Market comment: A Coalition victory, an unchanged cash rate, and signs of stabilisation

Mon, 20 May 2019

Market comment: A Coalition victory, an unchanged cash rate, and signs of stabilisationAn election can be a real game-changer for the Sydney property market. Or it can simply be a sign that things will continue much as they are which can also be significant. In this year’s election the Coalition’s victory means the government will not be making any major policy changes with regard to housing, bringing a sigh of relief to many investors.

The Coalition had earlier announced a new National Housing and Homelessness Agreement to work with states and territories to increase the supply of new housing, including $375.3 million in funding to help people who are homeless and need crisis accommodation.

The government will also establish a $1 billion National Housing Infrastructure Facility that will work with states and territories on funding deals with local governments for infrastructure so new homes and apartments can be developed.

The government will continue its First Home Super Savers Accounts that it says will help first home buyers save for a home deposit at least 30 per cent faster by salary sacrificing up to $30,000 per person. It will also continue to help Australians over 65 years of age who want to downsize, by enabling them to make a non-concessional contribution of up to $300,000 into their superannuation fund from the proceeds of the sale of their principal home.

A late addition to the Liberals’ offering is a plan in which first home buyers who have been able to save for a deposit of at least 5 per cent, will be able to access a government guarantee for the remainder up to 20 per cent of a house’s value. The plan will be available for singles earning up to $125,000 a year, and couples earning up to $200,000.

If it had won the election the ALP had plans to end negative gearing, except for investors purchasing newly-built properties, and would have reduced the capital gains tax discount for assets held longer than 12 months from 50 per cent to 25 per cent. Labor had also announced it would offer 15-year subsidies of $8,500 a year to investors who build new houses, with the taxpayer support conditional on the dwellings being rented to eligible tenants at 20 per cent below market rent.

Are we almost there?

Sydney’s housing fall has entered the record books with prices dropping by the biggest-ever margin on record over the past 21 months, but an end to the downturn may be in sight. Property prices are no longer falling as quickly as they once were; CoreLogic figures show that the citywide median home price dropped 0.7 per cent over April which was well below the 1.8 per cent drop in December.

CoreLogic’s head of research Tim Lawless said prices would probably continue falling for the rest of 2019 but the rate of further drops would not be as fast as before. “The data implies that housing market conditions may have moved through the worst of the downturn,” Mr Lawless said.

One indication of the Sydney market’s bottoming came from new house listings in the three months to April. The total fell 21.5 per cent compared to the same period last year, according to Domain data, and the number of new apartments dropped 24.2 per cent.

“When you get to a total listing peak in the market, it’s an indication that it’s getting closer to the bottom,” said Domain senior research analyst Dr Nicola Powell. “All areas are now seeing a decline in new listings. Some started showing this much earlier, while others … like the city and east started seeing new listings drop only this year.”

AMP Capital chief economist Dr Shane Oliver said that while his view on house prices was “quite negative” we’re about halfway through the housing price correction: “We do have more downside to go, and that’s going to have a significant negative impact on the economy,” he said. “But I’m not in the camp that says we’re doomed and about to go into recession, and there’s no helping us,” he said.

Dr Oliver told’s Frank Chung that house prices will start to rebound at some time next year. Price falls of 25 per cent will bring them back to late 2014 valuations, which will entice buyers back to the market. By then, he said, we will “probably have two more RBA rate cuts”.

Deloitte Access Economics partner Nicki Hutley says we haven’t seen the end of the Sydney price falls, but we have probably seen the worst of it: “Employment is growing, wages are not strong but are actually growing — these are all signs to say this is not the beginning of something catastrophic,” she said.

Even more optimistic is Paul Bloxham, Chief Australia and New Zealand Economist at HSBC, who sees the housing market stabilising in the second half of 2019: ““Our forecasts are that national housing prices will have a peak to trough decline of around 10 to 15 per cent, so our central case is that the correction is nearing its end.”

His view is supported by recent housing-related data which has shown some signs of bottoming out when compared to last year’s accelerating tumble: “Evidence of some stabilisation in the housing market is starting to accumulate,” Bloxham said.

Matthew Hassan, Senior Economist at Westpac told the Sydney Morning Herald that the recent moderation in the downturn is broadly consistent with the improved tone from auction markets and consumer sentiment: “While much of the initial moderation in monthly declines appeared to be due to seasonality, the April update shows a clearer shift over and above seasonal variations,” he said.

RBA holds rate

Despite the financial community’s virtual certainty that the RBA would cut its cash rate at the bank’s May board meeting, the event wrapped up with the rate unchanged at 1.5 per cent. In his statement following the meeting, RBA Governor Philip Lowe said the outlook for the global economy remained reasonable, although the downside risks have increased.

“The central scenario is for the Australian economy to grow by around 2¾ per cent in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia's exports. The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices,” Dr Lowe said.

The ABC’s Ian Verrender had earlier said it was an ‘even money bet’ as to whether the RBA would cut its rate by a quarter of a percentage point, adding: “If it doesn't move tomorrow, it most likely will be next month. And there will be at least two within the next few months.”

Two factors may have been weighing on the RBA’s collective mind. The first is the federal election that fell about midway between the May and June board meetings, while the other is the simple fact that a cut from 1.5 to 1.25 per cent isn’t really going to provide much stimulus for our slowing economy. It may well have been the case that Dr Lowe decided to avoid any possible political repercussions by postponing the rate cut for a month or so, knowing it wouldn’t be a crucial delay for such a small fiscal adjustment.

The RBA’s latest Statement of Monetary Policy said the Bank is now expecting dwelling investment to contract by 6.7 per cent next year, compared to February’s forecasts of 4.5 per cent. Since the inflation rate is now only expected to reach 2.1 per cent in two years' time, a level that is at the lower end of its 2 to 3 per cent target, it’s reasonable to assume the central bank believes cuts are necessary.

Westpac economist Bill Evans said that if the RBA did not follow market expectations and chose to keep rates unchanged then underlying inflation may well fall short of the target: “It seems clear therefore that the RBA now believes that it needs to cut rates to barely achieve an acceptable outcome,” he said.

The Reserve Bank does its best to keep an eye on the country’s economic health from a number of perspectives. One of the key metrics is the state of our housing market which of late hasn’t been exactly robust. In fact, the RBA has warned that if property values continue to fall heavily, particularly in Sydney and Melbourne, it could force many borrowers into a state of "negative equity" where the amount owing on a homeowner's mortgage is higher than the value of their property.

The situation’s not critical at present; the central bank says the incidence of negative equity is relatively low with just over 2 per cent of borrowers in that situation. In the RBA’s view, housing prices would have to fall "significantly further" for negative equity to become widespread.

Another concern for the RBA is the rise in mortgage stress being felt by householders beset with a higher cost of living and no increase in wages to compensate them. Research from data crunching firm, Digital Finance Analytics (DFA) shows that a record number of Australian households — more than a million, which is one-third of all home owners with a loan — are experiencing some degree of mortgage stress.

International ratings agency Moody's says that Australia's mortgage delinquency rate has reached its highest level in five years, with 1.58 per cent of people at least 30 days behind on their mortgage repayments when surveyed late last year. Moody's says the mortgage delinquency rate will keep rising because of high debt levels, low wage growth and the conversion of many interest-only loans to principal and interest this year and next. But it still expects mortgage delinquencies to remain low overall, given the current rate of economic growth and low unemployment.

Regardless, housing prices in Sydney are still declining and economists are concerned this drop in households’ perceived ‘wealth’ will spill over into reduced consumer spending. If households cut back on their weekly shopping outlays the whole economy could feel the pinch with a resultant rise in unemployment and strain on government revenues.

Delays at the top

At the prestige end of the Sydney market - $3 million-plus, the housing downturn has created some delays, both in the time it takes to sell a home and in the additional time needed for pre-sale advertising campaigns. Domain says that it’s now taking an average of 85 days to sell homes in the prestige market, up 18 per cent on last year, while discounting from the advertised price to the actual selling price has reached ten per cent.

AMP Capital’s chief economist, Shane Oliver, says this proves the prestige market isn’t as bulletproof as it seemed earlier: “Things like increased supply in apartments, tighter credit conditions and fewer foreign buyers are still likely to impact the prestige market, as they are the broader market, but what’s having a greater impact at the high-end is an uncertain economic outlook, volatility in the sharemarket and a decrease in bonuses in the financial market.”

The desirable Sydney suburb of Mosman has seen the average sales campaign increase by 24 per cent to 98 days over the past 12 months with discounting rising from 6.1 per cent a year ago to ten per cent now. Woollahra has seen an increase of 12.7 per cent in days on market to 62 days and selling times in Hunters Hill have gone up to 48 days, an increase of 11.6 per cent.

However, it's still true that the broader housing market in price levels below the ‘prestige’ end have copped the biggest impacts from the downturn. The citywide median house price as calculated by Domain has come down 11.5 per cent to $1,027,962 which means that since the peak in 2017, it has fallen 14.3 per cent. Days on market for the average property have increased by 51 per cent and discounting has increased from 5.5 per cent a year ago to 8.2 per cent now.

Domain’s latest quarterly house price report tells us that Neutral Bay and Mosman have enjoyed the city’s biggest price gains in the order of 6 per cent, while Gladesville and Epping have seen the biggest declines of around 18 per cent.

Domain senior research analyst Nicola Powell said that buyers are beginning to take advantage of Sydney’s falling prices: “Buyers have had a falling market for some time. There has been renewed interest because buyers are seeing value and are feeling they are towards the end of the downturn.”

Dr Powell says there is a ceiling price for suburbs: “If a price is too high, buyers will move further afield and re-evaluate, making those life changes to provide a better lifestyle for their families,” she said.

Happier returns

Domain’s Kate Burke has released data that shows pockets of Sydney and Melbourne are showing investors receiving better returns from their properties as housing prices fall. In fact, the latest Domain Rental Report shows that all capital cities, with the exception of Brisbane, are delivering better rental yields.

The report shows that Sydney’s gross rental yield for houses has increased from 3.29 per cent in the December quarter last year to 3.32 per cent in the recent March quarter. The year-on-year gain in Sydney has grown by 5.3 per cent.

Units are showing a similar picture. Sydney’s rental yields for units have grown from 3.9 per cent in the December 2018 quarter to 3.97 per cent in the March 2019 quarter. The year-on-year gain is up by 2.7 per cent – not a massive gain but still going in the right direction for investors.

The Agency’s national director of property management Maria Carlino said investors looking to buy an apartment in Sydney needed to choose the right property and be competitive with their rental price: “Yields would be higher on older apartments, but it depends on where it’s positioned,” Ms Carlino said. “You’ll probably find newer apartments have more outgoings, higher strata … you might be able to get more in rent but the cost of it is more.”

The departure gate

The ever-increasing costs of living in Sydney are driving the city’s inhabitants to other parts of the country, mostly to Queensland, according to data compiled by the Australian Bureau of Statistics (ABS). Statistics from the September 2018 quarter revealed that 11,490 people moved from NSW to Queensland, with another 8126 heading south to Victoria. ABS figures from the July quarter last year showed the same trend: 12,802 people fled NSW for Queensland while 8126 headed for Victoria.

The cause for much of this demographic shift is the high cost of housing in Sydney, with a new survey by finding that 23 per cent of Millennials would move interstate so they would be able to buy their first home or upgrade to a bigger one. The survey also found 20 per cent of Gen Xers would also be willing to relocate due to Sydney’s housing unaffordability. researcher director Sally Tindall told that the other capital cities have lower entry-level housing market prices so it takes less time to save for a deposit to acquire a property: “It takes almost double the time to save a deposit in Sydney as it does in Brisbane, and it’s a similar story in Adelaide, Perth, Hobart and Darwin,” she said.

“You can afford a nice family home without having nothing left over. It gives people breathing space and financial options that you might not get in Sydney and Melbourne; Prices have come down in Sydney, but even with that, it’s still hard to get on the ladder,”

Affordable housing needed

Sydney has a huge backlog in social and affordable housing after decades of undersupply, according to research fellow Laurence Troy from the University of New South Wales City Futures Research Centre. His research concludes that Sydney needs to find room for 200,000 more homes for low to moderate-income earners who are now facing chronic rental stress.

“Social housing doesn’t currently deliver enough to even maintain the same share [of the market] and while affordable housing is being built by the community sector, it’s not enough to meet the current unmet backlog,” Dr Troy told Domain’s Kate Burke.

The study found the biggest area of need is the inner south-west, where 33,600 homes are needed within the next two decades just to keep up with demand at that income level. The Parramatta region and the south-west also have a lack of appropriate housing and face a shortfall of 28,000 and 23,000, respectively.

Anglicare Australia’s Executive director Kasy Chambers said a lack of affordable rental properties had created a crisis for people on low incomes: “It’s the worst it’s been. We’re looking at the bottom end of the market and that never gets cheaper because we have more demand than supply and rents fall off at the top end. Rents don’t fall at the bottom end.”

She said there was an alarming change in rental affordability for people on a minimum wage. “We’ve really seen the affordability drop there, which is really disappointing because we didn’t use to register the minimum eight years ago,” Ms Chambers said, adding that more investment is needed in social and affordable housing rather than in tax breaks for investors in the private rental market.

Community Housing Industry Association chief executive Wendy Hayhurst says government action is urgently needed to build a further 117,000 properties across NSW: “It’s a huge total, but if we turn our back on it, all it will do is get bigger and bigger, and more difficult and more difficult to solve … it won’t go away,” she said.

To create such a huge amount of social and affordable housing would cost many billions of dollars. The report indicates governments would need to come up with something like $3.3 billion a year to meet demand; more than $1.2 billion would be needed for housing in Sydney alone.

A spokeswoman for NSW Social Housing Minister Pru Goward said the government would deliver 23,500 new and replacement social and affordable housing dwellings over the next ten years, while an extra 3400 homes were expected to be delivered by community providers under an affordable housing fund.

Both major political parties seem to be aware of the need for more affordable housing. Before the election the Coalition renewed its promise from last year’s budget to give $1.6 billion to states and territories for the National Housing and Homelessness Agreement and pledged extra money to NSW for community housing regulation.

In its pre-election promises, the Labor Party said it would offer tax concessions intended to support the introduction of a build-to-rent market in Australia which it says will lower rental costs by encouraging institutional investors into the sector. It would do this by halving the managed investment trust tax from 30 per cent to 15 aims to balance the impact of the proposed changes to negative gearing and capital gains tax.

Dr Troy expressed his belief that if government focuses on the supply of affordable dwellings it would both support Australians struggling with housing costs and strengthen the now-declining construction market: “A properly designed, large-scale, not-for-profit program could mean investing in new housing becomes a positive for state and national balance sheets,” he said.

“In short, the evidence-based economic case for government investment in social and affordable housing is strong. Given the impending fallout of a property bust following the largest property boom in Australian history, now is the time to act and reshape the nation’s housing system for the long term.”


‘Labor says it will match Coalition's deposit scheme for first home buyers,’ Sarah Martin, The Guardian, 12 May 2019
 ‘Sydney vendors sit on their hands, taking new listing numbers back to 2004 levels,’ Kate Burke and Lucy Macken, Domain, 10 May 2019    
‘Property slump steers RBA towards 1pc cash rate,’ Jonathan Shapiro and Matthew Cranston, Australian Financial Review, 10 May 2019
'The correction is nearing its end': Property prices will soon be at rock-bottom, says HSBC,’ David Scutt, Sydney Morning Herald, 11 May 2019
‘Australian dollar headed for a fall as Reserve Bank mulls interest rates cut,’ Ian Verrender, ABC News online, 7 May 2019
 ‘Rental yields on the rise across capital cities: Domain data,’ Kate Burke, Domain, 16 April 2019
‘The Sydney suburbs where house prices have risen and fallen most,’ Tawar Razaghi, Domain, 3 May 2019
‘Worst of housing slump has passed as property price falls begin to slow,’ Aidan Devine,, 2 May 2019
‘Property ‘armageddon’: House prices could fall by 50 per cent,’ Alex Brooks,, 16 April 2019
‘Annual rental affordability survey finds worst results for low income earners in 10 years,’
Tawar Razaghi, Domain, 28 April 2019
‘Sydney faces shortfall of more than 200,000 homes for low to moderate-income earners, report shows,’ Kate Burke, Domain, 13 March 2019
‘Property faces a ‘day of reckoning’ if Labor scraps negative gearing — hurting every Australian,’ Shannon Molloy,, 5 April 2019
'We've never seen it as bad as it is': Researchers warn of rising mortgage stress,’ David Taylor, ABC News online, 5 April 2019
‘Property owners risk falling into 'negative equity' if downturn worsens, Reserve Bank warns,’ Peter Ryan, ABC News online, 13 April 2019
‘RBA warns on debt, falling house prices,’Eryk Bagshaw, Sydney Morning Herald, 13 April 2019
‘How an interest-rate cut could change the housing market,’ Jason Murphy,, 5 May 2019
‘Sydney’s prestige property market feeling ripple effect of wider downturn,’ Lucy Macken, Domain, 23 March 2019
‘Thousands of people are fleeing Sydney each month as the city becomes unliveable,’ Shannon Molloy,, 10 April 2019
‘Federal budget 2019: Government slammed for lack of affordable housing measures,’ Lucy Bladen, Domain, 4 April 2019
‘Housing explainer: Labor and Coalition policies on negative gearing and capital gains tax,’
Charis Chang,, 6 March 2019
‘Federal election 2019: More bosses than teachers get negative gearing tax breaks, ATO figures show,’ Elizabeth Redman, Domain, 25 April 2019
‘Labor proposes slashing build-to-rent tax to provide cheap rent for Aussie families,’ James Hall,, 13 April 2019