There’s been a recent ‘bounceback’ in Sydney’s house prices, albeit a rather small one. But first, look back at the first three months of this year that saw prices fall by 3.9 per cent. Prices in March were nearly 13 per cent below the peak of June 2017, so the market was searching for a bottom. There are signs that at last it’s finally found one.

The drop in house prices in Sydney has been the necessary deflating of a bubble that was in danger of bursting. We had to face the reality that demand for buying houses at ever-increasing prices cannot last in an economy like Australia’s with weak household income growth. Median house prices in Sydney have now fallen from the overheated levels they reached in 2017, when the median price was more than $1 million, to the more realistic levels of early 2016.

In June property values across Sydney lifted for the first time since 2017. The re-election of the Morrison government and cuts to official interest rates have boosted confidence in the housing sector. The size of the lift wasn’t dramatic - 0.1 per cent, but it was the first increase in two years and surprisingly came mostly from rising prices in the apartment sector.

CoreLogic's Tim Lawless told the Herald’s Shane Wright the increase was due to several factors, including continued population growth in Sydney: "Stability within the federal government, along with the removal of uncertainty surrounding changes to negative gearing and capital gains tax discounts, has brought about increased certainty and boosted confidence in the housing market," he said.

"Aided by the housing downturn, we have also seen an improvement around housing affordability, although dwelling values remain high relative to household incomes in Sydney and Melbourne; add to this lower mortgage rates and the high likelihood that interest rate serviceability tests are set to improve."

David Hill of Raine & Horne HM Group told Domain that the election result and lower interest rates had brought buyers back into the market: “Prior to the election, we were seeing between zero and two registered bidders,” Mr Hill said. “After the election and the cuts, we’ve seen open for inspection numbers double and similarly we’ve had between four and eight registered bidders on the day.”

The much-awaited end of the property slump can also be attributed in part to the approaching end of the oversupply of housing - as supply and demand is predicted to come back into balance toward the end of the year. By that time most of the anticipated 54,000 new apartments will have hit the market and new construction will have been significantly reduced.

AMP chief economist Shane Oliver says that, while home prices may now be close to or even at the bottom, they are likely to remain constrained: "The situation today is very different to 2011 when the RBA first started to cut rates in this interest rate cutting cycle which in turn helped unleash booming conditions in the NSW and Victorian economies,” Mr Oliver told the Herald’s Elizabeth Knight.

"By contrast today, household debt to income ratios are much higher, bank lending standards are much tighter such that a return to rapid growth in interest only and investor loans is most unlikely, the supply of units has surged pushing Sydney’s rental vacancy rate well above normal levels and unemployment is likely to drift up as overall economic growth remains weak. So, while capital city average prices are likely to bottom by year end, we don’t see a return to boom time conditions but rather expect broadly flat home prices through 2020.”

A more optimistic outlook comes from Capital Economics, one of the leading independent economic research companies in the world. It has a positive view of Sydney’s housing market and is predicting a three per cent improvement in dwelling prices over 2020 and a five per cent gain the following year.

Better still is Domain Group's latest property price forecast which says the residential property market will start to recover in the second half of this year with house prices in Sydney to grow two per cent by Christmas followed by up to five per cent growth in 2020.

Domain’s property price forecast for June 2019 expects median house prices in Sydney to bottom out at just about $1 million and median unit prices to dip just below $700,000 in spring.

Domain economist Trent Wiltshire said the three big changes of the past month that should see the market bottom out are the Reserve Bank cutting interest rates, the Coalition's win, so no changes to negative gearing, which is having an impact already; and APRA's changes to mortgage serviceability tests.

"I do note there is some potential for further tightening of bank lending, but I think the net effect will be more of a boost to lending and a very modest turnaround in new home loan growth," he added.

Ray White joint chairman Brian White told News.com.au there has been a wave of activity in the market recently: “We’ve already seen a noticeable change in the atmosphere in the last few weeks with increased inspection numbers and people more willing to raise their hand at auctions again,” Mr White said.

The flattening of prices is a key indicator to investors to jump back into the market, he said, which was being fuelled by the rate cut and the positive election result for the sector.

“The message that the market has bottomed is just so clear,” Mr White said. “There’s just so much better news than people were probably anticipating.

RBA and APRA act

At its July meeting The Reserve Bank of Australia cut official interest rates to 1 per cent, the lowest level ever. Its aim is to boost the economy enough to drive down unemployment and lift wages. RBA governor Philip Lowe announced after the meeting that the bank would slice the cash rate by 0.25 percentage points for a second consecutive month.

Dr Lowe said the economy had grown below trend over the past year, with household consumption "weighed down by a protracted period of low income growth and declining housing prices".

He said that, while employment growth had been strong, there have been few inroads made into the economy's spare capacity, which meant overall wages growth remains low: "A further gradual lift in wages growth is still expected and this would be a welcome development," he said.

Economists from CBA, ANZ and NAB forecast a cash rate of 0.75 per cent by August with NAB expecting quantitative easing (QE) to follow next year, although Mr Lowe said it was 'quite unlikely' the central bank would need to start quantitative easing [where it buys government securities to increase the money supply]. Dr Lowe has said that QE was "not something that we would do lightly".

ANZ suggested the RBA may be forced to lower the cash rate below the 0.50–0.75 per cent level which most analysts assume is the bottom of the rate cutting cycle, beyond which quantitative easing would need to be used.

"Most analysts, ourselves included, say that after getting to that point the RBA will reach for the ‘unconventional’ policy tool kit," ANZ's David Plank said.

The banking regulator APRA has given homeowners and property investors even more good news that will help Australian house prices to head higher in 2019. It has scrapped its rule that lenders must assess home loan applications on the basis that the borrower is able to pay back the loan at an interest rate of seven per cent.

This rule had previously prevented major lenders such as CBA, Westpac and NAB from extending as much credit to property buyers as they would have liked. Now APRA has stipulated the banks must use an interest rate buffer of at least 2.5 per cent over the loan’s rate to help avoid mortgagor’s defaulting.

Ray White NSW chief auctioneer Alex Pattaro said APRA’s moves would encourage investors to apply for higher mortgage amounts: “Buyers are slowly starting to realise the market might spike on the back of the new APRA determination,” Mr Pattaro said. “I think [buyers are] aware it might give everything a kick because lending capacity and spending limits are about to increase.”

RateCity research director Sally Tindall said that many Australians may suddenly find they can now get their hoped-for home loan approved: "APRA has eased off the brakes slightly, but that doesn't mean it will be a complete field day for borrowers. There are still a number of checks and balances in place to make sure people aren't jumping into home loans they can't afford to repay."

Corelogic research analyst Cameron Kusher told news.com.au lower rates in isolation won’t have a dramatic impact on prices, but the combination of the removal by APRA of the seven per cent serviceability buffer and lower interest rates will likely mean more activity in the housing market.

“We don’t think it’s going to be a rapid rebound in the housing market, we think it’s still going to be a ‘slowly, slowly’ increase in the market. The main reason for that is it’s still a lot harder to get a mortgage than it has been in the past, even if those serviceability buffers are reduced. There’s still going to be a lot of scrutiny on credit worthiness of borrowers.”

Discounts – sort of

At this point in time a number of new apartments are being completed and joining others competing for buyers in a slowing Sydney market. A simplistic application of the laws regarding supply and demand would tell us that apartment prices would come down, but reducing prices is the last thing developers want to do.

Property analysts say the Sydney market has become oversupplied, with 54,000 new apartments built in during 2018 and 2019 expected to be marketed by the end of the year. Prices are already slipping - Sydney's median unit price in May was $678,199, with prices falling about 6 per cent over the past 12 months.

Sales have also been affected by quality concerns raised by issues with the Opal Tower and the Mascot Towers discussed elsewhere in this article. REA chief economist Nerida Conisbee said the apartment quality crisis had come just as values were slipping due to the large number of properties coming onto the market.

“There’s been concerns about oversupply for five years and it’s been difficult to get funding (to build or buy),” she said. “A big problem for people buying off the plan is they’ve put a deposit on, but when it comes to settlement, they have problems getting finance.”

Property analyst Martin North from Digital Finance Analytics said the real estate sector is getting what he calls a hard dose of reality: “From the data I'm seeing, investors are not interested in coming on board and the demand is not coming through."

He added that, although average unit prices have fallen only six per cent, there were pockets of Sydney, such as Hurtsville and Ryde, where the falls had been severe. "In Ryde, unit prices have dropped more than 30 per cent, essentially something that developers can't cover," he told Nick Sas from the Herald.

Cutting the offered price on unsold apartments would effectively devalue the worth of apartments already sold in the block. It would also lessen the developer’s return on investment as it would be difficult or impossible to raise prices once cut. So special deals are on offer that give buyers a ‘bonus’ for making a purchase at the original prices.

St Trinity Property Group is advertising 12 months mortgage free on its apartments in Blakehurst, 20 kilometres south west of the CBD. Arden Group will pay the stamp duty for buyers of its ‘Elora The Hills’ development, in Sydney’s north west. Belle Property International is offering a $15,000 Freedom Furniture voucher for its apartments, and Frasers Property is advertising a $50,000 bonus on its apartments at Tailor's Walk in Botany.

Mothballed sites

There is a growing number of ‘mothballed’ apartment development sites across Sydney that show just how quickly developers can respond to a slowing market. Steve Mann, the Urban Institute of Australia’s chief executive, says the number of "deferred and abandoned" apartment projects in Sydney has increased 110 per cent in the past year – that’s a total of 40,000 to 50,000 apartments on hold.

"The market is very challenging for new developments," Mr Mann told ABC News. "We've also seen nearly two years now of price declines - record price declines, and that's very challenging in terms of jobs and supply of new construction."

At the high point of the last property boom, in the twelve months leading up to April 2017, 44,762 units were approved for construction in NSW. Compare this to the 28,618 units approved for construction in NSW in the twelve months leading up to April this year and you’ll find a drop of more than 36 per cent.

Small wonder that several builders whose trade is constructing residential apartments have been laying off staff and are calling a halt to new developments; some have shifted into building commercial properties instead of apartments. One of these is developer Phillip George, the founder of Potter George Group, who has around $1 billion worth of projects in the pipeline.

Potter George Group is involved in both residential and commercial real estate. Five years ago, 50 per cent of its projects were residential, but now it's only a third.  "You've got to fish where the fish are," Mr George said.

"Our rate of sales for residential is not where we want it to be, so we moved away to [focus on] commercial. It's all about making money at the end of the day, we've all got bills to pay, and right now commercial is a far more viable option."

Vacancies grow

A record 3.4 per cent of Sydney rentals were sitting empty in April. This is the highest since records began in 2005, and there are concerns the figure may hit four per cent by the end of the year as new apartments continue to be released into a saturated market. When you look at the 1.7 per cent vacancy rate of just two years ago you can see why these concerns exist.

Another factor that’s gone mostly overlooked until now is that some of the new apartments have been built in areas such as the Hills District where families traditionally go to find more housing space rather than a small unit. Just because the new Sydney Metro goes out that way doesn’t mean instant tenants for landlords; SQM Research recently found that the vacancy rate of the Hills District is currently 5.6 per cent, and the vacancy rate of the Rouse Hill-Kellyville postcode is nearly eight per cent.

SQM Research director Louis Christopher is one of those who thinks the Sydney-wide vacancy rate could rise to four per cent by end of 2019. He says that projects started two to three years ago, during the height of the market boom, still need to be completed.

“These projects were based on decisions developers made years ago so they can’t stop releasing them,” Mr Christopher said, adding that he thought some developers should have given more thought to their projects in the outer suburbs.

Towering troubles

The crumbling beams in the Opal Tower at Sydney’s Olympic Park last Christmas were bad enough, but a smaller structure in Mascot has also been evacuated due to structural faults and added to the growing pressure for the NSW government to quickly introduce a much better regulatory framework for new strata developments. This is becoming critical as statistics emerge that something like 80 per cent of all new residential strata buildings are built with defects.

Stephen Goddard, the chair of Owners Corporation Network, says the most common defects are those that allow water penetration and the absence of fire safety requirements (structural elements intended to prevent spread of fire). A surprising third place was building facades falling off.

Building defects can take years to be identified by which time the statutory warranty period has expired. Enforcing the warranty can also be a problem; Even if the fault is discovered within the warranty period, the builder/developer can be hard to sue as they often fold up their companies and walk away once the project has been sold.

Meanwhile, tower residents and tenants can be tossed out of their homes with no idea when they’ll be allowed to return. Owners find their purchases are significantly devalued, and in many cases have to cough up thousands of dollars from their own pockets to cover the costs of remediation.

Christoph Reithmeier, Director and owner of Dapcor, a remedial building company, told David Ross of News.com.au that fixing non-compliant buildings can be incredibly expensive: “Generally most defects in new buildings are more related to superficial cracking and noncompliance; the biggest cost to unit owners for defects is waterproofing.”

“When a building is in the construction phase, the waterproofing component is approximately 2 per cent of construction cost,” he said. “When you have people living in there then you have a number of other issues to get through, that goes for all the other defects.”

UNSW City Futures director Bill Randolph said the time has come that the interests of the developer and builder are secondary to those of owners: “Everybody is looking at these towers and thinking ‘My God, is that going to fall down? Is that going to cost me $50,000 to $60,000 to fix?'”

Buying a strata property ‘off the plan’ has quickly become problematic which is showing up in recent unit sales figures. Restoring public confidence in residential strata buildings requires urgent and decisive action from both government and developers or, as Mr Randolph says: “Sooner or later, people will say ‘I don’t want to buy that stuff’. If people are very wary of buying a unit off the plan in a block of flats that hasn’t even been built because of the problems occurring, the developers won’t have anybody to sell it to.”

The NSW Premier, Gladys Berejiklian, said this week that self-regulation in the industry had not worked. Her government is consulting until the end of the month on a “Building Stronger Foundations” reform package, which includes the creation of a building commissioner, and the registration of more participants in the construction process.

Homeowners and subsequent purchasers of apartments would be owed a duty of care by builders and other participants in the property industry, under proposed reforms outlined by the state government.

The four main components of that proposal are: that designers of buildings must declare they are compliant with the Building Code of Australia; that designers be registered; that an industry-wide duty of care be legislated; and that a building commissioner be appointed to act as a consolidated regulator.

The commissioner will be appointed soon, and the government hopes to table legislation to implement the schemes by the end of the year. The discussion paper said that "it is envisaged that owners should have clear rights to pursue compensation where a building practitioner has been negligent, and it cannot be absolved through purchasing contracts.”

Sources:

‘Immediate reforms: Triguboff's Meriton wants building industry change,’ Jacob Saulwick and Tom Rabe, Sydney Morning Herald, 13 July 2019
‘We have spirited bidding again’: Signs Sydney prices are stabilising as market bounces back over the weekend,’ Kirsten Robb, Domain, 7 July 2019
‘Sydney and Melbourne property values lift for first time since 2017,’ Shane Wright, Sydney Morning Herald, 1 July 2019
‘After two years of pain, the property slump looks to be over,’ Elizabeth Knight, Sydney Morning Herald, 2 July 2019
 ‘Sydney house prices to grow 7pc by end of 2020,’ Ingrid Fuary-Wagner, Australian Financial Review, 27 June 2019
‘Sydney faces apartment construction slowdown as developers hit the brakes,’ Nick Sas and Liv Casben, ABC News online, 17 June 2019
‘Apartment vacancies surge to record levels as developers continue to release new housing,’ Aidan Devine, Realestate.com.au, 17 June 2019
‘Sydney's dirty strata secrets emerge through cracks in Mascot Towers,’ Stephen Goddard, The Age, 18 June 2019
‘Sydney apartments in spotlight as developers ramp up incentives to clear oversupply of stock,’ Nick Sas, Sydney Morning Herald, 18 June 2019
‘Mascot Towers: NSW government urged to move on building reform to restore confidence in sector,’ Tawar Razaghi, Domain, 17 June 2019
‘They may never recover’: Non-compliant buildings creating generation of ‘mortgage prisoners,’ David Ross, News.com.au, 20 June 2019
‘House prices bouncing back? Don't hold your breath,’ Greg Jericho, The Guardian, 20 June 2019
 ‘Interest rates slashed to record low 1 per cent,’ Shane Wright and Eryk Bagshaw, Sydney Morning Herald, 2 July 2019
‘Banks see RBA at 0.75pc by November,’ Matthew Cranston, Australian Financial Review, 21 June, 2019
‘RBA rate cut: What the Reserve Bank decision means for housing market,’ James Hall, News.com.au, 3 July 2019
‘APRA just moved to put a rocket under Australian house prices in 2019,’ Tom Richardson, Motely Fool, 5 July 2019
‘Berejiklian government reveals plan for post-Mascot Towers crackdown,’ Jacob Saulwick and Laura Chung, Sydney Morning Herald, 27 June 2019