Prices up, cash rate steady, affordability down

2024 is underway, with a Sydney property market that’s still big on demand and short on supply. There’s also an ever-growing set of challenges for those wanting to enter the market that are the result of recent economic developments, as is shown by new data from CoreLogic.

Tim Lawless, CoreLogic’s director of research, says that households earning a median income can no longer afford a median-priced home in most capital cities including Sydney. Housing prices have rebounded even better than expected, despite last year’s interest rate increases:

“It’s hard to see this trend turning around until either housing prices fall or interest rates come down,” he told the Australian Financial Review.

“It’s looking more likely that interest rate cuts would help improve affordability this year from a mortgage serviceability perspective considering that housing prices are likely to hold relatively firm if not see some mild growth due to burgeoning undersupply.”

Prices increased by 0.6 per cent through the final three months of 2023 - the lowest quarterly increase in inflation since March 2021. This brought the annual rate down to 4.1 per cent from 5.4 per cent. 

Housing prices most certainly haven’t come down. A median-priced Sydney home is now a record $1.6 million. To be specific, the median house price gained 2 per cent in the December quarter to reach $1,595,310, the latest Domain House Price Report showed. That represents a 10.6 per cent gain from a year earlier.

Although the 0.4 percentage point rise in national property values in January may not sound impressive, it represents an enormous financial gain for the Australian property market. In terms of dollars this means housing values just over the past month have gone up about $3,000 per dwelling.

Despite worsening housing affordability, the volume of home sales held slightly above average over the past three months.

CoreLogic estimated there were 115,241 dwellings sold over the three months ending January; 11.9 per cent higher than the same period last year and 0.5 per cent above the previous five-year average for this time of the year.

Affordability has dropped considerably in just the past couple of years CoreLogic data shows; in 2021 61 per cent of suburbs nationwide were considered ‘affordable’ for households buying an average priced home with a 20 per cent deposit, but in 2022 the figure had slipped to just 26 per cent of all suburbs.

More data from RateCity shows that in the past five years monthly mortgage repayments on a median-priced house have jumped to $4195 from $2030 in 2019, while house prices increased from 5.8 per cent annual growth in 2019 to 8.6 per cent in 2023.

And as always, Sydney is a statistical standout. Sydney has no affordable markets for those earning a median income looking to buy a median-priced house. It’s almost hard to believe that five years ago more than a third of houses on the market were affordable for median-income households. 

Demographer Mark McCrindle of McCrindle Research explains why the old method of saving up a 20 per cent deposit to purchase a home is no longer viable: “It would take more than a decade to save the 20 per cent deposit, so homebuyers have to think of ways to fast-track that process such as accessing some capital from the bank of mum and dad,” he said.

“They could also look at group buying or moving into areas where they are not spending most of their income on rent or mortgage repayments. They can also consider renting for a while and invest their money in other areas.”

Another way of looking at the current market comes from AMP chief economist Dr Shane Oliver who said that house prices are now about 30 per cent less affordable than they should be, based on a comparison with what Australians can afford to borrow and therefore pay for a home.

He said that historical analysis shows that the two figures are typically linked and over time they will usually follow the same trend: “It’ll close eventually. But it’s debatable,” Oliver said. “In terms of will it close this year, to get that to happen it would require a massive cut in interest rates. We’re looking at three, but you’d need ten.”


Pressure off RBA

Some good news came at the end of January when the ABS announced that Inflation has fallen to its lowest level in two years, dropping to 4.1 per cent. This takes the pressure off the RBA for any further interest rate rises at this point in time.

More good news came on February 6 when the RBA announced it was holding rates steady at its first 2024 board meeting. The official cash rate of 4.35 per cent was retained, although the Bank said it couldn’t rule out the possibility of any future rate hikes at this time.

The good news came just in time for those taking out a new mortgage. The ABS has revealed the average new mortgage size as of December was a record high of $624,383 across Australia, with NSW leading the tally with an average of $785,405.

There’s now an expectation among market-watchers that the RBA will cut its cash rate at least once and perhaps even twice before the end of 2024 which would be good news for homeowners with mortgages considering that since the end of 2020 the monthly repayments on an average new loan have risen around 55 per cent while wages have gone up by about 8 per cent.

CoreLogic's head of residential research, Eliza Owen, says buyers are trying to get in ahead of expected rate cuts later in the year: "The uplift that we're seeing could be a reflection of an anticipation that interest rates have peaked," she said.

"That comes back to limits associated with high interest rates. And the fact that even relatively high-income earners are seeing a limitation to their borrowing capacity or might just be deterred from the high interest costs associated with those home purchases."

PropTrack economist Anne Flaherty said the RBA’s decision to keep the cash rate steady had been expected after the latest economic figures showed inflation slowed faster than the Bank had predicted. 

"Headline inflation came in at 0.6 per cent over the December quarter, the lowest growth in consumer prices since March 2021 and below the RBA’s forecasts," Ms Flaherty told realestate.com.au.

"This continues the trend of declining annual growth in consumer prices and increases the probability that interest rates have hit their peak in the current cycle."


Retracements in sight?

You might be wondering if anything we can see now might eventually cause the Australian housing market to go into reverse. For now, the future seems assured, complete with rising prices. 

The latest ABS housing loan figures show that in November the value of new housing finance was 13 per cent above that of a year earlier, and that’s a clear indication house prices will continue to rise for at least the next six months. Remember too that November was the RBA’s last interest rate rise for a total increase of 425 basis points, and with no further increases in sight there’s every reason to expect prices to keep going up.

Westpac senior economist Matthew Hassan told Domain that a lack of listings helped push prices higher in Sydney where the demand was red-hot: “The resurgence in population growth and migration flows and a significant tightening in rental markets and rising rents meant a price-led upturn,” Hassan said.

Hassan said he expected Sydney’s price growth to slow this year, as a lack of affordability impacted the market and buyer demand softened. While there were many units for sale in Sydney, buyers preferred houses and there were unit build quality issues in the news again, he said.

“It’s the $1 million question,” Hassan said. “As affordability worsens, are people going to stay put, go to apartments or move to cheaper areas or states?”

“Tax relief is coming through and there would be some other policies waiting in the wings because state and federal governments are keen for more new houses to be built,” Hassan said. “We do expect prices to rise, but something has to happen to really kick it along.”

Cameron Kusher, PropTrack's director of economic research, said that in Sydney PropTrack observed a "big uplift" in new listings which took some heat out of the local markets.

"And if we look at the data from APRA [Australian Prudential Regulation Authority], which looks at who's borrowing, we have seen more activity from people with larger deposits," Kusher said. "So you're seeing more lending to people who are fairly comfortable and probably not impacted by higher interest rates as other buyers."

Belinda Moore, a senior economist at the Commonwealth Bank of Australia (CBA), forecast that the value of houses will jump by five per cent over the next 12 months.

“Overall, we expect a lift in home prices of five per cent in 2024,” she said. “But more modest price gains until an easing in interest rates from the RBA later in 2024 (our base case in September 2024 for the first cut).”

Oxford Economics Australia says Sydney's median house price is forecast to increase by 5.9 per cent over the two years to June 2026, while median unit prices are expected to jump by 8.3 per cent during the same period.

But recent research from the Commonwealth Bank confirmed that it’s not just tenants who are feeling financially stressed. Figures from the CBA show that record numbers of both renters and buyers are now experiencing financial stress, meaning they spend more than 30 per cent of their incomes either on servicing a mortgage or on paying rent.

Exactly how these stresses will affect Sydney’s rental rates and property prices in 2024 won’t be known for some time, but there’s no doubt their impacts will increase over the next few months.

Rental pain persists

Rental prices in Australia’s capital cities rose 13.2 per cent in 2023 and are expected to continue their upward trend. Units in Sydney have seen especially sharp increases in 2023 with median rental prices rising 17.2 per cent.

The Domain Rent Report showed that house rents across the combined capitals held at a record high median of $600 a week in the three months to December. This was up 9.1 per cent year-on-year and remained unchanged over the quarter.

Domain chief of research and economics, Dr Nicola Powell described the rental market as ‘highly competitive’ in 2023 and said the market was ‘skewed in favour of landlords’.

“The perilous conditions saw the year hit a record-low vacancy rate driving the longest continuous stretch of rising asking rents (also at a record),” says Powell. “It’s the first time in almost three years that we’ve seen house rents across the combined capitals flatline…ending the record-breaking stretch of 10 consecutive quarterly increases.”

She said that Sydney remains the most expensive city in which to rent a house or unit at $730 and $680 a week, respectively: “Many dynamics are shifting in 2024 which is an indication that we’re moving away from this extreme period of rental growth that we’ve seen over the last couple of years …  I do think that we will see better conditions for tenants in 2024.”

Everybody’s Home spokesperson Maiy Azize said renters were struggling to keep up with the continued increases: “Years of unchecked rent increases are taking a toll, with hundreds of thousands of Australians stuck in rental stress because they simply don’t have a choice,” Azize said. “Vacancy rates have crashed and they just cannot find an affordable rental.”

A report from PropTrack found the number of December listings was 30.2 per cent below the past decade’s monthly average. The company’s senior economist Angus Moore says there are signs of a slowdown in some parts of the country but rises will still be seen in most markets: “Maybe the small silver lining, the small comfort to renters, is it is a bit slower than what we saw the previous year, in 2022, when we saw growth just shy of 18 per cent.

“So there are some signs that things, at least in some parts of the country, are starting to slow down. But we’re still seeing very strong growth in places like Perth, Sydney and Melbourne. So we’re far from out of the woods for renters.”

The national rental vacancy rate that measures the proportion of all rental properties that are vacant and available rose 0.05 percentage points higher in November to reach 1.12 per cent. 3 per cent is considered to be a good balance between the interests of landlords and tenants, and latest data shows Sydney’s rental vacancy rate was 1.37 per cent in December.

The rental market may have begun a slight rebalancing as investors have begun returning to the property market, seeing the demand for rental properties increasing along with a surge in rental rates. In Australia more than 80 per cent of renters live in properties that are privately owned, meaning that renters depend on others to provide their rental accommodation. 

After weakening in late 2022 the number of investors taking out loans for property has grown to well-above pre-pandemic levels. This should translate to an increase in rental stock, although for most of 2021 more rental properties were sold than were added to the market. 

Over 2022 and 2023 the selloff of rental properties moderated, but overall the number of rental properties available for rent grew by just an estimated two per cent in each of those years. It’s now estimated that the total number of rental properties is roughly 250,000 homes less than if pre-pandemic growth rates had continued.


First-home buyers challenged

First-home buyers’ activity reached a new low in early 2023 but showed some signs of life late in the year. New owner-occupier loans rebounded 25.9 per cent by October, as shown by the latest figures from the Australian Bureau of Statistics. They finished the year up 6.8 per cent annually, but still below the five-year average.

The total number of first homebuyer loan commitments in December was 9491 Australia-wide, a sharp 8.4 per cent fall from November. The value of first homebuyer loans also fell 5.5 per cent to hit $4.8bn.

Meanwhile, loans to property investors have reached a six-year high as a share of total home lending. ABS figures show that more than 36 per cent of all housing finance in December went to investors. The first-home buyers’ share of finance, about 18 per cent, is just half that of the investors who are competitors in same space.

Master Builders Australia CEO Denita Wawn told news.com.au that the December decline meant first-home buyers now accounted for less than one third of housing loans: “During 2023, first home buyers struggled against the backdrop of larger than expected interest rate increases as well as resurgent house price growth,” she said.

“Strong rental price growth has also eaten into their financial capacity and slowed down the process of saving for a home purchase deposit.”

Curtin University research fellow Dr Christopher Phelps says his recent research showed that in 1998, older Australians had 2.6 times the home equity of younger Australians, but by 2018, this ratio had increased to 3.3 times.

“Older generations, who entered the property market in their 20s and benefited from the real estate boom of the 2000s, can use their existing property wealth to accumulate more housing wealth for themselves or their own children, creating a divide between and within generations.

“Young persons from well-off families are more likely to overcome deposit requirements and become homeowners, while those from less privileged backgrounds may not receive parental support, making it harder for them to own a home and access desirable areas with good job opportunities in our cities.”

Research by Suburbtrends found Australian households now need to earn more than $300,000 a year to comfortably afford to buy their own home.

The study analysed more than 22,000 property sales in 2023, finding median house prices were nine times household incomes — triple the so-called “median multiple” of 3.0 generally considered to be “affordable”.

Kent Lardner, founder and chief analyst at Suburbtrends, told Nine News the research showed home ownership was becoming out of reach for the average Australian. “The bank of mum and dad is great if you’re from the right parents,” Mr Lardner said.

“But if you don’t have access because you were born in the wrong postcode, or don’t have wealthy parents, then you’re increasingly being locked out entirely. Because if you move into the rental market, good luck trying to save a deposit while you’re spending 31 per cent or more of your household income on rent.”

The report found the median household income required to buy a home on Sydney’s northern beaches was $600,000 per year, and still as high as $283,000 in the city’s outer west and Blue Mountains regions.

Commonwealth Bank’s head of Australian economics, Gareth Aird, said Sydney’s price growth had been supported by the strong rental market, which gave first home buyers an incentive to purchase. Fewer homes for sale, a pickup in wages and foreign buyer interest had an impact, as had the bank of mum and dad.

“We’ve definitely had some wealth transfer coming through…it’s hard to know exactly how much that is worth, but that flow is definitely helping to support home prices,” he said.

But with stretched affordability weighing on buyer demand, and an uptick in listings now giving buyers more choice, price growth would slow until interest rates fall.

“Sydney is the least affordable it’s ever been [in recent history]…if you look at the amount of income now needed to service a mortgage,” he said.

ANZ senior economist Adelaide Timbrell outlined the major challenges for first-home buyers that were set to continue into 2024 - rising prices, higher interest rates and inflation, and more expensive rents.

“If you’re in the rental market you have less left over to save for a home…and inflation is running higher than usual, so your cost of living is also taking away from your ability to save, while higher interest rates are reducing your ability to borrow,” Timbrell said.

“House prices have also risen and will continue to rise, so your deposit is chasing after that too,” she said, adding that reduced borrowing power meant increased demand for cheaper properties, which was pushing prices up for that market segment.

Domain’s Maria Gil says house deposit costs have increased by 100 per cent in the last decade: “The amount of money buyers need to save for a house deposit in several capital cities has doubled in the past 10 years, making it more challenging for first-time buyers to enter the market without the help of the bank of mum and dad.”

Sydney buyers’ agent Michelle May said 2023 had been a tough year for first home buyers, and 2024 was likely to follow suit: “We had a fair amount of first home buyer interest, probably more than [in 2022] but we’re finding most of them will have help from the bank of mum and dad … we see a mix of cash gifts, loans and guarantees,” May said.

A survey of mortgage brokers by Jarden late last year found about 15 per cent of all borrowers were purchasing with family assistance, with two-thirds of those receiving a cash loan or gift with an average value of $70,000.


Building more housing

Keep in mind that NSW has been given the goal of constructing 75,000 new homes in 2024 to meet the target set by the federal government in August last year as part of a bigger plan to build 1.2 million homes across Australia over the next five years. NSW premier Chris Minns has admitted the government would fall short of the goal but was building as many houses and units as possible.

The Premier’s solution: ‘Build up, not out’, is supported by NSW Productivity Commissioner Peter Achterstraat who explained “If we keep playing musical chairs with too few homes, it is the youngest and lowest-income people among us who will lose.”


But the government can’t do the actual work of increasing housing supply; this depends on having the support of the housing and construction industries. Property Council of NSW executive director Katie Stevenson said short-term problems in the housing sector should not be allowed to sabotage long-term goals for the state to build almost 380,000 homes by the end of 2028.

Ms Stevenson mentioned ‘exceptionally high’ building costs as one of the problems: "We've got a whole lot of development going on here in NSW in infrastructure but also in other states, we've got Olympic infrastructure being built just over the border in Queensland, and that's drawing tradies away."

Master Builders Association executive director Brian Seidler agreed that finding skilled tradespeople would be difficult, but also nominated high interest rates and rising costs as stumbling blocks: "In the commercial sector, particularly when we're building apartment buildings, the developers…that is, the people who are putting up the money, are going to need the planets to align so that the outcome for them is worth going into the project and if it isn't, those sorts of projects get put on hold," he said.

The Guardian’s Peter Hannam says the federal government’s hopes are ‘fading fast’: “December recorded a drop in dwelling approvals of almost 10 per cent from November, the Australian Bureau of Statistics reported on Thursday. Approvals for apartments sank 25.3 per cent. 

“For the full year, approvals totalled about 162,200 – the lowest annual rate since March 2013, according to NAB,” he wrote.

Leith van Onselen, Chief Economist at the MB Fund and MB Super, also notes that dwelling approvals, commencements, and completions are each tracking around decade lows at the same time as the nation’s population is growing at a record pace: “The upshot is that there is no end in sight to Australia’s housing shortage, with demand via population growth certain to continue overrunning supply.

“Instead of dreaming up fanciful housing targets, the Albanese government should instead take the pressure off demand by slashing net overseas migration to sensible and sustainable levels below 150,000 a year.”

AMP head of investment strategy and chief economist Shane Oliver has called for lower immigration to address housing affordability, saying “the role of high immigration levels can’t be ignored”.

“On our estimates it needs to be cut back to nearer 200,000 people a year to better line up with building industry capacity and to reduce the chronic housing supply shortfall,” he said in a September note.

The NSW government has already announced plans to build more than 200,000 homes and focus on higher housing density by building up, not out. It plans to build 138,000 new homes at rezoned sites in 31 suburbs, and 47,800 homes near eight major transport hubs, although this will be part of a 15-year plan.

Developers in those zones will be able to access a fast-tracked approvals process, called a state significant development, to ensure apartments are built quickly. This will apply to developments costing over $60 million with construction to commence within two years of approval.

Minns is finding a lot of resistance to his housing plans coming from local councils who say his proposed reforms are ill-conceived and will reduce living standards. In addition to the three councils we listed last month, the Canterbury-Bankstown council is considering legal action against the reforms while Fairfield Mayor Frank Carbone said the proposals would “turn western Sydney into Kolkota”.

However, perhaps surprisingly, a recent Ipsos poll found that 34 per cent of Sydneysiders somewhat supported developing existing suburbs for higher density, and another 18 per cent strongly supported the idea. Support (either strong or somewhat strong) for redeveloping existing suburbs to accommodate higher density rose to 52 per cent from 44 per cent this time last year. 

Developers are already responding to the Minns government’s plans with a number of property owners in Sydney’s north shore suburbs reporting approaches to purchase their properties. The Herald’s Michael Koziol quoted from a letter to homeowners from developer Landmark Group, dated January 15, noting their land was earmarked for rezoning and saying: “We are currently speaking with your neighbours to drive this process and we would like to speak with you regarding the opportunity.”

A Roseville resident told Mr Koziol that she and her neighbours had been flooded with requests from developers in the weeks since the zoning changes were announced. The retired teacher, who lives alone in a five-bedroom house about 100 metres from the station, said she would be sad to leave her home of more than 50 years but that she would ‘probably move on’.


Sources:

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