Market comment: A package, a hit on overseas buyers, a bubble and a peak

Wed, 14 Jun 2017

Market comment: A package, a hit on overseas buyers, a bubble and a peak

It’s been a big month for Sydney property. One important development was the Berejiklian government’s release of a package of measures intended to improve housing affordability, clearly favouring first home buyers over investors in a softening market.

When Premier Gladys Berejiklian first came to power in January this year she said housing affordability was ‘the biggest issue people have across the state’: "I want to make sure that every average, hard-working person in this state can aspire to own their own home," she said.

Making her announcement of the new housing affordability package, Ms Berejiklian said her government was doing everything it can to level the playing field for first home buyers. She indicated the measures would cost the State Government an estimated $1.2 billion, but added that a new surcharge on foreign investors would offset some of the increased costs.

The measures that come into effect on July 1 include:

Stamp duty for first home buyers on existing and new homes up to $650,000 will be abolished;

There will be stamp duty discounts for properties worth up to $800,000;

No stamp duty will be charged by banks on lenders’ mortgage insurance if it is required for first home buyers with limited deposits;

The foreign investor surcharge, introduced last year, will be doubled from four to eight per cent on stamp duty;

Overseas buyers will pay an additional two per cent surcharge on land tax (up from 0.75 per cent);

To help first home buyers compete with investors, the government will remove stamp duty concessions for properties bought off the plan; and

The government has scrapped a $5000 grant to all purchasers of new homes and reduced eligibility for a $10,000 first home owners grant.

NSW treasurer Dominic Perrottet told ABC News that the thresholds for stamp duty and concessions had been carefully considered: "The median price in Sydney is $700,000 for an apartment. We believe this is an incredibly generous package and one that provides great support for first home owners."

Figures from industry research firm CoreLogic show that over the past 12 months 45.4 per cent of dwellings sold in NSW had a price tag of $650,000 or less, and 58 per cent had a price tag of $800,000 or less. That’s across all of NSW, but just within the Sydney metropolitan area only 25.8 per cent of sales in the past year were under $650,000.

The government noted that in recent years the number of first home buyers has been declining as investor numbers grow. According to the Australian Bureau of Statistics, first homebuyers made up just eight per cent of owner-occupier mortgage commitments in March, well below the long-term average of 17 per cent.

(However, figures released by the Australian Bureau of Statistics also show home loans to investors as a proportion of all loans fell 1.25 per cent in March to 48 per cent, down from a high of over half of all home loans in January.)

Other measures in the state government’s package targeted increased supply of housing, including allowing councils to borrow more money for infrastructure at reduced interest rates to accelerate rezoning around new developments.

"The State Government will support up to $500 million in additional borrowing by councils by halving the cost of borrowing for eligible projects through infrastructure subsidies," said housing minister Anthony Roberts.

“The Government will also boost the use of independent panels for Sydney councils to ensure development applications were dealt with swiftly."

The minister also said that approvals for ‘well-designed’ terraces, town houses and dual-occupancy dwellings would be fast-tracked by expanding the code for complying developments.The government promised $3 billion in infrastructure funding to accelerate delivery of housing, and unveiled proposals to streamline planning.

Overall, the government estimates its changes to stamp duty will save first home buyers around $25,000 for most purchasers, and if applied in full the total package could equate to more than $34,000 in savings.

Not everyone agrees

The NSW government’s announcement received criticism from many housing industry experts who cautioned that the contents of the housing package could increase demand and therefore push up prices.

CoreLogic says that removing or reducing the transactional costs for first homebuyers is likely to provide both positive and negative consequences as it is “widely accepted that policies aimed at stimulating demand tend to push prices higher”.

CoreLogic’s head of research Tim Lawless told News.com’s Frank Chung:“Abolishing stamp duty for first home buyers is likely to create some headaches for eligible buyers who have recently entered into contracts. Additionally, we can expect first home buyer activity to stall before surging higher on July 1 2017. The long-term outcome may be self-defeating due to higher demand pushing up prices.”

Professor Peter Phibbs, head of Urban and Regional Planning and Policy at the University of Sydney, said the government’s measures were based on a desire for "political popularity"and could leave behind "an enduring legacy of sustaining house price inflation".

"We've got a 30-year history in Australia of giving first home owners more money, and it only adds to the price”, he said. "If you were really trying to help first home buyers, you'd try to supply some stock that is affordable."

A May 19 article in Domain, reporting on a study on housing supply, pointed out another problem that the government’s price limitations fail to address: “The study shows 80 per cent of new unit approvals were in the top 20 per cent of local government areas with the highest unit prices.

“This is while 80 per cent of new house approvals were in the top 40 per cent of local government areas with the highest house prices. There is very little new supply in areas where house prices are lower, where households on low to moderate incomes can afford to live.”

A new report by the Australian Housing and Urban Research Institute and the Bankwest Curtin Economics Centre also says that most growth in housing supply has been in the upper price range.

The report concluded that “most new housing stock in Sydney is in the middle to high price range and fails to improve housing affordability by ‘trickling down’ to lower prices for those on low incomes.”

The report also noted that “housing tax preferences and asset test concessions” such as negative gearing and the capital gains tax concession “increase the demand for housing by encouraging the accumulation of savings in housing wealth.” It said these helped fuel house prices by adding to demand, in turn making “supply-side reform even more important” if governments are unwilling to curb the concessions.

Even former Reserve Bank of Australia governor Glenn Stevens, who advised the NSW government on the housing affordability package, gave it only qualified support. He said the government must try to increase supply and not rely too heavily on "demand side" subsidies that inflate house prices.

In his report on the package, Mr Stevens warned of the risks in slugging foreign home buyers at a time when the real estate market appeared to be slowing: "One area for caution might be demand side measures like taxing foreigners. If foreign purchasers are slowing down anyway, we may not want to push them down further," he said.

Hitting foreign buyers

The impact of overseas buyers on the NSW housing market is a matter for lively debate. Foreign citizens accounted for about 11 per cent of home purchases across NSW in the September quarter last year, according to NSW government data.

It’s generally acknowledged that strong demand for Sydney property from overseas buyers has been a significant contributor to the city’s ever-rising prices. A May survey for the ABC program ‘The Conversation’ found that Sydneysiders are seriously concerned about foreign investors pushing up the cost of housing.

The Conversation’s researchers Dallas Rogers, Alexandra Wong and Jacqueline Nelson asked 900 Sydney residents over 18 years of age for their opinions on foreign investment in the property market and found a majority said they believed foreign investors should not be allowed to buy residential real estate in Sydney.

The most commonly nominated driver of house prices (64 per cent of respondents) was ‘foreign investors buying housing’, and more than three in four participants (78 per cent) agreed with the statement "foreign investment is driving up housing prices in greater Sydney".

For a number of reasons, clouting foreign buyers with additional costs on their property purchases might at first glance seem a good idea.First, it would raise money that can be used to subsidise local first home buyers and reduce their purchasing costs. Secondly, it might deter some overseas purchasers, thereby reducing competition for property in general and taking some of the upwards pressure out of the market many analysts see as ‘overheated’.

But it’s not that simple. The Urban Development Institute of Australia (UDIA) warned that the increase in taxes on foreign buyers could ultimately raise prices because developers rely on pre-sales, largely to overseas buyers, to raise the capital needed to start construction.

This is supported by Domain’s Jennifer Duke who said: “Despite the promises of a ‘beautiful new lifestyle’ and ‘high quality fitments throughout’ in their finished products, the focus of developers is always on pre-sales to ensure a project goes ahead.”

UDIA NSW says any resulting drop in the number of foreign buyers could lead to projects being cancelled, thereby worsening Sydney’s under supply crisis: “You can’t expect to make things cheaper by increasing the tax on it,” UDIA NSW chief executive Steve Mann told News.com’s Frank Chung.

“Australian buyers won’t benefit from reduced competition if there’s fewer properties being built and sold. Every percentage point makes a difference in the development industry. Even though foreign buyers are only 11 per cent of the market, that could be enough to prevent thousands of new homes being built for Australians.”

Chinese investors are already beginning to leave the Melbourne property market, according to Ming Li, a real estate agent in that city’s eastern suburbs who specialises in selling Australian property to Chinese investors.

"The Melbourne apartment market is cooling down," he told ABC News’ Emily Stewart."It is kind of [an] oversupplied market, and the Chinese investors are losing their interest in buying an apartment in Melbourne. The capital gains return is so low."

He said that another reason for the downturn relates to the Chinese government's restrictions on its citizens' ability to move money offshore: "The Chinese government's new policies only allow Chinese individuals to transfer about $US50,000 overseas, per head per year; if it is more than that amount, they need to submit [an] application to authorities, and it becomes harder and harder."

There are some fairly important changes to Australia’s federal legislation in the May budget that also impactforeign buyers - as of July 2017, anyone whose home sells for $750,000 or more will have to submit a clearance certificate proving they are not a foreign investor or face having an increased 12.5 per cent of the sale price withheld from the seller and given to the Australian Taxation Office.

New laws in effect from July 1 this year will also require the sellers of property to prove they are Australian citizens when selling a home worth $750,000 or more. This new law is expected to affect 60 per cent of the property market Australia-wide, yet few vendors know about this new requirement.And it’s going to affect a high percentage of property transactions. An analysis of Sydney auction data from a recent weekend by Domain Group found that only 44 of 836 properties sold for less than the threshold amount.

Australian housing bubble

A growing number of mainstream economists and government policymakers are now acknowledging that Australia has some kind of housing bubble.According to economist Philip Soos: "There certainly is a housing bubble in Australia. Since 1996, we've seen housing prices inflate above all known fundamentals, such as GDP, inflation, income, rents and population growth."

Australians are holding more debt than ever before, he said: "Australia has accumulated the world's second highest household debt to GDP ratio at 123 per cent and rising.All countries that have a ratio above 100 per cent have experienced or are currently experiencing a housing bubble."

Citigroup Inc. chief economist Willem Buiter said Australia is experiencing a "spectacular housing bubble" which needs to be addressed with tougher regulatory measures: "It had better be focused on immediately, to try and tether a soft housing landing," Buiter said. "Clearly if these things are not managed well they can be a trigger for a cyclical downturn."

And even if they haven't used the word ‘bubble, analysts such as Chris Richardson and Shane Oliver have clearly inferred people would be making a very brave decision to buy property now, especially in Sydney with its sky-high prices.

Some respected analysts have already gone public with predictions of how far the market could tumble if the bubble should actually burst.  Most agree that the worst-case scenario would be something like a 10-15 per cent drop, which would really just wipe out gains from the past twelve months or so.

The ABC’s Michael Jandahas offered his own set of circumstances that could lead to the long-awaited bubble burst:

Australia’s record household debt has now reached around 189 per cent of incomes and more than 123 per cent of GDP;

An increase in interest rates, especially if combined with tightened lending standards;

An increase in costs resulting from a falling Australian dollar; and

An increase in unemployment.

He also notes that anything generating a sudden number of forced sales could start a cascade of falling prices as vendors cut prices to quit unprofitable investments, such as happened in the US, Ireland and Spain and more recently in Western Australia: “Economic cycles are great on the way up, but the spiral back down can be very painful, especially in markets with low liquidity where the adjustment can take years, not days or months” says Mr Janda.

Is the peak behind us?

With an underperforming economy and the prospect of negative economic growth over the March quarter increasingly likely, together with the likelihood of further mortgage rate increases from the major banks, additional stimulus from the Reserve Bank from an official rate cut in the next few months remains a possibility.

Meanwhile, auction clearance rates remain high and good numbers of properties are on offer in Sydney each weekend – even a record number of sales for a June auction, all well ahead of the corresponding weekend in 2016. Median prices are also well ahead of the same weekend last year, something like 17 per cent higher.

But not all indicators are positive for further strong price rises. During the first week of June figures from CoreLogic show that Sydney prices declined by 0.1 per cent after falling 0.5 per cent the week before. The decline over the month of May was 1.3 per cent. These aren’t massive falls by any means, but are a change from several months of consecutive increases.

CoreLogic's head of research Cameron Kusher cautioned against calling this ‘an end to the property boom’: "We haven't called the peak of the market yet. We want to see more data, we don't want to jump in too early," Mr Kusher said.

St George senior economist Janu Chan said in a Bloomberg article: "It appears that a perfect storm of factors have dented confidence in housing, and led to some heat coming out of the market. Nonetheless, we do not expect widespread large-scale price falls given that interest rates are expected to remain low, and absent a spike in unemployment."

Greg Jericho, writing in The Guardian, says that no state in Australia had more building approvals this April than in the same month last year: “The latest construction data, which saw a 0.7 per cent fall in the March quarter, has some economists thinking the [next set of] GDP figures could show the economy went backwards in the first 3 months of this year.

“And the latest building approval figures…certainly do nothing to suggest work in the building sector is flourishing. In the past year approvals for private sector houses have fallen eight per cent and for apartments and flats, 19.7 per cent,” he said.

Angie Zigomanis, BIS Oxford Economics property analyst, expressed a similar outlook: "If you look at apartment approvals, which is a bit of a reflection on apartment off-the-plan demand, they peaked 18 months ago, and [now] they have started to slow,”he said

He said prices had peaked, but that predictions of a sharp fall were wrong: "We think prices can be justified by population growth, interest rates, demand and employment growth," he said. "In some ways, prices are priced to perfection.In the next two to three years, we don't see a big shock which will push prices down."

ANZ’s Chief Executive Officer Shayne Elliott said home prices in Sydney are “very inflated” in an interview with Bloomberg Television.  However, when asked whether a crash is looming, Elliott replied it was “a really low probability, but it is certainly something we stress test a lot, and think about.”

S&P Global Ratings director Sharad Jain said his base case for the housing market is an "orderly unwind" of house prices he outlined at The Australian Financial Review Banking and Wealth Summit in April: "We still maintain our base case expectation that the unwinding of these imbalances will be orderly, and we think that will be either a slowdown growth rate of property prices or a very mild decline in property prices. That is our base case."

Journalist Michael Pascoe is a contributing editor to ‘Business Day’. He recently looked at the Australian housing market and concluded: “It looks like the housing supply side is correcting before prices fall off a cliff. The regulators' efforts to curtail investor and lender enthusiasm is likely to end up supporting prices by preventing oversupply.”

The editor of the monthly report from property monitor Residex also sees an easing but nothing in the way of a crash: “My view is that conditions in Sydney and Melbourne will continue to moderate due to less demand from investors, affordability barriers, and an overall weakening in housing related sentiment as well as the disincentive of higher mortgage rates and stricter credit policies from Australian banks.”

John McGrath, founder of the McGrath real estate advisory business, dismissed concerns of a property "bubble" saying in his weekly column in the ‘Switzer Daily’ that he has seen such talk "time and time again over 30 years and the 'doom and gloom' predictions simply haven't eventuated".

In his opinion, the pace of growth in property prices will slow down but not stop - prices will keep growing but at a lesser rate per year: "We have a minor correction, where the market will do as it has done before and give back about half of the prior year's growth, so that would be around five per cent," he said.

"Neither scenario is cause for panic. If the boom is indeed over."

Sources:

‘Australian house prices ‘very inflated’, ANZ chief executive Shayne Elliott says,’ Emily Cadman, Domain, 7 June 2017

‘Sydney, Melbourne home price falls pause,’ AAP and Business Day, 6 June 2017

‘First home buyers to have edge over investors under NSW housing affordability package,’  Sarahm Gerathy, ABC News online, 2 June 2017

‘Housing affordability package benefiting NSW first home buyers to be announced,’ Brigid Glanville, ABC News online, 1 June 2017

‘Premier Gladys Berejiklian announces housing affordability reforms,’ Sean Nicholls, Sydney Morning Herald, 1 June 2017

‘NSW housing package ‘may push up prices’,’ Frank Chung, News.com.au, 2 June 2017

‘Chinese investors pull out of Melbourne apartment market,’ Emily Stewart, ABC News online, 26 May 2017

‘Berejiklian's full housing tax break: about 25pc of Sydney properties, analysis shows,’ Lisa Visentin, Sydney Morning Herald, 3 June 2017

‘NSW slugs foreigners to help first home buyers,’ Geoff Winestock, Australian Financial Review, 1 June 2017

‘Sydneysiders blame foreign investors for high housing prices: survey,’ Dallas Rogers, Alexandra Wong and Jacqueline Nelson, ABC News online, 31 May 2017

‘Foreign’ until proven otherwise: ‘Subtle’ 2017 budget change affects thousands of sellers,’ Jennifer Duke, Domain, 3 June 2017

‘Strong results for Sydney auction market with late surge in listings for big May weekend,’ Dr Andrew Wilson, Domain, 22 May 2017

‘What will sink the housing market and drown property investors?,’ Michael Janda, ABC News online, 30 May 2017

‘House prices in Australia's big cities fell again in May,’ David Scutt, Business Insider Australia, 30 May 2017

‘House prices go into reverse for first time in 18 months,’ Emily Cadman , Sydney Morning Herald, 1 June 2017

‘How quickly talk changes: from ever-booming house prices to fears of a hard landing,’ Greg Jericho, The Guardian, 1 June 2017

‘Home prices ease across capital cities,’ Prashant Mehra, Australian Associated Press, 22 May 2017

‘Get used to your commute: data confirms houses near jobs are too expensive,’ Rachel Ong, Christopher Phelps, Gavin Wood, Steven Rowley, Domain, 19 May 2017

‘John McGrath bursts property bubble 'myth',’ Carolyn Cummins, Sydney Morning Herald, 1 June 2017

‘Increased housing at top end not 'trickling down' to help poor, report finds,’ Paul Karp, The Guardian, 18 May 2017

‘Residex Repeat Sales Index Hints at Easing Housing Market Conditions in April,’ Residex Report, CoreLogic, 4 June 2017

‘House price risk hits small banks,’ James Frost, Australian Financial Review, 23 May 2017

‘Have we finally reached 'peak' house prices in Sydney and Melbourne?’ Richard Holden, The Conversation, 2 June 2017

‘Doom and gloom: Property market scaremongers need to pipe down,’ Michael Pascoe, Sydney Morning Herald, 3 June 2016

‘Developers stuck in ‘limbo land’ as record supply fails to deliver affordability,’ Jennifer Duke, Domain, 17 May 2017

‘Stop building apartments for investors and start building for future generations,’ Jennifer Duke, Domain, 29 March 2017

‘Sydney has biggest ever June auction Saturday with 789 homes bid on,’ Dr Andrew Wilson, Domain, 5 June 2017