2008 Wrap

The only thing that can be said with confidence about the Sydney property market since the October 2008 CurtiseCall is that there is no confidence.

Hardly surprising given this context:

nearly every developed economy including Japan and Germany conceded a technical recession with the US economy having been in recession for a year parallels constantly being drawn between these events and the Great Depression global share markets became a “blood bath” massive local and overseas corporate “collapses” became an almost daily event

• the global financial system nearly “buckled” and global credit flows “froze” as the Global Financial Crisis (GFC) took hold
• the institution of investment banking (whose members were largely responsible for some of the hefty prices paid for Sydney prestige real estate) faced extinction
• executive pay packets became a Federal political issue
• global interest rates were cut to a record lows including of 0 -.25% in the US
• “trillions” replaced “billions” in the assessment of the unregulated global derivatives market that precipitated the GFC; in the value “wiped off” global share markets; and in the size of the emergency international stimulatory packages unleashed to meet that crisis
• Western consumer demand “plummeted”
• global housing markets “crashed” with falls of between 15% and 20% in the US and UK since 2006
• several overseas residential and commercial property markets continued to fall with the once invincible Dubai property market even reporting signs of stress
• unemployment continued to rise around the globe with potentially “catastrophic” levels likely in the US if General Motors, Chrysler and Ford or seek Chapter 11 bankruptcy protection
• the outlook for China moved from reduced but still healthy growth of around 8% per annum to much lower projections
• sudden question marks being raised about the strength of Australia’s resources boom with commodities prices and forward orders falling and culminating in BHP Ltd abandoning its planned takeover of Rio Tinto
• the Australian Government reacted to the GFC with a spending spree which seemingly overnight drove a long standing budget surplus towards a certain deficit
• confident assurances by the Federal Treasurer and other national leaders that a local recession would be avoided gave way to growth figures for the September 2008 quarter strongly pointing the other way
• the global issue of climate change was pushed off the front pages of all news publications by the GFC
• unlike the bursting of the Australian asset price bubble that occurred in the early 1990’s, the sense that if only because of greater globalization and de-regulation, no one really understands or knows what happened this time or how to fix it. One of the best perspectives during the year was that provided in December 2008 to the Lowy Institute for International Policy by Ian Macfarlane, immediate past Governor of the Reserve Bank of Australia: (http://www.lowyinstitute.org/Publication.asp?pid=935).

Add to this the media frenzy these events have generated – see the emotive quotes above - and it is equally unsurprising that the cashed up contrarian buyers mentioned in the September 2008 CurtiseCall all but deserted the Sydney prestige property market during the peak spring/summer selling period.

Even the Australian dollar’s fall on 27 October 2008 to a five year low against the US Dollar of $US0.6007 failed to attract overseas buyers to the increasingly plentiful supply of quality Sydney real estate. Curtis Associates in fact identified a perverse but clear inverse relationship in the same period: the more the Australian dollar fell against the US dollar, the fewer the overseas inquiries and instructions especially from Asia. Further, the reported flood of expatriates returning to Australia to escape the GFC in Britain proved an illusion with rarely released figures from the Department of Immigration and Citizenship confirming no statistical evidence of such an exodus.

The vast majority of prestige property was offered not by public auction but by pernicious ‘expressions of interest’ campaigns which purchasers sensibly avoided. This coincided with a spike in distressed sales and the occasional mortgagee sale at the top end.

In a sign that there is still some money left over from the 17 years of boom, there were sporadic prestige property sales such as:

• 22 Beresford Road, Rose Bay which sold on 25 October 2008 for $7.8 million after a short campaign
• over $20 million said to have been secured off plan for the Andrew Andersons designed three level penthouse in “The Elizabeth” next to the Sheraton on the Park Hotel and
• 8 Vaucluse Road, Vaucluse which sold on 1 November 2008  for $7,050,000 - one of the few bright 2008 moments for the suburb identified by Fitch Ratings as the seventh most leveraged in the country and the 25th worst for mortgage arrears.

Below the prestige end of the Sydney property market and despite desperate moves by the Reserve Bank of Australia to reverse three years worth of interest rate rises in just three months, the story was much the same: significantly lower auction clearance rates and sales volumes than this time last year with the upper north shore, the northern beaches and parts of the outer eastern suburbs slowing to a virtual standstill.

In the coastal, lifestyle destinations, some mortgagees took to advertising properties for auction in job lots. Anyone heading south down the picturesque stretch that starts 50 kilometers south of Sydney at Stanwell Park could not help but notice the forest of For Sale signs; a story repeated up the central and northern coasts of New South Wales and in the Southern Highlands as beach houses and weekenders become the first real estate asset liquidated in the rush to de leverage and meet margin calls. Prices are said to have fallen about 15% in Palm Beach with listings nearly double those of this time last year – a situation aggravated by the 2% land tax on investment properties valued over $2.25 million introduced in the State Government’s November 2008 mini budget

The main activity in pockets of the Sydney property market occurred at the sub $1million bracket driven largely by first home buyers taking advantage of Government largesse at both the State and Federal levels. With stamp duty exemptions and a cash payment, that largesse is substantial with a buyer of a new $500,000 home being eligible for benefits totaling more than $40,000.

The fear in the sub $1million bracket is unsustainable prices, especially closer to the City, leading to a severe correction when over committed and possibly unemployed first home buyers needing to exit the market quickly encounter a shortage of buyers after 30 June 2009 when parts of the Government funded boosts are scheduled to end.

The absurd $517,000 paid by one of the 29 registered bidders for a knockdown on a block of land not much bigger than a postage stamp (less than 44m2) and facing the wrong way at 72 Marshall Street, Surry Hills on November 2008 suggests that the risk of future negative equity in parts of the first home buyers Sydney property market is real and that this attempt to stimulate the economy and solve Sydney’s over stated shortage of rental accommodation may backfire in the short to medium term.

Despite the naysayers, apart from the mortgage stressed outer western and southern belts, real estate prices across Sydney did not crash during 2008. According to figures released by Australian Property Monitors on 11 November 2008, median house prices in Sydney fell just 1.7% in the September 2008 quarter.

Predictions for 2009

In 2009, Curtis Associates believes that the main forces driving the Sydney property market will be:

• the impact of Chinese growth on domestic confidence levels
• the threat to housing affordability caused by unemployment which currently stands at 4.4% after 15,600 jobs were lost in November 2008 and which some economists predict will rise to 9% by the end of 2010. Here, the financial services sector is already leading the way with Stephen Walters,  Chief Economist at JP Morgan suggesting there have been about 19,000 job losses in that sector since the beginning of 2008 and LandMark White, valuers, forecasting a consequential doubling of office vacancy rates in Sydney’s CBD in the next 12-18 months to double digit figures
• infrastructure initiatives such as those being rolled out by the City of Sydney and the newly created Commonwealth Infrastructure Fund which may see the resurrection of initiatives that will have an impact on property values such as the M4 East link
• rental yields available to investors in residential real estate and
• to a lesser extent, domestic interest rates.

In the sub $750,000 and first home buyers’ bracket Curtis Associates predicts a potentially severe market correction after 30 June when the artificiality of the present demand is exposed.

Movement in the $750,000 to $2million bracket will be influenced most heavily by rising unemployment.

And drawing upon an expression from the stock market, above $2million will be like ‘catching a falling knife’ with price falls at the prestige end being inevitable once the mood of denial ends during the first quarter and keeping up appearances over Christmas finally proves unaffordable. The trend that has already driven price falls in Palm Beach will continue to contract closer to the City. It has already started. One to watch is the prime offering at 38 Victoria Street, Potts Point:  Passed in at auction on 30 October 2008 for $3.72 million, it was advertised a week later at $3.925 million. As at 5 December 2008, it was still on the market with an asking price of $3.695 million.

This is the type of fantastic opportunity awaiting cashed up bulls in 2009 wanting to engage Sydney buyers agents like Curtis Associates to drive the hardest bargain possible. This is the market correction we have been waiting for!

In the meantime, Merry Christmas and a Happy New Year and thanks to all our clients and readers for their support.

Looking for guidance as to the likely direction of prestige property prices in Sydney?

One of the most popular of these projections is the comprehensive “Spring Property Guide” compiled by Australian Property Monitors and published in early September each year in the Sydney Morning Herald. In 2007, the Spring Property Guide was published on 1 September.

This year, it was published on 13 September. The Spring Property Guide collates suburb by suburb the percentage change in actual median house and unit prices in the preceding twelve months to 30 June and predicts the percentage change in median house and unit prices over the next 12 months; nominating Sydney’s next “hot spots” in the process.

As the Spring Property Guide does not compare the percentage change in actual median house and unit prices in the preceding twelve months to 30 June against the predictions the Guide made in the previous year, CurtiseCall has, as far as possible, done the exercise for prospective buyers whose purchasing decision might be influenced by such projections.

What follows is a comparison of Australian Property Monitors statistics published in the Sydney Morning Herald which is a direct comparison except for the non overlapping but relatively quiet winter months of July and August in each of 2007 and 2008.

We start with a ‘predicted v actual’ comparison of all “hot spots” nominated in the 2007 Spring Property Guide:

Next, we compare the other suburbs in which you would expect to find Sydney prestige property:

The significant number and sometimes, size of the variances recorded in these tables shows the difficulties forecasters have, despite their best efforts, in predicting future movements in property prices. Part of the difficulty is the low volumes of transactions in each suburb and therefore upon which to make predictions. Generally, the smaller the sample, the greater the variation. The highly accurate projections for the relatively high turnover and homogenous suburbs of Woollahra and Paddington show the reverse also applies.

The lesson here for buyers is that while macro level property reports and analyses like this make for interesting weekend reading, they are no substitute for more micro level analysis based upon the largest possible sample of specific re-sale histories that can be found and as should be provided by a buyers’ agent or buyers’ advocate such as Curtis Associates (www:curtisassociates.com.au).

As we thought, the rumour of a new record price for Sydney prestige property that we reported in our 17 September 2008 article “The prestige property market in Sydney. Is now a time to buy?” was accurate.

The confirmed figure is $47 million for an eastern suburbs property rumoured to be in Vaucluse. This is almost 50% higher than the previous record. When you add that figure to the other $2 million plus sales listed in our earlier article, the total turnover in the five week period just gone comes to more than $200 million - a staggering result by any measure and especially in the current financial environment.

From the beginning of 2008, the financial press has been an unending stream of bad news about the sub prime crisis, asset write downs, savaged equities markets, the collapse of the US residential market and the prospect of worse to come in global financial markets.

Adding to the uncertainty on which the media feasts are the twitchy central bankers who have jettisoned the old idea that monetary policy was a sledge hammer with multiplier effects on the money supply that took months if not years to work through the system. Instead, tweaking the cash rate has become a monthly ritual occurring without any overarching economic theory capable of predicting where and when all this so called doom and gloom will end.

As occurred during and after the dot.com crash and other corrections, the contraction in the Sydney prestige property market ($2 million plus) has mainly been at the margins with lifestyle properties the early casualties especially on the New South Wales northern beaches, south coast and Southern Highlands.

Lower quality stock that failed to sell earlier in the year when the sub prime crisis first hit is selling with reduced price tags while large tracts of suburbs like Vaucluse have quietly been on the market for months. It is mainly this sector of the Sydney prestige property market that is fuelling recent media reports of a softening market conditions in some of Sydney’s most affluent suburbs: Australian Financial Review

Other new prestige developments that were over priced last year remain unsold and will remain that way until their owners eventually meet the market.

And down on swanky Woolloomooloo Wharf, one of Sydney’s best tell tale districts, the restaurants are feeling the pinch as the discretionary spending dollar dwindles.

However and here is the analogy with the quality end of the Sydney prestige property market
(Curtis Associates): those restaurants and many like them are far from empty.

In a case of a ‘glass half empty or half full’, although clearance rates are down to 50% it still means that 50% of properties in fact sold and did so for prices showing no signs of weakness. Indeed, rumour has it that a new record for Sydney prestige property has just been set.

Away from rumours and looking at the evidence, these are some sales of prestige property in Sydney that have occurred in the five weeks to 16 September 2008:

• Over $28 million for 23 Victoria Street, Watsons Bay
• Over $27 million for 108 Wolseley Road, Point Piper
• $20 million for 114 Wolseley Road, Point Piper
• High $6 million for 12 Martin Road, Centennial Park
• $2.95 million for 1802/ 180 Ocean Street, Edgecliff
• $2.34 million for 532 Bourke Street, Surry Hills – a record price
• Over $4.million for 60 – 62 Cascade Street, Paddington
• Over $6.5 million for 3/8 King George Street, Lavender Bay
• $9.05 million for 57 Coolawin Road, Northbridge
• $4.6 million for 9 Coolawin Road, Northbridge
• $3.95 million for 16 Stack Street, Balmain
• $3.5 million for 46 Benelong Road, Cremorne
• $5.25 million for 18 Moruben Street, Mosman
• $4.021 million for 30A Morella Road, Mosman
• $3.46 million for 53A Raglan Street, Mosman
• $3.7 million for 11 Shellbank Avenue, Cremorne
• High $3 million for 5 Edward Street, Gordon
• $2.35 million for 48 - 52 Barton Avenue, Haberfield
• $2 million for 169 Stuart Street, Blakehurst
• $3.6 million for 1503/81 Macleay Street, Potts Point.

There have been at least two other sales above $4 million about which all details are confidential.

As with other buoyant economic indicators such as employment, investment expenditure and consumer confidence levels, these transactions are anomalous if all the pessimism in the media is to be believed. A similar story is emerging in parts of the arts world: Sydney Morning Herald

Why the resilience?

The short answer seems to be that there are Sydney prestige property buyers who are not convinced things are as bad as we might be led to believe. If the $20 million plus sales above are a guide, the strength of that conviction increases proportionately with the price tag.

The frenzy last year and against which current clearance rates are being compared must be seen in context. Much of last year’s activity was driven by abundant credit as well as investment and other bankers flush with cash bonuses. This exacerbated a chronic and continuing short supply of quality stock with sales volumes and prices soaring as a result. Even poor quality stock sold provided it was not hopelessly over priced.

The cheap credit and many of the bonuses have long since evaporated and the relatively soft correction now underway is exposing in its modest wake a confidence in the better parts of Sydney’s prestige property market.

The insolvency practitioners have not replaced the bankers, distressed sales at the top end are few and many prestige properties sell free of mortgages.

There are many objective reasons for longer term confidence:

First, with a shortage of quality land, the longer term trend will be a shortage of prestige residential properties in Sydney. As net population is forecast to grow over the next half century and the demographic trend is in favour of urban concentration, the underlying imbalance between demand and supply is set to continue.

Second, Australia’s relatively high interest rates have just been reduced by .25%. While this is the first reduction in seven years, more reductions are expected especially if domestic inflation remains in check.

Third, this recent period of modest correction in Sydney’s prestige property market has coincided with the Australian dollar rising over the past 11 months to near parity with the US dollar. In the past fortnight, it has traded below the psychologically important 80 cents barrier to its lowest point since 14 August 2007. According to some analysts, the longer term rate could be as low as 75 cents after the US Presidential elections and if domestic interest rates are cut further. This is reviving overseas and expatriate interest in Sydney’s prestige property market which has been subdued since the beginning of the year. At these levels, already world renowned Sydney prestige property, (Barclays Wealth), represents excellent value by international standards.

Fourth, is the commodities market and the demand in China and India for Australia’s mineral resources. Although growth rates are slowing in China and may slow further as the impacts of climate change are felt, those rates are likely to remain high by historical standards and may buffer developed regional economies such as Australia from some future trends in the US and Europe.

So, what is the answer to the question above?

It depends on your view of the current situation in overseas financial markets.

For those who believe Armageddon is yet to arrive, now is definitely the time to sit on the side lines.

For cashed up contrarians looking to buy Sydney prestige property before overall confidence returns, the answer is yes – unless of course, some economist comes along with a theory saying otherwise.