Market comment: The bottom of the market could be in sight – just maybe

Thu, 17 Jan 2019

Market comment: The bottom of the market could be in sight – just maybe2018 is over and 2019 is underway. This much we know, but the future direction of the Sydney property market in this new year is anything but known. The last year ended with prices still falling across the Sydney area after a record ten per cent drop, and there were signs the new year would bring more of the same – for a while, at least.

So, looking back, how bad was the year we’ve just farewelled? In 2018 Sydney was the worst-performing market in the country; it contributed to the poorest national result since 2008 when the GFC ravaged property values. Figures from CoreLogic show that Sydney’s dwelling prices have now plummeted to where they were in August 2016.

SQM Research managing director Louis Christopher said: “We've been in a downturn since the second half of 2017, I would say it's getting beyond temporary now - this is a medium-term downturn. Prices will fall again."

A Sydney Morning Herald article tells us Moody’s Analytics believes Sydney prices will fall even further in some suburbs: “In Sydney, Moody's is predicting an overall drop of 3.3 per cent in values. Areas such as Ryde (6.6 per cent) and the eastern suburbs (6.7 per cent) are forecast to endure substantially larger drops in value.”

CoreLogic’s head of research Tim Lawless agrees and says prices could fall even further in February, depending on how many houses come onto the market: “Typically at this time we see the number of advertised listings ramp up following the Christmas and New Year slowdown. If listing levels return to or exceed levels from late 2018 it could lead to even weaker housing conditions as buyers are spoilt for choice.”

CoreLogic isn’t predicting a property crash in 2019, but it expects a flood of new apartments to come onto the market in Sydney this year and says it is already seeing a growing proportion of these developments settling at lower prices.

Auction clearance rates certainly aren’t giving any signals of a resurgence in prices. Fewer than four homes in every 10 are selling at auction, and vendors have had to cut their price expectations in response to a market crippled by tight credit rules and extended times for processing mortgage applications

Starr Partners chief executive Douglas Driscoll sees rates staying below 50 per cent for at least the first half of 2019: “Tighter credit and lower buyer confidence will see auction clearance rates – which tracked below 50 per cent for the past two months – remain low, and fewer people choosing to sell under the hammer,” he told Domain’s Kate Burke.

Mr Driscoll also provided an insight into judging whether the market is at or near the bottom: “You only know you’ve hit the bottom of the market when it’s too late,” he warned. “You could wait, and the market could drop another 3 to 5 per cent, which [long term] is negligible.”

History shows us that the property price cycle usually pauses between swings. An estate agency specialising in Sydney’s Northern Districts, WigginsKeenan, says that property prices in that area have ‘found their level’ and will stabilise in 2019: “One of the reasons why is because the Northern Districts were the first to experience the boom with huge increases and other areas then followed – the first one to rise is why we are the first to drop.”

Agency principal Justin Keenan noted that prices in the Northern Districts property market had fallen by 15 to 20 per cent since the peak of the boom and said that in his opinion: “It’s hit the bottom and is now levelling out.”

How we got here

Mark Steinert, chief executive of developer Stockland, calls credit the ‘lifeblood of the Australian economy’: “Ensuring fair and equitable access to credit is vital for the stability of key Australian industries including property,” Mr Steinert told the Australian Financial Review.

If you ask CoreLogic’s head of research what caused the ‘boom to bust’ turnaround in Sydney property he’ll tell you that APRA’s tightening of lending criteria was the biggest reason: “Most regions around the country have reacted to tighter credit conditions by recording weaker housing market results,” he said in his company’s end-of 2018 report. “Buyers will be in the driver’s seat when it comes to choosing a property and negotiating on price.”

Recent changes to the availability of credit have had a clear impact on the market, according to ANZ chief executive Shayne Elliott: “There were some figures recently which showed an average family could have borrowed about $550,000 three years ago. Today that figure is closer to $440,000, so that’s a very tangible example of how the borrowing capacity for customers has been curtailed.”

Another banker, Westpac chairman Lindsay Maxsted, recently warned that further tightening of banking regulation, including placing excessive restrictions on new loans in the wake of the royal commission, is tightening credit and causing the pace of lending to homeowners and businesses to slow.

Australian economist John Adams said the Hayne royal commission had exposed poor banking practices that had resulted in banks making changes even before the commission’s findings had been released: “Credit growth in the economy has now slowed as a result. This spells economic disaster for an economy that is addicted to debt.

“Slower growth in household debt means that there are fewer property buyers in the market, resulting in house prices falling sharply in Sydney and Melbourne and a general slowdown in the Australian economy.”

The ABC’s Phillip Lasker says we shouldn’t expect the banks to rescue the property market: “What many people now describe as a ‘lending crackdown’ or ‘credit squeeze’ is simply the banks behaving as they should, lending more responsibly and conducting thorough loan assessments.”

Cutbacks on interest-only loans, popular with about a quarter of property investors and one in five owner-occupiers, were applied in early 2017 when the Australian Prudential Regulation Authority limited interest-only lending to no more than 30 per cent of new loans.  In 2015, interest-only loans accounted for 42 per cent of the new loans market, but after the 2017 limits were applied the number of interest-only loans fell rapidly and have now declined to just 15 per cent.

Many of these earlier fixed term loans are now approaching their expiry dates. About 900,000 loans worth an estimated $300 billion will need to be extended with existing lenders, converted into principal-and-interest loans with higher repayments, or transferred to new lenders. Investors, many of whom purchased property through their self-managed super funds using interest-only loans, will have to renew their mortgages in a much tighter lending environment than when they took out their original loans.

Very interesting

The Sydney Morning Herald’s Shane Wright said that in its mid-year update to the federal budget, Treasury noted that while house price falls had not had a "significant effect" on the household sector, further drops "could dampen spending".

He also noted that there is a link between the wealth-effect of rising housing prices and broader consumer spending: “Markets have started betting the Reserve Bank will slice official interest rates because they anticipate home owners will close their wallets in line with the diminishing value of their single largest asset.”

Official interest rates have remained at an historic low of 1.5 per cent for the past two and a half years. At year’s end, money markets were pricing in a 28 per cent possibility that the Reserve Bank would cut interest rates by late 2019. This is quite a turnaround from the market’s position early this month when expectations were for a rate hike in the first half of this year.

AMP’s chief economist, Shane Oliver, has already forecast that the Reserve Bank will reduce rates in 2019, saying the effects of falling house prices will drag on growth, especially when combined with weak wages growth and record levels of household debt. “That’s a red flag,” he told the Herald’s Matt Wade.

Westpac chief economist, Bill Evans expects no change in rates for another two years: “The housing drag on the economy is going to last into 2020, inflation will be stuck at around a little below 2 per cent and global risks at the moment are certainly not conducive to the central bank raising rates,” he said. “At this stage I don’t see any reason for them to change.”

Will rates stay where they are, or go up or even go down? It’s hard to say with our economy in somewhat uncharted waters. On the positive side, we have low unemployment, good levels of business investment, and an election year with probable commitments for expenditures on major new infrastructure projects.

But the flip side is an ongoing wages slump, tighter credit requirements, a threatened construction sector and a housing market beset with plummeting prices. Daniel Blake, a strategist at Morgan Stanley in Sydney, says that in 2019 the RBA will be placing greater importance on the housing sector.

"Since 2016, the RBA's focus on financial stability has held them back from further rate cuts as they wait for wages and inflation to recover. In 2019, we see their focus turning to monitoring the negative wealth effects from a housing market adjustment."

Threats to negative gearing

In simple terms, negative gearing is the ability to write off the losses accrued on an income-generating asset against your total income, a tax measure dating back to 1922. With a federal election on its way, this issue is already becoming a hot topic for Australian political parties.

Whereas the Liberal party is quite happy with things as they are, the ALP has announced its intention, if it wins government, to limit the concession to new buildings while grandfathering existing properties. Opposition trade spokesman Jason Clare said his party would clamp down on negative gearing "within the first 12 months of a Labor government".

The opposition also promised to improve housing affordability by halving the capital gains tax exemption from 50 to 25 per cent. The ALP says its changes will achieve $32 billion in extra revenue over the next decade.

Negative gearing is important to many players in the property market, including owners of rental properties, tenants, first-home buyers and government tax collectors. Taxation data shows that in 2015-16 there were close to three million rental properties around the country, and 1.8 million of them lost money on their property investments.

The Henry tax review of 2010 found that highly indebted investors received a huge tax advantage from negative gearing that was ultimately being paid by ordinary taxpayers. The Reserve Bank of Australia (RBA) recently released research findings that showed 76 per cent of Australians would be better off by abolishing negative gearing, with more people able to buy their own home.

Data compiled by the Parliamentary Library shows that, of the approximately 480,000 residential properties bought last financial year, between 10.3 per cent and 16.8 per cent were then negatively geared by the new owners. This equates to as few as one in 10 or, at the most, one in every six - a finding the ALP says proves Labor's policy poses no risk to the economy.

Even the Liberals former federal treasurer Joe Hockey, in his final speech to Parliament in late 2015, called for big cuts in personal tax rates that would be paid for by overhauling tax concessions: "In that framework, negative gearing should be skewed towards new housing so that there is an incentive to add to the housing stock rather than an incentive to speculate on existing property," he said.

The current federal treasurer Josh Frydenberg says the policy proposed by the ALP will be devastating for the property market and to small-time investors with one or two properties: "Labor’s policy will make sure that people who own their home will see the value of their home be less, and fall, and if they rent their home, their rent will go up as a result of Labor’s policy," he recently said on Sydney radio.

UBS's chief economist also has worries about the effects the ALP’s proposed changes would have on the economy: "My concern would be that if you were to make a material change to tax policy at the same time as banks are tightening lending standards, it could exacerbate what's already a downturn into something more serious," he told ABC News.

The 2019 federal election is likely be in May, although politics and other circumstances may make an earlier or later date the actual time we go to the polls and choose a government. Although the election date remains ‘TBA’ it’s a certainty that policies on negative gearing and capital gains taxation as they relate to housing will be hot items on the agenda until then, and probably long afterwards.

Policies and prophecies

Labor has announced a $6.6 billion plan to build 250,000 new homes over a decade for those struggling to pay their rent. The scheme intends to benefit people on low and moderate incomes and would offer subsidies to new homes with rents that are 20 per cent below the market rate.

If the ALP wins government and implements the scheme, it will provide a direct subsidy of $8500 a year over 15 years for investors who build new dwellings and offer them to people in need on lower rents. The policy makes it clear that overseas students, temporary foreign workers and other non-residents would not be eligible tenants for the new homes.

The policy will start slowly over the next term of Parliament with only 20,000 new units and houses to be built during the term on a federal outlay of $102 million over the four years to 2022.

The total cost of Labor’s housing affordability policy has been estimated at $6.6 billion over the decade to June 2029. The housing policy would be funded by increases in tax revenue, to be more fully detailed in Labor’s election platform. The ALP expects to save $32 billion over a decade from changes to negative gearing and capital gains tax plus another $56 billion over a decade from changes to tax refunds from dividend imputation on shares.

It should be noted that The Australian Housing and Urban Research Institute (AHURI) estimated in late 2018 that there is already a shortfall of 433,000 social housing units, and about 36,000 need to be built every year nationally to meet projected future demand. The ALP proposal is only a first step towards meeting that objective.

One of the authors of the AHURI report, Dr Laurence Troy from the University of NSW, told the Sydney Morning Herald’s David Crowe that Australian governments have only been funding about 3000 new social housing units every year: “We estimate that output of about 15,000 is needed just to stop the existing shortfall from getting even bigger. To fix the current problem as well, over a 20-year period, calls for a 10-fold increase,” Dr Troy said.

Labor says that, if it wins government, it would work with community housing providers, the residential construction sector and institutional investors to implement the scheme. It has not yet said whether individual investors could also build new homes that qualify for the subsidy, although this seems an obvious way to augment the planned construction of new housing without incurring extra expense to taxpayers.

Towering concerns

A recent development affecting the overall Sydney property market is the structural failure of some elements in the four-month old Opal Tower that caused the occupants of the building’s 300 units to be evacuated and 51 of those units to be declared ‘unsafe to occupy’.

This led to the NSW government announcing what it called a ‘safety audit’ of private building certifiers and construction sites with the intention of assuring public confidence in the quality and safety of the residential towers that have sprung up across Sydney in recent years.

Two engineering experts, commissioned by the state government, prepared an interim report that identified a number of problems in the Sydney Olympic Park tower. Professors Mark Hoffman and John Carter said they had identified several issues that would require further investigation.

Writing on, economist Jason Murphy said that apartment defects are common in Australia, usually leaks of some type, but to some degree this can be expected: “Buildings will normally have more quality problems than something like a car. They are not precision-made inside factories.

“Buildings are unique, made on their own sites with their own drainage and soil conditions. They are put together by a diverse group of people, mostly working outdoors, in a range of conditions. Expecting perfection is unrealistic.”

This doesn’t mean that any of our recently-constructed apartment buildings are in any danger of falling over, but faults must be rectified, and somebody will have to pay for the work. Who’s that going to be?

“Some builders will say, ‘It’s nothing to do with my workmanship I just built what was specified by others,” Australian Council of Strata Lawyers president Tim Graham told Jason Murphy, adding that architects and engineers will say ‘Nothing wrong with my design, it is a question of faulty workmanship.”

Because of the difficulty assigning the blame, owners often end up paying for the repairs themselves. This seems unfair – especially to the owners hit with often large and unexpected remediation costs. There’s also the issue that owning an apartment in a building that is known to be faulty, even if the problems are later rectified, will devalue the price the owner is likely to receive when the property is sold.

This is why the follow-up audit and probable NSW government legislation that follows are so important. The Berejiklian Government has announced four new measures include a large compliance operation that will see 25 to 30 per cent of certification work audited every year, undertaken in what it calls a "strike force-style approach".

"We're looking at buildings that are currently being constructed, and buildings that have gone up in recent times," said Minister for Better Regulation, Matt Kean. "I want to make sure we do whatever is possible to give the public confidence that the buildings that they are living in across Sydney are safe."

Tenants get some help

Pressure on governments from renters has built up in recent years, thanks in no small way to unaffordable house prices in all our capital cities that have locked out a growing number of families from home ownership. 2018 became the year in which political parties had to develop tenant-friendly policies in anticipation of state and federal elections in 2019, most particularly in NSW which has the nation’s highest property prices and rental rates.

ABS figures show that almost one-third of Australians now rent their homes, and that this proportion has been rising as property price growth outpaced wage increases. Significant tenancy reforms were legislated in Victoria and NSW, while steps were also taken in Queensland and Western to respond to the concerns of tenants, and indications are that more reform of this sector is yet to come.

The NSW government has passed legislation that ensures minimum standards for lighting and ventilation, plumbing and drainage, and bathroom and toilet facilities. The legislation limits rent increases by restricting them to once every 12 months for periodic leases. It also avoids penalties for domestic violence victims who break a lease; tenants who are victims or a co-tenant who is not the perpetrator will not be held accountable for property damage that occurred during a domestic violence incident.

This is all good news for renants, but the plan has been criticised for failing to outlaw no-grounds evictions – the practice of evicting a tenant without reason outside a fixed-term lease.

Leo Patterson Ross, senior policy officer at the Tenants’ Union of NSW, told Domain that the laws made tenants’ rights clearer but not necessarily stronger: “They will provide clarity about what the obligations are, but the question mark remains, will you be able to enforce the standards if you can be evicted,” he said.


‘House values set to fall up to 11 per cent in some Australian suburbs in 2019,’ Shane Wright, Sydney Morning Herald, 8 January 2019
‘What lies ahead for the property market this year: more apartments and low interest rates,’ Phillip Lasker, ABC News online, 7 January 2019
‘Why 2018 was the year of the renter,’ Elizabeth Redman, Domain, 30 December 2018
‘Weakest property market since 2008: Sydney, Melbourne house prices tumble,’ Jennifer Duke, Sydney Morning Herald, 2 January 2019
Australian house prices falling at fastest rate in a decade,’ Naaman Zhou, The Guardian, 2 January 2019
‘End of Year Market Wrap,’ WigginsKeenan December Update, 19 December 2018
‘The far-reaching consequences of Opal Tower,’ Jason Murphy,, 31 December 2018
‘NSW Government to crack down on dodgy building certifiers following Opal Tower saga,’  Jonathan Hair, ABC News online, 31 December 2018
‘After a 96 year losing streak, is time up for negative gearing?,’ Shane Wright, Sydney Morning Herald, 15 December 2019
‘Labor committed to scaling back negative gearing despite steepest housing downturn since GFC,’ David Chau, ABC News Online, 4 January 2019
‘New analysis shows negative gearers account for as few as one in 10 property purchases,’ Shane Wright, Sydney Morning Herald, 15 December 2018
 ‘Labor to unveil $6.6bn affordable housing plan at national conference,’ Katharine Murphy, The Guardian, 16 December 2018
‘Labor promises a $6.6 billion housing boom to bring down rents,’ David Crowe, Sydney Morning Herald, 16 December 2018
‘Sydney's property prices are becoming the RBA's biggest worry,’ Michael Heath, Sydney Morning Herald, 19 December 2018
‘Auction clearances still at 40pc but properties are selling after auction,’ Michael Bleby, Australian Financial Review,  16 December 2018
‘What to expect for Sydney’s property market in 2019,’ Kate Burke, Domain, 4 January 2019
‘Interest rates in the balance amid housing slump,’ Matt Wade, Sydney Morning Herald, 29 December 2018
‘Sydney's property prices are becoming the RBA's biggest worry,’ Michael Heath, Sydney Morning Herald, 19 December 2018
‘RBA control fraud is its crowning blunder,’ Macrobusiness article, 17 December 2018
‘APRA to remove banks' interest-only lending restrictions,’ David Chau, ABC News Online, 19 December 2018
‘Borrowers still seeking interest-only loans despite falling house prices and RBA warnings,’ David Ross, Domain, 14 December 2018
 ‘Aussie experts warn of worrying consequence of royal commission,’ Alexis Carey,, 5 January 2019
‘Property borrowers brace for $300b interest-only credit crunch,’ Duncan Hughes, Australian Financial Review, 6 January 2019