Market comment: What’s going to happen to Sydney Property in 2018?

Tue, 16 Jan 2018

Market comment: What’s going to happen to Sydney Property in 2018?
As the new year gets underway and we start writing ‘2018’ where ‘2017’ used to be, Sydney property owners and would-be owners would naturally be interested to know what events will shape the city’s property market over the next twelve months.

We are once again reminded by concerns about property prices that property investments are always best viewed as long-term activities. The ‘quick killing’ isn’t very common when it comes to bricks and mortar, although it’s also clear that many astute investors have done exceptionally well over the past five years of our greatest-ever property boom.

As the Herald’s Jennifer Duke says: “Typically, property prices have been known to double in Australia every seven to 10 years in capital cities after a strong market cycle. So, home owners who stay put for lengthy periods should see their property value increase in the long run, irrespective of short-term hiccups.”

It’s a certainty that the next twelve months won’t provide more of the kind of capital gains that we’ve become used to since 2012. However, there are most certainly gains to be enjoyed, even if the overall market isn’t booming, and a number of trends are already becoming apparent that will determine events in the year ahead.

Price rise reversals

The first and most talked-about trend is that Sydney prices have stalled and even, in some parts of the greater Sydney area, gone backwards. They’re following the national trend that now shows housing prices down 2.1 per cent for the final quarter of 2017 and 2.2 per cent below the market’s last peak in August.

HSBC’s chief economist for Australia, Paul Bloxham, says house prices in Sydney have been growing at low double-digit annual rates over the past five years, but during the past six months Sydney prices have fallen: “A hard landing is possible, but we believe this would require a negative shock from abroad and a sharp rise in the unemployment rate,” Mr Bloxham said.

“We do not see a significant local housing imbalance and view Australia as having had a housing boom rather than having a housing bubble.”

Treasurer Scott Morrison said the Federal Government deserved credit for the market’s gradual cooling, thereby avoiding a potential ‘crash’: "What we have seen is a fall off a very high pace of dwelling investment," Treasurer Scott Morrison told reporters in Canberra.

"I'm encouraged by what I'm seeing in the housing sector. You'll be aware of the measures we took early in the year which have had the desired effect of cooling the more enthusiastic investor parts of the market, particularly in Sydney and Melbourne,” he said.

However, there are many reasons for this price reversal and most of them are the result of actions taken by four of the market’s biggest players: The Reserve Bank, The Australian Prudential Regulation Authority (APRA), The Australian Securities and Investments Commission (ASIC), and the major Australian banks.

If you think there’s been a lot of pressure applied by these sources to bring the five-year property boom that began in 2012 to a controlled ending, you’re right. For some time, Australian governments at federal and state levels have expressed serious concerns about skyrocketing housing costs and consequent high levels of household indebtedness, most especially the costs of servicing housing loans.

The Herald’s Elizabeth Knight gave much of the credit to APRA: “APRA seems (to date) to have successfully employed ‘macroprudential’ measures, which essentially put checks on bank lending and curb the rate of growth in interest-only loans and investor loans. In response banks started to increase the interest rates for these borrowers, which had the effect of cooling demand,” she wrote.

Capital Economics' Paul Dales also gives credit to APRA for creating the conditions that ended five years of price rises: “"The cut in the supply of credit to investors and the rises in investor loan rates caused by APRA's new rules in March that triggered this slowdown will probably continue to weigh on the market [in 2018].

"They [the housing markets] are also more exposed to further falls in prices, as our house price to income ratios suggest prices there are well above their sustainable level,” Mr Dales told ABC News.

Two senior ANZ Bank economists, Daniel Gradwell and Joanne Masters, said in a recent report that they expect further slowdowns in house price growth in 2018. “APRA’s tightening on investor borrowing and interest-only loans has resulted in higher interest rates for those borrowers, and lowered demand for housing,” they wrote.

“Weaker auction results point toward further slowing as we move into 2018. Our forecast that the RBA will increase interest rates [in 2018] will also work to lower price growth. But if the RBA doesn’t tighten, then prices will likely slow less than we forecast. Importantly, there is still nothing to suggest to us that prices are going to enter widespread declines.”

Interest rate moves

Interest rates, particularly those applied to mortgages for property purchases, are critical factors in property pricing. Years of record low prime rates have encouraged borrowing, and both homeowners and investors have gleefully borrowed as much as they could. This is fine until interest rates rise and some borrowers find they struggle to afford the higher repayments.

Earlier fears of a price ‘bubble’ and warnings of a property disaster to come seem to have been calmed and we’re now seeing a soft landing rather than a sudden broad-based selloff and crash. But there are still some areas of concern – such as the large number of apartments yet to come onto the market as well as some parts of Sydney losing their previous degrees of sales appeal, but overall, we seem to be on the right track.

Interest rates won’t stay where they are forever and once they move it will most likely be upwards. After taking over the top job at the RBA in 2016, governor Philip Lowe left us in no doubt he wouldn’t be cutting rates further. When he said that easing wasn't in the national interest, the Bank’s easing cycle came to an abrupt end.

CoreLogic’s head of research Tim Lawless says the RBA would probably keep interest rates on hold during 2018, with lower rates unlikely because they would counter the controlled slowdown in the housing market, while any rise would stifle household consumption and business investment.

"Regulators and policy makers will be encouraging households who hold high levels of debt to reduce their exposure while rates remain low," he said in an AAP release.

Mr Lawless also said that the next move in interest rates was more likely to be up, not down.

But some banks have already raised their mortgage rates for investors, and many analysts feel it won’t be too long before the RBA hikes its prime rate from 1.5 per cent to at least 1.75 per cent or possibly two per cent. Increases will be small and incremental rather than dramatic, but with more than 300 Sydney suburbs forking out over $30,000 per year in mortgage repayments it won’t take much of an interest rate increase to create some financial stresses.

What’s the monthly cost of an interest rate increase? The average new housing loan in Sydney is somewhere in excess of $600,000 according to mortgage broker AFG. But let’s say the loan is an older one for ‘just’ $400,000. ME Bank head of loans Patrick Nolan told Domain: “[Higher RBA rates] mean repayments will also increase, typically $50 for every 25 basis point rise on a $400,000 loan.” So, an increase from 1.5 per cent to two per cent will cost an extra $100 a month or $1200 a year on what has become a relatively small mortgage amount.

Some Sydney residents will have it even tougher when interest rates begin to go upwards. Data from the 2016 Census show that seven harbourside and northern beaches suburbs have median annual home loan repayments of more than $50,000 per annum. These suburbs are Dawes Point ($62,400 a year), Duffys Forest ($60,000 a year), Whale Beach ($57,200), Clontarf ($52,000), Linley Point ($52,000), Longueville ($52,000) and Balgowlah Heights ($51,500).

There was a bit of good economic news in the latest Census data. Despite booming property prices and few signs of wage and salary growth, the share of Sydney households devoting more than 30 per cent of their incomes to repayments - a generally-accepted definition of the point where mortgage stress kicks in – fell from 12 per cent of households in the 2011 Census to 8.4 per cent of households in the 2016 Census.

First-home buyers return

Investors’ interest is cooling as prices are now so high that their chance of getting a reasonable return on capital is becoming difficult. This opens a gap that is now seeing a return of first-home buyers to the Sydney market.

Whereas investors have previously had taxation advantages that encouraged property investments, it’s the first-home buyers that now feel empowered by NSW government stamp duty concessions and competitive interest rates on offer from banks.  There’s also a growing selection of new apartments on the market with more to come over the next two years as projects reach completion.

A Perth-based property expert, Geoff Baldwin, says that a price slowdown that could assist first-home buyers is ‘absolutely’ coming for Sydney: “In Sydney prices are just crazy and the closer to the CBD you get the crazier they become. It won’t come back to an affordable point but my prediction is there will be a 10 per cent drop in prices, especially for high-density apartment prices over the next few years.”

Capital Economics’ Paul Dales noted that Sydney’s population growth, even at present rates, would only boost housing prices if the extra demand wasn’t met with additional construction: "However, in recent years the number of new homes built has far exceeded the number required by the growing population. This overbuilding is much greater for apartments than houses," he said.

The Guardian’s Greg Jericho also commented on the drop in Sydney apartment prices: “In the September quarter the average price of apartments fell by 1.4 per cent - the biggest quarterly fall for six years – while established house prices fell 1.3 per cent.

“It means that both elements of the Sydney housing market are mostly moving together – with the annual growth of both being down on where it was six months ago.”

Mr Jericho wrote that one of the beneficiaries of the lower growth in apartment prices has been first-home buyers.

He said that research conducted by the Reserve Bank had found the average number of bedrooms in affordable housing in Sydney has declined over the past 20 years, due mostly to apartments now being smaller.

“But it also found that while the average distance from the CBD of affordable houses has increased over the past 20 years – in Sydney from slightly over 40km to a touch less than 60km – the distance from the CBD of affordable apartments has remained relatively stable.

Curbs on foreign investors

New Australian laws concerning empty houses and apartments will have implications for many foreign investors that have purchased property here but choose to leave their properties unoccupied.

In November 2017, federal Parliament passed legislation giving the Australian Taxation Office (ATO) the power to fine foreign investors up to $5500 a year if they allow their properties to remain empty, plus up to $52,500 for failing to lodge the paperwork required.’s Frank Chung quoted UNSW professor Hal Pawson who explained how authorities might be able to identify empty properties: “Lack of reliable data on empty homes is a major problem in Australia,” Prof Pawson wrote in The Conversation.

“In 2014, an analysis of water usage data by Prosper Australia estimated that about 82,000 homes in Melbourne were vacant — about half the Census figure. Applying a similar ‘conversion factor’ to Sydney’s Census numbers would indicate around 68,000 speculative vacancies.”

An ATO spokesperson said that foreign investors would be required to lodge an annual vacancy fee return which will consist of an online declaration and payment system. If there are doubts about the validity of the vacancy fee return, the ATO would check the claim through “tax return data, immigration data and information from electricity and other utility providers”.

“If the foreign investor claims that they have rented the dwelling or made it available for rent then the ATO can check against the data detailed above as well as lease and real estate agent agreements, internet searches and records of rental tenancies authorities,” she said.

“If the foreign investor claims the dwelling is rented, but this is through short-term leases of less than 30 days, even if this totals over six months ... the foreign owner will still need to pay the vacancy fee as the law requires leases to be of a residential nature of at least 30 days duration.”

If fees and charges accumulate and remain unpaid, a hold can be placed over the property so that unpaid amounts are recouped when the property is sold: “The Treasurer can also have a property sold to recoup unpaid fees if required. The ATO expects that the severity of the penalties for non-lodgement will encourage foreign investors to lodge the vacancy fee return.”

Stamp duties or…

One big contributor to Sydney’s high housing prices has been the state government’s stamp duty on all property transactions. Over time, what was once a troublesome but vaguely affordable tax, usually financed within a mortgage as part of the overall purchase transaction, has become a crippling impost that has begun to limit people’s options for such things as purchasing a larger property for a growing family or for older couples downsizing after retirement.

In 1997, when the median house price in Sydney was $234,361, stamp duty would have been the equivalent in today’s dollars of $10,916. Jump ahead 20 years to 2018 and the stamp duty cost for a median Sydney house will be somewhere north of $50,000.

“We talk about bracket creep with income tax, but this is the biggest bracket creep you could ever see,” BDO National Tax Director Lance Cunningham told Domain’s Chris Kohler.

“The state governments have just been sitting there watching the house prices [and stamp duty] go up.”

Mr Kohler gave another example that is simply eye-watering. “Let’s say a couple who live and work in Sydney find out their family is about to grow – all of a sudden, their home is looking a bit small and they decide they need another bedroom and bathroom.

“The bank would have no concern lending to an upgrading owner-occupier couple like this, but if the house they wanted was worth $2 million – pretty standard for a family home within an hour of Sydney – the stamp duty would land at $105,490.”

Stamp duty is understandably unpopular, except with the NSW government for which it’s the source of around 11 per cent of total revenues. And with housing sales and prices in a downturn after five years of boom time, this ‘river of gold’ is under serious threat.

Joanne Seve, a Sydney lawyer and specialist in state-based taxes, told the Herald’s Jennifer Duke that the predicted market decline would be "really bad news for NSW revenue" – even more than just the projected $650 million in stamp duty revenue.

"It will also affect future projections of land tax revenue in NSW [which are based on a three-year average]," she said, noting that Land tax is worth about $3 billion to the state on top of around $9 billion in stamp duties.

But what could the government do to replace such an unpopular but lucrative form of taxation?

One answer to this question keeps popping up from time to time, but is usually quickly rejected by politicians who don’t want to be seen to be supporting something that would anger almost every homeowner in the state – a broad-based land tax applied to all properties.

In March last year the federal Parliamentary Budget Office costed a proposal by The Greens to abolish stamp duty and replace it with a broad-based land tax. The proposal was supported by the Grattan Institute which said it would be politically difficult to deliver but was generally regarded as a ‘good policy’.

Nationally, stamp duties bring in over $19 billion in revenues to state and territory governments. The Grattan Institute estimated that to replace this revenue with a broad-based tax would probably require a tax of ‘about $6 for each $1000 of unimproved land value’.

So, for your reasonably average Sydney family home with an unimproved land value of $900,000 the land tax would be around $5,400 – about the same as the current rate of land tax in NSW for properties that aren’t principal places of residence. Add to this figure whatever rates are applied by your local council, and it’s a big hit to household budgets.

What introduction of the broad-based tax would achieve is simple – elimination of stamp duty on property transactions. In theory, housing prices would therefore decrease, thereby making property more affordable and lowering real estate values generally. But at the same time rents would increase and it would be necessary for all homeowners to come up with several thousands of dollars more to hand over to the government each year.

This could very easily be seen as a solution that’s much worse than the problem it’s intended to solve!

Nevertheless, with a new year ahead and a state election just over a year away we may once again see the proposal for a broad-based land tax resurface. At least we can be certain of two things: governments will want more revenues, and stamp duty will remain unpopular.

So, what’s going to happen?

Prices for Sydney property have weakened and will continue slowing in 2018. Experts expect some areas to experience price falls of from three to eight per cent, although the most popular suburbs will continue to show moderate gains.

Interest rates have stabilised and won’t be falling further. The RBA will eventually increase the prime rate, probably towards the end of 2018 and then only by 25 or perhaps 50 basis points.

With a large number of apartments underway but yet to be completed across the greater Sydney area, and only a much smaller number of new houses to be constructed, price falls for apartments are sure to be higher than those for free-standing properties.

Investors will find it harder to get a suitable return on their Sydney property investments and will increasingly look outside Sydney to invest in both residential and commercial property. The interest of foreign investors will undoubtedly shift elsewhere as restrictions on them in NSW and Victoria are toughened.

First-home buyers’ activities will continue to increase as investors withdraw, although their continued participation will depend largely on government support in crucial areas like stamp duty concessions.

Watch for moves to replace stamp duties with broad-based property taxes, perhaps by a reduction in the former coinciding with the introduction of a ‘moderate’ BBT as a beginning of the process. It’s already happening in the ACT.

We’ve seen the end of one Sydney property cycle and the beginning of another. There won’t be a ‘crash’ but a gradual reduction in prices will happen, eventually followed by a return to prices growth.

As we said over six years ago, in this forum on 29 July 2011, just before the property boom of the last five years began: “Housing prices in Sydney are not as robust as they were a few months ago, but aren’t about to topple in established suburbs. Some prices will slip back towards their levels of a year ago, but most analysts don’t foresee much of a decline.

“The market will have slight falls in some areas but mostly stable prices in suburbs within 10km of the CBD. Some rises are also possible. Affordable interest rates and negotiable prices on quality property are just what astute buyers look for in Sydney real estate.”

And so we see another cycle about to begin.


‘Real estate 'boom is over' as most experts tip property price weakness in 2018,’ Michael Janda, ABC News online, 3 January 2018
‘Foreign buyers are dropping out of the Australian property race,’ Chris Kohler, Domain, 11 January 2018
‘Sydney property prices tipped to fall 10 per cent in 2018,’ Jennifer Duke & James Robertson, Sydney Morning Herald, 3 January 2018
‘House prices in Australia's capital cities are threatening 'negative growth' in 2018,’ David Scutt, Business Insider, 2 January 2018
‘For most, predicted downturn will be little more than a blip,’ Jennifer Duke, Sydney Morning Herald, 3 January 2018
‘Real estate 'boom is over' as most experts tip property price weakness in 2018,’ Michael Janda, ABC News online, 3 January 2018
‘Two things to watch in 2018 - interest rates and house prices,’ Elizabeth Knight, Sydney Morning Herald, 27 December 2017
‘Five property market trends to expect in 2018,’ Chris Kohler, Domain, 19 December 2017
‘Foreign cash driving top-end house prices in Vancouver and Toronto,’ Reuters in the Sydney Morning Herald, 23 December 2017
‘Sydney's biggest mortgage bills: how your suburb compares,’ Matt Wade, Sydney Morning Herald, 18 August 2017
‘Australia’s housing boom is almost over, says HSBC chief economist Paul Bloxham,’ AAP in Domain, 12 December 2017
‘High-density living: the rise of Sydney's 'vertical families',’ Matt Wade, Sydney Morning Herald, 11 December 2017
‘Real estate experts expect house prices to fall in Sydney, but don’t expect a bargain any time soon,’ Alexis Carey,, 30 December 2017
‘Will the end of the housing boom come with a bang or a whimper?’ Greg Jericho, The Guardian, 14 December 2017
‘Criminal sanctions are available for false statements’: ATO tools up for empty house crackdown,’ Frank Chung,, 23 December 2017
‘RBA chief faces his biggest task yet in 2018,’ Bloomberg in the Sydney Morning Herald, 19 December 2017
‘Home sales rise while Sydney leads price dip,’ AAP in the Sydney Morning Herald, 18 December 2017
‘House prices expected to fall in 2018: CoreLogic,’ AAP in the Sydney Morning Herald, 23 December 2017
‘House prices off the boil, but will population growth keep things simmering?,’ Stephen Letts, ABC News Online, 12 December 2017
‘Mid-year budget update: Housing investment rates to fall, raising prospect of long-term downturn,’ Eryk Bagshaw, Sydney Morning Herald, 19 December 2017
‘Property News,’ Cameron Kusher, CoreLogic,, 7 December 2017
‘Soaring stamp duty: How the tax system is urging millions of homeowners to renovate,’ Chris Kohler, Domain 17 December 2017