Dwelling prices rose 1.9 per cent nationally over June, meaning that housing values rose a total of 13.5 per cent over the financial year just ended. CoreLogic's monthly home price index rose 1.9 per cent in June, led by 2.6 per cent growth in Sydney.

Sydney has been the fastest-growing major market in the 2021 calendar year, with growth of 8.2 per cent in just the last quarter. The median value of a Sydney home is now more than $1.2 million, its value having increased by $38,000 across just the 30 days of June.

Lockdowns have become an unwelcome but not insurmountable element of the Sydney property market in recent times. Typically, in a lockdown in-person auctions and open for inspections are banned, but a person may show a single person a premises after an appointment has been made for that purpose.

Ray White NSW chief auctioneer Alex Pattaro told Domain that the industry’s experiences in last year’s lockdown meant everyone was well prepared for online auctions: “The good thing is we’ve done this all before. We’ve dealt with snap lockdowns before. This time around, auctioneers and agents have all the resources at the push of the button to cater to buyers and sellers.”

Most sellers have gone ahead with online auctions despite lockdowns, and clearance rates on those weekends compare favourably with those of unaffected times. June was a busy month for auctions, with Sydney’s clearance rate for houses and units at 72.7 per cent.

However, Domain senior research analyst Nicola Powell said fewer homes had gone to auction in June compared with May, thanks to extra activity in May due to April’s public holidays.

“Despite the monthly drop in auction volumes, it was the busiest June on record for Sydney’s auction market,” Dr Powell said. “A huge milestone, almost double the decade average for the month of June.”

While the market remains strong, CoreLogic's head of Australian research Eliza Owen said the June quarter had seen a slowing rate of property price growth for the most expensive quarter of the capital city markets: "This easing in the pace of growth at the top end of the market is another clear sign of a shift in momentum," she told ABC News.

"The rest of the market tends to follow movements at the high end, and this is the first time in nine months that the high-tier growth rate has not accelerated. We've seen the sales of some very top-end, high-profile sellers, so, if very high-profile sellers are calling the peak of the market and thinking it's a good time to sell, I think that's pretty telling as well."

Some parts of the city, as always, fare better than others when sales volumes slow, according to The Daily Telegraph’s Matt Bell, who says property has delivered up to $100,000 a year in increased wealth for the average homeowner in Sydney’s lower north shore.

“In Mosman, homeowners who sold during this period made $775,000 more on average than what they originally paid. Those in the North Sydney local government area netted on average $515,000 in profit. Both LGAs outperformed Greater Sydney in the first three months of 2021,” he wrote.

Beyond the fundamentals

An interesting study by Shuping Shi, a professor of economics at Macquarie Business School, concluded that property prices in Sydney have outstripped the growth that would normally be expected from a combination of fundamental factors like rents, interest rates, incomes and housing supply.

“While the interest rate is at its historical low and housing supply has dropped substantially in some cities, they cannot fully explain the fast-rising house prices in some cities,” said Professor Shi, adding that she does not expect property prices to fall substantially, although they might level off or fall slightly in future.

She believes the current increase in demand is being driven by some buyers purchasing out of fear that they will be priced out of the market entirely if values keep climbing at the current rate, and by investors counting on rapid gains to make a large profit.

HSBC Australia chief economist Paul Bloxham agrees that the growth in property prices seems to have run ahead of what the usual fundamentals would dictate for Australia: “We expect that the housing market is going to cool over the coming quarters and running into 2022,” he said.

 “The more investors pile in, the more it’s concerning that it might start to become a bit more of a speculatively driven market [but] we’re not expecting that there will be a need for prudential tightening. What we’ve observed is that lending standards … have all been fairly strict, and we think the housing market fundamentals themselves and, in particular, the closed border will be the main factors that will see the market cool.”

The Daily Telegraph’s Aidan Devine reports that nearly 60 per cent of the real estate market experts and economists in a recent survey by comparison site Finder.com.au said the market would peak before the end of this year.

“Eleven of the 28 experts polled by Finder said the market would peak in the final quarter of the year, while eight said the peak would come in the next three months. The remaining nine experts said the peak would likely occur in 2022.”

Loan commitments for new housing are always a good guide to future price movements, and the latest figures from the Australian Bureau of Statistics (ABS) show that there was a 4.9 per cent increase in loan commitments in May compared to April. This means another $32.6 billion of new debt will add fuel to an already scorching hot market.

But who’s borrowing the big money? ABS head of finance and wealth, Katherine Keenan, told News.com that May’s surge was driven by growth in new investor loans: “The value of new loan commitments for investor housing rose 13.3 per cent to $9.1 billion in May 2021, which was the highest level since June 2015.

“Investor loans equated to 28 per cent of the total value of housing loan commitments in May 2021, compared to 46 per cent in 2015,” Ms Keenan said, adding that investor loans growth in NSW was 12.1 per cent, while loans to owner-occupiers remained relatively steady.

News.com’s Jason Murphy says investors usually have the biggest share of new home lending: “It was only for a short period there at the end of 2020 that investors got nervous enough to disappear for a moment, and the way was made clear for young families to finally buy their own home. (We saw a similar brief swap back in the global financial crisis of 2008-09).”

The NSW government’s economic outlook as expressed in the recent state budget is that house prices are expected to peak later this year as more sellers are encouraged to list their homes and buyers are priced out of the market, thereby limiting house price growth.

“Annual house price growth is expected to peak around late-2021,” the budget stated. “As higher prices encourage more owners to sell, this will work to limit house price growth over time. In addition, higher prices are expected to price out more potential buyers, weighing on demand.”

Listings slow

The number of new listings dropped slightly in June, quite possibly because vendors fear they’ll sell their property but then won’t be able to find anything to buy.

Nick Boyd, head of growth at Belle Property Australasia, says this is giving vendors second thoughts about listing their property while strong demand outweighs stock shortages: “There’s so much pent-up demand out there but while vendors are all thinking it’s a good time to sell, they know it isn’t a good time to buy.

“Sellers know they’ll get a fantastic price as we’ve seen stunning price growth over the last nine months, but that can equally put a hesitation into the sellers’ minds knowing there might not be much out there for them.”

Domain senior research analyst Nicola Powell agrees that the market is proving too daunting for many potential sellers who think they’ll have difficulty finding their next home once they’ve sold: “And, even if they do find something they like after a couple of months of looking, they know the price might have gone up in that time because of the general upswing in the market.

“So, I think some people do their sums, realise they mightn’t have enough to buy the house they really want to upgrade into, and then decide to stay and renovate their existing home instead,” Dr Powell said.

Louis Christopher, managing director of SQM Research, has also seen a fall in listings, but says the number of listings regularly drops in winter. His company’s figures showed a 9.1 per cent fall in new Sydney listings in June compared with May, while nationally new listings also fell 9.1 per cent.

“But then we had falls in May and in April as well, so this is yet another fall. There hasn’t been any bounce back from those. It’s definitely a sign that sellers are holding off a bit, particularly if they’re upgraders. If they’re downsizers, they don’t have such difficulty as there’s more stock on the unit market.”

Overseas buyers return

Chinese buyers have been noticeably absent over the past year while Australia’s borders have been closed due to pandemic restrictions. Political tensions between China and Australia have also been felt in property sales with Chinese investments declining from their peak of $32 billion in 2015-16 to $7.1 billion in 2019-20. This was, however, up $1 billion (17 per cent) on the $6.071 billion recorded in the 2018-19 financial year.

China-centric real estate portal Juwai IQI has calculated Chinese investors spent almost $124 billion on Australian property in the past decade: “When it comes to cross-border real estate buyers, Australia is now more attractive than ever,” Juwai co-founder Georg Chmiel said.

“Only the closed borders and the inability of foreign students to attend [classes] in Australia in person is holding foreign residential investment back today.”

Chinese buyers of Australian real estate are now ranked behind buyers from the United States ($13.1 billion) and Singapore ($9.5 billion), but still ahead of those from Germany ($3.7 billion) and Canada ($3.3 billion).

Foreign buyers are still an important factor in Australian property. The Foreign Investment Review Board’s (FIRB) latest annual report shows that offshore buyers were approved to invest $17.1 billion on residential real estate in 2019-20 – up $2.3 billion from $14.8 billion in 2018-19.

Demand for established housing increased sharply, according to the FIRB annual report. Established housing had $4.5 billion worth of approvals, up from $1.7 billion, but demand for new dwellings remained fairly static at $4.9 billion worth of investment, up from $4.8 billion the year before.

Commercial real estate investment, on the other hand, fell from $73 billion to $38.8 billion, which continues along the trend in recent years.

Another interesting finding from the FIRB report is that the number of foreign-owned houses left empty for more than 183 days of the year rose sharply to 231 from 118 in the 2018-19 financial year when the federal government introduced a vacancy fee on foreign-owned houses.

“A lot of these homes that are vacant were purchased before COVID-19 hit and before we closed the borders,” Belle Property Balwyn director and auctioneer Robert Ding said. “They’re now caught overseas and can’t get back so there’s little they can do.”

Some buyers were looking to get around such fees, by gaining their permanent residency before buying in Australia. Many of these had been renting for four to five years, gaining their permanent residency and then buying a property without the need for FIRB approval, Mr Ding said.

“Lots of new migrants will rent first and then buy once they have their permanent residency because they save on additional stamp duty,” he said.

Buyers want houses

CoreLogic data shows that over the year to June houses have been more popular with buyers, rising more than 15 per cent compared to units, which increased by 6.8 per cent.

In Sydney a typical house now costs $1.3 million and a typical apartment about $750,000, so in simple terms units cost less than houses and they’re theoretically more affordable. However, a recent report from the University of NSW found that home ownership is now out of reach for most people under the age of 35.

Peter Tulip, the chief economist of the Centre for Independent Studies, believes the biggest cause of housing unaffordability is that developers are not allowed to build high-rise apartments in most areas: “The main reason we have these planning restrictions is because local neighbours insist on preserving neighbourhood character and these arguments ignore the interest of people not involved in the decision – potential buyers,” he says.

Mr Tulip also says he expects house prices to rise by 25 per cent by 2023 if interest rates and inflation remain low: “The main downside risk to the house price outlook is if we were to get surprisingly high numbers on inflation and wages and another big surprisingly low number on employment. We would expect a quicker rise in interest rates, and that would make buying less attractive,” he said.

But if a house is out of the question for many buyers, a unit may be the answer. Domain’s Tawar Razaghi did the numbers and concluded that it now takes first-home buyers a record seven years and one month to enter the Sydney market, according to new research.

This is six months longer than it did last year for a couple to save a 20 per cent deposit on an entry-priced house of $770,000

However, for first-time buyers looking to buy a unit, the time it takes to save is substantially less than takes for a house and it’s even getting faster. The data showed that, for an entry-level unit of $590,000, it takes five years and five months; this is four months less than it took a year ago.

Interest-ing possibilities

CoreLogic research director Tim Lawless says that it’s record-low interest rates that are fuelling the increase in buyer demand that’s not being sufficiently met, and that this is pushing up home values: “Record low mortgage rates … are the foundation for stimulating demand for housing,” he says.

There’s no doubt that one of the most important drivers of property price rises is the prevailing rate of interest as expressed by the Reserve Bank’s prime rate. It’s now at its lowest-ever level and the financial experts agree this is the absolute bottom; from here it’s going to rise, and this will impact everyone who borrows money, naturally including those who want to purchase a property.

Two big questions arise: when will the rises begin and what will be the new rates of interest? There are a number of opinions currently being expressed in the financial media and not all of them agree on the answers.

The ABC’s Ian Verrender says there’s a good chance that rate hikes will come “sooner than we have been led to believe”. He feels the economic recovery of most financial markets around the world will induce a global lift in interest rates that could start as early as next year.

This would be well in advance of the RBA’s anticipation that rates will stay down for the next three years. The Reserve Bank has kept official interest rates at 0.1 per cent since November last year and said it does not expect wages growth and inflation will be high enough for it to lift rates until 2024 “at the earliest”.

Another financial expert with a sharp eye on our financial markets, Westpac chief economist Bill Evans, has said that, with the jobs market improving rapidly, he believes the Reserve Bank will start lifting interest rates in early 2023. This was accompanied by a statement that official interest rates could be at 0.75 per cent by late 2023.

The Herald’s economic team of Shane Wright and Jennifer Duke say that borrowers could face higher mortgage repayments as early as November 2022, quoting the CBA’s head of Australian economics, Gareth Aird who sees a cash rate of 0.5 per cent by the end of next year, reaching 1.25 per cent by the third quarter of 2023, as being likely.

Meanwhile, the RBA confirmed at its July meeting that it expects to maintain the cash rate at its current all-time low until the labor market returns to full employment, wage growth accelerates substantially, and actual inflation is comfortably within its 2.0–3.0 per cent target range, which it does not see happening until 2024.

RBA Governor Philip Lowe said the Bank was aware of increased borrowing by investors: “Given the environment of rising housing prices and low interest rates, the bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”

Sources

‘Forecast of 30 per cent housing price growth could be largely realised: economists,’ Tawar Razaghi, Domain, 7 July 2021
‘RBA flags changes to housing market and interest rates as economy bounces back,’ Shane Wright and Jennifer Duke, Sydney Morning Herald, 6 July 2021
‘Australia’s first home buyers squeezed out of property market by investors,’ Jason Murphy, News.com.au, 6 July 2021
‘International property buyers keen to make Australia home amid COVID-19 pandemic,’
Melissa Heagney, Domain, 4 July 2021
‘Uncharted territory: Australian property market soars above pre-COVID peaks,’ Rachel Wells, Domain, 3 July 2021
‘Sydney home sells for $2.67 million as auctions move online during lockdown,’ Melissa Heagney, Domain, 5 July 2021
‘Housing gridlock: New listings fall as property owners won’t sell if they can’t buy,’ Sue Williams, Domain, 1 July 2021
‘House prices surge to fresh record highs through June,’ Shane Wright, Sydney Morning Herald, 1 July 2021
‘House prices keep surging, real estate likely to shrug off short COVID lockdowns, CoreLogic says,’ Michael Janda, ABC News online, 1 July 2021
‘Chinese foreign investors have cooled on Australian properties, but overseas buyers are tipped to return,’ Nassim Khadem, ABC News online, 2 July 2021
‘New ABS lending data shows home loan commitments are still surging,’ Gerard Cockburn, News.com.au, 2 July 2021
‘Lower north shore homeowners making $775,000 in profit with the sale of their homes,’ Matt Bell, The Daily Telegraph, 1 July 2021
‘Australian property market showing signs of bubble risk, academic modelling finds,’ Kate Burke, Domain, 30 June 2021
‘Foreign buyers add $2bn to their spend on Aussie homes in 2019/20,’ Nathan Mawby, News.com.au, 29 June 2021
‘The top 5 reasons why house prices keep going up and up,’ Caitlin Fitzsimmons, Sydney Morning Herald, 27 June 2021
‘Australia's household wealth surged by the end of 2020 — but property owners have taken the lion's share,’ Gareth Hutchens, ABC News online, 28 June 2021 (Updated from 28 March 2021)
‘Open homes cancelled, auctions switch to online in Sydney’s lockdown areas,’ Tawar Razaghi, Domain, 26 June 2021
‘NSW Budget 2021: property prices expected to peak late-2021,’ Tawar Razaghi, Domain, 22 June 2021
‘Chances are that the timing on rate hikes will be much sooner than we have been led to believe,’ Ian Verrender, ABC News online, 22 June 2021
‘Interest rates could rise: Economists warn home owners about higher repayments in 2022,’ Shane Wright and Jennifer Duke, Sydney Morning Herald, 24 June 2021