Market comment: A tale of trillions, softening price rises and intergenerational theft

Wed, 18 Apr 2018

Market comment: A tale of trillions, softening price rises and intergenerational theftIn case you’ve ever wondered just how much Australia’s housing market is worth, a new report from the Australian Bureau of Statistics (ABS) tells us – a whopping $6.87 trillion. In fact, just between September and December 2017 it grew by almost $93 billion, but it’s the details of that fourth-quarter that make for interesting reading.

Even though the national annual average residential property gained 1 per cent in the December quarter, Sydney house prices slipped into negative territory, prompting CommSec senior economist Ryan Felsman to tell Domain’s Suzanne White: “The rebalancing of the Aussie housing market continues…and the slowdown in residential building construction is becoming evident – especially in NSW.”

In previous articles we’ve mentioned the somewhat complex methodology used by CoreLogic to compile its Hedonic Home Value Index, a measurement which tracks price movements down to the ABS Statistical Area 4 level. Using figures from CoreLogic’s index, Moody’s Analytics has forecast further house price falls for Sydney, but interestingly not for apartments.

Moody’s says house values across Sydney will decline 4.2 per cent in 2018 before recovering in 2019:“Incomes in NSW have increased faster than the national average and underpin some of the recent gains in home values. However, housing values have risen even faster and are overvalued relative to equilibrium value. Therefore, Moody’s Analytics expects a correction across NSW.”

Geography will play a part in Moody’s forecast drop. “House values in the City and Inner South region are forecast to fall by 10.1 per cent in 2018 to be the worst-performing statistical areas in Sydney,” the group says.

“For the Eastern Suburbs … our forecast [looks for a] 9.3 per cent decline in values in 2018 and a further 3.9 per cent decline in 2019, which would bring house values back to their level in 2016.”

Moody’s says house prices will also fall by more than the city-wide average in the Inner West, Ryde, North Sydney and Hornsby in the year ahead. However, according to Moody’s, apartment prices will make a moderate gain of 0.3 per cent due to ongoing demand.

“Apartments are expected to also slow but not as sharply with a 0.3 per cent expansion expected in 2018, down from the 9.8 per cent growth in 2017.”

The good news is that Moody’s thinks the downturn won’t be long-lasting: “By 2019, the correction is expected to have largely passed, with house and apartment values forecast to increase by 0.9 per cent and 1.6 per cent, respectively,” it says.

CoreLogic head of research Tim Lawless said that Sydney's property market was already showing signs of solidifying, with the 0.3 per cent monthly fall its slowest rate of decline since late 2017.

“If the trend towards an improving rate of decline persists, the Sydney housing market
may have already moved through its peak rate of decline," Mr Lawless told Reuters.

There is an ‘elephant in the room’ that could impact the prices of Sydney property in 2018-19, and that’s the Hayne inquiry into bank industry misconduct, including mortgage lending practices. The findings of this Royal Commission could result in a further tightening of lending laws that would make mortgage finance more difficult to obtain.

UBS economists George Tharenou and Carlos Cacho wrote a note to their clients which said mortgage borrowing limits could fall by as much as 35 per cent if higher living expenses were fully factored into lending calculations. This would reduce borrowers’ repayment capacity, hitting first-home buyers and lower income borrowers hardest.

UBS has already predicted house prices would sit between flat and -3 per cent year-on-year in 2018 and 2019 but warned a credit tightening scenario would see larger price falls.

The Hayne Royal Commission is expected to submit an interim report no later than 30 September 2018 and will provide its final report by 1 February 2019. ??

Another elephantine factor awaiting resolution is in the warning issued by the RBA which delivered the unwelcome news that around 30 per cent of all outstanding national mortgage debt will be subject to conversion from interest-only to principal and interest repayments over the next four years.

"Liaison with the banks suggests that there is a small share of borrowers who have not accumulated prepayments despite having had their loan for some time and may have little margin for unexpected increases in living expenses or income falls," the RBA said.

There are presently 1.46 million outstanding interest-only mortgages. A ‘small share’ of these, say just one or two per cent, would still mean many thousands of property owners would experience a degree of mortgage stress.

Is the RBA worried? Not yet. In its statement the Bank said: “"The share of borrowers who cannot afford higher P&I repayments and are not eligible to alleviate their situation by refinancing is thought to be small.”

Apartment construction slows

There’s been a significant drop-off in apartment construction which reduced the number of buildings approved across the country in February, according to the latest ABS data. Industry experts predict this trend to continue as more developers delay commencing projects and tighter lending standards for investors coincide with a flood of new apartments going onto the market.

 AMP chief economist Shane Oliver said there were still a record number of cranes on our skylines, but it won’t last: “You’ve got falling [property] prices in Sydney, and rising levels of unit supply, eventually the number of cranes across Sydney…will start to come down.”

“As supply impacts at a time of tighter lending standards I think more developers [will decide] to start delaying projects,” he added.

Housing Industry Association senior economist Shane Garrett said the dramatic fall in the number of apartments and high-density dwellings came at a time of near-record construction volumes. High-rise apartments had been especially affected, with the number of units approved for buildings four storeys or higher over the year to February down 15 per cent on the previous year.

Mr Garrett said approvals have yet to bottom out, predicting that won’t happen until about mid-2019: “The thing that worries us … is that if fewer new apartments are being built it represents a risk to supply … and that could have unfavourable outcomes, in terms of acceleration of property prices and rents.”

One group that wants more apartments in Sydney is the Urban Taskforce a group that represents the development industry. It says it’s concerned that the Greater Sydney Commission’s recently-announced ‘Region Plan’ hasn’t said how it would ensure that medium-to-high density apartment living will be given planning certainty.

By 2036, the Commission’s plan forecasts that Sydney's residents will see a city develop with “little change in the outward spread [of housing but an] increase in intensity of development within existing centres and the existing urban area”.

Chris Johnson, CEO of the Urban Taskforce, says there is significant tension in the community about the planned increase in intensity of development: "The language in the GSC's plan is about more diverse housing and about a mix of house types, presumably leaving the actual mix to council plans.”

Mr Johnson told the Sydney Morning Herald’s James Robertson that leaving the determination of the plans open could expose them to political pressure from MPs concerned about “stopping the squeeze”.

Group buying to save

One purchasing methodology that might give purchasers a better deal on apartments – or possibly even houses, is group buying. Although not a new idea, the current high prices in eastern capitals have made group buying an attractive option for those interested in acquiring property.

It’s essentially buying in bulk – a group of people who are looking to buy a similar type of investment organise themselves, often with a specialist property agent, to negotiate lower prices for something like off-the-plan apartments in a single building, or perhaps units in multiple buildings that have a common owner.

Buyer’s agent Nathan Birch, co-founder of, explains that developers often need to pre-sell a number of properties before they can secure finance to begin development.

“A lot of legwork, marketing and promotion go into finding and securing these buyers ahead of the build. Some developers have seen us as an easy outlet for removing all the stress and pain from doing large marketing campaigns,” he told Nila Sweeny from Property Market Insider.

He says that if a significant number of buyers come to the developer with a proposal to purchase units or blocks of land in a development they can often secure property well below market value.

This sounds logical, and in theory it should work out to be a win-win situation for both purchasers and developers, but there are possible ways to lose as well. Fees from buyer’s agents can be high, and there can also be problems with some would-be purchasers getting finance. Due diligence of both the property developer and the intending purchasers is essential to ensure the deal goes ahead with favourable outcomes for all parties.

Intergenerational theft?

A range of housing affordability measures at state and federal levels have been implemented in the past year. There have been a variety of stamp duty exemptions and discounts, first-home buyer grants and a federal “super scheme” that allows first-home buyers to save for a house deposit by making extra contributions into their superannuation.

However, a study by the Australian Housing and Urban Research Institute concluded that most of the government’s housing expenditure continued to be heavily skewed towards wealthy homeowners rather than new first-home buyers.

Former Liberal leader John Hewson recently was quoted in the media with a statement that governments had “kicked the issue of housing affordability down the road for decades,” and labelled the result “intergenerational theft”.

Dr Hewson was adamant that successive governments had failed to develop a national strategy to solve the problem and the issue has now become a crisis: “Problems don’t get solved … they get kicked down the road, and when you kick issues like housing affordability down the road or budget repair down the road, or climate change down the road, you are stealing from the next generation who are just going to be left to try and solve those problems.”

He argued that broad-based tax reform is needed and that housing-related tax concessions such as those on negative gearing should be grandfathered and capital gains concessions that benefit investors should be capped over time.

Dr Hewson said with a whole generation of Australians locked out of the housing market, the result of the next election could hinge on the country’s youth: “The youth of Australia underestimate how much political influence they can have if they work together.”

Economist Ross Gittins, a regular contributor to the Sydney Morning Herald, agrees with Dr Hewson that the solution for younger generations lies in generating more pressure at the ballot box.

“The feds failed to limit the growth in demand (by limiting immigration and fixing the tax system), while the states did too little to increase supply (by discouraging the building of new homes on the outskirts and by permitting a first-in-best-dressed mentality by people in inner and middle-ring suburbs).

“Why are they allowing the proportion of home owners to decline? Because most things they could do to genuinely help first home buyers would come at the expense of existing home owners, who have more votes than the youngsters,” he said.

Liberal MP John Alexander says that Australia’s housing market must be recalibrated towards home ownership. This requires ensuring that wage earners who aspire to be owner-occupiers are competing in the market against other wage earners, not investors.

His preferred solution is to give the Reserve Bank of Australia (RBA) the power to adjust the tax deductibility of housing. As an example, he said the RBA could decide that investors could only deduct 70 per cent of the cost of their borrowings.

Mr Alexander has also announced his own scheme to attract private investment in affordable housing. He wants to create an Australian Housing Trust in which investors can buy shares that will finance affordable housing.

Under his plan, renters could reduce their rent by becoming part-owners of in the properties they occupy eventually becoming full owners in what he terms an “equity mortgage.”

Interest(ing) times

We have now had record low RBA interest rates for a record length of time, and no signs of an impending change to the situation.  About the only movement is the growing distance between now and the time the market expects the next rate change to take place.

At the end of January, the market was predicting a rise in rates to 1.75 per cent in November 2018. Currently it’s anticipating a rise to 1.75 per cent by June 2019. This is largely due to a continued slowing in housing price growth, high debt levels and weak wages growth.

AMP Capital’s Shane Oliver said: “high business confidence, strong jobs growth and the RBA’s own growth and inflation forecasts argue against a rate cut, but risks around consumer spending, weak wages growth and inflation, the slowing Sydney and Melbourne property markets and the still too high $A argue against a rate hike.”

Housing finance is definitely taking a backward step. In January this year the level of housing finance was 1.5 per cent below what it was 12 months earlier - the first annual fall since August 2016. Clearly, the fall in housing finance is being driven by a decrease in investor finance.

But another significant factor that’s holding back housing finance volumes is the slowing prices for established houses. In September 2017, the average price across all capital cities for established houses was 9.3 per cent above where it was 12 months earlier; in December 2017 this had fallen to growth of just 5.6 per cent.

As always, Sydney generates its own, unique statistics. Since December 2011, established house prices in Sydney have grown by 83 per cent, whereas average full-time earnings in NSW over the same period grew just 17.5 per cent. The price growth strength was based on investors and progressively lower interest rates, but with new rules limiting investors and interest rates most likely at their lowest point, the housing boom is all but over.

Mathew Tiller of LJ Hooker told’s Sophie Foster that housing markets across the country remained active with listings increasing and auction clearance rates just below the long-term average.

“More properties on the market for sale has provided more choice for buyers and when combined with the moderation of investor demand has led to a slowdown in price growth. In weighing up these variables, it is likely that the RBA will keep the cash rate at the record low of 1.5 per cent over the short-term.”

Also in agreement were Noel Whittaker of QUT who said “housing not rising - markets wobbly - no reason to move”, and Clement Tisdell of the UQ School of Economics who said he agreed with: “No reason for a change.”

There is, of course, a possibility that the banks themselves could raise mortgage interest rates, thereby causing a countering reaction from the RBA. Ian Verrender from ABC News Online says that between them, the big four banks hold about 80 per cent of all Australian mortgages.

“Our banks have borrowed around $700 billion on offshore markets and watched on in glee as we've ploughed that into real estate, pushing prices to the heavens, forcing new entrants to borrow even more.

“Real estate has become their dominant business, comprising up to 60 per cent of their total loan books.

“If we do see our banks pushing the button on a series of mortgage hikes in coming months, the RBA will have no option but to hack into its already record low of 1.5 per cent just to keep the economy on track.”

With that possibility and the forthcoming interim report of the Hayne Royal Commission due in September, we’re assured of interesting times ahead!


‘RBA flags dangers of $480b in interest-only loan resets over the next four years,’ Jacob Greber & Jonathan Shapiro, Financial Review, 14 April 2018
‘House prices predicted to keep falling, but Melbourne and Sydney units to take biggest hit,’ Michael Janda, ABC News Online, 11 April 2018
‘What’s next for Australian property prices? 3 economic heavyweights make their case,’ Chris Kohler, Domain, 9 April 2018
‘RBA should be clearer about when and how interest rates will change,’ Efrem Castelnuovo, Bruce Preston and Giovanni Pellegrino, ‘The Conversation’, ABC News Online, 19 March 2018
‘Australia's property market is now worth almost $6.9 trillion - a record high,’ Suzanne White, Domain, 21 March 2018
‘Group Buying: How Does it Work and What Are the Hidden Traps You Need to Be Aware of,’ Nila Sweeney,, 23 March 2018
‘Moody's tips house price 'correction' across NSW,’ David Scott, Sydney Morning Herald, 19 March 2018
‘Australia’s housing affordability crisis ‘intergenerational theft’: John Hewson,’ TawarRazaghi, Domain, 26 March 2018
‘Who is to blame for the housing crisis and how to fix it,’ Ross Gittins, Sydney Morning Herald, 14 March 2018
‘John Alexander on why Australia's housing market risks 'grotesque' inequality,’ Paul Karp, The Guardian, 25 March 2018
‘The housing boom is over – and the RBA isn't busting to raise rates,’ Greg Jericho, The Guardian, 22 March 2018
‘The pullback of investors off the back of tighter lending restrictions is also taking its toll,’ Kate Burke, Domain, 2 April 2018
‘The number of cranes dotted across city skylines is set to fall with a decline in building approvals for apartments,’ Kate Burke, Domain, 4 April 2018
‘Why Sydney needs more apartments,’ James Robertson, Sydney Morning Herald, 19 March 2018
‘RBA to sit on 1.5pc cash rate with economy “not strong enough” to handle a rise,’ Sophie Foster,, 2 April 2018
‘RBA should be clearer about when and how interest rates will change,’ Efrem Castelnuovo, Bruce Preston and Giovanni Pellegrino, ‘The Conversation’, ABC News Online, 19 March 2018
‘Sydney, Melbourne property prices continue to slide,’ Reuters, Sydney Morning Herald, 3 April 2018