Good riddance 2008. Market wrap and 2009 Sydney property market predictions

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.