Figures from CoreLogic showed that in April the national home value index increased 1.8 per cent, which was historically high for the month but down from the 32-year high of 2.8 per cent rise in March. Then in May, houses once again surged with a 2.2 per cent increase across the nation.

CoreLogic’s research director Tim Lawless said that buyer behaviour was one important factor driving up prices: “The combination of improving economic conditions and low interest rates is continuing to support consumer confidence which, in turn, has created persistently strong demand for housing,” he said.

“At the same time, advertised supply remains well below average. This imbalance between demand and supply is continuing to create urgency among buyers, contributing to the upward pressure on housing prices.”

The total value of Australia’s residential real estate has now reached an estimated $8.1 trillion, give or take a few billion. “This puts Australian residential property at around four times the size of Australian GDP, and around $1 trillion more than the combined value of the ASX, superannuation and commercial real estate stock combined,” says CoreLogic head of residential research Eliza Owen.

Sydney had Australia’s second-highest capital city price rise with a 3.0 per cent increase in May, with this city’s values up 9.3 per cent in the first four months of 2021. The median price of all residential property in Sydney has reached $970,355; the average free-standing house in Sydney is now going for over $1.1 million with units at around $800,000.

Data from Domain compiled for The Sydney Morning Herald and The Age shows that 52 per cent of houses and 24 per cent of apartments sold in Sydney in May reaped in excess of $1 million.

Geography plays a big part in these numbers. More than 95 per cent of houses sold this year in five regions of Greater Sydney have achieved prices above $1 million. These include the city and east, inner west, lower north shore, northern beaches and upper north shore.

Domain figures show that prices for the most expensive houses surged 10.6 per cent over just the first three months of the year, increasing twice as fast as the middle of the market and four times as fast as the cost of the most affordable homes.

This translates into some incredible selling prices at the very top of the market, where prices climbed $350,000 in the March quarter to a peak of $3.65 million and are now up 20.5 per cent, or $620,000, in the past year.

CoreLogic’s Eliza Owen says the housing market remains strong, even if there is a slight reduction in the growth rate: “There is only so much house rates can grow even with low mortgage rates and favourable conditions,” she said. “New listings are sitting at 14 per cent above the five-year average, which may have created an easing on the side of the buyer.”

Even more statistically significant is that the value of a freestanding house in Sydney was well above the national average. It rose by 2.8 per cent to $1,147,352, which was $164,090 above the low point in September’s 2020. This represents an incredible 11.2 per cent growth since the start of this year.

Sarah Sharples from News.com says the situation in Sydney is ‘brutal’: “For people with savings of up to $100,000 who are looking to put down a deposit of 20 per cent, there are just six suburbs where they could afford to buy. All are located in the outer city and are more than 40km away from Sydney central, including Austral, Airds, Blackett, Bidwill, Box Hill and Willmont.”

Prices easing

Analysis from Capital Economics suggests that the gap between sales and new listings has reached its peak, and the Sydney property market will return to a more even balance between buyers and sellers over coming months.

"While annual price growth will continue to rise strongly in the near term thanks to the favourable base, we think monthly price gains will ease in the months ahead," Capital’s economist Ben Udy said.

"What's more, as affordability constraints bite, and housing supply expands thanks to surging construction activity, we think prices may decline a little next year."

A new survey by ME Bank found that attitudes of both buyers and sellers towards property purchases are changing and overall sentiment shows signs of decreasing as prices keep rising. The bank’s latest Quarterly Property Sentiment Report found the overall sentiment dropped seven percentage points to 42 per cent.

60 per cent of survey respondents said there was not enough choice in the current residential property market. This was a 17-percentage point increase since January. First-home buyers were especially pessimistic, recording a 3-percentage point drop in positive sentiment to just 24 per cent.

The May REA Insights Housing Market Indicators Report also tells us that, although the residential real estate market is still strong, buyers are becoming hesitant and concerns about affordability are growing.

However, Cameron Kusher, director of economic research at REA Group, said the market wasn’t falling - only slowing for the second half of 2021: “Many of the metrics remain at elevated levels compared to a year ago, albeit they have eased back from their recent historic highs,” he said.

“I think essentially what’s happened is there has been a huge wave of buyers, probably really since the middle of last year when interest rates started to get cut, and a lot of those people have now purchased.

“The next wave of buyers won’t be quite as big because we don’t have HomeBuilder. There have also been some slight increases in longer term mortgage rates and obviously prices have gone up as well, which has made it more expensive to get into the market,” Mr Kusher told News Corp.

Westpac senior economist Matthew Hassan told the Herald that he also expects price gains to moderate with a total national increase of 15 per cent for all of 2021.

“Affordability will become more of a restraint as the year progresses with macro-prudential tightening expected to see a further slowing in momentum next year,” he said.

“Price growth is expected to slow from here and there are four main reasons: sellers will return, affordability will start to bite (particularly for first homebuyers), macro prudential policies will be introduced, and oversupply may become an issue.

“Reasons one and two will see some near term slowing in the rampant price gains seen since the start of the year but are unlikely to bring an end to the boom. That is only likely to happen some time down the track once other elements comes into play: an expected lift in investor activity and a subsequent tightening in prudential policy by regulators.”

From the auctions

A new term has been added to the property market’s lexicon that reflects the frenetic pace at which prices at Sydney auctions have been racing ahead. That term is FOMOA (or ‘Fear Of Missing Out Again’).

Sydney’s auctions have become somewhat similar to the floor of a stock market when the economy is booming. Bidders who think they’ve made a winning bid suddenly find that another bidder has gone thousands of dollars higher, and their well-thought-out offer is no longer going to acquire the home of their dreams. They’ve missed out and become just another ‘wounded underbidder’.

This leads to the condition now known as FOMOA, and can in turn generate a feeling that ‘next time I’ll win regardless of what it costs’.

Domain figures show that Sydney’s auction clearance rate in April was 75.3 per cent, which was 6.1 per cent lower than the six-year high in March. The median auction price also fell back, with Sydney’s median price for houses sold at auction at $1.65 million, down from $1.755 million in March.

Auctioneer Damien Cooley, of Cooley Auctions, said the Sydney property market was still strong: “Vendors’ reserve prices have risen – rightly so, given the recent sales that have been taking place – so it’s possible that the slight reduction in clearance rates is as a result of some vendors not meeting the market at auction.”

But Ray White NSW chief auctioneer Alex Pattaro said that buyers have seen other properties sell well above reserve and have become a little cautious about paying too high a price: “There are some sellers that are prepared to meet the market,” he said. “There are some sellers that are holding out for this price, that may or may not be there after auction.”

Investors return

First-home buyers are finding conditions increasingly challenging as competition heats up for properties on offer. Residential property prices have risen to such dizzying heights that many would-be buyers of their first home are now finding their deposit is too small or their ability to borrow isn’t sufficient to acquire the property they desire.
 
Australian Bureau of Statistics lending indicators released in May showed the value of mortgage commitments for first home buyers dipped 1 per cent to $6.8bn in March but at the same time new home loans approved for investors jumped almost 13 per cent to $7.8bn.

“The rise in March is the largest recorded since July 2003 and was driven by increased loan commitments to investors for existing dwellings,” ABS head of finance and wealth Katherine Keenan told the NCA Newswire.

After investor credit growth actually went backwards on a month-to-month basis in 2020 due to COVID-19, it is now approaching the same levels as in 2017 when the regulator APRA intervened and tightened lending requirements.

RateCity research director Sally Tindall said speculators were racing back into the market to capitalise on predicted rising property prices and first-home buyers were the casualties in the battle: “The number of owner-occupiers looking for their first home has dropped for the second month in a row, which could be the start of a worrying trend as investors start muscling in at auctions,” Ms Tindall said.

National Australia Bank (NAB) has just announced that it was cutting its variable principal and interest rate for investors by 30 basis points to 2.79 per cent. This is the lowest variable interest rate of a loan in that category with the big four banks, and comes after NAB had the largest fall of any bank in investment loans last year.

Government help

A 40-year, million-dollar-plus mortgage is too often the only way many people can afford to purchase a house in Sydney. Governments, both state and federal, have tried to come up with ways to assist would-be homeowners and some have been more successful than others.

Saul Eslake, an independent economist who has worked in the Australian financial markets for more than 25 years, says that house prices started to run away when governments increased demand for housing at the same time as construction slowed down: “From the late 1940s until the mid-1970s, government policies generally focused on increasing the supply of housing – either by building a lot of it themselves or encouraging and facilitating the private sector to build a lot of it – and avoided artificially inflating the demand for it.

“But beginning in a small way with the introduction of the first First Home Buyers’ grant scheme in 1964, and especially from the late 1970s onwards, government policies have moved away from boosting supply (towards constraining it) and towards inflating the demand for housing.”

The Commonwealth believes that ‘empty-nester’ retirees are sitting on houses that are larger than required once the children have left home. So in 2017 it came up with a ‘downsizer’ plan that would encourage retired Australians to sell their family homes and put up to $300,000 each into their super funds at a reduced tax rate of 15 per cent. The latest version of the scheme has lowered the eligibility age from 65 to 60 years of age.

Richard Holden, professor of economics at the University of NSW, told The Guardian he didn’t think it would have much of an impact: “Topping up super makes sense for retirees and it will likely free up some housing stock, but it’s unlikely to have much of an effect on broader house prices. The demand is still there and it vastly outweighs the supply.”

The federal government has also introduced the Family Home Guarantee that will give 10,000 guarantees over four years to single parents and allow them to purchase a home with a deposit of just 2 per cent. The government will guarantee the rest of the deposit.

And, another 10,000 places will be added to an existing home loan guarantee scheme that allows people to buy their first home with a deposit of as little as 5 per cent. The government will guarantee the rest of the deposit here as well.

It should be noted that those 10,000 new places for both of these home guarantee schemes will only be available for individuals with taxable incomes of less than $125,000 and couples with taxable incomes of less than $200,000.

First-home buyers are now able to withdraw $50,000 from their superannuation balance and put it towards a deposit on a home they intend to live in. Professor Holden sees a problem here: “If everyone can take out big slabs of superannuation to buy houses, then the prices of houses will just go up more,” he said.

“This kind of subsidy just transfers the retirement savings of younger people to older people and does nothing for affordability.”

How about grants to first-home buyers? Domain’s Elizabeth Redman says they’re not much of a success: “Grants to first-time buyers tend to push up prices because buyers have more cash to spend, experts warn, helping those who are close to getting onto the property ladder while making it harder for future buyers.”

Credit concerns

In the past 12 months annual credit growth has risen by a staggering 55.3 per cent, largely driven by first-home buyers borrowing money to pay for properties that have entitled them to some form of subsidy for their purchase.

Property investors have been staying away from the Sydney market for most of the past year, recording activity levels 22.8 per cent below their peak in April 2015.

Between March 2020 and its peak in January this year, the number of first home buyers entering the market rose by 68.6 per cent but their number is now declining as investors re-enter the competition.

Several financial experts have cautioned that the government’s support for borrowers, such as the Family Home Guarantee, creates risk and may put vulnerable borrowers in a bad situation. They say there are dangers to individual borrowers, the financial system and the broader economy when people are encouraged into homeownership with wafer-thin equity.

Now, house hunters stretching their borrowings to get into the property market are being warned borrowing costs could rise sooner than expected, with some mortgage rates already going up and more hikes expected before the end of this year.

Domain’s Kate Burke points out that only a handful of lenders are still offering the ultra-low rates reached last year: “Four-year fixed term rates [for homeowners] across the big four banks are now all back above 2 per cent, with NAB lifting its rate last week, following similar moves by Westpac and NAB earlier this year. ANZ’s rate never fell below 2 per cent.

“Experts warned back in March that competitive fixed rates had probably reached their lowest point, with bank funding costs to rise after the June 30 deadline for a pandemic-era program that offers cheap three-year funding to lenders to reduce their costs, and in turn reduces interest rates for borrowers, known as the RBA’s term funding facility,” Ms Burke said.

Sally Tindall, research director at RateCity.com.au. warned that those fixing at ultra-low rates would likely face “vastly different” borrowing costs in a few years: “While the banks build in a buffer, borrowers needed to make sure they would be comfortable with increased repayments in future — particularly those already stretching themselves to keep up with rapidly rising property prices.

“Lots of people are taking on larger loans at the moment — larger amounts of debt as they’re fixing at record low rate, in two- or three-years’ time they’ll be facing revert rates that are significantly higher,” she said.

Mortgage broker Justin Doobov of Intelligent Finance says FOMO overcomes these concerns for many buyers: “They want to get into the market before it slips away from them. We’re saying they have to look at the possibility of, say, a six per cent rate in five years’ time and, while most believe rates will go up, they see prices going up much faster, so they’re willing to take that risk.”

The RBA is watching

The Reserve Bank is well aware that its record-low interest rates are making a big contribution to rising house prices, but it has warned both state and federal governments and regulatory authorities that this is their problem to solve.

RBA deputy governor Guy Debelle used a speech in May to the University of Western Australia to point out that, while high house prices have created problems, raising interest rates would hurt the jobs market and jobs are more important than dealing with high property prices.

Dr Debelle said rising house prices encouraged home building that in turn helps boost economic activity and employment: “Housing price rises can have distributional consequences. That is certainly an issue that needs to be considered and there are a number of tools that can be used to address the issue,” he said.

“But I do not think that monetary policy is one of the tools. Monetary policy is focused on supporting the economic recovery and achieving its goals in terms of employment and inflation,” he said, adding that the Bank was focused on driving down the jobless rate to increase wages growth and inflation.

Bank governor Philip Lowe recently stated that despite the economy recovering faster than expected, the RBA still believed it would not lift interest rates until inflation was within its 2-3 per cent target band.

The RBA reiterated in its May monetary policy statement that it was “monitoring trends in borrowing closely”, and noted the biggest demand was for detached houses and higher-priced properties.

“Many properties are on the market for only a short time before being sold,” the Bank said.
“In this environment of strong demand for housing, rising prices and low interest rates, it is important that lending standards are maintained.”

The RBA also noted in its latest Financial Stability Review that borrowers can create a problem for themselves without increased controls on banks: “Even if lenders do not weaken their own settings, increased risk-taking by optimistic borrowers could see a deterioration in the average quality of new lending,” it notes.

“This would weaken the resilience of businesses and households, and so the financial system, to future shocks.”

UBS economist George Tharenou said he expects the boom to last several more months, until regulators intervene.

"We expect the boom to continue until there is a policy response, which we still think is most likely to be macroprudential tightening, rather than RBA rate hikes or federal government policy/tax changes," he wrote.

As regards APRA’s timeline, Mr Tharenou said the bank regulator has signalled possible tightening measures if it sees a “substantial increase” in the pace of mortgage credit growth relative to wage growth.

UBS said it expects that condition to be met by October, based on its forecast that growth in housing credit climbs to an annualised rate of 6 per cent in the months ahead.

October also marks the next meeting of the Council of Financial Regulators (CFR), a coordinating body comprising the RBA, APRA, ASIC, and the Australian Treasury. The CFR publishes a statement at the conclusion of each of its quarterly meetings and this could be an opportunity to make a unified announcement of financial tightening.

In that context, “our view remains that macro-prudential policy tightening will likely be implemented around October”, UBS said.

Developers still active

It’s not like input into Sydney’s dwelling supply is about to stop anytime soon. NSW Department of Planning forecasters estimate between 132,800 and 171,200 new homes will be built in Sydney by 2025. The highest growth suburbs are forecast by the department to be Parramatta where 4305 homes are expected, Marsden Park (3760 new dwellings), and Rouse Hill (2965).

More than half of all the new homes forecast to be built in the next four years are projected to be built in just 41 of Sydney’s 782 suburbs.

Sydney University urban planning professor Nicole Gurran told the Sydney Morning Herald that large growth in one concentrated area is generally preferable to “scattergun growth” but insufficient infrastructure is a problem in new suburbs.

“Residents in some new-release areas continue to wait for road upgrades, access to public space, and even footpaths,” Professor Gurran said. “Infrastructure lags continue to be a problem in western Sydney, where schools are over-burdened, and communities are lucky to have access to a regular bus service.”

Professor Gurran said factors such as topography and the market value of housing in established suburbs strongly influences any potential new development or redevelopments:
“It’s likely that given the availability of other development areas, many established suburbs will not see significant change in the near future,” Prof Gurran said.

The Herald noted that in the past five years, 180,000 new homes have been built in Sydney, with 42,400 homes completed in 2018-19 – the highest number ever recorded in one year. However, in 2019-20, housing completions fell to 32,464 due to restrictions imposed by concerns about COVID-19.

The Urban Development Institute of Australia NSW said for Sydney to thrive, hundreds of thousands of new homes are needed but “the only way to achieve this” is to spread both the new housing and infrastructure across the city, not just to “selected pockets”.

“It does not make social or economic sense to build infrastructure in one place and housing in another,” a UDIA NSW spokeswoman said. “We need to integrate upgraded infrastructure with new housing, whether that be along the new Sydenham to Bankstown Metro Line or near the New Beaches Link.”

BIS Oxford Economics Sarah Hunter told the Herald’s Jennifer Duke that the supply and demand for housing was “broadly balanced”: “Dwelling approvals are expected to fall through 2021 as the stimulus from HomeBuilder to detached houses fades,” Ms Hunter said. “Price momentum is also expected to moderate, partly because of the new supply of housing and partly because of an increase in the number of sellers of established dwellings.”

Sources:

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‘Mortgage brokers’ warnings over future interest rate rises fall on deaf ears of desperate home buyers,’ Sue Williams, Domain, 9 June 2021
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