Australian housing values are surging at their fastest rate in 32 years. Residential values rose 1.8 per cent in April across Australia. This was slightly down from the 2.8 per cent posted in March, which was the fastest rate of growth since 1988, according to data firm CoreLogic. Sydney led the race again in April with values rising 2.4 per cent over the month.

Domain Senior Research Analyst Dr Nicola Powell says the average house price in Australia is now just under $900,000 with units at just under $585,000:"This is the first time house prices have risen simultaneously for two consecutive quarters since 2009 post-GFC."

The Guardian’s economist Greg Jericho commented: “The 43 per cent annual growth in NSW housing finance would historically suggest that Sydney house prices by September will be about 20 per cent above what they were a year earlier – which, if history serves, will see the median price for a house in Sydney reach more than $1.2m.”

Statistics from Domain tell us it’s already there. The median house price across Sydney is now, according to Domain, $1,309,195 after a 12.6 per cent jump over the past year and a leap of 8.5 per cent in the first quarter of 2021.

House prices have risen by six-figure sums across more than 130 Sydney suburbs. Sydney’s median house price rose 8.5 per cent over the last quarter, the latest Domain House Price Report shows, which was the fastest quarterly growth since Domain records began in 1993.

When we compare Sydney’s most expensive 25 per cent of houses to the least expensive 25 per cent over the past three months, the top quartile's values increased by 11.4 per cent while the bottom quartile grew just 5.0 per cent.

Sydney property auctions have become a saga of heated competition and rising prices. Houses have surged more than $100,000 in just a month, and the median price paid for a house under the hammer in Sydney hit a record high of $1.755 million in March. 

Units also rose with the auction price for apartments above $1 million for the first time, up to $1.03 million.

“The property market is red hot” CoreLogic Australian head of research Eliza Owen told NCA News Wire. “It is increasing in value and the rate at which it’s increasing continues to rise as well. For the stock that is coming onto the market, there’s a lot of buyers [and] properties are taking less time to sell. It’s more of a seller’s market at the moment.”

Ms Owen said speculation was growing about when a downturn might come and what could trigger it: “What might trigger a slowdown in the market would be changes to lending standards, probably something that would impact owner-occupiers as well as investors.

“The Australian Prudential and Regulation Authority has made pretty clear they’re not looking to intervene yet because the lending standards they’re looking at haven’t deteriorated.”

However, Ms Owen also believes that the housing market will lose strength even without APRA’s intervention: “I think these growth rates are going to slow down,” she said.

“People are going to come against affordability constraints, particularly first-home buyers, and there’s got to be a cap on someone’s willingness to pay, even in an environment where there is relatively little supply.”

She noted that there were more than 40,000 properties put onto the market in April – an increase of 14 per cent on the average number over the past five years.

"That is a sign that vendors are starting to respond to these swift dwelling value increases and really utilising that sellers' market," Ms Owen said.

More properties on market

There were 66 per cent more homes available in the upper north shore in April compared to the trend over the past five years, while eastern suburbs listings were up 59 per cent. The increase in the Ryde-Hunters Hill region was 48 per cent over five-year trend and within inner Sydney it was 36 per cent.

CoreLogic research director Tim Lawless told News.com’s Aidan Devine that “exuberance” in the housing market was peaking: “This isn’t to say housing values are about to reverse; a more likely scenario is the housing market is moving through a peak rate of growth,” he said.

“We are expecting housing values to continue to rise throughout 2021 and most likely throughout 2022, just not at the unsustainable pace of (recent) growth.”

Greg Jericho, in another Guardian article, commented on housing affordability and says it’s not what it seems just because interest rates are low and housing’s an attractive form of investment.

“When we compare…household income in each state with the median established house prices in the capital cities we see that in Sydney, for example, the median house price is now around 9.2 times the annual income of a median household – some 23 per cent above the 7.5 times level it was a decade ago.”

Deposit requirements too have increased: “In Sydney…based on needing a 20 per cent deposit we can estimate that the average deposit for buying a new or established home is $153,200 – some $55,000 more than a decade ago. In 2002, the average deposit for a home in Sydney was the equivalent to around 11 months’ worth of a median household’s income; now it is around 17 and half months’ worth.”

There is a notable disparity, however, between rises in the price of houses and those of units. Nationally, house prices are rising much faster than apartment prices (4.4 per cent and 1.4 per cent respectively over the past three months), and in oversupplied Sydney unit prices in many areas are going backwards.

The Telegraph’s Aidan Devine concluded: “Buying an apartment instead of a house with a backyard would save home seekers up to 80 per cent in some Sydney suburbs,” which was interesting, but it seems that buyers would generally prefer to acquire a house if they can afford it.

The Herald’s Polly Dunning summed up the reasons for this situation: “We sat in our homes last year and saw all the things we hated; all the ways it didn’t work for us and our family.

“Apartments are great when you’re out of the house at work all day and strapped for time – they’re easy to maintain and tend to be close to local amenities. But when you’re stuck in them for long periods, especially with little kids, well, frankly, they suck.”

CoreLogic figures show that in the past year, the median price of a Parramatta unit has fallen 3 per cent to $574,963. That's a significant drop when you consider Australia's median unit price rose 2.3 per cent in the last 12 months while the median house price jumped 7.4 per cent.

CoreLogic’s Eliza Owen says there are a few reasons, in general, why certain apartment suburbs fell harder than others: "The biggest trend is proximity to the CBD, as overseas arrivals are more likely to sit at big international centres."

However, CoreLogic’s statistics show that even within an under-performing apartment suburb, there are some units which manage to buck the trend and sell for a very high price.  Overall, apartment prices across Sydney rose 2.2 per cent in three months even though unit rents were flat.

More auction records

A flood of cashed-up buyers has kept auction clearances at record levels, with houses hitting their strongest monthly rate since 1995 in April at 84.2 per cent, and with a rate above 80 per cent for eight consecutive Saturdays. Also impressive were the climbing volumes of properties on offer across Australia, hitting a peak of 4250 homes under the hammer.

One recent weekend, Sydney’s northern beaches recorded the strongest clearance rate at 90.2 per cent, followed by the upper north shore and the central coast, at 87.2 per cent and 85.6 per cent, respectively. 

Domain figures also showed that the number of homes selling before auction reached a record high in March, with 37.3 per cent of sellers accepting a pre-auction offer. We might wonder why this is happening at a time when auctions are bringing such outstanding results.

Peyman Khezr, a lecturer in economics at RMIT University, says that sellers are the winners in these pre-auction sales because emotional and inexperienced buyers are more likely to overestimate values: “If there are a few buyers with a very high value … it’s best to not allow them to compete publicly,” Dr Khezr said. 

“In a public auction, because people observe other people’s bids … if they’ve overestimated [the value] they will update it immediately and reduce what they will bid to. [But] in a silent auction [when they make early offers] they never get to see the other bids.”

McGrath’s chief auctioneer Scott Kennedy Green told Domain that he did not think the auction market would see any significant changes before mid-year: “In wintertime, we generally see auction numbers decrease … but that won’t change the way the prices are going because there will be less stock,” he said.

He said he thought buyer demand would remain strong for months to come and that he expected unsuccessful buyers to return for another round: “That does tend to get buyers down, but that’s the state of play, and you just have to keep backing up and be prepared to maybe spend a little bit more or wait for the right property and prepare yourself for a competitive auction.”

Many ‘wounded underbidders’ are apparently pulling out of the market and waiting to see whether prices will fall before diving back in. Michelle May, principal of Michelle May Buyers Agents, said some frustrated Sydney buyers are finding the market rising too fast for them and are now looking for extra help.

“We have to tell them that what you are looking for in this market is just not possible,” Ms May said. “They need to adjust their criteria or leave the market.”

Though she has heard about people walking away, she warned against it, instead encouraging buyers to persevere to get into the market: “If you’re thinking things are going to change anytime soon, that’s super risky,” Ms May said.

First-home buyers

Sydney’s first-home buyers have so far been the drivers of this amazing property market we’re seeing. First-time buyers have been racing into the market in numbers that haven’t been seen since 2009, and lending to first-home buyers has shot up by 66 per cent in the past year.

More than one in three new property loans has been taken out by first-home buyers, so no wonder the federal housing minister, Michael Sukkar, called the Morrison government ‘a government for first-time buyers’. He credits his government’s generous support schemes for the buying burst and highlights the HomeBuilder grant program for much of the favourable statistics.

However, Mr Sukkar recently told an Urban Development Institute conference that the Commonwealth had no intention of collaborating with states and territories to reduce their imposts on first-home buyers: “The much bigger issue we have here is the affordability challenges in our major cities, which is a real and present risk for all state governments,” he said.

HomeBuilder and additional building bonuses in some states and territories that enabled first-home buyers to access up to $55,000 in cash grants have already ended, and many other coronavirus support measures are scheduled to end by mid-year.

Even those who were eligible for a HomeBuilder grant and had applied before the deadline now fear they will forfeit their grant. Work has to commence on any approved project within six months of the contract being signed, and a combination of delays in approvals of development applications and overstretched builders has meant this deadline may not be met for many applicants.

Another concern for those who aspire to home ownership in NSW is that they have only until July 31 to access the extension of stamp duty exemptions which saw the price cap on new builds lift from $650,000 to $800,000.

Sydney mortgage broker Rob Lees of Mortgage Choice told Domain that he has been seeing record volumes of first-home buyers until lately and has noticed a bit of a slowdown in recent weeks.

“The big challenge at the moment is just finding property … a lot of first-home buyers are starting to feel like they’re being priced out of the market, so there is a lot of frustration and disappointment,” he said. “And a lot [of pre-approvals] are expiring because people can’t find a property in time.”

Sydney-based buyers’ agent Nick Viner, of Buyer’s Domain, said first-home buyers had well and truly burst onto the market in recent times. Rapid price gains created a fear of missing out, he said, but would likely fizzle out as more properties hit the market once homeowners were encouraged by the strong selling conditions.

He commented that, while first-home buyers have been fuelling strong competition, they will increasingly find themselves competing against investors, who are beginning to return to the unit market to take advantage of the large price gap between houses and apartments, he said.

The 12.7 per cent increase in property financing to investors in March was significantly higher than the 5.2 per cent increase in finance to owner occupiers. And the value of loan commitments to investors was up 54 per cent on March last year.

And the resurgence of housing investors has coincided with early signs of a peak in demand for finance by first home buyers whose participation in the housing market appears to be running out of steam. In March first home buyer finance fell by 3.1 per cent (seasonally adjusted), according to the ABS.

Realestate.com.au director of economic research Cameron Kusher says that as more people purchase homes, there may be a better balance between supply and demand later this year: “I expect supply to increase for the next few months and ramp up quite a bit during spring, assuming we aren’t forced back into lockdowns at some time.

“We are seeing a significant increase in the volume of sales so far this year compared to recent years and the supply of stock is increasing, albeit the rise in supply remains insufficient relative to demand,” Mr Kusher said.

Mr Kusher’s forecast is supported by the sizeable lift in fresh listings hitting the market. In the four weeks ending April 18, 26,470 new listings were added to the market – the most in a 28-day period since 2016. New listings are now sitting 17 per cent above the five-year average.

Is the end nigh?

The Herald’s Shane Wright has expressed concerns with what he calls “a situation that leaves one of the world’s most sparsely populated nations with some of the globe’s most expensive housing”. 

Mr Wright says the RBA is ‘acutely aware’ of the issues surrounding high housing prices and quotes the CBA’s Gareth Aird who says that a reckoning is coming: “Every time the central bank cuts interest rates, a person walks into a bank and asks for a bigger loan to pay for a house. It happens again and again,” he says. “You get to that point where you can’t keep doing that when you have interest rates at zero. We’ve now had the last of the kicks of the can down the road.”

In early February, RBA governor Philip Lowe told the House of Representatives’ economics committee that the Bank was “closely” watching the housing market.  He also stressed the Bank’s role was not to target the property market.

“The RBA does not and should not target housing prices,” he said. “Instead, our focus is on the lending that’s used to purchase housing. We want to see lending standards remain strong. At present, there are few signs of deterioration in these standards.”

In another statement, Mr Lowe affirmed: “Household and business balance sheets are in good shape and should continue to support spending,” Mr Lowe said. “Nevertheless, wage and price pressures are subdued and are expected to remain so for some years.”

Following its April board meeting, the bank updated its key economic forecasts, with GDP expected to expand by 4.75 per cent this year. In its February update, the bank had tipped growth this year of 3.5 per cent. The Bank left the official cash rate at 0.1 per cent and said it would consider extending its $200 billion quantitative easing program into 2022.

The RBA has to take a balanced approach when it comes to house prices. As Mr Lowe well knows, higher prices are associated with the so-called “wealth effect” which also lifts consumer confidence and spending. Higher housing prices make people feel better and more like spending. 

If the Bank tightens lending standards it risks dampening confidence and stifling the domestic economy. Wage rises also suffer, and lower wages give rise to increased consumer debt, which is one reason Australian households are among the most indebted in the world. The present low-interest regime that facilitates borrowing, tied with low rates of wages growth, creates its own problems.

ANZ economist Daniel Gradwell believes there is a chance that regulators will have to step in at some point: "I just think that the longer Australia has these really strong price movements each month, the more likely we are to go down that macroprudential road as well," he said.

"As much as there are some benefits to rising prices at the moment, in terms of the wealth effect and the impact that has on peoples' spending patterns, I think it's also worth keeping in mind where some of the downside risks might play out over the next 12 or 18 months."

At least one market watcher has forecast the next rise in interest rates. RateCity.com.au research director Sally Tindall believes a rate hike is coming up in 2024 when many homeowners will come off three-year fixed rates: “It’s incredible to think there are over one million homeowners who have never experienced a cash rate hike,” she says.

“The concern is, some people fighting tooth and nail to get into the property market today haven’t thought about whether they can meet the repayments in three or four years’ time. When [borrowers apply] for a mortgage, banks factor in a 2.5 per cent buffer on the ongoing rate. However, people should stress-test the loan for themselves.”

Will APRA step in?

It’s interesting to note that for the age group between 30 and 34 the rate of home ownership has fallen, down from 64 per cent in 1971 to just 50 per cent in the last census data from 2016. Among those aged 35 to 44, it has fallen to 63 per cent. This is at least in part due to the growing unaffordability of Sydney housing.

As property prices go up, the first-home buyer has a big decision to make. Borrow more to keep up with rising prices, buy something much further out of town, or drop out of the market entirely. Raising the deposit is hard enough for struggling 30-plus year olds but making repayments on million-dollar mortgages isn’t any easier.

So what happens if the same kindly federal government steps in, via the Australian Prudential Regulation Authority (APRA), to hold back the banks from lending money to buyers who take the plunge and want to take their chances with a budget-blasting mortgage?

It has happened before. An investor-led boom from 2015 and 2017 led to APRA’s cutback on interest-only loans and on the number of investor home loans by the banks. Since both those control measures were removed in 2018, investor loans and interest-only loans have remained within APRA’s limits. 

But if rules such as limits on big loans with small deposits are imposed, it would especially affect first-home buyers, according to Brendan Coates, household finances program director of the Grattan Institute.

“It’s fair to say that first-home buyers typically are disproportionately affected by macro-prudential rules because they tend to have smaller deposits and take out larger loans relative to their income,” Mr Coates told the Sydney Morning Herald.

APRA chairman Wayne Byres said it would be “giving careful thought to which tools might work” to control excessive risk-taking in the housing market. And the Reserve Bank said in its April monthly statement that it will be “monitoring trends in housing borrowing carefully”. 

IMF foresees global bubble ‘pop’

The International Monetary Fund (IMF) has warned that rising interest rates in the US could cause overpriced assets in world markets “to unwind in a disorderly manner”. And there’s little doubt that Australian housing is overpriced.

IMF chief economist Gita Gopinath warned that the global recovery from the economic impacts of the coronavirus would be undone by a ‘divergent’ pace of recovery and rapidly rising interest rates.

“Multispeed recoveries could pose financial risks if interest rates in the United States rise further in unexpected ways,” she wrote in an IMF blog post on Tuesday to mark the release of the latest World Economic Outlook.

“This could cause inflated asset valuations to unwind in a disorderly manner, financial conditions to tighten sharply, and recovery prospects to deteriorate, especially for some highly leveraged emerging markets and developing economies.”

Offsetting this prediction for Australia is the eventual reopening of our international borders to migration and international students that’s expected to stimulate house prices to rise even further.

Property market experts say that another round of real estate price upthrusts is virtually guaranteed when the pandemic measures ease, with demand expected to intensify in a market characterised by continued short supply.

CoreLogic head of research Tim Lawless told the Courier-Mail that the next wave of demand would not be immediate but would eventually occur.

He said that temporary migrants, including international students and visitors, tend to rent while the other 40 per cent arriving in Australia with plans to stay here will rent first and then buy.

“If you open up international borders again, you get another surge in population growth,” Mr Lawless said.

“We will first see inner city apartment markets tenancy demand shore-up and stabilise and the progressively see that permanent migration trend flow through to additional purchasing demand and a second wave of price surges.”

Sources:

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