Market comment: Waving Not Drowning

Mon, 21 Aug 2023

Market comment: Waving Not DrowningPopulation, property prices grow faster than house numbers

Sydney’s winter may deliver cooler evenings, but in the light of day the heated property market continues to bring price increases that Domain calls ‘hyper-growth’. Nationally, home values have shot upwards at the fastest rate since 2021, and in Sydney the median house price rose $500 a day during the first six months of 2023.

The Reserve Bank eased fiscal tensions at its August meeting by once again leaving the cash rate at a reasonable 4.1 per cent for the second consecutive month. It’s looking like the outgoing Governor, Dr Philip Lowe, will depart his post on a positive note as far as homeowners with mortgages and those hoping to acquire property are concerned.

Nicola Powell, Domain’s head of research, noted that Sydney’s house price growth of 5.3 per cent in the June quarter was “reminiscent of the boom times”. To be more specific, at the end of the June quarter the median house in Sydney cost $1.538m which was about the same as twelve months earlier. Prices are now just below their peak in February 2022.

Ms Powell did note that Sydney’s quarterly increase was not far short of twice the average historical advance of 2.8 per cent, but further rises would start to test affordability limits. “One of the key things underpinning this price recovery has been the lack of supply [and] that dynamic is starting to change.”

Another problem for would-be first-home buyers is that it now takes up to $100,000 more than it did four years ago just to come up with a 20 per cent deposit on a median-price Sydney house. The size of a deposit has jumped from $206,964 in June 2019 to $307,603 today.

One interesting fact revealed by digital settlement firm Pexa is that more than one in four transactions for dwellings or land in NSW, Victoria and Queenland were made for cash – that is, without a mortgage. This is attributed in part to retirees downsizing, but it’s not exactly a new phenomenon; the share of cash purchasers in the eastern states has held steady around 25 per cent for the past five years and that means they’re pretty much immune to rises in interest rates.

The latest Domain House Price Report shows that Bellevue Hill headed the list for house price growth over the year to June, with its median sale price rising 18.4 per cent. Bronte and Cronulla were also among the top-growth suburbs, as were Merrylands West, Auburn and Box Hill, all with a rise of more than five per cent.

The report also found that Milsons Point had the most unit price growth, up 25 per cent, while Wahroonga, Elizabeth Bay, Schofields, Meadowbank and Rockdale also had solid gains.

One of the Big Four banks, NAB, is now predicting that Sydney property prices will rise by 6.9 per cent by the end of 2023 with a further rise of 4.9 per cent in 2024 – that’s a massive gain of almost 12 per cent, clearly showing the bank’s expectation that the imbalance between supply and demand will outweigh the affordability issues generated by interest rate increases.

“We have revised up our expectation for dwelling prices based on the recent resilience and outlook for strong housing demand in the near term, while supply growth continues to be challenged by higher rates and supply side pressures,” NAB’s group chief economist Alan Oster said in its latest residential property survey.

“That said, we see the pace of price growth slowing in (the second half of 2023), with (capital city average) prices remaining broadly flat but ending the year around 4.7 per cent higher based on price gains in the year to date.”

CoreLogic’s research director, Tim Lawless, said that Sydney leads the field in home value growth: 
“Sydney home values increased another 1.7 per cent in June, taking the cumulative recovery since January through to 6.7 per cent," he told ABC News. "In dollar terms, Sydney’s median housing values are rising by roughly $4,262 a week."

Mr Lawless said that interest rates will continue to be a big factor in the housing market’s performance: “Forecasts on where the cash rate will land and how long it will stay elevated vary, but it’s likely there is at least one more rate hike to come, potentially more.

"It’s hard to imagine the recent pace of growth in housing values being sustained while sentiment is close to recessionary lows and the full complement of borrowers are yet to experience the rate hiking cycle in full,” he said.

Mr Lawless credits the ongoing lack of supply for keeping upward pressure on house prices: “Through June, the flow of new capital city listings was nearly -10 per cent below the previous five-year average and total inventory levels are more than a quarter below average. Simultaneously, our June quarter estimate of capital city sales has increased to be 2.1 per cent above the previous five-year average.”

Speed limits

In the meantime. Leichhardt is still the fastest-selling suburb in Australia where houses spend an average of just 34 days on the market – about half Sydney’s average. It must be noted that houses in Leichhardt are taking six days more to sell this year than they were a year ago.

Arthur Barrett of The Agency Inner West says buyers are less committed to buying as quickly as they did last year: “The reason [Leichhardt] sells so quickly is because it has a lot of smaller homes with more affordable price points of $1 million to $1.5 million,” Barrett says. “Most of what we see are two-bedrooms, semis and townhouses that attract a wide range of buyers, from downsizers to investors, first-time home buyers and empty nesters.”

Sydney buyers’ agent Dan Sofo, founder of Unicorn Buyers Agents, said that the segment of the market comprising inexperienced buyers and vendors, particularly, has been beset by FOMM (Fear of Making Mistakes): “Those buyers who are Baby Boomers and who have bought and sold in a number of markets in different cycles are more confident to act, but all others are being numbed into indecision” he said.

“If you’re only buying your first or second house, or selling for the first or second time, we’re finding a lot of people are just bewildered at the moment by what’s happening in the market,” he said. “The buyers are saying, ‘What happens if I make a mistake and pay too much?’ The vendors are worrying that they won’t find anywhere else to buy when they sell their homes. So, we’re all doing a lot of appraisals at the moment, but people are just not acting on them.”

Some properties changing hands in “lifestyle” pockets on the fringes of Sydney have traded for below the list price as sellers’ often overoptimistic expectations aren’t being realised. 

PropTrack data shows that the Southern Highlands and Shoalhaven regions had a high proportion of properties sold below list price in June at nearly 76 per cent, with 23 per cent trading at the asking price and only 1.4 per cent selling for over.

In the Hunter Valley the proportion sold below asking price was 57 per cent, while in Sydney’s St George and Canterbury-Bankstown region it was 54 per cent. The Illawarra, where there was another boom market during the pandemic, saw 46 per cent of sales come in below the list price, PropTrack reported.

The bedroom crisis

As Australia’s population grows, so does our rate of population growth, spurred on largely by the number of migrants entering the country.  Former RBA governor Philip Lowe warned just before it was announced he was leaving the Bank that the rate of rental price growth would remain high “for a long time” and said our high population growth was a major factor: “The population is increasing by 2 per cent this year, are there 2 per cent more houses? No,” Lowe said.

Unlike the previous period of high population growth in 2008-2009, reflecting a high rate of births in Australia, the current increase in population is driven largely by the immigration of adults. This creates a significantly greater demand for additional housing than if the growth was in children that would be joining existing households.

As property agency CEO John McGrath explains: “Migration will be a key factor driving growth in Australian property in FY24.  International students are returning and importantly we’re opening the doors to more skilled migrants in order to close a very big gap in our labour market.” 

The latest census data found there are more than 28 million bedrooms across Australia, not counting those in dwellings that were unoccupied on census night. A survey by the Australian Bureau of Statistics concluded that around 46 per cent of these, or 13 million bedrooms, were empty during 2019-20, largely in households occupied by couples without children or in single person households.

So, what might convince those who are the current owners of these homes with surplus bedrooms to downsize and free up some of these unoccupied bedrooms? It’s not simple, partly because the gap between the price of the family home and smaller, downsizing alternatives isn’t very great after transaction costs including relocating. It’s also to do with the potential impact on pensions and the shortage of potential housing into which downsizers can move.

The Baby Boomer generation is important in this issue. In 2005, 17.5 per cent of households were headed by someone 60 years of age or over, but in 2023, that proportion has risen to 22.9 per cent. Rates of housing turnover have slowed as a result, and this has also led to a slowly diminishing supply of stock coming to market.

Demographers tell us the Australian population will continue to age and unless there’s some new ways to incentivise the ‘Boomers’ to downsize, the impact of this issue will grow and in time become a political issue. The federal government’s downsizer contribution arrangements that let eligible homeowners contribute up to $300,000 from the proceeds of the sale ($600,000 for couples) of their home into their superannuation fund is a good beginning.

Mortgage stress may be rising

Domain’s Kate Burke says that distressed property listings in Sydney’s western and south-west suburbs, and also in some inner pockets, have increased year-on-year, Domain figures show, as the fall-out from 12 cash rate hikes hits borrowers: “Although the share of urgent listings remains low overall, they more than tripled year-on-year in the Bringelly-Green Valley region, covering suburbs such as Austral and Leppington, to 7.3 per cent”, she said. 

“Listings more than doubled in Penrith and Camden, but to lower rates of 3.3 and 2.4 per cent. They also climbed to 8.8 per cent in the Blacktown region, and increased in the Liverpool, Carlingford, Bankstown, Campbelltown and Botany areas, making up between 4.5 and 5.5 per cent of listings.”

Another possible indication of mortgage stress is seen in CoreLogic data prepared for the ABC showing that the percentage of properties being sold after being owned for less than two years is at a nine-year high. 

"We've seen these short-term loss-making resales of two years or less go from 3.4 per cent of loss-making resales in the March quarter of 2022 to over 12 per cent in the March quarter of 2023," said CoreLogic’s head of research Eliza Owen, "so a lot more short-term sellers are willing to sell at a loss at the moment."

Yellow Brick Road Home Loans Executive Chairman Mark Bouris worked out the details of how increased rates have hit some borrowers: “If you took on a $500,000 loan in say, late 2020, your average monthly repayment would be about $1850.

“Fast-forward two years later, when your rate goes from 2 per cent to 6.5 per cent, your monthly repayment would rise to more than $3000. That’s a 50 to 70 per cent increase in monthly repayments, depending on the exact nature of their loans.”

AMP’s chief economist Shane Oliver said he had expected a greater increase in distressed selling by now, but households had been supported by saving buffers, mortgage pre-payments and the strong jobs market. He did say there has been an increase in urgent sales, as household budgets are affected by rising mortgage repayments and many households that had been on low fixed-rate loans had to refinance at much higher rates

“The problem is that all of those supports are coming to an end. The saving buffers built up in the pandemic are getting run down ... and of course we’ve got this fixed rate reset getting under way,” he said.

Roy Morgan research says that more than 1.4 million borrowers are considered at risk of mortgage stress, the highest level since May 2008 just before the global financial crisis struck the world’s finances. That is 539,000 more households than were thought to be at risk before the RBA started its string of interest rate rises in May last year.

Roy Morgan estimates the number at risk will pass 1.5 million, to hit 30 per cent of mortgage borrowers, if the Reserve Bank raises interest rates again and takes the cash rate to 4.35 per cent.
The company's chief executive, Michele Levine, also said that number would increase if unemployment also jumps.

"If there is a sharp rise in unemployment, mortgage stress is set to increase towards the record high of 35.6 per cent of mortgage holders considered 'at risk' in May 2008 during the global financial crisis," she told ABC News, saying she is even more worried about the rise in households that are seen as "extremely at risk", because just the interest component of their mortgage exceeds an affordable proportion of their income.

Erin Kitson from ratings agency S&P Global said her firm has noticed arrears have been edging higher, but this was from a very low base during the pandemic period: "Mortgage arrears have been increasing for a number of months now, and that's not surprising given the rapid rise in interest rates that we have seen," she said.

Ms Kitson agrees that arrears will rise as more borrowers refinance their cheap fixed loans onto much higher variable rates: "I think that arrears certainly haven't peaked yet," she said.
"I think that further arrears increases are ahead of us, particularly because the cash rate, we don't think it has peaked yet.

"In terms of when we think arrears are probably more likely to peak, I think we're more likely to see that towards the end of the first-half of next year," she said, but feels arrears and defaults will not rise to dangerous levels: "Because unemployment is still quite low and is forecast to remain relatively low," she explained. "That is certainly going to help keep mortgage defaults at not particularly high levels, and certainly not levels where we're concerned about high levels of distressed selling."

Investor uncertainty

Economic uncertainties are often reflected in the opinions of property investors. Some recent comments from a survey commissioned by taxation software developer TaxTank show that investors have a few interesting areas of concern. In the survey, more than 600 Australian property investors were asked questions about how the changes to conditions in the property marketplace were affecting their feelings as the end of the financial and taxation year was getting close and how they felt about their ability to manage their finances.

Eighty per cent of property investors told the survey they believed interest rates will continue to rise. More than half of respondents said they’d already taken action to manage their loan repayments, including increasing rents. One third said they’d already raised the rents on their properties, another fifteen per cent said they’d begun efforts to raise their rental incomes, and seven per cent said they were going to sell their properties.

TaxTank founder Nicole Kelly told “This is putting many taxpayers in difficult situations, where they need to simultaneously weigh up the pros and cons of managing a property with the realities of needing to pay larger monthly bills amid an uncertain economic backdrop,” Ms Kelly said.

But our current situation makes it hard to predict what will happen next. AMP chief economist Shane Oliver says he’s never seen property prices react to a rate hiking cycle the way they are now in his decades-long career: “It’s not just the ’90s rate hiking cycle which makes this one stand out,” he said. “The normal relationship is rates go up for a while, then you get a weaker jobs market and the impact of rates start to lag and then prices come down. Then it’s only after interest rates fall, prices start to bottom out.

“This time it’s all back to front. Earlier this year [prices] bottomed out and then started rising when rates hadn’t stopped rising.”

Supporting the idea that some investors might be selling out, short-term property resales are on the rise, and experts say some owners could be choosing to get ahead of the debt collector and sell before being forced, while others are just cashing in their investments.

CoreLogic data show the percentage of property resales that happen within two years has risen across the country, to 8.3 per cent in April from 6.3 per cent a year earlier. CoreLogic head of Australian research Eliza Owen said it was significant because short-term resales typically increased when house prices were strong.

She said that a rising trend of flips outside a boom market could indicate property owners were choosing to sell rather than being forced – such as in Melbourne and Sydney, where prices have been growing but not soaring.

Westpac senior economist Matthew Hassan said he thought the short-term resellers were most likely to be investors: “The pinch is harder for investment properties, they have higher rates typically and notwithstanding the rise in rents they wouldn’t have kept up with mortgage increases,” he said. “They may well be reconsidering, and think, ‘It may be time to offload and meet my mortgage payments on my principal place of residence’.

New RBA governor and house prices

The current RBA deputy governor Dr Michele Bullock has been appointed the next governor of Australia's central bank. She has worked at the Bank for almost 40 years including the past 13 in senior executive positions and is the Bank’s first female governor in its more-than 60 year history.

Federal Treasurer Jim Chalmers had earlier ordered a review of the RBA’s performance under the leadership of Dr Bullock’s predecessor. The review’s findings, released in late March, were critical of Dr Lowe and of the Bank’s proclamation that rates would stay down for three years – a proclamation that had encouraged around 1.2 million first-home buyers to purchase homes by borrowing with the expectation that their repayments wouldn’t skyrocket as they did when rates were raised again and again from May 2022.

Yes, the RBA will have a new governor but it’s not likely to change the Bank’s positions on things like the rate of inflation, unemployment, or even the all-important cash rate. In August 2022, Dr Bullock said that Australian households were in a “fairly good position” to cope with further rate hikes. 

Before that, in March 2019, she said the substantial increase in apartment construction since the start of the decade could potentially be "sowing the seeds of a decline" when prices had started falling in both Sydney and Melbourne. 

And in March 2017 she was quoted as saying: "There are indicators that, in the event of a downturn, there might be systemic issues for the banking system. It is about whether or not they are adequately provisioned, whether their lending standards are adequate, and if there is an oversupply and falling prices, whether they end up underwater or wearing larger losses than they expected because they hadn't anticipated this”.

Ian Verrender from the ABC says we can expect to see a lot more of Michele than we have in the past after the Treasurer’s review came down so hard on Dr Lowe: “The review has demanded more transparency and accountability from our central bank, so you can expect to see and hear a great deal more from Michele Bullock about the decisions being made and the direction the RBA is attempting to forge.”

Although just like her predecessor, we may see the new RBA governor at dinners, forums and conferences, it’s not likely that the latest change at the top of the RBA is going to mean any automatic relief for borrowers, at least in the short term.

Finance journalist Alan Kohler expects the RBA under Michele Bullock to get inflation down from above seven per cent without delivering a recession, not an easy thing to do. Peter Martin from ABC News writes that this would be a world first: “There was a recession when the bank tried to get inflation down below 7 per cent in the mid-1970s, in the early 1980s, and in the early 1990s.

"That we might be able to pull off yet another first ought no longer to surprise us, after all of the firsts during COVID. Enduring Australia's (brief) 2020 recession without unemployment climbing above 7 per cent was also a first. The minutes of the Reserve Bank's June board meeting …show it is prepared to countenance such a first.”


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‘Aussie homeowners are now sitting on staggering amounts of wealth despite rate rises,’ Aidan Devine,, 12 August 2023
‘Moving goalposts? The next hurdle for hopeful home buyers,’ Melissa Heagney-Bayliss, Domain, 9 August 2023
'Premature' house price rebound raises risks of double-dip downturn despite RBA interest rate pause,’ Michael Janda and Stephanie Chalmers, ABC News online, 2 August 2023
‘Rate rise burnout: Have interest rates finally peaked in Australia?,’ Sue Williams, Domain, 4 August 2023
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