A Cooling Market With Growing Price-Sensitivity

Sydney continues to have Australia’s most expensive real estate, with a median dwelling value including both standalone houses and apartments of $1,180,463. 

Properties in some areas are still selling quickly, as noted by Domain: “Home buyers are snapping up properties fastest in sought-after Sydney neighbourhoods such as the inner west, the northern beaches and Sutherland, as well as more affordable areas in the western suburbs.

“Homes in Leichhardt and Marrickville in the inner west are among the fastest to sell as of August, based on Domain data. Houses in Leichhardt have been on the market for about 40 days as of August, and 45 for Marrickville and adjacent suburbs.

“The figures are similar in Sutherland (38 days) and Warringah (41 days). Affordable properties in the west, including St Marys, Penrith and Blacktown, spend less than 40 days on the market.”

Spring is usually a peak selling season in the Sydney market but preliminary auction clearance rates have drifted lower across Sydney at the start of September, reflecting the sharp increase in the number of homes taken to auction ahead of spring.

“Auction volumes usually peak in the first weeks of December so we’ll absolutely see the numbers pick up significantly from here,” CoreLogic research director Tim Lawless told the Australian Financial Review. 

“However, I don’t think there will be a commensurate uplift in purchasing activity, given the range of demand-side barriers, including affordability constraints, easing population growth, savings being depleted and an erosion of borrowing capacity.”

Mr Lawless said that new listings in Sydney have built up over winter and are now 17.7 per cent higher than the five-year average. He said the increase in fresh stock could indicate a rise in distressed sales as the pressure of higher mortgage repayments due to higher interest rates becomes unbearable for some homeowners. 

“It would be naive to think there isn’t some element of motivated selling here, given that the rate of mortgage arrears has increased, although still at a very low level,” he said.

That ‘motivation’ might also come from a desire to cash in on homeowners’ capital gains in some cases. The latest Domain Profit & Loss Report shows that the proportion of profit-making resales has reached multi-year highs in many cities, and that Australians are making a median of $326,000 from selling their houses and $171,000 from selling their units.

SQM Research has found there were 20.2 per cent more homes for sale across Sydney in August than the same time a year ago while the number of homes for sale for six months or more is also rising. 

More research from CoreLogic showed that Sydney’s home prices rose just 0.3 per cent in August. It also showed that house values had dropped in almost 26 per cent of suburbs analysed, driven primarily by the increase in advertised supply according to CoreLogic economist Kaitlyn Ezzy.

"Sydney has also seen a steady accumulation of advertised supply, from roughly -10 per cent below average at the beginning of the year to 5.4 per cent above average over the four weeks to September 8," she said.

"As supply levels normalised across the city, buyers have had more choice and more power at the negotiation table, taking some of the steam that had previous fed value rises, out of the market, resulting in more suburbs starting to record a decline in value."

Domain’s Tawar Razaghi added some details: “A string of inner west suburbs led the top 10 falls in the Harbour City. Rodd Point posted the largest fall, 8.1 per cent to a median of $3,187,308, followed by Concord (down 5.2 per cent), Concord West (down 4.7 per cent) and Enfield (down 4.6 per cent).”

Cautious buyers

This year buyers seem to be less willing to commit to prices they might now perceive as stretching their ability to make repayments in the face of the rising costs of living.

BresicWhitney chief executive Thomas McGlynn said Sydney buyers across all markets of the city were more price-sensitive and had more choice: “We’re starting to feel the effects of the cost of living. In the sense that all buyers across all categories are willing to pay a fair price, but they are hesitant to extend themselves,” McGlynn said, noting Commonwealth Bank spending data that showed under-45s had been hit hardest.

“Although there is a healthy amount of sales occurring, the overwhelming sentiment is buyers are not willing to push beyond their means,” he said.

OH Property Group principal buyer’s agent Henny Stier agreed, saying buyers are becoming very price-sensitive: “There’s a lot of buyers who are wary of the very high interest cost, and they don’t want to put themselves where they’re stretched enormously, so they’re really self-regulating their financial purchases,” she said.

Eliza Owen, the head of research at CoreLogic, said that nationally house prices have been rising consecutively for more than a year, which was "seemingly defying" the current economic climate, noting that households have been affected by the high cost of living and higher interest rates since the Reserve Bank started hiking in May 2022.

"But ultimately that trend [of rising prices] is slowing, and you can see that where the three-month growth rate in home values at 1.3 per cent is down from the same period of last year, where we had a 2.7 per cent growth rate," she told the ABC.

She also said that even if there was a cut to interest rates it might not have an effect on property prices: “There's no guarantee that that will actually boost housing demand because there's still so much affordability constraint and a wide disparity between what an affordable purchase price looks like and actual dwelling values across Australia," Ms Owen said.

"And you can also see that where housing demand is very skewed to cheaper pockets of the market."

Westpac senior economist Matthew Hassan told the Herald’s Elizabeth Redman that even where buyers seem to be in a good position, home buyer sentiment was poor because affordability is weak. He said Sydney had about the same number of months of inventory on the market as its long-run average.

But sentiment was “a bit of a different story”, he said. Westpac tracks survey responses on whether it is a good time to buy a dwelling, linked to affordability concerns.

“Is the price and interest rate situation conducive to purchasing at the moment? That’s clearly not the case, affordability is pretty poor everywhere and buyer sentiment in that sense is pretty weak everywhere,” Hassan said.

“It’s a buyers’ market, but you’ve got to be a pretty special buyer in Melbourne and Sydney given where prices are.”

Budget buying

There are a number of inner Sydney suburbs where units have increased in price while houses have fallen over the past quarter. The reason for this seems to be that demand is growing at lower price points, leaving more expensive options without much support. 

CoreLogic’s research director Tim Lawless explained: “You’ll generally find medium- to high-density development along transport spines and close to major working roads. So I think that helps to explain why investors are more active in the unit sector,” he said. “[Buyers like] their proximity to transport and the level of amenity in these areas. So markets like Sydney’s inner south… These areas are really well-connected.”

Ray White’s Nerida Conisbee told the Herald a brand-new apartment block can increase the area’s median price, and meanwhile, there is a larger pool of buyers at the unit price point: “At the moment, we’ve been seeing fairly reasonable levels of investment activity, and we’re seeing fairly decent levels of first-time home buyer activity, but we know first-time home buyers and investors can’t afford or don’t generally buy things for $3 million for example, but they may spend $1.3 million.” 

Tim Lawless foresees a coming change in the market where house prices align more closely with unit prices. 

“Ultimately, longer-term, you probably will find that the underlying scarcity value of houses, particularly houses that are located within the close proximity of the CBD or the coastline or areas that are popular, will maintain the value quite well, just simply because they’re not building any more land,” he said.

“But for those people looking at unit markets that are quite strategically located, say, within 10 kilometres of the city … then absolutely, I think they will see a very competitive rate of growth.”

Rents falling

Data from SQM Research shows that capital city asking rents recorded their largest monthly falls since the outbreak of Covid over July. Sydney led the declines with a drop of 1 per cent in the month, with house rents dropping by an average of 1.4 per cent while unit rates fell by 0.6 per cent.

These falls coincided with an increase in the available rental housing, with Sydney’s inner city and eastern suburbs seeing the largest jumps in rental listings.

The decreases in rentals may seem minor compared to the exceptionally high rises over the past two years, but SQM Research director Louis Christopher told realestate.com they were the biggest seen since 2020: “For the past 30 days, SQM Research has recorded the largest decline in capital city rents since the days of 2020 when Covid first hit the country. This will be somewhat welcoming to tenants and as a research house, we do believe the market rental rises of 10 to 20 per cent annum are now over.”

Mr Christopher noted that although the rate of rent rises may be subsiding, the rental crisis is still ongoing: “The falls were broad based, with the larger falls recorded in our larger capital cities and regional coastal locations. It should be noted of course that rents are still very high and this retracement is minor compared to the massive rise in rents recorded around the country since 2021.”

The research also found Sydney’s CBD and surrounds had a vacancy rate of 5.5 per cent – the highest in the greater metropolitan area – while the eastern suburbs vacancy rate was about half that at 2.8 per cent.

Figures from CoreLogic also showed that rent values in Sydney declined in July and August and the annual growth trend is slowing, although the annual rate of growth was still 7.2 per cent.

PropTrack economic analyst Megan Lieu told realestate.com.au that rents may continue to rise in some areas over coming months but tenants were probably through the worst of the rental crisis.

“While it continues to be difficult for renters to find available properties in Sydney, there has been some improvement in the past few months,” she said.

She said part of the improvement in vacancies could be attributed to a recent increase in investor activity: “The return of investors to the market, following their mass exodus during the pandemic period, has led to a much needed uplift in properties hitting the market.

“This has slightly offset the demand from renters brought about by strong population growth and has contributed to a moderation in the growth of weekly rents.”

Interest rates static

The Reserve Bank is showing little interest in reducing the prime interest rate any time soon, despite the hardship it’s causing borrowers. RBA governor Michele Bullock gave a speech to the Anika Foundation in early September, saying the Bank’s board was conscious of the how interest rates were impacting households and businesses but the alternative was continuing inflation and an economic recession. 

She estimated five per cent of borrowers were struggling with a “cash flow shortfall,” where essential spending and mortgage repayments took up more than their incomes. Ms Bullock admitted this group would need to make what she called “quite painful adjustments”.

“This includes things like cutting back on their spending to the more essential items, trading down to lower quality goods and services, dipping into their savings or working extra hours. Some may ultimately make the difficult decision to sell their homes,” she said.

Ms Bullock told her audience that “inflation causes hardship too,” and “our experience of how costly inflation can be is the reason that getting inflation back to the target range is our priority.”
She added that “circumstances may change, of course, and if economic conditions don’t evolve as expected, the Board will respond accordingly.”

Ms Bullock also warned that if high inflation became entrenched, the bank would have to enforce “even higher interest rates” which would lead to a “larger rise in unemployment and higher risk of recession”.

Most economists are now estimating the earliest we might see a rate cut would be February 2025, although after March is seen as more likely.

Materials costs slow

The rate of cost increases for building materials has slowed to single-digit growth after two years of massive price rises. Construction industry figures say this means more confidence in taking on contracts and improved build times. Experts still point out the industry’s difficulties in finding sufficient construction workers to handle the current backlog.

Based on ABS data, the category of steel products led the prices falls, down 6.8 per cent in the year to June. The category of timber, board and joinery came next, becoming 1.1 per cent cheaper over the same period, while some products in each of these two categories recorded even greater reductions.

The scope of these falls is apparent when these declines are compared to building materials prices in March 2022, when prices were growing at a double-digit rate for products in the steel and timber categories, up 42.1 per cent and 20.6 per cent year-on-year, respectively.

Housing Industry Association chief economist Tim Reardon told Domain that the rate of cost increases had returned to pre-pandemic levels for most products: “The rise in material prices is back to normal. We saw a 1.1 per cent increase in [material] prices in the year to June.

“We’ve seen the time it takes to build a home fall from around 18 months back to what it was pre-pandemic, which has given builders the confidence to compete on price again and as a result, we’ve seen a very price-competitive market in 2024,” he said.

Simonds Homes chief executive David McKeown cautioned that a massive shortage of tradespeople was weighing on the industry and would for the foreseeable future: “Labour costs … were a big issue for us in the back end of COVID and that is still an issue,” he said. “We still have not solved the issue of skilled labour in this industry. So, we do need to address this nationally as this still will continue to be a constraint on us and other industries.”

New housing minister

The government of Prime Minister Albanese is hoping to promote its plans for a $32 billion investment in housing and target for 1.2 million homes in the leadup to the next federal election. A new minister for housing and homelessness, Clare O’Neil, has been appointed to manage this task and has already reminded voters that the Albanese government invested more in housing in its last budget than the Coalition did in the nine years it was running things in Canberra.

However, a recent ANU Poll quoted on ABC News found that Australians feel less satisfied with their housing circumstances, are more likely to experience housing payment stress and increasingly doubt they’ll ever afford their own home compared with how they felt just before or during the pandemic. The electorate is looking to Ms O’Neil for something new that can start right now and it’s not immediately visible.

She’s facing what the National Housing Supply and Affordability Council says will be a worsening housing crisis due to the critical housing supply shortfall. The experts on this council have concluded the government could achieve only 943,000 homes at best of the 1.2 million homes targeted over the next five years, and noted there is a growing inequality between those who can and cannot afford home ownership.

The government has proposed a build-to-rent (BTR) bill that would provide tax cuts for developers of long-term rental complexes. However, a Senate committee heard from property developers that the tax concessions were not generous enough, and from affordability advocates that it would not improve rental affordability.

Both the Greens and the Coalition say they will block the bill in the Senate, so it’s not likely to get through the barriers they’ve erected.

Total unaffordability

Two university professors specialising in property took a look at the Sydney property market to see where in Sydney someone with a part time job might be able to buy a home. Any home. What they found was that it was more than just a problem; it was an impossibility.

University of NSW School of Built Environment professor Chyi Lin Lee teamed up with Dr Mustapha Bangura from the University of Technology Sydney to look into the vexed issue of affordability in the Sydney housing market.

They used a model based on a homebuyer with a 20 per cent deposit, an average mortgage lending rate and a loan period stretching up to 30 years. This was then related to the median earnings of $1500 per week, based on data from the Australian Bureau of Statistics. 

The final step was to apply the ratio of housing affordability to earnings of 30 per cent. (Spending more than 30 per cent of a household’s income on accommodation means the loan repayments are considered unaffordable.) Their findings surprised even two such experienced data scientists.

Their conclusion was that nowhere in Greater Sydney was even remotely affordable. Some units in the cheapest suburbs of western Sydney were just a little above the threshold, but none were located within. And affordable houses were nowhere near anywhere in Greater Sydney.

The researchers noted that with the proportion of part-time workers increasing from 20.6 per cent to 23.6 per cent over the year to May 2021, on a median wage of $600, those people will be even less likely to be able to enter the housing market.

“The supply needs to increase medium-density housing to enhance the number of homes, especially in areas close to the city where jobs are located,” he said. “It’s not ideal that people will only be able to afford property far away from Sydney.”

Sources:

‘Popular Sydney suburbs where houses are snapped up fastest,’ Kristy Johnson and Alexandra Middleton, Domain, 7 September 2024
‘Home values hit record highs, climbing in all states except Victoria,’ Millie Muroi and Shane Wright, Sydney Morning Herald, 10 September 2024
There is no such thing as a 'national property market' in Australia anymore,’ Sue Williams, Domain, 11 September 2024
‘Home values declined in a third of suburbs. Here’s where they fell most,’ Tawar Razaghi, Domain, 12 September 2024
'Starting to see some weakness': The suburbs where house prices are falling,’ Ruchika Talwar, SBS News, 11 September 2024
‘Australians are making a median of $326,000 from selling their houses, new data finds,’ Maria Gil, Domain, 22 August 2024
‘Australians in most common jobs can’t afford to save for deposit without housing stress, report finds, Sarah Basford Canales, The Guardian, 20 August 2024
‘Downsizing the dream: Australia’s incredible shrinking houses,’ Shane Wright, Sydney Morning Herald, 31 August 2024
‘Aussie price shock as home prices reach record high after 20 months of consecutive growth,’
Blake Antrobus, news.com.au, 1 September 2024
‘Downsizing the dream: Australia’s incredible shrinking houses,’ Shane Wright, Sydney Morning Herald, 31 August 2024
‘One-bathroom house beats reserve by $1m, but property slowdown looms,’ Nila Sweeney, Australian Financial Review, 2 September 2024
‘CoreLogic house price data shows home values still rising but growth is slowing,’ Lucia Stein, ABC News online, 2 September 2024
‘This is overpriced’: Home sellers forced to take a reality check,’ Elizabeth Redman, Domain, 6 September 2024
‘Rents fall at fastest rate since Covid hit,’ Aidan Devine, realestate.com.au, 18 August 2024
‘RBA Governor warns alternative to high interest rates is an economic recession,’ Jessica Wang, news.com.au, 6 September 2024
‘The most popular inner Sydney suburbs for home buyers on a budget,’ Carmen Forward, Sydney Morning Herald, 18 August 2024
‘Labor's housing investor tax break hits Senate snag after developers, affordability advocates air concerns,’ Tom Crowley, ABC News online, 5 September 2024
‘Whether Clare O’Neil’s entry will bring in any substantial positive change to the housing crisis is still up in the air,’ Intifar Chowdhury, The Guardian, 18 August 2024
‘The figures that show why building costs are no longer going through the roof,’ Jim Malo, Domain, 21 August 2024
‘Two experts measured how bad Sydney’s property market is. They got a shock,’ Sue Williams, Sydney Morning Herald, 13 August 2024