NEWSLETTER

Monthly Sydney Property Insights

A core element of finding and buying premium properties for our clients is undertaking due diligence that gives a thorough insight into what is potentially being purchased – not only the nuts and bolts of the property, but also the myriad factors which come together to determine whether the property is right for our clients.

Just as we do this for individual properties, as Sydney buyers’ agents, we also apply this approach to the Sydney property market and its many micro markets allowing us a deeper understanding of opportunities and threats.

Over the next few months, we will share a series of Insights with you from this analysis of that market and those micro markets.

The Present:

Much of the current mainstream property commentary is highlighting the problems of a lack of supply, inflation fighting high interest rates, residential rents and construction costs, housing unaffordability and population growth from migration.

Whilst we agree this is all true, there are several influences at work including the two we discuss in this the first of our series of Sydney property Insights:

  • the newly elected NSW Minns minority Government
  • the RBA – both in terms of interest rates and its overhaul.

The NSW Minns minority Government

Only elected on 25 March 2023and in a largely unnoticed trend, this government with a minority in both houses, has already established itself as a property force with which Sydney buyers will need to reckon.

There have been several statements from the new Premier indicating his government will not be shying away from their promise to fix Sydney’s housing supply crisis.  The Premier is quoted in the Sydney Morning Herald on 15 May:

“We have to go up…. Sydney can’t grow by adding another street to the western fringe of Sydney every other week….[because] you have to stretch social infrastructure over a bigger and bigger plane”

The recently released NSW Productivity Commission report “Building more homes where people want to live” has given the Government further opportunity to strengthen its resolve, with one of the Commission’s main findings being Sydney’s housing supply crisis requires an increasing of density in suburbs near the CBD.

Already there has been pushback from Mayors (of all political stripes) from councils which would likely be affected by this change.  How hard and successful this pushback is remains to be seen. But at present the Minns government looks steadfast in its approach.

(And how that approach sits with the WFH/hybrid working model will also be interesting to watch. The rise and possible demise of that model will be the subject of a future Insight).

Other indicators that the Minns Government and its already dissenting cross bench may have major impacts on the NSW property market include:

  • removing the new First Home Buyers’ Stamp Duties Exemption Scheme with a broader range of stamp duty exemptions foreshadowed. These are likely the thin end of the wedge for broader stamp duty and land tax reform to replace lost stamp duty and poker machine revenue
  • the Beaches Link has now officially been placed “on hold” indefinitely – which will likely further suppress market activity on the northern beaches. Several infrastructure projects may follow that lead, including Metro West
  • scrapped is the potential Botany Bay cruise ship terminal and put back on the agenda is Garden Island. With this, the southern suburbs gain could become the eastern suburbs loss, owing to the risk of diesel bilging particulate ships that so badly polluted East Balmain when berthed at White Bay.
  • cross benchers may force cashless poker machines on Premier Minns which could see massive revaluations in the presently over heated NSW pub sector, in addition to the valuation pressure being experienced in less than premium grade retail, commercial office and some industrial markets. Those cross benchers have already flexed their muscle by forcing Premier Minns to climb down from an election promise to ban secret rent bidding.

The RBA and Interest rates

When discussing the present Sydney property market, it is of course impossible not to focus on the actions of (and plans for) the RBA.

It is important to note that all 51 recommendations of the “An RBA fit for the Future” report delivered on 31 March 2023 have received bipartisan support and will be implemented in 2024 (the Review)

The impact of this report on Sydney’s property market lies in the way and how frequently the official cash rate will be decided.

Instead of the current Board model, which some say is dominated by the current RBA Governor, the new model will involve the cash rate being determined by a newly formed board which will include six independent experts who “collectively, have a deep understanding of areas such as open-economy macroeconomics, the financial system, labour markets and the supply side of the economy” (RBA March 2023) and will subject the RBA’s Governor to greater oversight, with and controversially for insiders, the power to override the RBA’s representatives.

While future decisions of the new Board are ‘known unknowns’, that this new order is highly likely to be a game changer for the Sydney property market is a ‘known known.’

But that is the RBA of the future.

What about its current actions?

The RBA has increased the official cash rate 12 times in the past 14 months from 0.1 % to 4.1%. It is the fastest rates rise in the RBA’s history. The last time the official cash rate rose this much took over six years.

However, despite regular lifting of the official cash rate recent Sydney auction clearance rates and median house prices have both increased.

As May 2023 drew to a close, CoreLogic reported that the Sydney auction clearance rate sat at 74.7%. “[a]mid increased competition, auction clearance rates have trended higher, holding at 70% or above for the past three weeks.  For private treaty sales, homes are selling faster and with less vendor discounting” (CoreLogic 1 June 2023).

CoreLogic’s National Home Value Index also shows  a rise in Sydney home values of 1.8% for May 2023.   This continued the upward trend for the quarter, with home values having risen overall by 4.8% since the trough experienced in January. That said and as also noted by Core Logic: “Sydney home values are still 9.6% below the January 2022 peak”.

This apparent gravity defiance is even more pronounced at the top end where Sydney prestige property buyers above $4 million and trophy home buyers are largely unaffected by interest rates.

The low Aussie dollar is also seeing a gradual return of some expatriate and foreign buyers who, with many resident buyers, are willing and able to pay premium prices but only for quality properties.

According to Knight Frank on 25 May 2023 “[t]he most recently released data from Knight Frank’s The Wealth Report 2023 also found Australia’s wealthy populations are forecast for significant growth over the next five years….It found the number of high-net-worth individuals (HNWIs) – defined as those with a net wealth of more than US$1 million – was set to grow by 71.1 per cent between 2022 and 2027 in Australia…Meanwhile, the number of UHNWIs in Australia – defined as those with a net wealth of more than US$30 million – is set to grow by 40.9 per cent over the next five years”…

Does this apparent disconnect between buyer exuberance and a rising official cash rate mean the Reserve Bank’s official cash rate decisions no longer matter?

No and for several reasons.

Part of the disconnect is because we are in a transitioning part of the property market cycle where there are more Sydney property buyers than sellers and even signs of FOMO amongst some buyer cohorts.

Why so few sellers?

There are several reasons for this including:

  • doom saying mainstream commentary that has conditioned many sellers to believe this is a bad time to sell
  • few distressed sellers as a result of low unemployment
  • still high levels of mortgage pre payments
  • some owners still on fixed interest rates until at least December 2023 but also beyond that are much lower than the current variable rates (which will be another one of our future Insights) and
  • re-financing in what, until recently, was a competitive lenders’ market (which also helped fuel some buyer exuberance).

As a result, listings are significantly down in Sydney.

Urban Developer reports that in April the number of houses making it to auction in Sydney was lower than the same time in 2022 by 18.4%.

This trend continued into May with CoreLogic’s Home Value Index of 1 June reporting:

“Advertised listings trended lower through May with roughly 1800 fewer capital city homes advertised for sale relative to the end of April.  Inventory levels are -15.3% lower than they were at the same time last year and -24.4% below the previous five-year average for this time of year”

While it is a similar story off market, such properties still account for about 80% of the properties Curtis Associates has found and bought so far in this calendar year.

Why more buyers?

Amongst our buyer cohort, there have been two common themes:

First, most are in secure employment or in successful businesses and professional practices and with many either wholly or substantially cash buyers or just not affected by rising interest rate rises.

Second, ‘buyer burn out’ with the relentless stream of media commentary and data so head spinning it even confounds RBA boffins; a prime recent example of which being national accounts suggesting productivity growth is now the slowest on record.

However and as Shane Wright observed in the SMH on 7 June 2023 …”th[e] annual number relies heavily on a 3 per cent drop that occurred in the June quarter last year…Why did that happen? Hours worked slumped in the March quarter because of the floods that destroyed Lismore and inundated parts of Queensland…That’s terrible for productivity growth, but it’s not an accurate measure of real productivity” (emphasis ours).

Whatever.

A change could be coming:

In our opinion, these are some of the many signs that this part of the property cycle is close to ending which, when it does, will resuscitate the influence of changes in the official cash rate whether every four or six weeks as the Review recommended:

  • the ANZ-Roy Morgan Consumer Confidence index has spent 14 weeks below the 80 mark which has not happened since the 1990-91 recession. If that trend continues, there may well be an upward change in the unemployment rate which will bring the effects of rate rises sharply into play.
  • Roy Morgan’s research also “shows an estimated 1.38 million mortgage holders (27.8% of mortgage holders) were ‘At Risk’ of ‘mortgage stress’ in the three months to April 2023…[which]…is the highest number of mortgage holders considered ‘At Risk’ since there were over 1.4 million ‘At Risk’ in August 2008…[and] the highest for over a decade since October 2011 (28.3%).”
  • reports of reducing head counts at some banks, law and other professional services firms (and that’s without taking PWC into account!)
  • even investment bankers are feeling the pinch as happened (briefly) during the GFC. As Aaron Welnman reports in today’s AFR “[i]nvestment banking fees are on course for their worst first half showing in four years as the slump in deals takes a toll on bankers’ wallets… Even at Macquarie, its investment banking business logged a 47 per cent dip in global revenues in the 12 months to March 31…Macquarie Capital head Michael Silverton’s total remuneration was slashed to $10.6 million from $16.8 million a year earlier”…

We’re not alone:

According to SQM’s Louis Christopher: “[based on]research that was done with loan book managers back in November [2022]…the probabilities of a double dip downturn in the Australian housing market now move to higher than 60%…the price rises of this current quarter and the brief pause by the RBA back in April all spell the false dawn scenario…While our numbers on distressed listings today remain largely benign…we can now expect distressed activity to rise based on a new round of forced and panicky selling starting sometime the 2nd half of this year. This will particularly be the case if unemployment rises towards 5%. Naturally, the higher the unemployment rate, the more forced selling we will see. So, in our view, market participants need to be prepared for a new round of housing price falls starting in the second half of 2023. The price falls may not immediately occur, but the expectation is the spring selling season will be a tough one for sellers.

Buyers need to be very cautious in this environment, especially for regional areas which were already weakening…As a potential buyer, spending some time on the sidelines, researching the market, isn’t a bad idea, right now.”

However and wisely, Louis Christopher adds:

“No one knows the future and I have been wrong in the past indeed I’m partially wrong now as I expected the RBA to peak the cash rate at no more than 4%.

For now, I will hold off on providing a 2024 forecast”…

Louis Christopher is also right to say …”there are too many X factors at play including an emergency rate cut if the RBA realizes they have risen too hard”…

Our final thought this month for Sydney property buyers:

In all phases of every property cycle, the many micro markets never move in unison with the macro market and as volatile as this macro market might seem, it is a far cry from 1990 and 2008.

Our future Insights will include:

  • WFH/hybrid working – game changer or fad?
  • Mortgage cliff in Q3 2023 – Armageddon or not?
  • Artificial Intelligence, Proptech and ChatGPT in the property world
  • Sanitised strata records – combustible cladding – a case study
  • The future of car parking.

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