Property market update: Sydney, March 2020

La Trobe Financial anticipates that the economic effects of the virus will continue to be seen into the second and third quarter of 2020, while the GDP will see a hit of up to 6.5 per cent.

However, looking further into the future, senior vice-president and chief investment officer of La Trobe Financial Chris Andrews noted that the housing market will ultimately experience a “sharp rebound” once the lockdown measures are relaxed.

After all, according to him, history has already proven the immense resilience of the Australian housing market, particularly following the global financial crisis in 2008 and the 2017–2019.

“In both cases, there was an initial drop of around 10 per cent, [where] the largest peak-to-trough observation in that period was Sydney in the 2017–19 period at 14.9 per cent retracement.

“In both cases, that was followed by a sharp rebound, as more normal market conditions re-emerged… So, that is a really good baseline for our thinking around the house prices,” Mr Andrews highlighted

Financial estimates show that housing sales activity will “slow dramatically” throughout the month of April and beyond, but housing sales prices through the next six months are “not likely to be representative or particularly useful”.

“Fundamentally, house prices tend to be less volatile than equity markets because, of course, housing is not just an investment, it’s also an instant essential consumption item,” Mr Andrews said.

“And our financial system is strong, as Goldman Sachs pointed out.”

While it seems counterintuitive, PRD Real Estate encouraged investors to buy in property now following the Reserve Bank of Australia’s cutting the cash rate in March 2020.

According to them, vacancy rates in both Sydney and Melbourne continue to decline, from 3.6 per cent and 2.5 per cent in December 2019 tom 2.9 per cent and 1.9 per cent in February 2020, respectively.

“These figures are both under the Real Estate Institute of Australia’s healthy benchmark of 3.0 per cent and a declining trend suggests healthier rental demand.

“Presently, data shows that investor confidence in capital cities should not waver as there is a healthier vacancy rate in both Sydney and Melbourne. Despite the decline in unique listings in the short-term rental market, which may suggest the property has been added to the long-term market instead, there does not appear to be any severe effects on the long-term market.”

Overall, it’s business as usual in the Sydney property market, Buyer’s Domain’s director Nick Viner said.

Despite uncertainties, areas like Lower North Shore, Eastern Suburbs and Inner West saw little sign that activity has been dramatically hit.

Moreover, clearance rates and inspections are showing that the Sydney property market remains as popular as ever, with some local buyers reading the market as an opportunity and property as a more stable wealth-creation vehicle.

“My overall feel is that the resilience of Sydney property has come to the fore,” according to Mr Viner.

“Real estate is not Qantas, it’s not Fight Centre and it’s not retail. Property is going to perform as per usual, which is a lot better than average over the long term.”

Once things return to normal, Mr Viner expects them to “return in a big way.”

Property values

CoreLogic said that low interest rates and mortgage repayment relief measures could cushion residential property prices from a looming “plunge” in housing market activity amid the ongoing COVID-19 crisis.

CoreLogic’s latest Hedonic Home Value Index reported a 0.7 per cent rise in national home values in March, driven by a 0.7 per cent increase in combined capital city values and a 0.6 per cent increase in combined regional values.

Darwin recorded the sharpest monthly increase in dwelling values (2 per cent), followed by Sydney (1.1 per cent), Brisbane and Canberra (0.6 per cent), Perth (0.5 per cent), Melbourne (0.4 per cent) and Adelaide (0.3 per cent).

Hobart was the only capital city to record negative price growth in March, with values down 0.2 per cent.

Over the quarter, Sydney had the highest growth over the quarter with values up 3.9 per cent, followed by Melbourne at 2.9 per cent and Canberra at 1.7 per cent.

The lowest quarterly gain was in Darwin and Adelaide, each increasing 0.6 per cent; a similar story occurred across the regional areas of each state with values higher over the month and quarter.

The national improvement in March continues a long-term trend of price growth following a wave of political, economic and regulatory developments in mid-2019.

However, the trend has been severely impacted by the economic fallout from the coronavirus (COVID-19) outbreak, which is expected to trigger a “plunge” in housing market activity, according to CoreLogic’s head of research Tim Lawless.

Mr Lawless expects the number of residential property sales to fall dramatically over the coming months as a consequence of tanking consumer confidence, a rising jobless rate and more cautious lending practices, as well as a slowdown in buyer activity as a result of restrictions on open homes and on-site auctions and any future policy announcements relating to peripheral services such as building and pest inspections, conveyancing and furniture removals.

The reversal in sentiment has prompted some analysts to forecast price declines of up to 15 per cent against an unemployment rate of 10 per cent (currently 5.1 per cent).

However, while much will depend on the length of the current crisis, Mr Lawless said that the conditions underpinning the mortgage market, including low interest rates and the repayment relief arrangements recently announced by lenders, would partly shield housing values from the looming “plunge” in sales activity.

“Considering the temporary nature of this crisis, along with unprecedented levels of government stimulus, leniency from lenders for distressed borrowers and record-low interest rates, housing values are likely to be more insulated than sales activity,” Mr Lawless said.

“Although Australia’s housing markets have begun to enter a period of disruption, they are coming from strong foundations.”

Meanwhile, results released in CoreLogic’s Pain and Gain Report show that national rents were 0.5 of a percentage point higher over the month of January 2020, with a median rental value of $440 a week.

This is the highest increase in rental income since January 2018, signalling the lowering of new stock available is favouring investors.

The report found Sydney remains Australia’s most expensive city to live in, with the median dwelling rental value in January 2020 being $574 per week. However, this is lower than a year ago when the median cost to renters was $582 per week.

Median rents in Canberra came in second, falling just $18 per week below Sydney, with Hobart coming in third place with median rental returns of $470 per week, and Melbourne coming in fourth place with rental returns of $458 per week.

Meanwhile, Brisbane will return investors $440 per week, while Australia’s cheapest city to rent Perth showed a median cost of $390 per week.

Supply and demand

CoreLogic found that preliminary auction clearance rates were 70.6 per cent for the week concluding Sunday 15 March, as 2,220 homes were taken to auction for the combined capital cities.

While uncertainty is rising and confidence is slipping as the coronavirus outbreak becomes more widespread, early auction results—with high volumes of sales and strong clearance rates—show that the housing market remains relatively resilient so far.

There were 749 auctions held in Sydney during the said week, returning a preliminary clearance rate of 74.6 per cent. In comparison, there were 830 auctions held over the previous week and the final auction clearance rate was 75.2 per cent.

In Melbourne, a preliminary auction clearance rate of 70.1 per cent was recorded across 1,173 auctions this week, while last week there were 418 auctions returning a final clearance rate of 66.1 per cent. Brisbane held 102 auctions, with a preliminary clearance rate of 51.7 per cent, while Adelaide had 99 auctions with 68.4 being sold.

Perth had 28 auctions with 57.1 per cent being sold, while the nation’s capital had a preliminary clearance rate of 69.4 per cent.

The strong gains in Tasmania look set to continue, with lower volumes again leading to a high clearance rate of 83.3 per cent.

Meanwhile, recent HIA data outlines that we are now entering the lowest level of approvals and construction that Australia has seen for over 10 years nationally.

Considering how long it takes to build new estates or large apartment complexes, experts are anticipating a mass undersupply of most property in our capital cities in the next two to three years, and possibly for the coming five to seven years.

Further, Propertyology’s Simon Pressley said that, based on his analysis of official ABS figures, population growth in Australia is reaching near-GFC levels, with more people looking to settle in Australia than ever before.

New South Wales, in particular, saw an increase of around 100,000 people for the calendar year due to restrictions in overseas migration, according to Mr Pressley.

Ultimately, Australia’s economy may be headed towards recession, with negative GDP growth forecast for the March and June quarters as a result of the ongoing health crisis, but AMP Capital chief economist Shane Oliver said that a supply and demand imbalance in the housing market would help offset a coronavirus-induced decline in property prices.

In the longer term, experts are expecting economic conditions to rebound from the pandemic-related slowdown in the second half of 2020, after which the low interest rate setting, improving economic conditions, a rise in sentiment and a release of “pent-up demand” from buyers and sellers should “provide a more meaningful level of stimulus to the housing sector”.

Expert insights

While it still feels a little premature to think about how COVID-19 will affect the property market since the worst is yet to come, Piper Alderman’s partner Margot King believes that Australia will continue to thrive as different sectors move to find solid ground amid changing working landscapes.

Clearly, the current health crisis is having a significant effect on the way people live and work, albeit temporarily.

“As businesses implement continuity plans and direct employees to work from home, futurists and other commentators are predicting that this may accelerate the trend towards remote working and permanently shift working patterns,” Ms King said.

“So far, the office sector seems to have missed the structural changes driven by technology. Although over the last 20 or 30 years, companies have reduced space by adopting open plan and agile working, the overall growth in demand has seen low vacancy rates and high rent in the Sydney and Melbourne markets. Research to date has predicted this will continue for a while yet.”

If the predictions around changes in working life due to the ongoing health crisis prove to be true, Ms King expects an accelerated structural disruption in the office property market, primarily driven by technology.

“These impacts are yet to play out, and there are currently more immediate concerns. But in considering the overall economic picture, policymakers should consider the potential impacts that such a fundamental and sudden shift in working life might have,” she said.

Property investors are encouraged to have a longer-term outlook and avoid focusing too much on interest rates as “it’s not as big a driver as what people think,” according to Quay Global Investors principal and portfolio manager Chris Bedingfield.

Instead, long-term property investors must focus on the price of building if they are looking to note what is really growing prices.

Mr Bedingfield said: “In the long term, what really drives it is the cost to build. And so prices go above and below the cost of building.”

“If it costs $20,000 a square metre to build an apartment in 10 years’ time, I don’t care where interest rates are, prices are going to be around $20,000 a square metre apartment. They have to be. Otherwise, we’re not going to build again.”

Further, investors are also encouraged to pay attention to improving technologies, flexible workplaces and changing demographics, which are changing the property types that investors are looking for, according to a Herron Todd White report.

Sydney is undergoing a tremendous shift, with larger properties making way for smaller, low-maintenance properties—a change largely driven by markets form two ends of the spectrum: young professionals and new families and empty nesters and pre-retirees.

“Young professionals or new families tend to gravitate towards low-maintenance property to allow more time to focus on building careers, fostering a young family and, in many instances, a combination of both.”

“At the other end of the spectrum, empty nesters who are either retired or approaching retirement have moved towards this style of living to allow for a simpler life and more time to reap the benefits of their hard work,” the report noted.

Generally, smaller properties including residential units, duplexes, townhouses and semi-detached dwellings are becoming more desirable, especially if they are new designs.

The report found that both the Shire situated 20 kilometres outside the CBD and the Northern Beaches of Sydney are both experiencing major geographical changes.

“The Shire has been transforming over the past decade or so as there has been changing demographics, ageing and increasing population, and particular areas becoming gentrified for various reasons,” Herron Todd White’s report said.

“Northern Beaches, meanwhile, is experiencing a changing demographic through first home buyers, families and downsizers all entering the market.”

Hotspots

Propertyology found that 14 wine regions are set to perform spectacularly in terms of property price growth and rental returns, outperforming the Sydney CBD.

According to Mr Pressley, over the last 20 years, the 6.9 per cent average annual rate of capital growth for a Sydney house was inferior to the municipalities of Cessnock, Goulburn, Launceston, Macedon Ranges, Mornington Peninsulas, Mudgee, Shoalhaven, Yankalilla and Yarra Ranges. The 6.4 per cent average annual capital growth for Orange is similarly impressive.

“The property markets of these wine regions are also significantly less volatile than Sydney. While Sydney produced five calendar years of median house price declines during the last two decades, 12 out of these 14 wine regions saw price declines in only one to four years.”

In terms of rental markets and tenant demand, the wine regions also emerged as winners, with vacancy rates below 3 per cent.

On the other hand, Sydney’s 3.6 per cent vacancy rate equates to 26,415 dwellings, which is sufficient to accommodate the entire population of Griffith and Orange combined.

Moving forward, multifaceted economies, affordability and controlled housing supplies will be among the biggest factors fuelling demand in these wine regions.

Meanwhile, Property Investment Professionals of Australia (PIPA) and CoreLogic found that, over the next 10 years, the best-performing markets will be quite different.

“Just as they were over the earlier decade where, for example, mining regions and regional coastal markets were some of the strongest performing areas,” Mr Lawless said.

The city location with the highest annual capital growth in the nation over the past decade was Lakemba in the Canterbury region of Sydney, where prices have grown by 8.4 per cent annually, allowing the median house values to double and grow to about $881,000.

The second placer was also in Sydney, in the Oatlands-Dundas Valley region of Carlingford, where house values grew by an average 8.1 per cent each year over the past decade. Its median house value has soared from $662,000 to $1.41 million over the past decade, according to the data.