Interesting news from Domain: Australian house prices recently set a world record after gaining 6556 per cent in 55 years, according to calculations from the Bank of International Settlements and referenced by UBS, with growth averaging 8.1 per cent each year during that period.

The report added that prices had doubled every nine years, and that it was the longest upswing in the world during that period without a “downswing” – a downswing was defined as a sustained price decrease of three years.

The media have recently been repeating themselves about Sydney property. “The housing boom is over” they often say, and rightly so. Investors are withdrawing from their previous high levels of activity, and vendors are finding that expectations of ever higher prices for their properties can be overly optimistic.

Other indicators – namely auction clearance rates, time-on-market, numbers of properties sold, and property lending figures all say the same thing. Yes, the Sydney property boom is behind us. But a return to normal conditions is what we’re now seeing, and the chances of going from boom to bust are miniscule.

As the New Daily’s Michael Pascoe wrote: “The fall in Sydney and Melbourne auction clearance rates over the weekend is a gift for writers of scary headlines. Before they get too excited, keeping some perspective paints it as part of a return to something more like normal – not heralding the constantly-predicted crash”.

Cooley Auctions' auctioneer Damien Cooley told the Financial Review’s Su-Lin Tan: "Things are changing and the market is not as good as it was, but it's a very fair market." He’s right. A fair market is just what we’re looking at, and while clearance rates remain in the 60 per cent levels, quality properties continue to achieve above-reserve prices at auctions.

But across the board prices are softening. Property advisory firm SQM Research has revised its Sydney price estimate forecast to between -4 per cent and zero per cent growth this year, from a previous estimate of between 4 per cent and 8 per cent.

It says that moves by the Australian Prudential Regulation Authority (APRA) to strengthen mortgage markets are weighing on the national property market: “This action, predominantly targeted at property investors, has triggered a decline in demand for residential property.”

The recent tightening of credit restrictions by banks and other financial institutions is reminiscent of the year 2015 when APRA announced a 10 per cent cap on the growth rate of banks’ loans to investors – a situation that affected prices for a period but was gradually relaxed.

Foreign investors, particularly those from China, have largely pulled out of the Sydney market, but this has opened up opportunities for first-home buyers and owner-occupiers who have been quick to take advantage of the stock of new apartments on offer.

2018 Budget impacts

Despite repeated concerns about housing affordability, the federal government’s 2018 budget, which it must be remembered doesn’t come into effect until it’s been passed by the Senate, offered little that will affect the property market - nothing on negative gearing and nothing on capital gains tax reductions.

This was a bit surprising after a study presented to the Reserve Bank of Australia concluded that almost 75 per cent of households could own their own homes if the current negative gearing policy was abolished, and house prices would soften by 1.2 per cent while rents would rise “only marginally”.

The paper, by Melbourne University department of economics researchers Yunho Cho, Shuyun May Li, and Lawrence Uren, found that eliminating negative gearing would lead to an overall welfare gain of 1.5 per cent of gross domestic product.

However, as News.com.au’s Liz Burke puts it: “Though housing affordability is frequently cited as a major concern for young Australians and a top financial issue, prospective property owners have apparently been forgotten by the Government.”

A cutback on tax incentives for vacant land was one of the few property-related measures in the budget, which means property owners will no longer be able to claim tax deductions for expenses such as council rates and maintenance costs for vacant land. The changes will take effect from July 2019.

At present, property owners can claim deductions on land they never intended to make an income from while ‘banking’ the land, hoping to sell it later and make a windfall profit when property prices have increased.

Under the government’s new tax settings, property owners would be able to claim deductions only after a property had been constructed on the land, the property had received approval to be occupied, and the property was available for rent.

The government hopes this will curb the popularity of land banking, which has the effect of tying up land that could otherwise be used for housing or other development. The measure is expected to add $50 million to the government’s income in 2020-21 and 2021-22.

Urban Development Institute of Australia’s national executive director, Kirk Coningham expressed concerns about the measure: “We know that it can take seven to ten years to bring house and land packages to the market in Sydney, so to be punished for the slow processing would be one big concern we would have.”

Lance Cunningham, national tax director at BDO in Australia, told Domain’s Kate Burke that denying vacant land holders from making normal deductions appears to be an attempt to stop developers holding onto land long term.

“I think it’s really aimed at property developers holding lots of land because they think they can perhaps get better profits in the future,” he said. “To try and free up some of the land for housing.”

Another housing-related twist in the budget was the government’s offering homeowners over 65 a ‘reverse mortgage’ worth up to $11,799 per year, meaning that anyone over the retirement age can now access equity in their homes without selling them.

This scheme based on the previous Pension Loans Scheme addresses the problems faced by many older Australians who have their wealth tied up in property and have little access to extra cash when needed. The rise in life expectancy also places financial pressures on retirees who can’t really know how many years they’ll be able to stay in their own homes.

The importance of this facility is shown by Grattan Institute figures which show that Australians between the age of 65 and 74 are $480,000 wealthier in real terms than households of that age bracket 12 years ago, but most would have to sell their homes to access some or all of that money.

An interest rate of 5.25 per cent will apply to the loans. This rate is unchanged since the Pension Loans Scheme was introduced in 1997 and is typically about 0.5 per cent below the rate offered by most banks.

The plan would improve the outlook for retirement-age homeowners, noting that a Grattan Institute report on housing affordability found that the over 65s are the only group of Australians with an increasing rate of home ownership.

“Retirees who have paid off the mortgage are insulated from rising housing costs, a substantial safety net if they exhaust their retirement savings,” said the report, which written by chief executive John Daley and Australian Perspectives Fellow Brendan Coates.

Medium-density popular

The NSW government recently introduced a new medium-density housing code, although some councils are resisting its implementation due to concerns about overcrowding.

NSW Planning Minister Anthony Roberts announced the new housing code in April, saying that low-rise medium-density housing is the “missing part” of housing stock between traditional free-standing homes and apartments.

The code permits homeowners and developers to divide blocks into terraces and dual occupancy dwellings, or to create what are being called “manor houses” in which a single building houses three or four dwellings. Development approvals would be managed using a complying development process that is supposedly faster and cheaper than existing approval processes.

This is a response to an important shift in the marketplace shown by growing demand for medium-density housing. Medium-density is a category that includes townhouses, terrace houses and three-bedroom apartments – suitable for downsizing older homeowners or young families looking for low maintenance properties that suit their time-poor lifestyles.

Knight Frank’s Michelle Ciesielski, head of residential research, told the Herald’s Carolyn Cummins that in 2013 the volume of medium-density development sites in Australia was $152.8 million, but by the end of 2017, the volume had increased to $1.1 billion.

“The shift towards low-maintenance living has only just begun, with an aging population in downsizing mode, more first-time buyers and an increasing trend in time-poor communities,'' Ms Ciesielski said.

She said her company’s analysis was that the portion of three-bedroom apartments being built is expected to increase by 42 per cent for higher density projects now under construction, and for those due for completion in the next four years.

There’s a measurable shift in the market occurring between the prices of apartments and detached houses. CoreLogic’s data shows that capital city detached house values grew at an average annual rate of 7.3 per cent over the past five years and unit values grew by a lesser 5.5 per cent over the same period.

“Despite the surge in unit construction over recent years, the past 12 months has seen unit values continue to trend higher, up 1.9 per cent, compared with a 1 per cent fall in house values,” CoreLogic head of research, Tim Lawlesssaid.

Some experts have said the mix of tighter lending restrictions, first-home buyer incentives and a flood of new apartments were the reason for the drop in house prices.

“[People who would have normally bought houses] may be thinking there’s better value in units, buying something brand new, close to the city usually on a good transport line,” AMP Capital’s chief economist, Dr Shane Oliver told Domain’s TawarRazaghit.

“Perhaps [that switch] in favour of units over houses has helped absorb the supply, which has put a dent in demand for houses,” he said.

Commonwealth Bank economist Kristina Clifton told The Guardian’s Gareth Hutchins that unit prices may be holding up better because they tend to be located in the larger capital cities, where population growth is strong, and close to public transport.

“Also, unit prices didn’t rise as quickly as house prices during the boom years,” she said.

Choosy at the top

Selling agent Jack Fontana says the market at the top has ‘definitely shifted’: “There are buyers but they’re cautious and picky. They’re looking for the suitable property, especially at that high end.

“It is not a two to three-year purchase for them but something that is long term. They want to make sure that the home is right, and the position is right, and if it is a waterfront, a lot of them do want the private jetty.”

The top end of the market is alive and well, as was demonstrated at a recent auction for a new-build five-bedroom house in Hunters Hill. The property attracted pre-registrations from five families; three of them made bids, driving the home to an under-the-hammer sale price of $5.8 million - $700,000 up on the $5.1 million reserve.

“We had over 150 groups through during the campaign, 60 of them on the first Saturday the property was open for inspection,” said the selling agent Paul Cavarra from McGrath Hunters Hill.

“The final price eclipsed the price point where everyone thought it would end up, that’s for sure,” he added.

The president of the Real Estate Institute of NSW, Ms Leanne Pilkington, said agents were finding it harder to get buyers to make purchase decisions because Sydney’s market has eased.

“Twelve months ago, the buyers were really fuelling the price growth because there was huge demand. They are not as willing to pay that premium right now, so I would say the market is cooling.

“It is not as if everyone is throwing offers on the table – that is not the way a market like this works.”

Tenants feel rent pressures

The Anglicare Rental Affordability Snapshot surveyed all the private rentals available in Australia over one weekend in March.It found a 28 per cent increase in supply across Sydney's rental market has failed to push down prices, and less than 1 per cent of properties in Sydney's market could be considered "affordable".

Rental properties are considered "affordable" if they cost up to 30 per cent of a person's income.

Anglicare's head of research and advocacy Susan King said an increase in supply has not helped low income earners, and there needs to be an increase in public housing: "Even though there are 28 per cent more listings available it hasn't translated to increased affordability," she said.

Long-term underinvestment in public housing, treating homes as an investment vehicle, massive tax concessions for homeowners and continually rising property prices have put the entire housing system under stress, Laurence Troy from the UNSW City Futures Research Centre told the Herald’s Nigel Gladstone.

“People who are pushed out of the home ownership market into private rentals with relatively good incomes put inflationary pressure on rents that are able to be charged,” Dr Troy said.

“Then at the bottom end [of the housing market] you have people that are pushed out of public housing into the private rental market because essentially that’s the only option, but they’re in a worse position because the rental market is under significant strain.”

However, CoreLogic's head of research Cameron Kusher said that Sydney’s rental yield of 3.2 per cent was below the median yield across the country of 3.68 per cent, and that Sydney had its weakest first quarter since 2009.

Mr Kusher forecasts that the capital cities (except for Hobart) will continue to experience slowing rental growth over the coming quarters.

The RBA’s position

Market-watching economists say that Australia’s cooling housing market will add to the case for rates to remain on hold even longer. But after 21 months of unchanging interest rates we’re beginning to get a bit edgy about the RBA making a move in either direction. We know a change will come, but nobody can say when.

In April the Bank issued a warning that as many as 1.5 million mortgage holders will face sharply higher payments over the next four years as interest-only loans convert to principal and interest loans. warned.Bank officials described the switchover an “area of potential concern”.

The warning comes two days after Reserve Bank Governor Philip Lowe said that the next move in official interest rates would most likely be up, and that it would “come as a shock to some people”.

Critics of the RBA say the Bank should be clearer about when rates are likely to change, what their direction will be, and what could be the magnitude of the change. This is called “forward guidance” and is provided by other central banks as a reinforcement of economic policy.

During a recent telecast of “The Conversation” on ABC News, participants used the example of the US Federal Reserve Bank announcing in 2008, when the cash rate was at zero, that “…weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time”.

This kind of communication influences the public's expectations about the future course of US monetary policy, and effectively advises consumers and businesses to expect an expansionary monetary policy for some time. It givespeople more information about the strategy the Reserve will take with rates, rather than simply providing forecasts about its expectations of future economic conditions.

In Australia it seems the RBA is concerned that record low interest rates, accelerating asset prices and a growing appetite for risk could be laying the groundwork for a sharp correction across financial markets.

In its latest Financial Stability Review the RBA said that strong global economic conditions over the past six months suggest asset prices have surged because investors "see little chance of adverse outcomes".

The RBA warned that a rise in interest rates from rising inflation could catch investors by surprise and lead to what it calls a "disruptive and lasting correction in a broad range of markets.”

The Bank commented that investors have taken on more risk in recent years which makes them more susceptible to large losses if there was a generalised fall in asset prices.

"This could be triggered by a sharp rise in interest rates in the absence of stronger economic growth arising from, for instance, a jump in realised or expected inflation or a change in investors' risk appetite."

However, for the time being the RBA believes tougher regulatory measures and a strengthening in lending standards have sufficiently helped to moderate housing market conditions in Australia, and in the absence of more definitive “forward guidance” we can expect things to stay as they are for the foreseeable future.

Sources:

‘Federal Budget 2018: Property owners sitting on vacant land targeted in budget measures,’ Kate Burke, Domain, 8 May 2018
‘Every homeowner over 65 offered reverse mortgage to unlock home’s equity,’ Chris Kohler, Domain, 8May 2018
‘Sydney house prices are set to drop. And it’s nothing to fear,’ Michael Pascoe, The New Daily, 30 April 2018
‘Prepare for sharply higher mortgage payments, Reserve Bank warns investors,’ Peter Martin, The Age, 14 April 2018
‘How the Budget affects housing affordability,’ Liz Burke, News.com.au, 9 May 2018
‘Sydney, Melbourne housing boom is over, auction clearance rates show,’ Su-Lin Tan, Australian Financial Review, 18 March 2018
‘Investors making way for owner-occupiers in housing sector,’ Carolyn Cummins, Sydney Morning Herald, 25 April 2018
‘House price forecasts slashed in all but three capital cities,’ Chris Kohler, Domain, 7 May 2018
‘Sydney prestige sellers slash prices at weekend auctions as investors target apartments,’ Chris Tolhurst, Domain, 8 April 2018
‘Sydney auction clearance rate drops below 60 per cent as market turns,’ Chris Tolhurst, Domain, 29 April 2018
‘Annual capital city home values fall for the first time since 2012,’ Gareth Hutchens, The Guardian, 1 May 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
‘RBA warns a sharp rise in interest rates could lead to disruptive and lasting market corrections,’ Peter Ryan, ABC News Online, 14 April 2018
‘Sydney renters paying $582 a week, while Darwin and Hobart enjoy best rental yields,’ David Chau, ABC News Online, 18 April 2018
‘Supply increase makes no impact on Sydney's rental market as tenants struggle to pay,’ Kathleen Calderwood, ABC News online, 30 April 2018
‘Sydney property boom blows poor towards public housing,’ Nigel Gladstone, Sydney Morning Herald, 2 April 2018
‘As Australia’s house prices fall, watch the bottom pickers start to emerge,’ Chris Kohler, Domain, 26 April 2018
‘House prices in Sydney drop 2.6 per cent over March quarter: Domain Group data,’ TawarRazaghit, Domain, 26 April 2018
‘Home ownership would rise if negative gearing is scrapped, study says,’ Ben Doherty, The Guardian, accessed 29 April 2018
‘Cash rate on hold as house prices to fall ‘5 per cent this year, another 5 per cent next year,’ Frank Chung, News.com.au, 2 May 2018
'Bulldozers in every street': NSW govt facing suburban revolt over new housing code,’ Andrew Taylor, Sydney Morning Herald, 30 April 2018