profitable to go in and some people will still do OK in the real estate market but it’s going to be harder.”
Citi's Paul Brennan agrees, saying the apartment boom isn’t over yet: “Apartment completions lag starts by one-two years, so the developing oversupply will continue to build into 2017 and 2018 with completions probably doubling across the eastern states," Mr Brennan said.
Past the peak?
CoreLogic’s Cameron Kusher says that the quarterly pace of capital gains in Sydney peaked over the June quarter of 2015 at 7.4 per cent, but prices growth is still robust.
“Although value growth in Sydney and Melbourne is not as strong as it was at its peak, growth continues to be supported by high auction clearance rates which are now at their strongest levels since the June 2015 quarter. In Sydney, clearance rates remained above 80% throughout September.”
Phil White, CEO of QBE Lenders’ Mortgage Insurance looked three years into the future and concluded: “prices are forecast to soften through the three years to 2019, which is likely to be positive for housing affordability. It's expected owner-occupiers, including first home buyers, will be stepping in to pick up some of this opportunity in the market."
Domain’s Dr Andrew Wilson has no doubts the boom still has legs to run, saying there was a ‘predictable’ resurgence in residential investors after a mid-year pause: “The latest Australian Bureau of Statistics data reports that lending to NSW investors increased by 1.6 per cent during August to $5.78 billion – 9.2 per cent higher than that recorded during August last year.”
“Rising prices, relatively attractive yields and tight vacancy rates will continue to attract investors to the booming Sydney market, again keeping upward pressure on already steeply rising prices”, he said.
‘Strongest Sydney house price growth in a year: Domain Group,’ Jennifer Duke, Domain, 27 October 2016
‘Australian cities are not building houses anymore,’ Julia Corderoy, News.com.au, 7 October 2016
‘Motley Fool: why property investment is nuts right now,’ Scott Phillips, Motley Fool, 19 October 2016
‘Will my property drop in value?’ Hannah Blackiston, Smart Property Investment Blog, 1 September 2016
‘Unprecedented uncertainty’ down the line as number of home starts breaks 12 year record,’ Michael Bleby, Australian Financial Review, 22 September 2016
‘Consumer caution may dampen property party,’ Clancy Yeates, Sydney Morning Herald, 18 October 2016
‘Unrealistic Great Australian Dream of a quarter-acre block is over for Sydneysiders,’ Kate Burke and Jennifer Duke, Domain, 21 September 2016
‘Home prices would need to drop 25pc to help first time buyers: Deutsche Bank,’ Michael Janda, ABC News Online, 27 September 2016
‘Sydney at risk of 'housing bubble', warns UBS,’ Bloomberg, Business Day, 28 September 2016
'This is just the start': China's passion for foreign property,’ Tom Phillips, The Guardian, 30 September 2016
‘CoreLogic: property values have chalked up 52 continuous months of price growth,’ Michelle Hale, News.com.au, 3 October 2016
‘Off-the-plan settlement risk rising, RBA warns,’ Clancy Yeates, Sydney Morning Herald, 14 October 2016
‘Housing boom has peaked, apartment glut to rock the economy: Morgan Stanley,’ Peter Vercoe, Bloomberg in Sydney Morning Herald, 21 October 2016
‘Property set to become ‘worst investment’, Charis Chang, News.com.au, 20 October 2016
‘Apartment prices fell 20pc back in 2004, could history repeat?,’ Stephen Letts, ABC News Online, 5 October 2016
‘September Property Snapshot Infographic,’ Cameron Kusher, CoreLogic, 20 October 2016
‘Terrace housing to come to Sydney suburbs under NSW government proposal,’
Lisa Visentin, Sydney Morning Herald, 17 October 2016
‘Sydney auction market rises as the spring property boom blossoms,’ Dr Andrew Wilson, Domain, 16 October 2016
‘ABS revision shows first home buyers at lower numbers than previously thought,’ Thuy Ong, ABC News Online, 5 October 2016
‘New apartments in Sydney sell like hotcakes despite RBA’s glut warning,’ Su-Lin Tan, Domain, 16 October 2016
‘Shortage of homes defies effort to rein in prices,’ Angus Whitley, Business Day, 7 October 2016
‘Morrison criticised for being ‘out of touch’ with first home buyers,’ Julia Corderoy, News.com.au, 11 October 2016
‘Australian house valuations hit record high, UBS research shows,’ Stephen Letts, ABC Online, 15 October 2016
‘A month into spring and there’s a vicious cycle – no homes to buy, so no-one is selling,’ Stephen Nicholls, Domain, 7 October 2016
‘Sydney housing boom has peaked after crackdown on investor loans, QBE says,’    Emily Cadman, Sydney Morning Herald, 13 October 2016
‘Scott Morrison puts states on notice over house prices,’ James Massola, Sydney Morning Herald, 24 October 2016
‘Failed off-the-plan apartments ‘second-hand’,’ Frank Chung, News.com.au, 24 October 2016

Sydney property descends from the peak

Tue, 4 Oct 2016

There’s a shortage of available housing stock as prices keep rising. We’re probably building too many apartments and not enough houses, and mortgage restrictions are impacting a slowing market.
The spring auction market has given every indication that it’s going to live up to its tradition as a season of good clearance figures and strong prices achieved.
If anything’s holding it back it’s a shortage of stock. Clearance rates have been around or above 80 per cent, but listing numbers remain considerably lower than they were 12 months ago, especially in high-demand areas near the CBD.
“Last year in August and September, there was too much supply,” said Belle Property Beecroft’s Nick Bedford. “This year it’s quite tight; there is nothing available.”
Investor numbers declined in early 2016, but since the July election they’ve returned to enjoy more certain taxation benefits while they take advantage of low interest rates.
Australian Bureau of Statistics (ABS) figures for July show that the value of investor housing purchased for rent or resale nationally rose by nearly two per cent over the previous month.
Domain Group chief economist Dr Andrew Wilson said the investor share of NSW residential lending is now 56.5 per cent: “I think there was underlying demand for investment properties and there’s been a fear of missing out.
“Numbers are now up to what they were before the peak of the market with investors looking towards higher yielding, low-priced properties,” said Dr Wilson.
Sales in the outer suburbs, subdued during the winter auctions, have shown a resurgence with higher results in terms of both clearance rates and prices being achieved.
Starr Partners chief executive Doug Driscoll told Domain that investors now make up almost half the number of all buyers in western Sydney: “There’s so much infrastructure proposed, the west has some solid buying,” he said.
This month has also seen key housing price statistics become a source of disagreement between the industry’s four main numbers compilers. Recent house price growth figures have shown fairly wide differences and analysts are now trying to work out which to believe.
CoreLogic has been the usual data source for the Reserve Bank of Australia (RBA) but it recently changed the way in which it gathers and analyses data, prompting the RBA to say in its August statement that "strong increases reported by CoreLogic were overstated as a result of methodological changes".
Data from CoreLogic for August showed a 1.1 per cent rise in home prices across the nation's capitals in August, bringing the increase in capital city home prices to 7 per cent year-on-year. Sydney’s rate of increase was even higher at 9.4 per cent.
CoreLogic's head of research Tim Lawless told ABC News Online that the boom was at its peak: "That's virtually half the rate of growth that Sydney was seeing last year, when values were rising at more than 18 per cent in Sydney on an annual basis.”
Economists at JP Morgan challenged the figures from CoreLogic saying their figures show home prices have been growing more slowly nationally than CoreLogic's index has suggested.
"This leaves us with the view that dwelling price growth has been running closer to 2 per cent nationwide this year, rather than the 8 per cent recorded by the CoreLogic hedonic index," said JP Morgan's Ben Jarman.
September figures from Residex showed a growth of 1.19 per cent in Sydney’s median house values from August last year to August 2016, with a growth in unit values of 3.75 per cent over the same period.
HSBC’s chief economist Paul Bloxham sought to clarify the reasons for the divergence.
"Compositional shifts in housing turnover are making it difficult to get a clear read on housing price growth but, importantly, housing loan approvals and credit growth have slowed," he said.
"One plausible explanation is that a greater amount of lower priced housing has been turned over recently. This fits with the fact that a lot of newly built apartments have been coming to market and apartments tend to be lower priced than detached houses."
Regardless of the discrepancies in growth numbers between the four major indicators, the RBA said they all showed a reduction in both housing loan approvals and credit growth which confirms the Sydney market is cooling.
Down from the peak
The Housing Industry Association (HIA) says the housing industry construction cycle has now peaked and it expects the next two years to see a continuing fall in new housing sales.
“New home construction has been the kingmaker of the Australian economy, but the cycle has peaked,” the HIA’s chief economist Dr Harley Dale said following the release of the Association’s July report.
“The short term outlook for healthy levels of new home construction remains intact – calendar year 2016 will be a record year for new dwelling commencements, but the situation could look very different from next year,” he said.
The HIA’s report showed that new home sales slumped 9.7 per cent nationally in July, dropping to their lowest level since July 2014. The NSW drop was 6.2 per cent.
Dr Dale added a note of caution about ‘sensationalising’ the statistics: “We would do well to remember that this down cycle is following a record high that is some 24 per cent higher than the previous (1994) peak and that there is an unprecedented degree of uncertainty this time around as to how the next few years of new home building unfold.”
Paul Sheard, chief economist at ratings agency Standard & Poor’s, told the annual Australian Banking & Finance magazine’s ‘Breakfast with the Economists’ that the country was at risk of thinking that housing prices would continue to rise.
“I don’t get the impression that we have a housing bubble here yet ... but I would say that Australia must beware of the narrative that because prices have never fallen they can never fall again,” he said.
Westpac’s chief economist, Bill Evans, told the Breakfast audience that “we shouldn’t be too negative,” noting that while the $200bn liquid natural gas development boom was slowing, it was being offset by $90bn of state infrastructure spending.
Shane Oliver, the chief economist at AMP, agreed saying that the Australian economy had been surprisingly resilient and flexible. The post-mining boom drag was bottoming out, he said, and sectors including education and tourism were benefiting from the lower dollar.
In an interview with The Australian Financial Review, retiring RBA Governor Glenn Stevens said that he has had ‘some discomfort’ about rising Sydney house prices, but also noted that housing remains an important stimulant of economic activity.
“It’s not without risk, and it certainly gives me some discomfort, but then we’re balancing that against the other obligations we have to pursue.”
Mr Stevens admitted that the lower interest rates of recent years had contributed to rising Sydney housing prices: “Most of the domestic effects of cheap money comes through the household sector - higher house prices than otherwise, more borrowing than otherwise, wealth effects, lower saving rate, etc.” he said.
“It’s probably not that surprising that parts of Sydney are leading the charge, because this economy is leading the country at the present time.”
A two-speed market
CoreLogic’s Cameron Kusher says that over the past 12 months house prices have outperformed unit prices across Australia: “House values have increased by 7.2 per cent compared to a 5.5 per cent rise in unit values.
“With a record pipeline of units under construction we would expect that growth in unit values will continue to underperform that of houses for the foreseeable future.”
Mr Kusher says that compared to last year there is a low volume of fresh stock for sale, with Sydney’s offerings down nearly 21 per cent on last year.
“The low level of new stock becoming available for sale appears to have been a key driver of the ongoing strength in the Sydney and Melbourne housing markets over recent months.”
The Ai Group/Housing Industry Association's monthly Performance of Construction Index shows that house building across Australia has contracted while apartment building has continued to expand.
"Very weak conditions in the house building sub-sector overshadowed the positive news for apartment building, commercial construction and engineering construction in August and pulled the broader construction industry down for the month," Ai Group policy head Peter Burn commented.
The Ai Group’s report noted that the new figures followed a decline in private sector house approvals in July, indicating there would be a further softening in house building activity in coming months.
Towering problems ahead?
Apartments are proving to be a very distinct category of the housing market with a 23 per cent jump in approvals of new apartments, townhouses and semi-detached homes in the month of July according to figures from the ABS.
In NSW, monthly approvals of multi-unit dwellings rose by almost 50 per cent to 5,104 from 3,442 in June causing some economists to again raise the question of whether developers are building too many apartments.
"Is this increase in approvals today led by demand or by supply?" UBS economist Scott Haslem asked in the Australian Financial Review. "If it's led by demand, then we're all okay. If it's led by supply, there may be cheap apartments to buy in the next few years."
Economic forecasters BIS Shrapnel have already called the turning point of the apartment building frenzy.
According to its ‘Building in Australia 2016-2031’ report, national dwelling commencements are estimated to have reached their peak over 2015-16 and will begin to decline from this level in the coming year.
“After recording strong growth during the past four years, we estimate that total
dwelling starts reached an improbable 220,100 in 2015-16, an all-time high,” said Dr Kim Hawtrey, Associate Director at BIS Shrapnel.
“From this level, national activity is forecast to begin trending down over the following three years, with the high-flying apartments sector leading the way down.”
It’s not hard to see why many of those with an overview of the Sydney property market perceive there’s a potential for serious problems over the next two years.
Towers of apartments in choice locations near public transport have been created to provide purchasing opportunities for overseas investors whose goal is primarily to shift wealth to a ‘safer’ country rather than leave it at home.
Many of these expensive developments have already been constructed. Others are rapidly taking shape floor-by-floor while still more are little more than a cleared block of land with an impressive website to market units off-the-plan.
It was a bit surprising in September when a Washington DC-based body called the International Strategic Studies Association (ISSA) issued a dramatic warning that “changes in local banking policies” could see foreign direct investment in Australia’s property sector “decline markedly”.
“This will profoundly impact the Australian government’s ability to fund major programs in the defence and civil sectors,” it said in an article titled: “Australia Risks Strategic Setback from a Significant Foreign Direct Investment Drop Due to Changes in Bank Policies.”
How long do we have before the banks’ tightened restrictions precipitate a collapse in the property market? “About six weeks” according to ISSA whose article appeared on 12 September, meaning by the time this article reaches its designated place on ‘Market Comment’ there are about two weeks left before some sort of property market Armageddon.
Or maybe not. Naturally, a number of Australian market analysts disagree with ISSA. NAB chief economist Alan Oster described ISSA’s prediction of an imminent collapse as “garbage”.
“One of the big problems of apartments is [that for] most of them, we don’t know who’s funding them,” he said. “If the big banks don’t know who’s funding them, then the bottom line is, basically the main risk is somewhere else.”
Mr Oster told The Australian’s Frank Chung that the issue of settlement risk was “probably further down the track” in 2017-18. “The idea that the banks, who might own 20 to 30 per cent max of these apartments, will somehow crash the market is silly,” he said.
‘Big 4’ reduce lending
However, a report in September by advisory firm Credit Lyonnais Securities Asia (CSLA) says that Australia's housing cycle has peaked and a ‘correction’ in apartment prices could lead to defaults among developers and a contraction in construction activity
“The squeeze from lenders continues, albeit recent actions indicate it is highly targeted towards foreign investors and apartment-focused lending,” CLSA said.
“Regulation aimed at foreign buyers (and we expect more to come) will also create an impact. While there has been an official crackdown on capital leaving China, it appears to be less of a constraint than we thought 12 months ago.”
If support for construction of new apartments dries up, postulates the report, it could cause dwelling prices to fall sharply and even lead to a recession in the ‘worst case’ scenario. And it will all begin, says the report, with apartment buyers failing to settle on their pre-construction purchases and foregoing their ten per cent deposits.
An article in The Australian quoted Albert Callegher from ACM Finance, a specialist finance broker that provides top-up funding for property developers, who said CLSA’s prediction was already coming true.
“The small to medium developers doing projects between $2 million and $20 million, they’re going broke,” he told journalist Frank Chung. “I’ve had one client say to me he’s got one developer with over 2,000 apartments that can’t settle. We’re hearing it everywhere but it’s not making the news because you don’t want an avalanche.”
The voice of Australia’s richest man, billionaire property developer Harry Triguboff, can also be heard warning that a “very significant” number of Chinese buyers are now failing to settle purchases of their off-the-plan units. 
If this wasn’t bad enough, according to Mr Triguboff, a bigger risk is yet to come in the next new wave of developments. As apartment price growth stalls or goes backwards, he says, the risk of buyers walking away from their deposits also grows.
More warning flares are being sent skywards by global financial services firm UBS which says the growth in apartment supply over the past 12 months poses a danger to Australia’s banks.
A UBS statement noted that in that period residential approvals have hit a record 235,000, and 73,000 of those are for apartment buildings four-or-more storeys high.
UBS banking analyst Jonathan Mott told ABC News Online that it isn’t the big four banks - CBA, Westpac, NAB and ANZ - that have been funding the apartment boom recently.
"Data released by the Australian Prudential Regulation Authority indicates the major banks have significantly reduced this lending, with total exposures to residential commercial property held flat during the June quarter and up only 2 per cent over the last six months," Mr Mott said.
However, Westpac’s Lyn Cobley says her bank has seen settlements slowing but it’s what’s expected at this stage of the property cycle.
“We’re really comfortable with the portfolio and some developers now are taking the view that ‘I was going to build something but it’s not the right time of the cycle. I think I’ll leave it for a year or two and see what things are like then’.”
Foreign banks, principally Chinese, have effectively been funding the ongoing boom in apartment construction up to this point in time, but there’s no guarantee this flow of funds will continue.
Yet still they build. The number of multi-storey apartment buildings under construction in Sydney has more than doubled in the last few years to record levels, and as mentioned previously there are concerns this might create an oversupply that could cause a slump in property prices.
But for this to happen, say the analysts, there would have to be at least one ‘trigger’ that sets off a wave of selling. There are several contenders for this dubious honour.
The first mentioned is that foreign buyers who had paid deposits to purchase ‘off the plan’ apartments can’t get finance to complete their deals. This would create a pool of apartments that would have to be sold quickly.
The second, and probably least likely given global conditions, would be a sudden rise in interest rates that would raise the cost of loan repayments and could force many marginal purchasers to dispose of their properties.
This possibility can’t be completely discounted, however. US Federal Reserve Chair Janet Yellen spoke at a symposium on the 26th of August saying “the case for an increase in the federal funds rate has strengthened in recent months”.
The third possible trigger is a sudden rise in unemployment. It’s reasonably stable at around six per cent at present and there are no signs this is likely to change in the immediate future.
Affordability problems remain
Is there anything the government can do to make Sydney housing more affordable? The ever-rising level of prices in the greater Sydney area indicates that there’s not much anyone can do unless the market experiences major economic disruptions.
Herald journalist Elizabeth Knight outlined the problem: “Already, housing affordability is stretched and thanks to an extended four years of extreme price rises, first home buyers now make up a record low 10 per cent of demand for mortgages. Only six years ago, that figure was around one-third.”
Shadow treasurer Chris Bowen made headlines in September when he said, in an address to the McKell Institute in Melbourne:  "The inability of young people, in particular, to buy a home to accommodate them has reached, I say calmly and soberly, crisis levels. We are a nation that can no longer house its own children."
Planning expert and Committee for Sydney CEO Tim Williams says that in the housing market, demand is not driven by housing 'need' but by access to housing finance.
"Homes are unaffordable not because we are building too few but because the market is flooded with cheap credit," he said in a Sydney Morning Herald article.
"Increasingly access to this is being channelled to existing homeowners over first-time buyers, leading to many Sydneysiders owning two and three properties while the average 30-year-old cannot get into home ownership.”
It seems that our long-held view of laws governing supply and demand simply don’t apply in this market. No matter how many new homes come into the mix, prices still keep rising. House prices have risen by 40 per cent since 2011 and dwelling completions have rocketed upwards by 85 per cent.
Professor Bill Randolph, director of UNSW's City Futures Research Centre, says the state and federal governments are going about trying to make housing more affordable the wrong way.
"If they understood how housing markets actually worked, this would come as no surprise at all. The problem is you can't apply year 10 economic theory to a metropolitan housing market."
Economist and geographer Professor Peter Phibbs, takes up the thread: “With housing, because it's an asset market, as the price goes up it encourages buyers to get into the market because they can see the potential gain of holding an asset that's going up in value."
The professors and many other economists have long recognised that the housing market isn’t the same as the market for bananas or beans. One of the major distortions is the tax advantages for investors purchasing housing.
"Nobody has ever shown … that you can supply enough housing into a market to effectively make prices fall. New supply is two per cent of the housing market. Even if that doubled, what impact would that have? Most of us buy second-hand housing."
Professor Randolph says that we need to reset some entrenched ideas about how we provide housing, including encouraging investment in properties for long-term rental rather than resale for capital gain.
"It is a wicked problem," he said. "That's why most of our governments just rub their heads and walk away."
‘Housing market really is cooling, HSBC says,’ Jessica Sier, Business Day, 27 September 2016
‘Slump in supply hikes up prices,’ Shayne Collier, Northern District Times, 28 September 2016
‘September Market Update,’ Eliza Owen, Residex, 25 September 2016
‘Lean times hit skinny skyscraper as ‘mum-and-dad’ developers hit funding wall,’
 Frank Chung, News.com.au, 24 September 2016
‘Westpac will ride out property challenges: Lyn Cobley,’ Michael Bennet, The Australian, 17 September 2016
‘Chris Bowen's blunt housing crisis prediction,’ James Massola, Sydney Morning Herald, 22 September 2016
‘RBA governor Glenn Stevens admits Sydney house prices cause him ‘discomfort’, Karen Maley, Australian Financial Review, 9 September 2016
‘RBA Holds Rates in September,’ Eliza Owen, Onthehouse.com.au, 6 September 2016
‘No stopping property prices as strong Sydney auction market lifts off for spring,’ Dr Andrew Wilson, Domain, 5 September 2016
‘The government says it has a plan to fix the housing affordability crisis. This chart suggests it doesn't,’ Inga Ting, Sydney Morning Herald, 5 September 2016
‘Foreign banks funding the apartment boom: UBS,’ Stephen Letts, ABC News Online, 3 September 2016
‘Housing bubble a ‘recession risk’, Frank Chung, News.com.au, 2 September 2016
‘Lending squeeze to be catalyst for apartment market correction: CLSA,’ Michael Bennett, The Australian, 2 September 2016
‘Apartment correction to cause Australia-wide recession: report warns,’ Simon Johanson, Sydney Morning Herald, 2 September 2016
‘Standard & Poor's economist warns Australian house prices can't be trusted,’ Martin Farrer, The Guardian, 1 September 2016
‘Building approvals jump in July: apartments up 23pc from June,’ Michael Bleby, Australian Financial Review, 30 August 2016
‘This might be the end of Australia's new home boom,’ David Scutt, Business Insider, 29 August 2016
‘Home prices continue strong rise in Sydney, Melbourne; fall in Perth, Darwin,’ Michael Janda, ABC News Online, 1 September 2016
‘Australia six weeks from a housing collapse, US report warns,’ Frank Chung, News.com.au, 12 September 2016
‘Expect more cranes: apartment glut to dampen market,’ Clancy Yeates, Sydney Morning Herald, 6 August 2016
‘August Property Snapshot Infographic,’ Cameron Kusher, Property Value Pulse, 14 September 2016
‘Apartment building expands while houses slow: Performance of Construction Index,’ Michael Bleby, Australian Financial Review, 7 September 2016
‘The house price souffle is rising again,’ Elizabeth Knight, Sydney Morning Herald, 17 September 2016
‘New multi-residential building to plummet 50 per cent by 2020,’ Media release from BIS Shrapnel, 1 August 2016

Our latest Sydney property boom began 16 years ago

Wed, 31 Aug 2016
A shortage of properties for sale keeps price levels up as we look back to December 2000 for the beginnings of our current boom.

Winter chills are behind us and as we head into spring we also enter the peak selling season for Sydney property.  Weekend auctions already show a surge in listings and record clearance rates, although the number of properties on offer is well below figures at this time last year.

An unseasonably strong late-winter market looks set to flow seamlessly into spring, and there’s every reason to expect the price growth to continue as the weather warms up. 

But for a moment let’s seek out what might be called ‘the dark side’ of property price forecasts, and as usual professor Steve Keen of Kingston University, London can be called on for a negative appraisal of the property market.

You might recall professor Keen achieved some fame a few years ago when he predicted a catastrophic crash in Australian house prices following the GFC and had to walk 225 kilometres from Canberra to Mount Kosciuszko as a result of losing a bet.

The professor now says that Australia's current credit binge will implode as early as 2017, with house prices falling between 40 and 70 per cent, accompanied by a sharp rise in unemployment. 

"We have borrowed ourselves so much to the hilt that we are now dependent on that continuing to rise over time and it simply won't," he told the ABC's The Business. 

However, all indications are that professor Keen will need another pair of hiking boots if he’s made a similar bet this year to the one he made in 2010. 

We now have a situation where there’s still an undersupply of housing and population growth continues. Prices are high and still increasing in most parts of Sydney and auction clearance rates remain at ‘boomtime’ peaks, including the highest clearance rate ever achieved in August.

AMP Capital chief economist Shane Oliver says there’s a serious shortage of housing stock that explains why the clearance rates stay so high: “You can see the sales volumes are down a lot on a year ago, by about 40 per cent.

“That could well be because sellers have done their selling. The last few years have seen record levels of sales and people would have taken advantage of that, so even though now they’re getting better deals … they have already done their selling,” he said.

Investors are back in the market in a big way, borrowing again and stretching investment lending in such a way that banks are concerned that APRA will flex its muscles to return to the regulator’s ten per cent annual growth rate limit, or possibly lower the threshold to seven or even five per cent if borrowing continues at such high levels.

Mortgage Choice chief executive John Flavell said the number of loan applications received by the broker in recent weeks suggested record low interest rates were boosting the mortgage market.

"When you get the cash rate changes, that always takes a little while for the dust to settle, but the dust settled and application volumes are very, very, very strong," Mr Flavell told the Herald’s Clancy Yeates. 

"The market's pretty tight, and everyone's looking for new stock to come onto the market, so when it's there, it's moving quickly and it's getting snapped up.”

Domain’s Dr Andrew Wilson notes that investors remain a key ingredient of our rising housing market, pointing out that the latest Australian Bureau of Statistics residential lending data reports another surge in activity over June for NSW. 

“The prospect of a change to negative gearing has activated investors since May, with a June total of $6.6 billion – the highest monthly result since June last year,” he added.

Foreign investors are still key elements of the buying mix. The Foreign Investment Review Board (FIRB) says in its latest annual report that the value of approvals for foreign investment in Australian real estate increased 75 per cent last financial year to $61 billion, with Chinese buyers accounting for around two-thirds of the applications.

An ANZ Bank research note said that the lower Australian dollar has supported foreign investor demand for Australian housing, although the bank’s economists wrote: “Tighter lending conditions may see this ease.”

The research note also said tighter borrowing criteria and increased taxes on foreign buyers “could see reduced demand from foreign buyers, although as yet there is little hard evidence of this”.

Affordability’s a growing issue

Housing affordability is a hot topic at present. Domain’s Jennifer Duke recently conducted an analysis of the present situation and concluded that, in every capital city with the exception of Sydney, homes were more affordable in 2016 than their 15-year average.

In fact, even in Sydney affordability was improving from 2010 to 2013 until it was quashed by the latest period of rapid price growth. 

As recently as 2012, Sydney’s median house price was $645,000. Just four years later it’s more than $1 million. Domain Group says that every second house owner ‘can now stake the claim of being a property millionaire’.

Just five years ago, only one in six of Sydney’s 600-odd suburbs had a median house price above $1 million. By mid-2016, 323 suburbs had six-figure price tags. 

That’s quite a leap, but looking back a few years we can see the forces taking shape that have now made Sydney Australia’s least affordable city.

Just how unaffordable has Sydney become? Data from real estate research firm CoreLogic shows that NSW has just over 68 per cent of all national suburbs with a median home value of at least $1 million, up from 60 per cent in 2008.

However, BIS Shrapnel senior manager Angie Zigomanis tells us that from December 2000 to December 2003 there was a Sydney property boom that makes 2012 “pale in comparison”.  He reminds us that prices growth in this period was 65 per cent for houses, and people were actually leaving Sydney due to those high prices. 

“At the same time, the government introduced all sorts of development levies into the market, including vendor tax. This hit the market,” he said.

The result that followed was a prolonged time of underbuilding – of providing a lower number of dwellings in the Sydney area that were needed to accommodate a fast-growing population. Land releases slowed and the new layers of development costs either retarded or prevented development.

An ‘Infrastructure Charges Report’ published in 2009 by the Master Builders Association shows that over the four years from 2001/2002 to 2005/2006 developer contributions grew at an average rate of 8.2 per cent a year for each new dwelling. 

By 2009 only 25,000 dwellings were being added to the housing stock in Sydney annually. To give you an idea of just how much of a shortfall this represented, it’s less than half the number constructed in 2015/2016 which still leaves Sydney undersupplied.  

Housing Industry Association figures identify a window of increasing affordability from 2010 to 2013, when housing prices dipped slightly and interest rates were cut, but the pause was short-lived and prices soon began to rise again.

Naturally enough, at that time investors leapt into the property market to take advantage of growing demand for rental accommodation and favourable interest rates. And the more investor activity there was, the higher prices rose.

So, there was only one possible outcome from years of chronic housing undersupply and that was a growing unmet demand that would drive property prices upwards at a rate far higher than could be met by growth in incomes. 

First home buyers still around

First home buyers have reminded us they’re still in the market, albeit in a relatively small way when compared to investors. The number of grants claimed by first home buyers in NSW went up by almost 11 per cent last financial year, according to figures from the Office of State Revenue (OSR).

NSW Treasurer Gladys Berejiklian says the government’s first home owner grants are helping to improve housing affordability: “We have consistently said that supply is the key to putting downward pressure on prices’

"Our policies to encourage the construction of new homes are clearly bearing fruit, with residential building approvals soaring by 10.5 per cent over 2015-16,” she said.

The latest OSR figures show the number of first home owner grants rose by 900 to about 9400. The total value of the grants was $138 million.

Ms Berejiklian’s optimism about increased supply is offset by June figures from the Australian Bureau of Statistics (ABS) showing that new building approvals fell to their lowest total in seven months.

The number of new homes approved by planning authorities fell 2.9 per cent to 18,693 from 19,250 in May, the lowest monthly figures since November 2015. 

The June figures showed the fall in the monthly figure for multi-unit dwellings was 3.4 per cent, while the decline in standalone houses was 2.4 per cent. 
The Housing Industry Association sees these figures as indicative of a gradual slowdown of building activity: "Approvals on both the detached house and multi-unit side peaked in mid-2015," HIA senior economist Shane Garrett said. 

"Since then, detached house approvals have glided lower in an orderly manner. The immediate pipeline of new home building work is set to remain very solid, based on this latest approvals update."

Supply shortage continues

There’s clearly a shortage of properties on the market, particularly in the more desirable areas like the lower north shore and the northern beaches. One sign of the times is the median price of a three-bedroom apartment reaching $1 million – a 50 per cent increase over the past five years.

Three-bedroom apartments are the dwellings of choice for people downsizing from detached homes as well as for those who want to buy a family home but can’t afford the $1.5 million for a house.

“This data shows we’re still seeing a considerable demand for higher priced and bigger units in Sydney; there are plenty of buyers out there who are happy to live in a unit but they want a bigger unit even at a higher price,” said Domain Group chief economist Dr Andrew Wilson

BIS Shrapnel associate director Kim Hawtrey says New South Wales will remain undersupplied for some time, although even home building in Sydney would slow down. 

"Sydney is up against an affordability ceiling as well as constraints on site availability; investor demand is cooling, and the city will see a surge in new supply coming on stream over the next one to two years," Dr Hawtrey said.

He said the fall in activity from its current peak would mostly be felt in the higher density segment of the market: “New commencements of multi-residential dwellings are forecast to fall by from around 107,000 currently to just 53,800 by 2019-20."

Rents fall as supply grows

CoreLogic figures show that according to data going back to 1996 rents are falling at their fastest rate on record. However, although rents are falling in most capital cities, Sydney is still the most expensive city to live in, with a median average weekly rent of $595. 

A CoreLogic report noted rental yields had remained at record lows in July and were expected to see a further reduction in the months ahead.

“Renters will continue to have more choice and will likely be able to move into superior rental accommodation for similar or even lower costs.

"However, with capital gains starting to slow, investors may place a renewed focus on maximising their rental returns, which could prove to be difficult given the already soft rental conditions and substantial ramp-up in housing supply."

Citi bank has issued a caution that Australia’s apartment-building boom is nearing its end and warned that housing starts have reached 230,000 this year across Australia, but these will fall to 205,000 next year and to 172,000 in 2018. 

 "Apartment completions lag starts by 1-2 years so the developing oversupply will continue to build into 2017 and 2018 with completions probably doubling across the eastern states," the bank said in a research note.

That bank said that, while Sydney as a whole is less at risk of seeing supply exceed demand, there are some areas of concern, namely the Botany council area, Auburn, Lane Cove and Ryde also at some risk of excess supply that will begin to show up late next year.

In the short term there are no indications of forthcoming marketplace changes that will cause housing values to make any dramatic retracements from boomtime levels. There are, however, a number of signs that some easing will take place.

David and Libby Koch say the market is at an interesting crossroads: “The really good news in our view is our booming major cities are finally showing signs of slowing down... and not crashing.

“And despite a few areas of concern...it looks like there is still enough demand in our two major cities to support prices while annual growth slows to more reasonable levels.

“We believe this is a strong signal that we have simply seen a boom in these markets, not a bubble, and we’re returning to a more ‘normal’ cycle,” say the Koches.

Cameron Kusher of CoreLogic RPData sums up what seems to be the general attitude of property analysts looking at the city’s future: “Tighter lending policies, less offshore investment, record low rental yields, falling rental rates, higher housing supply and stretched housing affordability in Sydney and Melbourne would suggest that a slowing in value growth is imminent. 

“These factors are dynamic and change fairly quickly but CoreLogic is anticipating further slowing of value growth in Sydney and Melbourne throughout the remainder of 2016,” said Mr Kusher.


‘Housing affordability in Sydney was actually improving three years ago – then the boom hit,’ Jennifer Duke, Domain, 17 August 2016
‘Median price for apartment now $1m,’ Jennifer Duke, Sydney Morning Herald, 20-21 August, 2016
‘Real estate: Rents fall across most capital cities in July,’ Thuy Ong, ABC News Online, 10 August 2016
‘Apartment building to collapse 50 per cent says BIS Shrapnel,’ Peter Martin, Sydney Morning Herald, 1 August 2016
‘Australia headed for recession next year, Professor Steve Keen says,’ Elysse Morgan, ABC News Online, 1 August 2016
‘Property investor surge could see regulator step in, economists say,’ Jennifer Duke, Domain, 10 August 2016
‘Sydney’s market booming as spring approaches,’ Dr Andrew Wilson, Domain, 19 August 2016
‘July Property Snapshot Infographic,’ Cameron Kusher, CoreLogic RPData, 16 August 2016
‘NSW first home owner grants reach $138 million,’ Sean Nicholls, Sydney Morning Herald, 11 August 2016
‘June new home approvals fall 2.9pc to seven-month low,’ Michael Bleby, The Australian Financial Review, 3 August 2016
‘David Koch explains what’s good, bad and ugly in the Australian property scene,’ David and Libby Koch, News.com.au, 11 August 2016
‘Number of million-dollar suburbs soars in wake of housing boom,’ Andreea Papuc, Sydney Morning Herald, 5 August 2016
‘Vancouver slaps 15% tax on foreign house buyers in effort to cool market,’ Ashifa Kassam, The Guardian, 3 August 2016
‘Interest rates: Reserve Bank confirms housing slowdown a key factor in cut,’ Michael Janda, ABC News Online, 5 August 2016
‘Why Chinese property buyers are here to stay,’ Frank Chung, News.com.au, 21 August 2016
‘Sydney auction market kept hot by ‘sellers’ conundrum’, Jennifer Duke, Domain, 22 August 2016
‘Sydney spring market opens with record-level buyer energy,’ Dr Andrew Wilson, Domain, 26 August 2016
‘Apartment glut looming in 2017, property downturn imminent, warns Citi,’ Michael Janda, ABC News online, 27 August 2016

Sydney property changes speed but not direction

Mon, 8 Aug 2016
The national property market has changed its rate of growth from the strong upwards trend early in the year to a more sedate level mid-year as banks tighten credit and investors and owner-occupiers find it harder to obtain finance for property purchases.
Figures compiled by Domain show that property prices have begun to slow across the country, and there are forecasts of sluggish growth in 2017.
Sydney property prices nevertheless achieved good gains in the June quarter with both apartment and house prices recovering strength, according to CoreLogic’s monthly house price index.
That index showed that in the three months to June property prices surged 6.8 per cent in Sydney, aided by an interest rate cut and an unseasonal rush of investor activity before the end of the financial year.
“A lot of the growth was fuelled through April and May, but Sydney’s June growth was exceptional after a moderating trend until early 2016,” CoreLogic’s head of research Tim Lawless said.
“We thought last year was the last hurrah, but there has been growth again. However, we’re not back to the frothy times of halfway through [2015] and we’re well below the peak of July last year,” he said.
St George Bank senior economist Hans Kunnen said that the strong fundamentals of Sydney’s property market would ensure continued stable growth: “In Sydney, there’s population growth and a previous lack of supply that’s still behind demand.”
A report from the PRDnationwide group said the Sydney market’s return to more sustainable prices growth in the first half of 2016 was a promising sign after the rapid price hikes of 2015.
PRDnationwide national research manager Dr Asti Mardiasmo said that sentiment toward the market ‘remains positive’: “Consumer confidence (is) the highest since January 2014,” she told News Corp’s Aidan Devine.
“This has flow-on effects for the property market, with buyers more willing to borrow capital,” she said.
Another positive factor noted by the PRDnationwide report was the strong performance of Sydney’s rental market in the first half of 2016.  It said the city recorded the highest growth (6.7 per cent) in median rent for three bedroom houses and has the lowest vacancy rate of any Australian capital city at 1.7 per cent.
Sydney’s auction clearance rates also continued at high levels – mid-70 per cent and above, although at well below the volumes recorded twelve months ago.
Director of Auction Services Rocky Bartolotto told Aidan Devine of News Corp that his auction house was experiencing a 30 to 40 per cent drop in the number of properties going under the hammer compared to last year.
He also said that for some agents, particularly those in the inner west, the drop in volume has been closer to 50 per cent.
The lower number of homes available for sale has discouraged many homeowners from listing their properties. However, the scarcity of offerings has only increased competition among buyers and sale prices are generally above expectations.
New home sales decline
Housing Industry Association (HIA) statistics show that new home sales fell 6.7 per cent in May as sales of detached houses declined in Australia’s eastern states.
Even though multi-unit sales rose 4.9 per cent in the month after a 10.7 per cent fall in April, this rise wasn’t enough to offset the drop in detached houses, and private new home homes sales were down 4.4 per cent overall.
HIA chief economist Harley Dale said there was nothing alarming about a reversal in the trend for new home sales: "There is a cyclical downturn ahead for new residential construction activity, as new home sales signal, but the early pull-back will be mild by historical standards."
The HIA did issue a cautionary note that some of the high numbers of new apartments being approved may not be constructed.
"A key factor to watch is the medium/high density market where the large pipeline of work to be completed and the record pipeline of work approved but not yet commenced sets up a period of unprecedented uncertainty," it said.
"Regardless of the relative strength to any trend recovery [in apartment approvals] over the last six months, these lead indicators provide less forward guidance than usual because of the uncertainty surrounding the record pipeline of work approved but yet to commence construction."
Urban Taskforce chief executive Chris Johnson said the brakes had been put on lending in Melbourne and Sydney, and warned those buying in these developments to be concerned about financing.
“People put 10 per cent down and wait a couple of years until the project is finished to get finance. If by that time the extra 90 per cent is hard to get from the banks, there will be issues settling,” he told Doman.
UBS economist Scott Haslem said in the same article that there is some market risk, with forecasts of 10 to 15 per cent falls in some inner city areas where there had been too much apartment construction: “My view is there’s a risk we are overbuilding in some narrow segments of the market, and it’s possible we will see some reasonable price falls in some of those segments.”
One big cause of the industry’s concerns about apartment sales is the recent decline of Chinese investor interest in NSW property. This is largely due to the introduction of stamp duty and land tax surcharges by the state government for non-residents buying residential property in NSW. 
REA Group chief economist Nerida Conisbee said the slowing of international sales meant there would be less development of new apartments: “Developers need a high pre-sale level; a drop-off in sales to either local investors or offshore investors means development won’t proceed.
“You won’t get the same level of completion [as before the restrictions were introduced],” she said.
Another problem in recent times is the impact of new borrowing rules on off-the-plan buyers of Australian apartments. According to several mortgage brokers and financiers, thousands of investors who have paid deposits are now having difficulties getting the finance needed to complete their purchases.
Scott Kirchner, the manager of Bella Resident in China told the Australian Financial Review that the inability of offshore buyers to access finance was "really starting to bite".
"We are reluctant to take on new clients unless they have 100 per cent of the cash for a property," he said, adding that it was getting harder to take money out of China.
He said that there was still strong demand for Australian property from Chinese buyers, but many were holding off making purchases until they knew how valuations would be affected by recent Australian restrictions on borrowing.
The dream fades for some
In literature the ‘great Australian dream’ has always been to own a home, preferably a freestanding house on a quarter-acre block with a backyard and a barbeque. A recent study shows this might only be possible for a minority of the population after this year.
As reported in The Australian, the great dream of home ownership will soon reach a tipping point when fewer than half of all Australian adults are expected to own property, according to the University of Melbourne.
Data collected by the university’s Melbourne Institute show that the proportion of adults who own their home has fallen from 57 per cent in 2002 to 51.7 per cent in 2014.
Professor Roger Wilkins, the deputy director of the Household, Income and Labour Dynamics Australia survey, says that based on trends the national ratio will likely fall below 50 per cent as early as next year.
“I don’t think there has been a real decline in people's aspiration to own their own home other than the fact people have just given up on it because it seems unattainable,” he said.
The NSW ownership rate, the highest in the nation, has fallen during the period 2002-2014 from almost 67 per cent down to 63 per cent.
Meanwhile, housing affordability has worsened over the June quarter, according to the HIA’s Housing Affordability Index which shows that affordability in Sydney dropped 1.6 per cent.
The Australian Financial Review’s Su-Lin Tan said this was because a further cut to the cash rate this year had increased housing demand, while uncertainty triggered by a delayed election and world events had increased vendors’ reluctance to sell.
In hopes of easing housing unaffordability, the federal government has consistently focused its attention on increasing supply through land releases and boosting roads and rail.
“Now this is how you address housing affordability,” Mr Turnbull said during the election campaign. “Housing affordability is the result of there being insufficient supply of housing. You need to have more supply of housing.”
The peak body for aspiring property owners, the First Home Buyers Association (FHBA), has criticised the Coalition for its argument that increasing supply will fix the housing affordability problem.
“This, we all know, is easier said than done, especially in the near future,” the FHBA said.
“We are concerned about the time it will take to work with state and local governments to fast track the supply of land and new housing.”
At least industry concerns about negative gearing changes have been mitigated by the confirmation of the Coalition as winners of the July 2 election. Some pundits had forecast that the ALP’s proposed changes would have seen property prices fall by up to 15 per cent and rents rise by six per cent.
SQM Research managing director Louis Christopher said that the proposed changes might have made property more affordable but that also meant lower property prices.
“While we take the view that negative gearing reform is a good thing, such reform should be done as part of a wider property tax reform,” he said.
Forecasts of future trends
The Westpac-Melbourne Institute’s Survey of Consumer Sentiment report records how people feel about whether it’s a good time to purchase a home. The survey’s ‘It’s Time to Buy a Dwelling Index’ showed a fall in those believing it was a good time to purchase property - down another 1.8 per cent in July after a 2.7 per cent drop in June.
The NAB released its Quarterly Australian Residential Property Survey Q2 2016, concluding that nationally house prices will grow 0.5 per cent, while unit prices will drop 1.5 per cent. 
It said Sydney apartments are forecast to drop 1.8 per cent and 1.5 per cent respectively over 2017 and 2018, primarily due to growth in supply.
"We have maintained our expectation that the housing market will cool appreciably, despite the near-term strength," it says in the report.
"Our average national house price forecast for 2016 has been revised up...Price growth is then forecast to stall while fundamentals [namely wages] begin to catch up."
The survey’s 230 property industry respondents included real estate agents, property developers, investors, asset managers, fund managers and valuers.
But the picture for the remainder of 2016 is brighter, according to NAB chief economist Alan Oster, who said the national house price growth is estimated at 5.1 per cent while apartments are expected to grow 3.6 per cent.
At the same time, BIS Shrapnel’s ‘Residential Property Prospects’ report predicted house prices would drop across most capital cities over the next three years.
AMP Capital’s chief economist Shane Oliver was especially negative about apartment prices: “I still think there will be declines of 15 to 20 per cent in the next couple of years,” he said.
The ANZ/Property Council survey of property market professionals found that expectations for prices growth and confidence within the industry had both dropped, with only NSW escaping the consequences of an oversupply of housing.
The survey concluded that in 2017 the state would have an expected shortage of 41,031 homes, representing only a slight improvement on the current shortage of 53,386 homes.
“The oversupply is becoming almost an urban myth, a truism, with no data to support it,” said Domain Group chief economist Andrew Wilson.
Foreign buyers, acknowledged as an important driver of prices growth, have increased their market share slightly in NSW to 11.8 per cent from 11.1 per cent in the first quarter, but this is well below the growth rate of 21 per cent in the first quarter of last year. 
The Reserve Bank of Australia (RBA) is likely to cut interest rates further, but Eliza Owen, market analyst for Onthehouse.com.au, said that this might not have a significant impact on a slowing housing market.
“The impact of low interest rates on the property market has previously been somewhat ‘intercepted’ by regulatory authorities who have attempted to limit home lending to investors and increase capital held by banks.
“However, irrespective of interest rates, recent events could still direct investors to property – the historically safe investment market – staving off the downswing for another few months.”
Independent property valuation and advisory group Herron Todd White released a report in mid-July which supports the view that prices for Sydney houses and apartments have yet to reach their peak.
The report acknowledged that price growth in 2016 was “slower than previous years” but said there had been consistent solid price growth in the ‘value band’ across the metropolitan area due to investor and entry-level owner occupier demand.
NAB chief economist Alan Oster said that the continued growth in Sydney had “surprised everyone.”
“At the end of last year we expected one per cent [property price] growth, and it’s already at eight per cent,” he said.
“Sydney surprised everyone by its strength in the last couple of months,” he said. “The growth will probably continue for a little while,” he said.
Dr Shane Oliver, chief economist at AMP Capital agreed, telling Domain’s Jennifer Duke that property prices are unlikely to fall until interest rates start rising, something that’s not likely to happen for some time.
“There have been lots of predictions of peaks and reports of property prices falling, but … prices will continue to creep higher into next year,” he concluded.
‘Banks put the brakes on high-rise developers,’ Clancy Yeates, Jennifer Duke, Domain, 30 July 2016
Residex Market Update, Eliza Owen, Onthehouse.com.au, 27 July 2016
‘Frozen loans trigger Australian property funding crisis,’ Angus Grigg and Duncan Hughes, Australian Financial Review, 25 July 2016
‘Oversupply an ‘urban myth': 10 suburbs where apartment prices are surging,’ Jennifer Duke, Domain, 23 July 2016
‘NSW property market in stable condition after making a positive start to 2016, new report claims,’ “Aidan Devine, News Corp Network, 13 July 2016
‘Apartment prices to drop in four capital cities in 2017, NAB survey suggests,’ Jennifer Duke, Domain, 15 July 2016
‘Housing affordability: How the major parties plan to tackle the crisis,’ Dana McCauley, News.com.au, 30 June 2016
‘Federal election 2016: House prices to fall, rents to rise under Labor negative gearing policy,’ James Massola, Jennifer Duke, Domain, 22 June 2016
‘Five graphs that show why Australia’s property price growth is over,’ Jennifer Duke (with AAP), Domain, 14 July 2016
‘House prices to rise faster than expected this year, NAB says,’ Michael Bleby, Australian Financial Review, 15 July 2016
‘Housing affordability has worsened in June quarter: HIA,’ Su-Lin Tan, Australian Financial Review, 19 July 2016
 ‘Low supply of homes for sale helps push Sydney’s auction clearance rate to highest in the country at 79 per cent,’ Aidan Devine, News Corp Network, 11 July 2016
‘New home sales fall for a second month in May: 'Nothing alarming', HIA says,’ Paul Rovere, Australian Financial Review, 29 June 2016
‘NSW real estate: Chinese investors cast their eyes over to western Sydney,’ Alison Cheung, News.com.au, 30 June 2016
‘Property prices continue to surge in 2016, report shows,’ Jennifer Duke, Domain, 1 July 2016
‘RBA Keeps Rates on Hold in July,’ Eliza Owen, Property News, onthehouse.com.au, 5 July 2016
‘Sydney’s house price growth hasn’t peaked yet: Herron Todd White,’ Jennifer Duke, Domain, 6 July 2016
‘The Australian dream: soon, fewer than 50 per cent will own home,’ Rick Morton, The Australian, 20 July 2016

An election, a Brexit – what’s next for Sydney property?

Mon, 4 Jul 2016
A shortage of prestige properties and a loosening of banks’ credit restrictions keep property prices rising, despite concerns about unit numbers.

It’s certainly been an interesting end to the 2015/2016 financial year. First came the Brexit on June 23 with its repercussions that will affect the world’s financial markets for some time. Then on July 2 came the Australian federal election.

The outcome of the election will mean, if promises made prior to the election are kept, no changes to negative gearing or to the current taxation treatment of capital gains. This will be good news for property investors who benefit from both.

But a new problem has arisen that’s causing headaches for both investors and the top end of property buyers. There was a 6.7 per cent decline in the number of sales of detached homes in May which wasn’t enough to offset a 4.9 per cent rise in the number of multi-unit sales.

It seems that owners have decided to hold onto their properties and not sell into the current mini-boom that’s seen auction clearance rates climb back into the high-70 and 80 per cent levels.

As Antony Lawes, Domain editor describes it: “The property drought is most severe in higher-priced, inner-ring suburbs, especially on the north shore and northern beaches where some agents are reporting up to 70 per cent fewer listings than this time last year.”

Domain Group’s chief economist Andrew Wilson compiled data on the total number of listings for the first four months of each year going back to 2011, which show that listings in the eastern suburbs, lower north shore and the northern beaches when compared with previous years have dropped dramatically.

“Lower listing numbers are clearly a result of what was an astonishing year last year, where there was a bonanza of buying and selling,” he said. “It’s still very much a sellers’ market in the inner-suburban, higher-priced areas.”

The Raine & Horne network conducted its own analysis of current market conditions and found listings have dropped by 68 per cent on the northern beaches this year compared with 2015, and 31 per cent on the north shore.

Head of SQM Research Louis Christopher also said his data showed fewer listings in the inner-ring areas this year compared with 2015: “The economy is moving along quite well at the moment so affluent home owners have no reason to sell; their businesses are doing okay.”

There are a few indications that investors are losing some of their lust to acquire Sydney property.

Australian Bureau of Statistics (ABS) figures released in early June showed a significant five per cent drop in investment housing loans. The total value of investor finance came to $11.291 billion. At the same time the value of owner-occupier loans was a much higher $20.702 million.

First-home buyers showed a bit of a recovery with their share of total finance commitments improving from 14.2 per cent to 14.4 per cent. However, when investor and owner-occupier lending are combined, the value of total housing loans for April was a decline of 1.8 per cent from the previous month.

This led some economists to forecast another interest rate reduction from the Reserve Bank (RBA) that could rekindle inflation and in so doing keep the value of the Australian dollar under control once the initial effects of the Brexit have worn off.

After having surged 8.5 per cent in May, the Westpac-MI index of consumer confidence slipped back one per cent in June. Although optimists still outnumber pessimists, one element of the survey has continued to fall since June 2014.

The survey’s question about whether this is ‘time to buy a dwelling’ fell another 2.7 per cent from the May figure and is now 7.4 per cent down since the start of 2016. It’s also down 14.4 per cent from its score two years ago. However, the separate ‘house price expectations’ index rose by a further 3.6 per cent taking it to its highest level since September last year.

“Both buyer sentiment and price expectations are still well below the readings seen a year ago but have shown a clear firming from the weak levels in early 2016, the RBA’s May rate cut clearly a supporting factor,” Matthew Hassan, senior economist at Westpac commented.

Banks loosen the restraints

In the past year housing investor credit growth fell from a peak of 11 per cent a year in 2015 to just 6.5 per cent after the banking regulator restricted growth in this market to a maximum 10 per cent a year.

AMP Capital chief economist Dr Shane Oliver said that APRA's 10 per cent cap appeared "quite excessive in the scheme of things" when compared with the much slower growth in household incomes.

A note published in mid-June by credit rating agency Moody’s noted that house prices are pushing up again and banks have returned to chasing property investors.

"While some of the newer activity can be explained by investors bringing forward ahead of the July 2, 2016 federal election, there is evidence that bank appetite for investor lending is returning after a period of tighter underwriting," the note said.

Westpac, Australia’s biggest lender to landlords, has begun allowing customers to include tax benefits from negative gearing in their loan assessments, and started to accept smaller deposits from investors.

The Bank of Queensland recently raised its maximum loan to valuation ratio (LVR) for investors to 90 per cent, up from 80 per cent, which allows investors to acquire property with smaller deposits.

"Banks don't want to miss the market," chief executive of Mortgage Choice, John Flavell told Business Day’s Clancy Yeates.

"If the market has come off a bit for investors, and it has done, then you can turn around and moderate your policies and your pricing to get your loan growth up towards your cap.”

However, a report from Macquarie analysts says that lending standards in parts of the mortgage market are likely to tighten further in the longer term: "While the changes implemented by banks appear to be prudent, we expect further tightening in lending standards over time.

"This would likely result in further pressure on housing prices and credit availability, which would ultimately result in ongoing pressure on housing volume growth," the report said.

Too many towers?

The Organisation for Economic Co-operation and Development (OECD) warned in June that a sharp rise in apartment construction could lead to a "dramatic and destabilising" fall in Australian property prices.

The Reserve Bank (RBA) had previously raised concerns of an apartment glut, and forecaster BIS Shrapnel described it as "an accident waiting to happen".

A June 3 article in Business Day outlined the core of the problem: “Failed settlements are cropping up as a major concern, especially at a time when the banks are tightening credit, meaning buyers who paid a 10 per cent deposit two years ago and are relying on a 90 per cent loan to fill out the rest of the purchase, may now have to pay more.”

But S&P analyst Sharad Jain said that Australia’s ‘big four’ banks had only limited exposure to the apartment building boom, as “…a large share of these units [are] funded by cashed-up developers or overseas banks.”

Sydney’s vacancy rate increased slightly during May, and some parts of the city are showing early stages of an oversupply issue after years of a building boom.

Economists from UBS Group compiled a report that showed why concerns about the number of apartments now being built won’t go away. In terms of sheer quantity, the number of multi-storey apartments under construction has more than doubled in the past few years, and nearly tripled since 2010.

A research study by Jones Lang LaSalle showed that about 61,000 new apartments will have been completed across the city of Sydney from 2015 to 2017. This compares with 44,500 completions from the period 2012 to 2014.

Eliza Owen, market analyst for Onethehouse.com.au, says this is part of a shift that began some time ago: “Most strikingly, the number of high-rise units began outperforming detached housing approvals from March 2011. The salience of this phenomenon increased around the beginning of the 2013 housing boom.”

Sydney had an apartment vacancy rate increase of 0.2 per cent to 2.2 per cent over the month, according to Domain Group senior economist Andrew Wilson, but he said there wouldn’t be a Sydney-wide oversupply problem.

HIA executive director NSW David Bare agreed, saying that over 2015/2016, new dwelling starts were likely to increase 7.6 per cent across the state, followed by a 9.9 per cent decline in 2016/2017 and another expected drop the year after.

“While residential building activity may be at the peak of the cycle, it’s important not to lose sight of the bigger picture,” Mr Bare said. “Ensuring supply meets underlying demand over the long term is critical to housing a growing NSW population and improving housing affordability.”

Ratings agency S&P Global have recently completed a report on real estate investment trusts and say it is unlikely that there will be a sharp drop in property prices.

"However, a scenario of the early 1990s where unemployment reached 11 per cent would place households under severe financial stress," said S&P analysts Craig Parker and Graeme Ferguson in their report.

UBS economists say they only predict a "moderation" not a "downturn," in prices as long as interest rates remain low. They also noted that the official figures on average house prices, including apartments, have been more resilient this year than many analysts had expected.

Interestingly, according to figures compiled by Mortgage Choice, 82 per cent of NSW investors chose to purchase an established investment property in 2015.

“Despite the fact that there is an increasing number of new properties — including new apartment blocks — coming onto the property market, it would seem as though the majority of investors feel as though an established dwelling would best suit their needs,” Mortgage Choice CEO John Flavell told News Limited’s Kirsten Craze.

“They want to invest in a property that has the potential to deliver strong capital growth and rental yields. And looking at the data, it would appear the majority of investors believe an established dwelling will help them to do just that,” he said.

Surcharge for foreign buyers

The NSW Government, still two years away from its next election, has decided a good way to offset any possible decrease in stamp duty collections will be to add an extra four per cent stamp duty surcharge on foreign buyers beginning June 2016. These buyers will also be hit with an extra 0.75 per cent land tax impost, if payable, from the start of 2017.

NSW Treasurer Gladys Berejiklian said the surcharges would not deter foreign investors: "These new measures will ensure NSW's property market continues to be an attractive destination for international investors while making sure that we are able to fund vital services into the future."

After Victoria's announcement of similar tax changes for foreign investors last year, Real Estate Institute of NSW president Malcolm Gunning had urged NSW not to impose similar taxes as "foreign investors would simply decide to invest somewhere else".

This is borne out by Greville Pabst, chairman of Victorian valuation and advisory firm WBP Property Group, who said: “In recent months the Victorian Government announced they were making significant changes to stamp duty for foreign buyers. What they’ve done is they’ve added an additional 7 per cent stamp duty for foreign buyers of property.

“On a million-dollar purchase that’s $120,000 of stamp duty — that’s quite a consideration on that investment, isn’t it?  Some of my investor clients I’ve had in Malaysia and Singapore are now looking at Melbourne and saying they’ll shut the door on Melbourne,” Mr Pabst said.

The impacts of the NSW surcharges are expected to be felt at the top end of the Sydney property market. Sydney Sotheby’s International director Michael Pallier said: “I don’t think the market will collapse but there will be ripples felt throughout the sector.”

One of these ‘ripples’ came when Digital advertising company REA Group reported a 25 per cent drop in Chinese visitors to its Chinese language property website Myfun.com.

Gavin Norris, Head of Australia for Chinese property portal Juwai.com, said that for Chinese buyers the advantages of buying property in Australia have until now outweighed the hurdles that they have to go through.

“However there’s a breaking point. In the medium term there are larger forces at play that overcome the new charges, but we seem to be heading in that direction,” Mr Norris told Domain.

Foreign Investment Review Board figures show that Chinese investment in Australian real estate has more than quadrupled over the past two years, from around $6 billion in 2012-13 to $24 billion in 2014-15.

Monika Tu, whose Sydney-based property agency specialises is catering for the Chinese buyer market, said international house hunters were factoring the extra land tax into their property search and reducing their budgets.

“The market is still here; there are Chinese buyers who have a visa and children are at school, and they really want to buy here but these changes do create a lot of uncertainty,” she said.

Looking ahead

There was a small drop in Sydney home prices of 0.7 per cent in the March quarter, but in the three months to June, property prices surged 6.8 per cent upwards according to CoreLogic’s monthly house price index.

JP Morgan economist Tom Kennedy said the fall in March was the result of a change in the dynamics of the property market, brought on by the rapid expansion in the number of apartments.

“This looming supply expansion is expected to exert downward pressure on price growth over the next few years, particularly in Melbourne and Sydney where the expansion has been most pronounced,” he said.

HSBC economists Paul Bloxham and Daniel Smith also expect the property market to cool further over coming quarters: “Tight prudential settings, a significant boost to housing supply and recently increased state taxes on foreign buyers are set to weigh on housing price growth,” they said in an AAP release.

Since mid-2012, Sydney prices have risen by 57 per cent, but Mr Bloxham said that nationally housing prices would only grow four to five per cent in 2016 and slow to somewhere from zero to five per cent in 2017.

Tim Lawless, CoreLogic Director of Research, Asia Pacific, says that compared to other states Sydney has been relatively sheltered from the downturn in the resources sector. Benefits have also come from having a healthy services sector and positive population inflows, but the boom days are definitely over.

“The cumulative effects of tighter lending conditions, more expensive mortgage rates for investors and lower yields, as well as natural affordability constraints and higher levels of new housing supply, is likely to continue to impact the Sydney housing market resulting in a further slowdown over the year.”

The latest NAB survey of residential property developers, owners, agents and investors concluded house prices will rise slightly, but apartment prices will drop as both local investors and foreign buyers reduce their levels of participation.

Credit rating agency Moody's has also repeated its belief that there's a growing chance of a "correction" in house prices - a fall of about 10 per cent it said is possible, though it also said a more "gradual adjustment" is the most likely outcome.

Most market-watchers are still confident that Sydney property prices will continue their upwards trajectory over the next four years, albeit with perhaps a slight dip or two along the way.

A survey of 20 economists and property experts by financial comparison website Finder.com.au found that 35 per cent believed property prices would rise 10 per cent by 2020, and a further 30 per cent expected increases closer to five per cent.

Finder’s spokesperson Bessie Hassan said: “While there was concern about a ‘housing bubble’ or unsustained growth for some time, we’ve now seen a correction phase where the property market has softened yet is likely to go up again.”


‘Property prices continue to surge in 2016, report shows,’ Jennifer Duke, Domain, 1 July 2016
‘NSW real estate: Chinese investors cast their eyes over to western Sydney,’ Alison Cheung, News.com.au, 30 June 2016
‘Housing affordability: How the major parties plan to tackle the crisis,’ Dana McCauley, News.com.au, 30 June 2016
‘New home sales fall for a second month in May: 'Nothing alarming', HIA says,’ Michael Bleby, Australian Financial Review, 29 June 2016
‘WESTPAC: Australians are feeling confident, but the RBA's still likely to cut interest rates,’ David Scutt, Business Insider, 15 June 2016
‘No sharp correction to house prices coming but debt risk growing, says S&P,’ Patrick Hatch, The Age, 15 June 2016
‘These charts show why some experts fear an apartment glut,’ Clancy Yeates, Business Day, 14 June 2016
‘NSW Budget 2016: Foreign property buyers in NSW to be hit with stamp duty and land tax hikes,’ Sean Nicholls, Sydney Morning Herald, 14 June 2016
‘Cracks emerging in Sydney’s apartment rental markets: report,’ Jennifer Duke, Domain, 14 June 2016
‘May Property Snapshot Infographic,’ Tim Lawless, CoreLogic, 9 June 2016
‘House price growth raises risks to banks: Moody's,’ Clancy Yeates, Business News, 9 June 2016
‘Housing investment loans hit two-year low as rules bite,’ Jeff Whalley, Herald Sun, 9 June 2016
‘Is the heat going to come out of the housing market now investors are backing off?’
Kirsten Craze, News.com.au, 8 June 2016
‘Property experts expect up to 10 per cent house price growth by 2020,’ Jennifer Duke, Domain, 7 June 2016
‘If the Sydney property market is booming again, why doesn’t anyone want to sell?,’ Antony Lawes, Domain, 4 June 2016
‘Market Update: Oversupply Fears Rise as LVRs Drop,’ Eliza Owen, Onthehouse.com.au, 3 June 2016
‘OECD warns Australian property prices facing 'dramatic and destabilising' demise,’ Business Day, 3 June 2016
‘Off-the-plan apartments are under the spotlight as prices slump,’ Kirsten Craze, News.com.au, 2 June 2016
‘Australian capital city home prices fall for first time since third-quarter 2012,’ AAP release in The Guardian, 22 June 2016
‘HSBC: property price growth to halve in 2016,’ Jessica Sier, Business Day, 21 June 2016
‘More tightening in mortgage lending likely: Macquarie analysts,’ Clancy Yeates, Business Day, 21 June 2016
‘Foreign-buyer stamp-duty charge unsettles luxury-home market,’ Jen Melocco, Domain, 22 June 2016
‘Property investors are going for old over new,’ Kirsten Craze, News.com.au, 26 June 2016

Buyers return and Sydney property keeps rolling on

Sat, 4 Jun 2016
A federal election’s on its way but Sydney property still powers ahead. Investors stage a last-minute rush as interest rates drop and a unit glut looms.
The federal election is underway and with several weeks to go we might expect the Sydney property market to grind to a halt until after the polls close on July 2. But that’s not what’s happening.
Domain Group senior economist Andrew Wilson noted that the number of auction listings and the price outcomes have softened from the boom times of last year: “The ABS revealed…that Australia is possibly entering into a deflationary environment and to have house prices booming in this context is counter-intuitive,” he said.
But as part of a national trend, ?dwelling values in Sydney continued to rise, although at a rate that’s behind their strong performance in the first half of last year.
"Housing is getting a lot more prominence in the election campaign than it has previously," David Cannington, a senior economist at Australia & New Zealand Banking Group, told Bloomberg.
"The election uncertainty certainly weighs on consumer confidence and home buyer sentiment and that along with softness in the market is having an effect."
CoreLogic RP Data research director Tim Lawless said the price growth rate is now about half last year’s figure: "The annual rate of growth in Sydney peaked at 18.4 per cent in July last year and has since moderated back to 8.9 per cent over the most recent 12-month period."
However, Mr Lawless said that in April Sydney dwelling prices rose 2.4 per cent for the month, supported by mortgage rates at historic lows, high levels of investment and the government’s current supportive taxation policies. This follows a gain of 3.9 per cent over the first quarter of the calendar year.
The last weekend in May, Sydney recorded a median auction price of $1,270,000. This was higher than the $1,110,000 recorded the previous weekend, but also 7.6 per cent higher than the $1,180,000 recorded on the same weekend last year.
CoreLogic RP Data senior research analyst Cameron Kusher said the market was expected to slow in the second half of this year: “We don’t think it’s going to hold or continue but over the last three months after a pretty weak last quarter of last year [there] seems to be a renewed level of confidence,” he said.
There are also signs that investors are becoming more active after a brief pause while they considered the implications of possible changes to negative gearing and capital gains taxation arrangements.
The latest ABS lending finance data showed a solid rise in residential investor activity, with investor loans increasing by 30 per cent in March to a total of $5.5 billion, the highest monthly total since September 2015.
Westpac Bank, Australia’s biggest lender to property investors, has lowered the deposit required and raised the maximum loan-to-valuation ratio for investor loans in a reversal of 2015’s tightened lending conditions.
Otto Dargan, managing director of Homeloanexperts.com.au, said the earlier tightening had gone too far: "A lot of the lenders have realised that the reduced borrowing power for investors was too harsh," he told the Sydney Morning Herald.
Auction clearance rates ranging from the mid-70s and even in the low 80s have been achieved in the current pre-election rush as investors try to beat any changes to the taxation system that might eventuate after July 2.
However, Housing Industry Association (HIA) figures Sales of new homes in NSW dropped during April, with units losing more than houses. The HIA’s New Home Sales Report showed that the number of sales of new homes in March had fallen 8.1 per cent overall.
Of course there are always ‘experts’ willing to predict a future drop in Australia’s housing prices. The latest is London-based Capital Economics whose chief economist, Paul Dales, has forecast a fall of 10 per cent over 2019 and 2020.
"We suspect that the catalyst will be interest rates, although that trigger won't be pulled until 2018 at the earliest,” he said, while predicting a 4.5 per cent increase in 2016 and a 2.5 per cent increase in 2017.
Stock shortages appear
The number of houses listed for sale across Sydney is about 20 per cent down overall on the figure this time last year, and there are now shortages of housing stock in several key areas of the Sydney market.
According to Dr Andrew Wilson, that represents a shortage of about 30,000 listings this year.
“And for April, they were down around 6 per cent from March. Those fewer listings are certainly part of what’s generating strong price growth in many areas, particularly in the eastern suburbs, the lower north shore and the northern beaches.”
Mathew Tiller, head of research at LJ Hooker says that strong demand for property, low interest rates and investor demand have created a high level of competition to buy properties.
“So while, traditionally, you’ve always been told not to buy a property until you sell yours, now that’s turned around, and people are wanting to buy before they sell because they’re not confident they’ll find a good property to buy. That’s having a knock-on effect throughout the market.”
The prestige end of the market is especially hard-hit by a shortage of ‘trophy homes’, according to an article in Domain.
“The number of high-end properties in the slightly more affordable prestige market throughout the eastern suburbs and north shore have also dried up leaving agents dumbfounded at the dramatic turnaround in activity levels compared with the boom-time turnover of previous years,” the article said.
More rate cuts to come?
The RBA lowered the official cash rate to 1.75 per cent in May, saying in its official statement that the drop was the result of lower than expected inflation, low consumer sentiment and a downward trend in house price growth.
Although inflation is often seen as an economic negative, when it’s low or dropping the RBA can lower interest rates in hopes of encouraging borrowing and stimulating spending.
In 2015 housing prices increased rapidly while wages growth was at a near standstill. This meant that purchasers had to spend more of their incomes to service housing debt instead of spending on consumer purchases such as appliances, entertainment and groceries.
Inflation data from the Australian Bureau of Statistics has highlighted a slowing Australian economy, with the annual figure now below the RBA’s target rate of two the three per cent.
The Commonwealth Bank has predicted that interest rates will hit further historical lows of 1.25 per cent this year, with cuts of 25 basis points in August and also in November.
CommBank chief economist Michael Blythe said the RBA's Statement on Monetary Policy in May showed a higher level of concern than had been expected: "The RBA now expects inflation to only limp back to the bottom of the RBA's 2 per cent to 3 per cent target band by mid-2018," he said in a note to investors.
JP Morgan economist Tom Kennedy said the recent low wage rises had supported rapid jobs growth, but he predicted the RBA would cut interest rates further to stop low inflation from becoming entrenched.
Chief market strategist at IG, Chris Weston agreed, saying a cash rate of 1.25 per cent is very possible: "There's every possibility we could get two rate cuts this year, and I don't think they're going out on too much of a limb," he said.
Morgan Stanley strategists Chris Nicol and Daniel Blake added their forecasts to the mix, issuing a note to clients saying the Reserve Bank of Australia will cut the official cash rate to 1 per cent by the first half of 2017.
Apartment numbers keep growing
As towers of apartments continue to rise into the skylines of Australia’s capital cities an increasing number of property analysts are asking the question: “Are there too many new units being built?”
Herald Money columnist Nicole Pedersen-McKinnon describes a possible outcome: “It's widely considered that in Australia there will soon be an apartment glut – and subsequent price fall. The effect is probably already captured in the borrowing figures. If we look at new dwellings only, loan amounts are down 15 per cent in NSW.”
CoreLogic research analysts Tim Lawless and Cameron Kusher released a New Settlement Risk Report which looks at the number of units due to settle over the next six, 12, 18 and 24 months.
It said that across the combined capital cities there are 92,102 new units set for completion over the next 12 months. That figure is expected to rise to a massive 231,129 new units during the next two years.
Mr Kusher says these numbers represent a challenge for the market: “The large volume of new stock, coupled with an ever-growing supply of existing stock means that historic high levels of unit settlements are due to occur over the next two years in most cities.”
In the meantime units have recovered some lost ground, according to Residex: “Units in the Sydney market increased a significant 1.26% over the April quarter, following losses in January. The median Sydney unit is now at a historic high of $695,000” it said in its latest Market Update.
The City of Sydney Council has expressed alarm over the NSW government’s planning for inner city apartments that will result in population densities ‘seen only in pockets of New York or Hong Kong’.
The council’s chief executive officer, Monica Barone, told the Sydney Morning Herald: “Given available public information we expect to see as many as 10 or more buildings over 30 storeys on the Waterloo Estate with others up to 20 storeys."
However, Mr Kusher noted that Sydney’s new unit supply is geographically diverse, with a large number of new units under construction in outer suburban areas including Parramatta, Strathfield, Auburn and Kogarah-Rockdale.
“In some respects this spreads some of the risk around the city rather than other cities where new supply is much more centralised,” Mr Kusher said.
New constraints on foreign buyers
Three of the four major banks have placed restrictions on lending to foreign property buyers. Westpac, ANZ and the Commonwealth Bank now require proof of identity, proof of employment, possession of Australian residency and deposits of at least 30 per cent of the value of the property.
This comes at a time when the National Australia Bank’s residential property index shows a significant drop in foreign buyers in NSW; they have started to look for investment opportunities elsewhere, most likely because Sydney prices are so high that getting a satisfactory return on investment is becoming a challenge.
Mortgage One Australia mortgage consultant Michael Khoury said he had received several calls from developers who expressed concerns about whether buyers who have purchased ‘off the plan’ would be able to get a mortgage on settlement day.
“With restrictions on bringing money in and lending restrictions [in Australia] a lot of these sales will fall over in the next 12 months.”
However, director of Chinese property portal ACProperty, Esther Yong said that offshore Chinese buyers aren’t big risk takers and most would have sufficient cash to cover any problems with funding.
In a separate move that also targets foreign purchasers, from July buyers and sellers of real estate in NSW will have to prove their residency and citizenship status to the state government before a sale is completed.
Foreign buyers will have to provide details of their citizenship and visas, as well as getting clearance from the Foreign Investment Review Board. The Australian Taxation Office will match data provided by the NSW government to ensure foreign buyers have paid a $5000 fee for any property sold for less than $1 million, and $10,000 for properties sold for over $1 million.
Housing affordability worries
The unaffordability of housing is once again in the news following the release of a report by Anglicare Australia that showed a single person on the dole would have to search 3,590 advertised properties before they found one they could afford and that was appropriate for their level of income.
This brought out in the media a number of proposed solutions including one that’s been promoted by some journalists and even an editorial in the Sydney Morning Herald following a March report from the independent McKell Institute that the present high rates of stamp duty were raising housing costs and should be replaced by a broad-based tax on all property.
The report’s estimated $5250-a-year “reasonable and fair” impost on the state’s 2.8 million households would put something in the order of $14.7 billion into the government’s coffers in the first year. Unfortunately, it could also have several negative impacts on the housing market and make a major contribution to housing unaffordability.
It’s likely that rents would rise as landlords recouped the additional annual expense from tenants. Homeowners would have to find another $5250 in their household budgets, on top of existing mortgage payments, and people would hesitate to build a new home if it’s going to immediately start costing them an extra $5250 each year.
And because purchasing a house would automatically incur an ongoing debt of $5250 each year the number of buyers would predictably decline, along with dwelling values. Not a good outcome just to do away with stamp duty.
Negative gearing and capital gains
The Reserve Bank of Australia has expressed concern about negative gearing and the tax concession for capital gains. This has great importance to the housing market because loans to investors account for 46 per cent of all money lent for housing according to a report in the Sydney Morning Herald.
The RBA says that any change that discouraged negative gearing might be "a good thing" for financial stability. That has added fuel to the fires now raging between the two major parties over the future of the system that now operates and provides favourable conditions for property investors.
Labor has promised a massive overhaul to the country’s negative gearing and capital gains tax regime that it says will save $32 billion over 10 years. The Coalition on the other hand has said that the changes proposed by the ALP would cause "a massive shock" to the property market and says it will leave existing tax arrangements alone.
The Greens have even gone a step further. Greens leader Richard Di Natale said he would abolish the capital gains tax discount altogether.
The battle lines are drawn but we’ll have to wait for the outcome of the July 2 election before we have any clear indications of what lies ahead for these two contentious but important financial topics.
In the meantime, Domain executive editor Stephen Nicholls thinks investors will outbid first home buyers in the rush to acquire properties before the election: “My bet is that the investor will come out on top, or certainly push the price higher for first home buyers.
“After all, the opportunity to get those tax breaks could go out the window if they hold off until next winter.”
‘Sales of new homes took a dive during April according to the Housing Industry Association,’ Michelle Hele, News.com.au, 30 May 2016
‘Chilly end to Sydney autumn auction market as rates slide,’ Dr Andrew Wilson, Domain, 30 May 2016
‘Morgan Stanley tips RBA to cut rates to 1pc, ASX at 4800,’ Vanessa Desloires, Business Day, 25 May 2016
‘Market Update,’ Eliza Owen, Onthehouse.com.au, 29 May 2016
‘Westpac lowers deposit hurdle for property investors,’ Clancy Yeates, Business Day, 24 May 2016
‘FOMO among investors could reignite the Sydney property boom,’ Stephen Nicholls, Domain, 21 May 2016
‘Monthly mortgage payments fall $254 in five months,’ Nicole Pedersen-McKinnon, SMH Money, 19 May 2016
‘Federal election 2016: low wage growth sparks bleak outlook,’ David Uren, The Australian, 19 May 2016
‘House prices rise in April with Sydney top,’ Robert Harley, Australian Financial Review, 2 May 2016
‘Bullish housing data from CoreLogic RP Data a ‘big surprise’, say experts,’ Jennifer Duke, Domain, 2 May 2016
‘RBA Cuts Rates in May,’ Eliza Owen, Property News, Onthehouse.com.au, 5 May 2016
‘Westpac withdraws from real estate lending to foreigners,’ Elysse Morgan, ABC News Online, 28 April 2016
‘Sydney house auction market rises as interest rates and taxes are cut,’ Dr Andrew Wilson, Domain, 6 May 2016
‘Foreign buyers leaving Victoria, NSW in favour of Queensland, NAB data shows,’ Kirsten Robb, Domain, 20 April 2016
‘Chinese buyers to reach new record in 2016, but pain ahead: report,’ Jennifer Duke, Domain, 7 May 2016
‘Foreign buyer crackdown as new identity rules applied to Sydney property market,’ Kirsty Needham, Sun-Herald, 15 May 2016
‘Interest rates will fall further Commonwealth Bank economists predict,’ Liz Hobday, ABC Online, 16 May 2016
‘Property buyers prepared to close the deal before the hammer falls,’ Sue Williams, Domain, 3 May 2016
‘Sydney’s trophy home market fast grinding to a halt,’ Lucy Macken, Ingrid Fuary-Wagner, Domain, 8 May 2016
‘Election 2016: Reserve Bank worried about negative gearing, capital gains tax concessions,’ Peter Martin, James Massola, Sydney Morning Herald, 9 May 2016
‘Boom to bust: how many is too many apartments for our big cities?,’ Kirsten Craze, News.com.au, 13 May 2016
‘Roger Montgomery sees apartment oversupply sending property prices south,’ Jessica Sier, Business Day, 16 May 2016
‘April Property Snapshot Infographic,’ Cameron Kusher, Core Logic, 13 May 2016
‘Sydney auction market soars as investors stage a comeback,’ Domain, Dr Andrew Wilson, 16 May 2016
 ‘One Out Of Every 3,591 Properties Affordable For Single Person On The Dole,’  Max Chalmers, The Insider, 21 April 2016
‘Stamp duty should be in the state government's sights,’ Sean Nicholls, Sydney Morning Herald, 14 May 2016
‘Clover Moore alarmed by Waterloo apartment plans that dwarf Singapore's squeeze,’ Leesha McKenny and Jacob Saulwick, Sydney Morning Herald, 17 May 2016
‘Election 2016: Sydney house market stalls as poll jitters sideline sellers,’ Narayanan Somasundaram, Bloomberg release in Business Day, 19 May 2016
‘House prices to fall by 10 per cent, say Capital Economics,’ Stephen Cauchi, Business Day, 23 May 201

As the boom recedes we slow down and wait

Wed, 4 May 2016
Housing price growth slows, buyers get choosy, foreign investors stay active, rents rise, interest rates stay low and apartment building continues. This is the 2016 Sydney property market today.
There can no longer be any doubt that Australia’s housing boom is over and growth is returning to more sustainable levels.
“Sydney’s median house price falls below $1 million” was the way the Sydney Morning Herald headlined the story, and statistics from Domain Group did indeed show a March quarter drop of 1.5 per cent to $995,804. Across Sydney, that is.
Looking at a bit more detail we see that houses in the lower north shore, city and east, and northern beaches continued to show gains, albeit lower than this time last year.
As the article pointed out: “House prices fell in five out of nine regions, remained flat in the south west and grew in the city and east, and northern beaches by 7.4 per cent and 1.9 per cent respectively.”
But the lower north shore showed the highest house price increase of 12.2 per cent over the quarter, to a median of $2,300,000, so the ‘fall’ is anything but uniform.
Nevertheless, figures in March from CoreLogic RP Data also confirmed the general slowdown, showing annual home price growth down to its slowest rate in 31 months. Its index of home prices for the combined capital cities rose 0.2 per cent in March, compared to February when prices increased by 0.5 per cent.
Annual growth across Australia slowed sharply to 6.4 per cent, down from 7.6 per cent the month before and significantly down from a cycle peak of 11.5 per cent in 2015.
CoreLogic says the moderation in the rate of capital growth in Sydney is the most pronounced, with annual dwelling value growth halving from a high of 18.4 per cent in July last year.
Sydney, which CoreLogic described as a “very different beast" to other capital cities, is on track for a 2 per cent overall rise for the full year, said CoreLogic analyst Cameron Kusher. According Mr Kusher, the dwelling prices slowdown will continue throughout the rest of 2016.
“The cumulative effect of tighter lending conditions, more expensive mortgage rates for investors and lower yields, as well as natural affordability constraints and higher levels of new housing supply, is likely to continue to impact the Sydney housing market resulting in a further slowdown over the year,” he said.
It should be noted that CoreLogic recorded a median auction price in mid-April of $1,150,000. It also said the median remained 12.2 per cent higher than the $1,025,000 recorded over the same post-Easter weekend last year.
Domain expects Sydney auction activity to continue to rise through to the Queen’s Birthday holiday break in June, which it says is the beginning of the quieter winter auction market.
“Although auction listings are well below last year’s results at the same time, inner suburban clearance rates remain encouraging for sellers,” said Dr Andrew Wilson, Domain Group’s chief economist.
“However, weaker buyer activity is set to remain in lower-priced outer suburbs to the west, reflecting falling investor activity and recent strong prices growth subduing the market.”
Regulators breathe easier
The declining property market will impact on the banks' home loan businesses as mortgage growth slows and the potential number of customers that fall behind on their home loans rises.
"We expect the Australia-wide delinquency rate for mortgages showing more than 30 days in arrears to increase in 2016, but remain at a low level," Moody's analyst Alena Chen said.
Moody's said the total arrears rate in NSW would also remain at very low levels, noting that in 2015 the state recorded its lowest mortgage delinquency rate since 2005.
The average home loan in NSW has dropped by 10.15 per cent or $45,500 in three months according to a Finder.com.au analysis of Australian Bureau of Statistics data.
Nationally, home loans shrank by 4.08 per cent in February, reflecting a drop in valuation pricing as well as tougher loan conditions from banks.
The RBA said in its half-yearly statement on the health of our financial system that the steps taken by regulators to tighten lending standards have reduced risks in the financial system while increased lending rates have also tempered both credit and house price growth.
However, it cautioned that tighter access to loans for households could create "challenges" in the apartment construction market given the volume of building undertaken.
Meanwhile, Australia’s property investors had a surprise resurgence in February, with ABS data showing an increase in the level of investor loans.
Lending to property investors grew 4.1 per cent in February but still remains down year on year.  Loans issued to owner occupiers grew by a modest 1.7 per cent over the month.
AMP Capital chief economist Shane Oliver told Domain’s Jennifer Duke that the bounce back in the figures came as a bit of a surprise: “It was a bit of a reversal after almost six months of investor lending being soft or below owner occupiers”.
In a Reuters release RP Data head of research Tim Lawless said he didn’t think dwelling prices would be going backwards.
"We are likely to see Sydney and Melbourne dwelling values continue to rise, at least on average over 2016 and 2017; however, growth rates are likely to be substantially lower than what has been recorded over previous years."
Mr Lawless also told ABC News Online that Sydney home prices could retreat before stabilising: "By 2017 we're expecting the Sydney market will probably be tracking at around about the 1.5 to 2.5 per cent growth rate," he said.
"A period of weaker price growth or outright modest declines is likely to become entrenched over coming years," said Merrill Lynch in a note to clients.
"We'd expect that such a period could severely test Australians' long love affair with property investment."
Splits in the market
Divisions are beginning to widen in the Sydney auction market between richer suburbs and those in areas considered less ‘desirable’.
Agents report that there are still buyers in the market but they have become more selective about the type of property they buy and its location.
“They’re being more selective, there’s no doubt about it,” CBRE residential head David Milton told the Australian’s Samantha Hutchinson.
“They’d buy anything 18 months ago, we’d never seen anything like it, but now they’re thinking a lot more about what they’re buying, the apartment, and they’re not prepared to accept secondary properties in a development.”
Tim Lawless, residential research director at CoreLogic RP Data said there has been an erosion of confidence and value growth across the Sydney metropolitan area.
"The inner city areas seem to be more resilient, but the areas from Ryde, the Hills Districts and the outer west is where the pace of value growth has been sharpest in decline," Mr Lawless said.
Domain’s Stephen Nicholls says that there has been a considerable shift away from buying patterns of last year: “This time last year clearance rates were consistently high across the city, but this year lower-priced property in the west and south-west is struggling to find buyers.”
Whereas last March clearance rates in the west were 75.8 per cent, in the same month this year less than half the number of homes put to auction were sold (49.4 per cent).
Domain Group chief economist Andrew Wilson says the reason for the continuing strength in more exclusive areas is due to people with higher incomes benefiting from the strong Sydney economy and also to those parts looking to be good value.
“They haven’t had the same level of price growth as outer suburbs in the past year,” Dr Wilson said in a Herald article.
Foreign buyers active
Data from the Foreign Investment Review Board (FIRB) show that Australia’s property prices continue to be supported by an increasing amount of foreign investment.
There were 36,841 applications by non-citizens who were also not permanent residents to buy residential properties. This represented a 60 per cent increase on the previous year, while the value of all properties covered by the applications rose 75 per cent to $60.75 billion.
Foreign purchasers bought 9,236 established homes last financial year worth a total of $10.1 billion. FIRB figures show that approvals to buy Australian residential real estate have more than tripled since 2012-13.
The majority of individual purchases of real estate were by Chinese nationals, who lodged about two-thirds of the total number of FIRB applications across all categories.
A Bloomberg media release said that the rising level of demand from foreign purchasers has triggered community concern that locals are being priced out of the property market. It said this had “prompted the government to tighten scrutiny of foreign investment”.
Building activity slowdown
There are a number of indicators that show the recent period of accelerated home-building activity is nearing an end.
Earlier this year a rapid fall in new home sales during February seemed to confirm that the property market has entered the first phases of a down cycle. In that month new home sales recorded their steepest monthly fall in more than 21 months.
Housing Industry Association economist Harley Dale said that downwards cycles usually started with a moderation in new home building and sales levels, which then picked up momentum.
“Stage one of a down cycle in new home building will be moderate, but signs of a sharper contraction in subsequent stages may emerge as the year progresses.”
Construction activity has now slipped to a 13-month low on the back of weakness in home building and declining engineering work.
The Performance of Construction Index slumped 0.9 points to 45.2 in March, remaining below the 50-point level separating expansion from contraction.
Ai Group head of policy Peter Burn said the fourth consecutive monthly decline of the index was driven by weakness in home building and engineering construction overwhelming small advances in the apartment and commercial building sub-sectors.
He also warned that there was no indication of any potential turnaround in the near future: "With new orders across the sector also falling, the immediate outlook for construction is for further contraction."
Apartment oversupply concerns
Concerns are being raised about the number of new apartments now being marketed in Australia’s capital cities. Once thought to be immune from the possibility of overbuilding, Sydney has now overtaken Melbourne in the number of new apartment building approvals.
Figures from the Australian Bureau of Statistics show that in 2015 Sydney became the leading capital for apartment developments with 35,538 approvals during the year compared to Melbourne’s 33,023.
Developers have undoubtedly been tempted by the recent price growth in Sydney apartments. According to CoreLogic figures, in the past five years the median unit price has risen 39.4 per cent.
However, Douglas Driscoll, CEO of real estate group Starr Partners, raises the issue that apartments might have more appeal to investors than they do to owner-occupiers: “We are forcing buyers into considering apartments because the reality is that they have very little other option in a semi-affordable price range.
“We are starting to see some ill-effects from an oversupply of apartments such as rents falling for the first time in three years, as well as vacancy rates rising,” he said.
Daryl Dixon, Executive Chairman of Dixon Advisory, cautions against buying an apartment ‘off the plan’ while an oversupply of apartments may cause both bank valuations and rents to fall.
“Holding off on new purchases, even for owner-occupied purposes, individuals could benefit from the lower prices certain to follow the completion of the large number of off-the-plan projects in the pipeline,” he said.
The Reserve Bank of Australia (RBA) even issued a warning to banks about the potential for what it called “large losses” from loans to property developers as a result of the forthcoming glut of apartments in some parts of Sydney.
The RBA identified what it called a "mismatch between a growing supply of geographically concentrated apartments on the east coast and softening demand for these apartments in some areas – given the rebalancing of housing demand and strengthening of lending standards".
The RBA said it doesn’t see the apartment situation affecting value of free-standing houses: “This development is not expected to materially [affect] price performance of detached housing but may [hurt] sentiment towards the property market overall."
Graham Wolfe of the Housing Industry Association said the Reserve Bank was being "overly conservative in their outlook".
He told the Australian Financial Review that 2015 was only the second year in the past decade that housing starts had exceeded demand from annual population growth and that Australia's latent undersupply of housing stock was evident by tight rental vacancy rates.
And Chris Johnson, CEO of the Urban Taskforce said that in fact more homes are needed, particularly in Sydney.
“The NSW Department of Planning says that 33,200 new homes are needed each year for 20 years in Sydney but last financial year only 27,348 new homes were completed,” he told Kirsten Craze at News.com.au.
 “I think in the long term value will remain and that’s because of a fundamental shift in lifestyle. A lot of people are preferring a cosmopolitan lifestyle that’s close to public transport, shops and amenities and this is what’s going to keep prices up.”
Rent levels rise
A positive note for investors came from the March 2016 Domain.com.au Rental Report which showed that Sydney rents had increased during the March quarter and remained at record levels despite the recent apartment building boom.
The median unit rent was recorded at $520 per week, while for houses it was $530. Sydney unit rents have now increased by 4 per cent over the past year.  Low vacancy rates also continued, according to the report.
Domain's December quarter 2015 report showed Sydney unit rents falling from $510 to $500 per week over the period before recovering in March.
Domain Group’s chief economist Andrew Wilson told the Property Market Outlook, put on by the Committee for Economic Development of Australia, that property prices are now so high that little can be done to make home purchasing more affordable.
“The boom has entrenched significant barriers of entry to the market and fast-tracked the rise of Sydney as the high-rise and renting capital. We’re moving inexorably towards that outcome.”
Interest rates remain low
One key element in the property mix – interest rates, seems destined to remain low for some time, and possibly go even lower.
In its April meeting the RBA announced it would hold the official cash rate at two per cent – the tenth consecutive month that it left the official cash rate on hold.
This was despite a persistently strong Australian Dollar threatening a cash rate cut, although the Australian cash rate is still high compared to other countries such as Japan whose rates are in negative territory.
Eliza Owen from Onthehouse.com.au says that recent optimism regarding Australia’s economy has resulted from increased activity in tourism, real estate and services, which are helping to offset losses in the resource markets.
“I anticipate revenues in real estate will come down over the remainder of this year, but any further cuts to the cash rate may be dangerous in fuelling further debt rather than stimulating the economy.”
She said that many economists expect the RBA’s cash rate to stay at its present level until May next year: “While a cash rate cut may temporarily help prop up further growth in the housing market, with such high levels of debt further growth would only lead to more pain in the economy down the track.”
Ms Owen noted that low interest rates have not worked in the favour of first home buyers. “In fact, in 2014, for the first time in recorded history and while the cash rate was at historic lows, more money was lent to people who were buying investment housing compared to people who were buying something to live in.”
At least for the time being the federal government will make no changes to capital gains tax and negative gearing. Prime Minister Malcolm Turnbull said before the May 3 budget that it was "common sense" to make no adjustments to existing arrangements.
Domain’s Dr Andrew Wilson agrees: “Any new policy that constrains the supply of housing, whatever that may be, will only act to increase prices and rents and exacerbate the looming reality that home ownership is set to be a largely unattainable privilege for most inner-city apartment renters.”
‘Sydney’s housing market will soon start to look like New York, expert says,’ Antony Lawes, Domain, 28 April 2016
‘Budget 2016: Malcolm Turnbull takes negative gearing changes off the table,’ Stephanie Peatling, Sydney Morning Herald, 24 April 2016
‘Sydney’s median house price falls below $1 million: Domain Group,’ Jennifer Duke, Domain, 21 April 2016
‘Glut or no glut, what exactly is happening with apartments in our major cities?,’ Kirsten Craze, News.com.au, 19 April 2016
‘Building activity slips to 13-month low,’ The Australian, 7 April 2016
‘Rents continue to rise despite national building boom,’ Julia Corderoy, HomeNews, Australian Broker, 7 April 2016
‘RBA warns of apartment glut risk to banks,’ Clancy Yeates and Jonathan Shapiro, Business Day, 15 April 2016
‘Record drop in NSW home loan size: analysis,’ Jennifer Duke, Domain, 19 April 2016
‘RBA Leaves Rates on Hold in April,’ Eliza Owen, Onthehouse.com.au, 5 April 2016
‘Industry insider says Sydney will soon have too many apartments,’ Kirsten Craze, Property News, news.com.au, 31 March 2016
‘Banks to feel slowing housing market,’ Clancy Yeates, Business Day, 1 April 2016
‘Steep fall in new home sales sounds the alarm,’ Samantha Hutchinson, The Australian, 1 April 2016
‘Australian home price growth slows further in March,’ Reuters in Business Day, 1 April 2016
‘Melbourne houses record strongest price growth as apartments flounder,’ Su-Lin Tan, Financial Review, 1 April 2016
‘March Property Snapshot Infographic,’ Cameron Kusher, CoreLogic Property value, April 2016
‘Home prices set to stagnate as Sydney boom falls flat,’ Michael Janda, ABC News Online, 3 April 2016
‘The growing divide between Sydney’s richer and poorer suburbs,’ Stephen Nicholls, Domain, 2 April 2016
‘RBA Leaves Rates on Hold in April,’ Eliza Owen, Onthehouse.com.au, 5 April 2016
‘The damaging ramifications of the apartment boom,’ Doug Driscoll, Domain, 10 April 2016
‘Foreign real estate investment jumps 75pc in a year, FIRB report reveals,’ Michael Janda, ABC News Online, 11 April 2016
‘Apartment glut a threat to financial stability, warns RBA,’ Jonathan Shapiro, AFR Weekend, 16 April 2016
‘Chinese buyers double down on Australian property,’ Bloomberg on Business Day, 11 April 2016
‘Sydney’s auction clearance rate hits lowest level this year,’ Dr Andrew Wilson, Domain, 18 April 2016
‘Loans to property investors jump in February: ABS,’ Jennifer Duke, Domain, 11 April 2016
‘Property slowdown to test Australia's love of real estate, says Merrill Lynch,’ Jessica Sier, Business Day, 11 April 2016
Residex Market Update, Eliza Owen, Onthehouse.com.au, 17 April 2016
‘McGrath shares crash after resuming trading,’ Carolyn Cummings, Business Day, 18 April 2016

Sydney property moves into the slow lane

Thu, 31 Mar 2016
Some parts of Sydney are outperforming others in a slowing market, but auction clearance rates are still showing strength.  However, residential construction – a key component of the Australian economy, is declining, and so are rental rates.
As expected, this year’s Sydney property auction results are lagging behind those of 2015. Clearance rates are becoming more uneven geographically with some areas clearly outperforming others.
Domain’s Dr Andrew Wilson said the results continue to show the recent trend of inner suburban, higher-priced regions reporting generally good results for vendors with overall clearance percentages in the 70s most weekends.
“Although auction clearance rates [are] down…the Sydney market overall remains positive for sellers and continues to track at its highest levels since August last year.
Dr Wilson also noted that buying within 10 km of the Sydney CBD has an automatic $1 million starting point: “Even 60 kilometres out people are snapping up very small new homes for $600,000 in some areas”, he told the Sydney Morning Herald.
Research from the University of NSW’s City Futures Research Centre (CFRC) indicates that affordability issues are severely restricting the choice of purchasing locations for average homebuyers.
The CFRC report found that, based on the average salary, three quarters of Sydney suburbs had less than 20 per cent of home sales at an affordable price. It said that only a small amount of affordable housing remains, primarily in suburbs near Penrith and in the Canterbury-Bankstown area.
House prices slip
For the first time in three years the median house price across Australia has slipped, with the decline in the Sydney market leading the fall.
As the Housing Industry Association (HIA) describes the market: “The growth cycle for national residential property prices has peaked, within which the variation in dwelling prices between capital cities (and regional areas) is at its widest in over 20 years.”
Sydney’s median house price fell by 1.6 per cent in the December quarter according to Australian Bureau of Statistics data, the first such drop since March 2012.
The Reserve Bank of Australia’s governor, Glenn Stevens, gave credit for the price fall to regulatory measures introduced to slow lending to investors: "Some moderation in house prices in some of the locations where they had been rising most rapidly, while not the direct objective of the supervisory measures is…in my judgement helpful," he said.
Mortgage activity provides an indication of the demand for property in the near future. The CoreLogic Mortgage Index is trending higher, but the level of activity is lower than it was at the same time last year.
This means the demand for mortgages is not as strong as it was at this time last year, showing that the rush to borrow funds for property investments has slackened.
For investors, rents are also showing signs of easing. According to CoreLogic, Sydney rental rates have increased by just 1.1 per cent for houses and 3 per cent for units over the past year.
Slowing rents mean that home value growth is now outpacing rental growth. Gross rental yields have dropped from 3.5 per cent for houses and 4.4 per cent for units a year ago to 3.2 per cent and 4.2 per cent respectively.
Housing construction declines
The latest Performance of Construction Index by the Australian Industry Group (AIG) and the HIA shows that activity in Australia's construction sector went backwards in February, representing a decline in house building.
As ABC Journalist Michael Janda points out, the housing sector is a critical part of the Australian economy.
“Over the past year, residential construction and renovations grew by around 10 per cent, according to the ABS national accounts. The residential building sector alone thus directly added around half a percentage point to the nation's 3 per cent GDP growth”, he said.
“If the sector stopped expanding, other things being equal, GDP growth would slow to 2.5 per cent. If the industry shrank by an equivalent amount, it would have directly pulled GDP growth back closer to 2 per cent.”
HIA chief economist Harley Dale said that the new residential construction sector will maintain healthy levels of activity this year, but will not generate further growth.
"Detached house building has been quite strong in some markets this cycle, but certainly hasn't satisfied the level of underlying demand, given insufficient availability of shovel-ready land and the excessive user-pays charges for residential infrastructure."
As a new analysis by ANZ Bank points, the ongoing housing undersupply also limits the likelihood of price falls in the Sydney market.
“When prices do start to fall, that creates opportunities for potential households who are priced out of the market” says ANZ senior economist David Cannington.
“This is part of the reason why house prices are able to be supported at the high level that they are at the moment.”
Sydney’s undersupply continues
At least Sydney will be the last capital city to be oversupplied with dwellings if to BIS Shrapnel’s 2016 Building Industry Prospects report proves to be accurate. The report concluded that although Australia will have 24,000 extra homes by 2017, most of them will be in Victoria.
The report also says that the undersupply of dwellings in Sydney is likely to continue for at least the next three or four years. It concluded that in 2017 Sydney will still see a shortage of 41,000 dwellings, representing only a slight improvement on the shortage of 53,386 this year.
Robert Mellor, managing director of BIS Shrapnel, said that Sydney has little chance of overcoming its present housing undersupply by 2020 unless new dwelling construction were to continue at the high levels seen in 2015.
Another limiting factor appears to be a shortage of building materials and manpower, according to Brickworks managing director Lindsay Partridge: “Every plant we have on the east coast is at capacity…the biggest issue for our company is roof tilers. They are very hard to find.”
AMP Capital chief economist Shane Oliver believes we’ve already seen the bulk of the home building momentum and are now entering a phase of the property cycle where growth is slowing.
“If [the building boom] continued for a few years we could eat up the supply issue [in Sydney], but this is unlikely as approvals are starting to roll down.”
Unit prices may have peaked
Australian Population Research Institute president Bob Birrell said the conclusions of the BIS Shrapnel report were consistent with APRI’s findings: “Sydney has had a relative high amount of stock built in the past two or three years compared to before. But this is largely small apartments for which there is a limited market,” he said.
Until now the price growth of Sydney apartments has been impressive. The 12-month median unit price is now $650,000 (after an increase of 38.9 per cent in the past five years according to RP Data CoreLogic figures).
However, figures from the Domain Group show that Sydney’s unit prices fell 2.8 per cent in the December quarter - the first decline in apartment prices since March 2012.
This could indicate that unit prices have reached their peak, especially when you consider that a median freestanding house in any other capital city – including Melbourne, would cost less than the price of a median Sydney unit.
With regard to the currently burning questions about negative gearing and the taxation of capital gains, we’ll have to wait at least until the May budget and possibly even until the next election before we get the full details from the federal government.
‘Buyers priced out of 75 per cent of Sydney’, Jennifer Duke, Sydney Morning Herald, 26-27 March 2016
‘Housing shortage to boost market’, Jessica Irvine, Sydney Morning Herald, 26-27 March 2016
‘Builders struggling to satisfy housing boom, says Brickworks,’ Tim Binsted, Sydney Morning Herald,24 March 2016
‘HIA State Outlook’, Housing Industry Association NSW, Summer edition, 2016
‘Bubble bursts as prices cool, ending boom of three years,’ Jennifer Duke, Sydney Morning Herald, 23 March 2016
‘February Property Snapshot Infographic,’ CoreLogic Property Value, 8 March 2016
‘Lowest house building figures in more than a year will weigh on economy: AI Group,’ Rebecca Hyam, ABC News online, 7 March 2016
‘Median house price falls in capital cities for first time in three years: Real Estate Institute of Australia,’ AAP release on Domain, 11 March 2016
‘Australia to have too many homes in 2017: BIS Shrapnel report,’ Jennifer Duke, Domain, 10 March 2016
‘The Sydney auction market is lagging this autumn,’ Dr Andrew Wilson, Domain, 11 March 2016
‘Congratulations Sydney, your units are way pricier than a house everywhere else,’ News.com.au, 5 March 2016
‘Negative gearing and the recession we have to have,’ Michael Janda, The Drum,
ABC Online, 16 March 2016
‘RBA's Glenn Stevens says moderating house prices 'helpful', Michael Heath, Business Day, 22 March 2016

Moving right along – just slower than before

Thu, 10 Mar 2016

The Sydney property boom of the past four years is over and market indicators are returning to more familiar levels. Prices growth of 3 to 5 per cent is still expected, but buyers will be more selective in the locations and types of property they purchase as investor activity decreases and the construction of thousands of new apartments continues.

It’s been a long time since the Reserve Bank last cut its cash rate – since May 2015 when it came down to the two per cent rate we still see today.

When the RBA’s March meeting decided to keep it at this historic low position it also sent out a few signals that it could go even lower if the Australian economy showed signs of slowing.

This was reinforced by Deputy Governor Philip Lowe who said in a speech on 7 March that the Australian economy was successfully rebalancing after the end of the mining investment boom but there is scope for a rate cut if economic indicators showed a slowdown.
"An important factor here will be whether the growth in aggregate demand continues to be sufficient to accommodate the growth in our labour force," said Lowe.
But at present the expansion of the non-mining sector together with low inflation, satisfactory employment data and increased business borrowing seem to have reassured the Bank that it’s got the numbers about right.
One slightly worrying indicator is the fall in building approvals for the construction of new homes. The market had expected a drop of around three per cent but the January fall was 7.5 per cent.
Until recently the fall in mining investment has pretty much been offset by increased activity in the construction sector, but if both of these key economic forces trend downwards the RBA may cut its rates around midyear, according to AMP Capital chief economist Shane Oliver.
Bessie Hassan, spokeswoman for financial services comparison website Finder.com.au told News.com: “Australians should be cautious — experts are divided about what lenders will do next. While we don’t expect a dramatic upswing in rates, they can turn very quickly and catch borrowers by surprise.”
Meanwhile, Sydney’s housing prices have slowed dramatically. The latest CoreLogic RP Data home value index for February shows the annual growth dropped below 10 per cent, and the past quarter showed a 0.2 per cent easing in prices.
CoreLogic RP Data's head of research, Cameron Kusher, told ABC News that most Sydneysiders can’t afford to pay more than the current high prices.
"I do think we're getting to a point where affordability is stretched and [Australians] simply can't afford to pay some of these prices that are being asked in Sydney," he said.
Sydney property auction clearance rates are lower than last year but remain above 70 per cent, although the number of properties on offer has also decreased. Inner suburban higher-priced regions such as the lower north shore and northern beaches are recording significantly higher clearance rates than outer suburban areas in the south and west.
Property investors aren’t nearly as active as they were before the banks tightened their credit policies in late 2015. Loan growth in the housing investor market has dropped to its lowest rate in two years, as shown in figures from the RBA.
The Bank said the value of housing investor loans grew by 7.9 per cent in the year to January - the slowest annual rise since February 2014.
ANZ Bank economists Daniel Gradwell and David Cannington said that some but not all of the slack in investor loans had been taken up with increased borrowing by owner-occupiers:  "Although stronger owner-occupier credit growth has provided some offset to this, overall housing credit growth has slowed in recent months."
The somewhat tenuous shift to a non-mining Australian economy has again raised questions about a housing ‘bubble’, mostly fuelled by comments from international economists.
London-based economist Jonathan Tepper, who earlier predicted mortgage bubble bursts in both Ireland and the United States, said that Australia would be the next nation to experience a shock housing crisis.
In a recent episode of ‘60 Minutes’ on the Nine Network Mr Tepper, founder of macroeconomic research group Variant Perception, predicted a property market crash of 30 per cent to 50 per cent.
His most widely-repeated quote picked up in the Australian media is: "Australia is the only country we know of where middle-class houses are auctioned like paintings."
His prediction of doom was immediately countered by Moody’s Analytics, a risk measurement and management firm, and CoreLogicRPData who forecast that home value growth will merely slow across Australia in 2016 and 2017.
Alaistair Chan, a Sydney-based economist at Moody’s Analytics, said: “Nevertheless, accommodative policy, robust rental growth, and a recovering labour market are expected to support valuations over the medium term.”
An article on News.com.au does say that Sydney’s housing prices are overvalued: “House prices in Sydney are closer to fair value than Melbourne’s, although they are still 9.5 per cent overvalued in aggregate. This smaller estimate of overvaluation is the result of Sydney’s stronger employment market.”
This doesn’t mean a price fall is imminent, however. The article concludes: “Over the medium to long term (2018 through to 2025), Moody’s Analytics expects Sydney house values to rise 4.9 per cent a year in nominal terms versus a 7.3 per cent annual increase that we’ve seen over the period from 1982 to the present.”
Dr Andrew Wilson, chief economist of the Domain Group, says we will probably need to wait until spring to see signs of prices growth: “In the last quarter, downward activity was driven by a lack of confidence, but the underlying shortage of housing will continue to keep demand ahead of supply once confidence recovers.”
What sort of growth can we expect? This is the time of year that analysts look at the first two months of the new year and make their forecasts for the rest of the year ahead. Although estimates range from under one per cent to over seven per cent, the general conclusion is that a housing price rise of around three per cent across Sydney is on the cards.
Louis Christopher, managing director of SQM Research, sees a geographic bias determining where prices rise the most: “Sydney’s outer west, south-west and north-west will experience the full brunt of the slowdown, with price falls likely to be recorded in these areas.
“The middle rings and inner rings are likely to record moderate price gains. These regions underperformed during the boom, but now they will outperform during the slowdown, as they are less influenced by investor activity,” he said.
There’s also a disparity between anticipated growth for prices of units and those of free-standing homes. Dr Shane Oliver from AMP Capital says: “I see modest growth for houses of 4 to 5 per cent and apartment growth of up to 2 per cent.”
A report by the Australian Population Research Institute concluded that Sydney will soon see a surplus of apartments as the number of completions rises to about 21,000 to 22,000 apartments in 2016 and 2017.
The report’s findings were opposed by Urban Taskforce chief executive Chris Johnson who described the report as “alarmist”. He said there is “definitely not an oversupply of apartments,” and referred to NSW Government statistics that forecast a need for 33,200 new dwellings each year in Sydney.
John Cunningham, president of the Real Estate Institute of NSW, says that 2016 will be a year of consolidation.
“I see no more than 3 per cent growth for houses, which will run close to the inflation rate. First home buyers will come back into the market, which might put more pressure on apartment prices, and growth might stretch to 5 per cent,” he said.
Sydney property has always been a good investment as any impartial analysis of the property market’s historic growth will show, and it’s likely to stay that way according to several market-watchers commenting in Domain.
Linda Wang, management consultant with agents Laing + Simmons, said: “Most of us believe Sydney still has a lot of good investment buying. We have a growing population, and often a shortage of accommodation, and those are the two single biggest factors in the property market.”
Metropole Property Strategists CEO Michael Yardney says Sydney’s steady population growth continues to drive the market upwards, especially the investment sector: “We’re still seeing a lot of demand for homes closer to the CBD, in the eastern suburbs, on the lower north shore and the inner west,” he says.
“That’s from a demographic of people whose wages are growing more than average and who have a higher disposable income, so those are always good areas to invest in.”
The Urban Development Institute of Australia (UDIA) released a report in March that said we would need another 16 years of construction activity at the high level of the past three years just to keep up with Sydney’s population growth.
“Prices of land and housing are rising in Sydney faster and higher than any other Australian city and Sydney still needs a dramatic increase in affordable land supply to arrest this trend.”
There are some interesting statistics from the legal and conveyancing fields that could point to a prices recovery earlier than might be expected. A survey by GlobalX Legal Solutions, a firm that provides services to the legal professionals, found that 82 per cent of its clients believed Australia’s home values would stay constant or increase over the next year.
Chief executive Peter Maloney said his clients were involved in the earliest stages of real estate transactions and had already seen a pickup in activity: “Despite the last quarter reporting slower than average growth, our research found one in three conveyancers believe market valuations will increase by more than 5 per cent in the next 12 months.’’
Tim Lawless, CoreLogic’s research director, said the period of lower price growth we’re now entering isn’t a problem: “It’s actually quite a controlled movement, it’s probably just what the doctor ordered when it comes to making an improvement in the stability of our housing markets.”
AMP Capital’s chief economist Shane Oliver said unless there is a very severe recession or interest rates go sky high a fall in prices across the board is not going to happen.
“If we had unemployment at much higher levels than six per cent, if we had mortgage rates at more than 10 per cent, I would be much more worried,” Dr Oliver told Domain.
“But I’ve seen all these claims before and there is an underlying resilience in the Australian housing market that sees it hold up,” he said.
‘Australia's economy rebalancing successfully: RBA,’ Reuters article in Sydney Morning Herald, 8 March 2016
‘Sydney auction numbers down as sellers remain cautious,’ Dr Andrew Wilson, Domain, 7 March 2016
‘Apartment bust to shock tens of thousands of investors, report suggests,’ Jennifer Duke, Domain, 7 March 2016
‘First-home buyers dreams dashed as Sydney land prices jump $100,000 in a year: UDIA,’ Jennifer Duke, Domain, 8 March 2016
‘Reserve Bank leaves cash rate on hold as building approvals fall off a cliff,’ Frank Chung, News.com.au, 1 March 2016
‘Home prices: Sydney stalls; Melbourne, Brisbane, Hobart on the rise,’ Michael Janda, ABC News, 1 March 2016
‘Property investor loan growth near two-year low,’ Clancy Yeates, Business Day, 29 February 2016
‘Industry forecasters predict slow and steady growth ahead, with no bubble in sight,’ Kirsten Craze, News.com.au, 26 February 2016
‘We may see prices go backwards … and stabilise in the later part of the year,’ Kate Farrelly, Domain, 26 February 2016
‘Predictions show house prices set to cool down this year, but unemployment could rise,’ Sue Lannin, ABC News Online, 26 February 2016
‘Property price growth may have slowed at the start of the year, but the experts have spotted signs things may soon pick up,’ Michelle Hele, News.com.au, 24 February 2016
‘Sydney real estate still a good investment, experts say,’ Sue Williams, Domain, 20 February 2016
‘Claims that Sydney is heading for a 50 per cent drop in house prices are outrageous, economists say,’ Jennifer Duke, Domain, 22 February 2016
‘The charts that suggest the housing bubble is out of control,’ John McDuling, Sydney Morning Herald, 24 February 2016
‘RBA Leaves Rates on Hold in March,’ Property News, Eliza Owen, Onthehouse.com, 1 March 2016

The good old days are back – just maybe not quite so good

Tue, 16 Feb 2016

As we get closer to mid-2016 we’re also nearing the anniversary of the beginning of the biggest real estate boom Sydney has ever seen. It was in June of 2012 that property prices started rising at a rate that turned many owners of very ordinary houses into millionaires by the end of 2016.
We soon became accustomed to double-digit growth in property values, to auction clearance rates northwards of 80 per cent, to on-market times dropping to be measured in days rather than weeks, and to a growing number of investors snapping up properties that were expected to be sources of capital gains more than rental returns. And all this aided by the lowest interest rates in living memory.
Was it going to last forever? Of course not, and now it’s over. Sydney’s median house price dropped 3.1 per cent over the December quarter 2015, the first drop since June 2012, according to the Domain House Price Report.
Eliza Owen, market analyst from Onthehouse.com.au said it had been a pretty good ride until it came to a halt: “The upswing in the current cycle lasted almost two years and, in real dollar terms, the median house price increased by approximately $375,000.”
Stephen Nicholls, executive editor at the Sydney Morning Herald, called it “the house price correction Sydney has long needed”.
“Prices had risen so much – an extraordinary 52.6 per cent over three years. The 14.8 per cent growth last year was beyond everyone’s expectations. House prices can’t keep going up at those sorts of rates forever,” he said.
AMP Capital chief economist Shane Oliver said the drop was the result of rising mortgage rates, restrictions placed on investor lending, a surge of new apartments and a slowdown of Chinese buyers in the Sydney market.
He did say that the price drop “exaggerates the weakness in the market” as it has to be viewed in the context of the huge growth Sydney has experienced over the past three years.
Core Logic head of research Tim Lawless told Newscorp’s Aidan Devine that Sydney’s price crunch was the result of affordability pressures and a changing lending environment that has made it harder for investors to access credit.
“[Regulatory changes] have made it more expensive and difficult for investors to access housing finance. Added to this are higher mortgage rates and more restrictive credit policies and loan servicing requirements,” Mr Lawless said.
“Weakening fundamentals have already seen the market starting to cool, suggesting the best of the price gains are probably behind us,” NAB chief economist Alan Oster said in the ‘NAB Quarterly Australian Residential Property Survey Q4 2015’ released in February.
Now we go back to reality and that means adjusting all those numbers to where they usually were before the boom began. In other words, the market is returning to more sustainable levels and it’s not such a bad thing.
One significant change is that in 2015 Melbourne’s annual growth rate for houses and units combined (11 per cent) is now marginally ahead of Sydney’s (10.5 per cent), according to the January 2016 CoreLogic RPData Hedonic Home Value Index.
However, Sydney retains the crown for having the highest median dwelling price ($776,000), well ahead of Melbourne’s $595,000.
There will still be weekends with impressive auction results like those from the first auction in February which showed a result of 72.5 per cent – a good rise from the previous weekend’s 43.3 per cent.
Even more encouraging was the result the following weekend of 74.3 per cent - the best result since September 2015. The median auction price of $1,041,500 wasn’t bad either.
And despite tighter controls on moving money offshore, including China’s state-owned banks delaying or even blocking money going overseas, Chinese investors haven’t gone away.
Goldman Sachs chief economist, Tim Toohey, even takes the view that “…a flood of money out of China in the last six months means that it may be too early to call the top of the property market.”
Regardless, there’s little doubt among Australia’s leading property market analysts that it’s going to take longer to become a property millionaire (or multi-millionaire considering the high base from which we’re beginning this new cycle) in 2016.
Some parts of Sydney will be in much greater demand than others and market prices will reflect this. Cameron Kusher, senior analyst with CoreLogic, told News.com.au that postcodes will play a key role in whether buyers or sellers are in the driver’s seat in 2016.
“Most years are years of contrast but generally what we’re going to see is slower growth, buyers will have more choice and sellers will have to be more realistic about their prices,” he said.
SQM Research managing director Louis Christopher said that some areas have more housing stock than others – specifically the Hills district and the southwest, and that could lead to depressed prices.
“There won’t be a crash, but vendors need to have realistic price expectations. The reality is that the buyers are still there but they are not as buoyant as last year.”
2016 will be a year unlike those we’ve seen in recent times. Domain Group senior economist Dr Andrew Wilson says: ““It’s undoubtedly a buyers’ market now with no more silly, unbelievable price hikes.”
Dr Wilson says that although it will be a quiet start to the year, buyer confidence will return quickly: “Underlying confidence is strong in the market, and the NSW economy is the strongest in Australia.
“There’s also a shortage of housing in Sydney, rents are still rising, there’s a lot of first home buyers around, high levels of migration into Sydney and while there are a lot of apartments being built, there hasn’t been significant growth in the number of new houses.”
The ABC recently published an article by business reporter Emily Stewart that considered the market for apartments and how it would respond to the end of boom conditions.
“According to NAB,” says the article, “apartment sale prices are forecast to stay flat or fall in all capital cities this year, as tighter credit, worsening affordability and increasing supply hit the residential market.”
Quoting figures from the Housing Industry Association, Domain writer Jennifer Duke says: “New apartment sales dropped 15.1 per cent nationally in November 2015 with slowing population growth, bank regulator controls and an uptick in variable mortgage costs behind the decline…”
In the same article, Commonwealth Bank senior economist Michael Workman was quoted, saying: “It looks like it’ll be very difficult to get high apartment prices by the end of the year.”
The National Australia Bank has revised its earlier estimates and now expects overall capital city house prices to rise by just one per cent in 2016, a downgrade from its previous forecast of 2.3 per cent.
NAB says that house prices in Sydney are expected to rise by just 0.6 per cent, representing a dramatic cut from 2015’s 11.5 per cent growth.
The Herald’s Stephen Nicholls says: “Sydney house prices aren’t about to fall off a cliff. They’re just not going to grow much.”
26 economists from financial markets, academia, consultancy and industry were polled in the Business Day Scope economic survey. The majority concluded that Sydney’s boom time is over and prices will rise by less than three per cent in 2016.
HSBC's chief economist Paul Bloxham said in a Business Day article: "We see Australia's housing boom as over, but expect a soft landing."
And of course we’re still waiting to see what the Commonwealth government does about its ‘tax reform’ package. There could be changes later this year to such crucial areas as the treatment of property in self-managed superannuation funds, capital gains on property sales, the possible introduction of a broad-based land tax – and even to negative gearing, despite earlier government denials.
Newscorp’s Aidan Devine probably summed up all we can be sure of regarding Sydney property this year: “More sedate conditions are expected to continue over 2016.”
‘NAB Quarterly Australian Residential Property Survey Q4 2015’, NAB Group Economics, 3 February 2016
‘Confidence returning to Sydney’s home auction market,’ Dr Andrew Wilson, Domain, 15 February 2016
‘Sydney home auction market bounces back hard,’ Dr Andrew Wilson, Domain, 8 February 2016
‘Home buyers in outer Sydney warned by experts to be ‘very cautious’, Su-Lin Tan, Sydney Morning Herald, 11 February 2016
‘Move over Sydney, it’s Melbourne’s time to shine on the real estate stage,’ Kristen Craze, Realestate.com.au, 3 February 2016
‘Off-the-plan apartments carry high and rising risks,’ Emily Stewart, ABC News Online, 5 February 2016
‘Capital outflows could spring a house price surprise: Goldman Sachs,’ Jonathan Shapiro, Sydney Morning Herald, 4 February 2016
 ‘Property price growth to stall, says NAB,’ AAP on News.com.au, 3 February 2016
‘Drop in new apartment sales in November, Housing Industry Association report finds,’ Jennifer Duke, Domain, 21 January 2016
‘Cash controls on Chinese buyers to hit Sydney property,’ Angus Grigg, Australian Financial Review, 21 January 2016
‘Do vendors need a reality check in 2016?’ Kristen Craze, News.com.au, 23 January 2016
‘Sydney house prices drop 3 per cent: Domain Group,’ Jennifer Duke, Domain, 28 January 2016
‘The house price correction Sydney had to have,’ Stephen Nicholls, Sydney Morning Herald, 28 January 2016
‘BusinessDay Economic Survey: What will happen to house prices in 2016?’ Gareth Hutchens, Business Day, 29 January 2016
‘Muted Sydney property market start hailed as healthy,’ Sue Williams, Domain, 30 January 2016
January 2016 Market Update, Residex Blog, Eliza Owen, onthehouse.com.au

Changes ahead for Sydney property in 2016

Mon, 25 Jan 2016

By any historical standards 2015 was an amazingly good year for Sydney property. According to figures from Residex, annual growth in Sydney houses during 2015 was an astonishing 20.53 per cent.

Using a slightly different set of statistics, Robin Ashburn from the Australian Bureau of Statistics told Domain’s Christina Zhou: “Whilst the quarterly growth in Sydney has slowed from the June quarter, through the year, house prices in Sydney have risen 21.9 per cent and attached dwelling prices have risen 15.8 per cent, both the largest annual rises of all cities.”

But by the end of the year that growth had slowed to just 2.93 per cent in the November quarter.  This sounds like the beginnings of a trend reversal; is it really all over for growth in Sydney property?
CoreLogic RP Data’s senior research analyst Cameron Kusher says growth was so strong in 2015 that it wouldn’t have the strength to carry over into 2016: “The current value growth phase has been running for more than three and a half years, having commenced in June 2012.” 
Jalil Wakim, managing director of finance broker Lendfin, says that 2016 heralds the first buyer’s market after four years of conditions favouring vendors.
“Prices are now coming back to much more realistic levels and where, 12 months ago, things sold within a week, buyers are waiting much more on the sidelines to see what happens, and they’re now taking two, three and four weeks to sell.
“That means savvy buyers are now in a much stronger position where they can negotiate both prices and terms.”
Michael Pascoe, contributing editor for Business Day, tells us that the federal Treasury is saying the housing construction boom ends in 2016: “That's the boom that has carried much of the economy since resources investment tanked.
“The good news is that there is still expected to be growth in new home building and renovation, but not much – 2 per cent [this] financial year compared with a fat 8.5 per cent [in 2015].”
One person who’s not sorry to see a slowdown in real estate price rises is Glenn Stevens, governor of the Reserve Bank of Australia who told the Australian Financial Review he was relieved that prices have now eased.
"I think it had to happen. The pace of growth that we had – you can't keep going at that pace without new stimulus coming into the market from somewhere because the affordability levels just get out of reach for people unless we keep cutting interest rates, which we're not doing right at the moment, obviously.”
However, there’s little chance of a major fall in prices across Sydney thanks to ongoing demand. There’s still not enough housing stock to eliminate the backlog from years of insufficient dwelling construction.
And even if there should be a market correction of something like 5 per cent – which translates to around $50K off the price of the median home in greater Sydney, it’s still much less than the value it has gained in the past twelve months.
There are many factors that will influence property prices in 2016. On the positive side of the ledger is that the federal budget deficit remains manageable and employment is growing slightly (about 2.3 per cent in the September quarter) depending on whose figures are used.
But the share market has gone seriously backwards since the start of the year and there’s little doubt that the recent tightening of restrictions on property mortgages by the big banks plus growing unaffordability have combined to reduce the numbers of people – both homeowners and investors, borrowing to purchase real estate.
Apartment rents are softening and Sydney property auction clearance rates have slumped from their unprecedented levels of 80 plus per cent midyear to around 50 per cent now.
Rents, unit prices weaken
Recent figures from the Australian Bureau of Statistics highlight a dramatic slowing in growth for prices of Sydney units; their rate of growth in the month of November was just 0.55 per cent. ABS figures also show that across Australia approvals for construction of private apartments fell by a massive 23 per cent.
Westpac senior economist Justin Smirk said the decline was greater than the bank had expected.
"Activity in private home construction for particularly the two major states, NSW and Victoria, is holding at reasonably high levels, but it does appear that a big surge in approvals going through for building multi-storey apartments has peaked and is now going through a correction phase," Mr Smirk said.
J.P. Morgan economist Tom Kennedy also expressed surprise at the size of the decline.
"While we had expected the number of high-density approvals to move lower into year-end on the back of tighter bank lending standards and deceleration in dwelling price growth, the magnitude of [the] fall was significantly larger than we, or the market, had projected," Mr Kennedy said.
Meanwhile approvals for new house construction dropped only slightly, down to 9730 from 10,027. Overall, new building starts fell 12.7 per cent from October, which was when the ABS reported the highest annual rate of total approvals since it began keeping records in 1983.
Commonwealth Bank of Australia senior economist Gareth Aird said that weakening home markets could mean fewer new jobs, which until now have helped to offset the decline in mining investment.
"To date, growth in the residential construction sector has provided a superb offset to declining mining investment and associated job losses. But as we head into 2016 there is a risk that mining job losses will outpace job creation in the residential construction space."
No big price falls
CoreLogic RP Data's head of research Tim Lawless told ABC News he is not expecting the Sydney market to experience any serious price falls.
"I think there's still that underlying factor of strong demand driven by low interest rates, and not really the supply issues that Melbourne has seen, I think we'll continue to see Sydney at least remain fairly neutral in its growth," he said.
Domain Group’s ‘State of the Market’ report forecasts growth of just four per cent across Sydney this year as increasing numbers of investors leave the market.
Domain Group senior economist Andrew Wilson said until now Sydney has been what he called an ‘investor magnet’ thanks to its strong economy and a continuing under-supply of homes.
“But the days of two figure growth are well behind Sydney, there’s no rational case for more double figure growth. Economic circumstances are now set to deteriorate and it will be a year of circumspection.”
He believes the lower levels of investor numbers will create a period of consolidation in which prices will slow: “The strongest markets are likely to be the higher priced inner-city suburbs, which performed best in the second-half of 2015.
“Properties in the city, east and lower north shore are tipped to be the best performers of 2016 with 5 per cent growth on the cards.”
The chief executive of Starr Partners, Douglas Driscoll, said that suburbs with numerous apartment buildings might see some stress, including some areas in the CBD: “As the investor boom is well and truly over, those properties are going to be far more difficult to sell heading into 2016.
“The west, which constitutes the vast majority of the Sydney market, was being partially underpinned by the investment boom in recent times, so I certainly believe places like the lower north shore will do well because it is less [susceptible] to this kind of investment as it is more of a family-centric market, much like a majority of the east,” he said.
So, what’s ahead for Sydney property in 2016? Most property analysts agree that the boom of the past four years is over. Prices growth in all areas of Sydney will slow and, in some less-sought-after suburbs could even go into reverse.
Global credit agency Fitch Ratings predicts that a combination of housing unaffordability, exposure to US rate hikes, and tougher prudential regulations will add up to a much slower rate of growth in Australia.
"Stretched affordability and further compression of rental yields are likely to be key factors driving down price growth in Australia," Fitch said in a media statement.
"This is especially the case in Sydney and Melbourne, where price appreciation in recent years has outpaced wage growth - leading to decreasing levels of affordability.”
The outlook for price sustainability is better for free-standing houses than for apartments, reflecting the recent mass of approvals for high-density housing across Sydney. This increased supply will, in turn, act to depress apartment rental rates and reduce returns for investors.
Mortgage conditions will continue to become more demanding of borrowers and fewer investment loans will be made. Interest rates will remain relatively low although banks are likely to raise their fees and charges, particularly for investors, independent of the Reserve Bank’s decisions. 
Aussie Home Loans chairman John Symond said in the Australian Financial Review that the key tests in 2016 will be the national and global economies, and policy changes. He believes 2016 will feature global uncertainty and slow economic growth.
But there are many local variables also in play. The AFR’s property journalist Su-Lin Tan commented: “In the longer term, the Turnbull government’s tax reform may change negative gearing, concessional capital gains tax, superannuation, stamp duty and land tax,” she said.
“Each one moves a real estate lever.”
‘How to tell if your suburb will see a drop in house prices,’ Bianca Hartge-Hazelman, News.com.au, 16 January 2016
‘Property market to hit the brakes in 2016,’ Mathew Dunckley, Business Day, 14 January 2016
‘Apartment rents tumble by 2 per cent,’ Jennifer Duke, Sydney Morning Herald, 14 January 2016
‘The year of the buyers’ market,’ Sue Williams, Domain, 9 January 2016
‘Where did house & unit prices really rise in 2015?’ Danielle Cahill, Realestate.com.au, 24 December 2015
‘2015 in Review and the Outlook for the Year Ahead,’ Market Update, Residex, December 2015
‘Apartment approvals boom could be over in Sydney, Melbourne with slump in new construction permits,’ Justine Parker, ABC News, 7 January 2016
‘Building approvals slump for apartments and houses,’ Matthew Cranston, Australian Financial Review, 7 January 2016
 ‘Australian house price growth eases in September quarter: ABS,’ Christina Zhou, Domain, 15 December 2015
‘Bad hangover expected for property market in 2016,’ Su-Lin Tan, Australian Financial Review, 29 December 2015
‘Sydney’s growth run is over in 2016: Domain Group,’ Jennifer Duke, Domain, 15 December 2015
‘Home prices stagnate in December after 2015 surge,’ Michael Janda, ABC News, 4 January 2016
‘Property Value by CoreLogic,’ Cameron Kusher, Property Snapshot Infographic, December 2015
‘RBA governor Glenn Stevens welcomes slowing property market,’ Mathew Dunckley, Business Day, 16 December 2015

What now for Sydney property?

Fri, 18 Dec 2015

As the fevered rate of property price increases subsides we might now ask think about how prices could have become so high in the first place.  Reserve Bank economists Marion Kohler and Michelle van der Merwe have an answer to this question.

In their paper titled 'Long-run Trends in Housing Price Growth' they note that over the past 30 years housing prices have risen across Australia by an average of just 7.25 per cent a year, but the increase has been anything but uniform.
They see three distinct periods: the 1980s when house prices rose by an average 10 per cent per year but gains were eaten up by inflation; the 'big boom' of the 1990s when the rate of prices growth came down but so did interest rates and therefore inflation took less of the overall growth; and the past decade where price growth was relatively moderate until the last three years when it's taken off dramatically, fuelled by heavy borrowing.
So, now here we are. Inflation rates and interest costs are low, but prices are at record levels and our debt-to-income ratio is the highest it's ever been.  Is there much economic fuel in the tank remaining to drive further price increases?
Traditionally growth in house prices has largely been driven by wage increases. In today's economy there's little prospect of wages growth happening.
Wages growth across Australia is low at 2.3 per cent for the September quarter. The unemployment rate has reduced to 5.9 per cent for October but remains high relative to the 10 year average of 5.2 per cent.
November economic data showing a big fall in business investment has also contributed to speculation about further interest rate cuts, although RBA governor Glenn Stevens told economists they should “chill out” about the possibility of a December rate cut.
This later proved to be an accurate guide to the decision at the Bank's November meeting which left the cash rate on hold at 2 per cent. The RBA's next meeting will be in February.
Mr Stevens may have been looking at data showing that growth in the value of outstanding bank loans to property investors had dropped to 9.7 per cent - the first time this year this figure has been below the RBA's 10 per cent target cap and a sure sign that mortgage interest rate increases are beginning to bite.
The rush of foreign buyers has also slowed. Most of the Chinese capital flowing into Australian real estate goes into building new apartments, contributing to increasing the ratio of apartments to detached homes in the current housing construction mix as well as increasing the overall supply of dwellings.
2016 rate cut likely?
Because housing construction  has become such an important component of the Australian economy, another interest rate cut by the Reserve Bank may be on its way in early 2016, according to the economists at Citibank Australia.
Citi's Paul Brennan says that the chronic national undersupply of housing, which reached an estimated 49,000 dwellings annually in 2013-14, will reduce to about half that figure within the next two years as new apartment construction comes onto the market.
He believes this will pose a threat to price growth just as the mining boom ends, immigration slows and regulatory restrictions lower demand for property from investors and overseas buyers.
"This narrowing should underpin ongoing slowdown in house price inflation, from 10 per cent in 2014-15 to 0 per cent to 5 per cent in 2015-16 and in 2017."
CitiBank believes that if housing construction's contribution to economic growth decreases the RBA will need to at least maintain or further reduce its already low cash rate.
"With housing prices cooling, consumers still cautious about spending, housing construction expected to make a smaller contribution to growth and no concrete signs yet of a recovery in non-mining business investment, interest rates will need to stay low for longer than normal," Mr Brennan said.
Building approvals were at a record level of 230,000 dwellings in September with a mix of two apartments for every detached home approved.
"Given this significant pipeline of work, especially for apartments, our forecast is for a gradual, rather than rapid, decline in activity over the next few years, assuming interest rates do not rise sharply," said Mr Brennan.
New apartments meeting demand
Terry Rawnsley, economist with SGS Economics and Planning, says Sydney has been casting off its liking for the 'cottage on a quarter-acre block' for some time, but the housing market has been slow to respond.
"Until quite recently the focus for new housing was on greenfields development out west. It's only in the past couple of years that large number of apartments have started to pop up close to the jobs."
He says with the housing market lagging changes in the labour market, the supply of inner and middle-ring housing has not kept pace with demand. The inevitable result has contributed to the higher prices we see now.
A discussion paper prepared by SJB Planning and released by NSW Planning Minister Rob Stokes recommends a new standard for 'medium-density' housing similar to the older-style terrace houses to encourage their construction across Sydney.
"Terrace houses are very desirable now but that's a great irony because there was such a backlash against them," said Peter McNeil, the Associate Dean of the UTS Faculty of Architecture.
The draft plan outlined in the discussion paper would allow residents to be accommodated in a maximum of 10 terrace houses on blocks no smaller than 600 square metres.
It's almost impossible to believe today that certain styles of terrace houses were actually banned soon after federation when garden suburbs became seen as far more desirable by urban planners of that era.
Housing prices still increasing
In the marketplace it's hard to escape the law of supply and demand. The price of a product or service will increase as demand for it increases, just as it will decline if a greater amount of a product or service is available.  Replace 'a product or service' with 'housing' and you get the idea.
We've become accustomed to seeing large auction volumes and price results that would have been unthinkable just a couple of years ago.  Buyers spent over $31 billion on Sydney property at auction in 2015 - around $7 billion more than was spent in the previous year. This remarkable rate of growth is simply unsustainable.
More housing on the market translates quickly into less upwards pressure on prices. JP Morgan chief economist Stephen Walters recently told a conference of business economists that house price growth had peaked and he isn't alone in this belief.
Economist Saul Eslake says it is possible that house prices could even be lower in two or three years than they are now. He also warns that investors, who now hold a growing proportion of the housing stock, are more likely than owner-occupiers to sell into a falling market.
SQM Research has predicted a 4 to 9 per cent price growth in Sydney for 2016 while ANZ Bank in its latest housing update is forecasting a 3 per cent rise for NSW, about in line with a 2.8 per cent growth forecast for Australia.
“Despite the headwinds facing the housing market through the second half of 2015, we see little significant downside risk to the housing market outlook in 2016," said ANZ’s senior economist, David Cannington and economist Daniel Gradwell.
“The housing shortage remains high, but strong building activity and slower population growth will limit gains.”
At least one property value index showed a drop in Sydney property prices. According to the CoreLogic RP Data Home Value Index released at the end of November, dwelling prices fell 1.4 per cent during the month, resulting in a nett 1 per cent drop over the past three months.
Commenting on the finding, Domain Group senior economist Dr Andrew Wilson said that there was no doubt that the key trend is a decline: “The future will be much more subdued than what we’ve become used to over the past two years,” he said.
However, Dr Wilson still sees some prices growth in 2016: “There will be modest and moderate growth at best in the Sydney market next year”, he said.
Investors more selective
A cooling period such as the one we're entering now will often produce hotspots that stand out from the generally quieter performance of the overall market.  In late November Sydney's lower north shore produced an auction clearance rate of 80.4 per cent despite the overall auction market slipping backwards.
" The multi-speed Sydney auction market was evident again - with widely divergent regional results," said Dr Wilson.
"Inner-city higher-priced regions continue to record strong results for sellers. However, buyer activity in the western regions of Sydney has all but disappeared."
He said that greater Sydney auction clearance rates have fallen sharply since the banks announced higher interest rates for owner-occupiers: "Higher rates for residential investors have also affected the Sydney housing market."
Eliza Owen, market analyst for property research firm Onthehouse.com, says this doesn't mean the current period of rising prices has ended: "The latest data indicates that Sydney has peaked in this particular growth cycle," she writes in the company's November newsletter.
"Sydney houses are still increasing in value but the current quarterly growth rate (4.04 per cent) is significantly lower than the 7.58 per cent achieved in the July quarter this year."
Ms Owen points to housing finance data from the Australian Bureau of Statistics that shows a significant drop off in investor lending from a peak of $15.50  billion in June to $12.53 billion in September.
"The median Sydney house is now valued at $1,058,000. Anecdotal evidence suggests that first home buyers, particularly in Sydney, are now entering the market as investors because this is the only way they are able to afford property – having a tenant help pay off the mortgage."
An AAP article in 'Business Day' also commented on the sharp decline in the level of investor lending.
"Loans approved for investment housing were down 6.1 per cent in October, based on their value, while approvals for owner-occupied housing rose 0.4 per cent.
"The total number of home loans approved in October fell by a better-than-expected 0.5 per cent, while the value of total housing finance was down 2 per cent in the month."
Domain journalist Christina Zhou summed up the pre-Christmas state of the Sydney property market, saying some vendors’ expectations are exceeding what the market is willing to pay because prices are no longer increasing at the same high rate seen in autumn.
"A cool change has swept across pockets of the property market, with falling median house prices and weaker clearance rates.
"It doesn’t necessarily mean prices are dropping, but many homes certainly aren’t achieving the same runaway results as their next door neighbour who sold earlier in the year.

'Big swing: property investor loans plunge in October,'  AAP in Business Day, 9 December 2015
'Consumer confidence cools amid GST talk,' Mark Mulligan, Business Day, 9 December 2015
'Sydney auction market limps into December with 57.5 per cent clearance rate,' Antony Lawes, Camille Bianchi, Anita Balalovski, Domain, 5 December 2015
'Five signs of a cooling property market,' Christina Zhou, Domain, 2 December 2015
'Sydney house prices fall in November: report,' Jennifer Duke, Domain, 1 December 2015
'ANZ says modest growth more likely in 2016,' Su-Lin Tan, Australian Financial Review, 1 December 2015
'Housing loan growth dips below speed limit,' Clancy Yeates, Sydney Morning Herald, 1 December 2015
'House prices are cooling, not crashing – but may force RBA cut, Citi says,' Vanessa Desloires, Sydney Morning Herald, 27 November 2015
'Simple supply and demand will decide what happens next to Sydney house prices,' Jessica Irvine, Sydney Morning Herald, 27 November 2015
Market Update, Onthehouse.com.au, November 2015
'Lower north shore auctions boom as rest of Sydney lags,' Dr Andrew Wilson, Domain, 23 November 2015
'Property sellers in last-minute rush to auction,'  Stephen Nicholls, Antony Lawes, Domain, 27 November 2015
'The price of being a global city: Sydney's rent crisis,' Rachel Browne, Matt Wade,
Sydney Morning Herald, 28 November 2015
'Land prices on Sydney’s fringe have surged in 2015,' Kirsten Robb, Domain, 28 November 2015
'NSW Planning Minister Rob Stokes reveals medium-density housing plan,' James Robertson, Sydney Morning Herald, 28 November 2015

Sydney property returns to more traditional statistics

Thu, 19 Nov 2015

The Sydney property boom is unquestionably ending. But is it over? Not at all.

Headlines in the daily press have trumpeted the impending collapse of real estate values: "House prices grind to a halt in October", "Waning Sydney auction market hits new low on Saturday",  and "Slowdown continues in Sydney property market as new report warns of a housing bubble".
But there's a slight problem. There's been no hint of a sudden collapse in prices. On the contrary, median prices are still rising, albeit at a slower rate than in the previous three 'boom' years.
Look at some of the other, less sensationalist headlines and you get a better picture: "RBA doubts Sydney property boom is over", "Sydney property breaking records, but prices in Darwin and Perth are retreating", and "Sydney property prices expected to continue growing until the end of 2016". The fat lady isn't singing yet!
We are witnessing the end of a cycle which demands a bit more study than simply watching prices rise and rise even further as they do in a boom.  We've had the best of the rapid price increases and from now on - for a while, it's back to the more familiar situation of prices rising gradually, more in some parts of Sydney than others.
Meanwhile, the transition to apartment living is happening at a faster rate in Sydney than in any other Australian city. The square kilometre population grid from the Australian Bureau of Statistics (ABS) shows that Sydney is now Australia's most densely populated city.
We're now going back to more familiar auction clearance rates and volumes. There just aren't limitless numbers of buyers out there and those vendors who've waited too long are now finding out that there's no guarantee their property will sell at a premium price just because it's on the market.
Someone noticed that all the new apartment buildings sprouting up around Sydney don't have back yards and so the ' baby boomers' have been castigated for selfishly holding on to their quarter-acre blocks and not freeing them up for young families to acquire.
As reported in the Sydney Morning Herald: " A new report from academics Bob Birrell and David McCloskey warned on Monday that Australia will experience a dramatic increase in demand for detached houses in coming years - mostly from young families - which authorities have failed to plan for."
The clincher was: "Experts say older Australians should be encouraged to downsize their homes."
The response from baby boomer homeowners was quick and direct.  As long as stamp duty is so high and potential properties for downsizing are both expensive and fraught with structural concerns, there's no real incentive to put all those older properties on the market.
And for those on pensions, any additional cash in the bank left after downsizing could have a serious impact on their pension eligibility. The so-called 'encouragement' to downsize just isn't there.
Another development during the past month has been a reduction in the number of Chinese buyers shopping for Sydney real estate.
A report in Business Day said that Chinese demand for global property could fall by 30 per cent this year, according to a research note by Credit Suisse analysts Damien Boey and Hasan Tevfik.
The analysts concluded: "All things considered, the likelihood is that Chinese flows into the Australian property market have flattened out in 2015."
The Credit Suisse analysts see this as posing a major threat to the Australian property markets but not a permanent one, thanks to the growing affluence of China's middle class.
"Combine that with a shortage of domestic investment options and ongoing capital account liberalisation, and the structural trend of Chinese money looking for an overseas home stays strong," the analysts conclude.
One of the more downbeat observations about Australian property came from the respected Barclays Bank whose economist Kieran Davies said: "We think activity will turn down later next year, with the significant over-valuation in house prices likely to be slowly eroded by a long period of broad stagnation in prices."
Mr Davies added: "Our expectation is that average growth will slow further into next year given tougher macroprudential standards and reduced affordability."
But the Reserve Bank of Australia isn't yet ready to call a halt to rising property prices. In its late October minutes the RBA said: "It [is] too early to be confident that these signs of slowing in housing price inflation would be sustained."
AMP Capital chief economist Shane Oliver expressed a view that a 'two speed' market may be developing in Sydney.
"The thing is, lending has slowed, clearance rates have slowed … even though there could be an element of a two-speed market in Sydney with some areas slowing more than others", Dr Oliver said.
BIS Shrapnel's associate director Kim Hawtrey told the Financial Review that the next three or four months may still see reasonable housing market indicators, but the real test would be in early 2016.
"As the peak summer season gives way to the traditional autumn slowdown, unaffordability [and] slowing population growth will begin to weigh on the market next year," he said.
The Commonwealth Bank's 'MyBank' report carried a more optimistic report on the Sydney market: "Sydney is once again a standout global city for value growth in its prime residential real estate market, according to the latest Prime Global Cities Index from Knight Frank."
It said that the quarterly report showed that of 34 European, Asian, North American, African and Australasian cities indexed, Sydney came second only to Vancouver for quarterly and annual price growth in its top-tier property market for the September quarter.
"Australia’s Harbour City saw a three-month increase of 3.6 per cent and 12-month increase of 13.7 per cent – one of only three cities, along with Vancouver and Shanghai, to record a double-digit annual price increase."
Another side-effect of recent real estate activity towards the end of the boom is that Melbourne is overtaking Sydney in some parts of the property statistical sweepstakes.
The Daily Telegraph summarised this situation, which will come as a shock to many Sydneysiders who've seen such impressive increases in the values of their property over the past three years:
"The Harbour City’s median home value climbed just 0.3 per cent over October, compared to Melbourne’s 0.6 per cent growth, according to Core Logic RP Data.
"Melbourne’s auction clearance rate also edged Sydney’s at 65.6 per cent, compared to 63.5 per cent for the NSW capital."
But Core Logic RP Data head of research Tim Lawless explained that market conditions have been easing in both cities. The biggest factors affecting Sydney property prices relate to issues of housing affordability and demand from investors.
“In Sydney, the median unit price is equal to, or higher than the median house price in every other capital city,” Mr Lawless told the Telegraph's Aidan Devine.
He added that Sydney’s low rental yields may act as a disincentive for some investors to make new purchases but sees higher levels of vendor competition helping prospective purchasers looking for property.
“We can expect Sydney buyers to face less urgency when it comes to making their purchase decision around property and higher discounting rates from vendors as they face more competition in the market.”
Instead of the Sydney property boom ending with a bang, it's giving every indication of a gradual slowdown in property price increases, accompanied by lowering auction clearance rates and reduced demand from investors.
However, the next time you see a headline in the vein of 'Sydney property price crash' or 'Sydney housing bubble about to burst', ignore it. There's no price crash coming and there isn't any bubble about to burst.
Domain Group's senior economist Dr Andrew Wilson explains: "There is no end in sight to the falling clearance rates in Sydney, with the weekend results remarkably 30 per cent lower than those recorded just six months ago and likely to go lower.
"However, the supply and demand drivers for the Sydney market remain sound, with the strongest capital city economy, a chronic underlying shortage of housing and continuing strong migration levels."     
We've enjoyed almost four years of boom times and the heat's going out of the market - for now. There has recently been a noticeable fall in the number of Chinese buyers due to instability in the Chinese stock market and that government's financial constraints, although the lower Australian dollar gives overseas buyers some compensation for these factors.
We're returning to normal times in such closely-watched statistical areas as auction clearance rates, numbers of properties sold, and that all-important metric - the median house price.
Four years ago in our column of November 2011, when Sydney real estate had spent several months in the doldrums, we confidently forecast that real property price growth would begin in early 2012. And so it did.
That growth spurt is now coming to an end, although behind the scenes the Sydney property market will continue its long-term upwards trend. 
Price growth is likely to slow between now and the end of 2016 and could stabilise for a period in 2017. Then the next upwards cycle will begin and it's very possible the headlines will once more be about the new Sydney property boom. We'll know for sure in about two years.
'Agents claim that the lower north shore property market is performing well despite softening,' Erin Forster, News Corp Australia, 6 November 2015
'Apartment living is redefining the Australian neighbourhood,' Joanne Brookfield, Domain, 17 November 2015
'Waning Sydney auction market hits new low on Saturday', Anna Anderson, Toby Johnstone, Anita Balalovski, Domain,  7 November 2015
'Chinese demand for Australian property waning: Credit Suisse,' Patrick Commins, Business Day, 4 November 2015
'House prices set for long period of 'stagnation': Barclays,' Vanessa Desloires, Sydney Morning Herald, 5 November 2015
'RBA doubts Sydney property boom is over,' Su-Lin Tan, Australian Financial Review, 20 October 2015
' Property Sydney's high-end property market continues high-end performance,' Sam Butler, CommBank My Wealth, 5 November 2015
'Why are property prices still stalling?,' Sam Butler, CommBank My Wealth, 2 November 2015
' Sydney home price growth dips below Melbourne’s over October,' Aidan Devine, The Daily Telegraph, 9 November 2015
'Rising interest rates threaten to crash Sydney housing market,' Dr Andrew Wilson, Domain, 9 November 2015
'Use tax changes to encourage older Australians to downsize homes: experts,' Gareth Hutchens, Sydney Morning Herald, 2 November 2015
'It's offensive': seniors groups defend rights of older Australians to stay put,' Judith Ireland, Sydney Morning Herald, 2 November 2015
'Housing crisis report says backyards for children vanishing as oldies stay put,'  Peter Martin, The Age, 2 November 2015
'House prices grind to a halt in October,' Jenifer Duke, Domain, 2 November 2015
' Slowdown continues in Sydney property market as new report warns of a housing bubble,' Aidan Devine, The Daily Telegraph, 2 November 2015
'More than 1000 homes to go under the hammer today in biggest auction day of the spring,' Aidan Devine, The Daily Telegraph, 30 October 2015
' Sydney property breaking records, but prices in Darwin and Perth are retreating,' David Taylor, ABC Radio PM, 22 September 2015
' Sydney real estate the third most overpriced in the world,' Phil McCarroll, Your Investment Property magazine, 2 November 2015
'Sydney house price growth to slump next year, NAB says,' Michael Bleby,  Australian Financial Review, 29 October 2015
'Sydney property prices expected to continue growing until the end of 2016,' Aidan Devine, The Daily Telegraph, 28 October 2015
' Western Sydney leads the housing decline,' Su-Lin Tan, Australian Financial Review, 29 October 2015
'Buyers' guide to a property market on the turn,' Michael Bleby, Australian Financial Review, 24 October 2015
'Should I buy now or wait for prices to fall?,' Su-Lin Tan, Australian Financial Review, 24 October 2015

The Sydney property boom is ending...sort of

Mon, 19 Oct 2015

There are conclusive signs that the unprecedented Sydney property boom is finally losing momentum.
But first, give credit where it's due. To quote real estate expert John McGrath: "This has undoubtedly been one of the most spectacular booms in Sydney’s real estate history."

Indeed, there has been an incredible rise in property values since the latest growth cycle began in May 2012.
In our Market Comment of March that year we quoted John Edwards, CEO and founder of Residex, who had seen a dramatic increase in sales of his company's property reports.  This, he said was an indication that the previously stagnant housing market was about to start moving forward.

The Residex lead indicator (Prediction Report Sales Index) suggested that we were about three months away from an Australia-wide pickup.
From that time onward the Sydney property market has been an unstoppable force, proving Mr Edwards right and leading to today's median house price of somewhere around $1 million, depending on which research findings are used for the calculations.
Boom conditions were clearly evident earlier this year when auction clearance rates peaked at 89 per cent in May. There was ongoing strong demand from investors, both in Australia and overseas, and the supply side was held back by a shortage of stock on the market.
In mid-May the housing stock available for sale was down 21 per cent compared to the same time twelve months previously.
Another statistic - the average time taken to sell a property, also reached a record in July when it dropped to only 26 days, according to CoreLogic RP Data.
But property market records can't continue to be set every month.  History shows that each property price cycle has a peak that's followed by a retreat, leading to a period of price stability before the next upwards cycle begins.
In mid-October the auction clearance rate hit a three-year low of 65.1 per cent - the lowest clearance rate in three years.
AMP Capital chief economist Shane Oliver said the poor result was caused by Westpac’s move to lift mortgage rates by 0.2 per cent: “The bottom line is that buyers are worried that the Westpac move is a sign of things to come,” Dr Oliver said.
The feeling that the latest property cycle has peaked was picked up in the latest “time to buy a dwelling” index published by Westpac and the Melbourne Institute. The index has fallen by 11 per cent over the past year and is now 30 per cent below its September 2013 peak.
More tellingly, in Sydney the index has reached its lowest point since the survey began in 1975.
For the past three years a shortage of homes for sale has been an important driver of Sydney’s property price rises, but now supply is beginning to catch up with demand. 
This is demonstrated by two statistics in the McGrath Report for 2015. The first is that by August stock availability was only 5 per cent lower than it was in August 2014. The latest statistics show that stock levels are now 4.7 per cent higher than at the same time last year.
This will have an impact on price rises, as Core Logic RP Data head of research Tim Lawless outlines: “The higher volumes of stock have pushed auction clearance rates lower and the average time to sell has likely increased over the past month as well.”
However, that's not the only indication that we've seen the peak of the latest Sydney property boom.
Regulations introduced recently by the Australian Prudential Regulation Authority (APRA) that aim to limit investor loan growth to 10 per cent annually have caused Australia's 'big four' banks to increase interest rates on mortgages to property investors.  The banks have also toughened their assessments of borrowers' ability to service a property loan,
Another recent imposition on the banks by APRA has forced them to raise billions of dollars to ensure they retain sufficient liquidity in the event of another financial crisis. As a result, Westpac was the first bank to announce an increase in mortgage interest rates, and the other members of the 'big four' were expected to follow suit.
The Reserve Bank of Australia, without revealing whether it intends to adjust its own cash rate, issued a caution about high property prices but minimised the risks of a housing downturn.
 "The risks appear to be comfortably manageable at this stage but they underscore the need to maintain sound lending standards and the resilience of the financial and non-financial sectors," the RBA said in its half-yearly report.
If the Bank has any worries about the property market it would seem to be based on an oversupply of apartments, although it named Melbourne and Brisbane as locations of particular concern.
The question must be asked: "If the boom in Sydney property ends, does that mean there will be a fall in prices?"
AMP Capital's Dr Shane Oliver said Sydney could see a similar situation to that last seen in 2012, when houses that had risen significantly in value over the previous three years experienced some of the largest falls.
"My view would be areas where there has been a significant increase in supply, and the suburbs where there's been the strongest gain, would probably be the most vulnerable in terms of declines," Dr Oliver told Domain.
He said that lower-income areas which had seen an increase in housing supply would be the first to see price declines: " Then, as time goes by, some of that might spread to some areas around the inner-city parts, again where there's been a lot of construction activity, then out to the eastern suburbs.
"When I'm talking about 5 to 10 per cent, some suburbs could see declines of 20 per cent and other suburbs could see none at all," Dr Oliver said.
Dr Andrew Wilson, the chief economist at Domain Group said Westpac’s rate hike had “changed the dynamics” in the property markets. However, he doesn't believe house prices in Sydney are going to fall.
"There's nothing that will grab the attention of Australian homeowners more than the headline 'house prices falling'," he said. "There's no historical precedent for this [prediction], particularly given we do not have the prospect of a sharp increase in interest rates.
"Short term variances might occur, but those things reflect confidence more than anything else."
HSBC’s chief economist, Paul Bloxham, said that interest rates are still very low and that this would support continued price growth: “If effective mortgage rates rise a little that will contribute to some slowdown in house price growth but it doesn’t seem to us that it will mean house prices will fall.”
Economist and financial commentator Saul Eslake indicated that Sydney's property market is still not oversupplied despite the recent surge in housing construction: “The probability of falls in house prices over the next 12 months isn’t zero but it is pretty low.”
National Australia Bank CEO Andrew Thorburn believes that home prices in Sydney will continue to rise at high single-digit rates due to strong demand and limited supply of housing close to city centres.
"You will see in Sydney and Melbourne, high single-digit rates of growth as being quite plausible given the fundamental drivers of what are pushing those prices up," he said at an Australia Israel Chamber of Commerce lunch in Sydney.
It’s important to keep in mind that boom periods are only part of a growth cycle. Prices can continue to rise after the peak of the boom, and it's highly likely that will  be the case in most parts of Sydney for some time.
The economy remains strong, unemployment is under control for the time being, and there is a continuing undersupply of property that is only now showing signs of moderating.
Interest rates remain low and are even if they rise sometime in the future they aren't likely to reach levels that would make housing investments unattractive .
The boom, as we knew it, is coming to an end and price rises have probably peaked. However, property prices in the majority of Sydney suburbs will keep on growing from now until the end of the year, and continue their rise into 2016, although most likely at a lower rate than we've seen over the past three amazing years.
'Share market closes higher as Reserve Bank warns property market putting financial system at risk,' David Taylor, ABC News Online, 16 October 2015
'Reserve Bank warns of significant housing downturn but says risks are 'manageable,'
Sue Lannin, ABC News Online, 17 October 2015
'RBA sees signs property market cooling in Sydney and Melbourne,' AAP on News.com.au, 16 October 2015
'Sydney homeowners embark on a selling spree in rush to cash in on last stages of property boom,' Aidan Devine, Daily Telegraph, 16 October 2015
'Opinion: Sydney house prices going nowhere but up in the short term,' Tim McIntyre, Daily Telegraph, 14 October 2015
'Beyond the boom: What comes next for Sydney and Melbourne,' Matt Wade, Domain, 16 October 2015
'Property slump looms? Not so, say NAB's Andrew Thorburn and Westpac's Brian Hartzer,' James Eyers, Business Day, 15 October 2015
'Property predictions for the remainder of 2015,' Alice Bradley, Realestate.com.au, 6 October 2015
'HIA: Land prices keep on rising,' Leith van Onselen, macrobusiness.com.au, 15 October 2015
'Sydney property market cooling off,'  7News Sydney, 21 September 2015
'When will the Sydney market come off the boil?,' Todd Hunter, Wheregroup, (Undated - accessed 17 October 2015)
'September listings figures paint different stories for Sydney and Melbourne markets,' Phil McCarroll, Your Investment Property, 8 October 2015
'The Spectacular Sydney Property Boom,' Kevin Turner,  Michael Yardney's Commentary, Property Investment, Where to buy investment property, 14 October 2015
'Data shows Sydney houses and units have set a new record for days on market,' Tim McIntyre, Daily Telegraph, 16 July 2016
'Spectacular Sydney boom about to end: McGrath Report 15,' REINSW , 12 October 2015
'Sydney auction market tanks after Westpac hikes rates,' Stephen Nicholls, Camille Bianchi, Anita Balalovski, Anna Anderson,  Domain, 17 October 2015
'Which suburbs will bear the brunt of Sydney's predicted house price drop?,' Georgina Mitchell, Sun-Herald, 17 October 2015

Negative gearing - friend or foe?

Fri, 18 Sep 2015
More than a million Australians now employ negative gearing and benefit from a tax break that's currently costing the Australian Taxation Office around $8 billion per annum.
When you're a government struggling to find revenues, $8 billion in tax concessions is a tempting target.  For this and a number of other reasons, negative gearing has become a hot topic in recent months.
If you're a would-be first home buyer trying to save for your first home it could seem like the government is just handing that money to investors, and as a result they will be able to outbid you at property auctions.
And anyone wanting to buy a home might feel that negative gearing contributes to the rise in property prices by allowing investors to pay more than owner-occupiers because they can gain a tax deduction for any losses.
This belief is supported by many economists including the former ANZ Bank chief economist Saul Eslake, who declared: “The availability of negative gearing contributes to upward pressure on the prices of established dwellings, and thus diminishes housing affordability for would-be home buyers.”
Another doubter is the Grattan Institute’s CEO, John Daly,  who wants a public debate on negative gearing because he believes the policy is expensive, inefficient, inequitable and that it reduces home ownership: “For governments under severe budgetary pressure it should be near the top of the reform list,” he says.
And finally, there's a general perception that it's the rich who benefit most from negative gearing because the 'average Aussie' can't afford property investments.  
So, who's really taking advantage of negative gearing at this point in time? Research by the Australia Institute think tank shows that the heaviest users, as might be expected, live in government electorates held by PM Tony Abbott and cabinet ministers including Joe Hockey and Malcolm Turnbull.
However this research also clearly shows that the use of negative gearing has spread from traditional Liberal seats to 'battler' suburbs held by Labor. In other words, it's no longer just the 'rich' who take advantage of the opportunity.
Interestingly, statistics from the ATO show that of those taxpayers declaring a net rental interest in recent years, approximately three-quarters earn less than $80,000 per annum. That's hardly what you'd call 'rich'.
An interesting history
Negative gearing has quite a history. As Peter Martin, economics editor of The Age put it: "The  story of how we came to be saddled with a system that taxes wages at twice the rate of profits made from trading real estate is an epic tale of revenge, incompetence, bloody-mindedness and gullibility."
Looking  back over the history of negative gearing we find it all began in 1985 when Labor treasurer Paul Keating (he of 'banana republic' fame) applied income tax to fringe benefits and capital gains - both previously untaxed.
Until that time most of the personal tax burden had been borne by ordinary wage earners, so these changes seemed reasonable additions to the taxation framework.
Then in 1996 the Howard government rejigged the rules and allowed investors to offset losses on their investment properties against any other income they had. Thus, negative gearing as we know it came into our lives and has stayed there ever since.

During recent economically good years it's been allowed to exist without challenge. But the mining boom is ending and sources of government revenue are drying up, so politicians are now looking for ways to extend the reach of existing taxes so they don't have to impose new ones.
Negative gearing is a prime target in the federal government's sights; this is becoming clear in many of the submissions made to a recent Parliamentary budget office inquiry into negative gearing and capital gains tax concessions.
Negative gearing and the capital gains tax are firmly linked in politicians' minds because, in the words of Greens deputy leader Scott Ludlam: "Normally investors would not be interested in an investment that is expected to run at a loss.
"But many are happy to purchase property where the rental income doesn't cover the interest payments, because they expect to make large capital gains in the future from selling it, which are subject to the massive discount."
The budget office found that by restricting negative gearing to only new property purchases and reducing the discount on capital gains tax, the budget would benefit by the sum of $9 billion over four years.
Even better for the ATO is that over time the takings would rise as home ownership turned over and a lower proportion of homes became negatively geared.
In fact, if it had been implemented on July 1 this year the budget office says the change would have saved $291 million this financial year, $1.5 billion next year, $4.2 billion by 2018-19, and $11.5 billion per year by 2025-26. Beautiful numbers if you're scrounging for revenue.
It all adds up to negative gearing being something that we could probably do without, doesn't it? Well, maybe.
Anything that affects negative gearing will have consequences on both sides of the political fence. And yes, it will affect the top 10 per cent of income-earning households who not coincidentally are also among the country's biggest political donors.
About one Australian taxpayer in every seven owns a rental property. Among our federal politicians, however, it's at least one in three. A study by  authors Lindsay David, Paul Egan and Philip Soos found that federal politicians collectively own a portfolio of 541 properties estimated to be worth at least $350 million.
Where to now?
Jamie Alcock, Associate Professor of Finance at the University of Sydney Business School, says that it's a mistake to think negative gearing makes it harder for first-home buyers to get a foothold in the Sydney property market.
"The reality is that by encouraging investment in housing, the supply of rentals increases which keeps rents low," he wrote in Domain.
"For example, in inner-Sydney gross rental yields can be as low as 2.5 per cent in some areas. This benefits the renter, not the investor, and allows renters a better opportunity to save for a deposit for their own home.
"Abolishing negative gearing would, in the long-term, drive rents up and make it much harder for renters to get on the property ladder," he concluded.
Professor Alcock also says it's unfair to blame Sydney's recent meteoric property price rises on negative gearing as some commentators have tried to do.
"Negative gearing rules have been in place for more than a quarter of a century and the number of investors taking advantage of them has been stable for well over a decade. The recent price rises are more closely related to supply restrictions and falling interest rates."
So, where to from here for negative gearing? Federal treasurer Joe Hockey, an acknowledged property investor, has already said the government won’t be touching negative gearing.
“If you change negative gearing in a market like Sydney, which has a very low vacancy rate, you are going to push up rents, which will have a horrendous impact on some of the lowest income families,” he says.
This agrees with the findings of a June 2015 report by ACIL Allen Consulting - 'Australian Housing Investment: Analysis of Negative Gearing and CGT Discount for Residential Property', that concluded if investors were no longer able to carry forward losses it is likely that at least some of the average net rental loss - $9500 in 2012-13, would be added to annual rental costs of tenants.
Finance Minister Mathias Cormann said that the government had no plans to make changes to negative gearing, describing such a move as “counterproductive”.
 “The Hawke government tried to make change in this space and very quickly had to reverse that position because of the effect it had on rental prices,” he said.
Even the RBA has issued a caution against viewing the ending of negative gearing as a cure-all.
"We are not suggesting that negative gearing be looked at in isolation," said RBA's head of financial stability Luci Ellis.
"We think that a holistic review of all the tax incentives to engage in leveraged asset accumulation are worthy of review."
Because the honeypot of billions of dollars in taxation revenues is too hard to pass up, it's likely that some changes to the rules around negative gearing will eventually come into being.
But because the practice of negative gearing has been in existence in one form or another for three decades and is part of the financial lives of over a million Australians, it's likely that any changes brought in will be "grandfathered" to exclude those with negatively-geared properties at whatever time such legislation becomes effective.
Investment advisor Richard Livingston says that negative gearing "remains one of the last great Australian tax holidays."
However, he comments that being realistic, because even at today's low interest rates it's costing the federal budget $4 billion a year, it's unlikely to be sustainable forever.
"The talk has been of changing the rules for future investors only, so existing property owners shouldn't be affected. But let the discussion serve as a reminder to keep your mortgage payments where you can afford them, with or without the taxman's help."
'Cut negative gearing, trim capital gains tax concession and save $9 billion, Parliamentary Budget Office says,' Peter Martin, Sydney Morning Herald, 5 August 2015
'RBA cautions on negative gearing changes,' Peter Trute AAP, News.com.au, 16 August 2015
'Easy tax reform: axe capital gains discounts,' Peter Martin, Sydney Morning Herald
11 August 2015
'Get in before the back pedalling,' Richard Livingston, Sydney Morning Herald, 27 June 2015
'Negative gearing: property’s worst enemy?' Nila Sweeney, Your Mortgage, August 2015
'Is abolishing negative gearing the answer to housing affordability?', Staff writers and wires, News.com.au, 14 June 2015
'How property investing politicians have skin in the game on the negative gearing debate,' Fergus Hunter and Gareth Hutchens, Sydney Morning Herald, 27 March 2015.
'Who is really taking advantage of negative gearing?' Staff writers, News.com.au, 29 April 2015
'Busting the five myths about negative gearing,' Jamie Alcock,  Sydney Morning Herald Online, 19 July 2015
'Negative gearing just one culprit in the housing-bubble blame game,' Elizabeth Knight, Sydney Morning Herald, 18 July 2015
'Rents may rise $10,000 a year if negative gearing axed,' Troy Bramston, The Australian Business Review, 27 June 2015

Sydney real estate - a city of property millionaires

Wed, 19 Aug 2015

The familiar saying: "All good things must come to an end” is often used when talking about changes in economic trends, such as Sydney's amazing chain of property price rises in the past few years.

These price rises have benefited millions of property owners across the greater Sydney area who've seen the values of their homes and investment properties soar by an almost incredible 48 per cent in just the past three years.
Sydney's median house price has risen to more than $1 million for the first time, according to real estate advertising group Domain.
Domain's quarterly report shows that the price of the average Sydney house rose 22.9 per cent over the year to the end of June to $1,000,616. This is the fastest annual rate of growth since at least the late 1980s, and Domain says it's even outdoing the property price boom of the early-2000s.
Sydney units too have shown a significant increase in their median price, rising 13.9 per cent to $656,078.
(It should be noted that figures from CoreLogic RP Data show slightly lower median figures of $900,000 for houses and $650,000 for units based on June quarter sales.)
Whichever figures are the most accurate, history and the power of logic tell us that no increases of this nature can be sustained indefinitely. There are now indications of slowing price increases across the metropolitan area.
Some of the many reasons for this slowing include declining rental yields, up just 2.5 per cent in the past 12 months, and the major banks tightening their loan facilities by increasing interest rates on property investment loans in response to pressure from the Australian Prudential Regulation Authority (APRA).
SQM managing director Louis Christopher said APRA's pressure could already be taking effect: "I believe the results do represent an indication that the measures undertaken by APRA [the banking regulator] in slowing investor demand are now having an impact on the market."
He hastened to add that it's still early days to say the market is going to do anything but continue slowing: "It is likely that the measures will slow the rate of dwelling price inflation recorded, rather than create a price correction."
Approaching the peak?
As well as Mr Christopher, many other observers of the Sydney property market believe that property price growth is near to its peak.  At the very least, most foresee a slowdown in the near future.
McGrath Real Estate's chief executive, John McGrath agrees saying that he feels the Sydney market is 80 to 90 per cent through its current cycle.
"I'd be concerned if Sydney sees another double-digit growth. I'm predicting 3 to 5 per cent more and then I think it's going to be plateauing," he said at the Aussie Home Loans conference in Melbourne.
"I wouldn't panic about the market. Sydney has got a few per cent more, then it might come back a few per cent and then it will go to a steady state."
Figures from market analysts CoreLogic RP Data show that across Australia there have been drops in demand together with an increasing number of owners listing their properties for sale. The old laws of supply and demand are hard to ignore.
Investors may also be cashing in on their property holdings by selling while the market is still undeniably 'hot'. The number of Sydney properties on offer in July was up over 6 per cent on the previous year.
One of the levers the federal government is hoping will slow or stop the escalation in property prices is the conditions that bank regulator APRA has announced applicable to the big four banks and Macquarie Bank that require them to hold more capital reserves to offset potential losses on mortgages.
APRA's aim is to restrict annual growth in property investor loans to 10 per cent per annum.  The major banks are complying by raising their rates for investor loans while in some cases reducing rates for first-home buyers.
A gap in the cost of home loans is being created between loans to investors and loans to owner-occupiers, creating a two-tier mortgage market which we haven't seen since the late 1990s.
Managing director of mortgage broker Homeloanexperts.com.au Otto Dargan is expecting further increases in interest rates banks charge property investors.
"The interest rates for most investor loans are likely to be 0.4 percentage points to 0.9 percentage higher than rates for owner-occupied loans by the end of this year," Mr Dargan said.
Principal of consultancy Digital Finance Analytics, Martin North, told the Sydney Morning Herald that the banks' strong growth in lending to investors would prompt them to "throttle back" their interest rate discounts for property investors this year.
"My expectation would be you could see a 70 to 80 basis point gap between owner-occupier and investor as we move forward into the next year," he said.
Tighter credit policies
A spokeswoman for Mortgage Choice said they didn't expect a greater widening in the gap between rates paid by investors and those paid by owner-occupiers, but they did expect further tightening of banks' credit policies.
"Many of Australia's lenders have made some sweeping adjustments to their lending policy in recent weeks and we expect to see more changes moving forward," she said.
Financial analyst David Potts says that the banks are simultaneously cutting the discount on the advertised rate by the same amount for new borrowers: "That's a rate rise of 0.54 per cent on new investment loans without so much as a by your leave.
"All investors are being slugged, but then the banks probably figure who likes landlords anyway? Except them, of course," he said.
Speaking to property analysts, Mirvac chief executive Susan Lloyd-Hurwitz took aim at APRA's moves to slow lending to property investors.
"It's clear that investor lending has been growing very strongly in Sydney, but this isn't the case for the rest of Australia," she said.
"We do need to be careful that national macro-prudential measures don't weaken the overall housing construction market, which is playing a critical role in the economy's transition away from mining to construction.
However, Domain Group senior economist Dr Andrew Wilson says that landlords will simply hit tenants with higher monthly repayments: "Certainly for landlords that are in areas which are popular... it gives them the opportunity to push rents up."
This, he said, will only encourage more investors to enter the market and cash in on higher rental returns, further weakening the ability of would-be first home buyers to save money for a deposit on a property.
Foreign students have also become an interesting factor in the property market mix,  according to Business Day editor Michael Pascoe, who says they could be the core of a new wave of housing price pressure.
"A rise in foreign student numbers should mean a rise in demand for rental accommodation in what are already housing hotspots," he comments, adding that we really should be planning right now for relevant housing to meet the anticipated demand.
"Instead it looks like the sharp rise in investor-supplied rental accommodation will intersect with the authorities'  attempts to hose down investor activity."
The impacts of those attempts are going to be felt fairly soon according to CoreLogic RPData's research director Tim Lawless.
"The net effect will be a fall-off in demand because investors are such a large part of the marketplace now — they're more than 50 per cent of the market, they're more than 60 per cent in New South Wales," he said.
"I think as we start to see more listings ramp up during the Spring season, will we see buyer demand match that uplift in new stock levels?" he said.
"That's yet to be seen, but with tighter lending conditions we may not see as strong a spring this year as last year."
However, Australian Property Institute's national president Tyrone Hodge says it's not yet time to "ring the bell and say it's over."
"If you look at the fundamentals, we still have lack of supply and growing economy. The only real change is banks increasing the hurdle rate for lending and that takes out more supply which puts more pressure on prices."
'Mirvac sees end to double-digit house price growth,' Carolyn Cummins, Business Day, 13 August 2015
'Home prices surge, Melbourne and Sydney lead gains again,'  Michael Janda, ABC News online, 2 August 2015
'Interest rate gap between investors and owner-occupiers to widen,' Clancy Yeates, Business Day, 4 August, 2015
'Melbourne leads $6t Aust housing market,' SBS World News, 3 August 2015
' Professor Vernon Smith says Sydney and Melbourne's property prices have grown too quickly,' ABC News Online, 29 Julyi 2015
"Abnormal property listings rise a sign of possible investor exit,' Michael Janda, ABC News online, 3 August 2015
'AMP slaps ban on loans to property investors as expert sees end to housing bubble, 'Michael Janda,  ABC News, 29 July 2015
'First-home buyers could take hit from investor interest rate hikes, 'Christina Zhou, Domain, 27 July 2015
'Foreign students set to power housing,'  Michael Pascoe, Business Day, 4 August 2015
'John McGrath: Sydney property 'close to peak, Melbourne similar,' Su-Lin Tan and Nick Lenghan, Domain, 10 August 2015
'Last of the rate cuts for home owners,' David Potts, Sydney Morning Herald, 31 July 2015
'Major banks flout housing investor loan limits, APRA figures show,' Michael Janda and Sue Lannin, ABC News, 30 July 2015
'ANZ raises property investor interest rates to cool demand,' Michael Janda, ABC News Online, 23 July 2015

How long will Sydney property prices keep rising

Fri, 17 Jul 2015

Predicting the extent of Sydney's property boom is becoming harder as the price rises - both in strength and duration, continue to surprise economists and analysts within Australia as well as internationally.
One thing's certain: Sydney's home price growth is almost three times as fast as the nation's next strongest capital city market in Melbourne, as shown by the latest official figures.
The Bureau of Statistics residential property price index, which includes houses and apartments, showed that Sydney had a 3.1 per cent jump in the March quarter and 13.1 per cent surge over the year to March.
Prices in Sydney have grown by almost a fifth in the year to June. No other capital city has even come close to matching Sydney over the past five years.
As a result of all this action, housing prices in Australia are now 12 per cent overvalued, says a leading investment bank that has encouraged policy leaders to introduce tougher measures that make property prices fairer.
Barclays chief economist for Australia, Kieran Davies, compared the growing gap between household income and mortgage rates, as well as the ageing population and the working age of the population, then developed a model that showed property prices were 12 per cent above fair value.
Respected global business publication The Economist says that of the 26 markets it monitors, Australia is the second most expensive country in which to buy a property.
According to the publication, "property is more than 25 per cent overvalued in seven of the markets we track, notably in Australia, Britain and Canada".
Jeremy Lawson, who is global chief  economist of giant British fund Standard Life, also agrees, saying the Australian housing market is "20 per cent to 30 per cent overvalued".  Mr Lawson was previously a senior economist at the Reserve Bank of Australia and was also with the OECD.
Overvalued? Reserve Bank of Australia research previewed in early July concluded that even at today's current high prices, purchase prices of Sydney housing are undervalued by 30 per cent relative to the cost of renting.
And somebody's willing to pay for Sydney real estate at these levels. Lots of somebodies. Let's instead assume that property in Sydney needs to become more affordable - something most people in the industry feel would be a good thing to happen.
There is general agreement that for Sydney's real estate to become more affordable there has to be a dramatic growth in housing supply and that's likely to be several years away.
Nick Proud, executive director of residential for the Property Council of Australia says this won't happen overnight, commenting that from building approval to completion is a process that can take up to seven years.
"It can all take a lot of time. Whatever we're thinking today about housing affordability could take years and years to come into play," he said.
Clear sailing for another year
Academics Abbas Valadkhani of Swinburne University, Ronald Ratti from the University of Western Sydney and Greg Costello from Curtin University analysed monthly house price data going back to 1995.
They first predicted where prices would be by May 2015 and proved the results accurate using four different statistical tests. They then extended the results 12 months to May 2016.
Their research findings predicted the average price of a freestanding Sydney house would climb 15.5 per cent to a record high of $951,960, before slipping 0.2 per cent to $949,800.
It should be noted that their findings on Melbourne and Brisbane, in a paper reportedly under review for the Economic Record, were criticised by several prominent economists, although the Sydney predictions went unchallenged.
But even if the next financial year isn't expected to be quite as strong as the one just concluded there's no reason to expect a sudden turnaround in values.
"In the absence of a trigger event, such as a sharp rise in the jobless rate, higher interest rates or an external shock, it is unlikely we will experience a significant correction in dwelling values," CoreLogic RP Data head of research Tim Lawless said.
AMP Capital senior economist Shane Oliver says he's "heard it all before". Although he agrees that house price ratios to rents and GDP are "very high" - "I wouldn't say grossly,"  he says the Australian housing market is "significantly undersupplied".
Domain Group senior economist, Dr Andrew Wilson, said there's "no sign of investors slowing down.
"There's still potential price growth in the Sydney market and we shouldn't be surprised if it keeps rising," he said.
Angie Zigomanis, author of a report published by building industry analyst BIS Shrapnel, said prices would likely continue to rise through 2015/2016 and start to fall in 2017.
"Interest rates are expected to enter a tightening phase towards the end of 2016," he said in his report 'Residential Property Prospects 2015 to 2018'.
Leading investment bank UBS recently completed a historical comparison that indicates soaring property prices in major cities across Australia have begun to exhibit some bubble-like characteristics but there is no sign yet of an impending cause for it to deflate until 2016-2017.
UBS said it expected a "stronger for longer home building boom" but indicated that worsening affordability and an 'inevitable' rate hike by the RBA will cause a price correction in the next two or three years.
"Sydney is standing out like a sore thumb," said St George Bank senior economist Hans Kunnen.
"There are certain constraints in Sydney that aren't going away any time soon: population growth, low interest rates, self-managed super funds investing, foreign demand and a lack of supply."
He says there's only one thing that can create a sudden fall in prices - a large number of Australians being forced to sell their homes - and any warnings are misguided.
"I think it's overdone - there are still many factors supporting house prices such as undersupply, low interest rates and foreign demand that are not going to go away in a hurry," Mr Kunnen says.
He expects growth in Sydney property prices to slow somewhat over the rest of the year and to keep slowing in 2016.
Growth continues into 2017
A report by National Australia Bank, in collaboration with Core Logic RP Data, has forecast house prices will continue growing this year, but at a more sluggish pace than over the first six months of the year, when the median house price shot up $50,000 — nearly seven per cent.
NAB expects price growth of around three per cent in the second half of 2015, pushing total growth for the year to 10 per cent, followed by growth of 5 per cent over 2016.
Eliza Owen, Market Analyst for Onthehouse.com.au, says that Sydney houses are currently in their largest, longest housing boom.
She points out that the 'house price index' (HPI)  rarely goes down, and when it does go down it doesn’t stay down for very long. For example, in 2003, Sydney houses experienced a peak growth rate of 24 per cent.
"The correction that followed between 2004 and 2007 saw a contraction of just 3 per cent. A mere 3 per cent contraction of what houses were worth at the end of a housing boom does not seem like a drastic correction, although this contraction continued for several quarters.
"Such growth patterns prompt me to view the Sydney market as an anomaly that could well stabilise at high prices."
But how about new housing construction? Australian Bureau of Statistics figures show that building approvals rose by 2.4 per cent to 19,414 in May when seasonally adjusted. This is 17.6 per cent higher than it was a year ago.
The ABS figures show this result was mainly due to a rise in approvals for buildings such as apartments or townhouses, which have grown by 46 per cent since the same time last year.
So, there's likely to be a slight rise in housing supply to offset demand. Now, examine loan approvals. One of the country's biggest mortgage brokers, Mortgage Choice, says the APRA restrictions on lending to landlords has dropped property investors' share of its loan approvals to a 20-month low.
Mortgage Choice also says the proportion of its loan approvals going to property investors fell from 34 per cent in May to 30 per cent in June, the lowest share since late 2013.
"It's a 12 per cent reduction in investor loans in a very, very short period of time," chief executive John Flavell said. He  said it was the first data pointing to a slowdown in investor lending triggered by banks' tougher credit policies.
But he said the lending policy changes hit hardest the first-home buyers who were also investors, because they tended to have less equity and lower incomes than more-established property investors.
"It doesn't knock out the foreign investor. It doesn't knock out middle-aged, middle Australia with heaps of equity access and excess income and high tax. It knocks out the people who are trying to get in," he said.
A slight growth slowdown between now and the end of 2015 can be expected, but not in such a way that prices begin to slip backwards.
Free-standing houses will continue to outperform apartments and, to a lesser degree, townhouses as increasing numbers of new units come onto the market in Sydney.
In 2016 there'll be more of the same. Slower growth but prices will still rise. The levels could begin to plateau by the year's end and 2017 might usher in a period of price stability but with no serious retracements.
'Leading economists slam academics' predictions for Australian house prices,' Jennifer Duke, Domain, 13 July 2015
'Australian house prices 12pc overvalued, says Barclays,' Rose Powell, Business Day, 13 July 2015
'Forget Sydney’s Property Bubble — What About Melbourne?,' The Daily Reckoning, 2 July 2015
'Affordable housing solution is still seven years away,' Kirsten Robb, Domain, 1 July 2015
'Sydney property prices up 16 per cent over the financial year,' Jennifer Duke, Domain, 1 July 2015
'Experts dispel fears of house price crash,' Garry Shilson-Josling, AAP in news.com.au, 30 June 2015
'Sydney prices up 45 per cent, correction next: BIS Shrapnel,' Jennifer Duke, Christina Zhou, News.com.au, 29 June 2015
'Home buyers not scared off by bubble talk,' News.com.au, 5 July 2015
'House prices in a bubble - but what will make them pop?, Rose Powell, Business Day, 1 July 2015
'Loan curbs slow investor borrowing, Mortgage Choice says,' Clancy Yeates, Business Day, 6 July 2015
Is the Sydney Property Market in a Bubble That is Going to Burst?
'Market Update', Eliza Owen,  Market Analyst for Onthehouse.com.au, 24 June 2015
'Melbourne house prices tipped to dive, while Sydney's climb then plateau, 'Peter Martin, The Age, 12 July 2015
'New research shows Sydney property more affordable than 26 years ago,' Jennifer Duke, Domain, 17 June 2015
'Report shows Australia's housing market is overvalued,' Garry Shilson-Josling, Domain, 1 July 2015
'Sydney house prices will continue growing, but at a slower pace than the last six months, report says,' Aidan Devine,  The Daily Telegraphl 27 June 2015
'Sydney stands alone in home price surge,' Michael Janda, ABC News Online,
'The property market defied predictions of a slowdown at the start of the year, how long will the good results continue?,' News Corp Australia Network, Michelle Hele, 4 July 2015
'Australian property 'bloodbath' prediction ridiculed by economists,' Stephen Nicholls, Sydney Morning Herald, 23 June 2015

Sydney property is bubbling along nicely

Tue, 30 Jun 2015

Property price bubbles are back in the news, and this time it's big news. It began when Australia's top economic bureaucrat, treasury secretary John Fraser, told a Senate estimates committee hearing: "When you look at the housing price bubble evidence, it's unequivocally the case in Sydney."
Then, Reserve Bank assistant governor Malcolm Edey? told the senators: "We agree that this is a situation where the market is strong. It's overheated - it's a risky situation. Some people call that a bubble."
These comments triggered an avalanche of media coverage that saw journalists vying with each other to see who could use the word 'bubble' in the most anxiety-causing fashion. Unfortunately, very few of these articles incorporated any definition of just what a property 'bubble' might be.
Full marks, then, to Domain review editor Jennifer Duke who gave us a definition that even economists might agree upon.  It goes: "A housing bubble is a period of above-average levels of house price growth that is followed by a drop in prices, back to or lower than the point where the growth started. The drop in house prices begins at the point where the bubble 'pops'."
In other words, a bubble is only proven to have been a bubble when it pops. And for it to pop housing prices would have to drop back to a point below where the growth period began. This is not about a slight retracement.
Figures from HSBC tell us that the cost of buying into Sydney's housing market has jumped by a massive 39 per cent in the past three years, and a drop of that magnitude simply isn't on the cards.
Otherwise what we have is just a sustained period of rising prices. With regard to  Sydney, as yet there's no sign of a 'pop' and prices are still going upwards. Auction clearance rates continue to rock along in the mid- to high-80 per cent levels, and selling prices for most properties are well above their reserves.
The most significant change in today's Sydney property market is in the motivation of the buyers. The market is increasingly being dominated by investors who view property as a secure place to put their money and a means of acquiring tax-advantaged capital gains.
Bank interest rates are too low to generate the kinds of returns to investors that real estate can offer, and other options, including shares, are perceived as having higher attendant risks.
CoreLogic RP Data's head of research Tim Lawless confirmed that investors are driving the gains in Sydney property prices: "Historically, we've never seen investors outweighing owner-occupiers based on new mortgage originations, and that's the case at the moment in Sydney.
"Investors account for about 60 per cent of new mortgage origination, so very high and without a doubt I think we will see the regulators looking to curb some of that investor demand through the macroprudential levers via APRA (Australian Prudential Regulation Authority)," he said.
This is why, according to a recent article in The Age,  fewer than half of Australia's dwellings - houses and units, are now owned by the people living in them. 30 years ago this figure was around 85 per cent.
Many buyers priced out of the market
Reserve Bank Governor Glenn Stevens told members of the Economic Society of Australia at a business lunch in Sydney that he too had concerns about soaring property prices.
“What is happening in housing in Sydney I find acutely concerning for a host of reasons, many of which are not to do with monetary policy,” he told the audience. “I think it’s a social problem.
“I think some of what’s happening is crazy, but we [the RBA] have a national focus and so that just increases the complexity.”
There is growing recognition that there are downsides to skyrocketing housing prices, including that more and more first-home buyers are being priced out of the market.
The ABC's Michael Janda recently said on The Drum: "With the typical Sydney home now selling for 10 times median annual income, and 6.7 years of saving required for a couple to put aside the $165,000 20 per cent deposit for a mid-priced property, there is no question that affordability is awful in Australia's biggest city."
Committee for Sydney chief executive Tim Williams, who was previously a key adviser to the British government on housing affordability and urban regeneration in London, says that the housing affordability crisis in Sydney has locked 70 per cent of 35-year-olds out of home ownership.
"The housing stress of global cities has reached people on average wages," he says.
Eliza Owen, market analyst for Onthehouse.com.au, has calculated that mortgage repayments as a percentage of income are at an all-time high, representing 35 per cent of income in Sydney, compared to 27 per cent of income nationally.
When she does some additional number crunching using average weekly earnings data, she concludes: "What we can reasonably infer from the numbers is what we have suspected for a long time – that the median household in Sydney cannot afford to purchase the median house in Sydney."
NSW Finance Minister Dominic Perrottet has called for 'a much greater dialogue about housing affordability for young people': "No doubt housing affordability for my generation is a real challenge and it's something that governments need to look at."
He said the NSW government could help the situation by releasing more land and that "obviously tax incentives can also assist".
Who's really buying property?
So, what's behind this situation? There's a recurring myth that high real estate prices are the result of 'Chinese buyers' with loads of cash buying into local real estate.
“It sounds like a big amount, but realistically it’s still a pretty small percentage of the entire market,” Cameron Kusher, senior analyst with property data analysts CoreLogic RP Data, told News.com.au.
National Australia Bank figures show that buyers from overseas - a cohort that includes American, Canadian and UK citizens as well as those from Asian nations, accounted for around 21 per cent of all new houses and apartments sold in NSW in the first three months of 2015. This means that about four out of five buyers of new housing in this state are locals.
Dr James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology, Sydney, told News.com.au that a 2014 parliamentary inquiry into foreign investment concluded that overseas buyers actually helped to increase housing supply, which put downward pressure on house prices.
“Foreign investment is concentrated in new property and this has expanded the supply. If you take away that investment, prices are going to be pushed up.”
Dr Laurenceson is quick to point the finger of blame elsewhere for Sydney's growing housing unaffordability: "The real reasons are right in front of our eyes - limited land releases, zoning regulations, development charges, record low interest rates and tax breaks to property investors."
Federal Treasurer Joe Hockey has admitted that he wonders how his children might afford a home but said he did not support any intervention in the market to deflate house prices.
"The best way to respond to elevated house prices is to increase supply. What we've seen is a massive increase in housing construction in the last year; it's up 18 per cent, 30,000 new dwellings…that is the best way to respond to elevated prices, that is happening," he said in an interview on ABC radio.
However, increased housing supply requires a corresponding increase in land available for development. RBA assistant governor Christopher Kent has warned of even higher home prices, saying stocks of unsold land suitable for development are getting "unusually low".
"Shortages are most evident in Sydney, where greenfield land releases have not kept pace," he said in a public speech at the Australian National University.
Calls for change
Growing concerns about the existence of a property 'bubble' have recently given rise to calls for changes to many current government policies relating to the ways in which real estate is treated - from the release and development of new estates to taxation benefits received by investors.
As a sign that some government bodies are already feeling the heat, Mark Chapman, director of tax communications at H&R Block, said in 'Smart Property' that the Tax Office has recently expressed a determination to ensure property investors aren’t 'rorting the system'.
“Whether it’s a commercial property, a city pad rented out long-term or a holiday retreat for family, friends and holiday markets, the ATO has signalled a big push to check that people aren’t over-claiming deductions,” Mr Chapman said.
In another financial area, the Australian Prudential Regulatory Authority (APRA) has asked Australia's biggest lenders to cut back on risky practices in investment lending.
These 'risky' practices include growing their investment loan book at more than 10 per cent a year, writing high loan to value ratio (LVR) loans where the borrower has less than 20 per cent deposit, and writing long-term interest-only investment loans.
RBA deputy governor Philip Lowe says these efforts are already having an effect on bank lending practices: "In the past couple of weeks, you have seen a number of banks say they are requiring larger deposits for investor loans and offering smaller discounts on interest rates, smaller rebates and are requiring higher serviceability levels.
"My conversations with a number of banks around the country [indicate] the various APRA measures are having an effect."
Changes to the current taxation regime could also be in the pipeline. At the request of the Australian Greens, the Parliamentary Budget Office investigated how much money would find its way into government coffers if negative gearing was scrapped for new residential investments.
The budget office found that removing negative gearing for all asset classes for assets purchased on or after July 1, 2015 would increase revenue by almost $2.94 billion over the next four years.
The extra revenue over the next 10 years would total something like $42.5 billion. Sums like these have a certain appeal to politicians desperately looking for ways to fund their programs.
Interest rate changes a factor
Interest rates are one of the key factors influencing the property market. At its May meeting the Reserve Bank of Australia (RBA) decided to keep its cash rate on hold at the record low figure of two per cent.
This wasn't an easy thing for the RBA to decide. Lower rates are supposed to stimulate economic activity, and all indications are that Australia's economic activity is slowing and will continue to do so, perhaps regardless of the RBA's actions.
Wage increases are at their lowest rate since the government started collecting this data 17 years ago. Household debt is growing, and businesses are signalling that their forward investments in everything from plant and equipment to staff numbers will be cut back over the next 12 months.
The Federal Government tried to induce small business to take on the role of an economic driver in the May budget by giving it an immediate $20,000 tax offset for business-related purchases.
However, according to Dun & Bradstreet’s latest Business Expectations survey, the Business Expectations Index for Q3 2015 has fallen to 14.9 points, down from 20.7 points in the previous quarter and 19.5 points at the same time last year, in a correction to the generally improving outlook that was measured between late 2013 and late 2014.
“There is now a clear cooling in expectations that we expect will continue this year as businesses pull back their earlier optimism,”  said Gareth Jones, CEO of Dun & Bradstreet - Australia and New Zealand.
A detailed statistical study by global bond fund PIMCO concluded that Australians' decision to borrow is driven by falling interest rates and rising house prices – not by economic fundamentals reflecting the health of the economy like employment.
If the RBA cuts interest rates further, this will spur investors to make even more property acquisitions which will, in turn, force the prices of real estate up even more. 
An answer to the question
Back to the question: "Is there a property bubble in Sydney?"  The pressures that have created high property prices in Sydney property haven't gone away. Demand still exceeds supply and will for some time.
It went largely unremarked in the media but the CoreLogic RPData Home Value Index found Sydney's home prices actually fell 0.7 per cent over the month of May - the first time prices had slipped since November last year.
However, CoreLogic's Tim Lawless said these price falls were just "an adjustment" after a strong period of growth: "I wouldn't expect it to be a trend because outside the index there was a lot of data supporting the onwards and upwards values," he said.
"So this is more a correction in the index after a couple of very strong months of data flows. We'd expect a return to growth over the coming months."
Money continues to pour into real estate because other investment options are much less attractive. In the words of real estate marketer, John McGrath: "The market will at some point reach a natural peak — prices will get too high and buyers will lose interest.
“Everyone needs to calm down and remember that this is a solid, high performing property market in a truly international business hub and in my opinion, it is going to stay that way for a long time to come,” he said in an interview with the Daily Telegraph.
A recent analysis by Barclays Bank economist Kieran Davies, says prices may be in a bubble, but it's not one that's about to pop: "I just can't see anything that will cause a correction in the short term, particularly when the RBA has been cutting rates. If any asset was going to crash it should have been during the GFC."
When he was asked if property prices are in a bubble, CommSec economist Craig James replies: "No, these things just go in cycles.  Things going a little bit crazy and then settle down, as they did in the 1980s and in the early 2000s."
Speaking at a Trans Tasman Business Circle lunch in Sydney, ANZ chief executive Mike Smith said the current situation is worth close attention: "I don't think it's quite a bubble yet, but it certainly has the potential," he said.
And the chief economist at Bank of America Merrill Lynch, Saul Eslake, says that new supply could be significant enough to affect prices in a few years, but "...there is no trigger on the horizon for the rush of forced home sales it would take to  provoke a large house price slide".
In Sydney the undersupply of housing stock is expected to continue driving the market, according to BIS Shrapnel senior manager of residential Angie Zigomanis.
He said Sydney's growth may slow over the next 12 months, but it would be rising interest rates that would slow Sydney down, not an oversupply of homes.
"In Sydney, it might take three to four years [for supply to catch up with demand], but there is the possibility that it might not fully catch up if something like rising interest rates choke off demand first," Mr Zigomanis told Domain's Jennifer Duke.
A bubble? Definitely not. There's no 'pop' in sight.
However, we can hope that the recent debate about Sydney's high real estate costs matures into a reasoned and nonpolitical (or at least bipartisan) examination of the best means to create greater housing affordability without destroying the incentives that have motivated developers and investors to finally build the new housing Sydney has needed for far too long.
'First home owner grants may drive up house prices,' Sean Nicholls, Sydney Morning Herald, 11 June 2015
'First cracks emerge in house rules,' Waleed Aly, Sydney Morning Herald, 12 June 2015
'Affordability Continues to Deteriorate,' Eliza Owen, Market Analyst for Onthehouse.com.au, Property Market Update, May 2015
'ATO targets property investors,' Smart Property, 3 June 2015
'Bubbles and bureaucrats: why housing affordability isn't being fixed,' The Drum, Michael Janda, 1 June 2015
'Changes lead to investment blues,' Mark Bouris, SMH Money, 5 June 2015
'Chinese property investment through the roof: What it really means,' James Law, News.com.au, 9 May 2015
'Finance Minister Dominic Perrottet warns first home grants may drive up house prices,' Sean Nicholls, Sydney Morning Herald, 11 June 2015
'Level of risk in housing has picked up, RBA's Philip Lowe says,' James Eyers and Jonathan Shapiro, Sydney Morning Herald, 27 May 2015
'New plan to curtail negative gearing would help the budget, cool property market,' Adam Gartrell, Sydney Morning Herald, 7 June 2015
'No bubble: Sydney home prices are not going to collapse, says John McGrath,' News.com.au, 2 June 2015
'No rest for the Sydney auction market,' Toby Johnstone, Domain, 6 June 2015
'Property bubble in Sydney and Melbourne, says Treasury Secretary John Fraser,' Michael Pascoe, Business Day, 1 June 2015
'RBA governor Glenn Stevens 'very concerned' about 'crazy' Sydney property,' Elysse Morgan and Michael Janda, ABC News Online, 11 June 2015
'RBA Leaves Rates on Hold in June,' Eliza Owen Source: Onthehouse.com.au, 2 June 2015
'Reserve Bank governor Glenn Stevens: More infrastructure spending now, please,' Peter Martin, The Age, 11 June 2015
'Rising house prices 'causing social harm' as property bubble debate continues,' Latika Bourke and Judity Ireland, Sydney Morning Herald, 7 June 2015
'Solution to housing affordability staring politicians in the face,' Michael West, The Age, 1 June 2015
'Sydney property prices dropped in May, but don't expect that to continue,' Antony Lawes, Domain, 1 June 2015
'Sydney tax: Why you pay $150,000 extra to live in Emerald City,' Jessica Irvine and Melanie Kembrey, Sydney Morning Herald, 7 June 2015
'Sydney's skyrocketing house prices are worrying, but Chinese buyers aren't to blame,' James Laurenceson, SMH Comment, 29 May 2015
'The housing bubble explained,' Jennifer Duke, Domain, 7 June 2015
'When Reserve Bank Governor says property prices have gone ‘crazy’, you know it’s bad,' News.com.au, 11 June 2015
'Home price growth continues, but not because of supply shortage, say analysts,'
Michael Janda, ABC News Online, 1 May 2015
'Property price crash more likely in Melbourne than Sydney, experts,' Jennifer Duke, Domain, 13 June 2015
'Reserve Bank: prepare for even higher house prices,' Peter Martin, Business Day, 15 June 2015
'Irrational exuberance in Australian household debt: PIMCO,' Jonathan Shapiro, Business Day, 17 June 2015

Sydney property sure to gain from latest RBA rate cut

Thu, 21 May 2015
While the Reserve Bank's rate cut in February came as a surprise to most economists, the cash rate cut to a record low of 2 per cent announced in the RBA's May meeting was almost a certainty.
Also as expected, following the Bank's announcement the value of the Australian dollar dropped and the sharemarket experienced a surge upwards. But once analysts had a chance to consider the fine print in the RBA's announcement the Aussie dollar rose again and the sharemarket's surge came to an end.
The RBA announcement included a statement about the Australian economy that was definitely upbeat. It said the rate cut was: ".... to reinforce recent encouraging trends in household demand."
However,  missing was a now-familiar line used in previous announcements that said: "further easing of policy may be appropriate over the period ahead."
Market watchers took these clues to mean that the May rate cut could be the last and we've finally seen the bottom of the interest rate curve. In other words, the next time the RBA changes the cash rate it could be in an upward direction.
Rate cuts have a way of generating predictable outcomes. One of the most important is to lower the cost of borrowing money to purchase property, thereby stimulating activity in the real estate market.
Mortgage analyst firm Canstar says that the recent rate cut, when applied to a $300,000 mortgage loan with repayments over 25 years, creates monthly savings of about $45.
If it's easier to purchase a property more investors and would-be homeowners will do so. This increases the demand for existing property and consequently prices will rise, most notably in Sydney.
The February cut of just 25 basis points certainly had this effect. Figures from the Domain Group show that the Sydney median house rose by 3.6 per cent in the March quarter to an all-time high of $914,056.
RBA Governor Glenn Stevens noted this in his May statement: "Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities," Mr Stevens said.
"The Bank is working with other regulators to assess and contain risks that may arise from the housing market," he added. What he didn't say was that there may in fact be no way to contain the price rises in Sydney that now seem inevitable.
More rate cuts could even be on the way. Nomura Australia rate strategist Andrew Ticehurst says the RBA will be forced to cut the cash rate again by November this year.
"The next real window for an RBA cut is likely August, and we currently assign a 40 to 50 per cent probability to a move at this time", says Mr Ticehurst.
"We think the probability rises again later in the year, and a move by November is more likely than not."
Houses outperform units
About the only recent sign of housing prices slowing in Sydney can be found in the prices of units where their values haven't kept up with the pace of house prices. Sydney units are up 9.7 per cent over the past year while house prices rose by 15.5 per cent.
"For the first time, there are more approvals to build new apartments [in trend terms] than free-standing houses," said CommSec chief economist Craig James.
"And one in four new dwellings approved is in an apartment block of four storeys or more," he added.
The ABC's 'FactCheck' came up with an interesting statistic: "Owners like free-standing homes. Of owner-occupied households, 88 per cent live in separate houses, compared with 57 per cent of renters."
Eliza Owen, market analyst for Onthehouse.com.au, had this to say on the topic: "Historically, houses have outperformed units, and have suffered less in periods of correction.
"Well built houses on large blocks of land will retain value because they come with land and present all sorts of potential for development, extensions and spacious living."
It's likely that free-standing houses will continue to lead the value equation as there are now relatively fewer of them being built in the current mix of housing construction.
Stage set for more rises
Louis Christopher, managing director of independent property advisory service SQM Research, said: "We're at almost record low stock on market, record low interest rates and the market will only rise from here."
Sheryle Bagwell, breakfast business editor on ABC's Radio National, agreed, saying: "House prices in Sydney have rocketed up more than 30 per cent in the past three years as interest rates have fallen.
"Soon the median price for a house in Sydney will hit $1 million. This latest cut will only provide more fuel for that fire."
Ms Bagwell said that lower mortgage rates would give investors more incentives to put their cash into real estate and push up prices even further.
"Those real estate investors will likely include an increasing number of self-funded retirees searching for better returns than they are getting on cash. They will take on more risk just when they should be playing it safe. But that's what happens in a low interest rate environment."
BIS Shrapnel's Angie Zigomanis says we've reached a dangerous point in the Sydney housing price cycle where people are experiencing the 'Fear Of Missing Out' (or FOMO as he calls it).
"Prospective purchasers are prepared to bid up prices now to get into the market before further price rises. A decreased interest rate is likely to provide purchasers with more ammunition to spur this further."
He believes the RBA is looking further afield than just at the housing sector: "They want to encourage more consumer spending and more non-resource sector business investment across the broader economy.
"Ideally construction would remain high, but not be accompanied by excessive price growth."
Whichever way the market goes, interest rates will inevitably rise and when they do adjustments will have to be made by investors who acquire property now when rates are at their lowest-ever point.
"If you're buying property for family reasons and for the long-term and you need to buy in, then buy," says Mr Zigomanis.
"However, ensure that you factor in the potential for further interest rate rises and that you can sustain mortgage repayments if there is a period of unemployment, rather than putting yourself in unsustainable levels of debt."
The federal government's 2015 budget left the housing market untouched, for a while at least. Missing from the treasurer's budget announcement was any commentary on such topics as negative gearing, help for first home buyers and property purchases by self-managed superannuation funds.
However, the government has indicated it will be looking at major tax reforms outside of the budget process so there could well be some interesting developments following discussions on a forthcoming tax white paper later this year.
Assistant federal treasurer Josh Frydenberg told The Australian Financial Review Banking & Wealth Summit in late April that the government will crack down on borrowing by self-managed superannuation funds but will not ban it outright.
"You don't want to see people have their retirement income savings so highly leveraged that they end up being severely damaged as result of another financial crisis," he said.
It should be noted that treasurer Joe Hockey has already commented on the ABC's 'Q&A' that if negative gearing is abolished, there could be serious consequences: "If you abolish negative gearing on investment properties, there's a strong argument that rents would increase."
Michael Bleby, writing in the Australian Financial Review before the RBA's announcement, had thought the Bank would leave rates untouched.
"Policymakers are keen to stimulate an economy that is struggling to fire up in areas beyond housing and construction, but lower borrowing costs are likely to primarily boost investor activity in a sector that is so buoyant it is drawing the attention of international agencies such as the International Monetary Fund."
Yes, apparently even the global financial gurus at the IMF are perplexed by the strength of the Australian housing market. As Radio National's Sheryle Bagwell reported: "Little wonder the IMF is reportedly sending a crack economic team to Australia to take a close up look at the housing market for itself."
If the IMF's economics team arrives around the end of the year they could see the prediction of Dr Andrew Wilson, senior economist for the Domain Group, fulfilled or even exceeded.
Dr Wilson has forecast that Sydney will have a median house price of $1 million by the end of 2015. Looking ahead even further, he's predicting a $2 million median house price by 2030 and a $3 million median house price by 2038.
If those estimates sound far-fetched, remember that 2030 is just 15 years away. Looking at the Australian Bureau of Statistics record of Annual Median House Prices - Capital Cities we can see that 15 years ago in 2000 the Sydney median house price was just $287,000.
Sydney home values in the March quarter increased 3 per cent, according to CoreLogic RP Data's home values index. They rose another 1 per cent in the month of April.
Do the maths and it's clear that at this rate Dr Wilson's forecast for 2030 is quite achievable.

'Nomura's Andrew Ticehurst calls third interest rate cut later this year,' Mark Mulligan, Sydney Morning Herald, 15 May 2015
'ASIC chairman Greg Medcraft warns on Sydney, Melbourne property bubbles,' Business Day, Sydney Morning Herald, 18 May 2015
'RBA adds firewater to property punchbowl,'  John Collett, Sydney Morning Herald, 6 May 2015
'Federal Budget 2015: What it means for you,' News.com.au, 12 May 2015
'Reserve cuts but there is a sting in the tail,' Malcolm Maiden, Sydney Morning Herald, 6 May 2015
'Record low rates will make Australia's hottest property markets even hotter,' Sheryle Bagwell, ABC News Online, 5 May 2015
'RBA cuts interest rates to historic low,' News.com.au, 5 May 2015
' Reserve Bank interest rate cut to fuel unprecedented buying frenzy in Sydney,' Jennifer Duke, Domain, 5 May 2015
'An interest rate cut would be dangerous for Sydney housing,' Angie Zigomanis, Sydney Morning Herald, 5 May 2015
' Sydney, Melbourne real estate auctions make case against RBA interest rate cut,' Michael Bleby, Australian Financial Review, 3 May 2015
'House prices up except for Canberra,' AAP in The Australian, 1 May 2015
 'Sydney Party Time as House Prices Boom 23% P.A.,' Linda Janice Phillips, Propell National Valuers, Index Results as at March 31, 2015
'RBA to cut rates as building booms,' Mark Mulligan, Sydney Morning Herald,  4 May 2015
'Fact file: 9 million homes with 2.6 occupants,' FactCheck, ABC News Online, 6 May 2015
'Disparity between house and unit growth widens,' Eliza Owen, Residex Blog, 6 May 2015
'Reserve Bank governor Glenn Stevens takes heat as $A rises despite rate cut,' Max Mason, Sydney Morning Herald, 7 May 2015

How much higher can Sydney property go?

Mon, 20 Apr 2015

Sydney’s property boom continues to amaze politicians, economists and journalists alike. After shooting upwards by something like 40 per cent over the past three years, the market's growth rate once again seems to be on the rise.
Sydney's median house price rose from $765,493 in the September quarter of 2013, to $872,811 in the December quarter of 2014, according to Domain Group data, and it's still going up - to $940,130 at 31 March as reported in the CoreLogic RPData home value index.
Records continue to be set.  On the same day as the NSW election was held, an auction clearance rate of 87.5 per cent, an all-time record, was achieved on what was also the biggest-ever auction day with 1128 homes going under the hammer.
Economists may disagree on the exact causes of such unprecedented activity but there's always a reason for whatever happens in the marketplace.
Property and shares are the core elements of most investors' portfolios. The low interest rates of recent times are given credit by many analysts for the recent strong performance of both of these asset classes.  There are also market observers who see similar dangers in their growth.
Roger Montgomery, of Montgomery Investment Management wrote on independent publishing service Cuffelinks that eventually:  "...the price of those assets [stocks and property] will be pushed way too high.
"After that, a large number of investors will, sadly, suffer financially again – from buying too late and paying too much," he said.
PM Capital's global portfolio manager, Ashley Pittard told Business Day that prices in both shares and property are now approaching dangerous levels.
"They are certainly approaching valuation extremes that would suggest when they deflate they will cause significant damage to the country and it is a timing issue of when problems will emerge.
"It is not sustainable to have [bank] loan growth that on average has increased by 10 per cent per annum consistently for 15 years and a housing market that has only gone one way, which is up, over the same period," he said.
Growth rates will slow
CoreLogic RP Data's head of research, Tim Lawless, believes the primary reason behind the recent prices growth is that investors see the prospect of large capital gains and are taking advantage of the present low interest rates on offer.
Mr Lawless also issued a note of caution to investors: "It does pose the question of how much longer the growth can persist," he said.
"When the Sydney housing market starts to lose momentum, there is some risk that recent investors could be left holding a very expensive but low yielding asset with a lower than expected rate of capital gain over the coming years."
In March, according to CoreLogic RP Data figures, Sydney home values increased 3 per cent, prompting HSBC economist Daniel Smith to say the current growth rate is "unsustainable over the medium term" while issuing a warning that once interest rates start rising there will be "risks to the Sydney market".
Merrill Lynch senior economist, Alex Joiner also cautioned: "Inevitably rates will move back to a more normal level and that is when we see the debt servicing ratio - income used to service debt, moving higher."
It suddenly seems like everything but the price of Sydney real estate is slipping. Consumer confidence surveys are producing declining outcomes, commodities prices are dropping almost daily, and industrial production is down for the third month in a row.
All good things must come to an end eventually, market 'booms' included. But when will Sydney's present property boom finally come to a halt?
Growth will eventually slow as prices grow beyond levels investors can afford. In addition, rental yields are near historically low levels and household income growth has slowed to the point where it's unlikely tenants will dip much deeper into their pockets to pay the landlord.
History shows that housing prices are cyclical and price rises run out of steam as the market approaches its peak. Across Australia, with Sydney being the exception, housing prices are already decelerating and the Reserve Bank is monitoring the situation in conjunction with other authorities.
The RBA's latest Financial Stability Review expressed strong concerns about speculative buying by investors in the property market: "Ongoing strong speculative demand would tend to amplify the run-up in housing prices and increase the risk that prices in at least some regions might fall significantly later on."
The RBA said new lending to property investors had risen by almost 150 per cent in the past three years, yet the Bank is viewed by most analysts as likely to again drop its cash rate before midyear.
It left rates on hold in April so the Heralds's Mark Kenny says May is now firming as the likely date for the next cut: "A rate cut has now become almost certain in May - just before the federal budget - after the RBA listed the pre-conditions and backed specific efforts through tougher regulation designed to 'contain' house price growth being inflated by prospective landlords."
How much more of a cut can we expect? The chief economist of AMP Capital, Shane Oliver, thinks a rate cut of 0.25 per cent is a sure thing in the short term, looking at the weak national economy and the plunging price of iron ore.
And even if there's no rate cut in May, Herald journalist, Gareth Hutchens, leaves no doubt another rate cut is on its way: "Financial markets believe there is a 100 per cent chance the cash rate will be two per cent by September or October this year," he said.
Senior business columnist Malcolm Maiden, also writing in the Sydney Morning Herald, discounted the possibility of the RBA's holding off a cut due to its impact on the housing market: "A rapid rise in house prices in Sydney that would be fanned by another rate cut is a hurdle, but it is probably not an insurmountable one," said
Sydney property still makes sense
Robert Harley, writing in the Australian Financial Review, says that for investors Sydney property still makes sense: "Despite all the cranes, the city remains chronically undersupplied, rents are still rising, and the city's economy is growing more strongly than any other."
He also points out that the number of houses up for sale in Sydney is less than a year ago. 
John Edwards, Founder of Residex Pty Ltd, agrees that there is a shortage of existing housing stock being brought to market, and says this is the result of "existing home owners being cautious given current economic forecasts."
In his view, these homeowners don't want to dispose of their current place of residence but instead will leverage their equity to purchase lower-cost rental housing stock - new and existing home units, as investments.
If we take the two price growth 'capitals' - Sydney and Melbourne, out of the calculations, home prices in most cities aren't even matching the rise in the CPI. Perth, Hobart and Darwin have even gone backwards over the past year.
However, there's still little sign of the Sydney market doing anything but continuing its upwards rush, despite prices now being almost a third higher than the previous market peak.
Annual price growth for the 12 months to the end of March for both houses and apartments across Sydney was 13.9 per cent compared with 12.4 per cent for the 12 months to the end of December.
In fact, property values in Sydney have increased each month for the past three years.  This parallels the boom in the Australian Stock Exchange which has seen shares trading at seven-year highs, finally taking them back to where they were at the time of the global financial crisis.
A media release from Sydney-based Propell Valuers summed up the situation: "The rest of the housing market may be in the doldrums, but Sydney may as well be in another country, as demand from new inbound population growth, and foreign investors, collide with lack of available property to drive up prices.
"The February rate cut triggered the new boom as buyers become confident that they are not going to pay higher mortgage rates anytime soon, and more cuts in the cash rate this year will only help."
Even though there was no rate cut in April, Peter Arnold, banking analyst at RateCity, doesn't think this will affect the market.
"We're already at record lows and the Sydney and Melbourne property markets are already running hot and things don't seem to be slowing down. We're seeing a lot of competition at the pointy end of the market and we see this continuing regardless of today's decision," he said.
Louis Christopher, the managing director of SQM Research, recently upgraded his forecast house price growth in the city to 11-15 per cent. He also told investors that the Sydney median house price could top $1 million this year.
Vimal Gor, the head of fixed income for BT Investment Management, told Domain that "we have an expensive housing market, but Sydney and Melbourne are two of the most desirable places to live in the world so it's a supply and demand issue."
He said that the RBA would be concerned if house price growth were to slow materially from present levels and he doesn't think that house price growth will be an impediment to the RBA cutting interest rates further.
"House prices will stay expensive for a long time," Mr Gor concluded.
'IMF warns Reserve Bank may have to keep cutting rates,' Gareth Hutchens, Sydney Morning Herald, 15 April 2015
'Reserve Bank puts house prices over jobless by keeping rates on hold,' Mark Kenny, Sydney Morning Herald, 7 April 2015
'Reserve Bank's decision to keep interest rates on hold no reprieve for Sydney market,' Jennifer Duke, Sydney Morning Herald, 7 April 2015
'RBA rate cut: It is just a matter of when,' Malcolm Maiden, Sydney Morning Herald, 4 April 2015
'The extraordinary Sydney house price growth that no one wants,' Stephen Nicholls, Domain, 1 April 2015
'Investors warned Sydney house prices can't keep growing forever,' Antony Lawes, Domain, 2 April 2015
'Sydney sets its own pace in home values,' Lee Brooks, Finance News Network,
1 April 2015
'Home prices keep rising led by Sydney surge,' Michael Janda, ABC News Online, 1 April 2015
'Sydney house price growth highest in six years,' Antony Lawes, Domain, 1 April 2015
' Sydney achieves highest clearance on biggest auction day,' Antony Lawes and Anna Anderson, Domain, 28 March 2015
'The boom is about to go bust,' Bianca Hartge-Hazelman, Business Day, 3 March 2015
'Sydney property still makes sense for investors despite price rises,' Robert Harley, AFR Weekend, 27 March 2015
'Sydney Continues to Set the Pace in Patchy Market,' John Edwards, Residex March Property Market Update, 20 March 2015
'Drop in house prices would be a disaster: analyst,' Stephen Nicholls, Domain, 26 March 2015
'RBA sounds alarm about bursting of housing bubble inflated by cheap credit,' Clancy Yeates, Business Day, 25 March 2015
' Sydney Party Time as House Prices Boom 23% P.A.,' media release, Propell Valuers, 2 April 2015

Sydney property the clear winner in race to the top

Thu, 19 Mar 2015
When it comes to value growth, Sydney property is out in front and on its own. Regardless of other economic factors that include a rising rate of unemployment, increases in the cost of living, falling commodity prices and concerns over housing affordability, the annual rate of growth in Sydney continues to defy predictions and has performed strongly over the first three months of 2015.
The CoreLogic RP Data February Home Value Index results show that Australia’s combined capital cities have seen dwelling values rise 8.3 per cent over the past twelve months. Sydney is once again the clear leader in value growth with dwelling values 13.7 per cent higher than a year ago.
Housing market consultant Robert Larocca told the Daily Telegraph that the Reserve Bank’s February decision to cut the cash rate to a historic low is behind these statistics.
“[It’s] further indication of the improvement in demand since last year. There can be no doubt now that the interest rate cut had a positive impact on the real estate market,” Mr Larocca said.
A market analysis by Tim Lawless, head of the RP Data research and analytics team, showed that since the beginning of the latest real estate growth cycle in June 2012, Sydney's dwelling values have climbed 34.8 per cent.
"We are already seeing the effect of lower mortgage rates, with auction clearance rates surging to the highest levels we have seen since 2009 and valuation activity across CoreLogic RP Data valuation platforms reaching new record highs based on daily averages over the second half of February," he said.
Mr Lawless did, however, offer a list of factors that could take some of the heat out of the market: "Weaker jobs growth, higher unemployment, declining affordability, low rental yields and political uncertainty are all factors that could dent consumer confidence and provide some counter balance to the rate cuts and quell any additional market exuberance."
Government ponders intervention
There is a possibility that federal government regulators may act to slow the seemingly unstoppable growth in property values.
The Australian Prudential Regulation Authority (APRA) is tightening its grip on the major banks, doing what it can to ensure Australian lenders remain within the government's lending benchmarks.
This could have the effect of making housing finance harder to get, although as yet the impacts of APRA's activities have been minimal.
One proposal to reduce risky borrowing came from John Symond, chair of Aussie Home Loans, who suggested that regulators ban interest-only loans for purchasers buying a house to live in.
"If you can't afford to pay interest and principal, then you shouldn't get a loan," he said.
This might sound a bit drastic, but not irrelevant when he also noted that in the December quarter more than 43 per cent of all new loan approvals to banks with loan books bigger than $1 billion were for interest-only loans.
Mr Symond is concerned that any sudden rise in interest rates would force highly-leveraged investors to sell properties which might start what he called a 'domino effect' that could affect the values of other properties.
In earlier times housing has been hard to afford because mortgage interest rates were too high - up to a horrifying 20% in the early 1980s. But that hasn't been much of a problem since inflation was brought down to more affordable levels in the mid-1990s.
High interest rates once gave governments a political stimulus to help would-be first home buyers (FHBs) by introducing a range of subsidies to help them purchase the property of their dreams. But in hindsight, about all these subsidies accomplished was to inflate the cost of property and place it even further out of their reach.
Recently federal treasurer Joe Hockey came up with a new twist to help first home buyers acquire a place to live. He suggested they could use all or some of their accrued superannuation funds (details weren't forthcoming) to offset some of the cost of their purchase.
It must be admitted that in terms of being a worthwhile investment, this use of super isn't a bad idea. As the ABC's Alan Kohler pointed out:
"According to Chant West, the average 15-year return from super (balanced option) is 5.9 per cent; the average 15-year growth rate from house prices is exactly the same, [but it's] tax free."
So far so good. But since tapping into their super means FHBs can more easily afford to purchase a home, the resulting increased demand means the prices of the homes they want to purchase will go higher.
The real beneficiaries of the treasurer's brainstorm would likely be those who sell their properties to the newly-funded FHBs.
As Stephen Nicholls, Domain executive editor said: "Making it a free-for-all will just push prices higher as more people dive in. We've seen that with the now widely criticised first home buyer schemes that, at one stage, promised $14,000 for buyers of existing property.
"It's no accident that government handouts to first-home buyers right around the country now apply only for new property - a clear acknowledgement that the problem lies on the supply side of the equation."
There's also the slight problem (deferred but still needing a solution) that those who drained their super funds to purchase a home will have fewer accumulated resources to support them in their later years and will require some sort of government help down the track. Or they might be forced to sell their houses.
Of course, it could be just that the government thought it had a win-win situation in which it could please the FHBs - at least temporarily, while at the same time pleasing  existing property owners who would enjoy even greater increases in the value of their real estate.
Regardless, the media's response to the treasurer's suggestion was to treat it like a political barnacle and it seems to have faded quickly away.
Jennifer Duke, Domain's review editor, commented on another federal government 'thought bubble' - that overseas investors could be charged a fee when they apply to purchase residential real estate in Australia.
"The recommendation from the House of Representatives Standing Committee on Economics for a fee of $500 to $1500 to be paid on applications may see any introduced cost absorbed by real estate agents and developers."
She quoted Esther Yong from Chinese property listing portal ACproperty.com.au who said the proposed fee of $1500 will not be a deterrent for foreign investors.
"Most Chinese buyers will just pay for it or sometimes agents might be happy to absorb it as part of marketing gimmick," Ms Yong said.
"$1500 is also very minimal in the context of property buying," she added.
Dirt more important than bricks and mortar
Think about what's behind the amazing growth in real estate prices across Australia. House prices have tripled in the past 15 years.  But houses now don't cost that much more to build; the big rise in housing costs is due to rising land prices.
It's the old story of supply and demand. When demand increases, if there's no accompanying increase in supply, prices will go up.  As Mark Twain is reputed to have said: "Buy land, they're not making it any more".
If a government can stimulate housing construction they'll score points with the electorate.  However, whenever governments take steps to stimulate housing construction and assist first-home buyers - including taxation concessions for negatively-geared properties and cash grants for those acquiring their first home, demand is also stimulated.
Add to this mix a rapidly-growing population created by favourable immigration policies - some 200,000 new migrants each year, and rising demand is assured. But what about the supply of housing?
If there is a long-term solution to the vexed question of how Sydney can meet the ever-growing demand for housing within its boundaries, it could be found in the words of Chris Johnson, chief executive of Urban Taskforce.
"Over the next 50 years Sydney will double the 1,660,000 existing homes and the best way to do this will be by encouraging urban housing in apartments as an important part of our housing diversity.
"This will lead to a 50:50 city, with half the dwellings in low-rise houses in leafy suburbia and the other half in mid and high-rise apartment buildings in bustling cosmopolitan urban areas."
Median price to top $1 million
If the brakes aren't applied and house prices keep growing, research conducted by respected economics analyst BIS Shrapnel indicates the median Sydney house price could rise to above $1 million within the next two years.
An AAP release in The Australian said: "Sydney house prices have grown by almost 14 per cent in the year to February, according to Australian Bureau of Statistics (ABS) data, and BIS Shrapnel expects annual growth of 13 per cent for the 2014/15 financial year, which could take the median price just past $1 million."
Realistically, the one factor most likely to eventually affect investors' demand for mortgage finance and take some of the heat out of property prices will be declining rates of rental returns in Sydney.
When rental yields decline, investors receive a lower return on their investment and must place a higher importance on the possibility of capital gains when the property is sold.
ABS figures show that rental yields are softening across Sydney, but as yet this seems to have had  little or no effect on the strength of the current property market. Even the NSW election is being overshadowed by activity in the real estate sector.
Sydney auctioneer  Matthew Shalhoub, principal of Under the Hammer, told Domain that the election would have no effects on the auction market that day which he predicted would be one of the biggest of his career.
"Given there [is] such a shortage of properties available, anyone who may be distracted by the election is definitely being covered by the people who aren't," he said.
"The real estate market overall seems to be making more headlines than the election at the moment."
'Rates keep house prices growing,' AAP release in The Australian, 17 March 2015
'We need more houses, not super-sized bandaids', Alan Kohler, ABC Opinion, 12 March 2015
'Aussie John wants ban on interest-only home loans,' Shaun Drummond, Sydney Morning Herald, 17 March 2015
MyRP Data Property Pulse, Cameron Kusher, 12 February 2015
'City of two halves: how Sydneysiders will split into house or apartment living', Chris Johnson, Sydney Morning Herald, 5 February 2015
'Bumper week of Sydney auctions pushes national auction clearance rate to six-year high,' Aidan Devine, Daily Telegraph, 16 March 2015
'House price metrics headed to new highs: Barclays', Mark Mulligan, Sydney Morning Herald, 2 March 2015
'Joe Hockey and Luke Foley's help for first-time home buyers is a con', Ross Gittins, Sydney Morning Herald, 11 March 2015
'First home buyers think it's super, but is it?', Stephen Nicholls, Domain, 10 March 2015
'Buyers' enthusiasm for Sydney property still at boom-time levels', Andrew Wilson, Domain, 9 March 2015
'David Murray says it's time to tackle superannuation concessions for rich',  Nassim Khadem, Business Day, 18 February 2015
'Sydney property predictions for 2015: boom times continue', Carolyn Boyd, Domain, 2 March 2015

Interest rate cuts and Sydney property

Tue, 17 Feb 2015
A month can be a long time in politics, as recent events in Canberra have amply demonstrated, but it can also be a long time in the usually more stable world of economics.
The Reserve Bank surprised most financial analysts and economists by bringing forward an anticipated March reduction in the cash rate and announcing a 0.25 percentage point cut at its February meeting - to a record low of 2.25 per cent and with at least one more cut likely to follow.
Was the rate cut really needed? RBA Governor Glenn Stevens, addressing the House of Representatives Economics Committee in Sydney, gave a downbeat assessment of Australia's economic fortunes, and admitted the RBA's ability to encourage economic growth had diminished.
"The board is ... very conscious of the possibility that monetary policy's power to summon up additional growth in demand could, at these levels of interest rates, be less than it was in the past," he said.
The RBA said in its February statement: "A decade ago, when there was, it seems, an underlying latent desire among households to borrow and spend, it was perhaps easier for a reduction in interest rates to spark additional demand in the economy.
"The bank is working with other regulators to assess and contain economic risks that may arise from the housing market."
In a 'Business Day' article, banking reporter Clancy Yeates pointed out that the rapid surge in housing prices hadn't resulted in Australians going on a spending spree as they used to.
"Despite a sustained boom in Sydney prices... there's growing evidence to suggest consumers aren't reacting as the central bank had expected."
He said the 'wealth effect' was a well-established concept among economists and in previous years there had been a correlation between the property market and household spending.
However, the reality is that households this time around won't be increasing their debt levels to fund shopping excursions and as a result there'll be no stimulation of economic activity.
"The reason for this is simple: consumers remain deeply reluctant to take on debt to fund their shopping habits, no how much the housing market boosts their paper wealth."
RBA to monitor housing market
The RBA said in its statement that it would be monitoring the housing market and warned that "an increase in leverage or a decline in lending standards could pose some risk to macroeconomic stability."
"Given the large increases in housing prices in some regions and ongoing strength in lending to investors in housing assets, housing market developments will need to be watched carefully," the RBA said.
"The bank is working with other regulators to assess and contain economic risks that may arise from the housing market."
Peter Martin, economics editor of The Age, noted that the latest unemployment figures showed a rate of 6.4 per cent, the worst for 13 years.
"It's a reminder that nothing much has emerged to drive the economy since the mining construction boom ended; nothing much apart from home building."
He said that half of all new housing loans were being taken out by investors: "The housing construction industry is working full bore in parts of the country and any further borrowing spurred by further interest rate cuts is likely to be diverted into pushing up house prices."
The interest rate cut has "added fuel to what is already a raging fire" according to the Domain Group's senior economist Dr Andrew Wilson, commenting on the incredible 82.4 per cent auction clearance rate the first weekend in February.
He described the Sydney housing market as being  "in hyperdrive while the rest of the country is in second gear".
Dr Wilson said sales figures in the December quarter showed that the boom is back: "The median house price increased 4.1 per cent – that's the strongest increase of any of the quarters of the year."
He noted that across Sydney most of the house price growth was in the $1 million to $2 million price range, although prestige prices had grown about 10 per cent over the year.
Dr Wilson said that the median house price for Sydney is now $873,786 and predicted price growth of between 7 and 10 per cent for 2015.
Westpac chief economist Bill Evans said the RBA's interest rate cut had boosted consumer confidence towards buying a house.
"The index tracking views on ‘time to buy a dwelling’ jumped by 9.7 per cent to reach its highest level since February 2014. Similarly, the index of house price expectations jumped by 6.9 per cent to reach its highest level since September 2014.”
Mr Evans said Westpac expects a second rate cut soon: “The most important point is that February is not the end of this rate cut cycle with another cut extremely likely over the next three months.”
A risky strategy?
Ross Gittins, The Sydney Morning Herald's economics editor, called the rate cut a 'risky strategy' and said the RBA could be more worried about the economy than it indicated in its growth forecast.
"The Reserve worries that business investment isn't recovering fast enough. So, despite having already cut the official interest rate from its peak of 4.75 per cent in late 2011, it decided to take off another click or two."
Mr Gittins said he doubted the cost of borrowing was preventing businesses from expanding: "More likely, they don't see any great scope for making a bigger buck, and they're not in any mood to try their luck."
He said the risk in the RBA's strategy was that it would increase borrowing for the purchase of existing residential properties and drive up house prices even further than their present high levels.
Other economists have also warned the Bank's decision  could lead to Australia's already-hot investment property market getting hotter, with investor housing loans as a proportion of all loans surging to 41 per cent in December.
"Investor lending has been charging and [this] data is likely to pique the interest of the Australian Prudential Regulation Authority and the RBA, with investor credit growth already running near the 'trigger point' of 10 per cent investor portfolio lending growth," ANZ senior economist David Cannington told clients.
The figures also attracted comment from Commonwealth Bank economist Michael Workman who said: "Investors are borrowing $12.6 billion per month, compared to $18.6 billion for owner?occupiers. Stripping out the refinancing brings the owner?occupiers back to $12.3 billion per month, just below investors."
CoreLogic RP Data's research director Tim Lawless said that the effects of the rate cut could be limited by a lack of confidence in the economy, already high prices and by the prospect of stricter lending limits being imposed on banks by the Australian Prudential Regulation Authority (APRA).
"The key obstacles in the marketplace will be affordability - we're already seeing Sydney median house price up around $850,000 - yields are very low, and I think a big part of demand in the marketplace at the moment is demand from investors and we've already seen some direction action from APRA ... limiting investor lending to no more than 10 per cent a year," Mr Lawless concluded.
Heading into uncharted waters
John Edwards, founder of Residex Pty Ltd, had no doubts the rate cut was premature.
"Affordability calculations indicate that it now takes about 56.9 per cent of the median family’s weekly income to meet their mortgage commitments and leaves them with a very small $734 per week to live on and pay for the necessities in life."
Mr Edwards issued a warning: "We have passed the top of a normal growth period and we are about to have the market stimulated and have further growth. That growth is taking us into uncharted waters where affordability will be potentially worse than we have previously seen."
Regardless of its merits or otherwise, the RBA's rate cut is now a part of history and it will be some time before its impacts can be analysed.
Housing Industry Association economist Diwa Hopkins said the rate cut would help support a strong level of activity, adding that after two years of high growth we could expect some easing.
HIA expects 2015 sales to remain strong, with end-of-year residential building approvals indicating increased construction in the first half of the year.
Propell National Valuers 'Residential Market Report' forecast a 10 per cent growth rate for Sydney property in 2015 saying: " Sydney remains the strongest residential
market, and though the pace of growth is easing it still in excess of one per cent per month.
"Foreign investors are particularly active in inner city apartment developments, and in upper end housing in quality suburbs."
And as it turns out, there are even more first-home buyers than we thought. The Australian Bureau of Statistics (ABS) found that for the past couple of years its figures showing how many people have been buying their first home were about 20 per cent lower than the actual number.
ABS made the announcement after it found some lenders had not reported figures for first home buyers who did not receive first homeowner grants.
Jacky Hodges from ABS explained: “Initially we thought the fall off in first homebuyer loans over the last two years was due to reduced affordability arising from changes in grants, rising house prices, increased investment housing loan activity and general economic conditions.
“However, subsequent analysis and follow-up with lenders has confirmed that the drop was partly due to under-reporting by some lenders” she said.
Even with a correction the national proportion of first-home buyers remains at a near-record low of 14.5 per cent, with Sydney's figure still lower at just 7.1 per cent.
"What goes up...', Matt Wade, Sydney Morning Herald, 14 February 2015
'Why the RBA Should Have Left Interest Rates On Hold,' John Edwards, Residex January Property Market Update
'RBA revises 2015 growth forecasts, will watch housing 'carefully,' Jonathan Shapiro, SMH Business, 6 February 2015
'Rate cut bolsters consumer sentiment,'  Mitchell Neems, AAP in The Australian, 11 February 2015
'Residential Market Report', Propell National Valuers, January 2015
'HIA upbeat despite dip in new home sales,'  Kylar Loussikian,  The Australian, 5 February 2015
'Australians won't spend their housing wealth,' Clancy Yeates, Business Day, 11 February 2015
'Worried Reserve Bank officials opt for risky strategy,' Ross Gittins, Business Day, 9 February 2015
'Unemployment hits 6.4 per cent. Will Joe Hockey do a Wayne Swan?,' Peter Martin, The Age, 12 February 2015
'Back to boom: Sydney house prices jumped 14 per cent in 2014,' Stephen Nicholls, Domain, 29 January 2015
'Bubble warning as house prices jump again,' James Glynn, Dow Jones in The Australian, 10 February 2015
'Melbourne and Sydney property developers face very different problems,' Robert Gottliebsen, Business Spectator, 4 February 2015
'Investors embrace rate cut at Sydney auctions', Antony Lawes, Domain, 7 February 2015
'First home buyers surge 20 per cent, and the reason may cause a #facepalm,' news.com.au, 4 February 2015
'Home price gains continue in early 2015,' business reporter Michael Janda, ABC News online, 2 February 2015
'Investment housing loans soar, and set to rise further after Reserve Bank's rate cut', Gareth Hutchens and Clancy Yeates, Sydney Morning Herald, 12 February 2015
'Mortgage owners benefit from RBA interest rate cut and low petrol prices,' Lisa Visentin and Lucy Battersby, Business Day, 4 February 2015
'RBA's ability to influence interest rates has diminished, Glenn Stevens concedes ,' Gareth Hutchens, 13 February 2015

A different year for Sydney property in 2015

Tue, 20 Jan 2015
Just because a new year is underway doesn't mean everything in the Sydney property market starts all over again.
Much of what's going to happen in the next twelve months will simply be a continuation of what took place in 2014, although there are some new factors in play which will in all probability make 2015 a somewhat different year from its predecessor.
Peter Kouilzos is an Australian lecturer and author who specialises in property valuation and economics.  Writing for realestate.com.au Mr Kouilzos looked over 2014 and summarised last year's outcomes.
He noted that at the beginning of the year Sydney had 22 per cent fewer properties for sale than 12 months previously, and prices had nowhere to go but upwards.
"There was not as much property for sale so there were relatively high numbers of prospective purchasers at your home opens and auctions. During the year, the time to sell a house in Sydney fell from 29 days to 26 days."
There was a bit of bad news for some property owners, according to Mr Kouilzos: "Gross rental yields fell as rents did not increase by as much as property prices."
But by any standards 2014 was a boomer of a year for just about everyone who owns property in the greater Sydney area.  Which brings us up to 2015.
The year is already taking shape and there is every reason to expect that it will be another good year for property investors - a description that includes homeowners who've found their home to be one of the best long-term investments they could have made.
Those who purchased Sydney property early in 2014 would certainly have enjoyed the increase of 13.2 per cent that they experienced by the end of the year. 
Rate cuts likely
SQM Research managing director Louis Christopher told  news.com.au that he expected 2015 to be another positive year for residential property owners: “Basically the money markets think it’s a dead certainty rates are going to be cut by April 2015, with the chances increasing of another rate cut in June.
“If such rates cuts happen, housing markets will be boosted throughout the course of the calendar year,” he said.
This boost will be moderated somewhat by an increase in the supply of new housing that will gradually come on stream during the year. CommSec chief economist Craig James said this will lead to softer price growth, but a major slump was not expected.
“Sydney home prices have just been playing catch-up. Over the last decade Sydney home prices have risen by just 3.6 per cent on average per year, the second lowest of the capital cities,” he said.
CoreLogic RP Data head of research Tim Lawless said he expected Sydney's price growth to soften in 2015, while the firm's senior research analyst, Cameron Kusher, also suggested that peak value growth has now passed.
"We would anticipate that the rate of growth will continue to slow through 2015 despite the low interest rate environment," he said.
Investor activity too will slow down in 2015 due to decreasing rental yields and what Mr Kusher calls "the likelihood of tougher lending criteria to investment buyers".
Dwelling values will continue to rise, but not at the same rate that made price growth so spectacular in 2014, with detached homes in Sydney likely to show a greater percentage of increase than units.
And unlike the previous year in which it seemed nothing in the economic world could affect the Sydney property market, 2015 will see a number of factors in play that will potentially have an impact on what has, until now, been a seemingly unstoppable rate of upwards growth.
Some changes ahead
Data from research house Investment Trends found that the percentage of investors who expected the official cash rate to fall skyrocketed from 4 per cent in August 2014 to 30 per cent in December.
"This is partly driven by the expectation of external shocks, such as falling commodity prices and a Chinese slowdown, having a negative impact on our economy," Investment Trends research analyst Recep Peker told Business Day's Ruth Liew.
"The December edition of our monthly Investor Intentions Index found a sharp deterioration in investors' outlook for the Australian economy."
The research also found that investors' lower confidence in Australia's economic outlook has had a negative impact on their intention to acquire bricks-and-mortar assets.
Investment Trends said the proportion of active investors who planned to increase their exposure to investment property in the next month (3 per cent) was the lowest since October 2011.
One reason for the decrease in confidence is that our currency has gone from being globally sought-after to become much like former PM Paul Keating's famed 'Pacific Peso', and this is going to make almost everything we buy, from overseas travel to electrical appliances, cost more.
Of course we can be confident that interest rates will remain low, which is a factor that supports housing price growth, and oil prices are unlikely to rise which will also reduce pressures on the average Aussie's cost of living.
But wages growth has slowed and is hardly sufficient to offset inflation. In many sectors wages are actually going backwards. Despite the often-expressed claim that this will encourage employers to add more workers to their payrolls, rising unemployment suggests that this belief is somewhat flawed.
Housing supply is starting to rise. Over the next 12 to 18 months a record supply of stock will begin to enter the market, predictably leading to a reduced growth of home prices and lower increases in rental rates.
Writing in the Daily Telegraph, Aidan Devine says Sydney's recent home price boom is about to reach its conclusion.
"CPM Realty research has predicted total price growth of between 5 and 7 per cent over the year, echoing earlier BIS Shrapnel and CommSec forecasts of up to 7 per cent growth — a slowdown from the 12.4 per cent spike to the median house price over 2014."
He quotes CPM managing director Sam Elbanna who said: “Supply will remain restricted, particularly in affordable suburbs with excellent public transport facilities. These areas are being rezoned to allow for higher densities, but local councils are painfully slow in the approval process.
“Coupled with high construction costs this will act as a disincentive for developers to commence new construction,” Mr Elbanna said.
Mr Devine also quoted BIS Shrapnel researcher Angie Zigomanis who said strong activity over the first half of 2015 would drive further price growth, but the market will lose momentum as the year draws to a close
“There is still demand for property, but it is gradually working its way through the market and low rental yields are encouraging investors to look at properties outside Sydney,” Mr Zigomanis said.
On the positive side of the equation, an article in the Australian Financial Review says that, according to forecasts from real estate firm Knight Frank,  only two of the eight global cities they monitor will show price gains in 2015 - New York and Sydney.
Knight Frank says the strength of these two markets is the result of the appetite for real estate from foreign buyers and the relative ease of acquiring property.
Knight Frank’s global head of research, Liam Bailey, said: “We expect Sydney to be one of the strongest­performing luxury residential markets in 2015. Rising business confidence and an increasing sense of political stability is helping to attract interest from overseas.
“The weak Australian dollar is adding to this momentum and also reviving interest from Australian expats.
“Low interest rates are forecast to remain steady with no change expected until mid to late 2015 and banks are keen to lend at competitive rates,” Mr Bailey said.
Sydney property retains its attraction for both domestic and overseas investors and there's no doubt value growth will continue to happen, especially in the first half of  2015. Last year's record-breaking rates of price increases however are not likely to be repeated in the twelve months ahead.
'2014: the year in property,' Peter Kouilzos, Realestate.com.au, 19 December 2014
'Aussie landlords swallow losses to bet on price gains,' Bloomberg in Business Day, 12 January 2015
'Sydney's summer property sales leave lawyers stranded at the office,' Anna Anderson, Domain, 12 January 2015
'Property prices: What to expect from real estate in 2015,' News.com.au, 25 December 2014
'Capital city home values rise by 7.9% in 2014,' CoreLogic RP Data Home Value Index Release, 2 January 2015
'Commsec: property to “slip” in 2015,', Posted by Chris Becker in Australian Property,  7 January 7, 2015
'2014 is Sydney's biggest auction year on record,' Sue Williams, Sydney Morning Herald, 21 December 2014
'A consumer guide to the Australian economy in 2015,' Gareth Hutchens, SMH Online, 10 January 2015
'Get used to low rates - they're here to stay,' Alan Kohler, ABC Online, 11 December 2014
'Sydney property boom to start receding by end of the year, analysts say,'  Aidan Devine,  The Daily Telegraph, 10 January 2015
'New York, Sydney best for property investors in 2015,' Larry Schlesinger, Australian Financial Review, 5 January 2015
'Growing number expect Reserve Bank of Australia to cut interest rates,' Ruth Liew, Business Day, 8 January 2015

Sydney property - a bit less of the same in 2015

Thu, 18 Dec 2014

At its December board meeting the Reserve Bank again left official interest rates on hold at their present historic low of 2.5 per cent. That makes 16 months that the cash rate has been left unchanged. In case you didn't recall the date, the last time it moved was in August 2013.
The minutes from the RBA's board meeting show that the bank remains committed to "a period of stability in interest rates", also acknowledging there were factors creating "market expectations [that] implied some chance of an easing of policy during 2015."
As growth in the housing sector has been shown signs of slowing recently, economists are now talking of a potential rate cut in early 2015.
First cab off the rank was Deutsche Bank chief economist Adam Boyton who said the RBA will cut the cash rate to a new low of 2.25 per cent toward the end of the June quarter before reducing it to two per cent later in the year.
Mr Boyton explained: “Are things going to get better over the next year or two than they have been over the past year or two? We don’t think so,” he told AAP.
“It’s just that combination of some early signs of cooling in house price growth, weaker commodity prices over the past few months, combined with our expectation that the unemployment rate will rise to close to seven per cent next year," he added.
Westpac's chief economist, Bill Evans became the first of the big four banks' economists to predict cuts in the cash rate in February and March 2015, citing comments by RBA Governor Glenn Stevens indicating the bank would lower its growth forecasts in February.
"At this stage we are comfortable to retain our recent call for two cuts in February and March while recognising that the exact timing has had a significant jolt from the Governor’s interview," said Mr Evans.
"Like the Governor we will 'take a fresh look at all these things in the new year' while maintaining that the appropriate policy is to cut rates early in that new year."
The National Australia Bank came in a close second to Westpac after its monthly business survey revealed more downbeat findings that supported two rate cuts in 2015, causing NAB to lower its growth outlook and increase its peak unemployment forecast.
A feast of findings
Interestingly, the Paris-based Organisation for Economic Cooperation and Development (OECD) says that Australia should raise its interest rates no later than the second quarter of 2015 to dampen demand for credit.
In its half-yearly economic outlook, the OECD said the low rate-driven, investor-led rise in housing credit was a serious risk to financial and economic stability.
"House price increases are encouraging construction and consumption, but are also a concern in that a sharp reversal could cut aggregate demand," the organisation warned. Not that the Reserve Bank seems overly concerned about the OECD's opinion.
If you're wondering whether there's really a problem, the RBA recently published its findings on who is at most risk of falling more than 90 days behind on their mortgage.
The Reserve concluded that the size of the debt makes a big difference, and especially the proportion of the property purchase funded with borrowed money.
Those who take out a loan with an LVR (loan to valuation ratio) of 90 per cent or more have a likelihood of missing a payment three and a half times greater than for those with a loan having an LVR of 60 per cent or less, and almost twice as great as for loans with LVRs from 80 per cent to 90 per cent.
The Australian Securities and Investment Commission has announced that it will investigate interest-only loans, which ASIC says make borrowers highly sensitive to movements in interest rates.
ASIC's alarm bells started ringing when interest-only loans as a percentage of new housing loan approvals by banks reached a new high of 42.5 per cent in the September quarter.
"While house prices have been experiencing growth in many parts of Australia, it remains critical that lenders are not putting consumers into unsuitable loans that could see them end up with unsustainable levels of debt," ASIC deputy chairman Peter Kell said.
The investigation will probe both banks and non-bank lenders and look into the possibility that lending practices are encouraging high-risk loans,  particularly in Sydney and Melbourne where house prices are the highest of Australia's capital cities.
ASIC said it is working with the Australian Prudential Regulation Authority (APRA), the Reserve Bank of Australia and the Treasury to "monitor, assess and respond to risks in the housing market."
The RBA has also noticed the growth in borrowing by investors, saying in the minutes of its December meeting: "Credit to owner-occupiers was growing at a pace only a little above that of income, but...growth in credit to investors was considerably higher."
APRA has launched its own attack on what it calls "risky lending practices," saying that the current high levels of investment and interest-only property loans threaten the stability of the financial system. 
The Authority has independently written to all the banks, requesting them to advise APRA of their plans to support sound residential mortgage lending practices.
As yet it's unclear what, if any action our regulatory agencies might take if they conclude that lending practices have become too risky for borrowers.
The Australian Bankers' Association says it isn't overly concerned: "Lending into housing markets has been a regulatory focus for some time and we are confident that banks have been maintaining appropriate lending standards," said ABA's chief executive Steven Münchenberg.
The recent enquiry into Australia's financial system chaired by former CBA head David Murray released its report to the Commonwealth Government saying that borrowings by DIY super funds should be banned and tax concessions related to negative gearing and capital gains on housing should be removed. 
These 'solutions' are easy enough to recommend but any government tinkering with negative gearing, capital gains on sales of the family home and people's superannuation funds would create its own political risks and is not likely to happen just now when the federal government is already dealing with a bagful of its own financial and political problems.
Price rise trend to continue
Even if some sort of regulatory brakes are applied to certain sectors of the mortgage lending market, little can be done to arrest the continuing upwards trend of property prices, especially in Sydney.
Most real estate analysts feel certain that even if  the rate of home price growth slows from its heights of this year, growth will continue well into 2015.
Dr Andrew Wilson, Senior Economist for Australian Property Monitors, says that  affordability barriers are starting to slow price growth because incomes aren't rising enough to sustain current high levels.
"But overall the Sydney market will be healthy," says Dr Wilson. "NSW has the strongest economy, unemployment is low, there's plenty of confidence around and we won't be seeing interest rates changing any time soon, while there could even be a cut towards the middle of next year."
Another analyst predicting growth in 2015 is Tim Lawless, head of research for CoreLogic RP Data: "In late January and early February when the marketplace becomes active again after the break, my guess is that the market will still be very strong, but not as strong as the finish of this year.
"Confidence will still be high, but there is a disconnect between the exuberance of strong prices and the feeling that the marketplace is overheated," he added.
There's no doubt that investor activity will continue at high levels in 2015 even though rents aren't keeping pace with the recent rapid rate of increase in Sydney property prices.
Numerous apartment projects are already underway across the city while the NSW Government's designated high-growth areas - 'urban activation precincts' (also known as "priority precincts") with high-rise towers in the planning mix are yet to get off the ground.
The Baird government's 'Plan for Growing Sydney' intends to cope with an increase in Sydney's population of 1.6 million by 2031. To do this it will include even greater concentrations of development around transport corridors which are bound to stimulate opposition from many quarters.
Nevertheless, it is certain that Australians' love affair with property will continue for some time, fed by the release of new developments throughout the next few years. And for properties not snapped up by local investors, there are investors overseas who are quite willing to put their money into offerings in Sydney, often sight-unseen.
Earlier this year the federal Treasurer asked the House Economics Committee to investigate just how effective are the rules around foreign residential real estate investment.
Six public hearings and 92 submissions later, the committee made 12 recommendations to strengthen the current rules, which limit overseas resident non-citizens to buying newly built, rather than established, properties.
In response to a proposed $1,500 fee for overseas residents purchasing property, the Housing Industry Association's chief economist Harley Dale said foreign investment has been important for boosting residential construction and a modest fee is unlikely to significantly reduce overseas interest.
"It's unlikely to materially have an impact on the demand for new housing, and nor would you want it to, because that new housing is playing a very important role in growing the broader domestic economy," he said.
So, what can we expect to happen in the year ahead? There are clear indications that interest rates will remain low and may fall even further in early 2015. The present taxation rules applying to negative gearing and borrowings by SMSF investors are likely to remain unchanged while the government fights other battles already underway.
Despite concerns about risky borrowing, a slowing economy, housing affordability, taxation treatment of real estate and rising unemployment, 2014 will flow seamlessly into 2015  for Sydney property.
Prices of Sydney real estate, particularly in areas within a half-hour commute of the CBD, will continue to rise, and vendors who place realistic prices on their properties will be pleased with the results they achieve.
'Reserve Bank keeps interest rates on a steady course,' Michael Janda, ABC News online, 16 December 2014
'RBA says could cut rates more, but OECD warns of housing risks,' Michael Janda, ABC News, 26 November 2014
'Consumer confidence plunges to 3-year low,' Mark Mulligan, Business Day, 10 December 2014
'Financial regulators united in attack on risky loans,' Georgia Wilkins and Nassim Khadem, Sydney Morning Herald, 10 December 2014
'Property prices to go up again in 2015,' Sue Williams, Domain, 9 December 2014
'What Murray means for you and your wealth,' David Potts, Sydney Morning Herald, 10 December 2014
'RBA leaves interest rates on hold at 2.5 per cent.' News Corp Australia, 2 December 2014
'Auction market at lowest point in almost two years,' Andrew Wilson - Senior economist, Domain Group, 1 December 2014
'Foreign buyers just part of housing affordability,' Sydney Morning Herald editorial, 1 December 2014
'Foreign buyer rule enforcement needs strengthening: committee,' ABC News, business reporter Michael Janda, 27 November 2014
'Size matters when it comes to defaulting,' Clancy Yeates, Sydney Morning Herald, 10 December 2014

Higher prices are in the stars for Sydney property

Tue, 18 Nov 2014
Christmas isn't far off and if history is any kind of guide we should be expecting some of the heat to go out of the Sydney property market.
To get an idea of just how frenetic is the present level of activity, the Sydney Morning Herald's website on 10 November featured a link to an article that read: "Auctions Clearance rate plummets".
The article related how the auction clearance rate the previous weekend had slipped to 'just' 75.5 per cent, although it did note that 943 homes were listed to go under the hammer at that weekend, compared to 883 the weekend before.
That’s not really much of a ‘plummet’, so there’s still room for a little more slowing of the Sydney market’s current pace if that’s what happens, but don’t be surprised if prices continue their upward trajectory even after they rose 2.7 per cent in the September quarter.
Buyers are active in all segments of the market. Figures from the Australian Bureau of Statistics (ABS) show that established houses with prices of between $500,000 and $2.2 million contributed most to the September quarter rise, while attached dwellings (units and row houses) with prices of between $550,000 and $650,000 rose the most in their category.
Andrew Wilson, senior economist for the Domain Group, isn’t anticipating a slowdown leading into the holiday season: “Auction activity will continue to rise over the next five weekends with buyers increasingly spoilt for choice and sellers looking for a result before Christmas.”
Analyst Louis Christopher from SQM Research said buyers were desperate to buy homes due to years of underbuilding: “It’s hard to see the market peaking just yet. Prices are going to keep increasing.”
John McGrath, CEO of McGrath Estate Agents, believes values will rise between 5 and 10 per cent by next August: “Right now we’re seeing a catch-up from the GFC period ... there will be single-digit [growth] for the next couple of years.”
And Raine & Horne chairman Angus Raine told the Daily Telegraph’s Aidan Devine that this spring would beat the record-breaking 2013 selling season: “There was a solid spring market in 2013 and many tipped a repeat performance in 2014 to be difficult, but the market has maintained the 2013 rage and it’s fair to expect the run to Christmas 2014 to be even better,” he said.
But it just wouldn’t be Christmas without a Grinch, and a Sydney Morning Herald editorial on 8 November raised the prospect that the Reserve Bank of Australia (RBA) might take some sort of action to spoil the party.
“The Reserve Bank of Australia has a salutary message for irrationally obsessed property investors and overstretching buyers this weekend: the good times are not quite as good as they were and, indeed, they are unlikely to last forever,” the editorial said.
It quoted Wayne Byres, chairman of the Australia Prudential Regulation Authority, who said that although housing lending had historically demonstrated a low-risk profile, APRA has of late been seeing what it called “increasing evidence of residential mortgage lending with higher risk characteristics’’.
It also quoted the chief executive of ANZ Bank’s Australian operations, Phil Chronican, who said some investors viewed buying property as a ‘‘one-way bet’’ and ‘‘There is a bit of an irrational obsession with housing as an investment class. For many investors, they would be better off in assets other than housing.’’
Paul Bloxham, the chief economist, Australia and New Zealand at HSBC Bank Australia Limited, told Jonathan Chancellor that Sydney’s already reached the point of danger: "Although national housing price growth of 10 per cent a year should not be unexpected for now, persistent double-digit growth would be a worry and 15 per cent annual price growth in Sydney is already concerning."
Mr Bloxham also said the RBA is concerned that a speculative element has begun to drive the housing market: "The RBA still sees the risks to financial stability from current trends as low, given that investors tend to be higher-income households with larger mortgage deposits.
"But increased investor involvement could lead to a larger rise in housing prices, which could see a bigger fall some time down the track, exacerbating the economic cycle."
While it is reasonable to say that the present low interest rates could encourage some investors to take on more risk than they should in the quest for higher returns, there’s no clear answer as to what the RBA or indeed any government might do about it.
State governments are enjoying the growth in stamp duty revenues from increased numbers of property sales and the Commonwealth is happy to have the housing industry boom take up some of the economic slack from a slowing mining industry.
The Federal Government could, if it wanted, tackle the perceived problem of speculative borrowing by doing away with negative gearing or preventing superannuation funds from borrowing to finance property purchases.  However, politicians of both major parties have no desire to face the resulting political backlash from such unpopular moves.
Besides, even if the Federal Government could find a way to slow the Sydney market’s prices growth, is it really necessary?
RP Data CoreLogic research director Tim Lawless told News.com that although the property market is still strong it is beginning to slow:  “Values are far from going backwards, they are still moving ahead quite quickly, it just looks like we have moved through the peak of the growth cycle,’’ Mr Lawless said.
He added a few more details in an interview with ABC News Online’s Michael Janda, saying: “We'll probably start to see a slowdown in investor demand - not just due to the macroprudential rules, but also due to the fact that yields are being quite severely compressed across the largest capital cities due to the fact that values are rising at such a rapid rate compared to rents."
RP Data's senior research analyst Cameron Kusher told BusinessDay that he expected prices to moderate in the coming months but only an increase in interest rates or some sort of controls on bank lending to property investors could cause any rapid slowdown in growth.
He also warned that falling real incomes and climbing dwelling prices would make affordability a key issue: "At some point, people just aren't going to be able to pay the prices of those homes that are available for sale."
In other words, there are natural forces in the marketplace that can achieve the very same outcomes that the government doesn’t have the backbone to create.
It’s also hard to work out exactly when any bureaucratic action should be taken. It was, after all the same Mr Kusher who, a little less than two years ago in January 2013, declared that the days of dramatic property price increases had come to an end.
“It is clear that the previous strong value growth conditions to which many home owners became accustomed of recent years are well and truly behind us,” he said.
But then, way back in 1997 Glenn Stevens, the RBA’s assistant governor (and now Governor) said: “It would be unusual, in our view, were strong rises [in house prices] to persist over a long period or become widespread.”
Well, strong value growth conditions are not behind us; they’re very much with us at present. And there’s nothing unusual about widespread strong price rises persisting as they have for the past twenty months.
As we anticipate the future there are those who say that price rises in Sydney property are in the stars. Astrologer Elizabeth Ball told The Australian newspaper in late 2012 that the property market is dominated by two planets - Jupiter and Saturn.
“A favourable aspect of the two planets will help the market rise at a sustainable rate”, she predicted.
“Jupiter, which rules expansion, hope, confidence and optimism, enters Cancer, which rules home and family, on June 27, 2013, through July 17, 2014, making the property market boom again.”
She surely got that right!
‘Reserve Bank's Christopher Kent warns of mining investment slump next year,’ Michael Janda, ABC News, 13 November 2014
‘Housing bubble debate: has a flood of foreign money lifted home prices?,’ Michael Janda, ABC News, 6 November 2014
‘Housing bubble debate: Dwelling shortage may not be as bad as believed,’ Michael Janda, ABC News, 4 November 2014
‘Sydney, Melbourne propping up slowing housing market,’ Mark Mulligan, Sydney Morning Herald, 3 November 2014
‘Home price surge continues in Sydney, other cities subdued,’ Michael Janda, ABC News Online, 2 November 2014
‘Property values continue to rise although the rate of increase has slowed,’ News.com.au, 3 November 2014
‘Property buying all in the stars for 2013, says astrologer’, by Elizabeth Ball, News Limited Network, 30 December 2012
‘Capital city property prices up slightly in October,’ Jean-Paul Pelosi, CBA MyWealth News, 3 November 2014
‘Sydney property investors the key to the three big issues for the RBA: Paul Bloxham,’ Jonathan Chancellor, Property Observer, 4 November 2014
‘Property price growth slowing: RP Data,’ Kylar Loussikian, The Australian, 3 November 2014
‘Analysts say Sydney property prices have plenty of room to grow more as Super Saturday of auctions kicks off ,’ Aidan Devine, The Daily Telegraph, 27 September 2014

Sydney property up, sharemarket down

Thu, 23 Oct 2014

Many investors in the sharemarket must be wondering what's happened to their savings. In recent weeks there's been a selloff with the market losing over 9 per cent of its value, and there are fears of worse to come.
Investment advisors generally provide the same advice about property and shares: both should be seen as long-term investments. Shares, however, can be bought and sold much quicker than property and, as a result, are more susceptible to emotional trading.
There are a number of global economic concerns at the moment that are partly to blame for this sudden decline. A falling Australian dollar, lower commodity prices, and a slowing recovery in European economies are all elements in the mix.
Also impacting on consumer confidence are such intangibles as conflicts in the Middle East and the possible spread of the Ebola virus from Africa to other parts of the world.
The media may be having an easy time filling their pages with tales of woe, but it's worth noting that fundamentally not much has changed. The economies of the US and China continue to perform well, while the price of oil - a key element in the cost of living, has dropped as world demand decreases.
Meanwhile, the housing market continues to tick along without disruption, following the inevitable laws of supply and demand as it always does.  For so long, across Australia housing supply has not kept pace with demand and the result has been rising prices.
Sydney weekend auctions have seen record-breaking  results in August and September, with the trend results continuing into October. Clearance rates remain around the 80 per cent level despite high numbers of properties on offer at each auction.
One consequence of the prevailing economic negativity is that the Reserve Bank of Australia is now less likely to raise interest rates in the next twelve months, aware that any increase could further threaten Australia's economic growth.
It's also less likely that the RBA will be reacting to the surge in housing prices, despite earlier worries about the level of housing investor loans and a feeling the Bank would do something to increase capital requirements in this lending sector.
However, the head of the RBA's financial stability department, Dr Luci Ellis, recently indicated in a speech at a conference on financial stability that the RBA remains concerned about current property prices in Sydney and Melbourne.
She made it clear in her speech that the RBA feels the driver for high property prices is high levels of investment which now account for nearly half of all new home lending: "That share is noticeably higher than rental housing's share of the housing stock, even allowing for a possible faster rate of churn in investor loans. Obviously that can't continue forever," she said.
In recent months the influx of foreign investment funds into the Australian housing market has been the subject of much media attention. The Australian Property Institute conducted a survey in October that found 96 per cent of respondents felt foreign investment was a 'significant driver' of real estate prices.
The construction in Melbourne of the 63-level 633 unit high rise Eq Tower, a project funded by one of China's largest property developers, is the kind of development that makes headlines for several reasons. It will be a massive addition to the Melbourne skyline with a towering height of 202 metres.
Admittedly Australia has long been a tempting target for Chinese real estate developers. The ongoing shortfall in housing supply has been easy to perceive and has finally resulted in increased levels of new construction, particularly in Australia's capital cities.  The strong demand for inner city housing where land is scarce has caused prices within 10km of the Sydney CBD to soar.
But foreigners cannot buy established dwellings in Australia. They can only purchase newly-built properties. The large Asian construction firms can self-finance their Australian developments and don't need to borrow from Australian banks. They build their tower blocks of apartments and sell a high percentage of them to mum-and-dad Chinese investors.
Planners have had to adjust their restrictions to allow sufficient new dwellings to be created by developers, both Australian and international. High-density living is the new norm with 25-storey towers sprouting up from suburbs with rail links across Sydney.
These will put pressure on existing infrastructure including roads, schools and power and water supplies, but at least they're being built after years of inadequate housing supply.
Despite the fact that Sydney housing's unaffordability is higher than ever, the market is still growing strongly although slowing slightly at this time. Rises in unit prices are already showing some signs of decelerating as new developments come onto the market, and the rate of increase in Sydney's rental rates is also slowing.
According to Dr Andrew Wilson, senior economist at the Domain Group, the key factors putting downward pressure on apartment rents are "affordability, as well as the increase in supply from investors as well as the new developer stock coming on to the market."
John Edwards, founder of Residex, says the buyers who make up the market have changed  and are no longer the median income families; those families are becoming renters so they can afford to live in the 'median value' areas of Sydney.
"Buyers of house and land are now second and third time housing buyers, with income levels which are much higher than the median income wage," says Mr Edwards.
"Median income families who are buying are now buying on the city fringes where housing prices are slightly more affordable."
According to figures from the Australian Bureau of Statistics, buyer activity could be about to slow. The ABS numbers for August show that the value of loans approved in NSW for house sales fell by 9.2 per cent while investor finance was down by 7.6 per cent.
The other side of the coin is that NSW is still the market leader with 43.2 per cent of Australia's residential investor finance across the country. In fact, investor finance increased by almost 40 per cent in NSW over the first eight months of 2014 compared to the previous year.
Only the first home buyers seem to be left out of the stampede. First home buyers now account for just 4.3 per cent of all housing sales finance. The average first home buyer loan for NSW fell to $318,400 in August which was down by 4 per cent from the previous month.
There was also a drop of 6.5 per cent in NSW first home buyers to 1,113, although their number increased by 8.8 per cent over the first eight months of 2014 compared to the same period last year.
ABS figures tell us that Sydney's house price growth is slowing. They also tell us that rental returns are slipping as the rise in rental rates fails to keep up with the rise in real estate prices.
It is probable therefore that the rate of prices growth will continue to slowly decline towards the end of the year, leading towards a period of stability or at least more moderate growth than we've seen over the past two years by mid- 2015.
'Flood of China cash to sow the seeds of a hundred towers,' Simon Johanson, The Age, 11 October 2014
'Restrictions on foreign buyers not adequately policed,' Simon Johanson, Business Day, 11-12 October 2014
'Hot Housing barely rates a mention,' Gareth Hutchens, Business Day, 8 October 2014
'Unsettling time for investors,' Daryl Dixon, Money, the Sun-Herald, 19 October 2014
'Don't blame bogeymen,' David Potts, Sydney Morning Herald, 15 October 2014
'10 per cent drop in first home buyers,' Andrew Wilson, Domain, 15 October 2014
'Asking rents fall in desirable inner city suburbs,' Domain, Toby Johnstone, 18 October 2014
'Sellers piling in, but will there be enough buyers?,' Domain, Andrew Wilson, 17 October 2014
' RBA keeps interest rates on hold in October,' Loan Market Media Release, 7 October 2014
'Australia's housing market problems laid bare,' ABC News Online, by business reporter Michael Janda, 10 October 2014
Residex September Property Market Update, John Edwards, 24 September 2014

Springing Into Spring Indeed

Sat, 27 Sep 2014

For those who can remember what life was like fifty years ago, about this time of year the big Sydney retailers like Waltons and Grace Bros. would launch a seasonal advertising campaign with the headline "Swing into Spring" or something similar. It didn't matter whether the goods being sold were women's fashions, transistor radios or outdoor furniture, the advent of Spring heralded the start of the selling season.
It was the same for Sydney real estate. You could get a reasonable home for around $10,000 to $15,000 and this was the time of year people would start looking at what was on offer so they could upgrade their residence, from a unit to a semi-detached cottage or perhaps from a two-bedroom place to something bigger, with maybe three bedrooms and a pool.  
With summer approaching, some even acquired a holiday home at a place that was far enough away to have affordable beach shacks, like Avoca Beach or Umina or Kiama. The places in those locales weren't very fancy but were within a day's drive of the city with the family packed into their Falcon or Holden.
These days things are a bit different. This is the start of what has traditionally been the biggest real estate selling season of the year, yet we've already experienced the strongest winter for property sales since 2007.
Figures from RP Data show that across Australia real estate prices have risen by 4.2 per cent this winter while Sydney's price rise has topped 5 per cent. Unlike fifty years ago, Sydney prices have gone into overdrive well before Spring, achieving a median dwelling price of $650,000.
RP Data's senior research analyst, Cameron Kusher told ABC News online that it's unusual for prices to rise so strongly over winter: "Maybe we'll see similar conditions again this year, but another three per cent growth over the next three months is obviously very strong in light of the fact that we've already had about 28 months of growth in the housing market."
Tim Lawless, RP Data's Head of Research sees even more property price rises ahead, saying on September 1:  "With today marking the first day of Spring, we are expecting listings numbers to rise over the coming month which will provide a real test for the housing market.
"Considering the ongoing high rate of auction clearance rates, a generally rapid rate of sale and the ongoing low interest rate environment, it's likely that dwelling values rise even further over the next three months”.
He also said that improving consumer confidence following the post-budget pullback will "…add fuel to the exuberant buying and selling conditions we have seen during winter".
A competitive Spring
This Spring the market will be active and competitive without a doubt. Rising auction clearance rates do show some signs of a market running hot, but it's been running that way for months. Clearance rates in Sydney for the past twelve months have averaged 74.6 per cent, which is an increase from the 70 per cent in the same period last year. More recently the average has risen above 80 per cent.
Adding strength to expectations of another good Spring selling season are falling interest rates on Australia's international financial debt that has sunk to seven year lows. This translates into reduced interest rates on mortgage loans from Australian banks and lessens any possibility the Reserve Bank of Australia will raise interest rates that are now at a 13-month low.
A Bloomberg survey of 31 economists concluded that the central bank would keep the rate unchanged at 2.5 per cent at its September meeting. The RBA behaved as predicted, saying in its monthly statement: “In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”
There's every reason for the RBA to keep interest rates low and give the housing construction market all the help it needs to replace now-declining levels of investment formerly pumped into the mining industry. Mortgage lending to investors in the 12 months ended July surged 8.9 per cent which was the fastest rate of increase since May 2008.
One effect of the recent steep price increases in Sydney property has been compressed rental yields which make investors focus on capital appreciation rather than rentals to give them returns on their investment returns. But this hasn't dampened buyers' ardour for property in the least, according to John McGrath, CEO of property group McGrath Estate Agents. 
“I believe this market has at least two years left in its growth cycle before we see a plateauing," he said, adding that Sydney’s current rate of growth would moderate to a more sustainable five to ten per cent per annum over the next two years.
There are some economists who are concerned about speculation pushing Sydney prices to unsustainable levels. This concern is understandable when we consider that Sydney home prices are now 20.8 per cent above their previous peak.
In a submission to the financial system inquiry led by former Commonwealth Bank chief David Murray, Standard & Poor's Rating Services warned against channelling more credit into the housing market.
"Greater access to housing credit may put further strong upward pressure on house prices. This would increase the risk of a disorderly correction in property prices down the track, which may hurt economic growth and risk financial instability," it said.
Beware of offshore shocks
Fast-rising real estate prices always bring out the voices of doom.  Standard Life's chief economist Jeremy Lawson, a former RBA senior economist, said Australia's housing market was 20 to 30 per cent overvalued and warned the country is highly vulnerable to any international or domestic shock.
"Overall financial conditions have probably been too loose and that has undermined longer-run financial stability," he said.
He told ‘Business Spectator’ he’s concerned that the high household debt-to-income ratio in Australia leaves the country exposed should there be another economic shock offshore.
How this might happen was outlined by Financial System Inquiry chairman David Murray who said Australia's financial risks are concentrated in real estate. Speaking on ABC TV's ‘The Business’, Mr Murray warned that Australian banks are still very reliant on foreign money to fund home and business lending, and cash could dry up in the event of a global crisis.
Someone else close to the action whose voice really counts - Reserve Bank governor Glenn Stevens, said that our credit growth of six per cent a year is 'modest' and that Australia's household debt levels are sustainable.
However, addressing the Committee for Economic Development of Australia recently, Mr Stevens said the RBA's monetary policy was aimed at stimulating business investment and generating employment.
"It is stating the obvious that at present, while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that."
Not that the RBA would condone making it easier for smaller lenders to pump massive amounts of credit into the housing market. The Bank said recently that it feels the supply of mortgage finance now available is ample: "Therefore, any proposed policies that could further increase that supply should be subject to rigorous analysis of their costs, benefits to consumer and risks to financial stability."
Writing in the Sydney Morning Herald's 'Business Day', Michael Bleby, Mark Mulligan, and Alana Schetzer questioned whether this year prices will be pushed into what they call 'dangerous territory'.
"Concerns about an out-of-control housing market could lead the Reserve Bank to apply the brakes. At the more extreme end, some commentators warn of bubble-type scenarios that end with a housing market collapse", they warned.
They said that competition is so rugged in Sydney that people who have missed out at auction on the properties they wanted have become more aggressive and can be emotionally-driven into paying too much for properties at auction.
They quoted HSBC bank's chief economist for Australia and New Zealand, Paul Bloxham, who said: "I don't think we have a housing bubble overall, but there's some froth in the Sydney market and some of the potential house purchasers need to be wary."
He cited figures showing that in July, investors accounted for 44 per cent of all new housing loan approvals in NSW, and said it's a sign that people are getting carried away.
To be sure, the market is rising, but it is now doing so at a slower pace than last year. The number of houses sold in Sydney in the first five months of last year rose 28 per cent to 37,719 from the 31,307 sold between January and May 2012. This year the figure is up again, but by a less staggering 6.2 per cent to 40,068.
Rich Harvey, who is CEO of buyers' agency propertybuyer.com.au, said he thinks things are under control: "The key thing that will continue to keep the market tempered is people's incomes. They can only buy what they can afford to borrow. I don't see the market as frothy. I see it as very competitive and very strong."
The ANZ Bank's chief economist Warren Hogan said: “The perceived expensiveness of our property market is, as much as anything, a social issue. We simply don't have the speculative credit element there to describe it as a bubble. Low-income earners getting heavily leveraged was the problem in the United States; we don't have that issue here."
Writing in the Sydney Morning Herald’s ‘Money’ section, economics writer Daryl Dixon outlined the conditions under which property prices could begin to slip off their highs: “While it may be some time off, a…downward ratchet in prices will start when interest rates rise again and when new housing developments result in an oversupply in the major locations”.
As we are now experiencing a prolonged period of low and stable interest rates, together with a construction industry that’s struggling to build 30,000 homes this year when at least 40,000 are needed, this year and every year for the next fifteen years just to catch up with the backlog, Mr Dixon's downward movement seems a long way off.
'Beware the 'disorderly correction': Standard & Poor's warns on overheating mortgage market', Clancy Yeates, Sydney Morning Herald, 5 September 2014
'Sydney property market booms into spring', Andrew Wilson, Domain, 5 September 2014
Bloomberg News
'Draghi Cuts Mortgages 17,000 Kilometers Away', Michael Heath, Bloomberg News, 31 August 2014
'Housing market heats up: strongest winter gains since 2007', Michael Janda, ABC News Online, 1 September 2014
'Melbourne, Sydney lead winter house price surge', Mark Mulligan, SMH Online, 1 September 2014
'Test looms for Sydney, Melbourne real estate ', Larry Schlesinger, Australian Financial Review, 28 August 2014
'As in shares, so in property: Skip the hype, grasp the detail', Marcus Padley, SMH Business Day, 29 August 2014
'Spring in the property market may be a leap too far', Michael Bleby, Mark Mulligan, Alana Schetzer,
SMH Business Day, 30 August 2014
'Don't get burnt by the property market', Daryl Dixon, SMH Money, 31 August 2014
'Aust housing may be 30% overpriced: expert', Business Spectator, 25 August 2014
'David Murray warns Australia's financial risks concentrated in real estate', Michael Janda, Neal Woolrich and Ticky Fullerton, ABC News online, 29 August 2014

The Tiger that is Sydney Property

Wed, 20 Aug 2014
Even seasoned followers of Sydney's property trends are finding it hard to believe the strength of the current real estate market.
Figures from the Australian Bureau of Statistics show that Sydney property prices rose by 3.1 per cent over the June quarter and by 15.6 per cent over the past  year. It's now clear that the most recent boom is still with us as one record after another is overtaken.
Writing in Australian Property, self-described 'unconventional economist' Leith van Onselen expressed his thoughts about real estate activity in the city he calls 'investor central'.
"The speculator frenzy that has engulfed Sydney’s housing market continues to reach absurd proportions, with today’s Lending Finance data for June, released by the ABS, once again smashing all records, with both the value and proportion of mortgages going to New South Wales investors surging to another all time high."
Eight months ago many analysts were issuing cautions that an expected rise in interest rates from the Reserve Bank of Australia would bring an end to the upwards prices curve by mid-year.  Some even forecast a price decline, quoting global experts who declared Sydney property was overpriced and existing levels couldn't be sustained.
Those overseas experts, including the US-based International Monetary Fund, viewing Australia from their desks in Brussels, New York, London or Bern got it wrong. But perhaps we should be charitable and admit that even Australia's own economists are finding the present market conditions astonishing.
Investors are driving the bus
The hunger for property is largely in the appetites of investors. The Domain Group's senior economist Dr Andrew Wilson attributes the market's strength to ongoing speculative buying activity from investors, although he's calling an imminent end to the frenzy.
"New South Wales investors make up nearly 50 per cent of the investor market in Australia," he said.
"I think we'll start to see prices growth tracking backwards now as affordability constraints work their way into the market.  Clearly the December quarter last year was the peak in terms of prices growth."
The HSBC's chief economist, Paul Bloxham, is on the same track: "The investor share of new housing loans is around record highs," he said.
"I don’t think Australia has a housing bubble but I do think that if the current trends were to continue, particularly in the Sydney market, that would start to become a bit worrisome."
Some slowing in the rate of growth has already been seen in figures from the Australian Bureau of Statistics. They show that Sydney's house prices growth halved in the first quarter of this year, rising by just 2.4 per cent after a lift of 5.4 per cent in the December quarter.
In an AAP media release finance journalist Jason Cadden quoted JP Morgan economist Tom Kennedy who expressed his firm's doubts about the longevity of Sydney's accelerating property price increases.
"We think that prices will moderate a little bit further as activity cools, particularly in Sydney where price growth remains very strong at levels that won't be sustainable."
Another analyst who sees prices moderating is Housing Industry Association economist Diwa Hopkins who said she expects the rate of price rises to ease later in the year as more housing stock becomes available.
"Continuing improvements in the supply of dwellings will be important in taking some of the momentum out of dwelling price pressures, and we may already be seeing early signs of this," she said.
ABC Business News reporter Michael Janda also sees some signs that the prices surge may have peaked.
" The heat in Australia's largest housing market is illustrated by Sydney's median dwelling price of $650,000 sitting more than $100,000 above the next dearest capital, Melbourne," he said.
He quotes RP Data's research director Tim Lawless who says the past six months have shown a slower pace of price appreciation than the peak of the boom in winter and spring last year, and he expects this moderation to continue.
"What is likely...is that the rate of capital gain will continue to reduce, particularly in those cities where affordability constraints are the most significant and rental yields are the lowest."
Mr Lawless also sees investor interest shifting away from free-standing houses. "Additionally, with affordability becoming a more pressing issue in Sydney we would expect buyers to be seeking out medium to high density dwellings located close to the city rather than where they could afford to buy a detached home."
St George Banking Group senior economist Hans Kunnen told Domain's Toby Johnstone that he is expecting house price growth to slow as buyers are increasingly 'choked out'.
"There comes a point when you can’t raise a deposit even if you lean on mum or dad," he said.
"You just don’t feel confident enough to borrow that much money."
Clearance rates stay high
Even though it's been a cool winter the Sydney property market has maintained high levels of clearance rates at weekend auctions, although the numbers of properties on offer have declined slightly from earlier this year.
Importantly, the Reserve Bank seems comfortable with current economic conditions - so comfortable that interest rates have been held steady for a record twelve months and the RBA has given the impression that no plans are in place to change them.
On the economic front we see some signs of rising unemployment although these have been muddied by change to the way in which the ABS calculates its employment figures.
We also see that consumer confidence is weakening, but the reasons for this could be a combination of several unrelated factors including the unmasking of more corrupt politicians by ICAC and continuing problems in the Middle East.
Spring is almost upon us and this is the start of the traditional 'selling season' for Sydney property. So what are the chances the property boom could reignite?
National Australia Bank global head of research Peter Jolly sees no immediate major changes looming in some of the market's key drivers: “Recent house price appreciation has been driven by more than simply a strongly growing population.
"Low interest rates have encouraged domestic investors to make asset allocations into housing. Foreign investors have also been buying. A reduced rental return on housing would eventually discourage domestic investors but that probably comes with a lag."
There has been a substantial increase in the construction of new housing in Sydney, mostly of the high-density variety. A recent NAB report authored by Mr Jolly pointed out that in January this year building approvals reached 17,800 in the month which represented a 37-year high and was the second highest tally of all time. About a quarter of these approvals were for apartment buildings of four storeys or more.
The increasing number of newly-constructed dwellings has helped to reduce the city's chronic undersupply of accommodation and may have been a contributing factor to a recent slowing in the rate of increases in rental rates across Sydney.
Will the boom reignite? Probably not. The present level of prices being paid for Sydney property is appreciably higher than twelve months ago and auction results show a slowing in their rate of appreciation.
But is the boom over? Not at all. Sydney prices will continue to rise for the remainder of 2014 and demand will remain strong across the metropolitan area.
As Domain Group's Dr Andrew Wilson put it: "Strong auction activity in Sydney over winter will translate into prices growth, although the level of growth will be below last year’s boom-time results."
The tiger that is Sydney property is alive and well. But even tigers have to rest now and then.
' Auction clearance rates keep climbing', Dr Andrew Wilson, Domain, 18 August 2014
'Sydney house prices up 3.1 per cent', Toby Johnstone, Domain, 12 August 2014
'Sydney property too hot, Walker' Business Spectator, 18 August 2014
'80 per cent clearance rate for Sydney property', Stephen Nicholls, Domain, 10 August 2014
'Auction markets are expected to pick up pace by the end of the month', News.com.au, 8 August 2014
'Sustained growth ahead', John McGrath, Sydney Morning Herald online news, 9 August 2014
'Are we heading back into a boom?', Andrew Wilson, Sydney Morning Herald, 8 August 2014
'Signs property prices could settle', Bianca Hartge-Hazelman, aussieproperty.com, 29 July 2014
'Home prices surge as real estate recovers from autumn slowdown', Michael Janda, ABC News, 1 August 2014
'Sydney leads house price surge', Jason Cadden, AAP media release, 12 August 2014
'ABS house price gains ease', Leith van Onselen, posted by Unconventional Economist in Australian Property, 12 August 2014
'Sydney property rocket exits solar system', Leith van Onselen, posted by Unconventional Economist in Australian Property, 11 August 2014
'China’s corruption crackdown could deliver a blow to Australia’s property market', Robert Gottliebsen, Business Spectator, 14 July 2014
'Sydney house prices up 3.1 per cent', Toby Johnstone, Domain, 12 August 2014
 'Commonwealth Bank chief Ian Narev rejects housing market warning', Clancy Yeates, Business Day, 13 August 2014

Sydney Real Estate - the never-ending story

Fri, 18 Jul 2014

When a major upswing in property prices begins to slow down it's often said that a 'boom' has ended.  Meanwhile, property owners can sit back and enjoy the fruits of their investments while waiting for the next upswing to begin.
Those who missed out might find some consolation in reading articles about how renting can be as rewarding as buying. This month the Reserve Bank of Australia released a report by two of its researchers that sought to answer the age-old question of whether it's better to rent or buy a home, 'better' in this case meaning 'cheaper'.
The RBA report found that if house prices keep growing at the average rate of growth experienced over the past sixty years buying a home would be about the same cost as renting. It also said that, if house price growth were to slow in future, households would be better off renting.
Before leaping into the bonds of tenancy, prospective homeowners should note that according to the RBA house prices rose by an average of 2.4 per cent a year over the past sixty years and by just 1.7 per cent a year over the past decade.
No, this isn’t Sydney we’re talking about. In fact, some other details from the RBA’s study make us wonder just where this report looked for information.
At least the RBA concluded that there were no signs of the dreaded ‘bubble’ in real estate prices, based on a comparison of rental expenses to purchase costs.
The Domain Group’s senior economist, Dr Andrew Wilson said that the paper’s findings were based on the "heroic assumption of long-term falling house price growth".
He said the Bank was practicing ‘megaphone economics’ and was really reacting to concerns about the high level of speculative real estate purchasing. He also said it was unlikely that the annual rate of growth in Sydney would fall below the long-term average in coming years.
Owning beats renting
The AMP’s Dr Shane Oliver said that he expected a period of below-trend annual house price growth to follow the high rates of the past two decades, but said that even if growth were to fall below the historic average of 2.4 per cent, there was still a strong argument for purchasing property.
Dr Oliver stated something that every homeowner knows when he said: "People who buy a property are forced into saving, so even if you have to pay off a mortgage over 20 or 30 years, you tend to end up with a better asset base than renters, who tend to spend their money."
St George Banking Group senior economist Hans Kunnen told Domain’s Toby Johnstone that he didn’t expect real estate prices to fall below their long-term averages just yet: "We are so far behind in the supply of housing that we still have some catch-up to do," he said.
Confirming ongoing high levels of buyer interest, Sydney real estate auctions continued to record clearance rates above 70 per cent, not too far from the 80 per cent figures during last year’s boom times.
More important is that the number of properties on offer at most auctions this year has been well above the numbers during most of 2013. There is no shortage of sellers just as there is no shortage of buyers. Only the rate of price increases is showing signs of slowing.
One market segment that’s now performing especially well is the Sydney prestige property market – properties from $1 million to $3 million, with exceptional auction clearance rates well above 80 per cent and even into the 90s in places like the upper north shore, lower north shore and northern beaches.
Also indicative of market strength are the latest figures from the Australian Bureau of Statistics that show the number of seasonally adjusted owner-occupied home loans approved in NSW in May rose by 1.3 per cent.
Writing in the Australian Financial Review, Sydney Property writer Rebecca Thistleton says there are “modest expectations” about future price rises.
“Economists and property commentators have reduced growth forecasts of between 6 and 10 per cent to between 5 per cent and 8 per cent for this year.”
“Growth has moderated in Sydney, the country’s hottest market, where prices jumped 15 per cent last year”, she added.
Her article quoted RP Data research director Tim Lawless who said the market was slowing but demand still exceeded supply: “I don’t think prices have peaked, but it is likely the market has moved through the peak of the growth cycle,” he said.
She also quoted Stockland chief executive Mark Steinert who said Sydney’s property would see a “golden decade” of stable growth around 3 per cent to 4 per cent a year due to the ongoing undersupply of housing.
Is the boom really over?
Jean-Paul Pelosi from the CBA’s MyWealth website, asks the question: “Is Sydney's property boom really over?”
He said that he’d asked a number of property experts in recent weeks where the Sydney market currently sits, and most of them had the same answer which is that price rises should ease but not stop.
Mr Pelosi notes that the home loan to income ratio will eventually widen so much that investing in property is no longer feasible, but although the current cycle has eased a little of late it is by no means grinding to a halt.
He also tells why some parts of Sydney are still experiencing boom time price rises: “Demand is the driving force here and even as the weather has cooled it’s been insatiable.”
RP Data’s analyst Cameron Kusher expects moderating rates of growth in the near future, according to an article by Kylar Loussikian in The Australian.
 “The last six months of last year saw strong growth across the market, but that was coming off the back of strong momentum in the first half,” Mr Kusher said.
“This coming year doesn’t have the same level of momentum, but the real test is the spring.”
Writing in the myRPData Property Pulse, Mr Kusher said he foresees a slowing of investor activity later this year.
“RP Data anticipates that affordability constraints will start to impact on value growth in Sydney and Melbourne throughout 2014 as a proportion of potential buyers continues to be squeezed out of the market as values move higher.”
The National Australia Bank’s index of housing market sentiment has also slipped since housing price increases began their return to more ‘usual’ levels.
The bank’s Quarterly Australian Residential Property Survey for the June Quarter of 2014 has recorded a nationwide reduction in the NAB’s residential property index of 17 points, down to its lowest level in the past twelve months.
NAB Group Chief Economist Alan Oster said Sydney was still expected to experience price growth although not all capital cities will perform as well.
Across Australia NAB is forecasting average house price growth of 4.6 per cent through the year to June 2015 and 3.2 per cent in the year to June 2016.
“Expectations both in relation to house prices and rents have come off, the market is getting closer to flattening out a bit,” he said. But ‘flattening out’ isn’t the same as calling a halt to the amazing growth of Sydney property that we’ve seen in recent years.
The price cycle has its periods of exceptional growth as well as times when growth slows and gets out of the headlines, but as long as demand exceeds supply the curve will inevitably track upwards.
It’s worth repeating the words of CBA MyWealth’s Jean-Paul Pelosi: “Demand is the driving force here and even as the weather has cooled it’s been insatiable.”
‘Renting or buying an even money call says Reserve Bank’, Michael Janda, ABC News online, 14 July 2014
Sydney auction market bounces back – for now’, Dr Andrew Wilson, Domain, 13 July 2014
‘RBA using ‘megaphone economics’ says analyst’, Toby Johnstone, Sydney Morning Herald, 16 July 2014
‘Sydney Auction Clearance Rates Lowest For A Year - Dr Andrew Wilson’,     Michael Yardney's Commentary, Property Investment, 5 July 2014
‘Interest rates ease fears of housing market crash’, Australian Financial Review, 21 June 2014
‘Is Sydney's property boom really over?’, Jean-Paul Pelosi, MyWealth, 24 June 2014
‘Property prices through the roof with Sydney leading charge,’ Kylar Loussikian, The Australian, 2 July 2014
myrpdata Property Pulse, Introduction by Cameron Kusher, 9 July 2014
‘Property sector cools, but new report says no housing bubble to bust’, ABC News online, business reporter Michael Janda, 10 July 2014
‘Property market sentiment and foreign investment down,’ News.com.au, 10 July 2014

Interesting Times For Sydney Property

Thu, 19 Jun 2014
Interesting times for Sydney property
For those who observe and analyse the Sydney property market these are indeed interesting times.
Analysts at investment bank Morgan Stanley issued a note to investors in June saying a potential glut of new apartments could affect unit values in inner city areas, while house prices could drop unless the RBA lowers interest rates.
The report said "without further interest rate cuts the current housing cycle is in danger of gradually fading."
It noted that during the past year, 81,000 apartments were approved nationwide - almost twice the long-term average of 44,600 approvals.
An interest rate cut would ease the threat of an oversupply of new apartments in inner city areas as a contributing factor to falling prices, the report argues.
The International Monetary Fund (IMF) recently said in its official blog that Australia has the third highest house price-to-income ratio in the world.
The IMF's Global Housing Watch says prices are "well above the historical averages" in Australia and that it is critical to avoid another unsustainable boom in house prices like the one that preceded the global financial crisis.
IMF deputy managing director Min Zhu said in a blog post that regulators like the Reserve Bank and the Australian Prudential Regulation Authority should move from "benign neglect" and take steps to contain housing booms.
The report also noted that Australia’s price-to-rent ratios are “well above their historical averages”.
In an article about the IMF’s report, Sydney Morning Herald banking reporter Clancy Yeates quoted Barclays economist Kieran Davies who said prices were ''flashing red'' with prices at 4.3 times household income and 28 times annual rent, both just below record highs.
However, Mr Yeates also noted that the latest Reserve Bank of Australia figures show that although housing lending was growing at its fastest annual pace in three years, it is still well below the pace reached before the GFC.
CommSec economist Savanth Sebastian told the Herald’s Penny Pryor that we should expect a retreat in the sales figures: “I think the growth is not going to be what it was in the last 12 months,” he says.
He added that the kind of growth we’ve seen over the past 12 to 18 months is “not sustainable over the longer run”.
Sebastian believes we’ll see an increase in supply over the next few months as the large number of properties that have been approved in the past couple of years are completed and come onto the market.
Like most analysts, he doesn’t see any signs of a crash in property prices, although there’s little doubt that there will be ‘restrained’ growth in prices compared to the recent double-digit rises in recent times.
Investment advisor David Potts agrees, while noting that property prices are coming off a relatively high base.
“Thanks to Australia’s strong population growth and the fact our low-density living gives housing a high land component, which is the part that appreciates in value because buildings depreciate, our property booms tend to fizzle out rather than collapse.”
Mr Potts says that, on the two measures of affordability – mortgage repayments or home prices relative to disposable household income – property values are too steep.
“Treasury forecasts national income will grow only three per cent next year, which rather limits the capacity, unless you’re an overseas buyer, for property prices to rise much more.”
He does say that the biggest threat to further growth in property prices is the rapid rise experienced in recent times.
“This has prompted building approvals for units to jump 26 per cent and for houses 21 per cent in the past year, way more than the population has been growing, so there’s going to be a lot of extra supply soon.”
The anticipation of this extra supply prompted the Reserve Bank of Australia to keep interest rates at the same relatively low figure of 2.5 per cent at its June meeting.
On another positive note the RBA has shifted from predicting that low rates would stimulate a rise in housing construction activity to stating that the lift in housing construction ''is now under way''.
The Domain Group’s senior economist, Dr Andrew Wilson, said the RBA is taking a wait-and-see approach and that rates are likely to stay where they are.
“Unemployment rates have remained steady with solid jobs growth, although jobless levels in some states are still stubbornly high; latest wage growth data is benign reflecting the low inflation economy with the level of real wages generally declining.”
Dr Wilson says there is potential for “solid price growth over winter, although not at the strong levels of 2013”.
RP Data research director Tim Lawless is also hesitant about predicting strong prices growth for Sydney, noting that the city’s property values dropped 1.1 per cent in May.
He told the Herald’s property editor, Stephen Nicholls: “Historically, housing market conditions have softened in April and May as the market rebalances from what is typically a seasonally strong first quarter and also as a result of cooler climatic conditions during the autumn and winter months.
‘‘Outside of the seasonality, we have been seeing signs that the housing market is at or is approaching the peak of the growth cycle.’’
He added that a recent deterioration in consumer confidence reported in the Westpac/Melbourne Institute Consumer Sentiment Index – a drop of 16 per cent since last September, indicated that this may also be playing a role in the slowdown of housing market conditions. 
Malcolm Maiden, writing in the Herald’s ‘Business’ section, put the blame for the decline in confidence squarely on the Federal Government’s budget introduced to the public by Treasurer Joe Hockey.
“It is influencing household sentiment, for sure. The most closely watched sentiment index is curated by Westpac and the Melbourne Institute, and it fell by 6.8 points to 92.9 points after the budget.
“Of those surveyed, 59 per cent said they expected the budget to financially hurt them,” he added.
The NSW Government moved to help beleaguered first-home buyers in this month’s state budget, announcing that it will raise the threshold for the first-home buyers’ grant to $750,000. This will allow more home buyers to qualify for assistance, but only if they purchase a new home.
In 2013 just 7800 home owners qualified for the $15,000 grant, compared with 36,600 in 2011 after which the scheme was restricted to the purchase of new homes only, so the rise in the grant threshold is not likely to have much of an impact on the overall market.
Of greater importance was Premier Baird’s announcement that the NSW government has freed up land for 6600 new homes in Sydney’s northwest.
“In western Sydney, there is a massive housing boom occurring and the unlocking of up to 6600 new housing lots at three sites will boost housing supply and make homes more affordable,’’ Mr Baird said in a statement.
Cameron Kusher, writing in Property Observer, says that current data suggests that the growth in the number of new owner occupier housing finance commitments has peaked, although there is still plenty of activity in the owner occupier refinance and investment segments of the market. 
“Total returns from residential property have been strong over the past 12 to 18 months; however, we believe that the peak level of capital growth has now passed and rental yields (will) continue to fall.”
Although total returns for investors are still strong they are likely to weaken somewhat. At the same time prices growth is softening and the supply of housing stock is about to increase.
There are some indications that the recent property price boom may have peaked, although Sydney auctions have rebounded after a pause for the June long weekend.
Looking at the longer term, there are few doubts that continuing demand together with ongoing low interest rates will ensure that Sydney property remains one of the best investment options for both capital growth and return on investment.
Because of this, it’s also very likely that the new properties coming onto the Sydney market over the next 12 to 18 months will find owners at the same rapid rate as existing properties are doing now.
‘Owner-occupier housing finance commitments topping out,’ Cameron Kusher, Property Observer, 12 June 2014.
‘Property prices about to drop without interest rate cut, warns report,’ Eryk Bagshaw, SMH Business Day, 17 June 2014.
 ‘Patience suggested as property sales rush eases,’ Penny Pryor, Sydney Morning Herald, 31 May 2014.
‘Property prices feel warmth before chill,’ David Potts, Investing, Herald Money, 4 June 2014.
‘Rates likely to remain on hold over 2014,’ Domain, Real Estate News, 3 June 2014.
‘Property prices head south,’ Stephen Nicholls, Domain, Real Estate News, 2 June 2014.
 ‘A winter chill for housing cools RBA hopes for a construction lead recovery,’ ABC News Online, Updated 2 June 2014.
‘Reserve Bank quiet on Hockey budget,’ Malcolm Maiden, Sydney Morning Herald ‘Business,‘ 4 June 2014.
‘Home prices outpacing earnings: IMF,’ Clancy Yeates, Sydney Morning Herald, Banking and Finance National, 12 June 2014.
‘Era of Benign Neglect of House Price Booms is over,’ Min Zhu, blog posted on 11 June 11 2014 by iMFdirect

Sydney Property Takes A Well Earned Break, Gradually

Tue, 20 May 2014
Geoffrey Chaucer wrote in 1374: "All good things must come to an end". He might have used these same words to describe the great Sydney real estate boom of 2013-2014.
History and the cyclical nature of property prices gives us every reason to expect that the boom will end in a uniquely Sydney fashion, and that a time of rapidly-rising values will gradually give way to a period of stability.
With the Easter holidays, Anzac Day weekend and the Federal Election behind us, we head towards winter and seek to gauge the property market's direction.
Figures from the Australian Bureau of Statistics (ABS) show that Sydney’s house price growth fell from 5.4 per cent in the December 2013 quarter to 2.4 per cent in the first quarter of 2014, while apartments’ price growth slipped from 4.1 per cent to just 2 per cent in the same period.
ABS figures also show the total number of owner-occupied dwellings financed fell from 46,082 in the December quarter to 45,570 in this year, while the size of the average loan has also declined from $363,800 to $355,500.
Australian Property Monitors senior economist Andrew Wilson declared the end of the property boom, saying: “The sugar hit of low interest rates has washed through the market; now we'll have a flatter housing market dependant more on incomes growth and local economic factors.''
Dr Wilson says the current phase represents "the transition from a strong market to a solid market."
AMP Capital chief economist Shane Oliver said: ''I think we have seen the best of Sydney's house price growth.
''Sydney probably has peaked in terms of momentum … affordability has been deteriorating.''
Not a full stop
This of course doesn’t mean the period of rising prices has come to a full stop. The national ABS Residential Property Price Index (RPPI) rose by a seasonally adjusted 1.7 per cent in the March quarter.
Director of RPPI at the ABS, Ms Robin Ashburn, said that, while the quarterly growth in Sydney had slowed from the December quarter, throughout the year house prices had risen 16.6 per cent and attached dwelling prices by 13.7 per cent.
The chief economist for advisory firm Urbis, Nicki Hutley said "The growth rate appears to be levelling off – as you'd expect given the rises in prices in major cities over the last year," but noted that activity in the marketplace was still at a high level.
Crunching the numbers a bit further in the Crikey Property Observer, Pete Wargent says that “Sydney has been one of the weakest performing property markets over the past decade, with house prices lagging incomes significantly since 2003.”
He says that Sydney has been “the best risk-adjusted bet for investors in Australia over the past five years” and that over the medium term prices will eventually catch up again sending the market up towards its next cyclical peak.
And despite some decreasing fervour among local buyers who appear to be giving the Sydney market a bit of a break, Wargent sees overseas buyers stepping up their activities.
"As property prices cool in Hong Kong and Singapore, which have long been magnets for Chinese investment, more money is flowing to real estate markets such as New York, London and Sydney.”
Autumn not so quiet
Jean-Paul Pelosi is a freelance writer who’s based in Sydney and writes for the Commonwealth Bank’s MyWealth investment hub. He noted that autumn is generally a quieter time for Sydney real estate sales and considers the chances of this year following suit.
 “It doesn’t seem likely given the high levels of listings to this point and the rate at which those properties are being scooped up by buyers.
“For example, there were 1,471 auctions in Sydney last week (12/13 April) according to RP Data, which represented a 30% rise on the previous week when there were 1,137. The clearance rate at the weekend was 78.5%, compared to 67% on just 529 auctions a year earlier.”
RP Data’s research analyst, Cameron Kusher agrees: “I suspect that fewer properties will be taken to auction but the low mortgage rates and strong buyer demand currently being experienced across Sydney will result in auction clearance rates remaining at levels close to those recorded over the year so far,” says Kusher.
Managing director of buyers’ agency Propertybuyer.com.au, Rich Harvey also sees the market’s momentum persisting this year: “I think it will continue through the rest of the year but at a slower rate,” he says.
 “You’re still going to get some capital growth and some price appreciation but at a reduced rate. We won’t get the unsustainable 15% year on year price growth but we’re most likely to see a 7-8% calendar growth rate from January to December.”
Harvey says there are vendors who have held off until now and will to try sell their properties in the coming months, which he thinks will keep volumes high.
“The frenetic pace of the market is slowing but at the end of the day buyers at any level, whether they’re first homebuyers or third homebuyers, need to recalibrate their expectations to meet the market.”
Tim Lawless of RP Data said the rate of growth in values had slowed in April, following strong increases in March and the first quarter of the year. He says that the latest figures show growth is now at a more sustainable rate.
“It suggests to me that the market is still at a very strong place but probably right at peak growth,’’ he said.
“When you look at a market like Sydney I think that (a) very high median price is quite reflective (and) that we are seeing a lot of activity in the marketplace now... at the upper end of dwelling prices.
“We are seeing more activity across the premium marketplace, million-dollar plus and less activity down the more affordable end as we are seeing first home buyers increasingly priced out of detached housing.’’
Interest rates stable
Stability in interest rates has certainly been achieved. For the ninth consecutive month the RBA kept its cash rate at an all-time low to combat the effects of the high Australian dollar and stimulate the growth of non-resource sectors.
Loan Market director Mark De Martino commented: “The cash rate has been under 3 per cent for a full year now - we’ve never had rates so low for so long.
“The combination of historically low interest rates and rate stability are helping homeowners and buyers build confidence in the property market.
“The RBA has made it clear the high Australian dollar is negating some of the pressures to move rates upwards and it’s unlikely we’ll see a rate move in the next few months. Chances are we will go a full year without a rate movement,” Mr De Martino said.
And that other roadblock to stability, the Federal election, is now behind us and has thankfully left the property sector unscathed.
Housing could have been targeted in a number of ways, not the least of which is doing away with tax-advantaged negative gearing. The $6 billion per annum it’s said to cost the government in lost tax revenues wasn’t tempting enough to override the political and economic difficulties its withdrawal would cause.
Financial commentator David Koch told News Limited that the time is probably near when its rules will change.
“Given negative gearing doesn’t appear to be stimulating much in the way of new housing investment - the original intention - and we’re approaching the peak of a property boom, the timing of a change in future concessions is probably right,” Koch said earlier this month, but the Treasurer left it off his hit list regardless.
Also preserved was the Capital Gains Tax-free status for owner-occupied homes, and the family home continues to be excluded from pension means testing.
In a May media release, Propell National Valuers highlighted the risk of the abolition of negative gearing in the budget, which it says is only politically possible at a time of low interest rates and a rising market.
“This was reportedly considered by the government, along with curbs on superannuation tax breaks and including the family home in the assets test for pensions, but these have been dismissed as politically impossible.
“Even disregarding the voter backlash, the government has to consider what it can get through a hostile senate.”
Turning its eyes toward the future, Propell says the greater risk to the housing market lies, not in any specific targeting in the budget, but in the net impact of the expected reduction in government spending, increase in taxes by any name and employment levels.
“These changes, no matter how they are arrived at, will reduce the purchasing power of consumers and increase unemployment through reductions in the size of the public service.
“While these things can be argued as necessary, the net impact on the real estate market will be to reduce demand.”
In the meantime, as the boom slowly comes to an end and the indicators avidly watched by market analysts return to their normal settings, it’s business as usual for Sydney real estate.
‘Sydney house price growth halves in 2014,’ Toby Johnstone and Antony Lawes, Domain, 13 May 2014
‘Federal Budget 2014: Homeowners and the property sector winners,’ John Rolfe, News.com.au, 13 May 2014
‘Pace of house price rises starting to slow, according to Australian Bureau of Statistics data,’ Justine Parker, ABC News online, 13 May 2014
‘House prices rise 1.7% in March,’ Bianca Hartge-Hazelmanin, Business Day, Sydney Morning Herald, 13 May 2014
‘Sydney's great property boom appears to have ended,’ Domain, Toby Johnstone, 24 April 2014
‘Property prices easing in capital cities — Australian Property Monitors,’ Sonja Koremans, News.com.au, 23 April 2014
‘Auction market steps down a gear,’ Domain, Andrew Wilson, 5 May 2014
‘Property price growth slows throughout Australia,’ News.com.au, 1 May 2014
‘Sydney leads way as property fires up after holiday break,’ News.com.au, 5 May 2014
‘RBA Keeps Promise, Holds Rates’, Loan Market media release, 6 May 2014
‘Will Sydney property continue its hot streak after Easter?’ Jean-Paul Pelosi, CommBank MyWealth, 15 April 2014
‘Sydney market to slow over next five years,’ Staff reporter, Real Estate Business, 27 March 2014
RP Data Property Pulse, Cameron Kusher, 30 April 2014
‘What's going on in Sydney's property market?’ Pete Wargent, Crikey Property Observer, 27 April 2014
NSW Excerpt, May Market report, Nila Sweeney, Your Investment Property magazine, May 2014
‘House price boom at an end’, press release, Propell National Valuers, 5 May 2014

Is this the peak of the Sydney property boom?

Thu, 24 Apr 2014

The cyclical nature of real estate prices is well-known. For a while nothing happens, then prices surge upwards and then a reality check ensues. Market watchers scramble to identify the peak of the latest boom and eventually prices begin to stabilise. Are we there yet?
RP Data says half of Australia's capital cities are now at record property price levels, with Sydney the most expensive at 15.8 per cent above its previous peak. Despite this, auction clearance rates are still steaming ahead.
The first Sydney auctions in April brought a new record of ten consecutive weeks of clearance rates above 80 per cent. The median house price was $1.12 million and the median apartment price was $706,500.
The lower north shore reported an exceptional clearance rate of 91.2 per cent following the previous weekend’s 92.5 per cent.
The auction action maintained its momentum when 1100 properties went under the hammer on ‘Super Saturday’ before the two-week break for Easter and the Anzac Day weekend. Australian Property Monitors put the weekend auction clearance rate at 78.1 per cent.
Compare these statistics to just twelve months ago, when the clearance rate was 66 per cent and the average house price was $890,000 while apartments averaged $591,000, and the meaning of the term ‘boom’ is clear. As Dr Andrew Wilson of Australian Property Monitors commented: “We are heading into uncharted territory in the Sydney market...”
At the top end of the market - $2 million plus, there’s now as much action as in the other segments.  The number of homes selling for more than $2 million in March is more than double that of the same month last year and record prices for many suburbs have been reported across Sydney.
Even Reserve Bank governor Glenn Stevens implied that Australia is going through a ''boom'' when he used that term in a speech to a conference in Hong Kong, although he was directly referring to residential construction over the next couple of years.
Dream fades for some
There are always tradeoffs when high real estate prices equate to higher amounts being borrowed to finance property purchases. Barclays chief economist Kieran Davies noted that Australian household debt had hit a record 177 per cent of annual disposable income and that house prices were equal to 4.3 times annual income and 28 times annual rent.
A growing number of Australians simply can’t afford the ‘great Australian dream’ of a house on a quarter-acre block with a reasonable commute to their workplaces. Australian house prices leapt almost 11 per cent over the 12 months to 31 March to record levels in absolute terms, with Sydney experiencing capital gains of 15 per cent.
For some the answer is to forego the house and acquire an apartment. Research company Macromonitor found that, while detached houses have traditionally accounted for about two-thirds of new house commencements, the present balance is now about 56 per cent detached and 44 per cent units and townhouses.
But the cost factor alone won’t bring this boom to an end. Much more housing stock is needed in Sydney after more than a decade of serious underinvestment, with the ongoing shortage of supply failing to meet the demand from a growing population.
It was interesting to see that planning approvals for new houses fell back slightly in February after their surge the previous month. However, they’re still 23 per cent above their level in 2013.
There’s even a current Senate enquiry considering ways to improve housing affordability. Although its concerns are more with those in our society who are less well-off, its findings due for release in June will be viewed with interest by all those interested in real estate, from first home buyers to investors, both domestic and those based overseas.
BRW reporter Michael Bleby quoted economist Saul Eslake who criticised the melange of government tax benefits and handouts, saying that priority should go to removing blockages to growth in housing supply.
''What government policy has done has been to inflate the demand for housing by giving more money to buy it with, whilst local governments have constricted the supply of housing through their urban land use and planning policies and by changes in the way they charge for the provision of suburban infrastructure.''
RBA advises caution
In March RBA governor Glenn Stevens warned "we need to be alert to the possibility that the past year of strong rises in dwelling prices leads people to assume that this is the norm".
"Were such an assumption to lead to increasing speculative activity, accompanied by a renewed increase in household leverage with all the associated risks to the housing market ... that would be unwelcome," Mr Stevens said.
Some analysts are already seeing a slowing of the property price spiral. John Edwards, consulting analyst for Onthehouse and founder of Residex, noted that prices are outperforming wages growth and at some point assets such as housing become unaffordable.
“In Sydney, the trend data suggests that house prices are reaching their peak value in dollar terms for this period of growth,” said Mr Edwards.
He cautioned that as consumer sentiment and affordability concerns affect buyers, it is to be expected that housing prices growth in Australia will slow down.
“The Onthehouse data predictions show that Sydney’s annual growth over the next five years will be 4%, Melbourne 3% and Perth 3%. Houses are also still expected to outperform units,” he said, concluding that the Sydney market seems to have peaked.
One of the key factors affecting demand for property is interest rates. At its third meeting of 2014 the Reserve Bank of Australia kept the cash rate at 2.50 per cent for the seventh consecutive month. Loan Market director Mark De Martino suggests those looking to purchase should take a hard look at getting into the market while rates were at a record low.
“With the Aussie dollar surging...we may start to see increasing speculation that the RBA will have to lift rates to protect the economy,” said Mr De Martino.
“If we’re not at the bottom of the rate cycle, we’re pretty close. There’s not much more room to go down.”
Housing supply to grow
CommSec economist Savanth Sebastian told AAP that greater supply of new homes in 2014 would help to restrain further growth in prices: "The strength in property prices has been phenomenal," he said.
“It is likely that increases in land sales, building approvals and new home sales will result in a greater supply of homes over 2014, and, as a result of increased home supply, price gains will become more restrained later in the year."
RP Data research director Tim Lawless said the present rate of growth in dwelling prices was unsustainable: "We expect housing market conditions to cool down as the year progresses.
"If the pace of capital gains doesn't slow, we may see higher interest rates realised much earlier than previously expected."
RP Data’s senior research analyst, Cameron Kusher agreed, adding: ‘‘our view is that the next direction of rates will be a hike but probably not until later this year.’’
National Domain Editor Stephen Nicholls also sees a slowing in prices growth: “Although house prices will certainly rise as a consequence of record auction activity over the March quarter, increases are unlikely to match the near-record levels of growth recorded by Sydney over the December quarter.”
Mr Nicholls concluded that while prices growth is set to continue for the remainder of the year it will do so at “markedly lower rates”.
Sydney Morning Herald business columnist Elizabeth Knight says Sydney property owners are now feeling ‘the wealth effect’ of being 15.6 per cent ahead of where they were a year ago.
“Home owners should be basking in what economists call the wealth effect - feeling richer but without the cash. But with each rise in the property market comes a warning on whether the level of growth is sustainable (or worse) whether property is in bubble territory.”
The Herald’s Glenda Kwek and Toby Johnstone say that interest rates will stay low to stimulate an otherwise sluggish economy: “The stable outlook for interest rates means borrowers can look forward to near record-low mortgage lending levels for an extended period.
“But with the number of prospective buyers at inspections and parties registering at auctions slowing, market watchers think the froth may already be coming out of the market.”
ANZ Bank’s chief executive for Australia, Phil Chronican, said the present level of Sydney house prices is a correction after a decade of slow growth but there was nothing in the market giving the bank any particular cause for concern.
“It’s either going up too quickly or it’s showing signs of running out of steam”,