Market comment: Sydney market highs prove sustainable, RBA’s not worried

Mon, 15 Mar 2021

Market comment: Sydney market highs prove sustainable, RBA’s not worried
Can Sydney housing really go this much higher?  The CoreLogic national home value index showed Sydney was Australia’s strongest capital city market in the month of February, rising 2.5 per cent – the largest monthly rise since 2003. The median price for a house at auction in Sydney has reached a record high of $1.68 million, and the auction clearance rate is challenging the high last seen in May 2015.

A few more statistics from CoreLogic that hit the headlines this month show that home values are at an all-time record high, soaring 5.7 per cent since October last year.  This new record surpasses the property market peak that Sydney reached in July 2017, despite a global pandemic and economic recession.

Westpac has predicted a 20 per cent jump in Australian property prices between now and 2023. The bank said record-low interest rates of just 0.1 per cent would see real estate values in our nation’s capital cities rise by 10 per cent both this year and next, meaning the median price of Sydney homes would increase by around $207,000 to an amazing $1.24 million.

“The bottom line is that Australia’s housing upturn now has strong momentum that looks to be lifting further and will remain well supported by monetary conditions and an improving economic backdrop,” Westpac economists Bill Evans and Matthew Hassan said.

“Note that the vaccine developments will also influence the relative performance of different housing markets. The smaller capital cities and regions are well placed to continue to outperform in 2021 but growth will swing towards the three eastern capitals – Sydney, Melbourne, and Brisbane in 2022 as the end of the pandemic allows international borders to reopen,” Westpac said.

Evans and Hassan said Australia is clearly a “seller’s market” with buyer demand running well ahead of the number of properties up for sale: "Buyer demand has run well ahead of 'on market' supply, with sales outstripping new listings by 34 per cent over the last six months and 'stock on market' down to just 2.5 months of sales — the long-run average is 3.8," they noted.

“The upturn is being supported by record-low interest rates, the confident expectation amongst borrowers that these rates will remain low for years to come, ample credit supply and an improving economic backdrop as the rollout of vaccines promises to bring the pandemic to an end and drives a sustained lift in confidence,” they said.

The Commonwealth Bank’s economics team isn’t quite as optimistic as Westpac’s, but still predicts prices will continue to lift. It believes Sydney’s prices will climb 7.5 per cent this year and 5.8 per cent in 2022. And in a separate study, the CBA’s economic projections also showed Sydney prices could rise by 20 per cent over the next two years.

CBA’s head of Australian economics, Gareth Aird, told the Sydney Morning Herald that, with interest rates below the return on rental properties, the fundamentals for house prices were strong.

“The Australian housing market is on the cusp of a boom. The boom is being driven by record low mortgage rates coupled with a V-shaped recovery in the labour market.

“New lending has lifted sharply. Dwelling prices are rising briskly in most capital cities. And turnover is up significantly on year ago levels,” he wrote.

According to Domain, most Sydney areas are now seeing houses offered at private treaty being sold much faster than a year ago. Auction campaigns are also being shortened, from the traditional four-to-four-and-a-half weeks to three and three-and-a-half weeks.

The median price for a house at auction in Sydney has reached a record high of $1.68 million and the auction clearance rate is at its highest level since 2015.

“It’s all about big buyer demand, low interest rates, people working from home and wanting to find a place that suits them better – and the market is trending upwards,” said James Price of inner-west agency Hudson McHugh.

Houses in Sydney’s inner-city are also selling faster, down 22.6 per cent from 53 days to 41, and the volume of off-the-market sales taking place in some spots could lower that still further, suggests McGrath agent Andrew Stewart.

“There’s a distinct lack of stock in many areas around the city, which is driving days on market down, but also properties sell off-market in just a week or two,” he told Domain.

BIS Oxford Economics economist Maree Kilroy told Domain while the house price forecasts looked to be strong, it’s important to note these rises would, in part, be offset by the rock-bottom interest rates.

“It might sound strange, but housing affordability has improved. Whilst we talk about prices getting back to pre-pandemic levels, we’ve also had interest rate cuts since then,” she said.

RBA isn’t worried

The ABC’s Ian Verrender says that Australian real estate prices hit record levels in mid-February and there’s no end in sight: “With interest rates locked in at a whisker above zero — and with Reserve Bank assurances they'll stay put for the next four years — it's little wonder buyers are scrambling for a piece of the action.

“Add in the imminent removal of responsible lending laws and the stage is set for a sustained real estate boom.”

Mr Verrender says that we’d normally expect the Reserve Bank to be formulating contingency plans on how to deflate the real estate bubble without hurting the broader economy: “Instead, our monetary mandarins are doing the opposite. They're stepping aside, more than happy to let prices rip.”

He quotes RBA Governor Philip Lowe who recently said: "There's a lot of focus at the moment on the fact that housing prices are rising again, and the stock market has been strong. Well, the national house price index today is where it was four years ago … and the equity market, we're back to where we were at the beginning of last year."

Central banks, says Mr Verrender, including Australia’s have allowed the property booms created by record low interest rates to continue without restraint, trusting the markets to remain buoyant regardless of long-term consequences. 

“To be fair, the RBA reckons real estate prices will have to start moderating soon for two key reasons. One is that for the past year, we've had no immigration which should have reduced demand for housing.

“And the second is that a large number of newly constructed properties have yet to come on the market.”

Reserve Bank board member Ian Harper told Bloomberg News that unemployment was too high and economic activity too low for monetary stimulus to trigger runaway house price inflation: “The tendency of this to produce an asset-price bubble is way off where we’re presently headed,” Mr Harper said, while noting rising house prices encouraged investment.

“There’s still plenty of excess capacity in the economy,” he said.

Nerida Conisbee, chief economist at global real estate company REA Group, told The Guardian’s Royce Kurmelovs that the situation is being driven by a combination of cheap money, a high savings rate among those who held onto a job through 2020, a receding pandemic and an exodus from densely populated cities into regional areas.

“You’re watching a realignment as people work out where they want to live and where they want to be employed,” Conisbee said.

“The recession we saw with the pandemic is not quite like what we’ve seen elsewhere in the GFC where it was finance-led. What that’s meant for property is there’s no shortage of money. Interest rates are at incredible lows and those who had jobs were forced to save during rounds of lockdowns.”

Martin North, the principal of Digital Finance Analytics, said the federal government is looking to pump up the market further by winding back responsible lending laws: “Scott Morrison said three years ago he wouldn’t let prices drop and that is proving to be true, but we’re building these rises off the back of massive debts.

“Banks are lending six- or seven-times average incomes. They’re doing what they were doing before the royal commission. This is an unsustainable and a highly risky extension when we should be investing in more sustainable or longer-term solutions.”

Among the economists taking part in The Sydney Morning Herald/The Age Scope survey, at least two said they believe there could be an RBA rate rise as soon as late 2022. University of Melbourne professor Neville Norman predicted an increase in the fourth quarter and Bankwest Curtin Economics Centre’s Rebecca Cassells forecasts one in the third. Another three believe rates could start to rise in 2023.

No boom lasts forever, and this month will see the ending or winding back of a number of government stimulus measures that have helped to cushion our economy from the impacts of the pandemic. 

After 31 March, the end of support packages such as JobKeeper, loan relief and mortgage deferrals will have as yet unknown effects on our economy and some of them will be felt in the property sector. Treasurer Josh Frydenberg says that the next round of economic stimulus will come from the households and businesses that have put aside around $200 billion in savings since the pandemic began.

“This money will help underpin our economic recovery and avoid a fiscal cliff as some of the support measures start to taper off,” Mr Frydenberg told Sky News.

First-home buyers return

Dr Cameron Murray, a post-doctoral fellow at the Henry Halloran Trust at the University of Sydney, told The Guardian that what is happening in Australia has to be seen in a global context.

The world is experiencing a global housing boom, he says, while central banks have come to view the housing market and the associated consumer spending as a key element of their economies: “Our macro-stabilisation policy works by juicing house prices,” Murray said.

“This is a policy most central banks have adopted. Secondly, we’re just at that point in the cycle. The best parallel to the situation now is 2004. I think we’re in a very similar phase right now. Sydney boomed early, then it tapered off. Then the rest of the country shot up for four years in line with the broad global house price cycle.”

There’s general agreement that the current market is being driven by owner-occupier homebuyers, rather than the investors who largely created the property surge of the past decade. Australian Bureau of Statistics figures show new loan approvals to owner-occupiers surged 39 per cent in the year to December, while loan approvals for first-home buyers leapt by 61 per cent, boosted by government grants.

Westpac economists said that the investor segment accounted for less than 25 per cent of new home loans over the second half of 2020 but usually averages over 35 per cent and rises in periods of housing upswings: “Some tentative early evidence here is the 15 per cent increase in new lending for investors in the last two months."

CoreLogic’s Tim Lawless says at the peak in 2015, property investors made up about 46 per cent of all new mortgage lending, while today investors account for just 23 per cent.

“Weaker rental demand, especially in the investment enclaves of Melbourne and Sydney’s inner-city unit markets, is likely a significant disincentive for investors,” Lawless says.

However, there was a 9.4 per cent increase in investor lending in January, which was the strongest monthly result for this segment since September 2016, according to ANZ Bank’s analysis of ABS data.

Peter King, chief executive of Westpac, described the investor market as “relatively quiet.”

“I wouldn’t say we’ve seen [investors] come back into the market yet, but conditions are looking like that’s a possibility, I think,” King said. 

Economist Saul Eslake told The Sydney Morning Herald that recent gains in the housing boom are unlikely to be undone: “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.”

The Herald’s Jessica Irvine has no doubts about who’s driving the current market’s price gains: “It’s largely first-time buyers – at least the lucky ones who have savings and access to credit. 

“Such buyers know they will pay absolutely no tax on any capital gains they make from their homes. In retirement, the value of their asset will be excluded from the age pension assets test. When they die, they can pass on the property tax-free to their children.

The Australian Bureau of Statistics is in full agreement that first home buyers have been a driving force behind the recent rally in prices.

ABS data shows first homebuyer loan commitments jumped 9.3 per cent in December and 56.6 per cent over the past year. The 16,664 first home buyers taking out loans in January was the highest number since May 2009.

“Federal and state government measures, such as HomeBuilder, and historically low interest rates are supporting ongoing growth in housing loan commitments.” ABS head of finance and wealth Amanda Seneviratne told

Work from home effects

For generations, Australians have wanted to live within a comfortable commute of their city’s CBD. Public transport systems and roads were in place to convey them to and from work, and it was worth paying a bit more for housing just to be closer to jobs, restaurants, theatres and the other attributes associated with our cities.

Over the past year there’s been a workplace revolution caused by Covid-19 and it’s having a noticeable effect on housing prices. Working from home used to be a scarce option for employees, but after lockdowns caused by the pandemic things have most certainly changed.

So many workers have grown accustomed to working from home that it’s showing up as a population shift from our cities into the regions, according to Morgan Stanley Research. It shows that tens of thousands of Australians exiting our cities have caused a boom in regional home prices and rental levels, while figures from CoreLogic show that regional home prices have risen by 7.9 per cent on average over the past twelve months.

To what degree this trend will become permanent is a subject of ongoing debate. A study conducted by Swinburne University for the Fair Work Commission found that only five per cent of workers sent home during the pandemic said they want to return to the office full-time once the pandemic has finally concluded. Employers too are reassessing the potential benefits to be gained by transitioning away from the traditional CBD-based commercial model.

It could be some time before we know how these issues will be resolved and how they will affect the housing market. It is certain, however, that while this work-from-home trend has developed, and while Covid-19 has impacted workplaces across Australia, the Sydney property market has continued to power its way upwards and demand has never been stronger.

Housing supply excess?

A recent report by the federal government’s National Housing Finance and Investment Corporation (NHFIC) predicts that the nationwide supply of new housing will exceed new demand by about 127,000 dwellings in 2021, and by about 68,000 dwellings in 2022. Sydney and Melbourne are naturally expected to have the largest excess supply of housing stock.

But look a bit deeper into these figures and we see the forecast oversupply will be largely limited to city-based apartments, particularly in capital cities. The biggest impact will be on rentals, with an expected softening of apartment prices in these markets. Detached housing won’t be affected, according to NHFIC’s CEO Nathan Dal Bon.

Speaking at NHFIC’s “State of the Nation’s Housing: 2021 and beyond” webinar Mr Dal Bon described the short-term oversupply of housing as “nuanced”, and said that record low interest rates and government incentives such as HomeBuilder and the First Home Owner Grant would stimulate demand in other sections of the market.

“From my perspective, there is clearly a great deal of momentum in segments of the property sector thanks to low interest rates and considerable fiscal stimulus. This has had the desired impact of stimulating demand at a time of significant uncertainty. However, this headline story is more nuanced. For example, there [are] significant differences between detached housing and apartments and across regions and metro areas,” he said.

The NHFIC’s report says beyond 2023 demand is projected to exceed supply as the construction industry begins to respond to a return of growth in demand. This will result in an undersupply of almost 14,000 dwellings in Sydney by 2024.


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‘House prices record sharpest increase since 2003, CoreLogic says,’ Michael Janda, ABC News online, 1 March 2021
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‘Sydney median auction house price reaches a high of $1.68m during record month of clearance rates,’ Tawar Razaghi, Domain, 26 February 2021
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