Market comment: Property shortage keeps prices up with offers ‘too good to refuse’Wed, 15 Jul 2020
While 2020 is unlike any previous year we’ve experienced, properties in Australia’s capital cities are actually selling faster than at the same time in 2019. Domain data shows that it took 69 days on average to sell a Sydney house by private treaty in the June 2020 quarter, while it took 87 days on average a year earlier.
It was the same story for Sydney units that took 69 days to sell this year, well down from the 93 days it took to sell a year ago. This might seem a bit strange, until we remember that at this time last year the federal government had moved to crack down on lending while the market was going through its usual pre-election pause.
Domain economist Trent Wiltshire said last year’s market had been even softer than expected: “It shows how soft the market was in the June quarter last year during the election period … properties were taking a long time to sell.”
He said the figures for days on market could be improving this year as the lack of homes for sale sees new properties snapped up quickly. “New listings, which bottomed out in April, started to rise again in May and June. Some of those properties listed more recently have sold quite quickly.”
Ray White NSW chief auctioneer Alex Pattaro told Domain that properties within 20 kilometres of the CBD were continuing to sell extremely well: “Properties within that radius are absolutely on fire at the moment,” he said.
He added that he thought buyers were looking to make an offer “too good to refuse” before an auction for a property they were interested in was held.
As might be expected, Sydney’s auctions have been a bit quieter than usual, mostly due to a lack of stock. It’s apparent that many homeowners are reluctant to sell while COVID-19 is disrupting the marketplace.
Despite concerns about the impacts of the virus causing price falls, CoreLogic’s hedonic home value index showed that in June property values slipped by just 0.8 per cent with the median value of a freestanding house at $1.01 million and the median unit price down 0.6 per cent to $761,000.
WT Newey & Co director and auctioneer Mark Newey says he’s noticed a surge in interest for family homes and felt this was because coronavirus had resulted in more people isolating socially and working from home: “The pandemic has proved the importance of a family home, especially with a backyard.”
The most expensive homes seem to be experiencing the biggest price drops, with CoreLogic’s figures showing that the top 25 per cent of Sydney homes have slipped some 1.3 per cent in value between April and June, while the lowest 25 per cent increased by a small but notable 0.2 per cent. Despite the recent declines, Sydney home values overall still remain up 13.3 per cent over the past 12 months,
CoreLogic head of research Tim Lawless said the June fall was “mild” and much would hinge on when the federal government rolled back stimulus such as JobKeeper, he said.
“It’s encouraging to see lenders have recently hinted at an extension in their repayment leniency policies (but) government stimulus will eventually taper and banks will require borrowers to repay their loans,” he told News.com.au’s Aidan Devine.
“The longer-term outlook for the housing market is largely dependent on how well the economy is tracking when these support measures are removed.”
In another interview with the ABC, Mr Lawless said it was unclear when values would begin to rise: "We simply don't know how long the economy is going to remain repressed, or how long it'll take for housing values to start to show some level of growth again," he said.
"It will probably be a fairly gradual cycle where we do see further declines in housing values, maybe followed by some stability before we see values starting to rise."
The 0.4 per cent average fall in values over May was the first time Sydney home prices had dropped in close to a year. Home values inched up 0.4 per cent during the height of lockdown measures in April and there was also an increase in values over March.
“A variety of factors have helped to protect home values from more significant declines, including persistently low advertised stock levels. Additionally, low interest rates and forbearance policies from lenders have helped to keep urgent sales off the market, providing further insulation to housing values,” Mr Lawless said.
Realestate.com.au director of economic research Cameron Kusher said that record low interest rates had made the housing market more resilient to the economic impact of coronavirus.
“If you look at who has been adversely affected, it has predominantly been groups who are not traditionally active in the housing market such as under 30s. There are still plenty of people with steady employment … some buyers are (capitalising) on the low rates,” Mr Kusher said.
Realestate.com.au data also shows that overseas interest in Sydney housing has increased dramatically over the past financial year, due to Australia’s success in containing coronavirus and the weaker Australian dollar.
Search activity from overseas house hunters is up 20 per cent year-on-year, partly fuelled by expats in the United States and United Kingdom returning home because of COVID-19, but also because political unrest in Hong Kong has become a serious factor.
COVID-19’s side effects
An estimated ten per cent of off-the-plan apartment purchasers are believed to have defaulted on their contracts since the onset of COVID-19, and this is likely to continue for a few more months due to falling values in completed properties.
Martin North of property consulting firm Digital Finance Analytics says that off-the-plan values have dropped between 10 and 15 per cent during the past 12 months: “Today, if your lender’s valuation of the property represents a 15 per cent drop in value, walking away from a 10 per cent deposit makes some kind of economic sense. If your $800,000 unit is worth $120,000 less, then taking an $80,000 hit seems like a bargain.”
This ‘negative equity’ situation is caused by lending institutions only offering loans based on the final valuation rather than the initial purchase price, and by the purchaser winding up owing more on the property than it’s worth after settlement. For some, walking away and losing a ten per cent deposit is actually cheaper than completing the purchase.
However, this also means a number of properties will soon be coming onto the market that are genuinely priced to sell and offer opportunities for bargain hunters with access to capital and a long-term plan for property investments.
The latest National Australia Bank residential property survey found that housing market sentiment in the second quarter of 2020 has fallen to a negative 33 points, a 71-point fall compared with the first quarter that showed a positive index of 38 points.
NAB’s survey indicated that property prices in NSW could fall 10 or more per cent as a result of the effects of the pandemic, although these declines were better than initially expected.
NAB chief economist Alan Oster said in the survey report that all forecasts were ‘highly uncertain at this point in time: “While the initial COVID-19 related restrictions on housing activity have eased, the economy has undergone a very large contraction, and while we appear to have passed the trough in activity, it will take time for the recovery to unfold,” he said.
Victoria’s recent surge of COVID-19 cases has brought on a repeat of restrictions on face-to-face auctions in metropolitan Melbourne and the Mitchell Shire. In regional Victoria the situation’s a bit more relaxed with on-site auctions and inspections still being allowed for up to 20 registered buyers.
Real Estate Institute of Victoria president Leah Calnan said that most estate agents had expected the reintroduction of restrictions and were better prepared to move auctions online than last time.
“Everyone will be looking forward to warmer weather and coming out of these restrictions into what will be a strong spring market,” she said.
It’s interesting to note that recent figures compiled by Domain show that Sydney house rents remained unchanged over the June quarter at a median of $530 after a rebound early in the year was abruptly halted by the coronavirus pandemic.
House rents did see some falls in inner suburbs — down 5 per cent in the city and east, but the Sydney median rents held up overall thanks to stable conditions in more affordable outer areas, with rents unchanged in the west, south west and north west, and even an increase of 1.3 per cent on the upper north shore.
Domain also found that the cost of renting a Sydney unit fell 3.8 per cent in the three months to July, to a median $500 a week. This was the sharpest quarterly drop in 15 years, and 9.1 per cent below the 2017 peak, causing Domain’s senior research analyst Nicola Powell to conclude: “The rapid rise in [the number of] advertised rentals has put pressure on rents and tenants are using this as bargaining power to negotiate a deal.”
Sydney recorded a 3.6 per cent vacancy rate in June with an estimated 22,665 rental properties left empty. Domain’s analysis showed that rents had dropped on almost 30 per cent of listings, with inner-city areas having the biggest price declines as they experience increased supply at a time of weaker demand. However, Dr Powell did say that the marginal decline in new listing volumes since May, and an unchanged vacancy rate month on month suggested there was some stability ahead.
Home loan numbers drop
Figures from the Australian Bureau of Statistics (ABS) show that the number of new home loans in May, the most recent month for this important statistic, fell by 11.6 per cent nationally. The number of owner-occupier home loans fell 10.2 per cent over the month, while investor-only loan commitments fell by 15.6 per cent.
Sally Tindall, research director for mortgage comparison site RateCity estimated the value of home loans lost to the banking sector was $2.15 billion for the month: “Today’s figures show just how hard COVID-19 hit the housing market during lockdown.
“May recorded the biggest monthly drop in the value of new home loans settled, as vendors pulled the pin on listings, and on-site auctions were banned for weeks.”
Westpac chief economist Matthew Hassan said the May figures reflected the initial impact of COVID-19 on the housing finance market.
“These figures are showing a lagged impact from the April lockdown rather than anything relating to the subsequent reopening,” Mr Hassan said, indicating that forthcoming figures for June could show an improvement in the number of home loans made as the housing market adjusted to conditions imposed by the virus.
There have been concerns in recent weeks about an "economic cliff" coming in September with the end of the loan deferral period coinciding with the scheduled withdrawal of Federal Government support measures that include the JobKeeper wage subsidy and the JobSeeker coronavirus supplement.
In a bit of good news for homebuyers, more than 800,000 bank customers still battling due to COVID-19 will be given another four months to start paying back their loans. Australian Banking Association (ABA) chief executive Anna Bligh said: "Banks are announcing the next stage of this support, which will be specifically targeted to getting people back on repayments while continuing to help those hardest hit," she said.
"This new phase of support avoids a cliff which would have been a terrible outcome for customers and had a negative impact on the economy."
The Australian National University (ANU) conducted a survey in June that showed the coronavirus crisis has led to the number of Australians unable to pay their rent or mortgage on time more than doubling. It found that those who were unable to service regular housing costs surged from 6.9 per cent to 15.1 per cent from April to May, and 44 per cent of people aged 18 to 24 years were unable to pay their rent on time.
However, REA Group director of economic research Cameron Kusher told news.com.au that he was “a little surprised” with how high they’re recording mortgage stress: “There’s the concern of what will happen come the end of September when JobKeeper and JobSeeker are removed and the mortgage holidays are also eased.
“But what we’re hearing from particularly the banks is there’s going to be a fairly pragmatic approach. And the fact borrowing costs are the lowest they’ve ever been eases that risk a little; it’s not like the last recession when interest rates were 20 per cent and the banks had to shift mortgages off their books straight away.”
He added that the current record low interest rates will shield lenders from the need to call in a large number of their loans, but he believed: “We will see an increase in vacancy rates, we will see some falls in rents and I think it’s going to take some time to recover,” Mr Kusher told news.com.au.
Home ownership among younger Australians has been declining for some time. Between 1988 and 2017 the proportion of 25- to 34-year-olds who owned their home dropped from 54 per cent to 35 per cent while in 2016, 22 per cent of over 55-year-olds had a mortgage.
Stamp duty may go
The push to do away with stamp duty and replace it with a more dependable source of revenues for state and territory governments continues. Analysis from consultancy firm PwC has proposed raising the GST from 10 per cent to 12.5 per cent and extending it to include education, health and fresh food.
The intent of this is to replace the revenue lost from potentially doing away with stamp duty and payroll tax. (Let’s just remember that the original GST proposed back in 1998 and implemented in 2000 was to do away with a number of various State and Territory Government taxes, duties and levies such as banking taxes and stamp duty.)
PWC’s report states that the increased tax on goods and services would raise about $40 billion a year in a reform that would serve as a stimulus to help lift Australia’s GDP. It also broadly supports the thinking of NSW Treasurer Dominic Perrotet who wants the GST to include fresh food, education and water sewerage, and provide an option for homeowners to either pay a stamp duty or a land tax.
Stamp duty is NSW’s second-largest revenue stream, and those earnings would take a serious hit with a switch to land tax unless the government is willing to endure a great deal of political pain and ensure there’s no drop in overall revenues if stamp duty’s abandoned.
But Mr Perrottet said that could be offset by a GST increase or by broadening the tax’s base, and this would be a good time to make the change: “As we‘ve gone around and talked to various people, we’ve felt the momentum for change is strong, and it’s not just from a few individual leaders, it’s from a broad base across the sector – business, academics and in the community,” he said.
“And for the first time in many years, it appears that we have the mechanisms to deliver quite genuine reform … it is a good opportunity, and we need to grab it.”
AMP Capital’s chief economist Shane Oliver supports replacing stamp duty with a land tax but he acknowledges there would be a transitionary period where state governments would miss out on revenue. “So an increase in the GST could presumably cover that period,” he said.
It should be noted that Federal Treasurer Josh Frydenberg has previously ruled out any increase to the GST, and has said if the states wanted to initiate tax reforms they would get no financial support from the government.
From the Towers
Owners of units in Sydney's Opal Tower have commenced legal action against the NSW Government after discovering more than 500 new defects in the troubled building. The owners claim the new defects were discovered during independent building inspections.
The owners' corporation is taking legal action in the NSW Supreme Court against the Sydney Olympic Park Authority (SOPA) — a NSW Government entity, and the builder Icon
Owners' corporation chairman Shady Eskander said the owners were suing for the cost of fixing all defects in common areas, building inspections, project managers, insurance and legal fees. He also said the insurance premium for the whole building this year came to more than $1 million — up from $100,000 in 2018.
A government register indicates that more than 440 buildings in NSW are under review, being assessed or require remediation for flammable cladding. The situation is worst in the inner city where the City of Sydney has issued fire-safety notices for 130 buildings due to concerns about combustible cladding.
The NSW government has declined to help residents cover the cost of removing the defective cladding. It has, however, established a support unit to expedite the assessment of high-priority buildings.
NSW Premier Gladys Berejiklian said her Government was working to support the affected residents: "We certainly have been there doing what we can and recently not only have we appointed a building commissioner but put through new legislation to protect owners into the future so certainly we appreciate the angst they're going through and we'll continue to support them in whichever way feels appropriate," Ms Berejiklian said.
A spokeswoman for Better Regulation Minster Kevin Anderson said the government had introduced new laws to protect building owners in NSW which require anyone carrying out building work to avoid construction defects which include flammable cladding.
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'They should help': Sydney cladding crisis leaves big bills for owners,’ Matt O'Sullivan, Sydney Morning Herald, 13 July 2020
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