The Experts

Tim Lawless
Expert
+ About Tim Lawless
Tim Lawless heads up the RP Data research and analytics team, analysing real estate markets, demographics and economic trends across Australia.

Is now the right time for first home buyers?

Tuesday, October 17, 2017

By Tim Lawless

First home buyers are clearly ramping up across the housing market. The most recent data from the ABS showed a surge of first home buyers in July, with the number of housing finance commitments reaching the highest level since November 2013. First home buyers now represent 16.6% of the owner occupier market, which is the highest proportional level of activity from this segment in four years.
 

So why are first timers rushing back into the market? There are a few reasons. New stamp duty concession went live in July across New South Wales and Victoria. Under the changed rules, first home buyers in New South Wales receive a full stamp duty exemption if buying a dwelling priced under $650,000, while in Victoria the rules apply to properties under $600,000. In NSW, this equates to a potential saving of nearly $25,000 and in Victoria, where stamp duty rates are higher, the potential first home buyer saving is more substantial at just over $31,000.

With housing affordability an ongoing issue in Sydney and, to a lesser extent, Melbourne, the savings on stamp duty provide a decent leg up for first home buyers, so it’s understandable that many would be taking advantage of the incentive. First time buyers in Sydney and Melbourne should be aware that these incentives have come after five and a half years of solid capital gains and recent signs that that housing market is weakening. A $25,000 to $30,000 dollar saving could be wiped out over the next year if property prices trend lower.

In Sydney, where the median dwelling value is $909,600, it would only take a fall of 2.75% before the $25,000 saving evaporates. In Melbourne, where housing market conditions have been more resilient, dwelling values would need to fall by approximately 4.3% before the $30,000 dollar stamp duty concession is wiped out.

Of course, most first home buyers will be in the housing market for a long period of time and across several cycles. Time tends to heal all wounds, and for many, getting a foot in the housing market door via saving for a deposit and funding the high transactional costs is often the hardest part for many prospective first home buyers. Despite the very real risk that values could move lower, I think first home buyers will continue to take advantage of the cost savings on offer.

It’s not just Sydney and Melbourne where first home buyer activity is ramping up; most other states and territories are also seeing an acceleration of first home buyer participation. This rise in activity hasn’t been accompanied by an announcement of new stamp duty concessions or other incentives. On this basis, the rise in first home buyer activity outside of New South Wales and Victoria is more organic and based on this segment of the market taking advantage of low mortgage rates and an increased appetite from banks to lend for owner occupation.

The reduction in investor market activity is also likely to be contributing to higher levels of first home buyer competition as the first home buyers and investors tend to compete for similar housing stock. The pace of capital gains in most of these capital cities has been much more sustainable, if not negative, and the risks of a downturn are arguably less pronounced.

 

Wealth created via housing

Tuesday, September 19, 2017

By Tim Lawless

The strong capital gains evident across the Sydney and Melbourne housing market have created a significant boost in wealth for home owners who were fortunate enough to own a property through the latest growth cycles., However across other housing markets, the rate of capital gain has been remarkably lower with home owners outside of Sydney and Melbourne seeing far less accrued equity from their housing assets.

On the flipside, there are also those housing markets where dwelling values have fallen, particularly in areas associated with the mining sector, where a larger proportion of properties in these regions are now worth less than their original purchase price.

With this in mind, I thought it would be interesting to measure two aspects of wealth accumulation via the housing sector: what proportion of dwellings are now worth double their purchase price and what proportion are worth at least 10% less than their purchase price.

Proportion of properties worth at least double their purchase price


Nationally, the proportion of dwellings where the value of the property is at least double the purchase price has slipped over the past decade, falling from 45.4% of dwellings in 2007 to 39.1% in 2017. The slippage is evident across regions outside of Sydney and Melbourne where capital gain conditions have been much softer over the past decade.

The proportion is highest in Sydney, where 48.1% of dwellings are now worth at least double what their owners paid for them; ten years ago the proportion was much lower at 37.2% Melbourne follows close behind with 47.3% of dwellings worth at least twice what their owners paid (up from 38.1% ten years ago).

The remaining capital cities show a much lower proportion of dwellings that are worth at least double their purchase price, ranging from 25.9% of dwellings in Darwin to 37.4% in Hobart. Across the broad ‘rest of state’ markets outside of the capitals, regional Victoria stands out as showing the highest proportion of properties worth at least double the purchase price at 40.8%, followed by regional Western Australia at 34.8%.

The high proportion of properties worth at least double their purchase price across regional WA may come as a surprise, given the weak performance of the housing market across this region over the past five years, however a decade ago the proportion was substantially higher at 60.8%.

Proportion of properties worth at least 10% less than their purchase price


Over the past decade, the proportion of properties valued at less than 10% of their purchase price has risen slightly from 3.2% to 3.4% between 2007 and 2017. The national figures hide a significant difference between the major regions of the country. The highest proportion of dwellings worth at least 10% less than their purchase price can be found in regional Western Australia, at 17.8%. Darwin (15.1%), Perth (11.1%) and regional Queensland (11.0%) have also recorded a significant proportion of dwellings where values have slipped more than 10% below the purchase price.

Only ten years ago, while the mining boom was in its early stages, regional Western Australia and Perth were recording the lowest proportion of dwellings where the value was more than 10% lower than the purchase price. In 2007 only 1.1% of Perth properties and 2.3% of regional Western Australian properties fit this profile.

The lowest proportion of dwellings with a valuation more than 10% lower than the purchase price can be found in Sydney (0.7%) and Melbourne (2.1%). Ten years ago, 7.1% of Sydney dwellings recorded a valuation that was more than 10% less than the purchase price, highlighting the effect of strong capital gains post GFC.

Drilling down to the suburb level, it is clear how hard mining towns have been hit. The Bowen Basin town of Dysart tops the list with 65.7% of dwellings showing a valuation that is at least 10% lower than the purchase price. Queensland’s Gladstone Central is close behind at 64.2% followed by South Hedland in the Pilbara region of Western Australia at 64.0%.

The good news for many of these mining regions is that housing market conditions seem to be moving through the bottom of their cycle. Transaction numbers are generally rising and advertised stock levels are reducing which should help to promote some value recovery in these regions.

With growth in the housing market now easing across Sydney and, to a lesser extent, Melbourne, we may start to see a slow reversal of these trends.  It will be harder to double the value of a property in Sydney and Melbourne after such a sustained period of high capital gains, however markets such as Hobart and Canberra, which have gathered some momentum, are likely to see home owners benefit from improved capital gains that is likely to boost their overall wealth profile.

Similarly, the worst appears to have past for the mining sector, although it is likely to take many years before property values recover to their previous highs in many of these regions.

 

What’s behind the subdued first-home buyer activity?

Tuesday, August 15, 2017

By Tim Lawless

First-home buyers are close to record lows in many of Australia’s states and they are below the long-term average in every state except Western Australia. As at the end of April 2017, first-home buyers comprised just 13.9% of all owner-occupier mortgage demand nationally. The situation is worse in New South Wales, where first-time buyers comprised only 8.4% of the market over the first four months of the year. Based on the long-term average, first-home buyers ‘normally’ comprise around one fifth of owner-occupier demand across New South Wales.

Is housing affordability to blame?

With first-home buyer participation declining as prices rise, it’s easy to suggest that housing affordability is to blame for the low participation rate - but that is probably only part of the reason. South Australia, for example, doesn’t have the same affordability challenges as New South Wales, yet first-time buyers are the second lowest of any state at 12.2%. First time-buyer activity in Victoria (16.6%) is more substantial than participation in Tasmania (15.2%), where housing is the most affordable of any state.

Availability of jobs is an important factor for first-home buyers. This is likely to be one of the factors supporting first-time buyer demand in Victoria, even though stamp duty rates (prior to July 1) are high and affordability measures are the second highest of any capital city outside of Sydney. Over the past five years, 39% of the jobs created nationally have been in Victoria, which is substantially higher than the long term average of 24%.

The two states where first-time buyers are most active, at least on a proportional basis, are Western Australia, where first-time buyers comprise 28.4% of owner-occupier mortgage demand, and Queensland at 21.5%. First-home buyers are higher than the long-term average in Western Australia, and Queensland first timers are close to the long-term average participation rates. Jobs growth has been mild across both states over the past five years, however housing prices have been tracking lower in Perth and increasing roughly in line with incomes in Brisbane. The dwelling price to income ratio in Brisbane is 5.9 and in Perth its 6.0; substantially lower than the larger capital cities. It’s likely that the healthier affordability of housing in these regions, despite the mild jobs growth, is a primary factor in supporting first-time buyer demand.

Other factors come back to transaction costs, particularly the cost of stamp duty and deposit. There is a high likelihood that stamp duty exemptions for first-home buyers, which went live on July 1st in Victoria and New South Wales, will temporarily boost first time buyer numbers in the market. While the exemptions are likely to drive first-home buyer demand, it’s likely that additional demand concentrated across the lower priced end of the market could simply push prices higher over the short to medium term. 

 

Is the housing market truly slowing down?

Tuesday, May 30, 2017

By Tim Lawless

Early signs pointing to a housing market slowdown shouldn’t come as a surprise given the strong and persistent capital gain conditions over the past five years; longer than most growth cycles historically. 

Included in the signs of an early slowdown are:

  • CoreLogic home values indices have shown an easing in growth rates over the second quarter, with the softer growth reading attributable to weaker conditions in Sydney and Melbourne;
  • Auction clearance rates remain above the long-term average, but have subtly trended lower through April and the first week of May; 
  • Mortgage activity has slowed, particularly from investors, which is evident from CoreLogic valuation platforms as well as from the lagging ABS housing finance data;
  • Transactional activity has slowed, with the number of settled dwelling sales down almost 9% over the 12 months to April 2017 compared with the same period a year ago. 

The softer market readings have mostly flowed though during April, a month which can be seasonally affected by Easter as well as school holidays and the ANZAC Day long weekend. Therefore, it may be somewhat premature to call a peak in the market; the coming months should provide a clearer indication of the how the housing market is trending. 

Many factors contribute to a slowdown in housing market

Importantly, a slowdown in the housing market, if it is upon us, isn’t due simply to the maturity of the growth cycle which has been running now for almost exactly five years. Many other factors are conspiring to slow demand in the marketplace.

It’s the overall dampening effect of new regulatory policies, higher mortgage rates, low affordability, high debt, low cash flow and weak sentiment that is likely creating a barrier for a continuation in the high growth rates that have been synonymous with the Sydney and Melbourne housing markets over the past five years.

Mortgage rates are shifting higher, particularly for investors. The average three-year fixed rate for investor loans increased by 35 basis points between November last year and April 2017, while discounted variable rates are 25 basis points higher since September last year.  Owner occupiers have also faced a rise in their housing repayments; discounted variable rates for owner occupiers are 10 basis points higher between November 2016 and April 2017 and three-year fixed rates are 20 basis points higher. 

At a time when household debt has never been as high, mortgage holders have become more sensitive to the cost of debt, despite mortgage rates remaining close to the lowest level since the 1960’s. It’s likely the higher cost of housing mortgage repayments, as well as stricter servicing criteria from lenders, is discouraging or preventing some buyers from entering the market.

Based on February 2017 data from the ABS, investors comprised approximately 48% of new mortgage demand. Unfortunately, they are now facing the double edged sword of higher mortgage rates and less cash flow on their properties. 

Rental yields in Sydney and Melbourne have also slipped to record-lows over the past five years which is likely to compound the effect of high mortgage rates in the face of low rental yields. 

Additionally, if investors have a perception that market conditions are weakening, this is likely to act as a further dampener on investment demand. After all, who wants to be holding a low yielding asset when value growth is likely to be much lower than what investors have become used to? 

The latest round of consumer sentiment data released by Westpac and the Melbourne Institute pointed to weaker housing sentiment, particularly in NSW and Vic, as well as a further reduction in their ‘Time to Buy a Dwelling Index’ which is now tracking 25% below the long run average.

Add to this the latest round of policies from the prudential regulator, APRA, as well as some tweaks to what expenses can be claimed by investors for taxation purposes announced in the 2017 Federal Budget, and the investment scenario is looking all the weaker.

Overall, the next few months of market activity data will paint a clearer picture of whether the housing market is truly slowing down. My expectation is that if we aren’t moving through the peak of the growth cycle in Sydney and Melbourne, it’s probably just around the corner.

 

Making housing more affordable: What's the solution?

Monday, April 24, 2017

By Tim Lawless

A solution to housing affordability is extraordinarily complex, requiring a multifaceted response from a variety of public sector and private sector stakeholders. The goal of affordable housing can also be at odds with the aims of maintaining capital inflows from foreign investment and sustaining the value of domestic assets. A coordinated and cooperative approach is likely to be one of the largest challenges to improving housing affordability – can we get all the stakeholders to agree on the best strategy and then execute the plan?

The three layers of government have separate and sometimes conflicting agendas, limiting a coordinated response to housing affordability. One of the prime examples of the imbalance between federal, state and local polices is population growth, which is a primary driver of housing demand. 

Population growth

It’s not a coincidence that the two states with the highest population growth (Victoria and New South Wales) have the highest growth in dwelling values. Both states are seeing a solid upward trend in net overseas migration rates, while interstate migration is also remarkably higher than average in both states (despite remaining negative in New South Wales). Strong population growth stimulates the economy, providing a larger taxation and consumption base. It also puts upward demand pressure on existing dwellings and transport and requires an adequate investment in new infrastructure.

The federal government sets migration policy, state governments need to supply more infrastructure and local governments need to ensure land is appropriately zoned for appropriate population densities and additional housing. While the federal government sometimes contributes funding for these initiatives, state governments are generally faced with the funding challenge for these new projects. 

An underinvestment in efficient transport infrastructure projects relative to population growth can be one of the primary contributors to high dwelling values in certain areas because housing demand becomes focussed within those areas that are in a convenient location relative to work and essential amenities. This is one of the reasons why growth rates are so disparate between Australian capital cities and regional areas. 

Strategically located and zoned land

A shortage of strategically located, appropriately zoned land is another key contributor to higher housing prices and, consequently, the affordability challenges many cities are facing.  

Take Sydney as the worst case example, where the dwelling price to income ratio for detached housing is approaching ten times the median gross annual household income. Buying a house within 20 km of the Sydney CBD generally involves a purchase price of at least one million dollars. Demand for housing is substantially higher across the inner city suburbs, along the coastline and along the transport spines, while demand for housing located in the city outskirts is often undesirable for many aspiring home owners due to the long commuting times and lack of essential amenities.

Of course, focusing on transport infrastructure in isolation is unlikely to push house prices down. Indeed, new infrastructure projects often increase demand from investors looking for new growth areas. The complexity of a solution to housing affordability is therefore about adjusting the interplay of many demand factors in addition to housing supply considerations. 

Investor demand

Investors are contributing substantially higher-than-average levels of demand to the housing market. Investors have historically comprised around 33% to 40% of housing demand, however the latest data from the Australian Bureau of Statistics shows that investors comprised closer to 50% of new mortgage demand nationally (excluding refinances) and closer to 60% in New South Wales. The high participation rate of investors has contributed to housing market activity and added to the upwards pressure on housing prices. 

Recently, APRA and ASIC have cracked down on mortgages originating on interest-only terms and lenders are implementing stricter servicing standards and writing fewer mortgages on small deposits. These measures should help to slow investment in housing, however investors are still incentivised to participate in the housing market via taxation policies like negative gearing and the 50% capital gains tax concession that applies after twelve months. 

However, considering the unprecedented number of high-rise apartments currently under construction, it is important that investor demand is not dramatically reduced. The large majority of apartment stock under construction is reliant on investors being able to settle their off-the-plan purchases.  

Regulators and policy makers are likely to be mindful of this risk when adjusting their policy settings and dampening investment demand. The 2011 Census showed that apartments were more than two and a half times more likely to be owned by investors than owner occupiers highlighting that ultimately a large proportion of new unit stock is being purchased by investors.

Foreign investment and low rates

Other factors affecting the demand side of housing affordability include additional demand from foreign buyers and the stimulatory effect of low mortgage rates. Foreign investment adds to overall housing demand and the fact that official figures on the level of foreign buying approvals haven’t been updated for almost two years makes quantifying the effects of foreign demand problematic. Additionally, historically low mortgage rates are also stimulating higher demand; even though mortgage rates are now edging higher, they remain close to the lowest levels since the 1960’s. 

Furthermore, the inflationary effects of historically low interest rates has boosted home owner’s equity. Home owners are searching for returns and Sydney and Melbourne housing has been attractive due to the ongoing strength of returns relative to other asset classes. 

Housing supply challenges

While understanding the drivers of housing demand is critical to forming a strategy for improving affordability, so too is understanding housing supply. The interplay between these two factors push housing prices higher or lower. 

The Australian economy is benefitting from an unprecedented dwelling construction boom, however, one must question whether the record levels of new supply is the ‘right kind’ of supply that will help to address housing affordability. Building more dwellings is key to improving housing affordability, but if the majority of new dwellings being built have a mismatch with buyer preferences, then a disconnection between demand and supply will remain.

Based on the latest building activity data from the ABS, there are just over 152,600 units under construction across Australia and 65,700 detached houses. While detached house building is only 7.2% higher than the decade average, the number of units under construction is 85% higher than the decade average and virtually double the thirty year average. Additionally, ABS data confirms the large majority of apartments which are under construction are in high rise projects, which, at least anecdotally, are more likely to be oriented towards investors rather than first-home buyers or family households. 

The current boom in housing construction is better described as a high rise building boom, with the number of detached houses under construction peaking at about the same level as previous cyclical highs. A trends towards higher densities is natural for mature cities like Sydney, Melbourne and Brisbane, however the surge in high rise dwelling construction has happened against a back drop of a substantially lower proportion of low and medium density dwellings.

Ten years ago, based on building approvals data, townhouses comprised 48% of all non-house dwelling approvals; the latest data shows townhouses now comprise only 24% of all non-house approvals, while at the same time, high rise units (classified by the ABS as unit projects with at least four storeys) have moved from being 39% of all non-house approvals only ten years ago to 70% based on the latest data.

It’s reasonable to argue that much of the housing stock that is being built at the moment, being high rise units, is more suited to investors and consequently rental markets, rather than families, who would generally prefer to live in lower density dwellings. Furthermore, the majority of new unit stock is one or two bedrooms which is generally not appropriate for families. 

Other factors affecting housing supply include town planning legacies which prevent infill development in strategic locations close to major working and transport nodes, insufficient transport infrastructure linking affordable housing markets with major working hubs, and high development fees and headworks costs associated with developing land.

Additionally, high transactional costs such as stamp duty are a major disincentive to upgraders or downsizers. Many of these potential home sellers are simply staying in their home for longer which detracts from the efficient transfer of housing stock across generations.   

Overall, there is no silver bullet for solving housing affordability issues in Australia. Housing demand and supply levers can be pulled, however the ability to do so is not straight forward. Changes in both demand and supply factors could have broader consequences for household wealth and economic growth.

Australian households have more than half of their wealth tied up in the residential housing sector and about 70% of their debt is housing related; a larger than expected downturn in housing values would likely result in less household consumption and impact negatively on economic growth and Australian retirement assets.   

Investors are an important component of the housing market from both a demand perspective and delivering new rental supply. Turning down the volume on investment activity is important, however, reducing investment demand at the same time as a record number of off-the-plan apartments is about to settle is a proposition fraught with risk. 

Perhaps the most logical course to improve housing affordability is a gradual adjustment to some of these factors.  

Transport

Arguably, one of the most strategic solutions is to build more efficient transport linkages that connect the regions where housing is affordable with regions where jobs are located. New infrastructure creates greater productivity, provides jobs and opens up affordable areas that were previously less desirable.

Another long-term strategy is to work towards greater geographic distribution of employment opportunities. The past five years has seen 75% of Australia’s jobs created in NSW and VIC, with the vast majority of these positions located in Sydney and Melbourne. More businesses and government departments located outside of the largest metropolitan areas would help to attract larger populations to these regions where housing prices are typically substantially lower than what is available across the large cities. State governments should be looking at taxation incentives to attract large businesses across state borders and there should be further support for new businesses seeking to establish themselves in key areas.

Bottom line

Whatever the strategy, in order for there to be a cohesive and coordinated plan, there needs to be someone in charge. A federal housing minister who is tasked with formulating and executing a housing strategy would be a logical first step. Counterpart roles within the state governments makes sense, as well as a broader coordinated town planning strategy for the metropolitan areas that sets the framework for local government planning schemes (the Greater Sydney Commission is one of the best examples of a coordinated approach to town planning).

 

Settlement risk yet to peak

Tuesday, March 21, 2017

By Tim Lawless

Recent building activity data released by the Australian Bureau of Statistics (ABS) showed that the amount of new supply flowing into the unit market across Australia is unprecedented. What’s concerning is that settlement risk is yet to peak.

Based on building activity data, there are approximately 153,000 units currently under construction nationally, with the vast majority of this stock likely to have been purchased ‘off-the-plan’. To provide some context, the scale of unit construction over the September quarter of 2016 was 86% higher than the decade average and 141% higher than the twenty-year average.

It’s probably safe to say that the number of units under construction moved through the peak early last year. Unit approvals reached a record high in October 2015 and have been trending lower since that time, and unit commencements peaked in March 2016, which coincides with a levelling in the number of units under construction.

The next phase in this unprecedented unit construction boom will be the completion and settlement of these 153,000 units. There is already evidence that a large proportion of settlement valuations are coming in at less than contract price. In fact, metadata from CoreLogic valuation platforms shows approximately 45% of off-the-plan unit valuations are less than the contract price at the time of settlement.

There are several risks for off-the-plan unit buyers; if their valuations are coming in low, they are facing an immediate negative equity situation at the time of settlement. The other complication is that buyers may need to top up their deposit in order to meet the lenders’ loan to valuation ratio requirement. Some buyers may be unable, or at the least, unwilling, to contribute more capital at the time of settlement. When settlements aren’t able to occur, this creates problems for developers and financiers who had considered those properties to be sold, and will need to find a replacement buyer.

With a surge in unit settlements just around the corner, it’s likely that settlement risk will become more pronounced over the remainder of 2017. Unit projects that have some differentiation based on their location, the quality of the developer and development, as well as a healthy mix of owner occupiers and investors are likely to demonstrate a healthier settlement profile. However, unit stock located within the supply epicentres and offering little in the way of differentiation are likely to be the most at risk of negative equity at the time of settlement.

 

Key barriers to interest rate hikes

Thursday, February 16, 2017

By Tim Lawless

The latest Reserve Bank ratios on household debt relative to household incomes highlights one of the barriers to higher interest rates. The data shows that the household debt to income ratio reached a record high of 186.9% in the September quarter of 2016, meaning that household debt levels are almost 87% higher than annual household disposable income.  

A significant component of household debt is attributable to housing debt. In fact, the housing debt to household income ratio was recorded at 132.2% in September, which is also a record high.  

While the cash rate is likely to remain low for the foreseeable future due to low inflation and below average economic growth, we can expect that, eventually, interest rates will rise from their current record lows.

Higher mortgage rates are likely to test the resilience of household balance sheets. CoreLogic measurements on mortgage servicing indicate that the average capital city home buyer will dedicate 36.4% of household income to servicing a mortgage. When mortgage rates do rise, it’s likely that households will be dedicating a larger portion of their incomes to debt servicing.  

Historically, 90+ day mortgage arrears rates have tracked well below 1% of Australian mortgage portfolios; this is likely to remain the case as households continue to service their debt obligations, despite higher interest payments. If this situation does occur, we could see household consumption muted as home owners sacrifice spending in other areas. 

We expect this to be a key scenario for consideration by policy makers when contemplating a future rise in interest rates. As to what extent households can withstand higher costs of debt without causing mortgage stress, and without creating an imbalance in household consumption remains to be seen.

Inflation currently remains below the RBA’s target range. Recently, the Reserve Bank stated that although headline inflation is likely to head back towards the target range this year, underlying inflation will remain below and take some time to return. Given this, increases to interest rates may be a distant prospect.  

 

4 hot topics for the housing market in 2017

Tuesday, December 13, 2016

By Tim Lawless

With 2016 nearing its end and the New Year just around the corner, it’s worthwhile looking back over the year that’s transpired and reviewing the hot topics we can expect to tackle next year.  

The two words that are useful when describing the housing market in 2016 would be: diversity and complexity.  

Diversity: Because we continue to see dwelling values streak higher in Sydney and Melbourne, while in Canberra and Hobart, these markets gathered some pace over the second half of the year. Coasting along with modest growth rates were Brisbane and Adelaide, while Perth and Darwin markets saw values trend lower since 2014.

Regionally, the lifestyle and tourism-centric markets have seen a bounce back in buyer demand, which is pushing values higher. Those regional areas connected with the resources and mining sectors remain soft as they try to find a floor after significant value falls and low buyer demand.

Complexity: Because it’s hard to recall a time when there has been so much diversity and so many conflicting signals in the market. On one hand, dwelling values are generally showing strong growth, mortgage rates are at their lowest since the 1960’s, advertised stock levels are close to record lows, auction clearance rates have held firm at high levels and homes are generally selling quickly in the hot markets. On the other hand, transaction numbers have trended lower, housing finance requirements have tightened up which is resulting in lower credit growth, unprecedented levels of high-rise unit supply in the pipeline and record low rental yields due to soft rental conditions against a backdrop of rising values. 

Looking out to next year, we’re likely to see evolutions around market trends. Broadly, we expect the pace of capital gains to moderate during 2017 due to natural affordability constraints, higher supply levels, tighter lending and potentially less investment demand as the prospects for capital gains wind down and rental yield plumb new lows.

The four key trends that I believe are likely to influence the housing markets are: speculation that interest rates will rise, a peak in the construction cycle, more from regulators on investment activity and debate around housing affordability and how to fix it.

As for interest rates, there is growing acceptance that interest rates have reached the bottom of their cycle and will potentially start to rise in late 2017. The catalyst for higher interest rates could be an improved level of comfort with regards to the Australian dollar and an expectation that the US dollar will rise on the back of higher US interest rates and higher inflation, a lack of comfort with the pace of growth in dwelling values, and the rise in household debt which can at least partially be attributed to the low interest rate setting.

Financial markets are no longer pricing in any rate cuts. If rates do start to move higher next year, the rises are likely to be small and gradual with the RBA mindful of the record high household debt levels and a requirement to stimulate the broader economy and keep the dollar low. Higher interest rates are likely to dampen buyer demand and place more focus on the record low-yield profile that is evident in Sydney and Melbourne.

Housing Construction: It is becoming increasingly clear that dwelling approvals have peaked, with the Australian Bureau of Statistics reporting sharp falls in approvals for high rise construction and more modest falls across other sectors of residential construction. Despite the slowdown in approvals, the construction pipeline remains substantial with an unprecedented number of high-rise units currently under construction. As these units, which have largely been sold off the plan, approach completion, the risk of non-settlement is likely to become more visible as valuations fall short of contract prices and foreign buyers fail to secure finance. Well located projects that are differentiated and that have less of a skew towards pure investor markets and overseas buyer markets, aren’t likely to show the same risk profile.  

Another important consideration is where the next pillar of economic growth will come from after the residential housing construction sector took a smooth baton pass from the resources sector. With the residential construction sector winding down over the next year or so, ideally, the next ‘boom’ would be based on an infrastructure boom, fixing the congested roadways and linking outer lying more affordable housing options with the key working nodes via more efficient transport options.

Investment: Investment activity has been a key feature of the current housing boom. Since APRA weighed into the market with a 10% speed limit on investment credit growth and higher capital requirements for investment loans, the value of investment mortgages showed a substantial reduction. Since May 2016, investors have been consistently stepping up their activity in the market. Based on September ABS data, investors comprised 49% of all new mortgage demand (excluding refinanced loans) and the value of investment related housing finance commitments has increased by 14.5% since the May rate cut. If regulators are uncomfortable with this level of investment (at a time when rental yields are at record lows) we may see a further regulator response aimed at curbing investor activity. This could take the form of a tougher speed limit on investment growth (currently set at 10% per annum), loan to valuation ratio limits or geographical polices aimed at slowing investment in the hottest markets such as Sydney (these policies have already been rolled out in New Zealand), or lenders may be required to hold even more capital against investment related mortgages which would widen the spread between owner occupier and investment mortgages that already exists.

Affordability: The housing affordability topic is always bubbling below the surface, however recent months have seen the issue become debated more fiercely in the public policy arena. The CoreLogic dwelling price to income ratios range from 8.4 in Sydney to 4.7 in Darwin, indicates that affordability of housing is vastly different from region to region.  

On the measure of household incomes compared with dwelling prices, affordability has worsened in Sydney and Melbourne, held reasonably firm across most of the smaller cities, but has improved substantially in markets like Perth and Darwin where values have fallen.  

The solution to housing affordability isn’t to see a crash in housing values (this would likely cause significant disruption to the economy considering more than half of household wealth in Australia is held in housing), rather to make affordable housing options more accessible and plentiful through infrastructure development and upgrades, as well as more efficient of housing supply that is strategically located and well designed so as to appeal to owner occupier buyers.

There are likely to be a wide range of other factors that impact on housing markets next year, including the unknown effects of the Trump presidency. One thing that is certain is change and we can expect a lot of that next year.

 

Buyers stamped out of property market

Tuesday, November 15, 2016

By Tim Lawless

The topic of stamp duty has become increasingly heated over recent times, with many market commentators and economists calling for the removal of the land transfer tax, replacing it with a more broad-based and efficient land tax that would apply to all property owners, not just those who are purchasing.

Large revenue source

For state governments, stamp duty is one of the largest revenue sources. In the 2014-15 financial year, state and local government taxation revenue was recorded at $89.278 billion, having increased by 7.0% over the year. The taxation revenue was comprised of $45.203 billion, or 50.6%, from property. While total tax revenue increased 7.0% over the year, property tax revenue increased by 10.5%, highlighting that property taxes are the largest source of taxation revenue for state and local governments and are rising at a rapid pace.

Importantly, the revenue from stamp duty is reliant on both housing turnover, as well as pricing movements. When prices fall or activity falls, stamp duty revenue declines. The reliance of such an important revenue stream on the housing cycle makes state government budgeting less certain and more volatile.

A barrier to housing market activity

On the other hand, stamp duty costs can be a substantial barrier to activity in the housing market. Based on the median dwelling price in each capital city, it’s clear that the high cost of housing and aggressive stamp duty rates in New South Wales and Victoria are a substantial cost burden.

The median dwelling price in Sydney is currently $800,000, and the median dwelling price in Melbourne is $200,000 lower at $600,000. Based on purchasing a median-priced dwelling in either city, buyers are confronted with a stamp duty cost (plus other government fees) of circa $32,000. That’s after pulling together a deposit, which is more often than not, expected to be around 20% of the purchase price.

Compare that cost burden with Brisbane, where stamp duty rates are less than $10,000 thanks to lower housing prices but also less aggressive rates of stamp duty.

The costs of stamp duty have increased across every capital city over the past five years, however the increase in Sydney and Melbourne has been substantially more than other capital cities. Based on median prices five years ago, government fees on a real estate purchase have risen by $13,275 (+72%) in Sydney and increased $11,703 (56%) in Melbourne.

The bottom line

I’ve recently seen some commentary that stamp duty costs aren’t likely to be a significant factor in slower housing turnover. I’m not so sure about that … in markets like Sydney and Melbourne where buyers of the median priced dwelling are facing costs in excess of $30,000, plus the cost of deposit, plus other transactional costs like pest and building inspections, conveyancing fees, removalist costs etc., and it becomes pretty clear that it’s not just the price of housing that is becoming unaffordable. The transactional costs play a large role as well.

 

Housing market downturns: Lessons from history

Tuesday, October 25, 2016

By Tim Lawless

The housing market growth cycle has broadly been running for almost four-and-a-half years, with dwelling values across CoreLogic’s combined capital city index rising by 40% since June 2012. Sydney dwelling values have risen by 63% since values started pushing higher, and dwelling values in Melbourne are up a lower – but still strong – 46% over the same time frame. Considering the maturity of the growth cycle, the new unit supply moving through record levels, rental yields producing historic lows and mounting affordability pressures, it’s worthwhile revisiting what housing market downturns have previously looked like. 

The last time we saw a housing market growth cycle this long and strong was the ‘boom’ period that broadly tracked from early 2000 through to early 2004.  

At that time, the pace of capital gains was even faster, as housing markets were spurred on by a combination of low interest rates, improving economic conditions and a strong mix of first home buyers and investors. As a refresher, using the same number of months that the current cycle has been running, the Sydney housing market reached a peak rate of cyclical growth in September 2003, with dwelling values rising 77%. That’s a faster pace of capital gain than what we've seen over the current cycle.

In Sydney, dwelling values peaked in March 2004, before falling by 8.2% over the next 21 months. It took 42 months for the Sydney housing market to stage a nominal recovery, with values recovering to their 2004 high point in September 2007. The recovery was, of course, short-lived, as the GFC was just around the corner, causing Sydney dwelling values to fall by a further 6.2% across 2008. On the back of a range of stimulus measures, including lower mortgage rates, first buyer incentives and cash handouts, Sydney home values surged higher in 2009 and 2010, before dwelling values fell by 5% between November 2010 and June 2012. 

The three most recent periods of decline across the Sydney housing market are a stark reminder that dwelling values don’t always rise. Generally, growth cycles are followed by a period of decline, or more stable market conditions, which provides time for yields and affordability to improve.

If the past two decades of housing market cycles are anything to go by, it is rare for a growth cycle to last more than four years. Natural disincentives, such as low yields and affordability constraints, are likely to curb buyer demand. Additionally, lenders will become increasingly cautious about lending into markets where home values have risen substantially which is also likely to act as a brake on the high rates of capital gain. Add high supply levels, particularly across the unit market, and it seems likely that the Sydney housing market is rapidly approaching its peak. However, the main difference between previous housing market cycles and the current cycle is that previously, interest rates were rising, but today they have been falling.

While values across Australia’s largest housing market may fall, the magnitude of any downturn across Sydney is likely to be muffled by the positive effects of ongoing population growth, low interest rates providing an ongoing incentive to buy, and continued robust economic conditions. The offset to these stimulatory factors will be seen in the significant unit supply pipeline, growing lender caution and low rental returns, which are likely to act as a disincentive to investors who currently comprise more than half of all mortgage demand across New South Wales.

Supply levels across Sydney’s detached housing market have been much lower than medium-to-high density supply additions, which suggests that the detached housing sector may be less exposed to a housing market downturn than the unit sector.

 

MORE ARTICLES

Investors strike back in property market

Property lessons to learn from listing numbers

Do property prices double every decade?

Spectacular investment trend for self-managed super funds

A step towards affordable housing

Are first home buyers really locked out of the market?

Do we need a broader based property tax?

Housing prices across Australia

Regional markets offer growth

The rundown on rental yields