Market comment: We’ve seen the bottom and now await further developments

Wed, 14 Aug 2019

Market comment: We’ve seen the bottom and now await further developmentsThe media have given a great deal of coverage recently to Sydney property prices appearing to have found the bottom of the slump and even offered opinions about price rises in the very near future. When it comes to the housing market downturn, the ABC’s Michael Janda says it’s over…at least for now.

“Don't take my word for it. A veritable army of tipsters have called the bottom over recent weeks. They include property analysis firms SQM Research, Domain and CoreLogic, AMP Capital chief economist Shane Oliver — who was one of the first to tip the big downturn — BIS Oxford Economics, ANZ, and even the Reserve Bank.”

It's therefore not a surprise that Australians across the country are feeling more positive about house prices with 38 per cent expecting them to rise over the next 12 months, according to a survey by ME Bank. The survey involved 1000 people from across the country – 500 owner-occupiers, 300 investment property owners and 200 first-home buyers.

In NSW however, there was a bit of caution. Many respondents still believed the value of their property would drop over the next 12 months compared to other states and territories; 41 per cent of people surveyed believed prices would continue to fall across the state, while only 26 per cent thought prices would rise.

Overall, the property market’s news lately has been pretty good. Domain’s June House Price Report shows that Sydney’s median house price is likely to stay about $1 million, using their methods of calculation, having dropped back to early 2016 levels at $1,032,338, while the city’s median unit price has fallen to mid-2015 levels at $688,652.

We have been through the biggest downturn in property prices since the 1980s; house prices have now fallen 14 per cent citywide. There are a number of reasons why things have stabilised, among them the federal election results, the end of threats to negative gearing and favourable capital gains tax treatment, two interest rate cuts by the RBA, and changes to lending rules by APRA that have eased restrictions on bank lending.

Auction clearance rates are now at their highest level in two years, seemingly confirming a turning point in the market. Clearance rates in Sydney are about 45 per cent stronger compared to last year, an improvement AMP chief economist Shane Oliver said would usually suggest prices could rise up to 10 per cent in 12 months.

“Historically, once clearances move higher [and] volumes eventually start to pick up again, more property comes to the market and eventually that results in higher prices. Once we start to see more supply coming into the auctions, then the clearances will probably come down a bit,” he said.

“It’s hard to believe things are this strong, it’s improved but it’s debatable as to [what] the raw clearance figures would suggest.”

However, at present there’s a shortage of vendors willing to put their properties on the market at a time when prices are low, and those selling are likely to be doing so only because they have to. Raine & Horne Newtown director Duncan Gordon told Domain’s Tawar Razaghi that there is a real shortage of supply: “Sellers won’t react as quickly as buyers, there will be a lag – sellers want more confidence.”

He said that properties had sold at auction between $200,000 and $500,000 above reserve in the past few months: “In the height of the market in 2017, we wouldn’t have thought we would get that. It absolutely defied all odds. Demand is strong and supply is low. That’s what’s caused this volatile activity in the marketplace. Until that [supply] level is up then these results will continue to happen.”

Advantage Property Styling managing director Dan Gerber told Domain that he has seen an uptick in business, judging activity by the amount of homes his company styles: “We did see a consistent and gradual uplift in the second half of July and August, which has been good. It’s not the kind of frenzy of activity we saw in 2017,” Mr Gerber said, adding that it was too early to predict what would unfold in spring.

A shortage of investors has been noticed by analysts in the financial sector. Australian Bureau of Statistics figures show the value of lending to investors was down 45.4 per cent in April this year from its peak in April 2015. Four years ago, investors were borrowing $12.5 billion; in the 2018-19 financial year this fell back to $6.8 billion. chief economist Nerida Conisbee said we are looking at a very different property market to what it was during the boom: “Buyers from Asia, a key market for new development, have dropped dramatically; over the past 12 months alone, property seekers from China have dropped by over 60 per cent to the lowest level we have ever recorded. And confidence in the new apartment sector is low following some high-profile structural issues.”

CoreLogic head of research Cameron Kusher said that investors in recent times have been more focused on capital gains from property rather than rental income: “There’s also been a large volume of new stock in the apartment segment hitting the market at a time when values have started to fall and it highlights that a lot of investors chase the capital growth not necessarily the rental return,” he told

“Once values started to fall, there was less inclination from an investor to purchase a property because the value wasn’t increasing.”

Increasing buyer caution

Domain’s Tawar Razaghi says prospective apartment buyers are showing increasing caution due to what he calls a ‘crisis of confidence’ in the city’s buildings. He quoted Double Bay estate agent Wayne Ihaka who said: “They’re having a closer look at pre-built buildings and looking at the strata reports … they’re doing more due diligence into what the building was constructed of. They’re more cautious, there are no two ways about that.

During July, alarm bells started ringing when the collapse of two high-rise apartment developers made the headlines.  The Sydney-based Ralan Group and Melbourne's Stellar Group ceased trading, fuelling the property industry's worst fears: that large numbers of would-be buyers either are unable or unwilling to settle on pre-sold apartments.

It used to be so easy; there were good profits to be made in a booming market. Anticipating a quick capital gain, property investors bought units off the plan, often with a small deposit and sometimes a non-binding assurance from a financier. Off-the-plan buyers, however, have a legal obligation to take the unit when building is completed. They must pay the full, final payment or face default, which means losing their deposit and being potentially exposed to legal action by the developer to recover the full amount.

The property downturn in the past two years has seen sharp falls in apartment prices – falls that have left many investors underwater, committed to pay boomtime prices that are usually well above the current market rate by the time of completion. Property research group CoreLogic reported in April that about one in five units bought off-the-plan were now valued at 10 per cent less than the agreed purchase price.

Addressing concerns

News that the Australian Building Ministers Forum is now responding to the recommendations of the Shergold-Weir report into building defects is an indication that at long last the failings of the development industry to control building quality are finally being taken seriously by legislators.

The lord mayor of the City of Sydney, Clover Moore, criticised the state government's regulation of the building industry, saying that to date it had been "breathtakingly irresponsible", and said that a lack of independent certification had paved the way for buildings that were "unfit for occupation".

Cr Moore called for independent onsite construction inspectors and said that engineers and building professionals working on those sites should be adequately qualified and registered. In addition, she said all buildings should be assessed by independent, third-party inspectors.

"This would ensure proper checks and balances that protect the environment and amenity, and address the conflict of interest inherent when private certifiers and inspectors are paid by the building contractor," she told the Herald’s Megan Gorrey.

It is to be hoped that real progress can be made by the NSW Government with the proposals it outlined in its Building Stronger Foundations discussion paper, although fixing the numerous faults in the industry will undoubtably be a long and complex process.

NSW Premier Gladys Berejiklian says the present system of regulation in the building industry is not working, but she wanted to assure the community that [the government] knows there's a problem: "We know there's a gap in legislation; we allowed the industry to self-regulate and it hasn't worked. There are too many challenges, too many problems, and that's why the government's willing to legislate."

Minister for Better Regulation and Innovation Kevin Anderson told the Herald that the industry was undergoing major reform to improve the transparency, accountability and quality: “With the appointment of David Chandler OAM, as the first ever NSW Building Commissioner, we are now moving into the next phase of the reform process,” Mr Anderson said.

Deferred projects

The Herald’s data journalist, Nigel Gladstone, says that the number of deferred and abandoned multi-unit projects in Sydney rose last year with the Urban Development Institute of Australia (UDIA) reporting a total of 29,030 multi-units were dropped in Sydney.

Because finance for developers has become much tighter, most projects take longer to get the required pre-sale levels to proceed to construction, property market consultants Urbis reported this month. Only about 4 per cent of new flats were sold at several sites in the March 2019 quarter; this was down from sales of 13 per cent in the September 2018 quarter, according to Urbis' quarterly surveys.

Urbis also expects "a significant drop" in sales of completed new apartments in 2020. “We’re seeing a cautious market as buyers and investors anticipate a drop in apartment prices," Associate Director at Urbis Alex Stuart told the Herald.

Job advertisement data indicates the outcomes of the banking royal commission and recent declines in house price falls may already have curtailed career opportunities in several industry sectors. Investment bank UBS say the recent slide in construction job advertisements is consistent with its forecasts for job losses before the end of this year. Economists at the bank expect construction jobs to fall by around 100,000 from the peak of the building boom.

There's also a ‘ripple effect’ across the building supply industry. In early August cement group Adelaide Brighton downgraded its earnings forecast for the second time in three months and announced it wouldn’t pay a dividend.

The Reserve Bank is well aware that the housing market is still facing challenges due to a drop in development activity. It recently said in its July meeting minutes: "While the pipeline of construction work yet to be done in New South Wales and Victoria remained high, liaison contacts expected housing construction could drop off more sharply because pre-sales activity had been so weak."

Rentals retreat

Sydney’s tenants are seeing the largest annual fall in rents in the last fifteen years for two big reasons: First, because of the ongoing housing market correction that has significantly reduced property values, and secondly because of the recent building boom that has nearly doubled the size of the Sydney apartment rental market.  30,880 multi-unit dwellings were built just in the past year, and there were 16 multi-unit projects finished in the first three months of 2019 which added another 1948 units.

The latest Domain Rental Report shows that median unit rents fell by 4.5 per cent in the year to June, while at the same time the median house rent dropped by 3.6 per cent. This means that median rents are down to 2016 levels, at $530 per week for houses and $525 for units.

Domain economist Trent Wiltshire says that despite the retreat in rental rates, our city is still the most expensive capital in which to rent a property: “Record rates of construction have been flowing through to rents for a while and you can see that through the vacancy rate.”  

Mr Wiltshire noted that Sydney’s vacancy rate is 3.2 per cent, compared to 2.4 per cent a year ago: “It’s a bit of a win for tenants. But Sydney is still very expensive compared to other capitals,” he said.

Location plays a big part in how well a property’s rent levels are retained. Figures show that the largest drop in unit rents was on the upper north shore, closely followed by the south-west, with a 5.3 per cent decline. House rents fell most in Canterbury Bankstown, sliding 5.5 per cent over the year. The number of flats listed for rent on popular real estate websites has more than tripled in 15 postcodes, particularly around Gordon, Miranda, Botany, Sutherland and Homebush.

Dick Crampton, director at Shead Property in Chatswood, a company that manages more than 1000 rental properties, told the Sydney Morning Herald that the supply of north shore rentals is at an all-time high: "When properties were totally selling out off the plan about two or three years ago I suspect that probably 80 per cent of them were sold to investors. So I suspect it's either developers or investors leasing [those] properties now."

Battered household budgets

There’s little expectation of a return to boomtime conditions in the near future. ABC’s The Conversation's 2019-20 forecasting panel of 20 leading economists from 12 universities across six states predicts a weak economic growth rate and depressed consumer spending, with no improvement in unemployment or wage growth, and an increased chance of recession.

The panel expects continued wage growth of only 2.2 per cent in 2019-20, which, if that average forecast is right, would be the seventh consecutive year in which wage growth has fallen short of the Budget forecast. Even that unusually low rate of wage growth would be well above the rate of inflation, which is expected to be only 1.5 per cent, or 1.4 per cent on the so-called "underlying" basis watched closely by the Reserve Bank.

Economists who took part in the Scope survey for the Sydney Morning Herald and The Age concluded that the days of strong increases in both housing prices and household spending are a long way off. Victoria University economist Janine Dixon told Scope that, although a rise in prices would deliver a wealth effect to owners and investors, prospective buyers will have to face affordability issues.

"This may in fact have a negative impact on household consumption overall. Asset-rich homeowners might not increase consumption if they don't feel that their regular income has increased, while prospective new home buyers will feel the pinch when the dream of home ownership again slips away," she said.

Ratings agency Moody's has issued a warning that mortgage-backed securities are experiencing growing delinquencies. Moody's senior analyst Alena Chen said with household debt at almost 200 per cent of annual disposable income, a large number of homeowners have become financially exposed.

"The increase will be because of record-high household debt levels, the conversion of a large number of interest-only mortgages to principal and interest loans and falling house prices," she told the Herald’s Shane Wright.

Two other interesting indicators of financial stress – falling car sales and decreasing passenger numbers flying between Melbourne and Sydney, have also shown up in recent year-on-year figures and indicate a weakening economy.

ANZ senior economist Felicity Emmett said the bank believed credit would continue to be strained: “Our view has been that the major driver of the weakness in housing has been about credit supply,” Ms Emmett said. “Also, households are full up on debt after a long period of low wage growth. Households are feeling uncomfortable with the levels of debt and so it’s unlikely they want to pile more on.”

And the RBA’s minutes from its August meeting include some figures that tell us the central bank is keeping a close eye on the housing market: "Growth in housing credit remains low. Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality," the minutes read.

In summary, we have seen the bottom of the Sydney property market and that’s a good thing. But the next significant uplift is in all probability going to take some time - and more than a bit of good fortune, before it begins.


‘The early indicators that show vendors are gearing up for the spring selling season,’ Tawar Razaghi, Domain, 11 August 2019
‘Buyers brave winter chill as property market warms,’ Nick Lenaghan, Australian Financial Review, 12 August 2019
‘Building certifiers leave a trail of chaos,’ Carrie Fellner and Nigel Gladstone, Sydney Morning Herald, 3 August 2019
'Higher value houses leading property recovery,' AAP on, 11 August 2019
‘Fears of 'dead cat bounce' for house prices as economists warn of retail troubles,’ Shane Wright and Eryk Bagshaw, Sydney Morning Herald, 3 August 2019
‘Return of investors points to much-improved Sydney auction market,’ Melissa Heagney, Domain, 28 July 2019
‘Sydney auctions: Clearance rate at two-year high but numbers well down year on year,’ Melissa Heagney, Domain, 22 July 2019
‘Sydney house price falls slow as property market downturn nears its end: new report,’Tawar Razaghi, Domain, 24 July 2019
‘Australians positive about house price growth but worry about affordability, survey finds,’ Melissa Heagney, Domain, 23 July 2019
 ‘Construction industry cracks showing as Ralan Group goes under,’ Ian Verrender, ABC News online, 3 August 2019
 ‘Those left to pick up the bill shut out of building crisis debate,’ Bill Randolph, Sydney Morning Herald, 24 July 2019
‘Sydney apartment buyers more cautious, agents say, as it’s revealed a fourth building has been abandoned,’ Tawar Razaghi, Domain, 20 July 2019
'It hasn't worked': Premier admits Sydney's building industry is failing,’ Jacob Saulwick, Megan Gorrey and Lisa Visentin, Sydney Morning Herald, 11 July 2019
'Breathtakingly irresponsible': Sydney mayors lash building controls,’ Megan Gorrey, Sydney Morning Herald, 23 July 2019
‘Sydney rents record biggest annual fall in 15 years in good news for tenants,’ Tawar Razaghi, Domain, 10 July 2019
‘Sydney's stupidest building boom was born in a bonfire of regulation,’ Elizabeth Farrelly, Sydney Morning Herald, 26 July 2019
‘Apartment oversupply puts squeeze on rents,’ Nigel Gladstone, Sydney Morning Herald, 14 July 2019
‘The economy is weak and heading downward,’ The Conversation, Peter Martin, ABC News online, 1 July 2019
‘More homeowners falling behind on mortgage as debt climbs,’ Shane Wright, Sydney Morning Herald, 17 June 2019
‘RBA leaves door open to more interest rate cuts,’ Shane Wright and Eryk Bagshaw, The Age, 17 July 2019
‘Housing market: Low numbers of investors in Australia dragging on the property market,’ James Hall,, 11 July 2019