Market comment: The recovery begins, but how far and how fast will it go?

Mon, 16 Sep 2019

Market comment: The recovery begins, but how far and how fast will it go?There’s general agreement among analysts that the Sydney property market has hit its bottom point and is now on the road to recovery. But there are many differing views about where we go from this point onwards. The August property sales results have provided some encouraging signs of recovery that offer a guide to what the future holds.

CoreLogic figures show that house values in Sydney rose by 1.5 per cent last month, bringing the total rise since June to 1.6 per cent. Unit values also rose in the last month, up by 1.8 per cent. The strong growth figures even surprised Core Logic’s head of research, Tim Lawless, who told ABC News: "The August figures really have taken quite a [steep] change upwards, which is a much stronger rate of growth than what we would have expected. It does look like a growth trajectory is very much on the cards."

Double Bay estate agent Paul Biller said that sellers who had held back in recent months were returning to the market: “Since the election, there's certainly a lot more confidence and there are more homes hitting the market. Still [it's] not as many as we'd like, particularly for the time of the year — however, whatever is on the market is selling very well," he said.

Nila Sweeny, at the Australian Financial Review, says that some parts of Sydney are already ‘bolting ahead’: “In Sydney, unit prices in the Northern Beaches and Botany Bay have grown strongly over the past year, defying the 6.9 per cent drop in the Sydney market over the same period.

“Eastgardens units in Botany Bay racked up a 14.3 per cent median price growth to $906,882 over the year to July while Newport, Northern Beaches climbed by 11.6 per cent to $929,568. Since the boom ended in July 2017, prices for units in…Newport rose by 6.9 per cent according to Corelogic.”

Keiran Whaley, director at Jellis Craig Ivanhoe, said the property market was at an “interesting point” right now: “From a buyer’s perspective, there is no better time to buy, because prices are still 10 to 15 per cent off their peak. The bounce back has been amazing, and I’d say very similar to what happened after the GFC, in that it [the market] was off one week, and on the next,” he told Domain.

Inner west estate agent Jackie Williams said vendors that had earlier been hesitant are now starting to put their properties on the market: "Vendors are finding confidence that now is the time to move. Prices aren't falling as we felt they were for the last 12 months, so they've got the confidence that when they put their property on the market, they'll achieve a certain level; if anything, there's a lot more demand than there is supply."

The Herald’s Elizabeth Knight was quick to remind us that the upward price trend, clear as it is as present, is based on a small sample as recent sales volumes have been relatively small. She says it won’t be until the spring season gets underway that we’ll have more detailed statistics based on additional sales across the Sydney area.

“To be sure auction clearance rates have also picked up significantly relative to a year ago. But this can also reflect the fall in inventory of house stock on the market,” she said. “And secondly, homeowner credit growth remains weak – albeit picking up slightly. In the latest July figures there was a 0.5 per cent improvement in owner occupier credit growth but a 0.1 per cent decline in home investor credit.”

Angela Ashton from Evergreen Consultants offered her thoughts: “We think that the housing market has bottomed, and we see modest improvements in residential housing over the next twelve months…But we expect to ultimately see 2019 ending on a higher note as improved demand dynamics and looser credit supply conditions continue to emerge,” she said.

Louis Christopher of SQM Research, an often-quoted property analyst, agrees the market has hit bottom, but said that Sydney has bottomed out at an overvalued price: “The data suggests the Sydney housing market remains 21 per cent overvalued despite the two-year correction,” he said.

“For reference, the average overvaluation (since 1986) in Sydney is 19 per cent with a low point of 5.9 per cent ‘undervalued’ in June 1987 and a high point of 55.5 per cent overvalued in December 2003.  The most recent overvalued point was 51.6 per cent in the June Quarter 2017. The most recent undervalued point was 1.6 per cent undervalued in September 2012.”

Mr Christopher also added that he believes that historically, the Sydney housing market has rarely been undervalued, and said there has nearly always been some sort of premium attached.

So, there you have it. Yes, the property market has hit bottom after a 14 to 16 per cent fall in prices across the city, with some parts of the greater Sydney area dropping up to 18 per cent. And as always in such cases, some more desirable parts of town have not only retained their values but grown as much as six per cent, like Neutral Bay and Mosman.

And now a Sydney property price recovery is underway, as shown by the August sales results. However, it’s acknowledged that these results are based on relatively small volumes and the strength of the recovery may well slow down once more properties come onto the market.

There are now a number of conflicting factors at work which will help determine the future of Sydney property prices, among them the availability of credit, low interest rates, global instabilities and an unwillingness of vendors to put their properties on the market. The overall impression is that the market is very much in a “wait and see mode” that will keep prices stable, or at best showing moderate gains, at least until the end of 2019.

If borrowers, both homeowners and investors, are able to acquire the funds they need to purchase property, and if vendors that have been holding off until the price downturn is over finally emerge to put their properties on the market, this Spring could once again see the kind of selling season that Sydney’s been waiting for.

Hong Kongers move to Sydney

Recent unrest in Hong Kong has caused many of that city’s residents to consider their futures with the current ‘one country, two systems’ under threat. The NSW Department of Industry has commented that there’s been a significant increase in applications for business and investor visas over the past few months.

Georg Chmiel, executive chairman of, the platform that markets overseas property to the Chinese market, said: “Over the next two to five years, there could be a substantial impact on the property market as these individuals look to settle down and purchase but, for now, it is too early for that”, he said.

“Expect to see wealthy Hong Kongers first renting in Sydney or at least waiting until they have obtained their visa before they purchase. That way, they can avoid the foreign buyer tax.”

Monika Tu, director of real estate agency Black Diamondz Group International, told Domain’s Sue Williams that she’s already seeing groups of buyers visiting from Hong Kong to check out property: “These are all people from Hong Kong of Chinese origin who are successful, established businesspeople; a few already have Australian residency, or their children do, but now they’re all seriously looking.”

The Guardian’s Ben Doherty said that Australia was the top destination for Hong Kong emigrants in 2018 – nearly a third (2,400) of the 7,600 Hong Kongers who left last year went to Australia.

He quoted Hong Kong migration agent John Hu who said the political climate in that city is not easy at this time: “When protests start to bring unrest to Hong Kong, and as these protests have gone on for a long time, we have people ringing us up, they are becoming more and more determined to get a visa for what we call a ‘plan B’. Over the last few months, there has been a very large increase in people inquiring about Australia. If we were getting 10 to 15 applications every month before, now it’s 20 to 30,” he said.

Building approvals fall

The residential construction sector is feeling the effects of the weakening housing market. The Australian Bureau of Statistics has reported a 1.2 per cent drop in building approvals across the country in June.  Importantly, it was led by a 5.4 per cent fall in NSW. More ABS figures showed a small uptick in approvals for houses which were up by 0.4 per cent in June, but down 14.8 per cent over the past 12 months.

Meanwhile, approvals of units and apartments slumped 6.5 per cent in the month. Approvals in the apartment sector have now fallen by 39.3 per cent over the past year with the worst June performance since 2013. Some of the biggest drops have been among unit blocks four storeys or taller, with approvals of these in NSW down 50 per cent over the past two years.

More statistics from the Housing Industry Association also show that there are problems in the property market. In the last financial year there were 56,357 house sales across the country which was the lowest annual number since the 1991 recession. The sales figure in NSW was 10,220 house sales, a 15 per cent decline from the previous financial year as well as being a record low.

UBS senior economist George Tharenou told the Herald’s Shane Wright that residential construction was set to continue contracting, and that up to 100,000 jobs could be lost from the construction sector as approvals continue to drop. He also said investment across the sector would drop by 10 per cent:  "Our tracking of construction job ads is consistent with 100,000 job losses ahead," he said.

BIS Oxford economist Maree Kilroy also expects a further drop-off in residential construction: "Despite recent stimulus measures, the downwards trend in houses is set to continue over the remainder of 2019 given the weakness in land sales and the lag to the approval stage. Risk to the downside for the apartment market remains with apartment pre-sales remaining weak and build quality concerns escalating," she said.

More forecasts of a construction downturn came from Ben Jarman, senior analyst with JPMorgan, who said it appeared real residential investment had fallen by almost two per cent over the past quarter: "The trajectory of the approvals data into [the] third quarter suggest a similar drag for that quarter, though with dwelling prices doing a little better lately there could still be some moderation in the pace of decline for approvals in coming months."

Recessionary concerns

Fears about a possible recession have been in the news lately, stirred primarily by the trade war now being waged by American president Trump against China. It is worth noting here that both countries are major trading partners with Australia, with China and the United States ranked first and fifth respectively. Their country’s economic health has a direct relationship with Australia’s.

Naturally, with two of our important trading partners feuding with each other, there are possible impacts on our own economy, most of them not very beneficial. And at this point in time there’s a general slowdown in economic activity, both in Australia and worldwide.

Herald journalists Eryk Bagshaw and Shane Wright said Australia’s economy looks set to record its worst annual result in two decades:  “Markets believe there are downside risks to the average forecast growth rate of 0.6 per cent, leaving policy makers facing the worst result since 2000, when the global economy was hit by the collapse in technology stocks.”

So, nothing dramatic just yet, but what if a full-scale recession should happen in 2020 or 2021, and how will it affect the Sydney property market? Yahoo Finance property expert Michael Yardney says that house values aren’t destined to fall even if our economic growth slips.

“While we may have a ‘technical recession’ – a period of temporary economic decline with a fall in GDP in two successive quarters – it is unlikely to lead to significant falls in our property markets; the concern for our property markets would be if people lost their jobs and couldn’t repay their mortgages, but this is unlikely to be an issue.” chief economist Nerida Conisbee, agreed that job losses would be the main issue as it could cause mortgage holders to go into arrears: “It is a little early to say what will happen this time around,” Conisbee told Yahoo Finance.

“Melbourne and Sydney are more sensitive to multinationals cutting jobs and may be hit harder. “If this is the case, it could look like a post GFC-type impact.”

Ultimately there may well be no global recession, as is now being discussed. The USA and China may sort out their differences, and other factors – like Brexit, may happen without causing negative economic ripples around the world. However, a general slowdown in economic activity, both in Australia and overseas, is likely after so many years of steady upwards growth.

Regulatory failures

By now, everybody should be familiar with the failure of the NSW government and local authorities to regulate the building industry. Over the past nine months at least five apartment buildings have been declared ‘uninhabitable’ and more than 600 other high-rise structures have been identified with combustible cladding.

How could this happen? A growing population, fuelled largely by immigration over the past two decades, created a demand for housing in Australia’s capital cities, most notably Sydney and Melbourne. Pressure was on put on state and territory governments by the federal government to free up land and get sufficient housing built, so when developers called for a ‘reduction in red tape’ through cuts to regulation our elected members reacted in what seemed an appropriate manner.

Building certification, formerly conducted by local councils, was handed over to private certifiers, whose frequent lack of experience or qualifications have resulted in some buildings being constructed with faulty materials, shoddy workmanship and faults that include dangerous water penetration and unmet fire safety standards.

The Australian Bureau of Statistics tells us that there have been 259,580 new apartments built in NSW since 2000. A study by Deakin and Griffith universities surveyed buildings constructed after 2003 in Australia’s east coast states, finding more than 97 per cent of buildings in New South Wales surveyed had at least one defect in multiple locations.

Shocked by these and other related findings, Australian state and federal governments commissioned a report on the building industry by lawyer Bronwyn Weir and former senior public servant Peter Shergold. Their report’s 24 recommendations included a crackdown on private certification, and registration of all those involved in the building process. At a meeting in July, building ministers made a commitment to implementation of these reforms.

That takes care of future construction, we can hope, but what about those existing residential apartment buildings with structural defects, including dangerous combustible cladding? The Construction, Forestry, Maritime, Mining and Energy union (CFMEU) has released a report - ‘Shaky Foundations: The National Construction Crisis’, which states: “the cost to building owners and state, territory and federal governments of addressing the structural and safety defects in [affected] buildings will approximate $6.2 billion".

Buildings with structural defects will be an issue well into the future and could impact the housing recovery now underway. Digital Finance Analytics' Martin North says that we’ll see a significant loss of demand in the high-rise sector: “"We know that more people are now not wanting to 'complete' on high rise buildings that they actually committed to buy off-the-plan.

"Those rates of default have doubled compared to where they were … in some [areas] property values in the unit sector are down 30 per cent now from where they were, and we know there's more ahead. I think this is going to be one of the biggest most critical issues for the economy over the next couple years. The high-rise sector is in for a very bumpy ride for a long period of time," he told ABC News.

Options for the Berejiklian government in NSW to address these structural problems include providing support and funding either to individual owners’ corporations or to Sydney councils confronted with buildings with major construction defects. The NSW Building Commissioner David Chandler has said he would possibly recommend low-interest government loans for apartment owners facing significant defects or cladding that needed to be removed, but the government is still formulating its response to the dilemma. We will keep readers advised of developments.

Broad-based land tax - again

Like a bad cold, some taxation proposals just won’t go away. We’ve mentioned in previous articles that there’s a push among state and federal governments to implement a broad-based land tax (BBLT) and do away with stamp duties on housing. The latest push has come from the Housing Industry Association that argues this transfer of tax targets would remove a significant barrier to home ownership and ‘level the playing field’.

HIA economist Angela Lillicrap stated: “Instead of the taxation revenue being paid by just the people who are buying a property in the market, it’s being replaced by everyone who owns property…if you replace stamp duty with an alternative broad-based tax, it would provide a consistent, reliable revenue stream.”

She was speaking about the ACT which is in the middle of a 20-year tax reform which will eventually abolish stamp duty on property transfers and replace the lost revenue with money from a BBLT. As the property boom fades and other state governments lose stamp duty revenues, you can see why the idea appeals to the NSW government which now gets about one-fifth of its taxation income from stamp duty.

The Grattan Institute estimates that a Sydneysider pays $41,789, or 4.1 per cent, in stamp duty at Sydney’s median house price of $1,027,042. Grattan Institute program director of household finances Brendan Coates said stamp duty was an easy, silent tax for governments to apply: “You can ratchet up the rate, you only pay once and you don’t notice it in the same way as a personal income tax,” he said.

Some additional supposed benefits of introducing a BBLT have been outlined by The Guardian’s Ben Oquist: “Long a favourite among economists, the swap is expected to lead to more efficient use of land as it makes it easier for people and businesses to move as their needs change. It also captures some of the improved value of land from public works, so the households that benefit from, for example, the new [ACT] light rail end up paying higher land tax.”

Even Westpac is getting into the act. In late July, Westpac chief executive Brian Hartzer said governments should consider a major overhaul of housing taxation, replacing stamp duty with a BBLT. "The big upfront cost of buying a home – particularly stamp duty – is both a barrier for buyers and a disincentive for people to sell a home that’s bigger than they need (since they would then incur their own stamp duty when they move)," he said.

It’s acknowledged by most players in the property industry that it would be politically difficult to introduce the BBLT, but it’s an issue that has surfaced and resurfaced since it was first proposed ten years ago by former Treasury Secretary Ken Henry in the 2009 review of taxation that he led. We publish updates on the BBLT because it’s likely to become an election issue at some time in our futures – and because it shows no signs of going away.

Wait for the federal Treasury’s next Intergenerational Report, due out in 2020. It’s a forward look at how changes to Australia’s population size and age profile may impact on economic growth, workforce and public finances over the next 40 years. If implementation of the BBLT isn’t put forth as a solution to shortfalls in public funding at state levels it will be a surprise.

As a postscript, we should also mention that the Independent Pricing and Regulatory Tribunal, which sets rates on property, has proposed a shift in the way rates are assessed. This would take the focus away from the present "unimproved value" of a property to the "capital improved value" which takes into account the value of the actual property including the land value and the improvements made to it.

On top of this, some Sydney councils are pushing for owners of expensive properties to pay $500 a year more in rates under a proposal to change the way levies are calculated that is now before the NSW government.

Just like the BBLT, these proposals are politically sensitive and will be given a great deal of consideration before they ever see the light of day. But once they get ‘on the table’ they’re not likely to go away as long as governments at all levels continue to seek new ways to raise revenues.


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‘Now’s the time to buy’: Demand for lending bounces back as market recovers,’ Ellen Lutton, Domain, 9 September 2019
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‘Apartments could be the crack in the housing market recovery,’ Daniel Ziffer, ABC News online, 5 September 2019
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