Market comment: A new decade with new highs in the year aheadWed, 15 Jan 2020
Australia’s capital city property markets have enjoyed a pretty good end to 2019, with five of eight finishing the year showing price rises. Overall, national average dwelling prices rose 1.1 per cent in December and 2.3 per cent over the full year. Sydney and Melbourne were the top performers, both with annual gains of 5.3 per cent, although only Hobart and Canberra managed to rise above their previous record highs.
Tapas Strickland, director of economics and markets at National Australia Bank, told ABC News that the national gains meant prices were now 3.1 per cent below the all-time high reached in 2017, with Sydney 6.4 per cent away from its previous high: "Assuming price growth remains solid into 2020, then house prices are set to exceed their prior peaks by early to mid-2020," he said.
CoreLogic’s figures show that when the clock ticked over at midnight on New Year’s Eve and 2020 began, the typical free-standing Sydney house was worth $974,000. This is quite a drop from the peak of $1,060,000 back in July 2017, but still an uplift from the market’s bottom price of $865,000 in June 2019.
Tim Lawless, Head of Research for CoreLogic Asia Pacific, said his firm’s calculations show that Sydney dwelling prices rose 5.3 per cent in 2019 after they’d tumbled 8.9 per cent in 2018. The renewed upwards trajectory of the Sydney market’s prices strengthened at the end of 2019 with gains of 2.7 per cent in November followed by a rise of 1.5 per cent in December.
The return of Sydney freestanding house values to above the million-dollar level will happen soon, Mr Lawless predicted: "It's been quite a turnaround," he told the Sydney Morning Herald. "Prices have rebounded much faster than anyone would have expected."
He estimated that Sydney’s median house value would exceed a million dollars by February, and said his firm expected home values to increase by ten per cent in the 2020 year, propelled by renewed interest from investors.
So rapid has been the property market’s recent recovery that it’s even outstripped the NSW government’s most optimistic forecasts. Despite the drought, the Berejiklian government is now anticipating a surplus of $700 million, although some of this will no doubt be taken to cover costs related to the state’s many recent bushfires.
Admittedly, the government’s original forecast back in June 2019 was for a surplus of a little more than $1 billion, but lower than expected GST revenues have been offset to a great degree by an unexpected lift in stamp duties from property transfers: "Forward-looking indicators, such as Sydney auction clearance rates, suggest price growth will continue to strengthen in 2020," said a year-end budget review released by NSW Treasurer Dominic Perrottet.
"A rebound in house prices is expected to positively impact household consumption through positive wealth effects and will encourage a return to growth in dwelling investment from 2021-22," it said.
Ten years of growth
It’s not that these recent increases in property values are anything new. Craig James, the chief economist at Commonwealth Securities (CommSec), told ABC News that Sydney home prices were up 66.7 per cent over the decade: "Wealth is at record highs and incomes are still running faster than consumer prices," he said.
Domain’s Kate Burke, whom we’ve often quoted in these pages, took a decade’s end look at the past ten years and came up with some interesting historical details about how the Sydney property market has changed in the years since 2010.
She began with a reminder that at that time the Prime Minister was Kevin Rudd and iPads hadn’t yet been released, while Sydney’s population was just 4.58 million people and the median house price was under $650,000.
“The city recorded double-digit annual house price growth for the four quarters to September 2010 and, while prices dropped slightly the following year, it was not for long, with growth returning by September 2012,” she wrote.
“That was the beginning of sustained property price rises, which continued until the mid-2017 market peak when the median price reached about $1.2 million and the housing affordability crisis reached fever pitch.”
Ms Burke said that Sydney’s population grew by more than 650,000 people over the decade and more than 260,000 new homes were completed across Greater Sydney over the past 10 financial years: “Fast forward through the decade — 15 interest rate cuts, five prime ministers, a property market boom and a bust later — and Sydney’s median is, once again, back on the rise.”
Her colleague, Domain economist Trent Wiltshire, said there were a number of factors that drove the market over the decade, including interest rates, population growth and levels of homebuilding: “Interest rates fell, the population grew, but it took a while for construction to pick up, which it did from 2014 and 2015,” he said.
Ms Burke quoted Stephen Koukoulas, managing director of Market Economics, who agreed that it had been a “roller coaster” of a decade: “There were ups and downs, but basically the drivers have been strong population growth [and] the lowering of interest rates.
“With limited supply and growing demand …. it’s no surprise that on average the basic trend is a compound increase of 5 per cent on average, annually,” he said, commenting that regulatory changes from APRA, slow wage growth and unemployment rates had also impacted the cycle.
And what did we say ten years ago in these very pages in our ‘Market Comment’ of 25 January 2010? To quote from our article entitled “The crystal ball is crystal-clear”:
· “2010 will be an interesting year in real estate, especially in two areas – property prices and the cost of renting. What happens in the next twelve months will lay the foundation for at least the next three to five years.”
· “Indications are already clear that Sydney property prices will rise and so will weekly rental rates.”
· “A shortage of vacant land, combined with high levels of taxes and charges, ensures a continuing decline in new dwelling approvals.”
· “Unless something intervenes in the scheme of things, we can expect to see a continuation of this scenario until at least 2013, and for those who own property it’s a very positive outlook.”
The year ahead
There’s a generally optimistic view of the Sydney market for 2020 held by most property experts, although the unexpectedly rough and sudden drop that occurred after the 2017 peak has caused a kind of residual caution that impacts many forecasts.
We have just experienced the fastest turnaround in the market’s history, with prices rocketing upwards and auction clearance rates to match. It’s likely that both buyers and sellers will see these conditions continue for at least the first half of the year.
Mortgage broker Keegan Rezek from the Lending Alliance said the overall volume of home loan applications had picked up: “There is a lot of activity … a lot of the banks are vying for business and pricing across the board, that’s the main driver,” Mr Rezek told Domain, adding that the First Home Loan Deposit Scheme was fuelling interest, too.
Stephen Koukoulas, managing director of Market Economics who is quoted elsewhere in this article, believes that Sydney property prices will continue their upward trajectory, despite slow wages growth: “There’s plenty of momentum there,” he said, noting the sharp decline in building approvals may even result in a shortage of properties this time next year.
“You’ve got all systems suggesting double-digit growth [in 2020]. We’ll regain peak levels pretty soon … by March or April the market could hit fresh highs for prices and probably keep going.”
Ray White NSW chief executive Jason Andrew told Domain’s Tawar Razaghi: “We’re seeing phenomenal activity right across Sydney but even into the summer…the results are flowing on quite incredibly. We see no reason for that slowing down into the new year.”
Mr Andrew also said the high levels of activity could continue into the second half of the year if significantly more housing stock didn’t enter the market: “It might continue that momentum; then we might be in for a fabulous 2020 … [or] it might just be an okay winter and plateau towards the end of the year.”
Another possible mid-2020 moderation in market conditions was mentioned by AMP Capital’s chief economist Shane Oliver who says affordability will become an issue again after Sydney prices could hit record highs in May: “They’ll continue to grow through the year because we’ll be in the same environment of low or even lower interest rates and we’re passing the peaks in units supply.”
Frasers Property residential executive general manager Cameron Leggatt said he expected to see continued price growth in the first half of 2020: “But I think the health of the broader economy and what plays out at an international level will have an impact,” he said. “If there’s any shock to the broader economy, it’ll impact buyer confidence.”
More towering tales
Over a bit more than the past twelve months, since just before the end of 2018, defects in high-rise apartments have become an issue of major concern for developers, owners and governments. News of the cracks discovered in the Opal Tower at Olympic Park last Christmas Eve and the evacuation of the residents that followed opened a new and unwanted chapter in the history of high-rise apartments in our cities that is destined to be ongoing for years to come.
An Ipsos poll of 1000 residents, conducted for advocacy group the Committee for Sydney, found that eight in 10 Sydneysiders have safety concerns about the structural soundness of high-rise apartment buildings. The survey showed that the quality of construction and the structural integrity of towers were their biggest safety concerns, followed by fears of becoming trapped in a high-rise building by a fire.
Only recently have all the residents of Opal Tower been able to return to their homes, and this only after the builder, Icon Co. has spent more than $26.5 million on repairs and renovations, with more expenses likely. Icon has also announced that it will provide an unprecedented 20-year structural warranty on the cracked high-rise tower — 14 years longer than the standard six-year period now required for residential buildings in NSW.
Icon managing director Nicholas Brown told News.com’s Charis Chang that his company had prioritised the return of the apartments to owners and tenants and was now focused on closing out the remaining enhancement works.
“We believe Opal Tower is now the safest building in Australia when it comes to structural integrity,” he said.
Icon also said it had introduced significant changes to its construction and review processes to ensure the same problem did not happen again. These changes include mandated dual certification for all structural designs and a specific requirement for additional structural engineer inspections.
However, none of the residents of another crumbling high-rise structure, Mascot Towers have been able to return after their evacuation in June last year. The problems with these two structures have become the focus of attention for much of the property industry, and for good reason.
Developers report that potential buyers investigating purchasing a new unit have become much more discerning, asking many more questions about quality issues than ever before. Agents in general say that new home units are harder to sell, and sales in many projects have slowed to the point where developers have been forced to postpone their marketing.
It’s now obvious that for too long, the development sector successfully lobbied against regulations needed to provide adequate consumer protection. Even now, twelve months
after the issue surfaced in the media, regulation so far has fallen short of what is needed to rebuild consumer confidence.
The NSW government appointed a Building Commissioner, David Chandler, in August who has made a good start with the announcement of many positive initiatives. Work is under way to consolidate core information on the state's 80,000 strata schemes for consumers to access through an online portal.
The Commissioner is making progress on developing better information for buyers about the track record of developers, designers and builders. Plans are well advanced for an industry-based rating system to allow the public to differentiate between good and bad developers, builders and certifiers. This is expected to come online sometime in 2021.
Committee for Sydney chief executive Gabriel Metcalf said that the appointment of the Building Commissioner and proposed legislative reforms that would make it easier for purchasers of defective properties to seek damages would help to restore confidence. “However, all parties – government, industry, regulators – must work to rebuild public confidence,” he said.
Regrettably, legislators are dragging their feet and even though the Minister for Better Regulation introduced the Design and Building Practitioners Bill in October, it didn’t survive its review in the NSW Upper House.
All this means consumers still have to make important and expensive decisions about a major purchase – probably the biggest purchase in their lifetime, with only the same old inadequate resources to inform them.
‘Cracked towers spark widespread safety fears about high rises: poll,’ Matt O’Sulllivan, Sydney Morning Herald, 13 January 2020
‘Mortgage brokers inundated with home loan applications as homebuyers prepare to purchase,’ Tawar Razaghi, Domain, 13 January 2020
‘Sydney house prices set to top $1 million again,’ Jessica Irvine, Sydney Morning Herald, 2 January 2020
‘House prices finish 2019 on a high, as Sydney and Melbourne lead gains nationally,’ Nassim Khadem, ABC News online, 3 January 2020
‘Sydney house prices set to strengthen, says NSW government,’ Matt Wade, Sydney Morning Herald, 12 December 2019
‘Sydney's recovering property market boosts NSW Government, half-year review reports,’ Ashleigh Raper, ABC News online, 12 December 2019
‘Now and then: How Sydney’s property market has changed since 2010,’ Kate Burke, Domain, 29 December 2019
‘Property outlook 2020: Australia’s property market set to keep rising but will peter out mid-year, experts say,’ Tawar Razaghi, Domain, 5 January 2020
‘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
‘Opal Tower evacuation has cost builder Icon Co $26 million,’ Charis Chang, News.com.au, 11 December 2019
'Six-year nightmare': Shattered investors left with no one to sue for faulty units,’ Carrie Fellner and Nigel Gladstone, Sydney Morning Herald, 16 December 2019
‘Opal Tower builder Icon Co will provide a 20-year guarantee on works,’ Chais Chang, News.com.au, 19 December 2019
‘One year after Opal Tower fiasco, buyers are wary, sales are slow and the law hits a roadblock,’ Ross Taylor, Sydney Morning Herald, 26 December 2019