Market Slows ..... Unaffordability Grows

Most Australians see house prices as something that always go up.  Over the 20 years from 1980 to 2000, average house prices increased by 225 per cent, according to CoreLogic data, and that made a lasting impression. But house prices can also fall, and they did between May 2010 and January 2012 when they fell nearly six per cent and then took 18 months to return to their previous highs.

There are now signs of a new weakening in Sydney prices. House prices fell in Sydney for a second month in a row in November, dropping by 0.2 per cent, which followed a 0.1 per cent decrease in October. CoreLogic said September was likely the peak of this year’s growth cycle.

The Sydney suburbs with falling values are being led by waterfront homes in the city’s most desirable neighbourhoods.. Values have fallen by as much as ten per cent in the past three months in some areas, including Balmain East (down 6.9 per cent), Glebe (down 6.5 per cent), Rodd Point (down 9.7 per cent) and Abbotsford (down 8.1 per cent) on CoreLogic data.

Units followed the trend, with the fastest falling suburb being Kurraba Point. Its median, almost double the Sydney-wide value, fell 6.9 per cent to $1,537,771. 

CoreLogic head of research Eliza Owen said the steepest declines were in suburbs where values were much higher than the citywide median.

“It’s the high end of the Sydney market where most declines have been concentrated,” Owen said. “The median house value is $1.5 million, and the high end, the top 25 per cent of house values in Sydney, start at $1.8 million.

“This represents premium areas like Fairlight in the northern beaches, Glebe and Forest Lodge. A lot of these suburbs are extremely desirable markets within the parts of Sydney,” she said.

“It’s also a reflection of affordability constraints, high interest rates, high cost-of-living pressures pushing buyers out of the high end and [that] has them seeking the next most affordable market.”

She said it was a similar trend with units where suburbs that have double Sydney’s median unit value fell the fastest.

CobdenHayson Balmain’s Matthew Hayson said that even in the exclusive peninsula of Balmain East, there were more buyers for the lower end of the market than the top as affordability was being tested.

“The depth of the buyer pool has been tested for the past six months,” Hayson said.

“Supply and demand has fallen in favour of buyers, and any agent will tell you ‘you’ve got a two-week window to secure a buyer’, and if you don’t, you’re in for a tricky time,” he said. “That’s very much evident at the top end,” he said.

CBA chief economist Gareth Aird said unaffordable house prices would weigh on both Sydney and Melbourne, though he expected Sydney’s growth to outpace Melbourne’s.

“Sydney is the least affordable market in Australia … compared to the other capital cities, it stands out as being unaffordable,” Aird said. “You do get fatigue creeping in and there’s only so much that house prices can outpace wage growth when you have high rates.”

SQM Research’s Housing Boom and Bust Report 2025 tells us the average capital city property price will rise by one to four per cent while Sydney will fall from one to five percent in 2025. There is another important detail, says SQM founder Louis Christopher, who tells us the fall in Sydney will continue ‘until soon after a rate cut’.

“There will probably be a lag of two to three months before that happens. And most likely towards this time next year we will be recording rising prices in Sydney and Melbourne, but it won’t offset the falls we’ll see at the start of the year.”

Domain chief of research and economics Dr Nicola Powell said the property market in 2025 would be a year of two halves. She said most of the expected property price growth would occur in the second half when interest rate cuts are expected.

“If the aggressive increases in inflation are in the rearview and the cash rate is reduced, coupled with rising sentiment and Australians are feeling better about the overall economic outlook, that will be a catalyst in bringing buyers back to market.”

Building costs rise

The Herald’s Millie Muroi tells us that the cost of building a home in Australia has risen by $100,000 in the past four years: “The national average construction cost for a home – including houses, townhouses and apartments – rose from $345,410 to $443,828 between 2019-20 and 2023-24, according to Australian Bureau of Statistics data published last week.

“The cost of building a home soared during the pandemic due to higher demand, boosted by record low interest rates and government grants such as HomeBuilder. At the same time, disruptions to global supply chains pushed up material and freight costs, and worsened labour shortages,” she wrote.

Housing Industry Australia chief economist Tim Reardon said construction costs grew at the fastest rate in June 2022 as supply chain disruptions filtered through to the building process.

“You only need one disruption to disrupt everything else and the whole dynamic,” Reardon said. “If you’re missing one component, like the glue for a benchtop, you can’t manufacture that product, you can’t complete the kitchen, and you can’t sell the house.”

Reardon told the Herald that timber prices have fallen about 20 per cent over the past year as global supply chains improve, but that other costs – particularly for energy-intensive materials such as aluminium, glass and cement – continue to rise.

AMP deputy chief economist Diana Mousina said construction costs were among the fastest rising components of inflation.

“It has moderated a lot over the past six to nine months, but it’s still growing faster compared to headline inflation,” she said. “It started off as a supply issue, but the problem became worse because people were demanding materials to do renovations or to build their home.”

She said construction cost inflation, while down from its peak, could remain higher than overall inflation for some time, partly due to competing government infrastructure projects.

A bottleneck has now developed with the number of houses under construction nearly doubling from 56,000 in June 2020 to 104,315 in March 2023, a number 48 per cent higher than the pre-pandemic record of 70,000 six years ago.

This figure dropped to 87,149 in June 2024, but building times remain long, increasing from six months and three weeks in September 2019 to nine months and four weeks in June 2024, the ABS reported.

A new report by KPMG has found that new private residential spending per capita is at its lowest level since 1987-88 while spending on renovations has surged to a record 40 per cent of total residential construction expenses.

“For every nail hammered and brick laid in residential construction, 40 per cent of it is going into renovating a pre-existing home,” KPMG urban economist Terry Rawnsley said.

“This indicates that there is not enough money and resources being attracted to expanding the housing stock. More straightforward planning processes and lower risks for builders make renovating existing homes a favoured option over adding multiple homes on the same block.”

New private residential construction also includes demolishing a detached property and replacing it with a single new home, known as a one-for-one replacement.

Almost 10 per cent of new private residential construction spending is on one-for-one replacements, KPMG found, with New South Wales at 8.7 of total spending.

Covid also had an impact on renovation spend, according to the analysis. As new housing investment increased between 2012 and 2020, alterations and additions investment declined and reached its lowest share of 33.5 per cent in 2017-18.

“Homeowners are absolutely entitled to renovate their homes to add value to their investment and to ensure existing housing stock is maintained,” Rawnsley said.

“However, shifting some of the labour and materials away from renovations and one-for-one replacements towards the construction of new housing stock can help to relieve current housing shortages.”

Investors more active

An analysis of current property sales found that more investors are buying property than selling. CoreLogic figure show that the number of investor listings rose to about 13,000 in October. In comparison, the number of new investor loans for the same period was 18,400. 

This confirms earlier findings that the number of new investor loans is outpacing the number of listings by investors, and it seems investors with less debt are taking the place of those that had more and decided to reduce their exposure.

CoreLogic’s head of Australian research Eliza Owen said the analysis made sense of competing narratives about investor activity: on one hand that investors are selling up, and on the other hand that more investors are buying in.

“One [narrative] is that investors are done. Then there’s this other piece, when you look at ABS investor finance, investors are making up a bigger chunk of the market,” she said. New loans to investors were up 18.8 per cent over the 12 months to September, according to ABS data.

Ms Owen said the market was becoming more balanced: “The volume of investment listings coming to market was actually 7 per cent higher than the historic five-year average and it was higher than in Victoria as well, so about 3900 through the month of October,” she said. 

“The difference with NSW is that while listings were higher across the state, new investor loans were also up, almost 20 per cent across NSW.”

Sydney-based Equilibria Finance managing director Anthony Landahl told Domain that investor activity was up, supported by more realistic investors and by first home buyers who chose to buy an investment property to get onto the property ladder.

“Investors were very subdued in the 12-18 months when interest rates were going up quite quickly,” he said. “What we’re seeing now is some people who were thinking about buying a home not being able to afford a home and investing instead, and a lot more investors understand the cashflow requirements a bit more.

“While the rental market is quite strong, they’re acknowledging they’re still cash flow negative month to month.”

Australian investors are increasing their share of the property market. The number of approved residential real estate investments by overseas buyers fell to 5581 in financial year 2024, down from 6576 in 2023 (15 per cent), figures from the Foreign Investment Review Board (FIRB) show.

The combined value of approved residential real estate proposals from Chinese and Hong Kong buyers (with China the largest foreign-buyer pool in Australia), dropped last financial year from $4 billion to $3 billion.

Governments at work

The Minns government has revealed major zoning changes around the city’s major transport hubs, showing that six ‘accelerated’ precincts will have the capacity to provide nearly 60,000 homes. 

More than $500 million will be spent on trees, parks and community facilities in these areas. The rezonings will include space for schools, health services, public parks, and options for councils to nominate special entertainment precincts.

In each precinct, the rezoning allows for mid- to high-rise development within 1200 metres of major train and metro stations. The number of dwellings zoned to be built in Macquarie Park doubled in the rezoning to 9600, and those allowed to be built around the metro station at Crows Nest rose from 2900 to 5900.

Bankstown, Hornsby and Homebush will be zoned for at least an extra 1000 dwellings each in the final masterplan. Each precinct will also have zoning for 3 per cent affordable housing, available to very low- to moderate-income households. 

“These precincts will deliver a mix of housing, new open spaces and playing fields – they’ll be great communities for families to build a life,” Premier Chris Minns said.

However, it’s a sad fact that the number of approved residential developments is declining in NSW, despite the state government’s commitments to build more new homes as part of the National Housing Accord. It’s felt that two important reasons for this are the high costs of construction and a reluctance from the banks to supply commercial loans.

In early 2024 the Minns government pledged to build 377,000 new homes by mid-2029, but data from the Australian Bureau of Statistics shows NSW is only approving a fraction of this stock and is nowhere near building enough homes to reach the target. Just 3,668 new dwellings were given approval in July before falling to 3,425 in August and 2,918 in September.

Tom Forrest, chief executive officer of developer lobby group Urban Taskforce, says fewer development applications were being lodged in NSW because housing projects had become less feasible: "If it's not feasible, it won't get built because the banks won't lend the money to the developer to enable construction to start."

Stuart Ayres, who heads the Urban Development Institute of Australia (UDIA) NSW, a development industry body, explains: "When you've got high interest rates and high building costs, the cost to build for a developer often outstrips the price that future customers are willing to pay.

"There's only certain parts of Sydney where projects are genuinely feasible and so therefore developers are less likely to take risk on losing money by building projects," he said.

NSW Labor said it will create a three-person Housing Delivery Authority that can approve spot land rezonings and major housing developments simultaneously, bypassing local councils in what Premier Chris Minns described as “a big step forward and a significant change” to deliver more housing.

Sue Weatherley, the Planning Institute of Australia's NSW division president, said the higher costs of labour and land in NSW presented greater barriers to feasibility than just reducing approval times.

"Unless those things are addressed, tinkering on the edges of the planning system is not going to deliver more housing for NSW," Ms Weatherley said.

"There is a desire for everyone to have a more efficient planning system, but if we think we're going to solve the problem of housing delivery [just] by improving assessment times by 20 per cent, I think we've lost the plot."

The Federal government appears to have secured its Help to Buy and Build to Rent legislation which establishes a shared equity program to assist low to middle income earners to purchase new or existing homes. Some 10,000 homes annually, in each of four years, are targeted. The government would take up to 40 per cent equity in these properties.
 
The Build to Rent bill provides tax concessions that will encourage the construction of properties for rent.

The federal government has also established a new fund that will reward states and territories for policy changes that introduce policies to reduce red tape in housing construction. Treasurer Jim Chalmers announced details of the $900 million fund in a speech to the Australian Business Economists, saying: "There is no more important structural problem in our economy than productivity. No higher priority for reform."

He said it will not be limited to housing, with states and territories to be given a menu of options to achieve productivity gains: "Areas of focus could include streamlining commercial planning and zoning and removing barriers to the uptake of modern construction methods," the treasurer said.

Housing unaffordability grows

As always, housing unaffordability is in the news with reports saying it’s now the worst on record. New modelling shows that first-home buyers would now have to contend with mortgage repayments of more than half their income, and the typical Australian home now costs eight times the median household income.

The ANZ/CoreLogic housing affordability report found that it now takes 10.6 years to save for a 20 per cent deposit, as of September, and it takes 50.6 per cent of the median household income to afford repayments on a median home. Also, while a household is saving, it faces median rents that are now 33 per cent of the median income. 

CoreLogic head of Australian research Eliza Owen said housing affordability continued to worsen: 
“The key issue is housing values continue to outpace income growth,” Owen said. “Incomes were up about 3 per cent over the past year while housing values in the year to September were up about 6.5 per cent nationally.”

It is unlikely cuts to the RBA cash rate would improve affordability, she said. “We looked into this and based on ANZ’s forecast of a 75 basis point reduction to the end of 2025, assuming incomes and prices are stable, then the portion of income to service a mortgage falls to about 48 per cent.

“In reality, the issue is a reduction in interest rates might put upwards pressure on housing values.”

House prices nationally are 34 per cent above fair value, the analysis of Real Estate Institute of Australia data by AMP chief economist Shane Oliver found – an increase of five percentage points since March.

The research compares median house prices with average rents across capital cities, in a series that dates back four decades. Sydney reported the highest overvaluation at 47 per cent – up from 32.8 per cent in the March analysis.

Dr Oliver said it’s pretty bleak if you’re trying to get into the property market: “When you put high interest rates and high house prices together, you end up with a doubly bad relationship.” 

Rental unaffordability spreads

Rental affordability has become so tight that it’s now the worst on record. The National Shelter-SGS Planning and Economics Rental Affordability Index released on Friday shows it is now unaffordable for the average household to rent in every city aside from the ACT, the one jurisdiction in Australia where a rent cap has been implemented.

Rents were 30 per cent of a tenant’s income in Sydney and 31 per cent in Perth. The index scores are based on the income of each city’s residents. SGS principal and partner Ellen Witte said that in the index’s 10 years, affordability had almost uniformly worsened. She said unaffordable rental markets were affecting the wider economy.

“People need to move out further, and you see that in inner-city areas but also tourism areas, where a lot of stock has been converted to short-stay accommodation,” Witte said. “They can’t even find hospo workers to work in the tourism industry – it’s really biting its own tail. In aged care, they can’t find nurses, teachers can’t live where the school is – it’s really hurting the economy.

The increase in rental unaffordability has caused the number of older renters to increase by 73 per cent in the past ten years. Low-income renters frequently pay more than 50 per cent of their income for housing, according to the 10th annual National Shelter-SGS Economics and Planning Rental Affordability Index.

In just the past twelve months rental affordability has declined five per cent in Sydney, to where Median rent of $720 is 30 per cent of median income and on the threshold of rental stress classification.

Sources:

‘Sydney suburbs where house prices fell - and rose - most this year,’ Elzabeth Redman, Domain, 12 December 2024
‘As Australian housing prices drop, first homebuyers could be in for a win. But, as always, there’s a catch,’ Nicki Hutley, The Guardian, 5 December 2024
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