It’s a bit like watching a play where you know something about the plot but you don’t know how long the performance will last. Sydney’s housing prices continue to achieve record heights, and it’s logical to expect a retracement at some point; history tells us this, but just when will it happen?
 
Look at the cast onstage. The 45 to 54-year olds have two thirds of their total wealth in the form of housing, and for the 55 to 64-year olds the figure is about 60 per cent. While the older cast members are comfortable, the younger actors from generations X and Y are envious with low levels of home ownership and a choice of either playing the part of tenants the rest of their lives or of taking on the stresses of dealing with large amounts of mortgage debt.
 
Now add a new sub plot from the Organisation of Economic Co-operation and Development (OECD). This august body has just issued its latest biennial assessment that warns of an impending ‘rout’ in Australian house prices and says both prices and household debt have reached ‘unprecedented highs’.
 
In the OECD’s own words: “A continued rise of the market, fuelled by both investor and owner-occupier demand, may end in a significant downward correction that spreads to the rest of the economy."
 
The audience won’t want to leave its seats until the final curtain so they can see how it all turns out.
 
The OECD survey also says that in real terms Australian house prices have climbed to 250 per cent of their level in the 1990s, with much of the increase taking place in the past few years, "straining affordability, especially for first-time buyers in Sydney".
 
And it’s ‘housing prices’, plural, that deserve consideration. First there’s the price of houses – detached or semi-detached structures on their own block of land. Then there’s the price of apartments – a self-contained unit that occupies part of a building that contains other apartments. And there are a dozen other variables to consider including geographic location, proximity to the CBD, school catchment areas and so on.
 
For our purposes we’ll stick to the ‘median’ prices of houses and apartments as generally recognised by the Australian Bureau of Statistics (ABS) and the principal statistical compilers in the property industry. Even then, as we’ve noted before, there are variances in the methodologies used to calculate ‘median’ prices, but sooner or later we anticipate the ‘peak price’ of houses and apartments will be reached.
 
Cameron Kusher, CoreLogic’s senior research analyst, gives us a summary that puts the whole Sydney property market into perspective: “At the end of 2016, looking at both houses and units, 20.5 per cent of Sydney suburbs had a median value of less than $600,000 compared to 38.5 per cent of suburbs having a median value of at least $1 million. 
 
“To further highlight deteriorating housing affordability in Sydney, [only] 34.6 per cent of suburbs had a median [apartment]value of less than $600,000 at the end of 2016.”
 
He also commented that more Sydney suburbs have a median house value of $2 million than a median value under $600,000: “If you are earning a relatively low income in Sydney and are looking to buy a house or unit, you are competing for a rapidly declining pool of housing stock across the city.”
 
Irrational exuberance
 
Recently, after yet another frenetic weekend of sales activity, Domain Group chief economist Dr Andrew Wilson declaredthat we are now in “uncharted waters”.
 
“The amount of bidders and competition out in the Sydney market today…truly confirms what we’re all seeing – this is a hot market. The big question is where will prices go? I’m not sure buyers have capacity to keep pushing up prices.”
 
Lucia Stein from ABC News had this to say: “House prices can't keep rising forever. At some point, everyone will just calm down and refuse to pay way too much for a tiny place that isn't even in the area they really wanted to live.”
 
She quoted RMIT property economics professor Chris Eves who reminded us that it’s normal for housing prices to rise and fall.
 
"One of the things that sets Australia apart is that there are sectors that are currently oversupplied [too many houses] and there is potential that there won't be much market demand for those types of properties, which could lead house prices to fall," he says.
 
She also quoted LF Economics property economist David Lindsay who says we’re “in a pit of irrational exuberance.”
 
Mr Lindsay says we have a ‘speculative, credit-fuelled housing bubble’ and warns that the housing market isn’t bulletproof: “A lot of people thought the housing market was invincible and it could only go up, and one day it crashed and it burned a lot of people, and the financial system along with it."
 
Ms Stein’s conclusion is that when there are fewer people buying properties and supply continues to grow, prices will start to go down: “Eventually prices will reach a point where people won't buy and then you will see a slowdown in growth. But this might not happen for some time and, as Mr Eves suggests, what it means for first-time homebuyers is that they may be renting for the foreseeable future.”
 
The ABC’s Ian Verrender says that real estate is ‘baked into the Australian psyche’: “All up, Australians are in hock to the tune of more than $1.4 trillion on housing. That's a hell of a lot of debt just to keep the wind and rain out. Of that, more than half a trillion is on loan to property investors.”
 
He says that modern economies are geared to growth: “At the micro level, profits, wages and taxes all ideally should steadily increase, feeding into a moderate inflation rate and modest rises in asset prices that feeds into an expanding economy.
 
“Governments and central banks will do almost anything to avoid a bubble bursting, which is why no-one is serious about housing affordability. In the ensuing policy vacuum — and with the tax system geared to turbocharge prices — the Government and the Reserve Bank are praying for a moderate but relatively quick property market slump; a minor correction and a plateauing in national prices at the lower levels.”
 
But does this mean we’re in a bubble? Westpac boss Brian Hartzer doesn’t think so. He says in his opinion a housing bubble is fuelled by credit, but says: “I don’t think that’s what’s happening in Sydney or Melbourne.”
 
He told a House of Representatives economics committee that what’s happening to prices is the result of severe supply constraints running into a significant increase in demand from foreign buyers.
 
“There has been a significant ramp-up in construction and a big chunk of that has probably been targeting overseas buyers whose desire for the nature of the property isn’t necessarily the quality local buyers would want,” he told the hearing in Canberra.
 
Herald columnist Harold Mitchell poses a good question: “Why are we so concerned about owning our own property anyway?
 
“The great German economy has 60 per cent of residents renting their home. They don't feel the need to buy a property because the clever German government controls the rental market so that a family can securely lease a home for decades.”
 
Mr Mitchell says we need to change something soon: “It's plain we are letting our kids down, our country and now our grandkids. None of them are going to have the opportunity we had unless we have the courage to make some tough decisions soon. Reforming negative gearing would be good start.”
 
Investors take the lead
 
In the first quarter of 2017 there’s little doubt prices growth is being fuelled by investors. First home buyers represented just one out of seven housing loans taken out in December while the latest figures from ABS tell us that investors accounted for more than half – 57 per cent, of all housing loans. A growing number of would-be homeowners are giving up their aspirations and becoming long-term tenants, which only encourages more investors to acquire rental properties.
 
Sydney prices growth shows no signs of weakening. News Limited’s journalist Julia Corderoy tells us that CoreLogic’s Home Value Index shows house prices have risen an astounding 18.4 per cent from their levels a year ago.
 
“This is the highest annual growth rate in 14 years — since the 12 months ending December 2002 when the housing boom of the early 2000s started to slow. Over the past five years, Sydney house prices have surged 75 per cent,” she writes.
 
CoreLogic’s head of research, Tim Lawless, ascribes this growth to investors chasing capital gains on their property: “It clearly is not about the yield because yields are at record lows in Sydney. Investors are willing to sacrifice the cashflow on their property and are buying to secure future capital gains it would seem,” he told Ms Corderoy.
 
These are clearly good times for investors. Interest rates are low, prices keep rising, and those with existing properties can leverage those properties to borrow and acquire new ones.
 
The Australian Prudential Regulation Authority (APRA) tried to arrest rampant investor demand in late 2014 by imposing a cap on how many investor loans Australian banks could settle. Banks responded by raising interest rates and deposit requirements for investors, but the strategy hasn’t worked.
 
Martin North, financial services analyst and principal of Digital Finance Analytics told News.com.au that he thinks fiscal policy has failed and interest rates are too low: “I believe we have a major question as to whether what has been done is the right stuff. I think we should stand back and question where to from here? I don’t think just keeping a growth limit and doing nothing more is a strategy which is going to work.”
 
The state’s new Planning Minister Anthony Roberts, who has promised to deliver a government policy on housing affordability in the ‘very near’ future, recently declared that if you can get into the Sydney housing market you are then “pretty well set for the rest of your life”.
 
Mr Roberts also commented that Sydney is an international city: "And as such we are paying international prices for homes.”
 
He has a good point. The Knight Frank Wealth Report for 2017 tells us that the super-rich people of the world like what they see in Australia and are coming here in increasing numbers.  The report states that of all the people worth $US30 million or more in net assets, termed ultra-high-net-worth individuals (UHNWI), over 70 per cent will invest in Sydney and Melbourne property over the next 10 years.
 
And then there are the plain high-net-worth individuals, (HNWI) with a net worth of over $US1 million, excluding their primary residence. Michelle Ciesielski?, Knight Frank's director, residential research, Australia, says the latest figures show that Sydney has seen an annual net inflow of 4000 HNWIs.
 
"Sydney is at the top of the list for the highest net inflows of HNWIs globally, with the inflow representing growth of 4 per cent of the HNWI population already based in the city," Ms Ciesielski told the Sydney Morning Herald.
 
She said that historically low levels of homes listed for sale, strong population and tourism growth, continued investor appetite, rebounding foreign investment and a slow approval process which restricts new development have driven Sydney’s house price growth well ahead of other cities.
 
It might bereassuring to know we live in a country that’s viewed by others as “offering a fiscal and political ‘safe haven’ as well as quality of life”, but it also means that domestic property buyers will be competing with relatively wealthy buyers from overseas who may only have to pay what for them is a small premium to get the Sydney property they desire.
 
We might mention that Australian businessman Dick Smith has gone into print blaming immigrants for high house prices, declaring that the "enormous population increase" makes it impossible for young families to buy their first home.
 
"All of our problems are from this unbelievable population increase,” he says. “You can't drive in Sydney at the moment. The housing prices are enormous.”
 
Pollies’ affordability solutions
 
He’s certainly right about one thing: Higher housing prices do make housing less affordable, and affordability remains a huge problem for politicians and economists. In June 2015, the former treasurer Joe Hockey said that Australians wanting to buy their first home should "get a good job that pays good money".
 
And in February this year federal Victorian MP Michael Sukkar, Assistant Minister to the Treasurer, who has been delegated the task of finding solutions to the country's housing affordability problems, said a "highly paid job" is the "first step" to owning a home.
 
Not surprisingly, there are thousands of hopeful first-home buyers out there who don’t find such simplistic statements helpful to resolving their problems with unaffordability.They also question why the government has repeatedly rejected suggestions to curb negative gearing and capital gains concessions.
 
In March, Reserve Bank Governor Philip Lowetold a Standing Committee on Economics that altering negative gearing and the capital gains tax would take some heat out of the housing market, at least in the short term.
 
"It's likely it would reduce investment demand for a while, and if you have less demand for a while, you'd have lower prices and that would take the heat off housing market,” he said, noting that these kinds of taxation measures are outside the RBA’s authority.
 
Dr Lowe admits the Reserve Bank now finds itself in a difficult position. It could cut interest rates to stimulate the economy, but this would further fuel real estate prices. Or, it could raise interest rates to take some heat out of property prices, but this could also create serious problems for those with high levels of household debt.
 
The RBA’s March meeting left interest rates untouched and the Bank’s post-meeting statement commented that there had been a recent increase in borrowing by investors which would have the effect of adding to rental housing stock and lowering rent rises.
 
“In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years,” it said. “Growth in rents is the slowest for two decades.”
 
But this could be wishful thinking. The most recent appointee to the RBA’s board, high-profile businesswoman Carol Schwartz, told The Australian newspaper thatNSW’s strong economy supported by infrastructure investment was sustaining housing prices in Sydney.
 
“Unless there is a major global event, I can’t see what will bring it to an end,” said Ms Schwartz, who is also a director of the country’s biggest residential developer Stockland.
 
Also wary of international economic fluctuations is Greville Pabst, the executive chairman of valuers and buyers’advocate WBP Property Group. Mr Pabst expects Sydney house prices to continue their upwards trajectory: “I don’t see a correction this year, barring global events,” he said.
 
The Herald’s Peter Hartcher says much has happened on the demand side of the housing market in recent years as interest rates have fallen and the population has grown:“But no serious change has been made to address the supply side. The lopsided nature of the market, with rising demand and inelastic supply, has exaggerated price rises.”
 
Credit must therefore go to property developer Mirvac for their innovative ‘Right Start’ initiative that targets Sydney’s affordability crisis.
 
Mirvac’s General Manager of NSW Residential and Major Projects, Toby Long, told News.com.au’s Julia Corderoy that Sydney’s high prices have reached the point where a generation of young people face the prospect of never owning their own home.
 
“We’ve been looking at affordability for some time trying to find ways to give first homebuyers an opportunity to get into the Sydney market. We were looking at the pain points and two of the biggest pain points first home buyers have is not having the opportunity and then not being able to save up that 10 per cent deposit.”
 
As a way to overcome these ‘pain points’, Mirvac’s Pavilions development,a proposed 690 apartment project at the gateway to Sydney Olympic Park, will offer 60 of its lowest price apartments exclusively to firsthomebuyers, giving them priority over investors and owners of other homes.
 
In addition, first home buyers will be able to purchase the apartments, priced from $575,000 to $749,000, with just a 5 per cent deposit - about half the usual deposit requirement.
 
The remaining five per cent of the deposit can be paid in two annual instalments of 2.5 per cent. By the time the apartment reaches settlement when the development is completed in 2020, the first homebuyer will have the full deposit.
 
However, the NSW Government has ambitious plans for another 10,000 homes to be built at Olympic Park over the next decade, but so far only 3 per cent of these are to be designated as ‘affordable properties rented below market rates’.
 
So open the curtains and let the play begin. There’s drama aplenty as the dispossessed youths take on their elders in a battle over family castles. See the barons in Canberra and Macquarie Street fight their wars of words without reaching any meaningful conclusions, and beware of the foreign hordes that lie just without, poised to invade and capture the locals’ territory for themselves.
 
And amazingly the prices of dwellings in the kingdom of Sydney, from manor houses to the smallest cottages, continue to elevate skywards. The play’s the thing, the ending is still out of sight, and the drama’scertainly not over yet.
 
Sources:
‘Westpac ‘putting customers first’,’ Colin Brinsden and Mary Silk AAP, News.com.au, 8 March 2017
‘Increased pressure on Federal Budget to use taxes to help first-home buyers,’ Malcolm Farr, News.com.au, 7 March 2017
‘Bank of mum and dad: Parents' property key to children's wealth,’ Thuy Ong, ABC News
Online, 3 March 2017
‘Annual growth in Sydney house prices the strongest in 14 years,’ Julia Corderoy, News.com.au, 1 March 2017
‘Sydney, Melbourne property now affordable – if you are ultra-rich,’ Carolyn Cummins, Sydney Morning Herald, 2 March 2017
‘Buy property in Sydney and you're 'pretty well set for life': Housing Minister Anthony Roberts,’ Jacob Saulwick, Sydney Morning Herald 24 February 2017
‘Rise and rise of house prices showing no signs of slowing down,’ Turi Condon and Sam Buckingham-Jones, The Australian, 2 March 2017
‘RBA's Philip Lowe takes aim at negative gearing, questions global race to cut corporate taxes,’ Thuy Ong, ABC News Online, 26 February 2017
‘A manifesto for Generation Rent,’ Jessica Irvine, Sydney Morning Herald, 22 February 2017
‘House prices: When will we get to the point that we just say NO?’ Lucia Stein, ABC News Online, 2 March 2017
‘More Sydney suburbs have a median house value of $2 million than a median value under $600,000, Cameron Kusher, CoreLogic, 23 February 2017
‘Coalition MP tasked with housing affordability says 'highly paid job' is 'first step' to home ownership,’ Latika Bourke, Sydney Morning Herald, 21 February 2017
‘The government is missing the opportunity to solve the housing crisis,’ Peter Hartcher, Sydney Morning Herald, 25 February 2017
‘Major apartment development to offer first homebuyers dibs,’ Lisa Corderoy, News.com.au, 27 February 2017
‘Immigrants to blame for high house prices, businessman Dick Smith claims,’ Michael Koziol, Sydney Morning Herald, 22 February 2017
‘Housing affordability: How did we get here, and do first-time buyers ever stand a chance?
Analysis,’ Ian Verrender, ABC News, 20 February 2017
‘Australia must face some home truths about housing affordability,’ Harold Mitchell, Sydney Morning Herald, 24 February 2017
‘First home buyers: Treasurer Scott Morrison vows to tackle runaway house prices,’ Peter Hartcher, Sydney Morning Herald, 21 February 2017
‘OECD warns of 'rout' in house prices if investors head for the doors,’ Peter Martin, ABC News Online, 3 March 2017