Market comment: Boom or bubble: what are we seeing?

Sat, 19 Oct 2019

Market comment: Boom or bubble: what are we seeing?Are we really seeing the start of another sustained property market boom? It’s too early to say, although rising Sydney housing prices have certainly been in the news of late. Auction clearance rates have stayed above 70 per cent and house values in Sydney jumped by 1.9 per cent in September. And just to add fuel to the fire under prices, at its October meeting the Reserve Bank cut its prime rate to just three-quarters of a per cent – a new record low.

If the RBA rate cut of just 25 basis points (0.25 per cent) doesn’t sound like much,’s Aidan Devine commented: “Even though the major banks have only passed on about half of the Reserve Bank's latest cut (owner-occupied mortgage rates have been cut by 13-15 basis points), that's enough to give a household with income of $150,000 about another $12,000 to $14,000 in borrowing power.”

As CoreLogic calculates it, the median Sydney house value is now back over $900,000, rising by a healthy $23,000 just in September and finishing up $34,000 above its most recent low point in May. Sounds great, and this means that Sydney house prices have risen by 3.6 per cent since June, although it should also be noted that values are still down by just under one per cent this year.

Some parts of Sydney are clearly outperforming others. CoreLogic’s latest hedonic home value index showed prices in the inner west rose 5.2 per cent over the past three months, going up by 2.8 per cent growth in September alone. Prices in the Ryde region increased by an average 2.9 per cent in that month and by 4.1 per cent for the quarter, while there was growth of just over 4 per cent for the last quarter in the north shore, eastern suburbs, Sutherland Shire and the area surrounding the CBD.

A new Domain analysis found that vendors and agents are holding firm on asking prices. The median discount on a house across the city in August was $30,000, well down on $140,000 in August last year. There is a similar trend for unit sellers, with a median price cut of $25,000, well down on the $100,000 discount the previous year.
But it must be remembered that historically one key driver of rising prices has been a shortage of supply. The number of properties on the market is at least ten per cent lower than a year ago. Fresh listings are down fifteen per cent which is an even more significant statistic.

CoreLogic’s Asia Pacific research director Tim Lawless said the period of improved housing affordability created by the fall in property prices was coming to an end: "If you look at the numbers … we are going to be facing a situation with an undersupply of housing - we are already seeing housing prices rise," he said.

Domain’s research analyst Eliza Owen says that house prices are likely to keep going up  because developers started work on fewer dwellings during the recent downturn: "By the time they get their developments approved and commenced and completed there will be strong demand while we wait for that new supply," Ms Owen said.

According to Louis Christopher, property analyst from SQM Research, the property boom is back: “September’s decline in listings was an abnormal result. Listings normally rise for the first month of the spring selling season. New listings did rise. It’s just that older listings recorded a large decline. It suggests stock is being absorbed at a quicker rate.

“The evidence, by way of the fall in listings, the rise in auction clearance rates and the accelerated rise in asking prices, all suggest that the city has indeed entered into a new housing boom. I think we can expect to record rapid rises in dwelling prices for our two largest cities at least in the December quarter and likely beyond.”

The Spring factor

The first big weekend of the spring selling season attracted a high number of properties on offer as well as achieving a high clearance rate, prompting Domain economist Trent Wilshire to predict clearance rates would be staying strong: “This aligns with recent Domain research that found clearance rates are a good indicator of market conditions regardless of the number of auctions,” he said.

“The clearance rate remained very strong despite more auction activity. Even if the number of auctions continues to rise, clearance rates will likely remain at around 70 per cent this spring.”

The Herald’s Elizabeth Knight says that FOMO (Fear of Missing Out) seems to be a factor in determining the current price rises: “The price rises are being amplified by a lack of supply. Volumes remain relatively low - with fresh listings 15 percent lower than they were a year ago. This can create a sense of urgency among some buyers to get a foothold in the market.”

She sees October as a crucial month for the Sydney market: “In August the property market prices were also strong but came with warnings that this may be the market’s dead cat bounce. The even stronger September rise suggests the bounce may be more sustainable. The high auction clearance rates we are currently experiencing are generally correlated to a rising property market.”

Ms Knight did her calculations and says that if August and September's house price growth rate in Sydney is maintained for the next year, the markets will have risen by a staggering 19.2 per cent, which will be a recovery from all the falls it experienced over the past two years.

This outcome would be quite a bit higher than the kind of growth expected by economic and property forecaster BIS Oxford Economics. The firm’s executive chairman, Robert Mellor, doesn't believe first-time home buyers, who were locked out during the last boom, have anything to worry about: "Some people are saying prices could get back to 10 per cent growth [annually] but I don’t think that’s likely. We are likely looking at only modest rises for Sydney and Melbourne."

Doron Peleg, founder of property researcher RiskWise, expects price rises of between four per cent and eight per cent in Sydney next year and says double-digit growth looks unlikely: "However, in a couple of months, if we see auction clearance rates into the 80 per cent range on increased volumes, that would be an indicator that [double-digit growth] may be possible," Mr Peleg said.

Asset Managers UBS believe the current housing price boom triggered by two RBA rate cuts will run out of steam. UBS economists George Tharenou, Carlos Cacho and Jim Xu said in a note that weak credit growth, little pick-up in new housing development and very low levels of homes listed for sale in Sydney suggest there may not be enough fuel to sustain a lasting boom like the one in 2012-2017.

UBS says that unlike the previous boom, the current uptick in the cycle hasn't seen the same new housing supply surge that normally follows price increases, indicating it's likely to be short-lived or weaker than previously. More broadly, UBS expects the kind of "multiplier effect" from a "real boom" such as the one in 2012-2017 will be muted, given low sales listings and a record low turnover in renovations and other housing-related spending.

Lendlease's chief executive for property in Australia, Kylie Rampa says the residential recovery will unfold over years, not in the next few months. “We think it will flow through over a period of time - we're not expecting a full recovery in a quarter.

"You start to get some price growth then you get some more activity, it all starts building. It will take time. Over the next two to three years we think the market will continue to strengthen.

"We always say 'you go up by the stairs and down by the elevator'," she said.

Speculation dangers?

Domain’s latest figures show that in the three months to August the number of property sales in Sydney is around 17 per cent higher than a year ago. This means that, in seasonally adjusted terms, Sydney property sales have increased by an estimated 40 per cent since the bottom was reached in the three months to February this year. Admittedly, it’s an uptick from a low base, but the increase in sales is encouraging vendors to return to the market.

So buoyant is this market that many property market players are already talking about the possibility of a price ‘bubble’ developing. In its latest quarterly update on systemic issues facing the financial system, the Council of Financial Regulators (COFR) relaxed its concerns about the availability of credit. Despite house prices recovering in recent months, the COFR described conditions in the mortgage market as "subdued," noting that the big four banks had been expanding more slowly than other lenders, and that there had been a soft growth in property investor loans.

"The potential for risks to financial stability from falling housing prices in Sydney and Melbourne has abated somewhat, with prices rising in the past few months," the COFR said in a record of its latest meeting.

Regardless, Wayne Byres, chairman of banking regulator APRA issued a warning to banks that a fresh resurgence of property speculation would be “unhelpful” and urged them to not lower their lending standards to try and generate growth in their loan books: "The downward adjustment in [property] prices has occurred in an orderly fashion and been positive for stability.

“However, it is worth remembering that the original risks we were concerned about in 2014 – high prices, high debt, low interest rates and subdued income growth – have not gone away, and in some cases increased," Mr Byres said in a speech in Melbourne which reflected the squeeze on bank profits from low interest rates that have caused lenders to struggle trying to offset the decline in their lending rates.

Stephen Koukoulas, managing director of Market Economics, expects prices to keep going up due to pent-up demand from first-home buyers and investors.  However, he doesn’t think Sydney will find itself at risk of a ‘bubble’ developing in the coming years: “Yes, Sydney houses are expensive … [but] if people are willing to pay the prices – and they have for many, many decades and prices continually surprise everybody – it’s clearly not a bubble because [they] end with a catastrophic fallout.”

Apartments’ appeal slipping

The recovery in property prices has been uneven with unit prices lagging behind house prices. Concerns over problems including structural cracks and combustible cladding in high-rise buildings have dampened buyer interest, as well as have the effects of a citywide oversupply of new properties.

Agents across Sydney are seeing increased interest in older apartments with growing popularity for buildings from the 1960s and ‘70s, especially those within 10 kilometres of the CBD. Drummoyne real estate agent Craig Stokes says ‘recent concerns’ are behind this renewed popularity: “I think people prefer the older style, with all the negativity around the high rises,” he said. “Certainly, people would prefer to buy old and do it up,” he said. “Also, they’re smaller blocks,”

The market’s downturn and falling prices has squeezed the budgets of many developers with some closing their doors in mid-project. One such developer, Ralan Group, went under owing $277 million to its creditors. Another group that stands to lose from the company’s failures is the Chinese investors who bought off-the-plan units in the firm’s projects.

Some parts of Sydney, most notably those with large numbers of newly built apartment buildings, have been virtually ‘blacklisted’ by lenders who have tightened their mortgage restrictions and stipulated higher deposits on unit purchases, especially for off-the-plan purchases in some suburbs.

Arun Maharaj, CEO of mortgage comparison website HashChing, told the Sydney Morning Herald that he had seen lending restrictions tighten in some high-density areas this year:  "In Sydney, the list of postcodes that have these restrictions is growing ... making loan approvals extremely difficult in high-density areas such as Wolli Creek, Parramatta and Oran Park," Mr Maharaj said.

The lenders’ original concerns were based on a feared oversupply of apartments in those areas, but now a new worry has emerged about construction defects and the possible use of combustible cladding in projects recently completed or still under construction.

Robert Mellor, executive chairman of economic and property forecaster BIS Oxford Economics, says the ability to sell apartments could be one of the factors that keep a lid on the recovery in property price rises: "Developers could struggle to offload some of this completed stock that has not been pre-sold because of [buyer] fears," he said.
Peter White, managing director of the Finance Brokers Association of Australia, said lenders are "quite nervous" and are seeking to reduce their exposure to buildings with known defects: "Lenders run hot and cold all the time in different areas. They’re constantly running their risk ratings. It would be most unlikely if lenders were bullish on these apartments that have had publicised issues - they’ll naturally want to steer clear because of the risk,” he told the Herald’s Josh Dye.

Another issue is the ‘financial health’ of a building’s strata scheme. Intending purchasers of existing properties should always obtain a strata report (or strata search) before signing anything. These reports usually cost a few hundred dollars but can turn up potential problems including inadequate maintenance funds and evidence of building defects.

Forgoing a strata report can be risky, because vendors may not be forthcoming with vital information, according to Strata Reports Victoria director Jane Giacobbe: “The vendor might not disclose to you there’s been a whole lot of water penetration issues or essential services issues they’re trying to get on top of,” she says. “Essential services and water penetration are as high up there as the cladding issue.”

Chinese buyers are back

Tourists from mainland China are in Sydney to shop for more than souvenirs, according to a new survey of Chinese consumers. Property portal Juwai’s survey found that 27 per cent of Chinese tourists intend to look at property during their travels, and Sydney is one of their top choices for a holiday destination.

Some other survey findings that could indicate positive outcomes for the Sydney property market are that 49 per cent of Chinese tourists intend to travel in their July and August holidays and 42 per cent are looking at traveling during the New Year Golden Week in February. And even though in 2017 and 2018 it looked like the numbers of Chinese buyers coming to Australia were on their way down, the latest figures show that visitor numbers have stabilised and are even showing signs of trending upwards.

(Previous research conducted for Juwai showed a 50 per cent increase in the number of inquiries from Chinese buyers looking for retirement properties in the first half of 2019 compared to 2018.)

Juwai spokesperson Dave Platter said that these ‘tourist buyers’ were especially interested in new developments, partly because of the Foreign Investment Review Board’s guidelines affecting non-residents buying properties here. He added that concerns about the build quality of off-the-plan purchases didn’t seem to be a big deterrent for them, and some of the biggest developers in Australia had origins in China and were well-known there.

Chinese buyers from Hong Kong have also been active in the Sydney property market as a result of the chaotic democracy protests in their city. Research from shows that Hong Kong-based searches for Australian properties have risen by 37 per cent since June this year, not surprising since Australia is seen as a safe haven for investments in case the security situation in Hong Kong deteriorates further. says that interest from Hong Kong buyers looking at property in Sydney is concentrated in the Sydney CBD and surrounding suburbs - Haymarket, The Rocks, Millers Point and Barangaroo. Outside the CBD, Hong Kong searches showed interest in Chatswood, Epping, Lindfield and Castle Hill.


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‘They know they’re a good quality build’: Why older units are popular with Sydney buyers,’ Nicole Frost, Domain, 9 October 2019
‘The RBA's cut to interest rates will boost house prices, but that's not the only effect,’ The Conversation, Richard Holden, ABC news online, 6 October 2019
‘Sydney property is booming again as spring listing numbers tank,’ Aidan Devine,, 7 October 2019
‘Bubble risk: UBS names cities around the world where property is most overvalued,’ Kate Burke, Domain, 3 October 2019
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‘Mini housing boom will run out of steam: UBS,’ Su-Lin Tan, Australian Financial Review, 16 September 2019
‘Chinese buyers in Australia: Here for holidays and here to buy property,’ Nicole Frost, Domain, 19 September 2019
‘Hong Kong interest in Aussie real estate surges amid pro-democracy protests,’ Aidan Devine, Daily Telegraph, 14 September 2019
‘Return of housing speculation would be 'unhelpful', warns APRA chief,’ Clancy Yeates, The Age, 14 September 2019
‘Over-supply, shoddy building work and fears of combustible cladding have put a dampener on the unit market,’ Martin Farrer, The Guardian, 14 September 2019
‘Apartment oversupply and construction defects give lenders pause for thought,’ Josh Dye, Sydney Morning Herald, 22 September 2019
‘How to tell whether an apartment building is financially healthy before you buy in,’
Daniel Butkovich, Domain, 27 September 2019
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‘House values jump 1.9 per cent in a month in Sydney and Melbourne,’ Shane Wright, Sydney Morning Herald, 1 October 2019
‘Clearance rates up as more homes hit the market in big Sydney auction weekend,’ Melissa Heagney, Domain, 29 September 2019
‘Sydney's property market is set for a new boom,’ Nick Bonyhady and Jessica Irvine, Sydney Morning Herald, 28 September 2019
‘Bubble fears are back: Property prices threatening to get out of control,’ Elizabeth Knight, Sydney Morning Herald, 2 October 2019
‘Housing risks have 'abated' as prices bounce back, say top regulators,’ Clancy Yeates, Sydney Morning Herald, 23 September 2019
‘Property prices on the rise but return to boom times unlikely,’ John Collett, Sydney Morning Herald, 15 September 2019
‘Sydney home owners’ asking prices on the increase, new data shows, as discounting dips,’ Kate Burke, Domain, 21 September 2019
‘NSW tells councils to cite terrorism to keep flammable cladding locations secret,’ Christopher Knaus, The Guardian, 16 September 2019
‘If incomes don’t keep up with property prices, we’re in danger of another housing bubble ,’
Greg Jericho, The Guardian, 19 September 2019