2022 Sydney Property Market Wrap – and why to look through the windscreen not the rear view mirror

With some subtle differences, Sydney’s property market in November 2022 and part of December 2022 before its widespread closure about three weeks earlier than usual, was a repeat of what’s discussed in our popular October 2022 Newsletter with an added 0.25% increase in the official cash rate taking it to 3.1%.

While those differences may help light the way forward for Sydney residential and commercial property buyers in 2023, some known unknowns through next year’s windscreen will be more important.

To see what we mean, read on.

Those subtle differences

• Mainstream media stopped catastrophizing.
• The few exceptions were drowned out by more nuanced commentary pointing to an acceptance of the now eight month old rising interest rate environment, a slowed but stabilising residential market and a substantially lower turnover commercial property market that’s re-pricing in response to higher funding costs.
• Building costs began falling as supply constraints loosened leading to some developers land banking recently shunned un renovated properties
• In a major but hardly noticed climb down, the NSW State Government confined its long touted and once potentially game changing stamp duty reforms to first home buyers
• Much to the chagrin of the catastrophists, a slew of data showed:

– five consecutive weeks of rising auction activity

– adjusted residential auction clearance rates in the high 50% mark (and much higher in some regions including the inner west where most initial price guides were exceeded by 10% with 18 Harney Street, Marrickville being a stand out example when its $4,280,500 sale price at auction eclipsed its $3.5 million price guide)

– stable numbers of new listings and reduced days on market consistent with low levels of vendor stress as confirmed by the four major lenders

– stellar prices were achieved for several prestige properties including a new Mosman auction record with the sale of 30 Plunkett Road, Mosman for $16.3 million (at which and interestingly, Charter Hall CEO, David Harrison was an under bidder)

– per ABS statistics published on 2 and 6 December 2022:

~   seasonally adjusted new loan commitments for housing down just 2.7% in October and 1.4% in trend terms for business property purchases

~   drops of just 7% in the median prices of Sydney detached and attached dwellings in the 12 months to 30 September 2022 (following 36% and 10% increases respectively in the preceding 12 months)

– per the 30 November 2022 CoreLogic Home Value Index:

~    “Sydney remains the only city where housing values have fallen by more than 10% from their peak.  Through the upswing, Sydney values increased by 27.7% before peaking in January. Despite the sharp fall in values through the downturn to-date (-11.4%), Sydney home values remain 10.3% above pre-COVID levels (March 2020)” and according to CoreLogic’s Tim Lawless:

~    [t]hree months ago, Sydney housing values were falling at the monthly rate of -2.3% [which] has now reduced by a full percentage point to a decline of -1.3% in November.”

–  per “Christopher’s Housing Boom and Bust Report 2023” released by SQM on 29 November 2022, “[a]s 2022 draws to a close, there have been signals that Sydney’s Eastern Suburbs has entered into this recovery, particularly for free-standing houses. It is also noted, that on SQM’s leading indicators, there has been a moderate rise in the Auction clearance rate for Sydney, particularly for Sydney’s Eastern suburbs. SQM’s forecast for Sydney is for dwelling prices to rise by five to nine per cent [based on these scenarios]:

• And for perhaps the most important of these subtle differences: a change in the wording of the RBA Governor Dr Lowe’s forward guidance between his 1 November 2022 and 6 December 2022 Statements (during which period on 28 November 2022, he ‘sort of’ apologised for having misled borrowers in 2021 into believing that rates would not rise before 2024).For the many keen watchers like us of the monthly forward guidance paragraph, this clearly deliberate change as highlighted in the next table suggests at least an openness to relaxing the tightening bias that has gripped the RBA for those eight months:

Looking through the 2023 windscreen

These are just some of the more important known unknowns that will influence Sydney’s property market in 2023:

• What will happen after the nine week pause between now and the next RBA Board meeting on 7 February 2023?

Although an annual occurrence, this particular pause is of unique significance as it will allow the effects of what has been the steepest succession of interest rate rises in 32 years to be assessed.

By then:

– regulators will know more about the true inflation rate which and even before the recent national energy cap deal, many believe is already falling as it is in the United States and

– the national accounts will likely confirm both falling GDP and company profits partly due to rising wages.

Critically and having a direct bearing on property prices, will be a better understanding of consumer confidence measured by spending patterns this Christmas.

If the dismal results in the November 2023 Westpac-Melbourne Institute Confidence Survey are any guide, it is possible that the now (or so it says), ‘not on a pre-set course’ RBA may decide it has done enough and changes course by pausing rate rises. Maybe that explains the subtle forward guidance wording change discussed earlier?

• What will be the outcome of the independent review into the RBA due in late March 2023?

Rather than engaging with various rumours already swirling around this unprecedented and long overdue initiative of the fast moving reformist Albanese Federal government, we don’t speculate on what the review might find or on its implications for Dr Lowe’s tenure which comes up for renewal next year.

What we will say is that the review has the potential to alter drastically Australian interest rate settings by which its property markets are so directly and quickly affected given an historical Australian preference for variable rather than fixed interest rate loans.

• What impact will climate change have on the Sydney property market in 2023?

As this extract from an excellent Alan Kohler article in the New Daily on 5 December 2022 shows, the answer to that question could form part of the independent RBA review.

And again, few appreciate its potential impact on Australian property markets:

“In his most recent speech, RBA Governor Philip Lowe included a chart of the rapidly increasing extreme weather events, and said: “These climate events disrupt production and they affect prices … and it is likely that we will see more of these disruptions in the years ahead.”

But he didn’t then talk about what they plan to do about the “effect” on prices, and definitely did not mention any change to the inflation target.

But surely that is the obvious next step. When asked in the Q&A whether climate change could be added to the RBA’s charter, he replied: “I set the short-term interest rate, as much as I wish that could help solve climate change, it can’t. So I really struggle. Even if … it was added to our charter, what could it mean in practice?”

He said the RBA is spending a lot of time and resources understanding these things, but concluded that “we cannot do anything about it”.

And that is precisely the point.

Central banks can’t do anything about inflation that’s caused by climate change except crush demand with higher interest rates.

If anything, higher energy and food prices will do their own demand destruction so central banks will be forced to cut interest rates, not hike them, to preserve employment (which is actually in their charter, unlike climate change).

It’s going to become clear fairly soon that keeping inflation to 2 or 3 per cent is not compatible with a warming world, at least one that provides enough jobs.”

• What impact will those coming off fixed interest rates in 2023 have on the official cash rate?

About one third of all current mortgages are on fixed interest rates of which about two thirds of those expire in Q3 2023 when such borrowers could face a tripling or more of their monthly commitments.

Whether or not those borrowers fall off the mainstream media dubbed ‘cliff’ might be the first order of business for a perhaps by then radically re-structured RBA and its new Governor.

• What impact will the expected 2023 influx of migrants have on the Sydney property market?

Like climate change, this is another elephant in the room.

The Federal government is rushing through hundreds of thousands of visa applications which could see the workforce swell in 2023 with implications for property few are mentioning as this passage from the AFR on 2 November suggests:

“Despite the higher risk of mortgage distress, a large scale forced selling was unlikely” said Tim Lawless, CoreLogic research director.

“While there is likely to be upwards pressure on mortgage arrears, we aren’t expecting any material rise in forced sales unless there is blowout in the unemployment rate” he said.

“Although the labour markets are expected to loosen, it’s likely the unemployment rate will remain well below the decade average of 5.5 per cent. Along with further growth in wages, such tight labour market conditions should stage [sic] off any material rise in mortgage defaults.””

An influx of new workers and international students will both exacerbate already tight Sydney residential rental vacancy rates forcing up new rents and may also increase unemployment while suppressing the predicted wages growth on which the recent interest rate rises are predicated.

• What if Labor wins the NSW State election on 25 March 2023?

With a recent Labor win in Victoria, multiple NSW front bench defections, pre-selection issues and a delayed ICAC Report into the former Premier looming, the incumbent NSW State Government is, to the say the least, under electoral pressure.

If Labor wins, some already announced policies will have direct impacts on the Sydney property market including the repeal of the recent stamp duty reforms for first home buyers discussed earlier and scrapping the Beaches Link Tunnel which will influence the downward price pressures experienced this year on the northern beaches.

March 2023 could indeed be an interesting month.

Conclusion

We hope the above discussion provides a little context to help you navigate some of what lies ahead in 2023.

Lots of uncertainties and risk. But also plenty of property buying opportunities, especially if SQM’s Boom and Bust Report scenarios discussed above prove correct.

For expert assistance and to discuss further, please don’t hesitate to get in touch. The first consultation is free and we are open until 23 December 2022.

Otherwise and as this is our last Newsletter until February 2023, stay safe and we wish you all the best for the festive season.