Market comment: UP SHE GOES

Thu, 22 Jun 2023

Market comment: UP SHE GOESMore gains likely for Sydney house prices and rentals 

Sydney housing prices are proving to be incredibly resilient, despite an economic slowdown and twelve interest rate increases in a little more than a year. Of all Australian capital cities, Sydney has continued to produce the largest price gains, with home values rising by 1.8 per cent in May – the fastest monthly increase since September 2021. In the past three months alone, Sydney’s values rose by 4.5 per cent.

Sellers had pulled out of the market after seeing falls earlier in the year, while the number of people seeking to buy property in the NSW capital has surged with a huge rise in immigration. As the ABC’s Ian Verrender put it: “At the moment, more than 1,000 people are entering the country every single day. 

“They're arriving at a time when there isn't enough housing to accommodate those already here. And we are certainly not completing anywhere near the necessary 300 to 500 new residences a day. In fact, we are still completing roughly the same number of new dwellings as in 1995.”

In the greater Sydney area, Domain figures show that Lakemba was the winner in house value growth with a 13 per cent rise over the three months to May to a median of about $1,133,000. It was closely followed by Hurlstone Park, Earlwood and Bayview - all where values rose more than 12 per cent, then by Canterbury, Clontarf and Waverley, all of which were up more than 11 per cent.

It’s not entirely surprising that PropTrack’s latest Home Price Index for May has shown the rise in prices that started in Sydney early in 2023 has broadened and accelerated across national markets. According to the PropTrack figures, national home prices rose for a fifth consecutive month in May, increasing 0.33 per cent, bringing prices up 1.55 per cent from their low point in December last year.

The favourable market conditions described by PropTrack senior economist Elanor Cragh are a good summary of just why Sydney’s prices are likely to continue their upwards trajectory: “Supply constraints have eased slightly with respect to total stock for sale, but the flow of new listings remains soft.

“This is keeping a floor under prices, with sellers benefitting from less competition with other vendors. Auction activity has improved and clearance rates remain firm after rising above levels seen in the second half of 2022,” she said.

David Walker, Ray White Upper North Shore principal, told that stock levels were back to historical lows, sitting at 20 per cent less [listed] for sale: "The lack of choice has meant that clearance rates remain high and the numbers of buyers coming through open homes are high,” he said.

“Prices seem to have stabilised and we are seeing homes that have sold 12-18 months ago being sold at similar, or higher levels than when they last transacted. Buyers are still active, cautious but active. People now are understanding they need to factor in interest rate rises so maybe not borrowing their maximum capacity but the activity level and buyers willing to transact has not ceased at all.”

There’s also been a recent price growth in some ‘commutable’ regional areas, said CoreLogic’s Tim Lawless: "In amongst those regions there's quite a bit of variability as well, the past three months has really started to see the stronger growth conditions emerging from your more commutable regional markets.

"Areas like the Illawarra has seen a 2.7 per cent rise in the past three months and the Newcastle region has seen housing values rise by 1.8 per cent."
Will prices go into reverse?

The unexpected rebound in Sydney’s housing prices has accelerated in recent months, causing many economists to question how long it can last. Despite twelve interest rate increases which have seen official rates rise by nearly four per cent over the last year, property prices stopped falling and are once again on the rise.

Writing in his ‘Property Update’, author and property developer Michael Yardney says that it now seems clear that our property markets have bottomed out and we are moving into the next phase of the property cycle: “Lower listing volumes (fewer properties for sale) are helping protect the market from further downward pressure.

“While many are concerned about a ‘fixed rate cliff’ ahead, RBA data indicates the majority of mortgage debt is on variable terms. Many people have also been overpaying on their mortgages during the low interest rate cycle, while many others have already refinanced.

“There may be more rate hikes ahead, but our analysis suggests there is light at the end of the tunnel and once interest rates peak (and that may not be that far off), and now that inflation has peaked, consumer confidence will return and the market will reset as a new property cycle begins.”

He then cautioned that we shouldn’t expect the price recovery to be rapid and the next phase will be one of stabilisation.

TCorp chief economist Brian Redican told the Financial Review that property prices could go into reverse in the next six months unless interest rates begin to fall.

Mr Redican said the property market is being driven by sentiment and a belief that the RBA is near the end of its rate hiking process and a rate cut is coming: “Potential sellers aren’t selling because they think prices are too low, so they’re prepared to wait out for prices to rebound,” he said.

“We haven’t really seen an improvement on those hard-edge fundamentals that support a rebound in house prices this year,” he said. “Wages growth hasn’t picked up materially. In fact, real wages are still falling because they’re not matching the inflation, in terms of the ability to take out a large mortgage.

“We’re still seeing the flow-on impacts of the Reserve Bank’s rate hikes. The rate increases…are still running through the system. So people will be facing higher mortgage rates over the next couple of months, including those who are coming off their fixed rate loans.”

SQM Research’s managing director Louis Christopher warned his subscribers to expect “distressed activity to rise based on a new round of forced and panicky selling starting sometime the second half of this year”.

Christopher said that the market should “be prepared for a new round of housing price falls starting in the second half of 2023”.

However, HSBC chief economist Paul Bloxham told the Australian Financial Review that further interest rate rises might have an effect on property sales but would “not likely be enough to stall this housing market momentum we’re seeing”.

“I think the housing market has built enough strength because of strong population growth and limited housing supply. You’d need a very substantial rise in interest rates from here to slow the housing demand enough to bring it back in line with housing supply. But that would do a lot of damage to the economy,” he said.

CoreLogic research director Tim Lawless said that higher rates would probably reduce some of the renewed strength evident in the housing sector, but that the imbalance between supply and demand was likely to persist.

“Whether this is enough to keep upwards pressure on housing values remains highly uncertain, but at the very least I would expect growth to moderate back to levels that are more sustainable,” he said, adding that persistently low levels of available stock and a growing urgency among buyers would support the renewed strength in prices.

A surprising rate increase

The decision by the Reserve Bank of Australia on Tuesday 6 June to hike the prime rate by 0.25 of a percentage point to an eleven-year high of 4.1 per cent came as a surprise to many financial analysts. The financial markets had only priced in a 35 per cent chance of a rate rise in June, and there was an expectation the RBA would give its May increase more time to have the desired effects.

Domain’s Melissa Heagney-Bayliss says that pe0ple looking for a house in Sydney now need to earn more than $250,000 per annum to be able to borrow enough to purchase a typical home. She adds that the amount needed to obtain and service such a loan is largely the result of the RBA’s twelve cash rate rises since May 2022 that have reduced buyers’ ability to borrow faster than other factors such as property price increases and rising mortgage costs.

Recent Canstar modelling shows that a Sydney buyer who purchased a house for the March quarter median price of $1.46 million would need a gross annual income of $255,600 before tax to have enough borrowing capacity to make their purchase after paying a 20 per cent deposit. This is an income $50,700 more than twelve months before and more than triple the $78,800 median pay of full time employees in 2022.

Canstar’s modelling was based on the interest rates prevailing in March this year when the prime rate was 3.6 per cent and assumed the rate on a variable mortgage was 6.13 per cent. Both will have risen again as the result of the May and June increases by the Reserve Bank. Canstar Group executive Steve Mickenbecker related this situation to first-home buyers, saying: “For single first home buyers, 99 per cent of them are going to be excluded from buying a house at the median price, but when you think about couples, it’s not as big of a stretch.”

More modelling by the ANU’s Centre for Social Research and Methods showed that the average homeowners will have to allow up a quarter of their take-home pay towards their repayments, which means they are now paying fifty per cent more than before the pandemic.

ANU associate professor Ben Phillips told that while mortgage holders are coming off “a few years of very low interest rates, mortgage costs as a share of income are at their highest since 1984. There has been a very sharp increase in the last two years, obviously related to sharp increases in interest rates, but also higher average debt levels,” he said.

AMP Capital chief economist Dr Shane Oliver agreed that  first home buyers would find it almost impossible to purchase a house at the median house price, even with a 20 per cent deposit: “Tax data shows that only 1 per cent or 2 per cent of Australians earn above $180,000 a year, so you’d have to be relying on having two high-income earners, or alternatively, relying on the Bank of Mum and Dad to be able to buy,” he said.

The latest interest rate rises have had an immediate, if short-term impact on property auction results, says the Daily Telegraph’s Aidan Devine: “Interest rate rises announced this week have spurred a flurry of activity at Sydney auctions as home seekers try to secure properties before banks void their loan approval,” he wrote.

“There were more than 400 properties scheduled for auction this week (10 June), a decline in volume due to the long weekend, but preliminary indicators showed most auctions were successful. Auctions for properties considered ‘entry level’ in their suburbs were the most competitive, but there was also strong demand for premium properties.”

Why the latest hike?

The Reserve Bank’s main concern is that it’s taking too long for Australia’s rate of inflation to come down. Figures from the Australia Bureau of Statistics show that prices rose 6.8 per cent over the year to April, causing RBA governor Philip Lowe to issue a warning against the rising cost of services which are labour intensive and can reflect rising wages, although the Bank says wages growth remains consistent with its inflation targets providing productivity improves.

Governor Lowe said: "Recent data indicate that the upside risks to the inflation outlook have increased and the board has responded to this," he noted in his post-meeting statement. "While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued."

He warned that the rate of public sector wages growth is expected to increase, noting that the increase in award wages was higher in 2023 than in the previous year, and didn’t rule out another rate increase: "Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will depend upon how the economy and inflation evolve," he said after the Bank’s June meeting.

RBC Capital Markets chief economist Su-Lin Ong told ABC TV's The Business program that the recent 5.75 per cent increase in award wages was likely add to inflation, as Governor Lowe has stated.

"That is not consistent with the inflation target," she said. "While it is very understandable from a fairness, equity perspective that the lowest paid in Australia should receive an increase, there are potentially some consequences of such a large increase for wages and inflation more broadly."

Ms Ong said the RBA would also be concerned by the recent recovery in housing prices that began in Sydney and is now spreading across Australia: "While it may not have been the key driver of today's decision, I think it's one of a number of factors that support policy moving to more restrictive territory," she commented.

Federal Treasurer Jim Chalmers argued that neither the recent budget nor the 5.75 per cent rise in award wages were the causes for the RBA’s latest rate hike: "This rate rise today is not because of the budget, and it is not because people on the minimum wage are being paid too much, and we should be really clear about that," he said.

"The Reserve Bank's job is to squash inflation without crunching the economy, and they will have lots of opportunities to explain and defend the decision they have taken today," he told reporters at the conference after the June monthly meeting.

Some economists already believe the RBA’s cash rate will increase to at least 4.35 per cent. Angus Coote, executive director of Jamieson Coote Bonds, is concerned the Bank may raise interest rates too far and risk putting Australia into recession: "Clearly central banks are going to continue to hike, but I think this could be a policy error in the making — just the same way cutting rates to zero and flooding the place with money in 2020 was.”

Housing shortages a factor

In 2022 there was a response to the RBA’s rate hikes that put a stop to price increases that had seen Sydney housing hit peak levels across the city. The current 2023 recovery will be influenced, in part, by a shortage of available homes that’s due to a number of factors including a rebound in immigration, a shortage of rental properties, and owners holding back on listing their properties in expectations of more price rises once interest rates stabilise.

The construction industry would usually be in a position to take advantage of this situation by increasing the supply of housing but this is currently challenged by a combination of high and rising costs, a shortage of skilled labour, and supply chain issues the industry fears won’t be settled in the near future.

According to building approval figures from the Australian Bureau of Statistics, approvals for new houses as well as apartments and townhouses are at their lowest levels in more than a decade and private house approvals have fallen by 23 per cent in NSW. 

Treasury secretary Steven Kennedy told parliament the downturn in building approvals is expected to continue until 2025, with investment in new dwellings likely to contract by 2.5 per cent this year and a further 3.5 per cent in 2023?24 and 1.5 per cent in 2024?25.

Housing Industry Association senior economist Tom Devitt told ABC News that the present situation leaves both the residential construction industry and those relying on it to increase housing supply with a dire outlook: "On a quarterly basis, this leaves detached house approvals 15.4 per cent lower than the same time the previous year, and multi-units down by 38.9 per cent. This continues the long-lagged response of Australian homebuyers to the RBA's interest rate hiking cycle, with further declines expected in the coming months.

"The combination of construction cost blowouts, labour uncertainties, increased compliance costs and taxes on investors has seen approvals for multi-units fall. These disappointing approvals numbers are occurring as population growth surges with the return of overseas migrants, students and tourists.

Phil Dwyer, president of the Builders Collective of Australia and a builder with 40 years' experience, says the crisis in the construction industry is a "nationwide problem" and that there has been “a great escalation in insolvencies” among construction companies. He blames the current insolvency crisis on the effects of the HomeBuilder grant, which was introduced by the Morrison government in June 2020 as part of its economic response to the pandemic.

Mr Dwyer says that introducing the HomeBuilder scheme into an already "heated industry" created a massive volume of work that has overwhelmed the nation's builders. Two years of supply chain issues and inflation caused by factors such as the pandemic, the Russian invasion of Ukraine as well as labour shortages have created a crisis.

Builders operating on fixed-price contracts who are unable to pass on their increased costs to customers have been the hardest hit. The prices of raw materials such as steel and timber increased between 40 and 50 per cent during the pandemic and many builders ran out of the money they needed to finish projects.

Renters feel the pain

CoreLogic says that units are now the only option for many tenants but the limited supply has forced up rents to the point there renting a house in Australia costs just $39 more a week than renting a unit compared to a difference of $64 a year ago.

In April, rents for units across capital cities rose on average by 1.6 per cent, significantly outpacing the 0.9 per cent rise for houses, CoreLogic figures show. The rise in rents was strongest in Sydney, where unit rents rose by 1.9 per cent in April. This is part of a record annual increase of 19.1 per cent which equates to an extra $106 a week.

CoreLogic also says the supply of advertised rentals is now 40 per cent below the five-year average.

Eliza Owen, CoreLogic Australia’s head of research, said the makeup of dwellings had “a significant” impact on the rental market – with people moving during the pandemic creating the need for an extra 120,000 homes.

Owen said recent data showed there was a “slight” move towards share housing but it was nowhere near pre-Covid levels: We’ve gone through the pandemic, a lot of incomes have also gone up and that’s allowed a lot of people to actually hold on to their larger rental properties,” she said. “But we’d expect more share houses to now reform to try and deal with the increases in rental costs.”

Reserve Bank governor Philip Lowe recently triggered a wave of controversy when he suggested “we need more people on average to live in each dwelling.” 

Speaking in Senate estimates, Lowe warned that not enough dwellings were being built to keep up with a growing demand: “Higher prices do lead people to economise on housing. Kids don’t move out of home because the rents are too expensive or you decide to get a flatmate,” he said. “That’s the price mechanism at work.”

Lowe said an increase in migrant workers and international students meant the population would rise another two per cent and the only way to ease the pressure in the longer term was more supply.

“We’ve got a lot of people coming into the country, people wanting to live alone or move out of home. The way that this ends up fixing itself is, unfortunately, through higher housing prices and higher rents.”

Dr Lowe said the RBA is forecasting rents, the single largest component of the consumer price index, to grow about 10 per cent. This would be the biggest annual rise in rents since the 1980s.

“It’s very tough,” he said.

He’s certainly right about the rental situation being ‘tough.’ Treasury secretary Steven Kennedy told a Senate committee that the rental market was very tight, with advertised rents growing 10.1 per cent in the year to April. He said those advertised rents would eventually feed into average rental costs as new lease agreements are signed.

According to Kennedy, one pressure point on the rental market has been people moving out of home. He said about 130,000 extra households had been created, compared to the pre-pandemic period, because of this phenomenon.

“This is partly a result of local residents choosing to live in smaller households, for example, adult children moving out of their parents’ home,” he said.

Writing in Michael Yardney’s ‘Property Update’, National Director of Property Management at Metropole Leanne Jopson says it’s likely Sydney's rental market will continue to be competitive, with rents likely to increase in the short term: “This is due to the limited supply of rental properties and the ongoing high demand for rental housing, particularly in popular suburbs close to the city centre and public transportation.

“The dearth of new apartment developments, a slow property market, the arrival of overseas migrants, and the return of international students will see rental demand remain elevated, further worsening conditions for tenants in Sydney.”

In short, her conclusion is that we will most likely see lower vacancy rates and even higher rents in Sydney in the coming months.


‘The Sydney suburbs leading the property market rebound,’ Tawar Razaghi and Melissa Heagney-Bayliss, Domain, 12 June 2023
‘Sydney auctions: Interest rate rises fire up bidder activity,’ Aidan Devine, Daily Telegraph, 10 June 2023
‘Sell while you can’, Leith van Onselen, Macrobusiness, 14 June 2023
‘Inflation is high but is the Reserve Bank raising interest rates into a recession?,’ David Taylor, ABC News online, 12 June 2023
‘Defies logic’: How much income buyers need to purchase a typical house,’ Melissa Heagney-Bayliss, Domain, 5 June 2023
‘I’m obviously not first choice’: rental crisis forcing older Australians back into share houses,’ Cait Kelly, The Guardian, 1 June 2023
‘The solutions to Australia’s housing crisis are actually quite obvious,’ Greg Jericho, The Guardian, 1 June 2023
‘Home prices rise for fifth consecutive month as rebound gathers speed,’ Lisa Calautti,, 1 June 2023
‘House values in regional NSW record sharpest drop since before the COVID-19 pandemic,’ Ainslie Drewitt-Smith and Kenji Sato, ABC News online, 10 June 2023
‘Rental units only $39 cheaper than houses per week as demand soars for affordable options,’ Jordyn Beazley, The Guardian, 31 May 2023
‘The housing crisis threatens to unleash Australia’s darker angels. Peter Dutton is intent on exploiting it,’ Peter Lewis, 31 May 2023
‘Collapse in new home approvals tipped to worsen housing affordability crisis,’ Shane Wright, Sydney Morning Herald, 30 May 2023
‘The home hunters racing to buy at auction before costs go up,’ Melissa Heagney-Bayliss, Domain, 31 May 2023
‘RBA boss gives depressing solution to Australian rent price surge,’ Courtney Gould,, 31 May 2023
‘Why Australian households are divided when it comes to financial pressure, and economists are divided on the outlook,’ Stephanie Chalmers, ABC News online, 31 May 2023
‘Building slump 'will see the affordability and rental crisis deteriorate further' warns HIA,’ Michael Janda, ABC News online, 31 May 2023
‘Sydney suburbs where first home buyers could save on stamp duty,’ Kate Burke, Sydney Morning Herald, 28 May 2023
‘Guardian Essential poll: majority of Australians support rent freezes and migration cap amid housing crisis,’ Paul Karp, The Guardian, 30 May 2023
‘Sydney house prices are up 4.5pc since summer,’ Nila Sweeney, Australian Financial Review, 1 June 2023
‘Struggling renters should get flatmates or move home, RBA boss says,’ Adam Vidler, 9News, 1 June 2023
‘National property price rebound gathering pace despite interest rate rises, with Sydney leading the recovery,’ Stephanie Chambers, ABC News online, 1 June 2023
‘Thinking of building a home? Here's what you need to know about the crisis in construction,’ Emma Machan, ABC News online, 1 June 2023
‘I’m obviously not first choice’: rental crisis forcing older Australians back into share houses,’ Cait Kelly, The Guardian, 1 June 2023
‘Home prices rise for fifth consecutive month as rebound gathers speed,’ Lisa Calautti,, 1 June 2023
‘Federal budget 2023: 'More work to be done' to solve supply crisis, experts say,’ Lisa Calautti,, 11 May 2023
‘Latest property price forecasts for 2023 revealed. What’s ahead in our housing markets in the next year or two?,’ Michael Yardney, Property Update, 30 May 2023