Market comment: STEADY AS SHE GOES

Fri, 28 Jun 2024

Market comment: STEADY AS SHE GOESSydney’s rents and property prices slow a little but still rising

Winter is usually a quieter period for Sydney property but this year might see a continuation of the momentum we’ve seen throughout spring and summer.  One of the best reasons to say this is that the Reserve Bank has held the cash rate to 4.35 per cent, and there’s a possibility the rate could be cut later this year which would certainly encourage more activity in the market.

Houses in Sydney have hit record prices this year while units have performed almost as well. The Australian Bureau of Statistics confirmed this month that NSW is the state with the highest median price for homes as well as reporting that that the total value of homes in Australia rose by $209.4 billion in the first quarter of 2024, to a record total of $10.7 trillion. 

Across Australia the average home value is now $959,300, an increase of $14,300 in just three months, while in Sydney the median house price is just over $1.4 million.

Earlier this year Sydney’s auction clearance rate was just under 70 per cent but has dropped slightly to 67.4 per cent in the four weeks ending June 2. At the start of winter last year, the clearance rate was 81 per cent so there are some signs of a cooling market.

CoreLogic head of Australian research Eliza Owen said overall lower clearance rates broadly pointed to a slowing of the market: “The lower clearance rates go, the weaker capital growth trend becomes,” she said. “That’s just a function of less willingness to pay when properties are passing in at auctions. Vendors have to readjust their pricing, and that will bring market values down.”

However, Sydney home values overall keep rising, at a modest pace but still up 2.1 per cent since the year began. Owen said the property market was slowly cooling due to the higher interest rate environment taking its toll on demand as intended.

This doesn’t change the fact that literally dozens of Sydney suburbs are no longer affordable for the average buyer. Domain crunched the numbers and found that median house values in 109 suburbs, mostly in the inner and outer south-west, Sutherland, Parramatta and Blacktown regions, fell out of reach for a couple on average incomes in the past two years to April 2024.

And for unit buyers, Domain found they have 71 fewer suburbs to choose from and are priced out of Northbridge, Paddington and Cronulla. These suburbs all recorded falls of 10 per cent or more in the past two years but their prices still exceed $1,075,000.

AMP chief economist Shane Oliver says he is not expecting rate cuts to begin until next year: “If that’s the case, buyers will become less patient if the rate [cut] is delayed and hold off on making property decisions during winter until that cash rate is cut. That could have a negative impact on the market, given we’ve already seen some cooling in recent weeks.”

But what if rate cuts came later this year? Commonwealth Bank economist Gareth Aird expects rate cuts in November and says this would result in increased market activity: “If we’re right on that, there will probably be growing expectations as we go through winter, and that will be a key supporter of the housing market,” he says. “It’ll generate more activity and house price growth in winter in the lead up to [rate cuts].”

Even without the rate cuts, Mr Aird expects prices to continue increasing throughout the winter months. “We have low vacancy rates, strong population growth and low housing supply,” he told the Herald. “So, all of those forces will be there this year, independently of what the RBA does, and they will all be acting to support home prices because there’s a huge imbalance at the moment between the rate at which we’re building homes and the population growth that’s caused vacancy rates to drop to record lows right around the country.”

The Herald’s Elizabeth Knight also expects housing prices to continue rising: “If you are waiting for supply and demand to balance in the housing market, don’t hold your breath. Demand keeps rising, supply is drifting down and according to the Reserve Bank’s chief economist, there isn’t a quick fix,” she says.

She points out that we lack the skilled tradespeople to build the 1.2 million homes targeted by state and federal governments for delivery within five years. The costs of building materials and labour have risen dramatically in recent times and aren’t about to fall back. She also notes that there is a demographic trend for bigger houses to suit people working from home and the average size of Australian households has declined.

“According to Reserve Bank chief economist Sarah Hunter, just under 27 million people live in Australia in about 11 million households. The average number of people living in each household has trended lower, from around 2.8 in the mid-1980s to around 2.5 of late.

“This may sound like a small change. But, if for some reason average household size rose back to 2.8, we would need 1.2 million fewer dwellings to house our current population – no small difference.”

Housing stock growth too slow

The Organisation for Economic Co-operation and Development (OECD) took a close look at Australia’s housing and found that our number of dwellings per 1,000 people increased from 403 in 2011 to just 420 by 2022. Our rate of housing supply was only 92 per cent of the OECD average in 2011 and seventeen years later it had fallen to 90 percent. This put us behind other ‘similar’ nations including Canada, the US and England.

Our biggest year for completion of private dwellings was 2018-19 when we built over 200,000 homes, but now we only build about 160,000 per year. The number of homes offered for sale has been falling since 2015, and the number offered for rent has been falling since early 2020. In simple terms, supply has fallen while demand has grown.

Another factor that reduces the number of homes offered for sale or long-term rental is the growth of platforms like Airbnb that offer short-term rental accommodation. It’s estimated that the number of such properties in NSW is now over 50,000, causing the state government to consider such moves as a levy on holiday homes and a cap on the number of days for which a property can be let out.

One of the main reasons for our current housing crisis is the growing gap between the rate at which wages have grown and the rate of housing price rises, and it’s getting bigger. ABS figures show that wages rose 4.1 per cent over the year to March while home prices in capital cities rose 8.4 per cent in same period according to Domain data. The increase was higher in Sydney at 9.7 per cent. 

Because house prices have risen so much faster than wages, would-be home buyers have to take on relatively higher burdens of debt. Funding for this is now increasingly coming from family sources, known as ‘the bank of mum and dad’.

PRD Real Estate chief economist Diaswati Mardiasmo commented on the widening gap between growth in wages and property prices: “Even if wages keep on going up, even if houses keep stable, there’s still quite a large gap that wages would have to be going up by – and for a long period of time – and houses would have to be stable for a long period of time,” she said.

“The trajectory is, all things being equal, that that gap is going to keep on widening because house prices keep on going up.”

How much do members of a household have to earn to become homeowners? Canstar modelling showed that a household with one partner earning the average income and the other partner working half the week could borrow enough money to buy a home worth $756,250. First, of course, they have to save a deposit of $151,250 plus cover all the transaction costs including stamp duty.

That would enable them to buy an average house in Hobart or Darwin, but not in any other capital city. So, let’s say both partners are working full-time; their budget would then stretch to a home worth $1,075,000 once they’d covered the $215,000 deposit. They could then afford the median house in most cities but not in Sydney where it would need nearly another half a million dollars.

A side effect of the current housing situation is that economists have noticed an increasing share of women in the Australian workforce as the need for growth in household incomes requires more couples to work full-time to save deposits and to make mortgage payments.

Tenants too are increasingly feeling the pain. PropTrack statistics show that only 5.9 per cent of capital city property rentals across Australia now cost less than $400 per week, down from 10.6 per cent in April last year and 31.7 per cent down from March 2020. Sydney’s percentage is even less – just 3.8 per cent of advertised rentals are for less than $400 per week.

PropTrack economic research director Cameron Kusher says the rental market remains strained due to a lack of rental stock available: “We’re getting to the point where people are going to challenge to have the capacity to pay the prices people are seeking. What that means is people are going to move into smaller properties, move to less desirable locations ore move into share housing to save on rental accommodation,” he said.

A sign that rents may have grown beyond affordable levels is that new figures from SQM property research show the fall in average capital city rents – to $723 in May – was the largest monthly percentage decline since April 2020. Rents in Sydney fell by 1.1 per cent to $844 a week in the 30 days to 4 June, 

More owners selling

There are more active sellers in the market now than there were at this time last year, mostly a reflection of continuing high interest rates and the impacts of rises in the costs of living. Many property owners have decided to sell up and reduce their debt loads while others are downsizing and selling due to retirement or to simply cash in on their capital gains.

CoreLogic figures show that during the last four weeks of May new property listings in Sydney were 9.4 per cent higher than at this time last year, with listings in regional NSW up 14.6 per cent. 
CoreLogic research director Tim Lawless said: “Vendor activity really started to pick up through the middle of last year and in some ways that’s continued.

“There probably is an element of derisking for households to reduce their level of debt, maybe downsize, [or] cash out of the market ahead of any chance they might be falling behind on their mortgage repayments.”

Mr Lawless pointed out that the Sydney suburbs where the number of homes for sale has blown out most are mostly in Sydney’s west: Total listings in the Rouse Hill/McGraths Hill region, Blacktown – north, Wollondilly, Penrith and Dural/Wisemans Ferry are all higher than the five-year average.

“A lot of these regions around the outer fringe, they tend to be mortgage belts. It could be a warning sign that first home buyers or lower income families are facing some financial challenges in these markets which is prompting them to put their property up for sale,” he told Domain’s Elizabeth Redman.

Starr Partners CEO, Douglas Driscoll, saw a brighter side of the current listings growth: “We’re in this holding pattern where the market has for all intents and purposes plateaued, people have the ability to take a breath and make calm, measured decisions,” he said.

“We are obviously seeing a slight uptick in distressed sales, but nowhere near the amount that was anticipated. We’re seeing the occasional investor sell and cash out … There is a sense of light at the end of the tunnel.”

PropTrack’s Cameron Kusher says that the growth in listings has been met by increased buyer demand: “Despite the increase in properties available for sale, other indicators signal that buyer demand remains strong such as median time on market declining and overall enquiries rising compared to a year ago.”

Mr Kusher said property owners had reflected on how interest rates were impacting their budgeting and ongoing cost of living pressures: “The next few months will be quite telling because obviously a lot of people that own homes or are looking to buy homes are expecting interest rate cuts later this year but it’s looking more likely interest rates will come down in the first half of next year. It’s going to be quite interesting to see how the market reacts to those expectations having been pushed out so far,” Mr Kusher said on NCA Newswire.

Minns’ vision

The NSW Labor government has continued to work with councils to refine its ambitious vision to create substantial amounts of new housing in this state. At first it seemed like most of this growth would be in Sydney’s west but the burden has now been shared with the city’s east and north as well.

This ‘rebalancing’ as Minns terms it will see Ku-ring-gai Council’s five-year housing target rise from 3000 to 7600 in the next five years. This represents a 16 per cent increase in the area’s stock of dwellings, or around three per cent growth per annum.

Woollahra’s target has risen from 500 to 1900, or a total seven per cent increase in the current 26,500 dwellings now there. North Sydney and the Northern Beaches councils’ targets have doubled to 5900 each. Canada Bay, Mosman, the Inner West and Hornsby will also have major uplifts compared to what was originally planned.

The Herald summarised the rebalanced targets as: “About 40.6 per cent of Sydney homes will be built in the ‘eastern’ municipalities, an area that stretches from Waverley in the east to Strathfield and Ryde in the west. That is about 2 per cent more than the share set by the former Coalition government in its 2021-26 targets.

“In western local government areas – including Penrith, Campbelltown and Fairfield – the share of new homes drops from 23.2 per cent to 22.4 per cent under the government’s new targets.”

The impacts of this rebalancing will lessen the amount of greenfield development originally planned for the city’s western fringe while it forces infill housing to make up 82 per cent of the state’s new homes. Councils that go along with the state government’s plans will receive more funding for infrastructure such as sports fields and footpaths. A pool of $200 million has been set aside for this, but councils that fail to drive development in their areas will miss out on their share of the cash.

The Herald also gave its support to the Minns government’s housing plans, saying in an editorial: “In today’s crowded Sydney, the only way to boost the supply of housing seems to be to put them near train stations. It is difficult to see a better alternative other than the government’s proposal.”

Not helping the housing shortage is that there is a backlog of dwellings in Sydney that have already been approved but not constructed. The Hills Shire has been lumbered with a targeted increase of 35 per cent over the next five years, but three-quarters of this growth is already either under construction, approved, or part of planning proposals on land that been rezoned as the government requested. Blacktown’s targets have risen from 16,500 to 21,500, but 80 per cent of the revised target is already in the council’s planning system.

A recent report from KPMG shows that more than 11,170 approved dwellings, 80 per cent of which are townhouses and apartments, are “approved but not yet commenced”.  According to KPMG, the number of new dwellings approved across NSW but not commenced jumped from 13,765 in the March quarter of 2023 to 15,593 by the December quarter.

Builders of detached homes expect their workloads to slow due to lower sales last year and so far in 2024, while new apartment construction, especially in high-rise structures, is already declining as the rise in materials and labour costs outpaces current sale prices.

Master Builders Association of NSW executive director Brian Seidler said while the Minns government’s targets gave welcome guidance to councils, the 45,000 homes approved in the past year was well below the 75,000 required to meet the federal government’s National Housing Accord targets in its first year.


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Jordyn Beazley, The Guardian, 12 June 2024
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