YOU can’t blame people for being confused.
One minute we are told there is an apartment glut and house prices could crash any minute. The next, our leaders are calling for negative gearing changes that will push prices down even further. So are we headed for housing armageddon or not?
PRICES ARE TOO HIGH …
Housing prices have been rising for over a decade and warnings about a property bubble have been brewing for years.
One of the latest warnings came last month from property analyst Louis Christopher, of SQM Research, who said the national property market was overvalued by 22 per cent.
This is being driven by prices in Melbourne, which hit its highest overvaluation level of 40 per cent and Sydney, which was at its second highest level of overvaluation at 40 per cent.
Mr Christopher warned that if changes weren’t made, such as lifting interest rates or tougher restrictions on home lending, prices in Sydney and Melbourne would continue to rise by up to 16 per cent in 2017.
“However it is likely 2017 will be the last year of price falls generated by the mining downturn for these cities,’’ he said.
Mr Christopher said if interest rates were cut again, prices would rise even further, paving the way for a possible correction in 2018.
BUT THERE’S AN APARTMENT GLUT COMING …
At the opposite end of the spectrum, there are fears that construction of new apartments will lead to an oversupply in the next few years.
The construction boom already seems to be impacting Melbourne apartment prices, where there’s been record levels of building in the last two years.
On Thursday, Corelogic’s November Hedonic Home Value Index showed Melbourne dwelling prices had fallen by 1.5 per cent.
Head of research Tim Lawless attributed this to new units coming on to the market. Prices for units fell by 3.2 per cent last month.
Overall, prices for Melbourne units have only grown by 3.9 per cent this year, compared to 12.2 per cent for houses.
But this is where things get really interesting for Sydney.
While Sydney unit prices are not increasing as fast as those for houses, they are still rising.
In November, unit prices increased by 0.9 per cent, which was actually slightly higher than 0.8 increase achieved by houses.
Across the year, unit prices grew by 10.6 per cent compared to 15.3 per cent for houses.
Earlier this year BIS Shrapnel released a report that predicted Melbourne would have an oversupply of more than 20,000 homes by 2017, but managing director Robert Mellor said Sydney was still suffering from an undersupply of housing.
“It’s so severe we won’t see an oversupply in Sydney in the next four years,” Mr Mellor said at the time.
“A downturn in Sydney between 2004 and 2012 was so severe, basically only in the last 12 months we’ve started to see construction move above the level of demand.”
SYDNEY IS DIFFERENT
Prices in Sydney have outstripped those in other areas and it remains Australia’s most expensive city, with a median dwelling price of $845,000, according to the latest statistics released by Corelogic.
Since 2009 dwelling prices in Sydney have risen by a staggering 96 per cent, Corelogic head of research Tim Lawless told news.com.au.
Melbourne is not that far off, with growth of 78 per cent, but the next best performing market after that was Canberra, which has only seen growth of 33 per cent.
The difference was even more stark in Perth, which only grew by 6.5 per cent, and Hobart on 4.5 per cent.
Mr Lawless said Sydney’s astronomical growth had been achieved against the backdrop of record low wages growth of about 2 per cent.
“So the byproduct of strong capital gains (for housing) and relatively low income growth is that affordability is becoming stretched,” he said.
One way of measuring housing affordability is to look at the dwelling price to income ratio.
In Sydney this ratio is 8.4, which means it takes 8.4 times the typical household salary to buy the typical Sydney dwelling.
If you look at houses only, this ratio is closer to 10, while for apartments it is 7.1.
These figures are still higher than in other cities.
Melbourne has a ratio of 7.2 for dwellings, while Brisbane’s ratio is 5.7.
“It highlights that Sydney is becoming increasing unaffordable,” Mr Lawless said.
However, Mr Lawless said there was some confusion in the market because the measure of “serviceability”, the proportion of household income that goes towards paying a mortgage, which has been really flat because of record low interest rates.
“This hides the fact that dwelling prices have risen at a substantially higher rate than incomes in Sydney and to a lesser extent, in Melbourne.”
A TARGET FOR INVESTORS
All the analysts seem to agree on one thing — the Sydney real estate market is different and property prices in other areas are not growing as strongly.
This may be why NSW Planning Minister Rob Stokes, called for reform of negative gearing this week.
His comments were later backed by NSW Premier Mike Baird, who said changes should be considered. But this is in direct conflict with Liberal Party policy.
During the election Prime Minister Malcolm Turnbull said the coalition would not change the measures, and warned Labor’s policy to reform negative gearing and the capital gains tax discount would lead to price falls. Estimates have ranged from between two per cent to as high as six per cent.
Mr Turnbull pointed to the need to increase housing supply to improve affordability.
But in his speech, Mr Stokes said supply alone wouldn’t solve Sydney’s housing affordability problem.
The state is currently building 185,000 homes over the next five years to try and address an undersupply of close to 100,000 homes in NSW.
But with interest rates at record lows and generous federal tax incentives, Mr Stokes said Sydney had become a prime target for investors.
Property investors can use negative gearing to reduce the tax they pay if they make a loss, for example if the rent they collect is less than their mortgage repayments.
Once they sell the property, they only pay tax on half of the profit because of the capital gains tax discount.
Mr Lawless said statistics showed investors currently made up more than half the demand for mortgages in NSW.
States are now trying to wind back incentives for investors.
This year NSW introduced higher taxes on foreign investors buying residential property, following in the footsteps of Victoria and Queensland.
HOUSING MARKET IS STILL HOT
AMP chief economist Shane Oliver said NSW must think there’s still some extra capacity in the property market as the state planning minister probably wouldn’t be talking about negative gearing if the market was weaker.
“They are probably thinking there is still room in the market as it’s not altogether clear that the market has peaked,” he told news.com.au. “They are probably thinking there’s a long way to go.
“I would be more cautious, I think a supply glut could hit next year,” he said.
However, if prices did fall, Mr Oliver said the market could still be propped up by two types of buyers.
Firstly, first home buyers may re-enter the market, especially if prices fell by 20 per cent and interest rates remained low.
Ironically foreign investors could also be lured by lower prices and move to snap up a bargain. Prices in Sydney are still reasonable compared to those overseas, especially because the Australian dollar is quite low at the moment.
Population growth in Sydney also remains strong and this would also cushion the market against a big fall. Mr Oliver said he didn’t think any price falls would go beyond 15-20 per cent.
“You wouldn’t be looking at a fall like what happened in the US or eurozone.”
SO SHOULD THEY CHANGE NEGATIVE GEARING?
By restarting the debate on negative gearing, NSW is basically trying to push some of the responsibility for fixing housing affordability back on the Federal Government.
While Mr Oliver believes supply is more connected to affordability, this doesn’t mean some changes shouldn’t be looked at — especially the capital gains tax discount.
“This is a bit of a distortion and that’s what makes negative gearing so profitable,” Mr Oliver said.
But Treasurer Scott Morrison did not seem to be taking the bait, and said on Friday that abolishing negative gearing would hit mum-and-dad investors in rental properties, pushing rents up and putting immense pressure on the market.
Another tricky thing about changing negative gearing and the capital gains tax discount, is that the measures would impact property markets around Australia, not just Sydney.
Meanwhile, Housing Industry Association chief executive Graham Wolfe pointed to the state taxes and levies charged on the sale of every new home.
“State-based stamp duty on the purchase of a typical new home alone adds a $91 per month burden on household mortgage repayments,” Mr Wolfe said.
Stamp duty is something the NSW Government could change to help first homebuyers but has left untouched.
In his speech, Mr Stokes said if states were to consider getting rid of inefficient state taxes, the Federal Government needed to outline how it would help states raise money for schools and hospitals to cater to a booming population.
Providing investors with generous tax breaks such as the capital gains tax discount, costs the Federal Government billions. In 2014/15, the CGT alone was estimated to have cost the federal Budget more than $6 billion.
And despite all the talk of housing bubbles, apartment gluts and falling rental prices, this hasn’t deterred investors.
ABS housing finance data has shown a consistent rise in finance commitments for investment purposes since May this year.
“Clearly investors are continuing to see housing as the preferred investment option, despite low yields and a mature growth cycle,” Mr Lawless said.
Mr Stokes believes it’s time for a real debate about policies and for the Federal Government to partner with states to address housing affordability.
“Why should you get a tax deduction on the ownership of a multi-million dollar holiday home that does nothing to improve supply where it’s needed?” he said.
“We should not be content to live in a society where it’s easy for one person to reduce their taxable contribution to schools, hospitals and other critical government services — through generous federal tax exemptions and the ownership of multiple properties — while a generation of working Australians find it increasingly difficult to buy one property to call home.”
Originally Published: http://www.goldcoastbulletin.com.au/
What’s Ahead for Property Markets in 2020
We cannot resume publishing for the year without first acknowledging the unprecedented and deadly bushfires that have ravaged the country.
While it is still too early to predict the economic impact of the bushfires, early estimates on insurance losses are closing in on half a billion-dollars and likely to continue to rise, according to the Insurance Council.
The negative fiscal cost on agricultural production and food prices, business sentiment and the tourism industry will be significant, while the length and health impact of the smoke appears to be unprecedented.
Moody’s Analytics economist Katrina Ell said that the risk of broader macroeconomic spillovers this season are high given the scale of the fires.
“Odds were already high that the Reserve Bank will cut interest rates at its next meeting, in February, to bring the cash rate to 0.5 per cent.
“The fires increase those odds.”
Reserve Bank governor Philip Lowe has come under increasing pressure not to cut interest rates further when the Reserve Bank meets in early February.
Quick refresh: Property, markets and the built environment
We returned to our desks in 2019 to the fall-out from the sudden, pre-Christmas evacuation of the Opal Tower, an ominous start to a year for an industry facing considerable uncertainty in residential prices and the yet-to-be handed down final report from the banking royal commission.
And with news Opal residents have been given the all-clear to return before Christmas, the saga bookended a huge year in property.
Low interest rates and the loosening of banks’ lending policies bolstered property markets, with residential markets ending the year on a high, surging 4 per cent over the last quarter—the fastest growth in more than 10 years.
The commercial real estate market capital growth cycle looks to have peaked, with research indicating that yields should remain stable into the new year as low interest rates and positive—albeit sluggish—economic growth maintains demand for Australian commercial real estate.
In development news, Dexus finally struck a deal with the Queensland government for its $2.1 billion redevelopment plans for Brisbane’s Eagle Street Pier. In Brisbane’s inner north, Geon Property is set to kick-off work on its $750 million Albion Exchange project, after winning approval for the first stage.
Mirvac ended 2019 with the $200 million acquisition of Chinese developer’s Nuway Wy’s 7-23 Spencer Street site in Melbourne.
Elsewhere, Victoria has continued to refine its shortlist of development bidders for Melbourne’s Treasury Square urban regeneration project on the VicTrack site, with up to 130,000sq m of prized commercial space up for grabs. The tender is expected to be finalised by mid-2020.
In Sydney, Lendlease moved a 25 per cent interest in its $1.2 billion Victoria Cross over-station development tower in North Sydney to its Australian Prime Property Fund. The 40-storey office building is set to add 58,000sq m of commercial space to Sydney’s rapidly-transforming second CBD.
Meanwhile, the government’s Clean Energy Finance Corporation launched a new green home loan worth up to $60 million that will offer borrowers a 0.4 per cent discount on their home finance.
Growth in property prices remains strong
Real estate will continue to bolster over the next five years as one group predicts growth in median prices.
As 2019 saw the housing market return from its lows, Propertyology expects growth will continue over the next five years.
Although a lot of the growth last year was centred in Sydney and Melbourne, Propertyology head of research Simon Pressley expects the growth will be more widespread.
The firm suggests that in 2020, property buyers should make decisions based on what the medium-term fundamentals say, instead of focusing on today’s market results.
“The 2019 mid-year momentum change in Australian property markets was triggered by the stimulus of three interest rate cuts. It’s a sugar fix of sorts. But it doesn’t change underlying fundamentals,” Mr Pressley said.
“While a quick burst of sugar on occasions doesn’t hurt anyone, we all know that sugar is not a sustainable energy source.
“Those contemplating participating in 2020 property markets would be wise to focus on the fundamentals of a balanced diet.
“Within a year or so, these current stimulatory policies will be gone, and Australia’s best-performed property markets will be the ones that always had the strongest fundamentals.”
While the current stimulus measures were in response to softer national economic data, when it is compared to the post-global financial crisis stimulus, it was valid, Mr Pressley said.
“The strong, and largely across-the-board, rebound in Australian real estate prices from the 2009–10 stimulus is likely to be repeated in 2020,” he said.
“However, the smart decision-makers of today will be looking beyond 2020 and trying to figure out which Australian property markets have the best potential post-stimulus.”
When the global financial crisis sugar wore off, all capital city property markets declined in 2011, and five of them also declined in 2012, he said.
“The markets which subsequently went on to become the best performers were ones which hadn’t seen much price growth during the pre-GFC years, their housing supply had been tightening throughout all of those lean years, and price growth then occurred through improved local economic conditions,” Mr Pressley said.
“Back then, the markets which had those key fundamentals included the likes of Sydney, Melbourne, Hobart, Orange, Byron, Geelong and Newcastle. This time around, it will be completely different property markets.”
There was nothing orderly about the current property markets, Mr Pressley said.
“Given the significant policy disruptions, I consider it to be a completely futile exercise to attempt to forecast actual rates of property price growth for 2020, and anyone who buys property based on the potential of a one-year result is in the wrong game anyway.”
The outlook for Australian real estate is as good as it has been for many years, he said.
Hot tips for buyers and sellers of Gold Coast in 2020
If you’re targeting new property for next year, it may be time to think about 2019 and how much the market has changed.
A nationwide downturn and low interest rates were the two big reasons why agents say buyers can get the most out of the conditions but need to act quickly.
John Newlands, director of the Real Estate Institute in Queensland on the Gold Coast, said buyers had regained their confidence after a shaky start to the year.
Mr Newlands said that since the election and the Royal Banking Commission, buyers have returned and realistic sellers can benefit from their willingness to buy.
“Lenders have settled in and there are very low interest rates for buyers,” he said.
“The infrastructure on the Gold Coast gives us more depth than in the past.
“Sellers need to be realistic and don’t think prices will go up.
“It’s a healthy market (on the way to 2020), you don’t have to be above the market, you have to be in tune with it.”
Mr. Newlands said good marketing and presentation are key for providers.
Michael Kollosche, director of the self-titled agency, said there will be limited stocks in the Gold Coast market by 2020, which means that both buyers and sellers should change their approach.
“Buyers who want to buy property have to be a little more aggressive,” he said.
“It is definitely the impression that the market is moving upwards. If you are not in a hurry, you will probably regret it as you see property prices go up and pay more for inferior properties.”
According to Kollosche, low interest rates have been a catalyst for sellers to keep their properties, resulting in a lack of supply and slowly rising prices.
“We find that most sellers see increased interest in the first three to four weeks (after the listing),” he said. “Premium buyers usually appear at the start of the campaign.
“It is important that you carefully consider the price and sales method when you first come to the market. “
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