Australia’s property prices have recorded their strongest ever quarterly growth since the Australian Bureau of Statistics (ABS) began keeping their residential property price index in September 2003. The index showed that the mean price of a dwelling across Australia is now $835,700, up from $678,500 one year ago according to the ABS.

Sydney’s new median price of $1.19m dwarfs the national figure. Even more impressive is the news that Sydney’s median auction house price has rocketed upwards to just over $2 million, meaning prices have gone up by more than 30 per cent in the just the past year.

Sydney homebuyers spent a median $2,000,500 at auctions in September, recording a solid clearance rate of 78.1 per cent according to the latest Domain Auction Report Card. Domain’s chief of research and economics, Nicola Powell, said these amazing numbers reflected the underlying strength of Sydney’s housing market throughout the lockdown.

“Clearance rates have risen on higher volumes. What it shows is that buyer competition is still there, still intense, but I think as we see restrictions ease further, we’re likely to see listings continue to rise. Once we start to see a real jump … that’s when it will be a real test on clearance rates,” Dr Powell said.

Knight Frank’s Global House Price Index for the second quarter of 2021 showed that Australia ranked seventh out of 55 countries for annual price growth, at 16.4 per cent for the full year ending June.

Knight Frank head of residential research Michelle Ciesielski said there were more buyers than there were homes, driving up the housing market in Australia: “Scarcity remains the key driver for the significant growth in residential values across Australia, with pent-up demand from those engaging in an incredibly low interest-rate environment,” Ms Ciesielski said.

The Reserve Bank of Australia (RBA), however, has warned that the nationwide surge in house prices and expectations of even higher prices could lead to “over-exuberance” in the property market.

In is six-monthly review of the stability of the financial sector, the RBA cautioned that while high house price growth over the past 12 months had improved the resilience of existing mortgage holders, it had also increased the risks associated with soaring indebtedness.

The Guardian’s Greg Jericho used a pregnancy to illustrate how the rapidity of Australia’s house price increases could affect a Sydney couple starting a family: “The latest figures from the Bureau of Statistics show that [if you] got pregnant last September, by the time you gave birth the median price of a house in Sydney had risen by almost $240,000.”

The number of home sales this year has been the highest since 2004 with nearly 598,000 houses and apartments sold across the country over the year to August 2021. This is 42 per cent greater than the previous 12 months, and 31 per cent above the average for the decade.

“It’s a real story of extremes, with record-low levels of listings this year and record levels of demand leading to a huge number of sales and the biggest price growth since 1989,” said CoreLogic research director Tim Lawless.

The new CoreLogic research shows that housing turnover (home sales as a percentage of the total number of homes) has reached 5.6 per cent which is the highest rate since December 2009. It’s interesting to note that just two years ago, it had dropped to a record low of 3.7 per cent as a result of tighter credit conditions, difficulties with housing affordability and the high costs including stamp duty associated with buying a home.

Mr Lawless did say that housing turnover will probably continue to increase in the short term as more listings come onto the market, but he expected that turnover would peak early next year, then begin to fall away.

APRA cracks down on loans

The Federal Treasury has grown increasingly concerned about the indebtedness of Australian households because, it says. the house-price-to-income ratio has risen from 2.5 in the early 1990s to over six in 2021, and people under 40 are now less likely to own a home than any other time since 1947.

Another statistic that has given rise to Treasury’s concerns is that over the past twelve months the average Australian owner-occupier home loan grew by 15 per cent to $564,900.  NSW hit the top of the table with an increase since February this year of  $112,000, bringing the average loan to a record high of $732,000.

At a time when more than one in five home buyers is borrowing more than six times their annual income, Treasurer Josh Frydenberg met with financial regulators in late September and encouraged them to consider ways to reduce high-debt home loans so as to minimise risks caused by low interest rates and soaring property prices.

The Treasurer left no doubts about what he felt should be done to achieve this result: “We must be mindful of the balance between credit and income growth to prevent the build-up of future risks in the financial system.

“Carefully targeted and timely adjustments are sometimes necessary. There are a range of tools available to the Australian Prudential Regulation Authority (APRA) to deliver this outcome.”

The Australian Prudential Regulation Authority (APRA) responded by reducing the maximum amount that households can borrow to buy a property, making it harder for some borrowers to get a mortgage.

APRA chairman Wayne Byres said the decision to reduce the maximum borrowing capacity was made to head off growing risks from an increasing number of very large mortgages.

"While the banking system is well capitalised and lending standards overall have held up, increases in the share of heavily indebted borrowers, and leverage in the household sector more broadly, mean that medium-term risks to financial stability are building," he said.

The financial regulator has decreed that, from 1 November, banks will have to be able to demonstrate that new borrowers are capable of making repayments on their mortgage if home loan interest rates rose three percentage points above their current level. (Until APRA changed the rules for borrowers the minimum buffer on home loan applications was 2.5 percentage points.)

APRA estimates this rule change will reduce a household’s maximum borrowing capacity by around five per cent. This means that households that could previously borrow a maximum of $500,000 would now be able to borrow no more than $475,000. When we consider that the average mortgage in NSW to buy an established home is already at an all-time high of $755,000, that five per cent becomes a fairly sizeable amount.

RateCity.com.au research director Sally Tindall said this will impact those who are in the process of purchasing a property and could make it impossible for them to acquire the property they want: “These changes will clip the wings of people borrowing at their capacity.

"Many Australians looking to buy will be scrambling to find out how much their bank will now lend them and whether they can still afford to buy the property they want. The changes are designed to protect people from taking on risky levels of debt, however, it will hurt first home buyers who typically have smaller incomes and deposits," she said.

However, Adrian Kelly, president of the Real Estate Institute of Australia (REIA), said that most borrowers don’t take out loans at their maximum capacity and the changes would have only a modest effect.

"REIA has always wanted responsible lending practices because the last thing we want to see in our industry is people biting off more than they can chew," he told ABC News.

"We would all like to see a return to a more balanced market with some longevity to it, and one way to return to that is by addressing supply which should kick in as lockdowns end and more properties come to the market."

RBA says look elsewhere

The Reserve Bank announced in its October statement that, despite the continued rapid rise in house prices, the cash rate will stay at the record low of 0.10 per cent for the eleventh month in a row.

The RBA responded to concerns about the economic impact of high housing prices by urging governments to deal with tax and social security policies to bring surging house prices under control after new figures confirmed that we’re experiencing the biggest jump in nationwide property values on record.

In his statement outlining the latest monetary policy decision, RBA governor Philip Lowe said housing credit growth had picked up due to stronger demand for credit by both owner-occupiers and investors.

"Given the environment of rising housing prices and low interest rates, the bank is monitoring trends in housing borrowing carefully and it is important that lending standards are maintained," he said.

The RBA said it didn’t expect ‘instant results’ from APRA’s tightening of home loan application tests. In its latest Financial Stability Review (FSR), the Bank said it would take a few weeks for the changes to filter down to many home loan applicants.

"The maximum impact of this policy change could take several months to be realised," it cautioned.  “Indirect effects may take even longer than the direct effects, although changes in potential buyers' expectations could bring forward the impact of the policy change."

However, the Bank noted that the effect could be greater for some groups of borrowers than others: "For a given income and initial net income surplus, the effect on borrowers with existing mortgage debts (such as investors) would be larger, as the increase in the serviceability assessment rate also applies to a borrower's existing debts," the FSR noted.

The RBA governor said an increase in interest rates to deal with soaring house prices was not on the RBA’s agenda because it would “mean fewer jobs and lower wages growth”. He said he felt this issue could be best addressed by dealing with the ‘structural factors’ that push up the value of land.

“The factors include the design of our taxation and social security systems; planning and zoning restrictions; the type of dwellings that are built; and the nature of our transportation networks,” he said, noting that these are outside the RBA’s ambit.

And once again, he confirmed that based on current levels of inflation and wages growth the RBA is unlikely to lift interest rates until 2024.

More advice came from RBA assistant governor Luci Ellis who warned against housing affordability policies that gave buyers more to spend, stating that “all that does is bid up prices”, and noted that access to superannuation was one such policy that would result in people spending more on housing.

The EU-based Organisation for Economic Cooperation and Development (OECD) has expressed feelings similar to the RBA’s, arguing in its recent survey of the Australian economy that Australia’s taxation policies had encouraged household funds to be invested into residential property.

“Tackling structural factors that might skew Australian household balance sheets towards residential property investment could reduce vulnerabilities and improve household wellbeing,” it said.

Demand slows a bit

Looking not too far back to early 2020 when the pandemic first pushed Australia into lockdown, it was then expected that demand for property would quickly and significantly fall. Each of the big four banks had its own opinions, but their economists forecast falls up to 32 per cent in housing prices.

However, for a number of reasons including record low interest rates and financial stimulation from various government programs, demand for property has raced upwards to new highs. One of the biggest factors has been a reduction in the supply of houses on markets across Australia.

Data from property analytics firm CoreLogic shows that, in August 2018 there were 153,803 houses for sale nationally; as of late August this year there were just 88,872 houses on the market, a drop of more than 42 per cent.

New listing volumes were down substantially during 2020 and early 2021. As a result, we have experienced a housing price boom like never before, especially with an unmet demand for free-standing homes.

But Crystal Ossolinki, the director of demand in the economic group of the Australian Treasury’s social policy division, said at the housing affordability enquiry that “demand factors are tapering off” because there would be no more interest rate cuts, and that population growth had stalled while migration had been paused by the pandemic.

Ray White NSW chief auctioneer Alex Pattaro said that he expected to see an ‘avalanche’ of listings hit the market after lockdowns end, but properties would still be passed in if vendors have inflated price expectations.

“Buyers are there to do a deal, but they’re not going to go crazy and really stretch themselves if they don’t think the property is worth it,” Mr Pattaro told Domain. “There are buyers now that are fearful of overpaying … they’ve already stretched themselves so much.”

Westpac senior economist Matthew Hassan said that APRA’s recent changes to lending rules was a “de facto rate hike” for the housing market. He said the changes would contribute to a slowing in property price momentum.

“It’s about as close as you get to an actual interest rate increase without having a cash rate move. We’ll see a moderation, most likely to single-digit price growth over the course of the next six to 12 months,” he said.

Belle Property Lane Cove agent James Bennett said the volume of stock for sale felt like half of what there would be in a regular spring market: “There was a couple of weeks where there were eight new listings a week but now it’s one or two,” he said.

“Demand from buyers is really good; there’s really good depth, there are a lot of buyers in certain price brackets. I think in a month we’ll really know whether there are a few vendors that are holding back.”

After stamp duty, what?

The resignation of Gladys Berejiklian from the NSW Premier’s role and the subsequent elevation of former treasurer, Dominic Perrottet to that position has given increasing emphasis to the government’s stated desire to scrap stamp duty on property purchases and introduce an annual property tax payment instead.

Under our present system, stamp duty of $40,207 is paid on a $1 million property purchase in New South Wales, and a $2 million property attracts stamp duty of $94,567. It’s quite a successful revenue raiser for the state, and to replace it with another source of funds would require finding around $9 billion each year.

Mr Perrottet has long been this state’s champion for the introduction of a land tax to replace stamp duty, and he’s recently been supported by numerous submissions to the recent federal enquiry into housing affordability from groups such as the Housing Industry Association (HIA), Urban Development Institute of Australia (UDIA), University of Canberra, Domain and the Urban Taskforce identifying these lucrative duties as factors that help drive inequality among generations.

The HIA said that stamp duty was inequitable and inefficient but acknowledged that reforming it was not simple as it could influence how GST revenue was distributed: “In order to facilitate progress on this reform, it may be beneficial for the Australian government to commit to a dialogue through the national cabinet to investigate measures that would support state and territory governments to remove stamp duty.”

The Urban Taskforce, a lobby group for builders and developers, recommended the federal government “take the lead in discussions with the states to abolish stamp duty and replace it with a broad-based tax”.

The University of Canberra said a move away from stamp duties would boost efficiency and economic growth, lifting federal income and company tax collections. “There would therefore be an argument for the federal government to make incentive payments to the states to encourage them to undertake this reform.”

Property listings website Domain, whose market analyses are often quoted in these ‘Market Comment’ articles, said that a change to land taxes would ‘dramatically’ reduce the upfront cost of buying a house but also noted this raised the risk of creating a two-tier property market if buyers were offered a choice between stamp duties and land taxes.

Liberal MP Jason Falinski, who is leading the inquiry, said that state and local governments had hampered federal government efforts to increase housing supply: “The benefits of replacing transaction taxes such as stamp duties with broad-based land taxes is well known. What is not understood is why state governments are so resistant to making a change that benefits everyone, especially those people trying to get a foothold in the housing market.”

What Mr Falinski seems to have overlooked is the fact that his fellow politicians in all states and territories are naturally hesitant to introduce a new form of taxation that would impose a new and inescapable tax on every homeowner in Australia.

With something like 3.3 million dwellings in NSW, to raise the $9 billion now collected in stamp duties would cost the average household almost $2700 each year – not something any sane politician would want to bring to their electorate or take to an election.

Sources:

‘House prices are not a bubble, says Chris Richardson,’ Ronald Mizen, Australian Financial Review, 12 October 2021
‘How do you raise mortgage rates without actually raising them?,’ Greg Jericho, The Guardian, 12 October 2021
‘October interest rate announcement: RBA keeps cash rate at record low despite calls for regulator intervention,’ Sue Williams, Domain, 5 October 2021
‘Home loan crackdown likely to prompt slower house price growth, not price falls yet: economists,’ Elizabeth Redman, Domain, 6 October 2021
‘Stamp duty crimps property listings, pushing up prices,’ John Collett, Sydney Morning Herald, 6 October 2021
‘Sydney’s median auction price for houses passes $2m, reaches record highs in other cities,’ Kate Burke, Domain, 8 October 2021
‘RBA warns of property price falls with sharp rate rises,’, Ronald Mizen, Australian Financial Review, 9 October 2021
‘Reserve Bank warns home loan restrictions 'may be adjusted' if housing market doesn't cool,’ Gareth Hutchens and Michael Janda, ABC News online, 9 October 2021
‘APRA tightens home loan rules on the same day New Zealand's Reserve Bank lifts interest rates,’ Michael Janda, Gareth Hutchens, and Samuel Yang, ABC News online, 6 October 2021
‘APRA takes modest step into housing ... with political echoes of 1961,’ Shane Wright, Sydney Morning Herald, 7 October 2021
‘APRA's mortgage crackdown catches out hopeful home buyers,’ Gareth Hutchens and Daniel Ziffer, ABC News online, 7 October 2021
‘Real estate: Signs point to slowdown in runaway home prices,’ Kirsten Craze, News.com.au, 18 September 2021
‘Australia’s housing market boom ranked seventh in the world: Knight Frank report,’ Tawar Razaghi, Domain, 16 September 2021
‘Federal government urged to intervene with states on stamp duty,’ Jennifer Duke, Sydney Morning Herald, 18 September 2021
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‘Australia’s house prices are disconnected from reality – and the RBA wants you to know it isn’t to blame,’ Greg Jericho, The Guardian, 16 September 2021
‘We’re back to record property price growth, so what’s being done about it?,’ David Taylor, ABC News online, 16 September 2021
‘Why Australian house prices are still rising despite Covid,’ Tarric Brooker, News.com.au, 16 September 2021
‘Australian house prices could be about to flatten out after rising 16.8% in last year,’ Paul Karp and Amy Remeikis, The Guardian, 15 September 2021
‘Aussie property prices record biggest three-month jump on record,’ Stuart Marsh, 9News, 14 September 2021
‘RBA says surging house prices are a government problem,’ Shane Wright, Sydney Morning Herald, 15 September 2021