Sydneysiders will feel an uncharacteristically cool spring chill from Monday’s news that house prices have begun their descent in September – an outcome that, while widely anticipated, has been a long time coming.
Far from a major correction, Sydney prices have nudged down very slightly by 0.2 per cent while most other capital cities, including Melbourne, experienced an increase in prices although the rates of growth are slowing.
The single biggest factor in Sydney’s housing value fall relative to other capital cities appears to be the volume of new stock coming into the market – an increase of 15 per cent over the same period last year.
It looks like Sydney sellers have finally called the top of the market and are rushing to get stock onto the market.
Additionally Sydney has traditionally had a larger portion of investors in its market – the segment regulators are trying to rein in because they are seen as primarily responsible for pushing values into the stratosphere.
Meanwhile, Melbourne’s price gains are being aided by a 2.4 per cent surge in population growth which is soaking up supply and putting something of a floor under prices.
Slow deflation of property bubble
But the remarkable aspect to residential property prices is the actual resilience to the forces from regulators for almost three years to dampen price growth.
The fact that levels of household debt are at record highs wasn’t enough to quell the residential property demand and certainly not enough to offset the investor-friendly negative gearing and capital gains tax regimes.
The Australian Prudential Regulation Authority has been attempting to put the brakes on prices since late 2014 when it started the process by capping the growth of investor loans. The response took a year to fully filter through the market and moderate prices. But this tempering in prices was reversed in 2016 when the Reserve Bank of Australia reduced interest rates causing the bubble to reinflate and prices to resume their climb upwards.
Earlier this year APRA pulled out another macroprudential tool and moved to limit interest-only lending to 30 per cent of new residential loans.
The response from the banks has been to push up interest rates on interest-only lending – which had the effect of partially a de-risking their loan books, taking some borrowers out of the market and increasing banks’ margins on these types of loans.
This, combined with pressure from APRA, the Reserve Bank and the Australian Securities and Investments Commission on the banks to improve lending standards, was all part of the push to allow the property bubble to deflate in an orderly way.
Potentially the affordability challenges facing Sydney buyers within the detached housing sector are pushing more demand towards the medium to high density sector.
Tim Lawless, CoreLogic
While all these measures seem to now be combining to show some signs of gaining traction, it is unlikely that the Reserve Bank will be caught out again and allow interest rates to drop – repeating its previous mistake.
Indeed most economists see the next rate movement will be up – albeit not for a while.
The effects of even small increases in rates are magnified when households are carrying higher burdens of debt.
Meanwhile, the Sydney market has long been the one that most have focused on given its rate of growth (until the month of September) has been higher than the others followed closely by Melbourne.
First-home buyers back
CoreLogic, which monitors house prices, noted that across the Sydney housing market, it was the detached housing sector that pulled the monthly and quarterly growth rates lower.
‘While unit values are also appreciating at a slower rate, detached housing values were 0.3 per cent lower over the month of September and 0.2 per cent lower over the quarter while unit values recorded a subtle rise,” it said on Monday when releasing its report on September price movements.
For the Sydney housing market, concerns around unit oversupply is less evident compared with the Brisbane unit sector, or to a lesser extent with Melbourne.
CoreLogic head of research Tim Lawless said: “Potentially the affordability challenges facing Sydney buyers within the detached housing sector are pushing more demand towards the medium to high density sector….”
Another emerging feature of the market is the return of the first-home buyers.
First-home buyers are coming back into the market in Melbourne and Sydney. Photo: Pat Scala
CoreLogic said that while investor demand may trend lower due to higher mortgage rates and tighter credit policies, first-home buyers are clearly increasing their presence across the housing market. Lawless said that based on housing finance commitments data, first-home buyer activity surged higher in NSW and Victoria as first-timer buyers took advantage of stamp duty concessions that went live on July 1.
Between June and July, the number of first-home buyer commitments increased by 28 per cent across NSW and 11 per cent across Victoria.
Over the medium term almost all experts agree that prices will continue to cool. But there is plenty of differing opinion on the extent and the time frame.