Sydney’s residential property market – has spring already sprung or is this a false dawn?

August 26th, 2009

The past

nucleus

As one of the most hectic winter selling seasons in parts of the Sydney residential property market draws to a close, it is appropriate to reflect on the turbulent trends since the September 2008 collapse of Lehman Brothers in an attempt to predict the likely trends in the Sydney property market leading up to the 2009 spring / summer selling seasons.

The four key electrons orbiting the nucleus that is the Sydney property market since September 2008 have been:

  • fear
  • government stimulus packages
  • lowest interest rates in history
  • chronic shortage of supply in all price brackets.

The effects of the first electron – fear – has mostly been at the top end with transactions in the prestige property market (defined as sales over $2 million) having tapered off in the past six weeks. With a relative handful of forced sales out of the way, it seems that surviving owners of prestige real estate have decided to shed lifestyle assets and to retain quality real estate closer to the City.

Whilst some property reports including the Knight Frank global house price index have suggested that prices in the Sydney prestige residential market had fallen, the reality is that there have not been enough transactions to pick an accurate trend.

The second electron – government stimulus packages – refers to the first home owners’ grant scheme which has driven frenetic activity in the $500,000 to $1 million price bracket that is only now showing signs of easing. The effects of the first home owners’ grant have primarily been in the secondary market rather than the new home market.

It is in the $500,000 and up to $2 million bracket where evidence of the global economy stabilising, China’s strong growth, rebounding stock markets, rising levels of confidence and deceptively resilient local employment rates have all combined to create the appearance of a buoyant property housing market in Sydney.

Prices in this bracket have inevitably risen over the quarter ended 30 June 2009. For those at the coalface such as Curtis Associates, the anecdotal evidence in relation to high quality properties is consistent with the price figures released by the Australian Bureau of Statistics on 4 August 2009 showing that Sydney house prices rose 4.9% for the quarter ended 30 June 2009 which represented their best performance since September 2003.

The third electron has been historically low interest rates. Throughout the past winter, Sydney property buyers in the $500,000 to $2 million bracket with secure employment seem almost to have forgotten that the low interest rates are an historical aberration. Many of those buyers have fought through layers of red tape, pre- settlement valuations, other tightening credit standards and overworked mortgage brokers to increase their borrowing limits. As a result, the number of loans for owner occupied housing has risen by more than 32% since September 2008. The high auction clearance rates reported in the media are mainly in this bracket.

Time will tell if this upbeat news in that bracket proves to have been a false dawn.

The fourth electron has been a chronic shortage of supply at all levels and in particular below $2 million. Here again, quality stock is in short supply especially in the inner city suburbs as owners cling to the safe haven of quality real estate. The main source of supply has been deceased estates and those trading up.

What to expect

In our view, over the forthcoming spring, rising interest rates (caused in part by major lenders having to raise mortgage rates to cover higher funding costs which in turn, is caused by Australians spending more than they save) and the shortage of supply will prove to be the most influential of the electrons discussed above.

Fear and government stimulus packages are likely to recede as energetic electrons.

Buyers remain nervous about interest rates. And with good reason given this statement by the Governor of the Reserve Bank of Australia on 4 August 2009:

“The present accommodative setting of monetary policy is appropriate given the economy’s circumstances.”

That remark has been widely interpreted by commentators and the foreign exchange markets as meaning that the next movement in Australian interest rates is up.

Any downward effect on Sydney house prices caused by falling demand in response to rising interest rates and reduced government stimulus packages should continue to be offset by the underlying short supply of quality housing stock in the secondary market. Whether investors and in particular, self funded retirees, contribute to that demand will also depend to an extent on the strength of the share market’s recovery.

Unemployment is the dormant electron. Whilst advertised job vacancies in the last quarter have been robust and unemployment levels defy earlier dire forecasts, the devil is in the detail. Those statistics disguise the level of under-employment in the economy as employers choose to share work rather than shed employees.

Local infrastructure upgrades is the other sleepy electron likely to influence house prices in certain parts of Sydney. One of the best examples of this is Green Square where an additional 2500 dwellings are due to be built with supporting commercial premises. The tension between this development and the wishes of others such as supermarket operators wanting to develop around Green Square has already spawned substantial litigation.

Other examples which, in our view, are likely to have an adverse effect on values in Rozelle, Balmain, Birchgrove and Lilyfield are the absurd NSW State Government plans for the CBD Metro, White Bay Overseas Shipping Terminal and Iron Cove Bridge widening. If you think the Anzac Bridge is congested now, just wait until those projects are completed.

Regulators may also emerge as another and significant electron. This will include Commonwealth legislation relating to under-quoting by selling agents which, as the principal of Curtis Associates has commented elsewhere, (SMH news article) will hopefully lead to a more efficient and less wasteful real estate market.

Finally, there is the recent threat, denied by the Federal Treasurer, of a capital gains tax on family homes that sell for more than $2 million. If this were to occur, the effects are likely to extend well beyond the Sydney property market: a similar scare in 1980 was enough to stop a change of Government in that year’s Federal election!