Market comment: A new year lies ahead and falling prices are left behind

Wed, 13 Nov 2019

Market comment: A new year lies ahead and falling prices are left behindThere’s no longer any doubt about whether Sydney property prices are once again enjoying the uplift from what can only be described as a ‘boom’. The market has recorded its fastest turnaround in decades, with house prices rebounding almost $50,000 last quarter, as shown by Domain’s September House Report.

This new property boom is producing strong results in Sydney’s auction markets weekend after weekend. After a two-year downturn, house prices have now regained fully one-third of the value they lost, and the city’s median house price is back up over the million-dollar mark with a rise of 4.8 per cent to $1,079,491.

Domain’s latest figures show that Sydney’s north west has had the steepest quarterly rise, up 9.7 per cent, with a new median house price of $1.25 million. The city’s south and inner west suburbs also recorded strong results, with increases of 7.1 and 6.9 per cent respectively.

Unit prices lag behind in most areas, although the northern beaches experienced a 13 per cent rise and the lower north shore saw a 5.4 per cent increase so it’s not all bad news in this sector.

The previous housing boom lasted about six years, from November 2011 to mid-2017, and Sydney was the main beneficiary with prices rising by 70 per cent, according to

Is this new boom sustainable? A couple of months ago it wouldn’t have seemed realistic to forecast continued rises into 2020, but now there’s a growing confidence that this strengthening recovery will be a feature of the new year ahead.

Domain's senior research analyst Dr Nicola Powell said a number of factors are fuelling the new price rebound: "The ability to service a mortgage has fallen, prices are still below their peak … [and] we have seen a subtle relaxation of lending," Dr Powell said.

Ramon Mitchell, director of Gault & Co Property Advisory, told that competition has strengthened among buyers, with bigger offers being made and faster sales completions: “There’s been increased traffic through open house inspections and there seems to have been much higher conversion of these to registered bidders on auction days,” Mr Mitchell said.

“You can see how this has played out in consistent improvement in auction clearance rates including sales prior to auction. There’s no doubt this is having an effect on values; they’re increasing across most of the markets we monitor.”

AMP chief economist Shane Oliver said the market was buoyed by more buyers and fewer properties at auctions, but he also thinks the results could flatten out as more vendors returned to the market: “Sydney’s sales have picked up, but they’re still pretty subdued to what we see in a normal market,” Dr Oliver said.

Epping estate agent Justin Keenan explained the rise: “The first half of the year saw buyers out "just looking" or chasing a bargain; the last four weeks has seen those same buyers shift into buying mode and realising they are facing strong competition from buyers keen to secure a home before Christmas.”

It can also be argued there’s ample room for even more expansion as prices are still well below their 2017 peak - down 9.9 per cent for houses and 10.6 per cent for units, while population growth and therefore potential future demand shows few signs of slowing.

Bank on rising prices

NAB chief economist Alan Oster thinks it will be two years before prices return to their 2017 peak: “Anecdotal evidence suggests that [price growth] may be softening slowly,” he said. “At the end of 2021 you might be getting back to that sort of level.”

David Plank, ANZ’s head of Australian economics, is a bit less cautious, saying his bank expects annual house price growth to be at 12 per cent per annum by mid-2020: “House prices have come back strongly; the question is how much of it continues and also what happens to [government] policy?”

ANZ senior economist Felicity Emmett told the Sydney Morning Herald that the property market was recovering much faster than expected: "The change in sentiment was driven by the combination of lower rates, easier access to credit, and increased certainty around housing taxation. Together, these factors have helped to shift sentiment from one of pervasive negativity to broad optimism."

Moody’s Analytics economist Katrina Ell is another property market optimist. “Our long-held baseline forecast—that the trough in the national housing market has occurred—is evident in improving activity in the Sydney and Melbourne markets, where 60 per cent of activity takes place,” she told Jessica Yun of Yahoo Finance.

Ms Ell says house values will rise by an estimated 7.7 per cent next year and 7.6 per cent in 2021, and apartment values will jump 7.9 per cent in 2020 and even further at 8.4 per cent in 2021: “Improved auction clearance rates in these cities, alongside the return of monthly dwelling value growth, according to CoreLogic data, support the outlook for ongoing improvement.”

Supply and prices

Despite all the concerns about construction defects, Sydney unit prices actually showed an increase of 2.6 per cent in the August-October period, rising to a median price of $694,840. The Domain House Price report for the September quarter showed gains were mostly in the northern beaches, lower north shore, inner west, city and upper north shore.

Domain research analyst Eliza Owen said some of these areas have experienced a lot of new supply with higher prices than the properties that have been replaced: “[This] may be pushing up the median because you’re introducing newer, more expensive homes; as unit prices have bottomed out … people might be trading up, so medians start to reflect something, bigger, newer or nicer.”

JLL Australia’s head of residential research, Leigh Warner, said increased apartment supply putting downward pressure on prices was unlikely to last much longer: “[Supply] is probably at around the peak … and it will fall away quite sharply,” Mr Warner told Domain. “There’s residual stock to soak up around Sydney, [but] it’s not a huge oversupply in the broader perspective.”

He expressed his thoughts that a massive decline in building approvals – down 50 per cent since their peak – was due to weaker demand and funding issues for developers. Warner added that Sydney would probably experience an undersupply within two years.

Jack Derwin, writing on Business Insider, commented that today’s conditions, with demand again outstripping supply, reflected a time not so long ago: “Those same conditions led to prices running away for years, pricing many out of the market entirely.  Prices in [Sydney] shot up 75 per cent between 2012 and 2017.”

He added: “The major problem with a dwindling new supply of housing is that it takes a long time to get it going again, particularly when it comes to the kind of high-density housing required in Sydney and Melbourne for example. That creates long lead times where momentum, both up and down, takes a while to build and a while to actually come to fruition.”

Construction concerns

The state of the housing construction industry is a dark cloud on Australia’s economic horizon, according to the Reserve Bank of Australia. The Bank’s deputy governor, Guy Debelle, told a Sydney audience that there was a sizeable downturn underway across the construction sector that was becoming a drag on the overall economy.

He forecast a seven per cent drop in housing investment over the next year and warned there was a “real risk” the drop could be larger, taking at least one percentage point off Australia’s total economic growth.

"The typical lags between the sale and construction of new dwellings imply that the decline in dwelling investment will continue for some time, despite the recent signs of stabilisation in the established housing market," Dr Debelle told the CFA Societies Australia conference.

He said that while residential construction had slowed, demand was still being driven by population growth and, despite some pockets of oversupply in Sydney, it will take some time for supply to catch up with demand: "The growth in demand without a meaningful supply response will lead to a larger price response," he said.

Investors, it seems, are still reluctant to borrow money to put into property. September's RBA data shows that overall lending is happening at a sluggish pace, with annual credit growth of 2.7 per cent the lowest since 2011.

ANZ chief executive Shayne Elliott said his bank was looking at ‘lowering its hurdles’ for investors in a bid to stimulate more borrowing. He cautioned that the current global trend to lower – sometimes even negative, interest rates carries risks: "Credit conditions are benign, but will inevitably turn at some point," he said.

JP Morgan's Ben Jarman said he thought it was unlikely the slowdown in building construction had bottomed out: "Building approvals have been very weak lately, with the annual rate at -19 per cent over the year, and levels down 39 per cent from the peak of the cycle around two years ago," he said.

"The lags from better price outcomes, the weakness of bank lending for new build, and the significant pipeline of homes still to be completed and sold suggest that the turning point in the home construction cycle is still some way off," Mr Jarman said.

Troubled towers

An ABC report on the 7.30 program told viewers it was mostly bad news for off-the-plan apartment buyers from the boom times of 2016 and 2017. Using CoreLogic’s August data, reporters Tracy Bowden and Kirsten Robb found that 60 per cent of the newly constructed apartments purchased off-the-plan in Sydney were worth less at completion than their original purchase price.

CoreLogic's head of research, Tim Lawless, said when many of these apartments were sold off the plan the market was very different: "We were seeing values rising at about 15 to 20 per cent per annum. Now cast your mind forward to 2019 and we've seen prices come down in Sydney by 15 per cent.”

He said there were two main reasons for the price falls. The first was a ‘significant oversupply’ in the high-rise sector; the second was concerns around construction quality, remediation costs and flammable cladding.

Propertyology, a company that researches property markets for investors, found that, while house prices in Sydney grew by 100 per cent over the 10 years to May 31 this year, the prices of apartments in suburbs dominated by high-rise properties have risen by less than half those of houses in many suburbs.

Propertyology’s managing director and head of market research Simon Pressley told The Age’s John Collett that a huge number of "Lego" high-rise apartments had been built over the past 20 years: "This poor performance has nothing to do with the structural and cladding problems that are coming to light, but that is likely to compound the underperformance even further," he said.

A survey by Property Investment Professionals of Australia (PIPA) found that just five per cent of property investors intended to buy off-the-plan units or house and land packages. In 2018 the figure was 6.4 per cent. PIPA’s chairman Peter Koulizos said that investors understand there can be an oversupply of apartments, but publicity on construction defects in some high-rise apartment blocks had slowed demand.

Meanwhile, the NSW Government is working on a Design and Building Practitioners bill that NSW Better Regulation Minister Kevin Anderson calls a “monumental step in the reform of the building and construction industry".

"People should feel confident they can enter the housing market in NSW knowing their home has been designed and built in accordance with the Building Code of Australia,” the minister said.

However, the bill is not destined to provide an immediate boost in building market confidence because it will only begin to apply to new buildings after about 2022 and will have zero impact on existing housing stock.

The University of NSW’s Geoff Hanmer, writing in the Sydney Morning Herald, said the bill’s approach is the wrong way around: “Ensuring that buildings are built correctly in the first place is more cost effective and less disruptive than fixing them up afterwards, particularly where the provision of access to upper floors of tall buildings can be so expensive; a $2 flashing failure repeated over 30 floors can become a $2 million rectification project.”

Good news for tenants and first home-buyers

As property prices began to fall, and a clutch of new apartment buildings hit the market, the cost of renting a house or unit in Sydney also started slipping. The latest Domain Rental Report shows that tenants are enjoying the benefits from the city’s investment driven property boom which has resulted in an oversupply of rental properties.

The Report found that house rents are lower than they were five years ago in 55 suburbs, and about 70 per cent of suburbs had unit price falls, but there’s a catch. “It’s the strongest annual decline in about 15 years,” said Domain analyst Eliza Owen, agreeing that the 2013-2017 investment boom had put downward pressure on the cost of renting.

“[However] I think we’re at point where rents may start to go back up. [There’s] stronger email inquiry for rental properties, the vacancy rate has trended down … and purchase prices are starting to rise, so landlords might seek stronger returns.”

The Coalition has finally come out with some details of the first-homebuyer deposit scheme it promised at the last election that will let up to 10,000 eligible buyers enter the property market with a five per cent deposit - with a $700,000 cap on houses in Sydney. This plan intends to spare buyers the economic pain of having to come up with the standard 20 per cent deposit as the federal government will guarantee the difference.

The scheme will begin in January next year, when eligible buyers will be able to apply the government’s specified lenders. Even though details are still sketchy, the ALP has made a commitment to match the scheme’s benefits, so even if the government changes hands the fundamentals will remain in place.

Ken Morrison, CEO of the Property Council of Australia, said it’s important that the elements of the scheme are appropriate for off-the-plan apartments and house-and-land packages: “The scheme comes at a time of declining construction levels for new housing which has an impact on jobs, housing affordability and supply,” he said in a statement.

RateCity’s research director Sally Tindall was also cautious about the effects of the scheme, telling The Guardian that a 30-year mortgage with a “wafer-thin deposit” is a recipe to pay “thousands more in interest to the bank over the life of the loan”.

RateCity’s calculations show that buying a $500,000 property with a five per cent deposit instead of 20 per cent will cost an extra $58,774 over the life of a 30-year loan: “APRA [the Australian Prudential Regulation Authority] has spent the last four years telling the banks to be cautious of lending to Australians with low deposits,” Ms Tindall said. “Now the major political parties are actively encouraging it.”


‘Investors still baulking at property market, with more apartments in the pipeline,’ Stephen Letts, ABC News online, 1 November 2019
‘Australian property: New record housing boom for most capital cities ‘just months away’, industry data reveals,’ Kirsten Craze,, 9 November 2019
‘Economists warn on debt risks as mortgage lending heats up,’ David Scutt, Sydney Morning Herald, 10 November 2019
‘Buyers more confident,’ Justin Keenan, Wiggins Keenan Investor newsletter, 28 October 2019
‘The 17 Sydney suburbs bucking the trend with rising unit prices,’ Kate Burke, Domain, 26 October 2019
‘Sydney suburb rents drop by up to one-quarter as prices continue to fall,’ Kate Burke, Domain, 12 October 2019
‘New property boom looks imminent with a range of indicators pointing to price growth,’ Shannon Molloy,, 31 October 2019
‘Australia’s house prices have rebounded by up to $3000 a week,’ Charis Chang,, 14 October 2019
‘Knowing who to blame is cold comfort to owners of defective apartments,’ Geoff Hanmer, Sydney Morning Herald, 29 October 2019
'No-go' lending zones: Development defaults rise in Sydney and Melbourne,’ Carolyn Cummins, Sydney Morning Herald, 23 October 2019
 ‘The ‘investor markets’ seeing big price falls in Sydney’s west,’ Kate Burke, Domain, 16 October 2019
‘Here’s where Australian property prices are going in 2020,’ Jessica Yun, Yahoo Finance, 30 October 2019
‘Sydney and Melbourne house prices will soon be growing at double-digit rates,’ Shane Wright, Sydney Morning Herald, 18 October 2019
‘Sydney property market records fastest rebound in decades,’ Kate Burke, Domain, 24 October 2019
‘Government announces price caps for first-homebuyer deposit scheme,’ Australian Associated Press, The Guardian, 28 October 2019
‘Strong results could flatten out as more homes head to auction in Sydney,’ Melissa Heagney, Domain, 21 October 2019
‘The RBA is anticipating a housing shortage and another crazy price boom in markets that really don't need it,’ Jack Derwin, Business Insider, 18 October 2019
‘Sydney high-rise apartment prices lag houses by 50pc in some suburbs,’ John Collett, The Age, 13 October 2019
‘Sizeable downturn': RBA warns housing will weigh on economy for another year,’ Shane Wright, Sydney Morning Herald, 17 October 2019
‘Majority of off-the-plan apartments worth less than purchase price, data shows,’ Tracy Bowden and Kirsten Robb, 7.30 Report, ABC News online, 21 October 2019