Market comment: What went up has now come down, but for how long?

Thu, 14 Jun 2018

Market comment: What went up has now come down, but for how long?
To read reports in the daily press, it sounds like some sort of disaster has befallen the Sydney property market: “Auction clearance rates down, asking prices down, times on market up, investor lending falls,” and if we weren’t comparing our present numbers to those of the recent three years of boom conditions we might be more concerned.

Which is not to say that there are many signs of buyers experiencing the FOMO (Fear of Missing Out)that they might have felt in 2016. The ANZ Bank even admitted it had underestimated the extent of the slide in Sydney housing prices. In a June research report ANZ senior economist Daniel Gradwell predicted further weakness ahead for the housing market, before it starts stabilising later this year.

"Weakness in Australia’s housing market has persisted longer than we expected, and the rate of decline in prices has recently accelerated. This weakness is challenging our previous view that prices would stabilise and then recover somewhat to finish the year in positive territory," he said.

He commented that there were several factors to blame for the fall in housing prices, including the shift away from interest-only loans and tightening of credit in the wake of the royal commission. While obviously things aren’t as good as they were last year, Mr Gradwell said it was important to note that “these movements pale in comparison to previous cycles”. In other words, the sky hasn’t fallen and isn’t about to.

Further reassuring is his belief that our strong population growth and record low interest rates will directly influence and lift housing prices. This will mark the beginning of a new price cycle, commencing at a point much higher than the previous upswing.

Some aspects of Sydney’s real estate market are consistent, year after year and cycle after cycle. Level blocks in the inner suburbs with potential for development generally do well, as do renovated properties in good locations. Properties in the prime markets of the north shore, the city, the eastern suburbs and the inner west remain sought-after.

Domain’s Chris Tolhurst tells us that most people instinctively try to buy in the best location they can afford: “They recognise that this purchasing strategy gives them the best chance of maximising capital growth and the least chance they will watch a property drop in value.”

The most prominent features since the boom’s demise have been more realistic asking prices and slightly longer times on market as buyers become more selective in their searches. The Agency’s Scott Thornton says the market’s now in a good place: “If the property is priced correctly, it will sell. The buyers are too well-educated now to pay ridiculous prices. If you are not in line with the market place, buyers will not engage with you.”

Admittedly, Sydney has experienced some of the worst price drops of all Australian capitals, with the current average sale price 4.2 per cent lower than this time a year ago. Sydney dwelling prices slipped by 0.2 per cent in May, and 0.9 per cent in the last three months.

Nationally, the value of investor housing loans slumped a seasonally-adjusted 9 per cent in the month and now sits at $10.88 billion –  its lowest level since January 2016, according to Australian Bureau of Statistics data, while the value of owner-occupier loans fell 1.9 per cent.

Chris Kohler, writing in Domain, says that first-home buyers haven’t retained the momentum they displayed in this year’s first quarter: “The return to form seen from first-home buyers stalled in March, after stamp duty discounts and exemptions saw a jump in activity from the group in late 2017 and early 2018.”

He said that the number of first-home buyer loans written – as a percentage of total owner occupier loans – fell to 17.4 per cent in March from 17.9 per cent a month earlier.

But economist and blogger Jason Murphy says there’s some good news in recent figures that show few Aussies are defaulting on their mortgage loans: “The rate of non-performing loans is under 1 per cent. We have not got to a crisis point where many people are forced to sell into a falling market, which could cause a rapid collapse.”

Domain Group data shows the average days on market fell 9.2 per cent in the year to February to 227 days, down from250 days the year before. Discounting also fell to 11.5 per cent in the same 12 months, from 12.2 per cent two years earlier. 'That suggests either improved market conditions at the high end or vendors pricing more appropriately,’’ Domain data scientist Dr Nicola Powell said.

And there’s one segment of the market that always seems to be run by its own set of rules. Some of Sydney’s wealthiest residents are popping the corks on their bottles of Moet, with new data showing homes in the ultra-prestige category - $10 million or more, are selling faster than a year ago.

Foreign buyers scarce

The rush of foreign buyers to acquire Sydney property is, for the most part, over. Figures from Swiss multinational bank UBS showed there were 13,198 approvals for foreigners to purchase residential real estate last financial year totalling $25.2 billion worth of investment.

This according to UBS was a 65.2 per cent decrease in the value of investment, from a peak of $72.4 billion in approvals and 40,149 applications a year earlier. Figures from the Foreign Investment Review Board (FIRB) confirm that approvals for foreign buyers to acquire residential property fell by 67 per cent in the last financial year.

"The reduction in approvals reflects investor reaction to the introduction of FIRB application fees in 2015, which has changed investor behaviour by encouraging applications only for properties they intend to acquire," the FIRB report said."Investors now have an incentive to apply only when they have a high certainty of purchasing."

The pullback by foreign investors wasn’t a great surprise given moves by state and federal governments that increased charges on foreign purchasers while removing some of their previous favourable tax treatment as well as placing a cap on sales of new developments.  These moves followed a series of Chinese government actions aimed at reducing capital outflows into foreign investments.

A recent survey by UBS of 3400 mainland Chinese citizens showed a clear drop in Chinese buying intention from the boom year of 2016, with their interest shifting to other Pacific neighbours including Thailand, Vietnam and Japan.

However, a prime factor in reducing overall Chinese interest in foreign investment, the capital controls introduced by the central government to stem capital outflows, may not be as long-lasting as was at first thought, according to Carrie Law, chief executive of Chinese property website’

“China’s capital controls have worked,” she told Domain. “Today, China’s foreign reserves are up, the Yuan is stronger, the flow of money out of the country has been reduced, and fears of a devaluation have virtually disappeared. But they have succeeded without having to make it impossible for ordinary Chinese families to buy property overseas.

She says the environment in China is changing and buyers are beginning to anticipate a time, perhaps later this year, when investing overseas again becomes easier: "Chinese buying enquiries for Australian property in March were 5.7 per cent higher than the month before and in April they were 22.3 per cent higher."

Interest rates avoid the brink

It’s hard to remember how long it’s been since the RBA’s prime rate dropped down to 1.5 per cent, (it was August 2016) and even harder to believe it’s stayed there so long (22 months). About the only thing on which most – but not quite all - economists agree is that the RBA’s next move will be up.

Having experienced such low interest rates for so long it’s hard to believe that there was ever a time when interest rates were so high they were a worry. Yet 29 years ago in June 1989 the standard variable mortgage rate hit 17 per cent and remained there through to March 1990.  And together with high interest rates we also had a high rate of inflation – 6.8 per cent, in fact.

RBA board member Ian Harper stresses that the Bank’s current policy settings are the “best thing the bank can do for encouraging confidence and stability”. He also adds that when it comes to determining the official interest rate settings house prices won’t be the determining factor.

Speaking to the Wall Street Journal, Mr Harper, who is Dean of Melbourne Business School, said that the direction of house prices simply wouldn’t matter, at least in his opinion, if other circumstances aligned for a rate rise.“The bank will raise interest rates when it has a basis for doing that — because inflation is starting to pick up,” he told the WSJ.

Harper says what’s happening in the broader Australian economy matters most, particularly the outlook for wages growth given its implications for inflationary pressures: “From my perspective, as somebody who has an input into the setting of monetary policy, what matters is what is happening right across the economy,” he said.

So, with annual wages growth of around 2 per cent – a far cry from the 3.5 per cent level that could bring underlying inflation back to the midpoint of the RBA’s target range of 2-3 per cent, unemployment of 5.6 per cent poses no threat to the 5 per cent level which might increase wage pressures.

(Just for the purposes of comparison, in the five years from 1989 to 1994, male full-time earnings rose 22 per cent, or 4.4 per cent per annum – more than double the current rate.)

Not all that long ago the sudden rises in house prices across Australia were causing murmurs of alarm within the RBA, with fears of “inflation” seeming to make a rate rise inevitable. But it never came due to concerns about other areas of the economy.

And now? With falling housing prices, low inflation, low wages growth and unemployment at acceptable levels (except for those unemployed, of course), it looks like interest rates will simply stay where they are for many more months ahead.

Tax idea won’t go away

In 2017 we reported that the federal Parliamentary Budget Office had costed a proposal by The Greens to abolish stamp duty and replace it with a broad-based land tax. The purported purpose of implementing this national broad-based land tax would be to replace over $19 billion in revenues raked in by state and territory governments in stamp duties on property purchases.

At the time the Grattan Institute said it would be politically difficult to deliver but was generally regarded as a ‘good policy’. Yes, it could indeed be ‘politically difficult’, as the Grattan Institute estimated that to replace stamp duty revenue with a broad-based tax would probably require a tax of ‘about $6 for each $1000 of unimproved land value’.

As we said in April 2017: “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.” All homeowners would be affected and have to pay the new tax.

This ‘good policy’ tax won’t go away. Two years later it’s still being floated as the solution to numerous government revenue worries, and now we find a new headline in the daily press: “Australia stands to gain $24.3 billion every year in GDP from 2047 if state governments phased out stamp duty replacing it with a broad-based land tax.”

Infrastructure Australia’s ‘Making Reform Happen’ paper which brought this tax to the surface once more made the case for major reforms to “better deliver infrastructure including land use to prepare for the ‘profound change’ Australia will face as the population is projected to grow to more than 30 million people by 2031.”

In a Domain article about the paper, IA’s chief executive Philip Davies said in this new iteration revenue generated from switching taxes would come about from ‘productivity benefits’ rather than homeowners’ direct tax contributions. It would be levied, for example, on gains in land value from land is rezoned or when a new train station is announced.

And in this latest proposal, the annual levy of this hypothetical tax for someone in Sydney would supposedly work out to between $1500 and $2000 on a median-priced house, according to the Infrastructure Australia report which appears to misinterpret the 2016 Grattan Institute calculations. However, regardless of how it’s calculated, the broad-based land tax is an idea too lucrative to disappear from government’s list of ‘possibles’ for new taxes. And it would be just as distorting to the property market as it would be beneficial to housing purchasers by removing stamp duty on purchases.

As the Domain article concluded: “Mr Davies acknowledged that there might be negative community perception around broad-based land tax, but it was up to the states and territories to prove a compelling narrative to inform the community and industries that the current system was broken.”

Build-to-rent rises again

In August 2017 we mentioned the idea of build-to-rent as having great potential for creating affordable housing once the apartment-building frenzy of the recent property boom faded away.  Now it’s back in the news.

Build-to-rent envisages developers building large clusters of apartments at affordable rental levels. While this sounds like a reasonable idea, it doesn’t enable developers to benefit from deposits in the traditional build-to-sell model; some sort of government support would probably be required.

Tim Graham, global sales director of foreign investment facilitator Investorist, says it’s already beginning to happen here: “If we talk about Australia, the [bigger players like the] Meritons are the only ones doing it well,” he told Domain. “It comes down to the land cost and the development outcomes here. It’s also just a big cultural change.”

He also said he believes that promoting investment in build to rent could help bring more cash into the country.

Affordable housing group PowerHousing Australia chief executive Nicholas Proud said there is a key question for our housing market: “Can an affordable housing build-to-rent component play a larger role to maintain steady supply in the coming years?'”

The build-to-rent concept is supported by Phil Ruthven AM, founder of IBISWorld who has established a reputation as a futurist. He says we should adopt the leasing model that’s common in Europe, wherein tenants take out long term leases of five to 10 years or even longer. They also have greater rights and control over how they fit out, decorate and use the home.

“For years I’ve been advocating that it’s better to lease than to own a home — but I don’t mean renting, which is unstable, short-term and limiting,” he told“Renting is very degrading, in a sense, compared to leasing. We have to change our rental rules — they are backwards in Australia currently; it’s antediluvian.

“Less than half of people in Germany own their own home … because with leases you can paint the bloody house purple if you want; the owner might say to return it to the original condition at the end, but it’s a two-way deal with more flexibility.”

Backyard dream ends

The days of the backyard are ending and there’s not much hope for a reversal of the process now in progress. Population densities are increasing while the size of new houses grows, and at the same time older houses are being bulldozed to make way for towers of apartments.

So, what happened to a city like Sydney where backyard cricket and a swimming pool for the kids were once elements of a homeowner’s dream that’s now rapidly shifting into the realm of impossibility? One way of looking at it is to understand that we are increasingly getting short of time for tending large gardens.

Researchers at Swinburne University asked 2000 people in 2016 in Melbourne and Sydney’s middle ring suburbs to describe the home they aspired to. As you might expect, nearly 60 per cent of respondents said they wanted a detached house and yard.

60 per cent sounds like a substantial number, but it’s nowhere near the 90 per cent in the early 1990s who said they wanted a big backyard. The house stayed popular, but the additional space on the block for a garden wasn’t nearly as important.

Jane Fitzgerald, the Property Council of Australia’s (PCA) NSW executive director, told “I don’t think the great Australian dream is dead, but I think it’s different now. Sure, when Generation Y get to 40 they might want a quarter acre block, but that choice is being delayed by most people and what they are doing now is choosing apartment living.”


‘As our cities become denser, the great Australian backyard is paying the price,’ Benedict Brook,, 3 June 2018
‘Build to rent could fix Australia’s foreign investment, affordable housing problems: experts,’ Jim Malo, Domain, 30 May 2018
‘Buyers are too well-educated’: Sydney house hunters seek safe haven suburbs as clearance rate tumbles,’ Chris Tolhurst, Domain, 14 May 2018
‘Clearance rate falls as market cools down,’ TawarRazaghi, Domain, 13 May 2018
‘Fall in housing prices will be ‘quite a bit larger than expected’,’ Natalie Wolfe,, 7 June 2018
‘Foreign buyers of Australian real estate plummet, Foreign Investment Review Board figures show,’ Lucy Macken and TawarRazaghi    . Domain, 29 May 2018
‘Foreign property investment plummets as tougher regulations bite,’ Stephen Letts, ABC News online, 30 May 2018
‘The fear of missing out for buyers has gone’: Sydney auction clearance rates continue to nosedive,’ Chris Tolhurst, Domain, 3 June 2018
‘Futurist and author Phil Ruthven on what‘s in store for jobs, housing and standards of living,’ Alexis Carey,, 2 June 2018
‘House prices set to tumble after buyers flee,’ Jason Murphy,, 31 May 2018
‘Housing market posts first annual drop in 6 years, driven by Sydney and Melbourne,’ David Chau, ABC News Online, 2 June 2018
‘Housing slump’: Mortgage lending plunges, further weakness expected,’ Chris Kohler, Domain, 11 May 2018
‘Replacing stamp duty with broad based land tax could increase revenue to $11.2 billion by 2047, new report shows,’ TawarRazaghitwitter, Domain, 4 June 2018
‘Why Australia's governments, banks and economy don't want 'affordable' housing,’ Ian Verrender, Sydney Morning Herald, 28 May 2018
‘RBA's Ian Harper says if rates need to rise, 'who cares what’s happening to house prices'
David Scutt, Business Insider Australia, 28 May 2018
‘Interest rates are lower than ever. So why is owning a home harder than ever?,’ Greg Jericho, The Guardian, 5 June 2018
‘Lending to Australian housing investors plunged by over a billion dollars in March,’ David Scutt, Business Insider, 11 May 2018
‘Sydney’s best places to bag a property bargain this winter,’ Stephen Nicholls,, 4 June 2018
‘Sydney’s wealthy dodge market correction,’ Lucy Macken, Sydney Morning Herald, 13 May 2018
‘Warning signs on housing, but are we cautious enough?,’ Jason Murphy,, 30 May 2018
Housing slide ‘larger than expected’, Clancy Yeates, Sydney Morning Herald, 8 June 2018