Market comment: Everything’s still heading upwards except interest rates

Wed, 15 Sep 2021

Market comment: Everything’s still heading upwards except interest ratesDespite the restrictions imposed by states and territories in response to Covid-19, the value of Australia’s residential property market should pass $9 trillion later this year, according to CoreLogic.

The global property data and analytics company says the total value of Australian homes reached $8 trillion in March this year and should reach its next trillion dollars by the end of 2021: “It won’t be too long before it breaks the $9 trillion mark,” said Tim Lawless, CoreLogic’s research director. “We’re going through a construction boom, and housing values are rising very swiftly.”

Swiftly, indeed. Sydney’s median auction house price shot upwards by a massive 32.3 per cent over the year and 11.8 per cent in just one month to a new record of $1.92 million in August. The median auction price for units hit $1,113,000 which was also a record high.

Another growing statistic is the number of properties sold prior to auction. Offers too good to refuse have encouraged 46.5 per cent of sellers to accept an offer prior to their scheduled auction day - an all-time high since Domain began keeping records back in 1995.

Earlier this year Australia’s property prices rose seven per cent in the three months to May, while their increase in the next quarter in the three months to July was slightly lower at 5.9 per cent. And for Sydney, dwelling values jumped 7.7 per cent in that same quarter, placing it just behind Hobart in the race for national honours.

Traditionally, the Sydney property market hesitates in winter, then bursts out strongly at the start of spring. This year, however, lockdowns have wiped away the focus on spring, according to ASX-listed e-conveyancing firm PEXA.

“It has fundamentally changed,” said PEXA chief executive Glenn King. “Before it was far more seasonal. Now we are seeing record volumes coming in when we would not normally have expected them.”

Even after twelve weeks of COVID-19 restrictions, Sydney house prices have continued to climb. Auction clearance rates in Sydney have stayed near their long-term averages as buyers transitioned to online bidding.

Cooley Auctions’ Damien Cooley has seen a rise in the number of participants at his auctions, to an average of 8.5 bidders in this new financial year, compared to an average of 6.5 for the year to June. He said the average price achieved is now nine per cent over a vendor’s reserve compared to six per cent in the previous financial year.

“Our market’s got stronger, no doubt,” he said. “We’re definitely seeing a lot of owner-occupier activity right now, not so much investor activity.”

It does appear, however, that affordability is catching up with prices in Sydney’s most sought-after neighbourhoods, according to Domain chief of research and economics Nicola Powell: “Affordability [is an issue] for all buyers, not just first-home buyers but all buyers, because we’ve seen such significant jumps over the year to date.”

She said that buyer demand in Sydney’s eastern suburbs and northern beaches is down 14 per cent compared to the average for this time of year, as buyers are confronted with price growth that has sent prices in those two areas up 26.4 per cent and 38.7 per cent respectively in the past twelve months.

“We’ve seen some extraordinary rates of growth in our premium areas,” Dr Powell said. “That becomes a hurdle – it’s a financial impact.”

And CoreLogic’s Tim Lawless also expects the market’s extreme rate of price growth to slow down as demand from priced-out buyers eases and an increasing number of sellers list their properties on the market once pandemic-inspired restrictions ease: “If those two things happen or even if we do see supply rising, that should help rebalance the market towards buyers and dampen this rapid price growth further.”

It should be noted that there are some warnings being issued about the economic impacts of having so much capital directed into ever-increasing housing prices. The Herald’s economics correspondent, Shane Wright says that economists are concerned future wage increases will be lower because so much money goes into housing that there’s less investment in businesses or possible advances in technology.

“The big run-up in prices has resulted in the nation’s banks now holding a record $1.9 trillion in mortgages to owner-occupiers and investors. Loans to owner-occupiers have lifted by $145 billion in just two years.

“It’s that leap in mortgages, being funnelled into the property market, that has economists worried,” he said.

‘Elements of Optimism’

Dr Shane Oliver, chief economist for AMP Capital, said there’s an element of optimism in the market from the low interest rate, and the fear of missing out (FOMO) is still driving both owner-occupiers and investors to acquire property for good capital growth: “But we’re scraping the bottom of the barrel of low interest rates and, if they do go up, then that’s when we’ll become more dependent on wages growth and our income to sustain price growth,” he told Domain’s Sue Williams.

Westpac economist Matthew Hassan says that a Westpac-Melbourne Institute report this month found consumer sentiment has fallen a “significant” 4.4 per cent from July to August to its lowest point in a year: “But, for sure, we’re not in negative territory, so that’s not impacting the housing market.

“During last year’s COVID shock, sentiment plunged to the low 80s because we didn’t know how it was going to play out. But one of the keys now is the availability of the vaccines, and that’s making us feel a lot more confident long-term,” he said.

Angus Raine, executive chairman of sales agents Raine & Horne, says that the market’s price rises are being further strengthened by a continuing low supply of stock combined with high demand.

“At the moment, only one person can buy a property compared to the six to 12 people who actually want it,” he said. “That’s strong demand and it will last a long time, with the historically low supply volume underpinning it.

“Then, when the COVID restrictions finally lift, we’re expecting 50,000 extra people per annum coming into Sydney alone, looking for housing, so this boom is going to have a very long tail, despite what wages do,” Mr Raine said.

Commonwealth Bank of Australia’s head of Australian economics, Gareth Aird, says that the support of banks and governments has given consumers confidence throughout the latest pandemic outbreak: “There’s a collective recognition that the lockdown doesn’t go on forever, and [that] the vaccination rate going up will re-open the economy,” Mr Aird said.

Paul Bloxham, HSBC’s chief economist, says that 2021 is very different from the experience Australia had when Covid-19 first struck in 2020: “When households or businesses look forward, you see a pathway out and that involves a vaccine rolling out and the eventual reopening of the economy.

“Overall, the housing market is well supported pretty much across the country. The major factor there is that interest rates are going to stay for a long time. People willing to buy and sell houses is a sign of some confidence … they’ve all weakened but they’re in a lot better shape than the initial shock in 2020.”

The ANZ Bank is certainly optimistic about Sydney property prices, saying it expects a rise of 23 per cent by the end of this year with further growth to come in 2022.

ANZ senior economist Felicity Emmett said lockdowns were unlikely to derail the strength of the housing market: “We’ve updated our forecasts because of how strong prices have been; that includes through the lockdown period.

“We did think by this time of the year that the momentum in prices would have pulled back [but] when you look at some of the leading indicators, auction clearance rates, sales to listing ratios, you can see the market is still very tight and there hasn’t been much of a drop-off in demand or interest in the face of these quite heavy lockdowns,” Ms Emmett said.

NAB chief economist Alan Oster said the Sydney property market is probably past its peak in terms of price growth, but that he still expects Sydney prices will continue to rise and predicts growth of two to five per cent next year.

Interest-ing rates

Interest rates remain newsworthy with the latest expectations that an increase in the prime rate won’t happen until 2023 at the earliest. The Guardian’s Greg Jericho says it’s now been 130 months since the RBA last raised the cash rate: “When the reserve bank last raised rates, the record length of time a major central bank had gone without a raise was the Japan central bank, when it went 119 months through the entire 1990s.

“The RBA broke that record back in November last year, although the Bank of England had in that time set a new record of 123 months. But no matter, the RBA broke that new record too, in March; the reserve bank has now gone a full six years longer than the previous longest stretch it went without raising rates.”

Recent research indicates that, with interest rates where they are, even a slump in wages won’t be enough to dampen the willingness of property buyers to keep bidding up market prices for their homes.

The Melbourne Institute’s Consumer Inflationary and Wage Expectations found that nearly 70 per cent of people are suffering a fall in pay, or no change. The Institute’s research economist, Dr Sam Tsiaplias, said that he would usually expect to see a link between house prices and income, but record low interest rates has weakened that link.

“As long as interest rates remain low, we won’t need high wages growth to sustain house price appreciation. But when mortgage repayments increase, and they’re harder to pay, then that’s when we’ll see wages become much more important.”

A Reuters article reported that, with the RBA saying interest rates are unlikely to rise until 2024, home prices are now forecast to surge 17 per cent this year and 6.2 per cent next year by a poll of 12 property market analysts conducted by Reuters.

Those median forecasts were significant upgrades from a survey Reuters conducted in May that forecast rises of 10.5 per cent this year and 5.0 per cent next year, despite virtually no immigration this year - a linchpin of the economy.

"A very low interest rate and other forms of monetary policy support have certainly driven down mortgage rates since the start of the pandemic. That has made housing more affordable for some buyers who are certainly taking advantage of it," said Sarah Hunter, chief Australia economist for BIS Oxford Economics.

In Sydney, Hamada Alameddine, an advocate from buyers’ agency BuyerX,  told Domain the appetite from buyers was stronger than ever, with many buyers keen to inspect a property one-on-one and buy while they could.

“I thought it would have slowed because of the lockdown, but it hasn’t at all,” Mr Alameddine said. “It really is insatiable at the moment because of the cheap money [low interest rates] and the RBA saying it won’t touch interest rates for now.”

Listings and lockdowns

Unlike our experience in 2020, lockdowns are beginning to impact on listings with the latest REA Insights report in August showing a decline of 27.3 per cent in new listings in Sydney. The report’s author, Cameron Kusher, who is REA’s director of economic research, says this statistic is a bit surprising.

“I guess it shows that while the market is really strong, there’s a little bit of caution around at the moment. As soon as people feel like it’s going to be more difficult to sell their property, they’re going to be less inclined to put it on the market.” he said.

“Vendors are seemingly quite reluctant to list their properties, but we still know that demand is very high, so, if someone is willing to bite the bullet and put their property on the market, they might actually find it’s quite successful just because there’s not much stock on the market.”

Mr Kusher told’s Kirsten Craze that he didn’t expect to see much of an increase in Sydney listings until lockdowns are over: “As we have seen over the past 18 months, the property market responds to restrictions being eased almost immediately.

“Based on the market behaviour following previous lockdowns, we would expect once current lockdown restrictions end, there should be a rapid rebound in the volume of new listings coming to market,” Mr Kusher said.

Real Estate Buyers Agents Association president Cate Bakos said buyers who could afford to wait should consider delaying their plans until after lockdown restrictions were scaled back.

“There will be more listings once restrictions ease and it make it easier,” she told’s Aidan Devine. “At the moment, many of the buyers you’re up against are the ones who’ve missed out again and again. They’re frustrated and will often pay more.”

Westpac’s Quarterly Housing Pulse, released in August, showed its “time to buy a dwelling index”, which reveals people’s intentions to buy a home and whether they think this is the best time to buy – reached its second-lowest point since 2010.

But lockdowns aren’t to blame for the drop in intentions, the Westpac report found. It’s surging prices and stretched affordability that were far more important than to buyers than COVID restrictions.

“On balance, we expect the situation to see a temporary loss of momentum rather than a correction – even in the most heavily impacted areas – and a rapid snap-back once restrictions ease,” the Westpac report stated.

Building costs rise

Tim Reardon, the Housing Industry Association's chief economist, told AAP that the cost of building a home is going to rise because a shortage of labour and materials has pushed costs higher. This is happening while the time it takes to complete a stand-alone dwelling has blown out from six to nine months to about a year.

He said that shortages in timber, steel, PVC pipes, fittings, electrical equipment and tiles are the result of factors that include a global shortage of shipping containers and domestic production of structural timber nearing capacity.

"It will be well into 2022 before the industry starts to return to more normal conditions," he said.

Tim Lawless from CoreLogic said there has been a surge in demand from the success of the federal government's HomeBuilder scheme, with more than 120,000 building projects eligible for the HomeBuilder grant before the program ended in April.

"Everybody knew it was going to drive a building boom," Mr Lawless told AAP. This was supported by CoreLogic’s CHIP Index, which measures the relative cost of building stand-alone houses, that shows construction costs rose 1.4 per cent in the three months to June, equating to an annual increase of about four per cent.

The Morrison government’s HomeBuilder program, which initially provided a $25,000 grant and later a $15,000 one for everyone building a home, used the private housing market to encourage construction work and thereby stimulate the economy.

After the first three months of the program, home construction rose strongly by the last quarter of 2020. New private-sector housing construction increased 3.4 per cent in the 2020 December quarter – the best for more than two years.

Then, in the first three months of 2021 it surged another 12.3 per cent which was the biggest jump since September 2001, subsiding to an increase of just 0.1 per cent in the June quarter, but by then the scheme’s impacts were being felt in the costs of housing construction.

Another reason homes are costing more to build, according to Herald economist Shane Wright, is developer fees that can add up to $85,000 for every block that’s put on the market.

“As housing affordability tumbles due to soaring prices across the nation’s major cities and regional areas, analysis from the National Housing Finance and Investment Corp suggests councils in NSW and Victoria are being so financially squeezed they are using developer contributions to protect their budgets.

“The NHFIC found developer contributions in NSW were the highest in the country, ranging between $25,000 and $85,000 per dwelling. In Victoria, they varied from $37,000 to $77,000 while in Queensland they were between $29,000 and $42,000.”

The NSW government requires developers to make contributions to “social infrastructure” around new housing developments, with roads, playgrounds, water, sewerage and drainage all partly paid for by these fees. The NHFIC research found that the fees are driving up property prices and in some cases aren’t being used to develop local infrastructure for new homeowners as intended.


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