Market comment: Price falls limited as Sydney property looks for Spring resurgence

Mon, 15 Jun 2020

Market comment: Price falls limited as Sydney property looks for Spring resurgencePrice falls limited as Sydney property looks for Spring resurgence

The Sydney property market is signalling that it’s anxious to return to normal, or at least fast forward to its ‘new normal’, whatever that turns out to be. The number of new listings at scheduled auctions continues to increase while weekly clearance rates are holding firm in the high 60 per cent levels.

In May, house prices fell just 0.4 per cent nationally, with Sydney falling by a similar amount. Nicola Powell, senior research analyst for Domain, commented: “The clearance rate is high. It’s still a robust outcome [but] we still need to put it into the context of the low auction volumes. 

“What we have seen is a bit of an improvement in sentiment because we’ve seen restrictions relaxed,” she said. “There are lots of green shoots. Everything is improving from that really low point in time during April, in the heart of the lockdown.”

Justin Keenan, principal at WigginsKeenan in Sydney’s northwest, says a combination of government support mechanisms has helped avoid the damage inflicted by previous crises: “Through a combination of wage subsidies in the form of JobKeeper payments, increased welfare through JobSeeker payments and mortgage holidays from the banks, the housing market has so far avoided the large scale falls seen during previous financial crises. 

“The combined stimulus has resulted in a lower number of properties for sale, and those homes selling are a case of willing buyers and sellers rather than distressed sales,” he said.

Chief auctioneer at The Agency, Thomas McGlynn said there is still a shortage of properties on offer: “The sellers who are going to market are being fair with their pricing. The first four weeks we were really expecting it to be a really tough three to six months … but it’s not anywhere near the downturn we expected.”

Belle Property’s selling agent Mark Foy said many buyers now looking at open homes were qualified and ready to respond to reasonable asking prices: “If they were seeing at least a 10 per cent discount they were happy to move forward,” he said.

It seems that many of the property market’s basic principles remain unchanged, despite the advent of Covid-19. Back in March, before the virus had fully realised its catastrophic potential, CoreLogic produced an article that explored the performance of property values in troubled economic times. Among the findings were:

⦁    Negative economic shocks do not necessarily lead to severe declines in property prices; 
⦁    Property does not see the same declines as shares during a downturn, because it is used to live in and therefore not as speculated upon as shares;
⦁    Property cannot be bought and sold as quickly as shares, meaning price movements are not as volatile; and
⦁    Due to the temporal nature of the Covid-19 downturn, vendors may hold high expectations for their property value and simply hold off selling until the economy returns to full-scale production.
CoreLogic's research director Tim Lawless told the Australian Financial Review that house prices were still on track to drop by 10 per cent from peak to trough, although home values were only showing a mild decline.

"Our house view is unchanged, although it's fair to say a 10 per cent drop is looking pessimistic at the moment," Mr Lawless said.

UBS has also upgraded its outlook for the housing market but says a decline of up to 10 per cent is still on the cards.

The bank is now expecting a price decline of “between 5 per cent and 10 per cent” in the 2020 calendar year, following figures showing a stronger than expected job market and smaller house price drops during the lockdown.

There’s a good chance this Spring will be, as always, a busy time for the property market. Our exit from the Covid-19 restrictions will be nearly completed and a good portion of our battered economy will be recovering, along with key metrics like unemployment and retail sales activity.

This is due in no small part to the special place housing has in our country’s thinking. Adrian Kelly, President of the Real Estate Institute of Australia, says we should compare our present circumstances with the past.

“We can only look at what is happening in the marketplace at the moment as well as in previous times of high unemployment to provide pointers to likely outcomes. Currently we have a situation where listings are decreasing yet the enquiry level from prospective buyers is increasing. 

“It is simple economics that when supply decreases and demand remains that prices edge upwards. They certainly don’t drop. History shows us that in the early 1990s we had a sustained period of unemployment above 10 per cent yet median house prices remained stable”.

First National Real Estate’s Chief Executive Ray Ellis says that Covid-19 has provided clarity on what Australians consider to be important: “If you step back from the distraction and noise of the predictions of economists, there are genuine factors pointing towards a strong recovery this spring, in a market characterised by first home buyers taking advantage of the percentage of investors who choose to exit, and families activating with long-held plans for change. 

“Australians don’t simply view their property as an ‘asset’ - they view it as a home. That has been demonstrated strongly during these challenging times. What people have been missing most is having friends and family over to their home. Or visiting the homes of friends and family.”

Mortgages deferred

One of the Commonwealth government’s biggest benefits for homebuyers affected by Covid-19 has been the mortgage honeymoon that expires in September. This has been a great help for first home buyers, investors and businesses who have now been able to defer $250 billion in loans after they were financially hurt because of the Covid-19.

Melbourne University economist Dr James Brugler estimates that the withdrawal of this support could cause a quarter of all households to see a fall in equity of 10 per cent or more:  “Most households have only a small amount of borrowings against their home and are generally in good positions to withstand a fall in home values,’’ he said.

“However, households that have borrowed more money will feel the impact on their home equity more.”

Labor Senator Kathy Gallagher said on Thursday it was clear some workers had been forced to destroy their nest egg by drawing down from their superannuation funds to make mortgage repayments: “We want the government to be proactive about making sure that we don’t fall off a fiscal cliff in September,’’ she said.

“That means people are given notice so there’s confidence in the economy, and the Reserve Bank governor spoke about that today, saying confidence was part of the economic recovery. Now clearly, that confidence isn’t going to be there if everyone thinks everything is cut off in September.”

Others with mortgages that could now become a problem are the estimated 730,000 investors, many of whom are self-funded retirees or people planning for retirement, who have taken out interest-only bank loans to acquire properties whose values are no longer rising.

Liberal MP Senator Dean Smith said that many of these investors had interest-only loans that were due to reset to principal and interest this year: "If property investors are forced to sell into a falling market, then that is a cost that every Australian property owner will have to bear," he said.

"That will put downward pressure on an already dampened property market and that will harm the financial wellbeing of every Australian family that owns a property, not just property investors."

The Australian Banking Association’s chief executive Anna Bligh said in a statement the industry had worked tirelessly since the beginning of the outbreak to help customers and that 700,000 customers had already applied for, or been granted, support on loans totalling more than $200 billion.

"Investors whose tenants are unable to pay rent as a result of Covid-19 are able to access a six-month deferral to mortgage repayments, including principal and interest, to help them get through to the other side of this crisis," she said.

"Interest-only options are still available to customers, with banks needing to assess a request to remain on interest-only repayments on a case-by-case basis, in line with regulators' prudential requirements and guidance."

Virus hits rents

Figures released in late May showed that rents for houses in Sydney have fallen to their lowest point since 2013 as a result of economic standstill, lower migration and a flood of former Airbnb lettings left empty by the shutdown of the travel industry. 

It now costs on average $646 per week to rent a house in Sydney, according to the latest figures from SQM Research. This is the cheapest level since 2013 and a 6.5 per cent drop from a year ago. The cost of an average unit is $480 a week, the lowest figure since May 2015.

"We've never seen anything like it," Grant Ashby, the director of Sydney Cove Property, told ABC News. "In our time, it's always been a corporate market. This is the first time we've seen such a drop in rents."

Louis Christopher, founder of SQM, said the economic uncertainty, rising unemployment and closure of the international border due to the pandemic would continue to put pressure on the housing market: “It’s hard to see it coming back to normal and hard to see a full V-shaped recovery in the economy,” he said.

Martin North, director of Digital Finance Analytics, said that the number of landlords who are liquidating their rental assets rose to 12 per cent from 8 per cent in April: “An estimated 90,830 investors dropped out of the market during the past 12 months, reducing the total to 2.34 million.”

At the market's peak in 2017 and 2018, the number of landlords rose by 8.9 per cent to 2.39 million.

As always, some parts of Sydney are affected more than others. Research from SQM showed average advertised rents are currently more than 10 per cent cheaper than they were a year ago in Pyrmont, Potts Point, Chippendale-Darlington and Bondi Junction. 

There was a similar trend in the Sydney CBD, where units were being listed for 14 per cent cheaper than a year ago, on average, while smaller average falls of about 8-9 per cent were recorded in Surry Hills, Redfern and in the Waterloo-Zetland area.

The Agency’s national head of property management Maria Carlino said while renters had the upper-hand, it should be a temporary situation: “Given the high vacancy rates, renters do have a lot of choice and landlords need to meet the current market in order to avoid extended days on market,” Ms Carlino said. 

“Next year we see a return to a more balanced market as Australia continues to move successfully out of the COVID-19 curve.”

There isn’t much good news in the current market for owners who’ve listed their properties on Airbnb and could now find themselves facing cuts to their expected rental incomes. There’s been a steep decline in weekly Airbnb revenues across all Australian locations, according to AirDNA, a website that tracks the Airbnb economy. 

Chris Pettit, a professor of urban science at  UNSW's City Futures Research Centre,  said UNSW research indicated around 80 per cent of the 200,000 Australian listings were investment properties - not traditional holiday lettings: "That is about six to eight per cent of Australia's total investment market, which is a fairly reasonable exposure."

Push for social housing, new home-buyers’ grants

The housing sector is experiencing its second major global crisis in 12 years, with the impacts of the Covid-19 equal to or exceeding those of the Global Financial Crisis (GFC) in 2008, according to the Herald’s Sean Macken and Tim Williams.

They argue that to recover from the Covid-19 crisis the housing industry needs to co-operate with governments with the goal of providing the housing Australians need at prices more people can afford to pay. Their solution: governments – state and federal – can buy new housing stock directly from developers.

“Governments could pre-purchase property on the proviso that the developer immediately starts construction, generating new jobs. Once built, these new homes become public assets.

“The government could then sell them in better times or rent them to provide a long-term return to taxpayers and rebuild our public coffers. Some could also be put to providing affordable housing, which our existing housing market sadly fails to provide.”

Social housing is also being seen as a means of economic stimulation by Master Builders Australia and the CFMEU, the construction union. They’ve put aside their usual differences and jointly called for the government to spend $10 billion building 30,000 new dwellings.

Peter Mares, lead moderator at the Cranlana Centre for Ethical Leadership, says that unless we invest in social housing we will be forced to spend a lot of money in less effective ways as a growing number of our population experience housing insecurity and rental stress.

“Large-scale programs to build social housing aren't a short-term fix to help the economy recover from the pandemic, they are a long-term investment in a prosperous and fair society,” he says.

“When property prices are strong, there is little commitment to address the shortage of affordable housing — yet a stable home is the foundation of a good life and a good society. Without a fair and efficient housing system, health, education and productivity all suffer.”

The Master Builders Association has its own ideas on how to stimulate the home building sector – it’s suggesting a $40,000 new-home buyers grant that would avoid a serious decline in the building industry and save hundreds of thousands of jobs.

At the start of the year about 1.2 million workers in Australia relied directly on construction for their employment. Latest figures from the Australia Bureau of Statistics indicate that more than 77,500 jobs nationally have been lost since the start of COVID-19.

Grant Galvin, the chief executive of Master Builders Queensland, said a new-home buyers grant was the only thing that could rescue the sector short-term: “There is minimal construction work set to carry on beyond August, so if the government does not act now, this sector it is going to fall off a cliff come September when hundreds of thousands of people find there’s no more jobs,” Mr Galvin said.

Steve Foley, the chief executive of Coral Homes, one of Australia’s biggest builders, said the drop in sales during COVID-19 had wider-implications such as restricting the acquisition of new land, stifling any future development.

He agreed a new-home buyer grant would greatly help to restore consumer confidence and bring footfall back to show villages: “We can see some enormous benefits if people can get this help. It will be a really good opportunity for people to buy a home, which I have not seen in many years,” he said.

The sentiment has been echoed by other industry bodies such as the Property Council of Australia and Housing Industry of Australia (HIA), which have also called for a new-home buyer grant, although they are asking for $50,000.

HomeBuilder grants announced

In a related move, the Morrison government announced a $688 million ‘HomeBuilder’ program that aims to keep tradesmen employed and support the construction industry. In a nutshell, it offers a $25,000 bonus to people who want to build new homes or substantially renovate existing ones.

There are some serious catches, however. The $25,000 will only be paid on renovations that cost between $150,000 and $750,000 and on new homes that are worth a maximum of $750,000 including land. The $750,000 limit on the total property value means that in Sydney it’s only going to apply home and land packages in the city’s outer suburbs.

Furthermore, to qualify for the $25,000 payment the home renovations must be made on property worth less than $1.5 million.

Tom Forrest, chief executive of the Urban Taskforce, which represents property developers, said the scheme would have limited use in Sydney, where fewer house and land packages were available under $750,000: “It's a good start but it doesn't really apply for Sydney and Sydney is the driver of the whole economy."

But Dean Boskovic, director of Bos Realty in Liverpool, 27km south-west of the CBD, told the Sydney Morning Herald that he took 70 to 80 calls in one day after posting about the program on Facebook.

"I'm getting so many first home buyers saying, 'Dean tell me all about it, we want to pull the trigger on this'," he said. "There have been a lot of buyers sitting on the fence because of Covid-19 - this is going to be the kick that puts them over the edge."

Stamp duty still targeted

There’s nothing like an economic slowdown to focus governments on finding ways to replace shrinking streams of revenue. Serious questions are being raised about the applicability of stamp duty to a post-Covid-19 economy. 

New research by website showed property transactions have dropped by nearly a third in some areas since the Covid-19 crisis began, with stamp duty charges deterring buyers and sellers. The survey found that nearly three in four Aussies would be more likely to buy or sell a home if they didn’t have to pay stamp duty.

The pressing most relevant issue is that the revenue it generates depends on turnover in the property market, while at the same time it acts as a disincentive to dispose of one property and purchase another. This impacts both economic performance and government revenues.

“It’s Australia’s most economically destructive tax,” according to the Grattan Institute’s Household Finances Program Director, Brendan Coates, who argues that it penalises people who are trying to break into the market or move to homes that better suit their circumstances.

Stamp duty has continued to be a hot topic of political conversation in recent weeks, particularly for the NSW and Victorian governments that are promoting its abolition in a quest to revive their states’ economies.

They look with envy to the ACT where, in 2012, the territory’s government began phasing out stamp duty as part of a20-year plan to reform the territory’s property tax system. To compensate for the consequent loss of revenue, the government has introduced higher land taxes and rates for residential and commercial property owners. 

In other words, stamp duty is being phased out while higher land taxes are being phased in. The catch is that only a few homebuyers pay stamp duty in any year, but all property owners pay land tax, so the nett result is that everybody who owns a home pays a tax that increases each year. This year, for example, land taxes in the ACT are expected to increase by an average of seven per cent.

Naturally, this provides a clear benefit to first-home buyers. As Bree Prince of Canberra-based Hive Property says: “Prior to the scheme coming into effect, it was very hard for first-home buyers to get their foot into the market.

“Now we have an influx of first-home buyers who are taking advantage of not having to pay stamp duty and having the option of buying established homes [as opposed to new builds only as part of the previous concession], which made a huge difference for some buyers,” Ms Prince added.

Domain economist Trent Wilshire says that a long-term tax reform would “make the tax system more efficient, help renters, improve housing affordability slightly and make state government budgets more robust”.

“The best approach is to phase stamp duty out and phase land tax in slowly, as the ACT government is doing; it’s a general consensus with economists that stamp duty is not an ideal tax.

“Abolishing stamp duty and swapping it for a broad-based, flat-rate land tax is not a bad way to go, it won’t be popular at first because no one wants taxes to be raised, but it is feasible and will boost the economy in the long-term.”


'The property investment party is over', Nila Sweeny, Australian Financial Review, 13 June 2020
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