The Australian property market is nothing short of bulletproof, as shown by new data from CoreLogic. Despite the country’s first recession in nearly three decades, national home values – including both houses and apartments – ended 2020 three per cent higher.

Another recent report, the Domain House Price index, showed the nation’s median detached house price hit a high of $852,940 in the December quarter. Sydney’s median house price tapped a record high mark of $1,211,488 - $50,000 above the high point pre-pandemic.

A new term – ‘wounded underbidders’, has entered the housing market’s lexicon. This is a term describing those who intended to purchase a property before last Christmas but who missed out in the end-of-year auctions. Now they’re back, attending auctions in 2021 and ready to buy with loans approved and deposits in hand.

The greatest increases in the full 2020 year came in outer Sydney areas including the Northern Beaches, where prices have risen 10.1 per cent in the past 12 months, the Blue Mountains, where prices are up 9.1 per cent, and the Central Coast which has seen an increase of 12.7 per cent, Domain said.

And in the three months to December, the northern beaches had the strongest quarterly growth with the median house price jumping $165,000 to a record $2.05 million.

It was one of six regions where house prices set a new record high price in the last quarter of the year, with house medians in the upper north shore, north-west, city’s west, Blue Mountains and the Central Coast all reaching new peaks.

The first weekend in February saw the Sydney auction market have its biggest result in 24 years, recording a preliminary clearance rate of 88.7 per cent from 408 auctions listed. Domain senior research analyst Nicola Powell said this was the highest clearance result since June 14, 1997, when the finalised clearance rate was 89 per cent after 226 auctions.

“We do expect a bounce early in the auction season because there are lower volumes of homes for sale and more home buyers on the market after the holidays,” she said. “That said, it’s a very robust result and highlights the market is in an upswing and it is a very competitive market,” she said.

The number of people attending open houses across the city in January was up by more than a third, year-on-year, data from Domain shows, as a fear of missing out (FOMO) sets in for house hunters once again.

In other times you’d expect something else to be happening with property values. After all, we’ve had the steepest decline in population growth in decades, rising joblessness, a pandemic, and the latest ‘recession we had to have’. Regardless. property values have climbed upwards unabated. 

Naturally, there are reasons for this. The JobKeeper wage subsidy, tax cuts, cash payments, early access to super, historic interest-rate cuts and mass bank deferments on loan payments have all contributed to what seems an economic miracle.

Buyers advocate Cate Bakos said the market for buyers has become “ferocious” with house prices rising by thousands of dollars each week due to the competition over the supply of  homes for sale. She said that even if more stock comes onto the market, there is enough demand from buyers to keep the current momentum going.

“I’ve never seen it like this before,” Ms Bakos said. “The demand for houses has gone through the roof.”

Still a modest rebound

Economist Saul Eslake says that, compared to the property boom in other countries, Australia’s rebound during the pandemic has been relatively modest: “I think it’s important to view what’s happening to Australian house prices in a global context,” he said. 

“Residential property prices have been remarkably resilient in most countries thanks to record low interest rates and ample supply of credit.”

Mr Eslake told the Sydney Morning Herald that recent gains are unlikely to be undone: “I would say the rise in house prices is probably sustainable. Indeed, we could see further gains in many regional cities as people adapt to the opportunities created by the more widespread acceptance – at least for white-collar occupations – of working from home.

“Much of the demand is coming from first-time buyers, who appear to perceive an opportunity to get into the housing market without facing the competition from cashed-up immigrants or negatively geared domestic investors, which has ‘squeezed’ them out for most of the preceding 30 years.”

Westpac’s chief economist Bill Evans believes Australian housing prices will continue to rise. He says concerns about prices falling in the coming months when borrowers with deferred-payment loans have to start paying again, are baseless: “It’s our view that that risk will be well managed.”

Evans thinks record-low interest rates, combined with the LNP government’s focus on growing the economy and an often-stated desire not to over-regulate bank lending, will create a “very, very positive environment for the housing market”. He also forecasts that Sydney home values will be up 14 per cent over the two years to the end of 2022.

Louis Christopher, founder of SQM Research, believes the greatest danger to such optimistic forecasts is what will happen when the government’s multibillion-dollar JobKeeper allowance scheme ends in March: “The ending of jobkeeper payments in March is a factor that we’re watching very closely. 

“We think that measure averted a crash of the housing market in 2020 so it will be interesting to see what happens when it stops in March. But if the market makes it through the end of JobKeeper then we’ll see more investment and it will see the market through 2021.”

Fast-rising property values across the nation are being closely watched by the Reserve Bank of Australia, said the Bank’s governor Philip Lowe. It’s his opinion that the coronavirus pandemic’s effects on the economy would have been much harder to deal with if home prices had fallen.

Dr Lowe told a standing committee on economics hearing that there are “many moving parts ... at present” making the economic outlook complex: “In the face of all these moving parts, the housing market has been more resilient than expected and this has been helpful in terms of the overall economy.

“The past year would have been even more complicated if there had been large and widespread falls in housing prices,” Dr Lowe said.

Construction boom?

ABS head of finance and wealth, Amanda Seneviratne, said that about 53 per cent of housing loans in the fourth quarter of 2020 were for owner-occupiers buying existing dwellings, while construction of new dwellings accounted for 32 per cent.

“The value of construction loan commitments grew 17.1 per cent in December, more than doubling since the June implementation of the HomeBuilder grant,” Ms Seneviratne said. 
“Federal and state government measures, such as HomeBuilder, and historically low interest rates, are supporting ongoing growth in housing loan commitments.”

Up to the end of December, 75,143 households had applied for a $25,000 grant under the HomeBuilder scheme which was nearly double Treasury forecasts. The government had earlier predicted the program would only support the renovation or construction of 42,000 homes at a total cost of $920 million.

HomeBuilder was introduced by the federal government at the peak of the coronavirus pandemic to respond to fears the construction sector would crash. Treasury now estimates the program is supporting around $18 billion worth of residential construction projects.

The HomeBuilder program was initially due to end in December, but due to its popularity has been extended until March 31, although the size of grants has been reduced from $25,000 to $15,000.

Despite the positive results generated by HomeBuilder, the number of new homes to be built in Sydney over the next five years will be considerably fewer than had been forecast by the state government before the coronavirus pandemic.

The NSW Department of Planning in its annual housing supply forecast estimated that from 132,500 to 171,200 new homes could be built over the next five years (2020-2021 to 2024-2025). Even the higher figure is less than the 38,210 homes a year forecast in early 2020 before the pandemic hit, and well down from the more than 42,000 new homes completed in greater Sydney in both 2017-18 and 2018-19. 

The Housing Industry Association (HIA) says the reduction in the number of dwellings over the next five years would put tens of thousands of jobs at risk: “That is going to be a significant shock to the building industry if it does transpire,” the association’s chief economist, Tim Reardon, told the Sydney Morning Herald.

NSW Planning and Public Spaces Minister Rob Stokes cautions against becoming complacent and accepting that the COVID-19 pandemic has only caused a temporary slowdown in Sydney’s population growth.

Mr Stokes said long-term housing and land development targets would still need to be met: “We must continue to build housing and infrastructure for a growing and ageing population,” he said. “Forecasts show last year will only be a speed bump in greater Sydney’s housing demand.”

Affordability concerns

The unprecedented rise in house prices has raised concerns about housing affordability, with experts predicting workers on moderate incomes will find it much harder to reach home ownership than in previous years.

The affordability problem has accelerated so quickly that it now affects all segments of the market, from entry level first-home buyers to current owners seeking to upgrade.

Nicole Gurran, a professor of urban planning at the University of Sydney, says the hurdles for entry level buyers are harder than ever to surmount: “…unless the first-home buyers are in a high-income bracket and so able to secure a loan — but they’ll be looking at very high repayments. If I was an essential worker trying to buy a home anywhere within striking distance of a major city, I’d be more disheartened than ever.”

Commenting on recent figures from the Sydney property market that show first-home buyers are at their highest level of activity since the GFC, Professor Gurran argues that government incentives and low interest rates have helped a limited number of buyers to acquire a property, boosting the market for the short term.

“The question is whether those first-home buyers were then already heading towards home ownership anyway. I’d question whether the first-home buyer assistance made any difference over the long term,” she said.

Another academic, UNSW professor of housing research and policy Hal Pawson, said that if house prices are rising while unemployment stays elevated, affordability for key workers and moderate-income households will be “more stretched”.

“For the last 10 or 15 years interest rates have fallen. What that’s created is a bigger and bigger deposit barrier,” he said. “Falling interest rates don’t help with the part of the price you’ve got to save.

“The way that lower interest rates are driving prices higher is pushing up the multiple of annual earnings that the typical buyer will need to save for a deposit.”

Land Tax update

The introduction of a broad-based land tax on residential property looms closer after NSW Treasurer Dominic Perrottet said that Sydney housing prices are proof that sweeping changes to the state’s property tax system have become urgent. 

“We need a fairer and equitable system in place, and yes those changes can be difficult, yes they financially can cost the state but ultimately we want to make sure we give our young people every single opportunity,” Mr Perrottet said.

“When you see the time it takes for young people to save for stamp duty, to save for that property ... by the time young people have saved for that deposit they’re going backwards because the prices of the properties have increased at a much greater rate.”

A survey conducted by the Committee for Sydney in January found that Sydneysiders were optimistic about their property market and supported major reforms now under consideration including replacing stamp duty with an annual land tax. 

Eamon Waterford, the deputy chief executive of the Committee for Sydney, said that about 52 per cent of respondents said they support “changing the system to allow homebuyers to choose between paying stamp duty and property tax”, with 21 per cent opposing. 

Support was highest among 18 to 34-year-olds, with 58 per cent in favour and 11 per cent against, and lowest among those aged above 50, with 47 per cent in favour of the change and 29 per cent against.

Among those living in Sydney’s east, 53 per cent supported the change and 20 per cent opposed, while 50 per cent of those in the city’s west supported it and 26 per cent stood against.

A consultation paper released in November 2020 recommended that for owner-occupiers the new property tax would consist of a fixed annual rate of $500 plus 0.3 per cent of the unimproved land value. The consultation period runs until March this year, when the government will consider its responses before the next state budget.

It’s estimated that an average Sydney house owner will pay either $51,000 as a lump sum on the purchase of the property or between $2000-$3000 every year.

Because of soaring NSW property prices and rising sales numbers, economists are projecting this year's stamp duty receipts to potentially outstrip the record set in 2017.

Nine News says that some government MPs are becoming nervous about the proposal, as leaving the tax as it is while property sales are booming would significantly help the NSW budget return to surplus. But it’s likely that any changes to existing stamp duty legislation will take time to implement.

“Nine News understands it will take at least 12 months to make any changes to the state's tax system, provided it is given the green light by cabinet and the parliament”, writes Nine’s federal political reporter Chris O’Keefe.

The gap between houses and units

The gap between the rise in the median price of Sydney houses and the median price of units continues to widen, after the median price of a freestanding residence in the city rocketed upwards by $4200 a week during the last three months of 2020.

Real Estate Institute of NSW chief executive Tim McKibbin said that a large percentage of those who purchase units are investors, and they have a different mindset to other property buyers during periods of economic turbulence: “Uncertainty has a higher impact on them,” he said.

Domain figures show that the median price of a freestanding house in Sydney reached a record $1.21 million in the December quarter, making it 66 per cent higher than the median unit price. 

This is the biggest percentage difference between Sydney houses and units since Domain started tracking prices in 1993. For comparison purposes, the average price gap over the past decade has been 46 per cent.

Domain’s senior research analyst, Dr Nicola Powell, said unit prices are likely to be under more pressure in 2021: “Over the past three decades it is rare that house and unit prices move in opposite directions annually. Weaker investor activity has disproportionately impacted unit prices because they tend to be the preferred property type.

“There are also particular locations with increased supply as a result of heightened development in recent years. Changed lifestyle preferences post-lockdown and the option of remote working have driven demand to outer suburban and regional locations as buyers seek affordability, liveability, space and greater value for money.”

A further sign of declining interest in purchasing a unit is the statistic from Domain that showed in the four weeks to January 31, while inspections for houses were up 36.7 per cent, year-on-year, foot traffic through units was down 12.9 per cent over the same period.

“It really speaks to that two-speed market. We are seeing house and unit prices move in different directions,” Dr Powell said.

Open Agent’s Emily Ng also feels that 2021 will be a rough year for the high-rise apartment market: “With many investors opting to put their money in regional areas and freestanding homes, inner city apartments particularly in Sydney and Melbourne have experienced weak demand and high supply due to stalled overseas migration and a lack of international student numbers.” 

Martin North, Founder of Digital Finance Analytics, says the highrise sector faces a serious shortage of tenants in 2021: “Many of the inner CBD high rise apartments were let to students and we know both in Sydney and in Melbourne there are massively high vacancies because nobody wants to rent there. Also, people aren't working in the CBD area where they used to. 

“It’s going to put huge downward pressure on the highrise sector that already is wrestling with remediations of poorly built properties, an oversupply of poorly built properties and the failure of a number of developers,” he said. 

While Sydney’s median house price reached a record high of $1,211,488 last quarter after jumping 6.7 per cent last year, Sydney unit prices dropped and were down 0.3 per cent over the year at a median of $729,840, Domain figures show.

Sources:

‘Sydney’s auction clearance rate hits highest point in 24 years,’ Melissa Heagney, Domain, 8 February 2021
Sydney open home inspection numbers jump as FOMO sets in again, experts say,’ Tawar Razaghi, Domain, 7 February 2021
‘New homes forecast for Sydney over next five years stuck in slow lane,’ Matt O'Sullivan, Sydney Morning Herald, 6 February 2021
‘Resilient housing market ‘helpful’ for COVID-19 economic recovery: RBA,’ Jennifer Duke and Shane Wright, Sydney Morning Herald, 7 February 2021
‘Support for stamp duty reforms and shift away from coal, Sydney survey finds,’ Pallavi Singhal, Sydney Morning Herald, 8 February 2021
‘Housing affordability: Record house prices reignite worries for home buyers,’ Elizabeth Redman, Tawar Razaghi , Domain, 29 January 2021
‘Out of control? Australian property market to rise to record highs this year,’ Martin Farrer, The Guardian, 30 January 2021
‘Record price difference opens between Sydney houses and units,’ Matt Wade and Jennifer Duke, 30 January 2021
‘Why are Australian home prices rising again and can it last?,’ Jessica Irvine, Sydney Morning Herald, 28 January 2021
‘Record housing prices spur Perrottet to deliver stamp duty reform,’ Tom Rabe and Matt Wade, Sydney Morning Herald, 29 January 2021
‘House prices predicted to rise by up to 10 per cent in 2021,’ Melissa Heagney, Domain, 2 February 2021
‘Coronavirus HomeBuilder construction scheme to hit nearly $2 billion amid spike in demand,’ Nour Haydar, ABC News online, 20 January 2021
‘Australia's housing market is boosted by policies designed to ensure prices keep rising,’ Greg Jericho, The Guardian, 3 February 2021
‘Wounded under-bidders set to drive property prices as 2021 begins,’ Sue Williams, Domain, 21 January 2021
‘Losses mount for apartment sellers in Sydney’s oversupplied high-rise regions,’ Aidan Devine, The Daily Telegraph, 24 January 2021
‘7 factors driving the property market in 2021,’ Emily Ng, Open Agent, 14 January 2021
‘Sydney house prices reach record high, outstrip pre-pandemic levels,’ Kate Burke, Domain, 28 January 2021