Market comment: More than a recovery - rates and FOMO drive a new boom

Thu, 19 Dec 2019

Market comment: More than a recovery - rates and FOMO drive a new boomWriting in The Guardian, Martin Farrer, the publication’s UK/US site editor recently posed a headline question: “From freefall to boom: what the hell is happening to Australia’s housing market?” That’s a very interesting question, and this month we set out to answer it for you.

Mr Farrer backed up his editorial question with a reminder of our recent past: “Earlier this year Australia’s notoriously expensive housing market was in freefall. Prices in Sydney and Melbourne had fallen by double digits from their 2017 peak and with credit being squeezed by a nervous banking sector after the royal commission, the bottom seemed nowhere in sight. Sales were at a 21-year low and there was concern that the economy could suffer serious knock-on effects.”

It's almost impossible to believe this was the state of the Sydney property market less than twelve months ago. We’ve just seen the biggest monthly increase in national house prices in 16 years thanks to record low interest rates and a shortage of supply.

According to CoreLogic, dwelling prices across the nation’s capitals shot upwards by 1.7 per cent in November – the biggest monthly gain since 2003.

The figures for Sydney were even more impressive. House values in the city increased by 3.1 per cent in November, taking the median house value to $956,249. This translates to a $37,900 increase through the month, or $1260 a day, with values now up by 4 per cent this year.

A look back in the history books shows that this was the largest monthly increase in Sydney house values since 1988, and house values are now only eight per cent away from the 2017 peak of the market. If current trends continue, we’ll see new record prices by April 2020.

Incidentally, CoreLogic also calculates a median dwelling price that combines units and houses. Sydney still tops the list across Australia with a median dwelling price of $840,072 – well ahead of second place Melbourne at $666,873 and Brisbane’s $497,491.

It should be noted that the rebound in prices is stronger in Sydney’s more expensive areas with the Hills District and the city’s inner west outperforming lower-priced suburbs. Overall, the quarterly price rise in the most valuable quarter of Sydney properties was 7.4 per cent, versus 3.8 per cent across the lower quartile.

Domain tells us that some suburbs are already back at their boomtime prices, such as North Richmond and Green Valley, while others have even increased beyond their peak – Balgowlah in the northern beaches has grown 0.38 per cent or $7500 from its 2017 peak price of $1,950,000. Avalon Beach houses recorded a 4.9 per cent increase or $90,000 since the suburb’s 2018 peak price of $1,810,000.

But will it last?

CoreLogic's head of research Tim Lawless told the Herald’s Shane Wright that property markets are responding to several positive factors including low interest rates and the end of uncertainty over tax policy in the wake of the Coalition's victory in the recent federal election.

"The synergy of a 75 basis points rate cut from the Reserve Bank, a loosening in loan serviceability policy from APRA and the removal of uncertainty around taxation reform following the federal election are central to this recovery," he said.

"Additionally, we're seeing advertised stock levels persistently low, creating a sense of urgency in the market as buyer demand picks up. There's also the prospect that interest rates are likely to fall further over the coming months and an improvement in housing affordability following the recent downturn are other factors supporting a lift in values."

Mr Lawless said he believed the current breakneck pace of price increases in Sydney was unlikely to be sustainable for long, even if interest rates fell further.

"Annualising the growth rate over the past three months implies the national index is already tracking well above double-digit annual growth (+15.3 per cent), while Sydney and Melbourne dwellings are tracking around the mid-20 per cent range for annualised capital gains based on the most recent three-month trend," he said.

"Considering wages and household income growth remains low, economic conditions are losing momentum and housing affordability is once again worsening (from an already high base in the largest cities), there are likely to be some headwinds in maintaining such a fast recovery."

The Herald’s Shane Wright, who’s covered the latest bust-to-boom turnaround for his paper in great detail since it began, agrees: “Clearly, such increases in prices cannot be sustained. Sydney is growing at an annualised rate of almost 40 per cent and Melbourne at almost 30 per cent, which – if continued – would see the median price hit $1.3 million and $1 million respectively by this time next year,” he wrote on 3 December.

However, AMP Capital's chief economist Shane Oliver noted that current auction clearance rates point to price gains of 10-15 per cent in Sydney in 2020: "The Australian property market — particularly Melbourne and Sydney — has gone from boom and FOMO in 2017 to slump and FONGO last year and now looks like its heading back to boom again with FOMO returning."

(FOMO is fear of missing out on a rising market by delaying a purchase; FONGO is fear of not getting out of a falling market by selling.)

And the always astute Louis Christopher, managing director of SQM Research switched on his crystal ball and predicted Sydney dwelling prices to rise between 10 and 14 per cent over 2020:  “Recent comments by APRA are basically along the lines that they actually welcomed the price rises in Sydney and Melbourne this year because that will stabilise the risks to the economy,” he said.

“Prior to the May election, the market was pricing in, or was quite concerned about, increased property taxes through increased capital gains tax and changes to negative gearing. [Afterwards] the outlook was suddenly a lot more positive for the market … on top of that we had cuts in interest rates, and APRA loosening credit conditions.”

Clearance rates, volumes rising

A key metric in assessing the health or otherwise of the housing market is the clearance rate at the weekly property auctions. To look at Sydney’s auction clearance rate in recent weeks is a glowing picture of health with rates higher than last year, even as more houses are listed for sale each week.

AMP’s Shane Oliver told Domain the Sydney market had passed its first major test: “When the recovery started, it was on low volumes [of homes for sale]. Volumes are still well below boom-time levels, but it looks like it’s back to a more normal market.

But the present numbers of properties on offer are still low relative to those in the booming first half of 2017 and Domain chief executive Jason Pellegrino has warned an acute shortage of properties for sale has led to the toughest conditions for property since the early 1990s when Australia was last in recession.

"It's an extraordinary period," Mr Pellegrino told The Sydney Morning Herald and The Age at Domain's annual general meeting, adding that real estate agents were also facing the same pressures of fewer listings. He also noted how difficult the current market is and admitted it was "weak" on the supply side and "remains challenging” but said he had seen some improvement month-on-month from July to October.

Success brings some concerns

Tim Lawless, head of research for property data firm CoreLogic said that if property prices continue to rise at the rate they have been rising over the past three months, national dwelling values could hit new record highs within in just six months. He says Sydney’s housing market is on track to post a full recovery within six months if the current pace of growth continues.

Australia's housing market is recovering with amazing speed - loan approvals, clearance rates and prices have all rebounded strongly over the past six months. Some economists have expressed concerns after seeing the Australian Bureau of Statistics figures that showed the value of new home loan approvals rose for a fourth consecutive month in September, driven by another surge in lending to owner occupiers.

These ABS figures showed that the value of total new mortgage approvals rose 1.3 per cent to $18.93 billion (seasonally adjusted) which was the highest monthly total since August last year. Meanwhile, the value of new investor loans reversed much of a lift in September, falling 4 per cent to $4.69 billion, leaving the decline from a year earlier at 13.6 per cent.

Year-on-year, new finance rose 0.1 per cent – a small rise but the first positive annual increase since November 2017.

"Growth in new mortgage commitments has been explosive since mid-year," JP Morgan economist Ben Jarman said in a note to clients.

"The upturn in new lending commitments is pronounced enough to suggest annual housing credit growth will be rising again by early next year," he said, adding that we could see APRA impose renewed macroprudential restrictions to prevent further growth in household leverage.

"We do not think regulators have much appetite for credit growth overshooting income growth on a sustained basis," he concluded.

Interest-only legacy

One holdover from the previous property price boom – interest-only loans, have become an important factor in today’s fast-moving property market.

In the next three years something like half a trillion dollars in interest-only loans, taken out when money was easier to borrow and the banks were more flexible on deposit requirements, will need to be refinanced, or ‘reset’.  This means that instead of making payments of the interest only on their loans these borrowers will need to refinance their properties and begin repaying both the interest and the principal they’ve borrowed.

At a time of rising prices this doesn’t sound too serious, However, the RBA estimates that the move from repayments of interest-only to repaying principal and interest will cost the average borrower an extra 30 to 40 per cent.

Many investors have built up sizeable portfolios of properties using interest-free loans to fund their holdings. If those with three or four properties can’t refinance their portfolios with new interest-free loans they could easily be up for repaying back several thousands of dollars every month.

This is going to cause problems for some borrowers and could compel them into a forced sale of their properties. These sales, in turn, could have an impact on property prices. Economist Saul Eslake told ABC News that so far there hasn’t been an increase in loan defaults or fire sales of investment properties, but the risk is there.

"It could be that the people for whom the transition is going to be most difficult is the cohort that is yet to make the transition, whereas those who could do it comfortably did it sooner rather than later," he told 7.30.

"Indeed, some of the Reserve Bank work suggests that a number of people have transitioned ahead of the legal requirement to do so. So, we'll have to wait and see how difficult it is for the remainder."

Incredible shrinking houses

A recently conducted study for CommSec (Commonwealth Securities) had an interesting finding, namely that there’s a trend for houses to become smaller and for units, townhouses and villas to expand in size.

Australia is still building the second-biggest homes in the world, just one position behind the market leader, the United States. The average size of all homes – houses and apartments, is 189 square meters.

According to the study, houses built in 2018 dropped to their smallest size in 17 years with an average area of 228.8 square metres, down 1.3 per cent on the previous year. Apartments, on the other hand, grew to an average 128.8 square meters, a small increase on the previous year.

Given the shortage of land available for development in Sydney, the shrinking size of houses and the growth in the number of apartments is understandable. Population’s growing and so is the desire of the city’s residents to live closer to services and amenities. Australians are willing to give up living space for better proximity to facilities like shopping centres or services such as schools.

The past points to the future

Economics and politics play a big part in our housing market and remind us of Newton’s Third Law which says that for every action there’s an opposite and equal reaction. For instance, the slowdown in house prices after the mid-2017 peak dramatically cut consumer spending which put a big hole in retailers’ turnover and eventually led to slashed expenditure on building construction and reduced building investment.

The Reserve Bank began to trumpet its own solutions to this threat, calling on the federal government to stimulate the economy with, among other things, a massive spend on infrastructure projects. RBA governor Philip Lowe made his position clear: “We need to remember that monetary policy cannot drive longer-term growth, but that there are other arms of public policy than can sustainably promote both investment and growth”.

This was at odds with the newly elected Liberal government that was targeting a budget surplus and wanted a loosening of the credit restrictions implemented as a result of the royal commission into the banks.

So, the RBA reached for the traditional stimulus trigger and delivered three interest rate cuts, all the time warning the government that making loans easier could lead to another cycle of excessive borrowing and increased consumer indebtedness. The Bank also cautioned that it was about out of ammunition for further interest rate cuts and that other economic tricks such as QE (quantitative easing) might have to be used as last-ditch tools.

Especially concerning were the latest construction figures from the Bureau of Statistics which told us that the volume of construction work in Australia has fallen for the fifth quarter in a row. The amount of engineering construction taking place in the September quarter was as low as it has been at any time in the past 12 years.

In fact, the 8.1 per cent annual fall of total construction is the biggest annual fall since the middle of 2016, making it clear that the residential building boom that began with the interest rate cuts from November 2010 is now over.

As the end of 2019 approached the government reprised its position which strongly believes in using interest rates as a stimulus and says it’s still possible to generate a surplus, and never mind a big infrastructure splurge at this time – the government’s tax cuts will be enough to get consumers to open up their pockets and start spending again.

As for the ease of borrowing funds, NAB economist Alan Oster said it was unlikely credit would become harder to access: “There’s no credit growth at the moment. You’d need a very strong pick up in prices,” Mr Oster said. “You can’t just raise it for just Sydney and Melbourne; you have to do it across Australia. It’s not going to happen in the next 12 months.”

Mr Oster told Domain that the market’s recent strength demonstrated the significant role that lending restrictions implemented by the Australian Prudential Regulation Authority played in moderating prices: “That feeds into the idea if there isn’t much of a restriction on these things then [prices] keep going up.”

The upshot of all this means our present low interest rates will stay low for the foreseeable future, contributing to increased borrowing and greater demand for Sydney property. Just like 2012, this means higher property prices are on the way.

Why 2012? Looking back to what we wrote in ‘Market Comment’ in December of that year, we can read the following: “The end of 2012 has set the stage for a buoyant year ahead with Sydney's best spring selling season since 2009.”

We reported then: “At its December meeting the Reserve Bank cut the cash rate by another quarter of a percent to three per cent - its lowest level since the global financial crisis. This was the RBA’s response to a flood of soft economic data that included growing fears of unemployment, a slowdown in mining activity, a weakening of China’s growth forecast and slow retail sales.”

If this sounds familiar, how about this from our January 2013 ‘Market Comment’: “St George Bank economist Janu Chan told Bloomberg that Sydney home prices could rise by 5 per cent to 10 per cent in 2013. This is a bit higher than analysts from ANZ and CBA who predict average gains of between 3.5 per cent and 5 per cent, but they nevertheless agree on the direction property prices will take.”

Conditions in the Sydney property market are now much the same as they were at the end of  2012: A downturn in property prices had made Sydney property more affordable, interest rates were low and getting lower, there was a shortage of stock on the market, new construction was in the doldrums and even auction clearance rates were beginning to rise after a slowdown.

We concluded in a final quote from this column in January 2013: “Forecasters - whether analysts, economists or even astrologers, broadly agree that the upswing will continue in 2013 with Sydney property prices rising somewhere from 3 per cent to 5 per cent or quite possibly even higher.”

And now, it’s on again!


‘Sydney, Melbourne house prices post fastest quarterly growth in three years, Eryk agshaw, Sydney Morning Herald, 11 December 2019
‘Further price rises’: The Sydney suburbs that have bounced back to boom-time prices,’ Tawar Razaghi, Ellen Lutton, Kate Burke, Domain, 8 December 2019
‘Sydney house market: Sydney is a sellers’ market as house prices grow at fastest rate since 1988,’ Matt Bell,, 7 December 2019
‘Surging house prices, low rates risk tipping Sydney and Melbourne back into property frenzy: economists,’ Jim Malo, Domain, 5 December 2019
 ‘Dwelling prices tipped for double-digit gains in Sydney, Melbourne: report,’ Elizabeth Redman, Domain, 14 November 2019
‘From freefall to boom: what the hell is happening to Australia's housing market?’, Martin Farrer, The Guardian, 16 November 2019
‘Lack of information on apartment defects leaves whole market on shaky footings,’ Martin Loosemore, Bill Randolph, Caitlin Buckle, Hazel Easthope, Laura Crommelin, (UNSW), Domain, 26 November 2019
‘Construction figures yet more evidence that the economy needs the government to step in ,’  
Greg Jericho, The Guardian, 28 November 2019
‘Australian housing values enjoy huge growth with the largest monthly gain in 16 years,’ Kirsten Craze,, 3 December 2019
‘RBA, government walk tightrope on soaring house prices,’ Shane Wright, Sydney Morning Herald, 3 December 2019
‘Sydney and Melbourne house values surge on lower interest rates,’ Shane Wright, Sydney Morning Herald, 2 December 2019
‘Economists warn on debt risks as mortgage lending heats up,’ David Scutt, Sydney Morning Herald, 10 November 2019
'Extraordinary period': Domain boss likens tough property market to 1990s bust,’ Jennifer Duke, Sydney Morning Herald, 11 November 2019
‘These opportunities don’t come up often’: Big sales at higher end of the auction market in Sydney and Melbourne,’ Melissa Heagney, Domain, 11 November 2019
‘Houses shrinking, but apartments growing in size in Australia,,’ Ulilses Izquierdo, AAP, 11 November 2019
‘First home buyers could be forced out as housing markets enjoy uptick, banks may loosen lending,’ Ian Verrender, ABC News online, 4 November 2019
‘Interest-only loan reset hurting borrowers despite the rate cuts,’ Carrington Clarke, 7.30, ABC News online, 28 October 2019