The Australian property market has continued to soar into uncharted territory as record-low interest rates fuel an increase in demand that the current volume of homes on offer can’t meet. Sydney house prices repeatedly break records, surging to $1,410,133 and going up by more than $1200 a day in the second quarter of 2021.

As it was outlined by Domain: “The median house price jumped 8.2 per cent in just the three months to June, according to the latest Domain House Price Report. Over the past year, median house prices have shot up by a staggering 24 per cent – or $272,887 – the fastest annual growth since Domain records began in 1993.”

The Baulkham Hills and Hawkesbury region had the year’s fastest growing house prices. The median price here grew 20 per cent in the three months to June 2021 to $1.62 million, and over the year it rose 32.8 per cent.

Unit prices also increased across Sydney, rising 3.2 per cent in the second quarter to a median of $786,175 - now just half a per cent below the previous record high in June 2017.
In some neighbourhoods, median unit prices are at record highs with prices on the northern beaches jumping $141,000 to almost $1.16 million over the June quarter and the eastern suburbs lifting $100,000 to a median of almost $1.29 million in the same period.

The surge in prices this autumn has once again invited the question of whether banks were making risky loans and whether the bank regulator APRA should intervene and make it harder to borrow money, although financial organisations were quick to point out that prices were only back to where they were before the pandemic struck.

Westpac chief economist Bill Evans said he expected some sort of government regulation would be forthcoming: “Deteriorating affordability is likely to weigh on owner-occupier demand, and a tightening in macro–prudential policy settings will restrain the supply of credit,” he told the Financial Review.

“We expect housing credit growth to exceed 7 per cent by the first half of 2022, triggering a likely policy intervention. The precise response will depend on the composition of lending over the next year.”

However, CoreLogic research director Tim Lawless doesn’t see a problem with the current prices: “We are seeing that monthly rate of growth starting to ease off and I think we can put that down to worsening affordability in a market that is rising so much faster than household incomes,” Mr Lawless said.

“I would expect values to continue to ease in the second half of this year and into 2022. We will still see values rise but not as quickly.”

Easing values? Perhaps, but the expectations are for continuing growth regardless. NAB has upped its growth forecast for Sydney home prices by more than seven percentage points to 21.6 per cent for this full year, but the bank cut the predicted gains in 2022 by about half, as affordability is expected to worsen and the boost from lower interest rates starts to fade.

The bank’s team of economists, led by Alan Oster, say that the impact of low interest rates and strong income support that has driven strong price growth in 2021 will start to fade next year.

“NAB has revised up its forecast for house prices in 2021 based on the faster-than-expected growth in prices over recent months. From here we see the monthly pace of growth slowing but continuing at a solid rate. Affordability constraints will likely begin to bind over the year and see a slowing in price growth as the impact of lower rates fade.”

The Reserve Bank of Australia said in its August report that the economic outlook for the coming months was uncertain, so it kept the cash rate at a record low 0.10 per cent.

“The economic recovery in Australia has been stronger than was earlier expected,” the reserve bank governor, Phillip Lowe, said in a statement. “The recent outbreaks of the virus are, however, interrupting the recovery and GDP is expected to decline in the September quarter.”

Dr Lowe remained optimistic about the longer term, saying: “The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly. Prior to the current virus outbreaks, the Australian economy had considerable momentum and it is still expected to grow strongly again next year.”

Interestingly, CoreLogic’s auction market review for the June quarter recorded the busiest period for sales since 2017, with more than 30,000 homes on offer. However, the clearance rate has eased since the beginning of the year to about 76 per cent of homes selling compared to above 80 per cent in the March quarter.

CoreLogic head of research Eliza Owen noted there had been a particular slowdown in Sydney where the clearance rate is down about 6 percentage points over the last three months: “This reflects a broader loss of momentum in the Australian housing market, as affordability constraints set in, and March looks to [have been] a peak period of growth for the current cycle,” she said.

There are other indications of a slowing of Australia’s phenomenal rate of growth. Australian Bureau of Statistics data shows the value of new home loans fell 1.6 per cent in June to $32.1bn. For owner-occupiers, loans fell by 2.5 per cent to $22.9bn. The number of home building approvals also fell 6.7 per cent to 18,911 in June, including an 11.8 per cent fall in private sector houses to 12,037.

Lockdown effects sidelined

Lockdowns are back and Sydney has returned to online auctions for the first time since last year, with public auctions not allowed under COVID-19 lockdown rules. Raine & Horne Leichhardt selling agent Morris Toscano said: “We have done online auctions before in the last lockdown, so it is second nature because we’ve done it before.

“I would still prefer a live auction because it can get a little bit awkward when you’re trying to help bidders [with a personal chat] and you’re saying it to everyone at the same time. Hopefully, we don’t have to get used to it,” Mr Toscano said.

CoreLogic's head of Australian research Eliza Owen says that short lockdowns will not hold back Sydney’s booming property market: "Throughout lockdowns in the past 15 months, basically what CoreLogic data has shown is that you get a drop off in demand, you get a drop off in sales, but you also get a drop off in supply, because people know it's not an ideal time to sell.

"So generally, we see lower volumes, and because of that drop in demand and supply, the net effect on prices really isn't much at all, especially when it comes to circuit breaker lockdowns," she observed.

Michael Yardney of Metropole Property Strategists agreed, saying: “If lockdowns are extensive our property market will go into hibernation for a while and then come out stronger than ever, just like they did last year.”

The number of homes scheduled for auction in Sydney is now at its lowest level in six months, but agents report strong competition for most properties on offer across the city. In an interesting turnaround, more than 20 per cent of properties listed in one recent Saturday auction had been sold by Thursday morning.

Nicola Powell, Domain’s chief of research and economics, described our present auction conditions under the latest lockdown: “Withdrawal rates have been much lower compared to anything we saw in the early lockdown stages in Sydney or Melbourne last year,” Dr Powell said. “What that tells me is vendors are a bit more confident [as] we’ve seen [how] our markets react to lockdowns, and what was really interesting for Sydney sellers is that there has been a big shift to selling prior.”

Dr Powell noted that overall, the number of homes listed across Greater Sydney over the four weeks to August 1 was down 19.9 per cent, from the previous four-week period, but new listings were holding steady week-on-week.

“The pullback in new listings over the four-week period was greater for houses (21.1 per cent) than apartments (17.9 per cent), and total stock levels were also down – 14.7 per cent for houses and 9.7 per cent for units month-on-month,” she said.

It’s interesting to read about a new report from KPMG Economics that concludes Covid-19 has actually been a positive factor for Sydney property prices. The report – ‘The Impact of COVID on Australia’s Residential Property Market,’ found that nationwide, house prices were now between 4 to 12 per cent higher and units up to 13 per cent higher than they would have been if the world had stayed “normal”.

KPMG’s modelling shows that without the pandemic, house prices in Sydney would have risen 13 per cent to hit $1,119,000 by December 2023. Now, because of pandemic policy responses, such as pushing the cash rate down to 0.1 per cent and introducing the HomeBuilder program, they’ll rise 26 per cent to $1,244,000.

Brendan Rynne, KPMG chief economist, told Domain that the initial uncertainty caused by the pandemic and consequent economic downturn caused a 3 per cent fall in prices in the June 2020 quarter, but it didn’t last long.

“Once market participants became confident that the pandemic would not result in a free-fall of home values, a combination of monetary and fiscal policies quickly began to push things the other way,” Dr Rynne said.

“The material decline in mortgage interest rates; extra savings from not spending on holidays and leisure; and generous income support from government and housing market support specifically, has seen property prices rise dramatically in the past six to nine months, past the point where they would have risen under a no-COVID scenario.”

It must be noted that the KPMG Economics report was compiled prior to the pandemic’s resurgence that has had its greatest effects so far on NSW, although other states have also been affected. The responses of governments, both state and federal, will play a part in determining the next set of impacts Covid-19 has on Sydney property and we’ll report them as they happen.

A comment regarding where we might go from our present situation came from the president of the Real Estate Buyers Agents Association of Australia, Cate Bakos, who believes the economy could rebound strongly after this latest scare: “The market will continue to move at pace, and the RBA will be using more macro-prudential changes to regulate it, looking at debt-to-earnings ratios and the loan-to-value ratio caps,” she said. “We’ll be in a low interest environment for several years yet.”

How long will it last?

One question that won’t go away, and the answers are many but varied, is: “How long will the Sydney property boom last?” The Daily Telegraph’s Aidan Devine had a try at answering this question and came up with several lines of thought on this topic.

He first pointed out that Sydney’s price growth is at a 30-year high. This has prompted a number of experts to forecast an ending in the final quarter of this year, with others saying that 2022 will be the year it ends. A common belief of most experts is that housing is becoming unaffordable.

The Herald’s John Collett says property price growth is slowing as more people who would like to buy are priced out of the market: “If the trend continues, price growth could continue to slide and may even start to fall by 2023.
 
“CoreLogic figures show that price growth, nationally, during July was 1.6 per cent. To put that into context, growth during this extraordinary surge in prices peaked at 2.8 per cent in March. House price growth is slowing as more home buyers get priced out of the market,” he concludes.

Stagnant wages growth at a time of rising housing prices is another reason many feel prices will peak soon. This will make our current levels of growth unsustainable and bring an end to the boom before long. Also cited is ‘buyer fatigue’, with buyers dropping out due to lack of supply and constantly rising prices.

The final causative factor will be, according to many market watchers, the inevitable rise in interest rates that will come sooner than expected. CoreLogic said there is already evidence of this in financial markets: “There have been early signs of more conservative home loan assessments; any reduction in credit availability is likely to contribute to a downside shift in market conditions.”

But what if interest rates don’t go up? The chief economist for the Centre for Independent Studies Peter Tulip said he expected 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,” Mr Tulip told Domain.

Investors recapture lost ground

For a brief spell at the end of 2020, investors pulled back and young people in Australia’s capital cities were able to get a foot in the property door, but that door has slammed shut as investors have once again taken over the positions of power in property markets. The reason is simple: Investors want the capital appreciation, so they are attracted to markets with rising prices.

“Investors are very much driven by expectations of capital growth, and those expectations are often formed by what’s happened over the last year,” AMP Capital chief economist Shane Oliver told Domain.

“As we’ve seen property prices surge over the last 12 months, that’s popped up on investors’ radars and they’ve thought, ‘Maybe we should get in here again.’”

Jo Masters, EY Oceania’s chief economist, commented on the other factor that’s crucial for investors: “The past year has shown how important interest rates are in influencing the housing market.”

She said while the forecast depended on whether consumers believe the interest rate cut would be permanent, rising fixed rates and an improving economy would suggest to households the next rate move was “up not down”. This means that any further growth would come from investors, not first-home buyers, Ms Masters said.

Data from the Australian Prudential Regulation Authority (APRA) confirms that the portion of new housing loans going to investors is once again rising.  The portion of new mortgages lent on interest-only terms has also gone up from pre-pandemic levels to 19.3 per cent in the March quarter.

Buyer’s agent Wendy Chamberlain said it was now easier for investors to get home loans compared to the lending crackdown in 2018 and 2019 sparked by worries about high levels of speculative buying and interest-only loans.

“Banks have become a little more lenient,” she said. “They have recently changed those policies so investors are starting to get back into the market because they’re able to get loans again.”

Economist Saul Eslake, who has long argued against Australia's existing housing tax breaks, says they cause people to speculate and push house prices to unstainable levels: "It does now seem that investors, combined with second-time buyers who are seeking to upgrade their homes, are once again squeezing would-be first home buyers out of the market," he said.

A July poll of 1015 respondents by comparison site Finder.com.au found that close to one in seven Australians is considering a property purchase within the next six months, and many of them are buying property as an investment.

Residents in NSW, where prices have ballooned the most over the past year, were the most likely to be considering a purchase: close to one in five (19 per cent) planned to buy in the next six months. More than half of the prospective NSW buyers said they wanted an to buy an investment, not a property they would live in.

Rates must rise someday

When interest rates go up, mortgage repayments will also go up, and those who are benefiting now will feel the pain once our current record-low interest rates return to higher levels. Who can forget that in the years between 1970 and 1990 interest rate rises were a serious threat to household budgets, and that mortgage rates almost tripled from around six per cent to a high of more than 17 per cent in 1990?

Then came three decades during which the Reserve Bank repeatedly cut interest rates to the almost zero level where they are today. The current generation of mortgage holders has no lived experience of worrying about rising interest rates, but as rates are now so low they can’t realistically go lower, interest rates will inevitably rise – someday, and probably someday soon.

Low rates were intended to stimulate the economy, and indeed they have. Banks could lend money to businesses for expansion, and to homebuyers for their mortgages. Throw in some extras, like capital gains tax discounts on property investments and a system of negative gearing for those same investors, and the property market’s been thriving on mostly borrowed money.

News.com’s Tarric Brooker did the sums: “If 1.5 per cent worth of interest rate hikes was to be priced into the current average variable rate, the average interest rate on a variable rate mortgage would rise to 4.6 per cent per annum.

“For an average buyer who recently purchased a home with the average mortgage of $504,000 who got a good deal of two per cent rate on a fixed term mortgage, the reversion to a variable rate loan amid rising interest rates could mean interest repayments more than double in an instant. As a result, monthly repayments would rise by $722 per month (38.6 per cent),” Mr Brooker calculated.

He added that, while it could be years before rates rise and impact the market, it’s also possible for rising rates that once kept a generation of Australians awake at night to return sooner that we think, and we may be find ourselves going back to the future.

Good news for overseas buyers

International buyers are still keen to move to Australia and, despite our closed borders, are making plans to purchase property and relocate here. Domain senior research analyst Nicola Powell said the latest rise in international investment was due in part to Australia’s booming house prices and being seen as relatively safe from the coronavirus pandemic.

“That rise in foreign investment spending was likely due to some extraordinary growth in prices compared to 2018-2019 when the property market was in a downturn. But also the types of houses being purchased by foreign buyers are bigger and more elite,” Dr Powell said.

Australia’s housing market continues to receive favourable reviews in international publications. Global ratings agency Fitch has forecast a further rise of 16 per cent this year for our housing markets, saying lockdown savings, income support and low interest rates are pushing prices higher than if Covid had not happened.

“Low interest rates in Australia have also started to encourage housing investors into the market, potentially replacing demand from first-time buyers as they start to be priced out,” Fitch said, voicing an opinion that will no doubt be of interest to overseas property investors.

Another international report sure to catch their attention is the Knight Frank 2021 prime forecast report, which ranks Sydney as the world’s leading city in luxury homes and says it expects our prices to rise 10 per cent over the coming year.

It places Sydney at the top of the list in forecast price growth, above Miami and Los Angeles in the United States. The report also predicts Sydney will continue its reign in the top spot in 2022, when, together with London, both cities are forecast to see prime prices accelerate 7 per cent year-on-year.

There was no disagreement from global data giant Equifax whose general manager for advisory and solutions, Kevin James, said Australia’s economic numbers point to a positive outlook for the nation, despite some pockets of concern: “Business confidence seems very high, and better than what it was in 2019 and 2020 – which will also fuel employment.

“The recovery looks strong, the economic buy-in from SMEs and consumers looks very strong, mortgage markets are strong, delinquencies are lower than they have been. As long as these factors remain in place, I think the recovery is on a pretty good trajectory,” James said.

Stamp Duty a sticky issue

The Stamp Duty debate has continued into this year’s second half, despite other topics grabbing the property market headlines. At this point in time, the changes are still in the ‘proposed’ category while the NSW government assesses the feedback it’s received.

We’ve covered this issue in these articles since 2018 so this is just an update. The outcomes will mean major changes to the Sydney property market and to the finances of the NSW government, so it’s worth keeping an eye on developments as they happen.

It’s argued that the high cost of stamp duty prevents people from being able to move home as frequently as they would like, keeps housing turnover low and discourages homeowners from upgrading, downsizing, or relocating to a home that better suits their lifestyle.

Broadly, under the NSW government’s latest proposal, stamp duty won’t be abolished, but buyers of property in this state will be given the choice between paying stamp duty upfront, or an annual property tax.

Domain explains: “Should the proposal go ahead, buyers who purchase a home between the announcement of the changes and the commencement date would be able to retrospectively opt in to the new property tax and have their stamp duty refunded. Buyers would need to opt in within six months of the commencement date.

“Existing homeowners would not be affected. Owners who purchased their property prior to the announcement date and paid stamp duty wouldn’t need to pay property tax for that property and wouldn’t be able to have their stamp duty refunded.”

Sources:

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Elizabeth Redman, Domain, 6 August 2021
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Kate Burke, Domain, 5 August 2021
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