Sydney market slows again but prices keep rising

Earlier this year, analysts were anything but united on whether the market could continue to build on the momentum gained earlier in the year. Most felt it depended on what happened with interest rates. Some thought a cut in interest rates would put pressure on property prices while others believed an interest rate cut might lower the intensity of the market. 

As it’s turned out, the cash rate has remained unchanged at 4.35 per cent since November and the market has kept up a steady if slightly slowing pace throughout the cooler months. AMP chief economist Shane Oliver says the current high-interest-rate environment has slowed the winter buying and selling season.

“Interest rates haven’t gotten any better from the start of the season – if anything, it’s gotten a bit worse with interest rate cuts still some time away,” he says. “The market has cooled down this winter, so to speak, from the rush it experienced at the start of the year but it is still relatively busy for winter.”

Mr Oliver told Domain that softening auction clearance rates across the country are indicative of a slower market: “In recent weeks, Sydney’s clearance rate has been hovering around the 65 per cent mark, while Melbourne’s has been sitting around 60 per cent.

“The clearance rates are a bit down from the highs [at the start of the year]” he says. “But the basic picture looks to be that there is still a supply shortfall relative to the underlying demand for housing … this will continue to drive activity and sustain the market this season, despite the high-interest-rate environment.”

PropTrack’s Home Price Index shows that national home prices hit a new peak after a slight rise of 0.08 per cent over July. Prices are now an average of 6.3 per cent higher than a year ago and about 43 per cent higher than they were at the start of the pandemic in 2020. Sydney prices increased 0.12 per cent over July and are now up 6 per cent for the year, but there was huge variability across different parts of the greater Sydney area.

PropTrack economist Paul Ryan said home buyer demand had continued to rise despite interest rate hikes slashing many people’s spending power. This coincided with a severe shortage of housing in many locations, which meant increased competition for the scant supply of available homes even in the normally quieter winter months.

Mr Ryan said that many of the most active buyers in the market were upgraders using equity to fund their purchases, or investors. These buyers were in a good financial position after getting wage increases and spending boosts from the tax cuts announced this year.

“These are buyers who are not as affected by interest rate rises. They are in a good position to buy and they would have been supported by good economic conditions and certainty in their job prospects,” he said.

Mr Ryan told news.com’s Aidan Devine he expected prices to continue growing “moderately” over the coming months: “This would change if there was another rate hike but at the moment this is looking unlikely.”

News of interest

Where will interest rates go from here? We’ve gone from expecting a cut late in the year to just being thankful the RBA hasn’t once again returned to rate rises, but nobody’s certain at this stage just what’s in store. RBA governor Michelle Bullock was quite specific in her latest statement when she told the financial press that the idea of a rate cut before the end of the year "doesn't align" with the RBA board's current thinking.

The Guardian’s Greg Jericho says the question now is when will the Reserve Bank move to cut rates, noting that just three weeks ago there were a number of what he called ‘inflation hawks’ who wanted the RBA to be tougher rather than lenient. 

“It’s important not to underestimate the impact of rate rises. A colleague at the Australia Institute, David Richardson, has estimated that every 25 basis point rise in the cash rate since March 2022 has increased the annual interest income to banks (essentially taking it out of the economy) by about $12bn.

“And while some people do get higher interest from term deposits, the costs and benefits are spread very unequally. Those gaining are generally older and wealthier, while the losers are generally younger first homeowners.”

Housing loans are recovering their place in the homebuyers mix with a growing number of loans taken out. In April, May and June the total amount of housing loans was 20.5 per cent higher than in those same three months last year. History shows us this means property prices will most likely keep rising for the rest of this year.

Because the cost of houses and the size of mortgages taken out to buy them have increased markedly over the past 10-15 years, repayments are much higher now than then when the average discounted home loan was 9.62 per cent, even if the current average of 7.12 per cent is quite a bit lower.

Greg Jericho says that repaying an average first-home buyer home loan now takes up more of the average household’s disposable income than ever before. Sadly, it is almost impossible to make repayments toward a home loan if you are an average household.

ABC News economist Ian Verrender tells us that while real estate has helped Australians achieve the enviable position of being among the richest people in the world, it’s also given us world record-breaking household debt. 

“A surge in home loan hardship requests and a record number of quick resales are two signs that Australia is still perilously close to the edge of the mortgage cliff”, he says. “We're richer than everyone else. But one more rate hike could change that.”

He says there's a flip side to our soaring house prices and that’s household debt at 200 per cent of income: “Anyone attempting to enter the Australian property market needs to mortgage their soul just to get a look in. Unsurprisingly, our household debt levels are the highest in the world. Many younger households are barely hanging on to homes they bought when rates were barely above zero during the pandemic.”

Data compiled by Martin North, principal of Digital Finance Analytics, showed that 26 per cent of June’s first-time buyers received financial help from parents, making the Bank of Mum and Dad the nation’s tenth largest lender in that month.

Buying gets harder

Real Estate Institute of Australia figures featured in the latest PRD Australian Economic and Property Report show that housing affordability has declined 15 per cent over the five years to March. PRD’s   affordability measure is an index derived from home loan and house price data and was weighted to account for COVID-era market instability.

Over the ten years to March, affordability fell by a smaller 13.4 per cent, and PRD chief economist Dr Diaswati Mardiasmo said this indicated the crisis is worsening. “It’s definitely accelerating in terms of unaffordability,” she said. “If you compare 10 years ago, 2014 to 2024, you’ve ridden out a lot of things. In the past five years that’s COVID. It’s a supernova event that pushed unaffordability.”

Mardiasmo told Domain’s Jim Malo that because house prices were continuing to rise, it indicated that Australians were putting more of their income towards purchasing property and servicing loans. Buyers had become more skittish than usual, however.

“We are definitely seeing buyers that are more cautious,” she said. “People know that prices are higher, interest rates are higher … days on market have increased and clearance rates are not that great.”

Domain’s Elizabeth Redman put today’s market conditions this way: “Dwelling prices have almost doubled over the same timeframe as wages have risen by a third, putting pressure on workers trying to save for a home deposit.

“Australia’s median dwelling price passed $995,000 across the combined capital cities in the June quarter, Domain’s latest House Price Report shows. It has nearly doubled since March 2012 when it was almost $498,000. Over the same timeframe, wages have lifted by 35 per cent to the March quarter, official figures from the ABS wage price index show,” she wrote.

So, it’s not surprising that this widening gap has made it difficult for the average household to afford the average house unless they can get help from their family or they move into high-paying jobs. However, research has found home loan applicants earn much more than only a few years ago and it’s still not enough.

“The average buyer in 2019 had a household income of $160,000, but this has risen to $220,000, meaning workers on more modest incomes that could have purchased a home would now struggle to do so in a higher interest rate environment.”

The Daily Telegraph said that Sydney buyers required the biggest rise in incomes to keep up with the market, with the annual salary needed to afford a median priced house rising to around $148,000.

An annual income of $130,000 would have been enough to secure a median priced Sydney house in 2020 ($970,000) and with banks then charging an average loan rate of 2.92 per cent. With the Sydney median now at $1.4m and the average lender rate for owner occupiers rising to 6.27 per cent, new buyers now need an annual household income of $278,000 to afford the repayments.

AMP chief economist Shane Oliver says the shortage of supply is a serious problem. “I would have thought [high house prices] would have acted as a constraint, along with the high interest rates, but somehow the market just seems to be able to squeeze out more [price] gains.”

He said the fundamental issue was the shortage of supply, where the nation needed 250,000 new dwellings a year to accommodate population growth but was only building about 170,000. As interest rates went down, people were able to borrow more money.

ANZ economist Madeline Dunk told Domain that the continual growth in housing prices made it tough for people looking to get into the housing market and noted the mismatch between supply and demand of homes: “Home construction has been lacklustre, while investor demand has been resilient and many owner occupiers want to have a home office since the pandemic began.

“There has been some structural shifts about how households have decided to spread out. They value their own homes in terms of making it a comfortable place to work from home,” she said. “It’s part of the Australian psyche that we really want to own our own home.”

To offset the impact of rising costs there’s now a growing trend for developers to offer apartments without a car space for up to $100,000 less than those with parking for vehicles. News.com’s Shannon Molloy credits changes to planning controls for the growth in this benefit for buyers.

“In a nutshell, the general convention has always been that each new apartment must be sold with a parking spot, while some planning controls required additional spaces for larger multi-bedroom units. A growing push for planning controls that are greener, coupled with major investments in public transport and the rising popularity car-sharing schemes and on-demand bike hire, have seen some councils remove minimum requirements for developers when it comes to car spaces”, she said.

In 2023 North Sydney Council proposed slashing its one-for-one requirement to 0.4 parking spaces for every one-bedroom unit and 0.6 spaces for each two-bedroom unit, while also reducing minimum visitor parking spaces. This would be workable, it was decided, because according to council data there are 6500 households in the council’s area that don’t have a car. The area has a total population of 69,000 people.


High costs of renting

Australian renters recently received some good news from PropTrack with June figures showing rental growth easing and the rental vacancy rate rising for four consecutive months: “Australia’s rental vacancy rate has now eased for four consecutive months, rising from a record low of 1.09 per cent in February to 1.42 per cent in June.”

However, PropTrack’s Rental Affordability Report also found that “Australia’s rental affordability is at its worst level on record”, with households earning the median income of $111,000 only being able to afford to rent the smallest share of properties since 2008 when records began.

Proptrack says that Sydney is the most expensive Australian city in which to rent a home of any sort. Over just the past three months the median rent increase was 2.8 per cent, reaching $740 per week. 

PropTrack’s director of economic research Cameron Kusher told News.com’s Benn Dorrington that rental price growth had slowed over the past year, although it still exceeded both the rate of inflation and household income growth: “Weakening rental growth likely reflects the trade-offs that renters are making due to the heightened cost of rent and living,” Mr Kusher said. 

 “Some of these trade-offs may include renting smaller properties, renting in less desirable locations where rental costs are cheaper or sharing rental accommodation with other tenants.”  

The latest Domain Rent Report shows the gap between renting a house and a unit in Sydney has narrowed by so much that the difference is just $30 a week. In Sydney, the median weekly asking rent is $750 for a house and $720 for a unit. Across the combined capital markets, the gap is even tighter at $20 a week. The median for a house is $650 a week and for a unit, it’s $630 a week. 

Domain chief of research and economics Dr Nicola Powell tells us why it’s not impossible for unit rental prices to one day overtake those of houses: “There have been points in time when unit rents have been higher than house rents,” Powell says, noting that the past few years have seen demand for apartment living rise, which has consequently driven up rent prices.

“When you wind back to COVID years, we saw record price gaps between renting a house and unit,” she says. “It peaked at a $100 difference because we saw much weaker demand and oversupply of units and a higher demand for houses during that time.

“What we see now is greater rates of growth for units relative to houses, and that has helped narrow the gap between the two property types. It’s not just the younger demographic of renters who are embracing apartment living; it’s the downsizers, those who are living out their golden years,” she says. 

“There is the element of affordability and convenience where renters want to be more centrally located to amenities, therefore it is cheaper to rent a unit in these inner or middle-ring suburbs, whereas houses are usually in the middle to the outer ring of the city and are more expensive.”

Economist Leith van Onselen says that the recent softening of rental growth accompanies an easing of net overseas migration, which peaked in the September quarter of 2023 at a record annual rate of 564,500: “This slowing in net overseas migration is having the greatest impact on the unit markets of the three largest capital cities, which are recording sharper moderations in rental growth.

“Meanwhile, ongoing strong population growth (immigration) will continue to make life difficult for Australian renters by worsening the imbalance between demand and supply,” he concluded.

NSW Premier Chris Minns said his government has four planks in its housing policy: sweeping changes to planning laws including its transport oriented developments, the “largest ever” investment in public housing, the sale and development of surplus government land and rental changes.

The Premier feels that rental reforms are the only way to provide housing certainty to young people. His government has made a commitment to ending so-called no grounds evictions on fixed and periodic leases, which will see landlords banned from kicking out tenants without “commonsense and reasonable reasons”.

Minns said that the housing crisis is the most pressing issue facing the NSW Labor government and while boosting supply remains a key part of the puzzle, the rental market was an “equity issue for young people” that cannot be ignored.

Sydney is losing about 7000 people a year aged between 30 and 40 to the regions or interstate. Between 2016 and 2021, Sydney lost twice as many people in that age bracket as it gained (35,000 came to Sydney, but 70,000 left).

“I think the reason the politics has changed is if you own a small business, anywhere in the state, you’re dying, you just cannot get access to young people for skilled or unskilled labour, construction sector, retail, hospitality, cafés, restaurants, nightclubs, you name it,” Minns said.

Construction industry struggles

Economist Leith van Onselen reviewed the latest data on dwelling approvals from the Australian Bureau of Statistics (ABS) and noted that only 13,500 homes were approved for construction in May: “This level of approvals is 6,500 (32.5 per cent) below the monthly run rate of 20,000 required to meet the federal government’s target of building 1.2 million homes over five years.

“Annual approval rates were no better, with only 163,800 homes approved for construction in the year to May, 76,200 (32 per cent) below Labor’s 240,000 housing target. This level of construction was achieved when the official cash rate was only 1.5 per cent, versus 4.35 per cent currently.

“The 2017 record level of construction was also achieved when construction costs were some 40 per cent lower than they are currently.” Van Onselen also pointed out that the latest insolvency data from the Australian Securities and Investments Commission shows that nearly 3,000 construction firms went out of business in the 2023-24 financial year, which makes it likely that productive capacity has been reduced in the home building industry.

AMP chief economist Shane Oliver said the supply and demand for homes has been off-balance for nearly 20 years, which had amplified other issues affecting the property market. “For much of that period we haven’t supplied many homes in balance with the population,” he said. “Usually, we’d build enough houses to match the growth in the population.

“In about 2005, with the mining boom, we saw a surge in population growth that wasn’t matched by construction. It has been getting a lot worse over time and with the absence of a decent supply response it will continue to deteriorate.”

Oliver said efforts by governments to add more stock to the market through the housing accord ironically had been hampered by the high interest rates, an economic headwind that weighs heavily on the construction industry.

“It’s a pretty bleak situation,” he said. “High rates do invariably have a negative impact on home building. Lower interest rates would help in the short term, but that’s about it. It won’t solve the fundamental problem, which is that we need to find a way to build 240,000 homes a year.”

Real Estate Institute of Australia president Leanne Pilkington agreed. “We need more supply. Until we get more supply in the market, prices won’t come down.”


Sources:

‘How years of higher rates helped the most affordable properties outpace the top end,’ Jim Malo and Tawar Razaghi, Domain, 7 August 2024
‘Melbourne is the only Australian capital to see a drop in house prices. What’s going on?,’ Peter Hannam, The Guardian, 3 August 2024
‘Began to change dramatically’, Tarric Brooker, news.com.au, 4 August, 2024
‘Parents are kicking in $200,000 or $1 million’, Elizabeth Redman, Domain, 6 August 2024
‘Pretty dire’: How stressed home borrowers could be about to break,’ Elizabeth Redman, Domain, 31 July 2024
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‘CoreLogic house price data shows drop in Melbourne, Hobart and Darwin values, but national average still going up,’ Lucia Stein and business reporter Emilia Terzon, ABC News online, 1 August 2024
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