Property market update: Sydney, September 2020

For instance, the 2019 election, closely followed by the bushfires and then the pandemic, originally stalled many buyers.

“This retraction of the property market has essentially impacted the natural flow of the property life cycle due to the unprecedented times – but this means a boom is close,” she predicted.

“Take the recent sell-out Qantas Flight to nowhere, for example, Australians are hungry for the things they love most and property is one of them.”

As the dust settles and Australians start to reassess their situation, Ms Davies expects demand for property to rise back up in order to meet the oversupply in some areas and create buoyancy in the areas where property has been held on tightly to.

This prediction comes as auction clearance rates continue to rise across NSW and Victoria despite heavy lockdowns being in place.

“I believe there will be standout areas to watch over the next 12 months that will be exponentially impacted by government investment into infrastructure and sustained employment levels post-COVID-19, matched with an undersupply of new property, on the CBD fringe in our capital cities,” Ms Davies highlighted.

Among the pockets to watch are areas around the new Western Sydney Airport and Parramatta, as well as CBD fringe off-market opportunities in both Sydney and Melbourne for price growth.

Westpac chief economist Bill Evans supported this prediction, highlighting that low interest rates and availability of credit push prices up, despite the country being in its first recession in nearly three decades.

Having previously expected a 10 per cent slump between April 2020 and June 2021, Mr Evans now expects only a 5 per cent correction through to late 2021, with property investors experiencing short-term pain before seeing a surge in value over the next two years.

In fact, Sydney and Melbourne are already tipped to have strong growth, with a 14 and 12 per cent jump by 2023, supported by sustained low rates, ongoing support from regulators, improved affordability, sustained fiscal support from both federal and state governments and a strengthening economic recovery.

Still, despite this seemingly optimistic outlook, Mr Evans reminded investors that there are some risks associated with the upside, including the 5 per cent fall expected by mid-2021.

“This would see a cumulative increase in prices of 10 per cent from pre-COVID highs over a three-year period where interest rates and credit supply are likely to be at maximum levels of stimulus,” he said.

“Those upside risks are based on the psychology of markets. If participants are convinced about our views on the likely favourable conditions in the fourth stage of the cycle, they may choose to boost demand earlier than we currently expect, providing an even more robust defence against the headwinds we envisage in stages 2 and 3.”

Property values

COVID-induced housing market weakness across Australia’s capital cities triggered a $98 billion slide in the total value of residential dwellings, according to the Australian Bureau of Statistics’ (ABS) latest Residential Property Price Index.

Over the quarter, dwelling values across Australia’s eight capital cities fell 1.8 per cent, with Melbourne recording the sharpest quarterly decline (2.3 per cent), followed by Sydney (2.2 per cent), Darwin (1.4 per cent), Brisbane (0.9 per cent), Adelaide (0.8 per cent), Perth (0.7 per cent) and Hobart (0.4 per cent).

Canberra was the only capital city to record an increase in residential property prices over the June quarter, up 0.8 per cent.

As a result, the total value of Australia’s housing stock (10.5 million dwellings), fell by $98.2 billion to $7.1 trillion.

The ABS’ head of price statistics, Andrew Tomadini, attributed the quarterly decline to the ongoing impact of the COVID-19 crisis on overall transaction activity.

“The number of residential property transactions fell substantially in the eight capital cities during the June quarter 2020, due to the effects of COVID-19 on the property market,” he said.

Prices continued to fall over the first two months of the September quarter, with property research group CoreLogic reporting a cumulative decline in combined capital city values of 1.3 per cent in July (0.8 per cent) and August (0.5 per cent).

AMP Capital chief economist Shane Oliver agreed, adding that prices would continue to fall over the next six to 12 months.

“High unemployment, the collapse in immigration – which has reduced underlying dwelling demand by around 80,000 dwellings a year – and the depressed rental market will likely combine to drive weak housing demand and increased forced sales into next year,” Mr Oliver said.

“JobKeeper, increased JobSeeker, bank payment holidays and other support measures have so far helped head off a sharp collapse in prices, but the market has still weakened anyway in Melbourne and Sydney, and we expect further falls as support measures start to be tapered from the December quarter.” 

According to him, Sydney and Melbourne are the most vulnerable given their higher dependence on immigration, higher debt-to-income ratios, higher house price-to-income ratios, greater investor penetration and a possible preference shift away from expensive inner-city property.

Over the year, aspiring home owners in Sydney, Melbourne, Hobart, Brisbane and Canberra are likely to spend more time saving for a 20 per cent deposit with affordability pressures mounting, property group Domain’s latest First-Home Buyer Report has revealed.

Sydney remains the least affordable capital city as first home buyers (FHBs) require an average of six years and six months to purchase an entry-level house valued at $680,000 – an additional two months over the past year.

Following Sydney are Melbourne, Canberra, Brisbane and Hobart, with an average of four to six years required to secure a 20 per cent deposit for houses valued between $380,000 and $600,000.

The hit to housing affordability across the aforementioned capitals has coincided with annual price increases, which were slightly offset by downward pressures experienced off the back of the COVID-19 crisis.

Canberra reported the sharpest annual house price growth (6.6 per cent), followed by Hobart (6.4 per cent), Melbourne (2.9 per cent), Sydney (2.6 per cent) and Brisbane (1.9 per cent).

On the other hand, some capitals recorded improvements in housing affordability over the past year, including Darwin, Perth and Adelaide.

This coincided with house price declines of 2.6 per cent in Darwin over the past year, and 2.4 per cent in Perth, while remaining flat in Adelaide.

According to Domain’s senior research analyst Dr Nicola Powell, affordability pressures are set to improve nationwide over the coming months as FHBs reap the benefits of state and federal government incentives, including the First Home Loan Deposit Scheme and the $688 million HomeBuilder scheme.

“Although the majority of capital cities saw the journey to home ownership become a little longer compared to the same time last year, weakening prices will eventually translate to improved affordability,” she said.

“Buying conditions have improved, first home buyers appear to be taking advantage of low interest rates, retreating investor activity, reduced foreign buyer interest, the extension of the federal government’s First Home Loan Deposit Scheme and other state-based incentives.”

The latest Lending Indicators data from the Australian Bureau of Statistics revealed that the value of FHB loan approvals surged 10.6 per cent in July to $4.2 billion, contributing to a 10.7 per cent spike in owner-occupied approvals to $14.3 billion.

Rental market

Landlords have been inclined to hold rental rates steady despite the COVID-19 pandemic seeing rising unemployment as government benefits continue to support the Australian economy, according to CoreLogic research.

CoreLogic’s head of research Eliza Owen said that rental yields have fallen nationally by 0.8 per cent, with JobKeeper and JobSeeker seeing a rise in income for many Australians.

While rental conditions have held firm over the past few months, Ms Owens noted that many renters have been seeking to reduce the rate.

“Almost a third of real estate professionals had seen an increase in requests for rent reductions, over a quarter had seen an increase in rental delinquencies, and 8.8 per cent had noted an increase in evictions,” Ms Owen said.

However, the rate of delinquencies has fallen since March, with the market normalising and government support continues to support landlords.

Instead of having delinquent payments, renters are more likely to terminate their lease early, the research showed.

Sydney and Melbourne remain the hardest-hit areas for landlords, with Sydney and Melbourne unit markets having seen rent reductions of 4.2 and 4.4 per cent, respectively.

In terms of vacancy, new figures released by the Real Estate Institute of NSW from the latest Vacancy Rate Survey suggest that the worst may be over.

Survey results show that vacancies across Sydney decreased for the first time in August, after five consecutive months of increases. Vacancy rate now sits at 3.7 per cent.

Similarly, vacancies in the inner, middle and outer rings of Sydney all recorded easing rates, with drops of 0.6 per cent, 0.8 per cent and 1.9 per cent, respectively.

“The Sydney market is showing the first signs of a turnaround,” REINSW CEO Tim McKibbin said. “But even with these drops, vacancies across Sydney are still markedly higher than they were at the start of the year.”

Further, the figures indicate slight easing in other NSW regions, particularly Newcastle and Wollongong.

The Central Coast, Northern Rivers, Orana and Riverina regions were the only areas to record an increase in vacancies over the last month.

Moving forward, the COVID-19 pandemic may be making way for a “two-speed rental market”, with suburbs closer to the city likely to experience greater rental falls, with inner-city property rentals more likely to fall compared with outer suburbs, according to data collated by CoreLogic.

Ms Owen believes that several factors of the COVID-19 downturn have made inner-city rental markets more vulnerable to a market correction, including the relatively high exposure to overseas migration as a source of housing demand.

CoreLogic data showed that, for SA3 regions (areas with populations of between 30,000 and 130,000 people; over 20,000 in regional areas) where the typical property is less than 10 kilometres from the CBD, the average decline in house rents was 2.3 per cent, while unit rents slumped by 3.6 per cent.

For rental markets 10 kilometres or further from the CBD, however, house rents had actually increased by 0.1 per cent, while unit rents declined by only 0.4 per cent.

Ms Owen observed that when studying the capital cities and housing stock separately, the strongest relationship was evident between rent changes in Sydney units and distance to the CBD.

“These two variables have a correlation coefficient of 0.8, suggesting that the closer a property was to the CBD, the more likely and steep rental declines have been through the pandemic,” she explained.

Supply and demand

Sydney’s monthly clearance rate reached its highest results since pre-pandemic levels at 59.7 per cent, according to Domain.

Dr Powell highlighted that, despite the figures being 11.2 percentage points lower than in August 2019, they have remained in the high 50s for four consecutive months, showcasing the capital city’s resilience.

“The true test of buyer demand has been the rapid rise of homes auctioned,” Dr Powell said.

“The ban on public auctions as part of social distancing measures to slow the spread of COVID-19 resulted in a spike of withdrawn auctions over March and April, bouncing to record-high levels. Removing all of the withdrawn auctions from the scheduled auction count reveals that from March through to August, the total number of homes going to auction has remained relatively the same compared to the same six months last year, down a marginal 2.1 per cent.

“This highlights the fact that, while the most recent months have seen a huge uplift in homes auctioned, when averaged out across the six months, they have remained similar.”

Another positive sign for Sydney is that sellers are finding buyers before auction, according to Dr Powell.

Based on the decade average, roughly one-quarter of homes find a buyer before the auction hammer falls. This trend has risen in recent months and is currently at 26 per cent.

“For some areas it could signal that the buyer pool is not deep enough for a competitive auction, or vendors are being attracted to a quick sale given the changing health and economic outlook, or it could be a new hybrid method of selling that hinges on a strong auction marketing campaign sealing a quicker sale,” Dr Powell explained.

At the moment, houses are currently outperforming units in the harbour city, with house clearance rate recorded at 62.5 per cent, the highest since February.

Units, meanwhile, saw a clearance rate of 53.3 per cent, a 17.2 decline from figures last year.

“Historically, units tend to produce higher monthly clearance rates compared to houses, but in recent months, it has been the reverse. Houses have outperformed units for three consecutive months and the divergence appears to be accelerating,” Dr Powell highlighted.

“The difference in clearance rates has nudged further apart, with houses 9.2 percentage points higher than units. This is the steepest difference favouring houses in more than two decades, excluding the month of January.”

The COVID-19 pandemic has seen a change in consumer preferences, with outer suburban areas possibly becoming the big winner this spring selling season, according to Domain.

Domain’s Buyer Demand Indicator has revealed that both houses and apartments in the outer suburbs of Sydney, Melbourne, Brisbane and Perth were the most demanded properties for these capital cities for the month up to 6 September.

The research showed that consumers are starting to adapt to the new norm, with working from home making living near the office less crucial in capital regions.

According to Dr Powell: “The current health crisis has changed the way we use our homes, and for some altered our purchasing decisions and property wish lists. While COVID-19 lockdowns sent buyer demand into a state of hiatus, activity from people likely to buy has rebounded in all capital cities apart from Melbourne.”

2020 outlook

Binnari Property’s head of research and acquisition Dominic Cavanigno recognised the extreme effect of the COVID-19 outbreak, particularly in Victoria and NSW, but like most experts, he believes that these states, along with the rest of Australia, are well on its way towards recovery.

According to him, further lockdowns would have less of an impact than expected despite the worries that came with the announcement of a second lockdown in Victoria.

“The prospect of further lockdowns around the country would have a significant impact on local businesses and the economy; however, what we do know is that the property markets withstood these significant disruptions in the past. The property market has remained surprisingly resilient despite lockdowns,” Mr Cavanigno said.

Moving forward, demand for housing will remain, ultimately maintaining stability in the residential property market even through tough economic times.

Returning expats will counter slowed migration in the short-term, remedying the declined housing demand seen by major property markets over the past months.

According to Mr Cavanigno: “The Australian Bureau of Statistics (ABS) forecasts that new overseas migration over the 2020 decade will be at 174,800 per annum. Over the past decade, net overseas migration averaged 215,706 per annum.”

“Countering the more subdued migration levels in the short term, though, is the return of thousands of Australian expats. Daily arrivals of returning Australians are limited to 4,000 per week.

“The widespread concern about this number indicates just how strong the desire is to come home and the number of people who are headed home. These numbers will help to replace the slowing levels of overseas migration. In addition, the government recently announced the extension of temporary visas for Hong Kong residents, who could see relocating to Australia as an attractive proposition.”

While there remains a possibility of seeing a dip in migration over the coming months, Australia’s response to the pandemic will make it an attractive destination for migrants seeking safety and security.

Ultimately, Mr Cavanigno expects the Australian property market to remain stable moving forward.

“It is important to note, though, that there will always be markets that perform better or worse than others – this can even include suburbs within the same city. As an example, from a rental perspective, suburbs with large quantities of Airbnb’s or short-term holiday rentals have seen many of these converted into traditional rental properties. This increase in rental supply has led to falls in rental asking prices and slight rises in vacancies,” he said.

“A great example of this is Sydney’s eastern suburbs where vacancy rates jumped from 2.5 per cent in February 2020 to 5.2 per cent in June 2020. In comparison, the Liverpool region has not been impacted by the lack of tourism and has seen vacancy rates unchanged at 2.7 per cent over the period.”

In terms of property prices, as markets soften, suburbs with higher levels of supply and a high portion of investors will likely see more significant price falls, Mr Cavanigno explained.

“Overall, however, investors can be confident that the property market is resilient. We’re not likely to see steep price falls, and certainly not in the long term,” he concluded.

Hotspots

Domain’s Buyer Demand Indicator showed that buyer demand has become elevated across all cities compared with last year, apart from Melbourne.

In fact, interest in Sydney real estate has remained strong despite the Australian economy being flung into a pandemic-induced recession, the first economic contraction in roughly three decades, according to Dr Powell.

Sydney’s Buyer Demand Indicator has hit a new peak for houses and units, the highest point since it began in October 2017.

Over the four weeks to 6 September, buyer demand for houses increased 9.5 per cent, which is the steepest four-week gain since the post-lockdown double-digit rebound in May.

For units, the indicator rose 4.5 per cent over the four weeks to 6 September.

Dr Powell noted that houses are the most in-demand property type in the Sydney market by far, with 89 per cent of investors more likely to buy these as opposed to units.

“While both property types have seen a significant uplift in buy intent behaviour from property hunters, with the indicator reaching new heights, the pace of growth for houses has been greater relative to units,” Dr Powell explained.

“The current health crisis has changed the way we use our homes, and for some it has altered purchasing decisions and property wish lists.

“The pandemic has forced digital transformation of businesses, making working from home the new norm. Many Sydneysiders will continue to work from home or go to the office on a part-time basis, making the distance between our homes and work less crucial.”

According to Domain’s Buyer Demand Indicator, the top 10 suburbs/areas for investors looking to purchase houses are:

1. Hawkesbury
2. Rouse Hill - McGraths Hill
3. Wollondilly
4. Hornsby
5. Dural-Wisemans Ferry
6. Canada Bay
7. Botany
8. Auburn
9. Camden
10: Bringelly - Green Valley

In terms of units, the top 10 suburbs/areas are:

1. Rouse Hill - McGraths Hill
2. Pennant Hills - Epping
3. Marrickville - Sydenham - Petersham
4. Eastern suburbs - south
5. Warringah
6. Botany
7. Sutherland - Menai - Heathcote
8. Leichhardt
9. Auburn
10. Manly

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