Market comment: SUPPLY DROUGHT

Wed, 19 Jul 2023

Market comment: SUPPLY DROUGHTLow supply and big demand, plus no prime rate increase, but for how long?

June was yet another good month in the Sydney property market as figures from CoreLogic show. Sydney house prices rose 1.7 per cent in the month which takes the cumulative recovery to 6.7 per cent since January this year. This translates into a weekly hike of around $4,262, or something like a gain of $600 each day for the average Sydney home. (PropTrack’s Home Price index shows a weekly rise of just $2,100 per week in the past three months, but you get the idea.)

This unprecedented price growth prompted The Guardian’s Greg Jericho to say: “We really need to update the old adage. No longer is nothing more certain than death and taxes; it’s now death, taxes and rising house prices.”

Any lingering doubts about the strength of the property price recovery over the past six months can be dispelled by looking at the Sydney suburbs where home prices have doubled in that time. 2022 was a bad year for the housing market, but growing demand and limited supply have seen prices soar since then, as shown by the latest PropTrack figures that follow.

Nirimba Fields, near Blacktown in Sydney’s northwest, recorded a 109 per cent increase, from a median price of $541,000 two years ago to $1.1 million now. Two other suburbs near Blacktown, Melonba and Grantham Farm doubled their median prices, with Box Hill near Baulkham Hills and Vineyard in the Hawkesbury also rising by 100 per cent.

You don’t even have to go too far from the CBD to see the same kind of price appreciation. Units in Dawes Point and Millers Point doubled in value in three years and five years respectively, aided by the construction of high-quality apartments intended to provide comfortable living for residents instead of simply profits for developers. 

It’s a real bonanza for sales of what are termed ‘trophy homes’ at the top end of the Sydney market. There have been more than thirty sales of properties for $20 million or more since the start of 2023, and this trend shows no signs of slowing. 

The Agency’s Ben Collier gave his reasons for this boom at the top: “Sydney’s top-end market is one of too many cashed-up buyers and too few suitable homes, and that is unquestionably driving these sorts of results, and has been for more than a year now,” Collier told Domain. “But there does seem to be generational change at play as well whereby homes that have not been available for decades have come to market.” 

But will it last?

Figures that indicate continuing high weekly auction clearance rates and a home value growth rate of more than four per cent are telling us this is the strongest market we’ve seen for some time and there aren’t any detectable signs of its slowing. But as to whether the boom will last, there’s little agreement between property analysts and other market watchers. 

The question of ‘How long will Sydney’s housing price boom last?’ is being asked almost daily in the media. Continuing high auction clearance rates are a good indicator that demand isn’t being matched by supply. 

The last weekend in June was also the last opportunity for first-home buyers to acquire a property under $1.5 million without paying stamp duty up front, which no doubt could have had an impact on sales volumes and clearance rates, but since that time the weekly clearance rate has remained above the 70 per cent figure, and selling prices haven’t faltered.

The Herald’s Kate Burke summarised the bright side of the picture: “Sydney had an auction clearance rate of 74.3 per cent last month, Domain data shows, the first time above 70 per cent since October 2021. It was higher still in pockets, reaching an exuberant 80.9 per cent in the Ryde region and upwards of 75 per cent in the city and inner south, inner west, north shore and eastern suburbs.

“The median home value has rebounded 4.8 per cent to about $1,052,800, as of May, on CoreLogic data that combines houses and units, its highest level in eight months. On CoreLogic’s calculations the weekly clearance rate topped 70 per cent for the past five weeks, also the strongest run since October 2021,” she wrote.

Ms Burke also pointed out there are some losers in the Sydney property market, many of them who’ve sold within two years of their purchase and have been impacted by rising mortgage rates: “CoreLogic’s latest Pain and Gain report shows…Sydneysiders made a loss on 10.7 per cent of property deals, the highest rate since 2009.” 

She also said that apartment owners were more likely to sell at a loss, and 17.5 per cent of units in Sydney were resold at a loss compared to just 2.3 per cent of houses. The highest proportion of loss-making sales were in areas known for their concentrations of units and investors were more willing to accept a loss as that could be carried over to their next property and offset future capital gains.

Louis Christopher, head of SQM research, said he is yet to see any signs of panic selling: "We look very closely at distressed selling activity, and we're not really seeing a material rise there," he said.
"So it's people who are calmly selling but, yes, there has been a pick-up of people selling within two years of buying."

Domain forecasts that Sydney will see housing price gains of from six to nine per cent by June 2024, lifting the median house price to a record of just over $1.6 million. Their calculations are based on high levels of net overseas migration, a tight rental market, and a reduced supply of new housing with rising costs of construction. Domain also predicts a two to five per cent rise for units. 

Domain’s head of research and economics Dr Nicola Powell said there were economic factors that would outweigh the downwards pressure from declining borrowing capacity, potential distressed sales, rising unemployment and sluggish real wages growth: “We’ve seen this happen before. The thing that’s underpinned growth has been the lack of supply,” she said, “…and it’s going to get worse.”

Westpac recently described the current house price rebound as ‘highly unusual’, noting it’s happened despite the series of interest rate hikes from the RBA. In Westpac’s own words: “Housing recoveries typically only emerge once the RBA is actively cutting rates or is very clearly poised to do so. Price gains also tend to follow a sustained lift in turnover, not vice-versa”.

Rates eased at last

Everyone with a mortgage or loan of any sort breathed easier after July 4 when the RBA announced there would be no increase in the prime rate this month and it would stay at 4.1 per cent. No guarantees that rates wouldn’t go up again in the coming months, but in his statement released after the Bank’s July meeting, outgoing Governor Philip Lowe said that, while inflation was still too high and would remain so for some time yet, it had "passed its peak".

The ABC’s David Taylor had a try at naming the five factors that will determine when the RBA will finally end all interest rate increases and begin easing its monetary policy. First, he mentions that slower economic growth as shown by a reduction in consumer spending would confirm to the Bank that its policies are having the desired effect.

The next crucial factor, he says, is rising unemployment. Not likely at present as there is a growing demand for both full-time and part-time employees, but this can easily and quickly be affected by changes to the economic climate, possibly causing layoffs and cutbacks. 

Mr Taylor then cites rising wage increases and higher productivity as being among his five factors, primarily because the RBA sees our current wages growth rate just under four per cent as being within its allowable range; productivity, however, is either static or decreasing and this could lead to higher prices for consumers.

The fourth factor is corporate profits. As long as employment growth is steady and wages continue to rise, workers will be able to meet higher prices and inflation will remain elevated. In other words, businesses can get away with charging more for what they produce because consumers will be able to meet these increased prices, thereby contributing to inflation.

And finally, the fifth factor is the rate of inflation as measured by the consumer price index, or CPI. The RBA’s target is for this figure to be between two and three per cent, and at the present rate just below six per cent we’re not close to meeting the RBA’s aims. 

However, the RBA has always said it takes at least a year for the impacts of an interest rate increase to be felt throughout the economy. The monthly inflation figures released by the Bureau of Statistics in June shows the annual rate of inflation falling from 6.8 per cent to 5.6 per cent – twelve months since it was this low. 

Admittedly, this is a composite figure and prices in some sectors of the economy, including bread, dairy products and rent, are still rising well above 5.6 per cent. But the costs associated with new homes have dropped by half over this time with housing purchase costs rising by 8.3 per cent this year – considerably better than last year’s 20 per cent. Prices are coming down as the RBA intended, and this was a good time for a pause to interest rate increases.

Thousands of missing homes

David Taylor from ABC’s ‘The Drum’ writes that there are thousands of ‘missing homes’ that could push Australia’s property prices even higher: “The bottom line is this: we are not building enough homes to meet the growing demand for housing. That will put upward pressure on property prices this year – despite soaring inflation and rising interest rates.”

He says that JPMorgan Research has uncovered tens of thousands of missing homes that were approved by authorities to commence construction, and should have been completed by now, but have not yet been built. An estimated 50,000 to 60,000 homes have been delayed by everything from labour shortages, materials shortages, or just by building firms failing financially.

Louis Christopher, head of SQM Research, says Australia is well behind where we need to be after completing around 180,000 dwellings last year: "This year SQM predicts that number will fall to about 165,000," Christopher says. "The fall is due to the increase in cancellations for which we are in agreement with JP [Morgan]."

Mr Christopher says that 240,000 dwellings were in the pipeline for this year, needed largely due to the massively increased number of migrants arriving in 2023-24, and that this has already contributed to the rise in dwelling prices for the first half of 2023.

"We've definitely had a significant increase in underlying demand, with the population growth right now running at about 2.3 per cent per annum," he said in an ABC interview.

Eliza Bavin from Yahoo Finance has no doubts that Sydney’s house prices will be at a new record high by the end of the next financial year. She sees the pressure from population increases as the key driver in creating a stronger demand for housing as something like 130,000 new dwellings will be needed to house the flood of immigrants from overseas heading our way.

She also factors in the problems in the construction industry and the ongoing weakness in property listings as contributors to the anticipated record price growth over the next twelve months.

NAB chief economist Alan Oster said price the current price growth had been fuelled by strong migration, low listing volumes, and expectations the cash rate was at or close to a peak. He expects the cash rate will peak at 4.6 per cent, then start to drop in mid-2023.

“[An important factor] in the changing dynamic of the market … was people thinking the RBA is nearly done and the RBA is trying to say, ‘hey we’re not done yet’.”

One who foresees a slowing in housing price gains is Yellow Brick Road chairman, Mark Bouris, who says he does not expect Australian house prices to continue increasing in the face of rising mortgage rates. Bouris thinks that housing supply will surge in the spring as households are fully impacted by the RBA’s interest rate increases. 

Mr Bouris told Sky News: “first and foremost the thing that creates increases in prices is when either one or two things occurs. First, if demand outstrips supply. In other words, we get an increase in demand and usually increase in demand is caused by more affordability and more affordability is created when interest rates fall.

“The second thing that can create house price increases at the same rate that we had in the last six months is if all of a sudden, supply – if supply stays the same, in other words stays very low”.

He concluded by saying that affordability won’t improve because interest rates won’t fall, nor will supply increase because there’s been such a low supply of housing over the last six months. This means that in the next few months more people will have to sell and they’ll be selling into a market with increasing supply.

Build up, not out

There’s little doubt that Sydney faces a serious housing shortage over the next few years, but no easy way to find a solution to this vexing problem. Geoff Roberts, the outgoing head of the Greater Cities Commission, told the Herald that parts of Sydney will need to double or even triple the number of homes they deliver in coming years to resolve the city’s “serious housing crisis.”

“We’re going to need to double, and in some cases triple, the number of houses,” he told the Herald in an exit interview. “We have to double – at least – the number of housing completions. That’s easy to say, much more difficult to deliver.

“We need to stop greenfields development,” Roberts said, referring to new housing in previously undeveloped areas which are often on the city fringe. There was a notable exception for the new metro line between St Marys and Western Sydney Airport. “That’s classically greenfields” said Roberts “but it’s going to have a railway line in three years’ time. Surely we should be optimising the housing and jobs around those stations,” he said. 

“We only build airports in cities once in 100 years. You can’t waste [that],” Roberts said. “We still don’t have enough jobs west of the Parramatta River.

He added that areas for more housing should include Bella Vista, Cherrybrook and Castle Hill, the Sydenham to Bankstown line which is being converted to metro, the Metro West line, Olympic Park and The Bays precinct.

“That doesn’t mean we’re all in high-rise apartment buildings,” he said. “We need to grade out from the railway stations back to semi-detached and detached dwellings further away. But quite close to railway stations, we need more people.”

On June 27 the Premier announced that the Greater Cities Commission was being abolished, saying the move would reduce overlap and duplication of finite public resources and help achieve his goal of more housing supply. “There’s no point having housing targets if you can’t deliver the housing,” Minns said. “This is about ensuring we have the right team in place to deliver the housing and infrastructure we so critically need in this state.”

The Minns NSW government had previously instructed the Commission to “rebalance” the targets closer to transport infrastructure and the city centre, with the north shore, eastern suburbs and inner west expected to get increases. At a speech in western Sydney, the premier, Chris Minns, said this state needs 314,000 new dwellings in the next five years but will only complete about 180,000 at the current rate of construction.

Mooted planning changes for NSW include giving any housing development valued at more than $75 million and with 15 per cent of its space used for affordable housing access to a “state significant development” pathway that would fast-track approvals. Developers proposing such projects will be able to also add 30 per cent to the ‘floor space ratio’ and build 30 per cent higher than the local environment plans allow.

In a related move, the NSW government is aiming for higher, denser residential developments. Premier Chris Minns said he wanted to see an increase in apartment builds, saying the focus should be on building up, not out, to reduce urban sprawl.

The biggest obstacle in this quest appears to be that developers have few incentives to build 3-bedroom apartments and most residential units now being constructed are not suitable for families. Census data shows that two-bedroom units made up 60 per cent of apartment supply in Greater Sydney in 2021, and fewer than one in six apartments (15.8 per cent) had three bedrooms or more. 

A study of new residential buildings in Liverpool led by University of Wollongong urban geographer Nicole Cook found that families preferred large, centrally located apartments over detached, car-dependent dwellings. She said developers are building the wrong types of apartments to house families because they make more money from smaller apartments.

“Our data suggests it is not only about the number of bedrooms but includes storage space (in the apartment and in common areas), bedroom size and sound insulation,” she told the Herald. “If the Minns government is serious about expanding high-density housing they need to do their homework … by knowing what type of families live in what type of apartments and at what proportions.”

What about ‘Mortgage Stress’ and ‘the Cliff’?

The term ‘Mortgage Stress’ is becoming increasingly common in articles that highlight the squeeze on household budgets created by rising interest rates and their consequent need for ever-greater mortgage repayments. Also having a run in the press is the term ‘Mortgage Cliff’, describing those borrowers who earlier locked in very low fixed rates now facing a big increase in debt repayments once their deals expire. This will affect about 880,000 borrowers throughout 2023 followed by another 450,000 in 2024.

However, so far this year there haven’t been many forced sales of Sydney properties resulting from mortgage stress or the mortgage cliff, and as far as the RBA’s concerned the majority of Australian households will be able to cope with the need for a greater share of their incomes to be diverted to mortgage repayments.

The RBA has already said that it expects debt repayments as a share of households’ disposable income to rise to about 10 per cent by the end of 2024 but commented that so far personal insolvencies remain at low levels.

The Bank estimated that in early 2023 more than 60 per cent of all home loans “had balances in offset and redraw accounts equivalent to more than three months of their scheduled payments” and noted that almost half of all mortgage holders had financial buffers equivalent to more than a year.

However, the Bank also expects 15 per cent of borrowers to experience negative cash flows in the coming months — a way of saying their incomings won't match their outgoings and they'll have to dig into their savings and tighten their belts.

CoreLogic’s Eliza Owen says there are a few ‘red flags’ showing up that could indicate areas of market stress in Sydney: ““When you look at some of the areas like the…Blacktown north market for Sydney, this is where we see a slightly worrying trend of listing volumes rising,” she said, although property prices have edged up in Blacktown. 

“Why are new listings rising…? Usually, this time of year it’s winter and listings should be going down, not up. New listings continue to rise, which is pretty curious. Maybe there are some people who feel they need to sell their property,” she noted.

Nicola Powell, head of Domain’s research and economics, said that indications of distress included terms such as ‘mortgage repossessed’, ‘urgent sale and ‘price reduced’ that turn up in property descriptions.

Domain data shows that there could be some pockets of forced sales in the greater Sydney area, naming the Blacktown area with 9.2 per cent of new listings in May designated as distressed, up from a rate of 5.2 per cent a year earlier. In Sydney’s south-west, another area of rapid population growth, the share of distressed sales among new listings had jumped from 4 per cent in May 2022 to 9.8 per cent in May this year. 

Quantify Strategic Insights head of data and insights Angie Zigomanis told Domain it wasn’t surprising some of the areas with the highest rates of mortgages were also recording spikes in listings but drops in prices.

“Those housing areas on the fringe typically bear the brunt. There’s a high percentage of first home buyers in these areas, they won’t have a lot of equity, they have a high loan-to-income ratio and they aren’t in the highest income brackets either. The moment those mortgage rates rise they put pressure on the borrower. 

Sydney has recently seen an uptick in new listings that’s ten per cent above the five-year average, although Domain’s Elizabeth Redman points out it’s mainly been in areas where a particularly large number of investors are selling up: “Sydney’s inner city had the largest jump in new listings, followed by mortgaged western suburbs around Parramatta, Auburn, Penrith and Blacktown,” she said. 

Westpac senior economist Matthew Hassan said he thought the CoreLogic analysis was valuable, but unseasonable rises in listings don’t necessarily mean that mortgage holders were distressed: “With respect to listings, one of the things we’ve come across recently, it does seem to relate to the differential between prices in the market,” he said. 

“A changeover buyer is also a seller. If there’s a big stretch involved to go from the current home to the new home that’s an affordability factor that’s not captured in other measures. We may be seeing listings improve because the gap between tiers has narrowed in the last few months.

 “Mortgage arrears to March are still relatively low,” he said. “They’ve lifted a little off a very low starting point, but they haven’t shown a wave of people who are selling because they’re stressed.”

The Herald’s Matt Wade also sees reassuring signs that mortgage stress isn’t causing much trouble: “The Australian Prudential Regulation Authority, which supervises banks, said in June the proportion of non-performing home loans ‘remained well below’ pre-pandemic levels at 0.72 per cent of outstanding residential mortgages. A modest rise in non-performing loans in the March quarter followed seven consecutive quarters of declines.

“A separate report by S&P Global Ratings said while the number of home borrowers behind on loan repayments had crept up, the overall share of mortgage arrears was “still below long-term averages”.


‘This year’s house price rise was a shock. But history left some clues behind,’ Jim Malo, Domain, 13 July 2023
‘The graph that shows stressed property owners may be starting to crack,’ Elizbeth Redman, Domain, 12 July 2023
‘Too much for me’: Sydney unit rents soar $145 a week in a year,’ Kate Burke, Elizabeth Redman and Jim Malo, Domain, 6 July 2023
‘The RBA has kept interest rates on hold. Here's why it'll be cautious from here on,’ Peter Martin, ABC News online, 5 July 2023
‘Own a home? You probably got richer during the pandemic,’ John Collett, Sydney Morning Herald, 4 July 2023
‘New data reveals where house prices are rising $2100 every week,’ Brooke Rolfe,, 3 July 2023
‘Sydney leads another house price rise,’ Josh Taylor, The Guardian, 3 July 2023
‘Perfect for us’: The Sydney suburbs no-one wants to leave,’ Kate Burke, Sydney Morning Herald, 2 July 2023
‘More recent buyers are reselling their homes, and that may be an early sign of mortgage troubles,’ Michael Janda, ABC News online, 30 June 2023
‘It takes a year for a rate rise to take effect – it may be time to halt the hikes,’ Shane Wright, Sydney Morning Herald, 29 June 2023
‘More Australian homeowners offloading properties at loss as interest rate rises take toll, new data shows,’ Peter Hannam, The Guardian, 28 June 2023
‘Morrison government HomeBuilder scheme 'overheated' construction, blindsided states and lacked controls,’ Daniel Ziffer, 28 June 2023 ‘Minns abolishes Sydney planning agency to bring control back in-house,’ Michael Koziol and Michael McGowan, Sydney Morning Herald, 27 June 2023
‘Home buyers refuse to surrender to RBA,’ Leith van Onselen, Macrobusiness, 26 June 2023
‘Clearance rates strong as first home buyers rush to avoid stamp duty,’ Bonnie Campbell, Australian Financial Review, 26 June 2023
‘Can big apartments solve Sydney’s housing crisis?,’ Andrew Taylor, Sydney Morning Herald, 25 June 2023
‘Developers ‘laughing’ about windfall under NSW government’s planning changes, mayor warns,’ Mostafa, Rachwani, The Guardian, 16 June 2023
‘Forced property sales on the rise in outer Sydney as interest rate hikes start to bite,’ Peter Hannam and Nick Evershed, The Guardian, 24 June 2023
‘Forget death and taxes, the real certainty in Australia is rising house prices,’ Greg Jericho, The Guardian, 15 Jun 2023
‘House prices were set to fall 20 per cent. Now there’s talk of record highs,’ Jim Malo, Domain, 22 June 2023
‘House prices will keep rising into next year, says Domain, as immigration boosts demand,’ Peter Hannam, The Guardian, 22 June 2023
‘Housing market braces for wave of forced selling,’ Leith van Onselen, Macrobusiness, 16 June 2023
‘How tens of thousands of 'missing' homes could push Australia's property prices even higher,’ David Taylor, ABC News online, 24 June 2023
‘Mortgage stress yet to bite, but 1.3 million on borrowed time,’ Matt Wade, Sydney Morning Herald, 24 June 2023
‘Property prices are about to skyrocket: Here’s why,’ Eliza Bavin, Yahoo Finance, 23 June 2023
‘Sydney’s property market is the best since the boom. But will it last?,’ Kate Burke, Domain, 18 June 2023
‘The five factors that will determine when the interest rate pain for households will end,’ The Drum, David Taylor, ABC News online, 18 June 2023
‘The suburbs where mortgage stress carries an extra risk,’, Jim Malo, Domain, 21 June 2023
‘Top tax tips to make the most of your investment property,’ Elizabeth Tilley,, 18 June 2023
‘Paddington apartment sold for $20 million amid trophy home market bonanza,’ Lucy Macken, Domain, 17 June 2023
‘Where Sydney, NSW home prices have doubled in just two years,’ Fiona Killman,, 22 June 2023