Market comment: 2018: A year to remember for all the wrong reasons

Thu, 15 Nov 2018

Market comment: 2018: A year to remember for all the wrong reasonsThe Sydney property market is well and truly back in the news, but unlike just two years ago it’s now all about price falls rather than soaring property values. We’re now heading for a new 28-year record annual drop that will eclipse the fall in 1990 when prices tumbled by 7.9 per cent annually. How times have changed.

Restrictions by regulators on interest-only loans and investor lending have taken effect and are now being felt by homeowners, vendors, developers and even first-home buyers. Banks have tightened their lending requirements and are now applying intensive scrutiny to their loan applicants’ estimates of living expenses, prompting Finance Brokers Association of Australia executive director Peter White to say: “This doesn’t affect the wealthy. It affects those who can least afford it, and it has almost stalled the home loan refinance market.”

CoreLogic's head of research Tim Lawless told AAP the home lending system had been let down by a failure to enforce existing laws: "We've already seen [that] tighter credit policy has been, in our view, the primary driver of the slowdown, particularly the reduction in investment activity," Mr Lawless told AAP.

"If it becomes harder to get a loan or if more segments of the market place are restricted from credit, then absolutely that should have a further dampening effect on the market."

At least economic pressures for an interest rate increase have eased. Capital Economics chief economist Paul Dales told the Herald’s Eryk Bagshaw that the weaker housing market, slower consumption growth and tighter lending standards meant he believed the Reserve Bank was unlikely to raise the cash rate from its historic low of 1.5 per cent until late 2020.

Meanwhile, major banks have already begun to raise their interest rates on some forms of lending, and that’s before the RBA applies any tweaks to its present record low interest rate that’s survived two years untouched.

The view from here

Our major banks continue to downgrade their forecasts for the Australian housing market. Most analysts believe Sydney will be hit harder than Melbourne. Domain’s Kate Burke compiled some numbers: “In the year to September, $75,000 slid from the [Sydney] median house price; a fall of 8.1 per cent since the peak mid-last year, and a 4.4 per cent fall in unit prices.”

NAB expects house prices will flatten in 2020, with a peak-to-trough fall of 6.5 per cent in Sydney and 2.5 per cent in Melbourne. Westpac, Australia’s biggest lender to landlords, says it expects demand for loans to remain “weak” and expects falls to continue ‘for a while’.

ANZ said it expects to see peak-to-trough falls of about 10 per cent in both Sydney and Melbourne in the same period. Macquarie Bank recently raised its estimate of the fall’s percentage from a previous 4 to 6 per cent prediction to “around 10 per cent”.

Deloitte Access Economics partner Chris Richardson told the ABC that housing prices in Sydney are falling by over $1000 a week: “Our house prices here in Australia had streaked past anything sensible by way of valuation,” he said. “Now, finally gravity has caught up with that stupidity and prices are falling.”

American multinational investment bank and financial services company Morgan Stanley said in its latest forecast that property prices in Sydney could drop by up to 15 per cent: “We now see a 10-15 per cent peak to trough decline in real house prices, from 5-10 per cent previously, which would mark the largest decline since the early 1980s. This downgrade largely reflects the downturn’s extended length, as we expect the relatively orderly declines to date will continue,” Morgan Stanley said in the report.

Perhaps the most negative of all available forecasts came from AMP Capital which had previously predicted top-to-bottom price falls of 15 per cent in Sydney by 2020, or by about five per cent per year. However, AMP Capital chief economist Dr Shane Oliver now says that the total of the decline is likely to be 20 per cent as “credit conditions tighten, supply rises and a negative feedback loop from falling prices risks developing”.

The previously longest downturn began in early 2004 and lasted until late 2006. During that time the median Sydney house price fell 7 per cent overall. Domain senior research analyst Nicola Powell said: “This downturn is new territory for Sydney …  driven by banking regulators who have implemented tighter lending conditions. And the banking royal commission has driven even more conservative lending. What APRA and the RBA wanted to do was slow price growth. They’ve achieved what they wanted.”

In September house prices dropped by their biggest monthly fall since the global financial crisis. To say the traditional spring selling season hasn’t happened is an understatement, as median prices continue to slide.

It’s not just price growth but the whole market that’s in a slowing mode. Sydney’s housing turnover is approaching a 20-year low and properties are taking longer to sell.  Even though fewer properties are being listed for auction, fewer than half are selling under the hammer. In what should be a buyer’s market, this means that vendors are setting their selling prices too high for current conditions.

Matt Hayson, director of Cobden & Hayson, said that buyers were holding back because of reduced borrowing power, although it’s not necessarily a bad time to be in the market: “For people both buying and selling in the current market, it’s all quite relative. If you need to sell for a legitimate reason sell, but if you can afford to hold, hold,” he said.

Geography of a pullback

Geography has become an even more important determinant in the price of a property now that the boom is over. The situation was summed up by Domain’s Kate Burke: “Sydney house prices have taken their biggest hit in decades but about one-third of suburbs across the city are still seeing price rises, data shows.”

Despite the overall trend of falling prices, some parts of Sydney have maintained their prices much better than others. The latest figures from Domain show that the inner west took the biggest hit to prices overall in the year to September, with a median fall of almost $180,000. However, the city’s biggest drop was in Rose Bay, where the median price dropped 20.4 per cent to $3.25 million.

Suburbs in the city and east where the supply of new apartments is more limited were the top performers for unit increases, while suburbs in the west, south and south west where houses are more affordable made up the majority of suburbs that saw strong house price growth.  

A new report from global property firm JLL says that Sydney’s unit sales fell more than 20 per cent last financial year, and the number of units being marketed over the three months to the end of September was also down more than 20 per cent on the previous quarter.

Leigh Warner, national director and head of residential research at JLL, said apartment prices were holding up better than house prices — as reduced borrowing capacity was limiting more buyers to apartments — but the softening market made it harder to get new projects off the ground.

Suburbs with the strongest house price growth – name, median price, (year-on-year change):

Cremorne -$2,750,000 (20.9%)
Blakehurst - $1,950,000 (18.8%)
Marsden Park - $827,000 (15.0%)
Woollahra - $3,470,000 (14.3%)

Suburbs with the biggest house price falls:

Rose Bay - $3,250,000 (-20.4%)
Russell Lea - $1,900,000 (-17.4%)
Lane Cove North - $1,820,000 (-15.5%)
Glebe - $1,595,000 (-14.7%)

Suburbs with the strongest unit price growth:

Elizabeth Bay - $1,075,000 (23.6%)
Vaucluse - $1,400,000 (21.7%)
Rozelle - $1,360,000 (19.8%)
Rushcutters Bay - $804,000 (17.4%)

Suburbs with the biggest unit price falls:     

Newtown - $655,000 (-17.1%)
Bellevue Hill     - $1,102,500 (-15.2%)
Double Bay -     $1,275,000 (-15.0%)
Turramurra -    $830,000 (-13.8%)

Steven Letts at noted that house prices have been falling for a year across Australia: “To date, most of the slump has been quarantined at the top end of the market — among the most expensive 25 per cent of houses and apartments.

“However, since June the more affordable end of the market has also started to fall. Cheaper housing tends to have less extreme swings in price and falls are quite rare, but when the bottom end does fall, it tends to point to more persistent weakness in the property market.”

Quality counts more now

During the Sydney housing market’s five-year boom before it ended in mid-2017, most buyers found they had to pay around 10 per cent above reasonable estimates of a property’s value to acquire a desirable property. Today’s buyers are more likely to be purchasing at fair-value prices or even below.

Quality homes are still finding buyers, with renovated properties and blocks of land in prime locations especially sought after. Buyers of higher-priced homes are generally meeting the asking prices in prime suburbs.

Buyer’s agent Rodney McLoughlin, of TBAS, told Domain’s Chris Tolhurst that the outer suburbs would be the worst affected by the decline in prices in Sydney compared with inner areas: “The dynamics of the market have changed, but it’s different in Bellevue Hill, I’ve noticed,” McLoughlin said. “People still want to be in Bellevue Hill because it’s close to the private schools.”

Domain’s Dr Nicola Powell said that between second-tier suburbs and their more expensive neighbours is the predominance of local buyers in the high-end market upgrading to beachside, lifestyle locations, according to Domain’s senior research analyst Nicola Powell.

“The $5 million-plus end of the market is holding up really well this year, unlike the $990,000 to $2 million market,” Dr Powell said.

With the weekend auction clearance rate dropping below 50 per cent, it’s been noted that some buyers think they can snare a better deal by waiting until after the auctions and negotiating to buy passed-in properties.

Another tactic that’s being employed by canny purchasers is to make offers 15 to 20 percent below an estimated value, hoping to get a better deal from a vendor who might be concerned about the market slipping further if the sale doesn’t take place.

But these tactics aren’t successful everywhere. Tracey Chandler, a buyer’s agent who specialises in the eastern suburbs, told Domain that every property listed in the area was selling, and vendors were taking advantage of the opportunity to sell both houses and apartments for strong prices.

“A lot of vendors are sticking by their guns on price and they are getting what they wanted,” Chandler said. “There is not a great deal of properties on the market in the eastern suburbs – people are holding off to see what happens.”

Tenants win

Although not a pleasant outcome for property investors, one result of the decline in housing prices has been a reduction of up to ten per cent in rental costs in some parts of Sydney. This is largely due to the high number of apartments on the market, which is why asking rents for houses have remained relatively stable.

“Those Sydney regions that were overexposed to investors will be more prone to rental price decreases,” said Nicola Powell, Domain senior research analyst.  “That’s already unfolding in the lower north where there is a high level of tenants and they have seen significant rent declines.”

Median weekly rentals in the lower north shore dropped by $100 over the past year, according to Domain's Quarterly Rental Report with rentals now sitting at $1000.

Margaret Woo, head of property management at Ray White Lower North Shore, told Domain’s Tawar Razaghi that it’s a particularly tough rental market at this time: “We virtually have to drop rents straight away to get people through the house compared to this time last year,” said Ms Woo.

She said rent increases in the past few years had been “out of control” and it had recently become more common for tenants to negotiate prices, as well as breaking leases to move to cheaper rentals.

But the lower north shore wasn't the only area to see a decrease in median weekly asking rent. Rents in the city and east (down 4.8 percent), inner west (3.2 percent) and northern beaches (3.1 percent) have all decreased in the last year.

Dr Powell puts this down to an all-time high in rental supply, largely due to apartments that were built during the property boom that are now coming to completion: "Tenants will find they have considerably more houses and units to choose from than this time last year," she said.

Another reason rents are dropping across Sydney is that there are more rental properties sitting vacant than at any time in the last 13 years. Figures from SQM Research published on show that 19,114 rental properties in Sydney were untenanted; this equals 2.8 per cent of the city’s rental stock.

This figure is well above the 1.9 per cent vacancy rate at the same time last year and is the highest since SQM began keeping records in 2005.

Revenue streams suffer

One problem with a housing boom is that governments get used to the ‘rivers of gold’ flowing their way in stamp duty from property sales, and when these revenues decline, they begin a search to find new ways of raising the now foregone billions of dollars.

The number of settled sales has already dropped significantly and further falls are predicted. Sydney’s 18.5 per cent drop in transactions has been accompanied by falling values, adding further constraints to the NSW government’s spending plans. And with an election coming early next year this government is frantically casting about for new sources of cash.

Tim Lawless, CoreLogic head of research, told “Clearly there’s a double whammy of less turnover and fewer stamp duty events,” he said. “That’s going to have to have an impact on budgets and revenues for a state government.”

The Grattan Institute’s Brendan Coates said that NSW had relied too heavily on stamp duty income to pay for government expenditure.  He said that NSW has “essentially become addicted to rising stamp duty revenues.”

He added that the NSW treasury had been forecasting relatively modest declines in revenues of around 10 per cent, but the actual 18.5 per cent decline was larger than what most economists expected.

The Grattan Institute has been leading the charge for a major change in taxation that would affect every household in Australia. On the surface, it’s simple: do away with stamp duty and replace it with a broad-based land tax on family homes. Very positive for state government coffers, but also very politically problematic.

The move to such a tax may have already begun this month with NSW treasurer Dominic Perrottet announcing what he called “the biggest overhaul to stamp duty in 30 years”, outlining a plan to index stamp duty brackets on residential property transactions to the consumer price index.

However, the stamp duty ‘overhaul’ would only save the purchaser of an average dwelling around $500 – not much of a reduction. No wonder that the treasurer said he was ‘open to further reforms’ of property-related taxes, but that these would require the cooperation of the Commonwealth government and the other states and territories.

A June 2018 report concluded that Australia stood to gain $24.3 billion every year in GDP from 2047 if state governments replaced stamp duty with a broad-based land tax. All good if you’re a free-spending government, but not so good for homeowners who already paid stamp duty when they bought their homes and may well resent being asked to pay more annually.

But it’s also been argued that Australia’s favourable taxation treatment of the family home – leaving vendors free to pocket their capital gains tax-free in most cases, allows the greatest benefits to go to those who already have the most wealth. The resulting inequality, it’s said, is creating a divide between ‘rich’ homeowners and ‘poor’ renters.

Advocates for social housing say that replacing stamp duty with a broad-based land tax would benefit younger Australians buying their first home. They also point out that it would lift annual federal and sate tax revenues by something like $11 billion. However, they have yet to come up with a way to ‘sell’ it to existing homeowners, particularly those older retired people who might have some problems coming up with an extra $2000 to $3000 or more per annum just to pay a new tax.

‘Housing slump set to be the largest in nearly 40 years, Macquarie says,’ David Scutt, Sydney Morning Herald, 7 November 2018
‘Westpac expects further house price falls,’ Clancy Yeates, Sydney Morning Herald, 6 November 2018
‘NSW to make the biggest changes to stamp duty in 30 years,’ Matt Wade, Sydney Morning Herald, 5 November 2018
‘The Sydney suburbs where house prices aren’t falling,’ Kate Burke and Tawar Razaghi, Domain, 4 November 2018
‘Home values are back to 2015 levels in parts of Sydney,’ Stephen Nicholls,, 3 November 2018
‘Sydney leads national home value falls with biggest annual decline since 1990,’ Isabelle Lane, The New Daily, 3 November 2018
‘Developers downsizing, offering more incentives in cooling market: JLL report,’ Kate Burke, Domain, 1 November 2018
‘There had to be a reality check’: Crows Nest home passes in at auction as buyers refuse to bid,’ Kate Burke, Domain, 13 October 2018
‘Sydney house prices to continue downward trend, experts predict,’ Kate Burke, Domain, 26 October 2018
‘Spring property season kicks off under a cloud,’ Frank Chung,, 1 September 2018
‘Chart of the day: Upmarket housing led the price falls — but cheap properties are following,’ Stephen Letts,, 30 October 2018
‘Flight to quality’: Buyers mark properties harder than six months ago,’ Chris Tolhurst, Domain, 28 October 2018
‘It’s a strange market’: Middle ring faces price pressure at weekend auctions,’ Chris Tolhurst, Domain, 14 October 2018
'Primary drag': Sydney house prices down 6.1% over 12 months,’ James Hall, Sydney Morning Herald, 1 October 2018
‘House prices have biggest drop since GFC amid warnings of credit crunch,’ Patrick Hatch & Eryk Bagshaw, Sydney Morning Herald, 1 October 2018
‘Sydney clearance rates tread water, as vendors sell to buy upwards,’ Chris Tolhurst, Domain, 7 October 2018
‘Sydney rent prices drop by up to 9 per cent in year, Domain report shows,’ Tawar Razaghi, Domain, 10 October 2018
‘Sydney Rents Drop In Some Areas By $100 Per Week,’ Alex Bruce-Smith, Ten Daily, 11 October 2018
‘Morgan Stanley forecast reveals house prices could fall by up to 15 per cent,’ Alexis Carey,, 12 October 2018
‘AMP downgrades housing forecast, now expects prices to fall 20 per cent by 2020,’ Frank Chung,, 19 October 2018
‘Sydney’s bridesmaid suburbs, where record prices are no longer a one-off,’ Lucy Macken, Domain, 13 October 2018
‘Reserve Bank 'alert but not alarmed' by house price decline,’ Eryk Bagshaw, Sydney Morning Herald, 16 October 2018