- New Home Under Construction - Phil Keeffe
Sydney's property prices continue to soften, but there are underlying strengths in the market that should see a return to increases over the next six months
Recent house price figures from the Australian Bureau of Statistics indicate that most capital city property markets showed signs of slowing in the March quarter. The ABS reported that prices for established houses in Sydney fell by 1.8% during the March quarter, restricting the annual increase to just 0.8%.
Australian Property Monitors figures for the March quarter show a slightly lower rate of price weakening. APM says that Sydney median prices fell by 0.4% during the quarter. This statistical variation is understandable, given that APM and the ABS use slightly different methods of calculating the median price.
However, as usual with the Sydney market, not everything falls at the same rate. In fact, not all Sydney house prices are falling.
Writing on Domain.com, Dr Andrew Wilson noted that in the past year the top five suburbs in median house price growth were Kensington (30.9%), Westmead (30.7%), North Sydney (28.9%), Lewisham (26.1%), and Neutral Bay (25.2%).
Dr Wilson also notes that Sydney remains the most expensive capital city in which to buy a house or a unit. The March quarter Sydney median house price was $643,713, and for units the median price was $448,585.
So it follows that renting is more expensive in Sydney than any of the other capital cities. Figures from Australian Property Monitors says Sydney's March quarter median weekly asking house rental was $485 – 33% per cent higher than Melbourne's $360.
Dr Wilson leaves us in no doubt about the future of Sydney house prices: “Expect Sydney houses and units to remain prohibitively expensive compared with other capitals, particularly as it clearly has the best prospects of a sustained recovery in prices from the current subdued market conditions being experienced in all Australian capital city housing markets.”
Interest Rate Hikes Expected
There are signs that the Reserve Bank will be raising its interest rate in the near future. A report by Richard Gluyas in The Australian says that the head of the CBA Bank, Ralph Norris, expects “...one or two more increases in official interest rates in the next six months.”
The report also said that Mr Norris is optimistic about conditions between now and the end of the year.
“Notwithstanding present challenges, we continue to expect a gradual improvement in operating conditions through calendar 2011, as the economy recovery strengthens and system credit growth rebounds,” Mr Norris said.
Another sign of what lies ahead is the rising number of new homes sold, which increased for the third month in a row.
An AAP-sourced story in The Australian said that the latest Housing Industry Association (HIA) new home sales report showed the number of new homes sold across Australia increased by a seasonally adjusted 4.3% in March, following a 0.6% rise in February.
The article quoted HIA chief economist Harley Dale, who said there was still a long way to go for new home sales to reach healthy levels.
"The March result for new home sales reflects an ongoing pause in the interest rate hiking cycle and some abatement of the severe weather conditions witnessed in early 2011," Dr Dale said.
The HIA also noted that sales volumes remain low by historic standards, and that the level in March was nearly 1000 sales lower than the average over the past decade. It joined the CBA Bank in forecasting an interest rate rise on the horizon.
"However, it's now apparent that the next move from the Reserve Bank may be early in the third quarter of 2011, and this runs the risk of reversing the upward trend in sales," the report said.
The HIA report said that NSW new home sales were up by a "very encouraging" 13.5% in March, for a 20.7% rise in the first quarter of the year.
"Sales are on somewhat of a barnstorming run in NSW, from an awfully low base," the report said.
Which Way now for House Prices?
Domain.com’s Michael McNamara, a property commentator and valuer, tried to sort out the direction of house prices.
“At this stage, the indices show that home owners have simply given back the capital gains they have achieved over the preceding 3 quarters. In short, over the year, national house prices have recorded no meaningful change.”
McNamara notes that finance approvals (a forward indicator of buyer confidence) are declining while at the same time stock levels (properties on the market) have begun to increase.
He says that the number of properties advertised in Sydney (comparing March year on year) have risen from 42K to 46K, or about 9%, and asks whether this growth in supply will team with the fall in demand to further weaken prices.
His conclusion is that the shortfall in demand from the owner-occupier sector will be offset by growing demand for properties from investors.
“Landlords are rubbing their hands together over the last five years’ results; according to SQM research, rental values, in Sydney for example, have climbed at a compound rate of 8.5% per annum, clearly exacerbated by vacancy rates below 1.5%.”
McNamara says that a combination of excellent rental returns, a shortage of rental properties and steady employment levels will pull Sydney prices out of their decline over the next six months.
“Today, yields in Sydney are at 5.4% and rising. There is no glut of accommodation, no rising unemployment. Quite the opposite.”
Journalist Chris Zappone, writing in the Fairfax newspapers ‘Business Day’ column, says the federal government’s decision to lift "the overall increase in the permanent migrant intake to 185,000 from 168,700 places," will further strengthen demand.
He quotes St George chief economist Besa Deda who said that boosting immigration "...means more demand for housing and dwelling starts are failing to keep pace with population growth at the moment”.
Ms Deda told Zappone that even without the increase in skilled migration, dwelling starts won't catch up with population growth for some years and the housing shortage problem could likely continue.
Zappone commented that Australia now faces an estimated 200,000 shortfall of houses and apartments, with building approvals continuing at historically weak levels.
Negative Gearing to Stay
This ongoing shortfall in meeting demand for property has a silver lining for investors in that it supports the federal government’s favourable taxation policies for property investors.
Terry Ryder, in his ‘Hotspotting’ column in The Australian, strips away the props for all those advocating an end to negative gearing in the hope it can somehow improve housing affordability.
“There is a growing debate about the reasons for rising property prices, which in itself is rather odd because we all learnt the cause in high school economics. There is strong demand for a commodity that is in relatively short supply. It's that simple.”
He says that the economy is strong, unemployment is falling, wages are rising, Australia’s individual wealth is at record levels and personal debt levels are falling.
“The only outcome of stopping negative gearing will be to create a shortage of rental properties, which will force up rents and make it harder to first-home wannabes to save a deposit - that's what happened the last time it was scrapped.”
Ryder even sees the bright side of rising house prices: “This pattern of rising home values is a good thing for most Australians, because about 70% of households own their homes.
“It's also good for the nation because the value of the family home is the financial imperative by which many Australians fund their retirement.”
Sources
- ABS 6416.0 – ‘House Price Indexes: Eight Capital Cities, Mar 2011,’ 2 May 2011
- ‘Prices are falling - some suburbs still hot,’ Domain.com, 7 May 2011
- ‘A slight hiccup, but house prices still on the up,’ Sydney Morning Herald, 9 May 2011
- ‘CBA ready for two official rate rises in next six months: Ralph Norris,’ The Australian, 11 May 2011
- ‘New home sales on the rise,’ AAP report in The Australian, 5 May 2011
- ‘Rents underpin property values,’ Domain.com, 10 May 2011
- ‘Inflation, rates and a deep breath,’ Domain.com, 5 April 2011
- ‘HIA: Budget worsens housing affordability,’ Sydney Morning Herald, 11 May 2011
- ‘Scrapping negative gearing won't make housing more affordable,’ The Australian, 5 May 2011
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