Market comment: Recovery roars ahead, new planning changes, and first-home buyers returnMon, 16 Mar 2020
It was just a year ago that price discounting in Sydney property sales was at its highest level in years, giving property buyers a rare opportunity to find a bargain in Australia’s most expensive market. Twelve months later, vendors are now selling into an improved and rising market and few houses or apartments are being discounted to stimulate sales.
Even FOMO (the ‘fear of missing out’) is back after first-home buyers have returned, aided by a variety of government programs as well as record low interest rates after the RBA cut its official rate to just 0.5 per cent at its March meeting.
Figures from the Australian Bureau of Statistics show that the number of first-home buyers is now the highest since 2012. It’s not surprising then that stamp duty exemptions and concessions for first-home buyers were also up more than 25 per cent, or that more than 6,000 Sydney first-home buyers have rushed to take up the federal First Home Loan Deposit Scheme which enables them to purchase a property with as little as a five per cent deposit.
Equally unsurprising is the fact that fewer than half of the homes for sale in the harbour city last month were on the market for more than 30 days, down from two-thirds of homes at the same time last year, according to data released by SQM Research.
This is all part of a national property price recovery. The recent property downturn saw an 8.4 per cent correction in values. In just seven months, however, this fall has largely been made up, and prices are now on track to fully recover in the next two months. Sydney house prices increased by 1.8 per cent in February, and If prices across Australia continue on their current trajectory, property research group CoreLogic tells us that 2020 will see the fastest market recovery in Australian history.
The year got off to a great start. In January median dwelling values went up 1.1 per cent in Sydney, adding to a total annual increase of 7.9 per cent year-on-year. This was followed by a huge ‘Super Saturday’ on the last day of February with Sydney having the highest number of auctions in two years and a preliminary clearance rate of 82 per cent.
This just confirms that Sydney auctions are booming. Clearance rates are near or even above 80 per cent most weeks, and few properties are being withdrawn from auction before sale. All this is especially noteworthy as it’s still early in the auction season.
Sydney auctioneer Damian Cooley says that first-home buyers are keen to get into the market before prices rise: “I think that anyone who is a first-home buyer and looking to buy, is buying to get into the market now. They’re doing everything they can to buy now rather than later in the year when things may be more expensive,” Mr Cooley said.
Domain’s Sue Williams says that Sydney’s growth is expected to be the highest in the country with both house and apartment prices predicted to go past the 2017 peak and reach record high prices by the end of this year.
“Domain’s ‘Property Price Forecasts–2020’ predicts houses in Sydney will rise by 10 per cent over 2020 to a new median of around $1.25 million, while apartments will rise by 8 per cent to a new median of $790,000 – just above the peak reached in June 2017.”
Property valuation firm Herron Todd White said it expects price growth to moderate in Sydney thanks to an increase in new listings, but “despite this we still expect to see prices increase by around 10 per cent for the year, which will mean prices should move above the previous peak in the second half of the year.”
One analyst even expects this current upwards cycle to generate capital gains of around 20 per cent before it ends. Christopher Jove, a columnist with the Australian Financial Review, wrote: “Based on the RBA’s model of housing dynamics, one should pencil in total capital gains of about 20 per cent this cycle assuming no further reductions in rates.”
He also mentioned that in a March 2019 paper published by two RBA economists it was forecast that: “a percentage point drop in the expected real mortgage rate would boost housing prices by 28 per cent in the long run,” which at the time sounded impossible but now it’s not totally out of the question.
In its latest review of the Australian economy, the International Monetary Fund issued a warning that the lift in house prices over recent months was a growing risk to the economy. But the IMF's report said there were other longer-term issues it believed need to be addressed, including broad tax reform.
The IMF also said actual house prices in Australia were 7 per cent above a debt-service-to-income ratio of 25 per cent, which is considered a reasonable level of debt.
How long will our current boomlet last? Every cycle has its limits, and Damien Klassen, writing in Microbusiness, outlines a scenario that explains why: “If house prices grow at 10 per cent p.a. for the next 20 years, and wages/rents kept going up at their historical rates then [by 2040] the median Sydney house price would be over $7 million, and this price would be 45 time higher than the median wage.
“Even if you managed to scrape together the 5 per cent deposit (only twice the median annual pre-tax salary) to qualify for one of [the federal government’s] 95 per cent mortgages, the mortgage payment would come in at almost 3 times the median pre-tax salary.”
What about affordability?
It’s not all that long ago that housing affordability was in the news. Sydney prices were already high, then kept on rising, pricing many out of the market including a growing number of first-home buyers. But then property prices fell, not unlike stones, and in theory at least, dwelling prices became more affordable.
The recent recovery of the housing market with housing prices rising almost back to their previous highs has reignited the arguments over risks of creating a separate ‘class’ of Australians who’ll never own a home of their own and will be forced to rent premises for the rest of their lives.
Deloitte Access Economics partner Nicki Hutley asks: “Are we allowing one class of Australians to build for their retirement more easily than another class of Australians? The answer to that is unequivocally yes,” she told the 7.30 Report.
“What’s happening now is real, but it’s not sustainable. We can’t keep having our house prices rise to these sorts of levels. We certainly have a housing affordability crisis in Australia,” she said.
Ms Hutley has a point. The Grattan Institute’s Household, Income and Labour Dynamics in Australia (HILDA) survey shows that in 2002, 34 per cent of 18 to 39-year-olds in Melbourne were homeowners, but that had dropped to 22 per cent by 2018.
The Grattan Institute’s household finances program director, Brendan Coates blamed worsening affordability for this trend: “It is a crisis where, over the course of the next couple of decades, we’re likely to see fewer and fewer Australians — particularly poorer Australians — own their own home, and that will have enormous consequences for all aspects of Australian life.”
But are things really so dire? Owner-occupiers are driving the market at present. Home loans in December for non-first-home owner-occupiers were 10.1 per cent above the year before, while investor finance was just 3.2 per cent above, and first-home buyer home loans were up 31.2 per cent.
The Guardian’s Greg Jericho says that first-home buyers make up a greater share of buyers than at any time since the GFC. Investors, he says, have kept away and that’s opened up the field for those who’d previously been priced out of the market.
He notes that, while total owner-occupier loans are just above where they were March 2017, investor home loans in December 2019 were still 39 per cent below that level: “What the numbers show is the big reason that allows first-home buyers get a foothold is when they don’t have to compete against investors.
“At the moment the market is being driven by owner-occupiers, and as long as that is the case housing affordability should remain relatively steady. And with that stability the RBA will be more comfortable with cutting rates again should it believe the economy needs a boost.”
Change of plans
The pattern of housing construction across Sydney is now expected to shift dramatically over the next five years, with some areas expected to boom and a slowdown expected in others. Reflecting a number of concerns about the scale of development in recent years, the NSW government's latest forecast shows that 5700 fewer homes are set to be built over the next five years than was predicted just two years ago.
The NSW government is now planning for 191,050 dwellings to be built in Sydney over the next five years, a considerable reduction from the 196,750 predicted in 2017-18. Planning Minister Rob Stokes said development was taking place at different rates than were then anticipated in response to changes in planning, infrastructure and market activity.
"In greenfield areas where we are planning for significant growth, we expect development to take place at higher rates as the planning process unfolds," he told the Sydney Morning Herald.
Bill Randolph, the director of the University of NSW's City Futures, said the change in forecasts for new homes mostly reflects a slowdown in the apartment market, but added that it will still be a challenge to deliver about 41,000 new dwellings annually in Sydney over the next five years.
Forecasts for three areas in Sydney's north – Mosman, Hunters Hill and Hornsby – have been cut by at least 40 per cent from those predicted in the 2017-18 financial year. Also, the lower total of 1950 new dwellings predicted for the northern beaches are a cut of 26 per cent on the government's target for that area in 2017.
This is in marked contrast to forecasts for Liverpool in the south-west which expects to have 12,750 dwellings built over the next five years - a massive 72 per cent rise on that which was predicted just two years ago.
And while new dwellings at Ryde are forecast to fall by 10 per cent to 8550 over the next five years, the forecasts for Liverpool, Wollondilly, Woollahra, the Blue Mountains and Fairfield have grown by at least 54 per cent.
The forecasts also show that 10 times as many homes are now expected to be built at Blacktown over the next five years than are forecast for the northern beaches. In 2016, the NSW Government estimated Blacktown’s population would jump to an eventual total of 480,000. Today Blacktown already has 350,000 residents, and by 2031 it’s now forecast to be a city of 526,000 - at least 100,000 more people than live in Canberra.
Even areas an hour’s distance from the CBD are being forecast for rapid growth. Rural Camden, in Sydney’s southwest, currently has 100,000 residents. Forecasts show that number will almost double by 2031 and reach 300,000 by 2041.
Land tax – again
Back in the news for the umpteenth time is the possible scrapping of stamp duty on property ownership transfers, which now adds about $40,000 to the costs of the average property sale in Sydney, and replacing it with a broad-based land tax (BBLT) that would be applied annually to all properties.
In simplest terms this move is intended to reduce the costs of buying property while at the same time giving the state government a more reliable source of funds than the present system that has huge fluctuations depending on the state of the property market.
An ongoing review of state and federal financing arrangements that is being conducted for the NSW government by former Telstra chief executive officer, David Thodey had this to say: “Throughout the consultation period, we consistently heard how transfer duty is a costly tax that impacts citizens’ freedom to move throughout the seasons of life.
“We also heard how it can often have the worst impact on first home buyers and seniors. By hindering mobility, we heard stories of people living in housing that doesn’t meet their current needs.”
The Property Council of Australia agreed, saying: “Stamp duty distorts business decisions, locks families out of housing choices, worsens housing affordability, suppresses economic activity and leaves governments with highly volatile revenue streams.”
So, the BBLT is a good idea, right? Adherents say it would make it easier for young people to acquire their first home and it would also make downsizing easier for older Australians, thereby freeing up dwellings that would otherwise not be on the market. The only problem really is the kickback from millions of existing homeowners who would suddenly find themselves saddled with an additional annual burden of many thousands of dollars.
A political party of any flavour would likely find it terminally challenging if it went to an election with the introduction of a BBLT in its platform. A home's a big asset for sure, but it's not income-producing unless it's rented out, and only then should it be a source of taxation revenues. More affordable housing is indeed required, but not at the expense of those who already own their own homes.
The politicians had been thrown a possible lifeline on this money-raiser with former Treasury Secretary Dr Ken Henry's statement a decade ago in his own review of taxation that "the tax switch should be phased in, so that existing property owners – who had already paid stamp duty - were exempt from paying the new land tax until their next purchase".
That's long been a potential key to getting this tax through an election without losing the votes of all existing homeowners but it would take time to ‘phase in’ and the government that went through the political pain of introducing it wouldn’t benefit much from revenues in the first few years. Governments don’t like this kind of delay.
Regardless of these drawbacks, the issue won’t go away. Dr Henry and another former federal treasury secretary, Martin Parkinson recently appeared at a conference at NSW Parliament to discuss federal and state finances as part of the Thodey review.
Dr Henry, who was an early advocate of the BBLT ten years ago, told the conference: “It’s a big obstacle for first home buyers - saving for the deposit and then saving for the stamp duty - it’s just nuts," he said. "Particularly in Sydney, it’s a massive bill they’ve got to pay.
“If stamp duty were abolished and replaced with an annual land tax, of course, over a 15-year period - or whatever it is - they’ll end up paying the same amount. But they don’t have to come up with all the cash up front.”
Dr Henry’s successor as Treasury Secretary, Martin Parkinson, also backed the call to abolish stamp duty and replace it with land tax.
The BBLT has been promoted in many forums since the whole issue was raised by the Grattan Institute some years ago, but this latest appearance would seem to bring it quite a bit closer to incorporation in future taxation arrangements. We’ll keep you informed of further developments.
Following the appointment of a new state Building Commissioner, Mr David Chandler, there were some hopes there would be assistance from the NSW government for property owners adversely affected by defects in the apartments they’d purchased. However, these hopes were dashed by Mr Chandler’s recent announcement that owners of properties with defects will not be given government help.
"There isn't a glove that's going to land around them and write a cheque to rectify [the problems]," he told a parliamentary inquiry into the state's building standards. He added that in instances where there was not a building company to seek damages from, owners would "have to stump and get that work done".
Private certification was introduced in NSW in 1998. This allows a developer to pay a certifier of their choice to inspect construction work at critical stages in progress and supposedly ensure it meets all applicable legal requirements. Although certifiers carry out inspections, they do not have responsibility for supervising work throughout the period of construction and are legally entitled to rely on documentation from other building professionals.
Not all private certifiers have exercised sufficient diligence in fulfilling their roles. Some have allowed buildings to be completed with structural faults that are dangerous, and during the recent construction boom, repeat offending has soared.
The government’s Building Professionals Board regulates certifiers and maintains a public register of disciplinary actions, with the most serious cases referred to the NSW Civil and Administrative Tribunal.
The Board has an audit program that is supposed to provide an independent check of the work of accredited certifiers. However, documents sought under freedom of information by the Association of Accredited Certifiers showed that no audits were performed by the Building Professionals Board in either 2015-16 or 2016-17, and in 2017-2018 only 13 audits were begun.
In 2012 the then NSW planning minister Brad Hazzard reportedly ordered the Board to get "tougher with those small number of certifiers who play games" and "seem to be popping up regularly". Since then, the Board has handed out stiffer financial penalties but the number of certifiers having their accreditation cancelled has only risen since February last year, two months after cracking forced the evacuation of the Opal Tower at Sydney’s Olympic Park.
In a related matter, apartment owners involved in two combustible cladding class actions have been given permission by the Federal Court to expand their claims under Australian Consumer Law. Both actions are being backed by litigation funder IMF Bentham.
The expanded claims against Alucobond supplier Halifax Vogel Group and manufacturer 3A Composites as well as Vitrabond supplier Fairview Architectural have been added to the existing claims that the combustible panels failed to meet acceptable quality standards.
This means that Australia’s two biggest suppliers of flammable cladding are now involved in class action lawsuits. If they lose these cases the there’s a possibility that many millions of dollars in compensation could be paid to owners of thousands of apartments across Australia.
Lurking in the background of all Australian property markets is a new factor that could have significant but as yet unknown impacts on Sydney property. Domain economist Trent Wiltshire commented on this new threat:
“The big risk is the coronavirus which could have a significant short-term impact on our tourism and education sectors and cause the economy to soften more. It’s possible the outbreak will be much more severe and cause a significant economic slowdown in China, which would have a massive impact on Australia’s economy.”
Aidan Devine from realestate.com.au adds some details to his concerns: “Coronavirus poses a major threat to the housing market and could derail sales if buyers stop going to open for inspections and auctions.
“The virus could also hit the development sector, which remains heavily exposed to offshore investment activity, particularly from mainland China, Singapore and Hong Kong. Disruptions to global supply chains – a large chunk of the country’s building supplies are imported from Asia – pose a longer-term threat to building projects.”
Announcing the RBA’s rate cut to a record low 0.5 per cent, Governor Philip Lowe said the coronavirus had clouded the near-term economic outlook: "The uncertainty that it is creating is also likely to affect domestic spending. As a result, GDP growth in the March quarter is likely to be noticeably weaker than earlier expected.”
Dr Lowe added that once the virus was contained, the economy was likely to return "to an improving trend".
CoreLogic's head of research, Tim Lawless, told the Sydney Morning Herald that the bank's move was driven by the threat posed by the coronavirus outbreak on the economy and household sentiment: "Lower interest rates would normally be a catalyst for an acceleration in housing demand and value growth, however, there is less certainty that this will add fuel to the housing market in the current economic climate," he said.
AMP Capital chief economist Shane Oliver told the Australian Financial Review that the coronavirus was a big and rising risk to the property market: "If the situation badly worsens globally and the virus takes hold in Australia then it could become a big short-term negative as the economy slows even further potentially into recession, the loss of share market wealth drags on property demand and if people put off buying property along with other activities for fear of catching the virus," Dr Oliver said.
ANZ associate director, property, Daniel Gradwell told an Urban Development Institute conference in Melbourne that his bank was expecting an up to 80 per cent reduction in visits from China, based on what happened during the 2002-2003 SARS epidemic: “You might expect that to reduce the presence or the demand from foreign buyers (of real estate) in Australia,” Mr Gradwell said.
So, it’s here and at this stage it’s too early to know the extent and impacts of this virus, but when health experts warn of a ‘global pandemic’ it’s concerning. We intend to monitor the situation with regard to the Sydney property market and will provide monthly updates on this subject.
‘Coronavirus could hit housing hard as Australia teeters on edge of recession,’ Martin Farrer, The Guardian, 11 March 2020
‘Sydney properties spending less time up for sale, new figures show,’ Kate Burke, Domain, 4 March 2020
‘Flammable cladding class actions escalate,’ Leith van Onselen in Australian Property, Macrobusiness, 3 March 2020
‘Foxes in charge of the hen house: new building law has a fatal flaw,’ Elizabeth Farrelly, Sydney Morning Herald, 7 March 2020
‘Housing market at risk of 'renewed overheating': IMF,’ Shane Wright, Sydney Morning Herald, 7 March 2020
‘Vendors sell early in bid to get better prices at Sydney auctions,’ Melissa Heagney, Domain, 9 March 2020
‘Twin shocks to hit the NSW economy hard,’ Matt Wade, Sydney Morning Herald, 2 March 2020
‘Virus poses 'rising risk' to housing market,’ Ingrid Fuary-Wagner, Australian Financial Review, 3 March 2020
‘RBA cuts rates to new record low to shield economy from coronavirus fallout,’ Shane Wright, Sydney Morning Herald, 3 March 2020
‘Sydney's median house price back over $1 million as interest rate cut looms,’ Jennifer Duke, Sydney Morning Herald, 3 March 2020
‘Flammable cladding class actions escalate,’ Leith van Onselen in Australian Property, Macrobusiness, 3 March 2020
‘Twin shocks to hit the NSW economy hard,’ Matt Wade, Sydney Morning Herald, 2 March 2020
‘Buyers look to get into Sydney market before prices rise too high,’ Melissa Heagney, Domain, 1 March 2020
‘Clearance rates remain strong on Super Saturday of auctions,’ Melissa Heagney, Domain, 1 March 2020
‘What coronavirus means for Melbourne real estate,’ Nathan Mawby, News.com.au, 27 February 2020
‘Australia’s new boom towns: the suburbs squeezing in tens of thousands more residents,’ Benedict Brook, News.com.au, 24 February 2020
‘Slowdown in pace of housing developments unevenly spread across Sydney,’ Matt O'Sullivan and Nigel Gladstone, Sydney Morning Herald, 24 February 2020
‘Owner in tears as Sydney home with shady history sells for $2.87m,’ Anastasia Santoreneos, Yahoo Finance, 25 February 2020
‘How high can the house price boom go?.’ Damien Klassen in Australian Property, Macrobusiness, 17 February 2020
‘How much will property prices increase in Sydney this year? By a lot, new forecast says,’ Sue Williams, Domain, 12 February 2020
‘House prices to rise 20pc this cycle,’ Christopher Jove, AFR, 15 February 2020
‘Homebuyers are stampeding back into the Australian property market, leading to what could be 'the fastest market recovery on record', Jack Derwin, Business Insider Australia, 12 February 2020
‘No bailout for defective buildings,’ Just In, ABC News online, 25 February 2020
'It’s just a bad tax': former Treasury heads unite to slam stamp duty,’ Jessica Irvine, Sydney Morning Herald, 17 February 2020
‘Abolish stamp duty - impose a proper land tax instead,’ Jessica Irvine, Sydney Morning Herald, 12 February 2020
‘Affordability crisis fears as property market comes roaring back to life,’ Frank Chung, news.com.au, 11 February 2020
‘First-home buyers flex their muscles as investors lose their oomph,’ Greg Jericho, The Guardian, 18 February 2020
‘Why you can no longer expect a discount on homes in Sydney and Melbourne,’ Melissa Heagney, Domain, 18 February 2020
‘Fear of missing out’ back for Sydney first-home buyers as prices rise,’ Kate Burke, Domain, 23 February 2020
‘Auction clearance rates rise rapidly in Melbourne and Sydney,’ Kate Jones, Domain, 16 February 2020
‘Sydney and Melbourne property markets remain hot … but for how long?,’ Shannon Molloy, news.com.au, 11 February 2020
‘Building certifiers leave a trail of chaos,’ Carrie Fellner and Nigel Gladstone, Sydney Morning Herald, 3 August 2019 (Republished 27 February 2020)