The closing months of 2021 have seen the anticipated slowing of the Sydney housing market after prices raced upwards to record highs earlier this year. One in four Australian houses is now worth more than $1 million, and CoreLogic figures show that 52 per cent of homes in greater Sydney are worth seven figures, while about 16 per cent are now worth $2 million or more.

Want some more eye-watering statistics? Australian Bureau of Statistics figures show that the value of the nation’s residential properties rose 21.7 per cent over the past twelve months to a total of $9.3 trillion. It increased by $487 billion in the September quarter alone. The NSW property market accounted for 40 per cent of Australia’s national rise, with values in the state soaring by $800 billion in the past year to a total of $3.7 trillion. 

These amazing numbers reflect a decade-long trend. A Ray White analysis of Core Logic data concluded that Sydney house prices have more than doubled in the past ten years, rising 146.4 per cent in the 10 years to October 2021. Housing continues to be a great long-term investment.

This also means Sydney property prices have reached new levels of unaffordability, locking many buyers out of the market at a time when various stimulus payments from state and federal governments have either been whittled back or expired completely. 

On the positive side, new sellers have emerged after previously undreamed-of profits were dangled in front of their eyes, and there’s a growing supply of housing stock on offer. Investors are active and banks are adjusting their lending policies so there’s still finance obtainable at favourable interest rates.

Figures from CoreLogic show that Capital city houses are now 37.9 per cent more expensive than capital city units, which is the largest difference on record.  In Sydney, where the gap between house and unit values is the widest, a house costs $523,000 more on average than a unit – the biggest dollar difference yet seen.

“With such a large value gap between the broad housing types, it’s no wonder we are seeing demand gradually transition towards higher density housing options simply because they are substantially more affordable than buying a house,” said CoreLogic’s research director Tim Lawless.

We’ll look at all these issues in more detail elsewhere in this article, but for now it must be stressed that there are no indications that prices will reverse their upwards trajectory. We’re only seeing a slowdown, not a change of direction. 

An indication of this can be seen in the national house price rise of 1.49 per cent in October, compared to 2.8 per cent in March earlier this year. This slowed to a rise of 1.3 per cent in November, which was the slowest rate of rise since January, but still following an upwards trend.

However, there is a feeling that buyers’ FOMO (Fear of Missing Out) is starting to ease. Spring is our traditional property selling season and this year, thanks to an increase in listings towards the season’s end, there’s been more stock to provide choice for buyers, although bargains are still hard to find.

Felicity Emmett and Adelaide Timbrell from the ANZ Bank's economics team are forecasting that this year's nationwide price gains of 20 per cent-plus will slow to 6 per cent next year: "Affordability constraints are biting, new listings have lifted strongly, and macroprudential tightening and higher mortgage rates are set to constrain lending over the coming year," they wrote.

"New lending finance to owner-occupiers has peaked: first home buyer finance has been trending down since the top in January, finance to other owner-occupiers has fallen 10 per cent over the past two months," they noted.

Buyers’ agent Henny Stier from OH Property says she’s seeing some shifts in the market: “People’s salaries haven’t gone up 25 per cent or 30 per cent in a year. The market has, but people’s salaries haven’t,” she said.

Another buyers’ agent, Michelle May, said she’s still seeing big results for homes in the market’s upper levels: “The craziness has been dampened down somewhat because there is more stock,” she noted.

“Obviously, the buyer pool gets a little bit shallower [before Christmas] which is great; instead of 17 registered bidders you have five. With five it’s still going to be a strong auction, but the craziness is not going to take hold as much.”

Real Estate Buyers Agents Association of Australia president Cate Bakos cautioned any hopeful buyers against waiting for a fall in prices: “I’ve watched people sitting on the sidelines for 18 months waiting for that fall,” she said, noting that a small dip when JobKeeper ended had quickly turned back into strong gains. 

“If the market did move up, and you could have afforded to buy, you’d feel really silly.”

Immigration to restart

There’s one element of rising housing prices that’s been missing for the past couple of years but is likely to return soon, and that’s immigration. According to ABC News online, economists say about one extra home is needed for every three migrants. Once Covid-19 is sufficiently controlled, Australia’s annual migrant intake could reach as high as 250,000 people by the end of 2023. 

AMP Capital chief economist Shane Oliver predicts house prices and rents will rise in 2023 as a result of rapidly rising migration, although much will depend on other variables such as interest rates and the possibility of further restrictions on borrowing.

If the scenario of 250,000 migrants by 2023 does eventuate – and given recent calls from LNP political leaders for a "Big Australia" fuelled by immigration, that flood of immigrants is possible — he says house prices would jump about five per cent by 2023 and rents would lift about seven per cent.

"If immigration were to come back rapidly, we would see significant upward pressure on rents and significant upward pressure on house prices," said Dr Oliver.

Another market analyst who foresees potential for price growth resulting from immigration is Louis Christopher, managing director of SQM Research. In his opinion, the return of international migration, coupled with relative affordability and supply compared to houses, would translate to more significant price growth of units and apartments in Sydney and Melbourne.

“While there will be negligible increases in underlying demand in Victoria and New South Wales, there will be a pick-up from an increase in net overseas migration, which typically goes to Sydney and Melbourne first,” Mr Christopher said.

More choice at auctions 

The end-of-year auctions are driving the Sydney market to a very successful finish, as shown by the numbers from 13 December where 1320 properties were scheduled for auction – the busiest day since Domain began keeping records in 1995. 868 sales were reported for a clearance rate of 63 per cent. 

The median sale price for houses over the month of October was $2.04 million while units showed a median sale price of $1.15 million. Data from Domain shows that Sydney’s median auction price for houses fell 3.6 per cent in November to $1.95 million, but this is still 21.9 per cent higher than a year ago.

A seasonal pre-Christmas slowdown is taking place, with more properties on offer easing competition. Data from property marketing firm Ray White shows that their Sydney auctions attracted an average of 6.5 bidders in November, and only 3.3 buyers made offers at that month’s auctions – the lowest number since November 2020, and down from a peak in July, when the city was in lockdown.

“There’s no question that the big glut of stock on the market has moderated the amount of competition we’re seeing at auctions,” Sydney-based independent auctioneer Clarence White said.

“More reserve prices are being adjusted in order to get properties sold at auction, competition is certainly a bit less robust than it has been.”

The monthly clearance rates have slipped from their highs of 80 per cent and now seem to be stabilised between the low-70s to high 60s as more homes go on the market, which is good news for buyers who have been starved for choice for most of 2021. 

Auctioneer Damien Cooley, of Cooley Auctions, said the increase in homes on the market has given buyers more choice and reduced the level of competition – with their recent auctions drawing an average of 4.4 bidders, compared to 10 in lockdown.

“The buyer pool is still coping well … one thing that we’re not seeing as much of though is those run-away results, they’re happening, but not as much,” he said. 

Nicola Powell, Domain’s chief of research and economics told Domain: “It’s probably the outcome that many buyers have been wanting for a long time.

“As long as we see listings track strongly, we could see the market tip towards buyers. It’s a good sign for buyers, particularly those who have missed out. It was ferocious at the beginning of the year. We’re not there yet but what we’re seeing is conditions are easing.”

Ray White NSW chief auctioneer Alex Pattaro told Domain’s Kate Burke that A-grade properties were still delivering standout auction results, but buyers had become cautious of overpaying, and vendors with inflated price expectations were seeing properties passed in.

“Buyers don’t have the FOMO anymore … because there are more properties to choose from. That’s taken away that edge, but the market is still performing very well,” he said.

Banks adapt their lending policies

Our ‘big four’ banks have figured out a way to counter effects of an earlier-than-expected interest rate rise. In fact, 25 of this country’s biggest lenders have been able to cut their basic variable home loan rate for owner-occupiers paying principal and interest, offering discounts to customers with substantial deposits of 30 per cent or more as a counteroffer against riskier home loan lending.

Canstar finance expert Steve Mickenbecker said this indicates the banks are forecasting the RBA will hike up interest rates earlier than the previously indicated timeframe of 2024: "ANZ's cut in variable home loan interest rates sends a very clear message that the bank is expecting the Reserve Bank to cut the Cash Rate late next year or early in 2023," Mr Mickenbecker told 9News.

"The big banks are still offering short-term fixed rates below their variable rates, but borrowers can expect to see them continue to rise. The fixed rate bargains are not going to get any sharper than they are now,” he said.

"The banks are chasing new business hard while the market is strong but are insuring their portfolio against a possible fall of house prices from their now lofty heights," Mr Mickenbecker commented.

‘New business’ means lending to the investors that are rushing back into the market as first-home buyers drop out. Figures from the Australian Bureau of Statistics showed that in October there was a fall in home loan demand overall, but property investor loan commitments rose 1.1 per cent.

The total value of new investor loans approved in October was 90 per cent higher than it was in 2020; the head of finance and wealth at the ABS, Katherine Keenan, told the ABC it was now close to record levels: "The value of new loan commitments for investor housing has grown for 12 consecutive months, reaching $9.7 billion in October 2021," she said. "This was the highest level since the all-time high in April 2015."

Director of research at RateCity, Sally Tindall, cites official figures showing that 1 million home loan applications were settled in the last year, which was up 30 per cent from the previous year, and says this is putting a strain on many banks’ processing systems.

“Home loan turnaround times can be critical when buying a property because the last thing buyers want is for their bank to drag its heels when there’s a deadline looming,” Tindall says.

"While proportionally first home buyers are being wedged out, over 140,000 owner-occupier first home buyer loans have been approved so far this year — that's over 4,000 more loans than in 2020, with two months of data still to come."

While some banks have earned criticism for their slowness in processing loan applications, the two banks getting the highest marks from investors for their mortgage processing in recent times have been Macquarie Group and the Commonwealth Bank. Both of these banks attribute their success to investments in technology and systems that have allowed them to produce faster turnaround times.

Interest rates tweaked

In early 2021 two-year fixed mortgage rates were below two per cent and five-year loans were under 2.25 per cent. Now, without any changes to the RBA’s prime rate, all major banks as well as many other Australian lenders have increased their fixed lending rates in recent weeks.

Canstar finance expert Steve Mickenbecker said fixed rates were not going down again: “The increase of the past few weeks means that the horse has bolted on the absolute sweet spot for fixed rates, but this week’s rate increases should nonetheless jolt some borrowers into action,” he told the Sydney Morning Herald.

“Inflation is up in Australia and rocketing up in the US, meaning that there can be only one direction for interest rates, and that is up.”

Reserve Bank governor Philip Lowe said in late November that he would hope to get official interest rates, now at 0.1 per cent, back to a “neutral rate” of at least 2.5 per cent, if not 3.5 per cent, adding that he still thought such a rise wouldn’t come until 2024.

“We’re trying to get interest rates up over time. If we’re successful, interest rates will go up. People borrowing today need to remember that” he said.

ANZ economists Emmett and Timbrell said in their forecast for the coming year that the double-digit gains in house prices over the past year won’t be repeated in 2022, and interest rates will be the key to what transpires in Sydney property. They reject the view held by many that the Reserve Bank of Australia may bump up the official cash rate next year as inflation rises faster than expected, which the central bank has also attempted to hose down.

“Affordability constraints are biting, new listings have lifted strongly, and macroprudential tightening and higher mortgage rates are set to constrain lending over the coming year,” they wrote.

“We see the RBA on hold until the first half of 2023, but fixed mortgage rates are already rising,” Ms Emmett and Ms Timbrell wrote.

Recent research from the Reserve Bank found that most households will be able to weather a rate hike cycle, according to researchers Gianni La Cava and Lydia Wang. They say it is entirely possible that a rate hike won’t be too painful a shock overall, but there will be some borrowers that will experience more stress than others.

They said those most at risk are in higher priced areas who’ve borrowed at the top of their range but failed to factor in significant interest rate rises into their home-owning budget. They also named first-time buyers in pricey property markets such as Sydney who are most likely to feel the pain of a rate hike.

Affordability concerns

Since September, figures from CoreLogic show that new sales listings Australia-wide have surged by 47 per cent from their September low point. In that same time, housing prices outpaced wages by a factor approximately 12 to 1. 

This wage-price disparity isn’t new. The price of the average Sydney house has multiplied by a factor of 17 times over the past forty years while wages are now about five times what they were in 1981 when the median house price was $78,900 and average annual earnings were $15,800. 

Sydney is now the nation’s most expensive property market, with a median house price of almost $1.5 million. It naturally follows that Australian Bureau of Statistics data for October 2021 shows the average mortgage size for a new home loan in NSW is also the highest in Australia at $770,868.

Saving for a deposit is increasingly painful, even for many two-income couples who want to acquire a home before starting a family. The 2021 ANZ CoreLogic Housing Affordability report found that the time it takes to save a 20 per cent deposit at the median property price has doubled since 2001.

In Sydney, anyone looking to buy a house at the median price of $1,499,126, based on Domain data, would need $299,825 for a 20 per cent deposit. That’s more than triple the average yearly wage of $91,743.60 for full-time workers, according to the latest Australian Bureau of Statistics figures. 

No surprise, then that 60 per cent of first-home buyers in Sydney can afford less than 10 per cent of properties in this city. It’s not much better in regional NSW, where first-home buyers with earnings in the bottom half of incomes can only buy 20 per cent of properties.

Domain chief of economics and research Nicola Powell said that an examination of the difference in wages growth and house prices would be a “heart-stopping” moment for first-home buyers. 

“It pushes saving for a deposit out of reach even further,” Dr Powell said. 

Westpac is still predicting rises in house prices and in interest rates over the next two years.
The bank’s senior economist Matthew Hassan said house prices would again rise faster than wages. An eight per cent rise in house prices was predicted for 2022, while wage growth would be three per cent.

“It’s a difficult position to be in, particularly with the pressure being added to the markets in regional centres … It puts would-be buyers in an even trickier situation,” Mr Hassan said. 

“As we head into next year, the housing market is going to be responding to very different factors to the wider economy, particularly the deteriorating affordability,” he noted. “Next year is when the economy catches up.”
 
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