Market comment: Homeowners rejoice, borrowers push limits, and investors cash in

Tue, 16 Nov 2021

Market comment: Homeowners rejoice, borrowers push limits, and investors cash inSydney property prices are in the news almost every day. The reasons for this intense coverage range from simply discussing how much housing in this city costs to the impacts of such high prices on affordability and the domestic economy. Earlier declarations of price ‘ceilings’ or of the end of the boom have regularly become outdated as the rises continue, month after month.

In Sydney the median house price rose by an astonishing $1200 a day in the June quarter, while house values increased by 1.6 per cent or around $24,000 in just the month of October.  The median house price in Sydney is now around $1.5 million. That’s quite a bit of money, but it’s also a lot less than you’d have to pay to live anywhere close to the CBD or in any of the more desirable suburbs.

And, speaking of those desirable suburbs, Domain’s compiled a list of dozens of Sydney suburbs where house prices have gone up by more than $500,000 in the past twelve months, with beachside suburbs like Bronte and Palm Beach and what it calls “lifestyle locations” like Killara leading the rates of growth.

Even the CEO of ANZ Bank, Shayne Elliott, has expressed surprise at Sydney’s high property costs, saying: “I think it is a time to be a little bit prudent and a little bit cautious about lending, I mean look at Sydney, house prices up 30 per cent in a year. That says to me it’s a time for prudent and reasonable risk assessment at a time of such extraordinary price changes.”

Domain figures confirm that Sydney houses are up 30.4 per cent in the year to September, with units up 13.6 per cent in the same period. Graham Cooke, head of consumer research at Finder, said the current house price surge was being driven by both owner-occupiers and local investors.

“The opening of international borders, and the return of potential overseas investors, may well re-fuel the market even further,” he told’s Sarah Sharples. He said the average homeowner in Sydney is due to make an incredible $342,306 in property value gains over 2021 and 2022: “Sydney homeowners stand to make an eye-watering 3.5 times the average household salary of $97,211 just on their property,” he explained.

For some time, the long-term trend has been for the gap between house and unit prices to widen, as Eliza Owen, CoreLogic’s head of research, explains: “Looking at the change in unit values as a portion of housing over time shows apartment owners in the current market would be able to put less towards a house than they could five years ago,” she says.

CoreLogic’s research director Tim Lawless explains that units are simply more affordable than a free-standing house: “As housing becomes less affordable, we expect to see more demand deflected towards the higher density sectors of the market, especially in Sydney where the gap between the median house and unit value is now close to $500,000,” Mr Lawless said.

Another reason for houses outpacing units is the rate and the speed with which houses appreciate. “There has been a shift by investors from units to free-standing houses,” says Doron Peleg, founder of RiskWise Property Research. “They are attracted to houses because of the potential for [greater] capital gains.”

Figures compiled by Domain also show that concerns about there being a shortage of stock available at the start of the spring period were largely unfounded with the number of listings at Sydney auctions up dramatically showing an increase of 31.8 per cent to mid-October, and that trend is continuing into November.

Domain’s Elizabeth Redman summed up the current situation in a Herald article: “The frenzied bidding seen in autumn is largely over, but don’t expect to get a bargain – property prices look set to edge even higher from here,” and she added “…with more buyers than sellers, expect prices to keep going up for now, just not at the same breakneck pace and not for every home.”

Westpac says the staggering rate of growth in the first quarter of this year would have been impossible to sustain, but the rises aren’t finished yet. Consumer sentiment surveys conducted by the bank show no drop in housing price expectations, and recent auction clearance rates are still running just below 80 per cent.

Correction coming?

Westpac's Chief Economist Bill Evans predicts that the property market will enter a ‘correction phase’ in 2023, but the market is still expected to post gains through all of next year: "We expect price growth to slow to 8 per cent in 2022, up from our previous forecast of 5 per cent), with most of that increase loaded into the first half of the year.”

NAB chief economist Alan Oster thinks the rate of growth has peaked but wouldn’t say the boom was over. He says prices growth will continue into early next year, before plateauing, driven by affordability constraints and rising fixed-term interest rates: “House price growth has slowed recently though it remains strong, activity has slowed with time on market increasing and new listings normalising, and approvals for both construction and lending finance pulling back.”

So, in the view of these experts, Sydney’s astronomically high property prices seem to have peaked, for now at least. But the rises will still go on. Global investment bank UBS has released its latest Real Estate Bubble Index, and that comes with a warning that “As long as financing costs trend toward zero, property prices, incomes, and rents can continue to decouple. But ever-higher prices and leverage imply ever-higher risks, a spiralling path that will likely prove a dead end in the long term.”

In other words, if interest rates rise again property prices will cease their seemingly unstoppable growth. But what happens then? Economist Jason Murphy thinks buyers will still be looking for Sydney property to acquire: “The risk of a correction in property prices is always real, but as UBS says, bubbles are funny things, you can only say they existed once they’ve popped, and spotting one getting bigger is a lot easier than picking the moment when they are going to pop.”

It sounds paradoxical, but even if Sydney property is overvalued, this doesn’t mean buyers will stop wanting to purchase properties. AMP Capital’s chief economist, Shane Oliver, says he thinks Sydney house prices are about 39 per cent above what he considers ‘fair value’ but all that’s likely to happen is a moderation of price growth up to and including 2022.

“The fact that housing is poorly affordable is a sign of overvaluation, but it hasn’t stopped housing in Sydney or elsewhere in Australia getting more expensive,” he said. “I wouldn’t be saying, just because it’s overvalued it’s about to fall.”

And in some ways, as ABC’s Ian Verrender points out, that’s a good thing: “Real estate is the single biggest asset for a huge portion of Australian households,” he said.

“When prices are rising, we feel wealthier and spend more. When they're in decline, the reverse psychology kicks in. People spend less, and construction slows, creating a huge handbrake on the economy. When real estate slumps, that's when problems really become acute.”

Rate rise?

The Reserve Bank of Australia (RBA) has until now steadfastly maintained it would retain the current record low prime rate of interest until 2024, but inflation, both locally and globally, is rearing its ugly head and rising faster than most economists had expected.

At its November meeting, the Reserve Bank’s Governor, Philip Lowe, indicated a rate rise in 2023 was “entirely plausible” after rejecting suggestions it could raise rates early in 2022: “I think that’s a complete overreaction to the recent inflation data. I still struggle with the scenario that rates have to rise next year,” he said. “The latest data and forecasts do not warrant an increase in the cash rate in 2022.”

The Guardian’s Greg Jericho says the banks might have some justification for increasing their fixed home loan rates, but they aren’t being forced into doing so: “Their funding costs remain at historic lows and there is zero justification for them to begin increasing variable mortgage rates before the Reserve Bank does.”

This doesn’t mean that our commercial banks are going to wait for a rise in the prime rate to hike their own interest rates. NAB, Westpac and the CBA have all raised their home loan interest rates after the RBA’s November meeting.

AMP Capital’s Shane Oliver says that mentions of earlier-than-expected rate rises signal “the beginning of the end” of the boom: “It is a beginning of the end, you can always debate what tips the beginning of the end … it’s often interest rate changes that signal the beginning of the end. It’s usually interest rate hikes that kill off the housing boom,” he told Domain.

Dr Oliver said inflation was just one of the indicators that influences a cash rate hike, but the RBA would prefer the unemployment rate of 4.6 per cent to be closer to 4 per cent, stronger wage growth, and a broader recovery in the economy as pandemic-induced lockdowns lift: “Today’s inflation numbers in Australia suggests we might be getting close to the conditions for a rate hike and it may come in a year’s time,” he said.

“But there’s still a fair way to go yet, and in the interim, the RBA would probably do other things to remove the extraordinary stimulus it has provided such as further tapering off its bond buying.”

The central banks of other countries are bringing their programs of quantitative easing to early conclusions and starting moves to bring their interest rates back to more normal settings. Rising prices for most categories of consumer goods are becoming obvious in all developed countries, and higher costs for businesses are also causing concerns for those who can remember the economic damages wrought by runaway inflation a couple of decades ago.

CommSec senior economist Ryan Felsman told the Sydney Morning Herald that the 4.1 per cent rise in the cost of imported consumer goods was being felt by purchasers of textiles, clothing and footwear, as well as food and drinks, household electrical items, toys and books.

“The lift in the prices of imported consumer and industrial-related goods could pressure profit margins for Aussie companies, with rising supplier costs potentially being passed on to consumers in the form of higher prices,” Mr Felsman said.

Housing construction is another area that’s feeling the pain of higher costs. CoreLogic reports that the latest Cordell Housing Index Price (CHIP) shows an annual growth rate of 3.9 per cent and the largest quarterly change since the third quarter of 2014, when residential construction costs increased 1.5 per cent.

“Widespread demand across the residential construction sector and a shortage of materials such as timber, PVC piping and fittings have contributed to the rise in costs with no sign of easing in the short-term”, it says in the CHIP analysis.

The Commonwealth Bank recently said it believes interest rates will rise next year due to an economy that is likely to expand by 4.4 per cent in 2022. The bank’s head of Australian economics, Gareth Aird, said this expansion was due to the faster than expected take-up of coronavirus vaccinations and the consequent earlier re-opening of state economies.

“We now expect the RBA to commence normalising the cash rate in November 2022, with a 15-basis point rise followed by a 25-basis point hike in December 2022. By the third quarter of 2024, the bank expects the cash rate to reach 1.25 per cent,” he said.

The Australian financial markets are a fairly accurate guide in matters relating to interest rates, and it’s interesting to see that in late October they were pricing in a 75 per cent chance of a rate hike in February 2022.  But not everyone agreed on this.

BIS Oxford Economics’ Sarah Hunter told’s James Hall that the current rate of inflation would provide little indication for a rate hike: “The transitory headwinds from higher commodity prices particularly petrol and global supply chain disruptions will continue, which will keep headline inflation at or even above 3 per cent in the near term.

“But as these factors are external, they are very unlikely to push the RBA into pulling forward the first cash rate rise, and their impact will fade over time as conditions normalise through increased supply and/or moderating demand as spending patterns shift away from goods,” she said.

Housing affordability

There’s no doubt that housing affordability across Sydney has fallen to its lowest level in at least a decade. The benefits of record low interest rates have been defeated by record high property prices and low wages growth.

Everybody’s Home, a campaign established in 2018 by a coalition of welfare bodies, says Australia is now the third least affordable housing market in the world where only 45 per cent of people aged under 35 own their own home and one in three houses are investment properties.

CoreLogic’s research director Tim Lawless says fundamentals such as income growth and supply are starting to catch up with the entire market: “Housing prices continue to outpace wages by a ratio of about 12 to one. This is one of the reasons why first home buyers are becoming a progressively smaller component of housing demand,” he said.

The average mortgage in NSW for an existing dwelling reached a record-high of $772,000 in September - an increase of nearly $140,000 over the past 12 months. Australian Bureau of Statistics data show a 5.6 per cent drop in loans to first home buyers in September. First home buyer mortgage loans have fallen by 27 per cent since peaking in January.

Unprecedented price growth and five years of weak income growth have massively driven up the cost of an average first home deposit. On average, according the ‘The Conversation’ on ABC-TV, it now takes a 24-35 year-old nine years of squirreling away a fifth of their income each year to save for a typical Sydney housing deposit, up from five to six years a decade ago.

Moody’s Investors Service calculated that the rise in Sydney’s median house price to its present $1.5 million, means a household with an annual income of $135,000 will need more than 45 per cent of that to service their mortgage. Not all that long ago, in February, they would have needed just 36 per cent of their income.

Moody’s analysts Pratik Joshi and Ilya Serov concluded housing affordability across the country has deteriorated over the past year, and Sydney buyers have been among the hardest hit: “Australian housing affordability, which deteriorated over the seven months to September 2021, will continue to worsen over the rest of the year and into early 2022 because of ongoing property price rises,” they said.

Moody’s noted that household incomes have been stagnant for the past year, although the economic recovery after pandemic restrictions ease should be positive for wages growth: “All up, we do not expect income growth to materially offset housing price gains over the rest of this year and into 2022.”

Domain chief of research and economics Nicola Powell says, although it’s still a sellers’ market, the peak rate of price growth has passed: “A big element of this is affordability, that is feeding into this pace of growth,” Dr Powell said. “First-home buyers are facing such headwinds in terms of getting into the market. For some buyers, the leap to upsizing has just become too great.”

Foreign buyers

Figures from CoreLogic show that across Australia dwelling values rose 20.3 per cent over the year which was the highest annual rise since June 1989. This came at a time when pandemic-created border closures severely restricted the activities of international buyers, suggesting that overseas purchasers aren’t the underlying cause of our inflated housing costs.

In fact, the latest survey conducted by the Foreign Investment Review Board shows that overseas buyers' purchasing activity has hit record lows, with residential real estate approvals for foreigners plummeting from 40,141 in 2015-16 to just 7,056 this year.

This doesn’t mean all overseas buyers have deserted Australia. According to a new report by Juawai IQI, Singaporean investors have acquired $19.3 billion in Australian real estate over the past two years. This puts them several billion dollars ahead of Chinese buyers, who accounted for just $13.2 billion of investment over the same period.

“Most big Chinese corporate investors have pulled back from Australia, while those from Singapore have doubled down on the lucky country,” said Juwai IQ’s executive chairman Georg Chmiel.

“Just like many Australian businesses consider Asia to be a natural market for their products, many Asians consider Australian real estate the natural destinations for their money,” he said.

Real estate agent Jeremy Tran, who specialises in selling Australian real estate to South-East Asian buyers, tells us that there are many advantages in dealing with overseas clients:
"The majority of my foreign clients are high-end and high-profile people, including leading business owners and sometimes serving government officials. Their finances are firm and solid, and they are willing to buy and make quick decisions.”

"Many overseas buyers deal in cash and cash buyers usually attract agents due to prompt exchanges and ease of settlements."

But at least for now, foreign buyers comprise a significantly smaller portion of residential housing demand than in previous years, according to CoreLogic’s Tim Lawless: "This group is now virtually immaterial as a contributor to demand for Australian housing," he says.

Stamp duty update

Now that the state’s former Treasurer is our new Premier, we could be forgiven for thinking Mr Perrottet’s enthusiasm for replacing stamp duty with a land tax would stimulate an immediate push for the introduction of this new source of revenue for NSW.

But apparently it isn’t so. Newly appointed Treasurer Matt Kean has told the budget estimates hearing that switching from stamp duty to a broad-based land tax “could be one option” but said that there was “a range of options” he would consider.

Both Perrottet and Kean say housing affordability is the government’s priority. But there are lingering questions about how effective removing stamp duty would be in the quest for lower property prices.

“There are other ways to improving housing affordability and this may be one lever which we could consider,” Mr Kean said, adding that axing stamp duty was “Premier Perrottet’s preferred method”.

Kean said it would be “very expensive in the early years” to replace stamp duty with a broad-based land tax and the Commonwealth would need to invest in the reform before it could be achieved.

He said it would be in the interest of the Commonwealth to support the NSW tax reforms because it would “grow the overall economy and that helps the federal budget by generating higher revenues”.

When he was asked about the Treasurer’s comments, Mr Perrottet said: “Housing affordability is one of the key issues in NSW, and our government will continue to look at reforms to the system which could make it easier for people, especially first home buyers, to get a foot on the property ladder.”

“The last 12 months we have seen the property prices here in Sydney increase by 25 per cent, we have seen the average stamp duty bill increase by $10,000. Stamp duty continues to grow and be an impediment to people getting into the property market,” Mr Perrottet said.

NSW Treasury secretary Michael Pratt later told the budget estimates hearing that his department had undertaken what he called “one of the longest consultations in its history” into stamp duty reform and received a “huge amount of extensive feedback.” The comments he has received will be incorporated into the government’s considerations.

No doubt the issue will continue to be discussed and debated at length in government circles, recognising that the introduction of a new and costly tax on every residential property in NSW would be a major reform of this state’s taxation system and a potential political nightmare for any government that tries to introduce it.

And so…

It’s always easy to make predictions about property prices. The hardest part is to ensure those predictions are accurate and will be fulfilled by what actually happens.

We can say that Sydney prices are now high and to even say ‘overvalued’ is probably justified in terms of affordability. But that doesn’t mean they’re going to fall. Concerns about the availability of housing stock seem to have been somewhat overblown with sufficient stock on the market to meet the demands of this year’s traditional spring selling season.

The incredible rate of recent property price rises will moderate as a result of action by APRA and the RBA, but the rises will continue throughout the final quarter of 2021 and calendar 2022.

The RBA itself will do its best to keep the prime rate where it is through 2022, but bank loan interest rates will rise by an amount that will make mortgage loans harder to service but not unobtainable. Affordability will continue to suffer and a growing number of first home buyers will find themselves literally priced out of the market.

However, the loss of those potential buyers will likely be offset by investors seeking capital gains, by a return of overseas immigration, and by a resurgence of buyers from other countries that are now recovering from the economic effects of the pandemic.


‘A good sign for buyers’: Clearance rates drop as more homes hit the market,’ Tawar Razaghi, Domain, 10 November 2021
‘Three reasons house prices will flatten after a period of skyrocketing growth,’ Katie McLeod,, 7 November 2021
‘Don’t fall for rate-raising banks pretending they are doing it tough,’ Greg Jericho, The Guardian, 9 November 2021
‘Australian banks lift fixed interest home loan rates despite RBA keeping official rate at record low,’ Ben Butler, The Guardian, 6 November 2021
‘The Sydney suburbs with the strongest house and unit price growth,’ Kate Burke, Domain, 6 November 2021
‘NSW overhaul of stamp duty needs federal support: Kean,’ Alexandra Smith and Matt Wade, Sydney Morning Herald, 5 November 2021
‘Premier should not be deterred from bold move on tax reform,’ The Herald's View 4 November 2021
‘RBA flags earlier interest rates rise as economy bounces back from Covid lockdowns,’ Peter Hannam, The Guardian, 3 November 2021
‘Some households will need $22,458 extra a year to avoid mortgage stress if rates rise by 1 percentage point,’ Tawar Razaghi, Domain, 3 November 2021
‘RBA holds rates at ultra-low levels in bid to drive up wages,’ Shane Wright, Sydney Morning Herald, 2 November 2021
‘Likely to lose momentum’: Australia’s dwelling values continue to grow, though the pace is slowing,’ Melissa Heagney, Domain, 1 November 2021
‘Sydney house prices predicted to rise by $102k in 2022,’ Sarah Sharples,, 2 November 2021
‘Australian property market slowly loses momentum as growth rate eases to 1.49pc, CoreLogic finds,’ Samuel Yang, ABC News online, 1 November 2021
‘Reserve Bank poised to ease debt-buying as economy rebounds.’ Shane Wright, Sydney Morning Herald, 1 November 2021
‘How the RBA allowed Australia to become a servant to property prices in a $9 trillion market,’ Ian Verrender, ABC News online, 1 November 2021
‘Extraordinary price changes’ in the housing market warrant ‘prudent’ lending,’ SkyNews, 1 November 2021
‘Sydney house price overvalued and on brink of bubble territory,’ Jason Murphy,, 26 October 2021
‘Now it’s Liberals telling us we are going to have to cut the capital gains tax concession,’ The Conversation, ABC News online, 27 October 2021
‘Vested interest: How the home-ownership game is rigged,’ Ross Gittins, Sydney Morning Herald, 27 October 2021
Home loans: Soaring inflation data sparks fears of interest rate hike,’ James Hall,, 28 October 2021
‘House prices are not a bubble, says Chris Richardson,’ Ronald Mizen, Australian Financial Review, 12 October 2021
‘Australia's property market forecast to dip in 2023 following an interest rate rise,’ Stuart Marsh, 9News, 21 October 2021
‘Sydney house prices hit record high, with median climbing to almost $1.5 million,’ Kate Burke, Domain, 28 October 2021
‘How high can house prices rise, with Australia’s combined capital median already near $1 million?’, Elizabeth Redman, Domain, 28 October 2021
‘Inflation in Australia might be on the rise, but it’s hardly running wild,’ Greg Jericho, The Guardian, 28 October 2021
‘Property market update: What buyers can expect this spring and summer’, Jessica Wang,, 18 October 2021
‘Bond markets push the RBA close to capitulation,’ Cecile Lefort and Ronald Mizen, Australian Financial Review, 28 October 2021
‘Era of low interest rates is over’: Rate rises expected ahead of federal election,’ Shane Wright and Jennifer Duke, Sydney Morning Herald, 28 October 2021
‘Housing affordability collapses despite record low interest rates,’ Shane Wright, Sydney Morning Herald, 25 October 2021
‘Cashed-up foreign buyers still seek Australian property, but are they really to blame for price rises?,’ Michael Luu, ABC Radio Sydney, 26 October 20221
‘Australian house prices to rise 22% this year and then ease off, economists say,’ AAP, The Guardian, 16 October 2021