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/
Unit oversupply remains an issue in Brisbane CBD: RiskWise’s Doron Peleg
The inner-city Brisbane unit market, already hit hard by unit oversupply, continues to remain a huge danger zone for investors since the advent of COVID-19.
Not only is equity risk the major issue for investors, increased vacancy rates and risk to cash flow are also heavily impacting the market.
According to RiskWise Property Research CEO Doron Peleg, things have not improved in the market since the pandemic hit and, if anything, have become worse.
“RiskWise reported in July 2018 that there were 14,813 units in the pipeline in inner-city Brisbane for the next 24 months, being an addition of 20.1 per cent of the current stock,” Mr Peleg said.
“Two years later and there is still a very high level of supply with 5,431 units in the pipeline, making up an addition of 5.9 per cent of the current stock.”
Pete Wargent, co-founder of Buyers Buyers, a national marketplace now offering affordable buyer’s agent services to all Australians, said that rental demand had been weak for CBD apartments for some time.
“The trend has been exacerbated by the pandemic, and CBD rents have been very soft” Mr Wargent added.
Analysis by RiskWise in 2018 showed unit over-supply in inner-city Brisbane had created weakness in the market leading to an elevated level of risk for investors and, therefore, lower valuations and rising defaults on settlements.
“The issue of oversupply is not a new problem and has been there for a few years and the continuous weakness of the unit market in inner-city Brisbane should raise red flags for developers and lenders,” Mr Peleg said.
“Defaults have been rising and will continue to do so.
“One of the key factors has been developers’ lack of foresight regarding unit oversupply as well as the impact of lending restrictions introduced from 2014. It seems there has been no methodological and structured risk-management approach including identification, assessment, and mitigating action plans to address those risks.
“This takes us back to the feasibility stage which includes the assessment of the projected fair market value and the likelihood of defaults and their potential consequences. Developers and lenders must find the right balance between taking risk and making profit.
“COVID-19 has only served to increase the risk. Currently, there are many high-rise properties being offered to a smaller number of investors. This is because there are less investors in the market due to the pandemic.
“The point is that if developers and lenders had put more proper risk-management practices in place, this could all have been avoided.”
Mr Peleg said it must also be remembered the value of off-the-plan property could decrease between the original contract date and settlement resulting in capital loss, as the equity in the home could be reduced, and this was well known in inner-city Brisbane.
He also stressed that investors buying rental apartments unsuitable for families were taking an enormous gamble, with both equity and cash flow risk expected to materially increase. Serviceability is also a major factor for investors who rely on a stable rental income to cover the costs associated with property and particularly the mortgage.
Mr Wargent of Buyers Buyers said houses for investors often carried significantly lower risk for those with the right budget because renters, especially in the more established suburbs, included families and, in many cases, those with permanent full-time jobs. They were also more likely to deliver good medium and long-term capital growth.
Additionally, as rental properties are not fully substitute products with owner-occupied dwellings, there is inherent risk associated with them as they do not appeal to families looking for three bedrooms, with outdoor space, close to schools, transport, and employment hubs.
This article is republished from https://www.propertyobserver.com.au/ under a Creative Commons license. Read the original article
Green Goals Halve Council Charges
Brisbane developers who reach high green standards will only have to pay for half of council’s infrastructure charges under a new incentive scheme.
The Brisbane Green Buildings Incentive Policy was announced in the council budget in an effort to encourage the construction industry to keep building through Covid-19.
Applicants who receive approval on a building—greater than 3-storeys—between July 2020 and June 2022 will be eligible to lodge a request for the payment.
Residential buildings, or mixed-use developments with dwellings will have to achieve a 5-star green rating, UDIA six leaf certification or one of the same criteria as commercial buildings.
Commercial office buildings will have to comply with the buildings that breathe design guide, have a carbon neutral certification and achieve a minimum green plot ratio.
However this incentive only applies to the council component for transport, stormwater and the community; and does not apply to infrastructure charges levied by Urban Utilities for water supply and sewerage networks.
Lord mayor Adrian Shrinner said the housing industry is a major employer, and if the predicted 40 per cent drop in new home starts eventuates half of those employed in the industry could lose their jobs.
“By incentivising the construction of high-quality and environmentally sustainable homes, we’ll also be making further steps towards our future blueprint goal of promoting best practice design in Brisbane,” Shrinner said during the 2020-21 budget speech.
“In addition to our 100 per cent rates rebate for first home buyers purchasing a new home, we will further support the home building industry by providing a 50 per cent rebate on infrastructure charges for the greenest and most energy-efficient buildings.
“This will be an incentive to those who are currently in the planning process or may already have an approval to make a commitment to getting on with the work, and creating jobs in our city.”
Upon commencement of the project and verification of the installation of specific design elements council will make the 50 per cent payment providing funding is approved in the budget.
Council will consider requests made for the Brisbane Green Buildings Incentive Policy until the end of 2023.
Vacancy Rates Reflect Shift From Cities to Regions
Major improvements have been made on national vacancy rates, with levels tightened to below or close to pre-Covid-19 rates across most capital cities in Australia.
The residential vacancy rate dropped from 2.2 per cent to 2 per cent compared to August 2019 and 2.1 per cent in July, according to the latest report by SQM Research.
Perth, Brisbane and Darwin made the biggest improvements compared to last year, while Sydney and Hobart were slightly worse-off.
Melbourne was the outlier, which again recorded an increase from 3.1 per cent in July to 3.4 per cent, this was up from a 2 per cent vacancy rate in 2019.
Residential vacancy rate
|City||August 2020||August 2020||July 2020||August 2019|
The SQM Research also shows most regional locations have recorded falls in vacancy rates, with Sydney’s Blue Mountains and Melbourne’s Mornington Peninsula dropping to 0.7 per cent, while just outside Brisbane, in Ipswich, rates fell to 0.9 per cent.
Asking rents levels painted a different picture: despite being up nationally for houses at 4.5 per cent and units 1.4 per cent compared to 2019, across capital cities houses rent prices were down 2.8 per cent for houses and down 5.5 per cent for units.
The worst-affected cities were Sydney, down 8 per cent on last year, Melbourne down 1 per cent for houses and 6 per cent for units, and Brisbane was marginally down 0.4 per cent for houses and 0.2 per cent for units.
Rents were up for both houses and units in Adelaide, Perth, Canberra, and houses only in Darwin compared to last year.
SQM Research managing director Louis Christopher said population shifts were a driving force in this data.
“The shift towards regional living continues at pace, largely at the expense of higher inner-city rental vacancy rates, I suspect there will have to be a high point in this move soon.
“However, I also suspect there will be a degree of permanency with the massive population shift,” Christopher said.
“Meanwhile, Sydney and Melbourne rents continue to fall providing leasing opportunities for tenants who have chosen to stay in town.”
International arrivals impact Sydney, Melbourne
Immigration has also had an impact on vacancy rates with the low levels of arrivals and returning residents recorded in the Australian Bureau of Statistics August data.
Arrivals dropped in August down 15.5 per cent on July and down 99.1 per cent on 2019.
According to ABS visa group data there were 2,670 people arriving on permanent visas and 2,880 on temporary visas last month compared to 119,990 permanent visas and 680,190 temporary visitors in August last year.
Charter Keck Cramer national director of research and strategy Rob Burgess said overseas migration has fallen off a cliff, impacting the residential market.
“In the last nine or 10 years of course NSW and Victoria—Sydney and Melbourne—have been the main beneficiaries of overseas migration,” Burgess said at The Urban Developer’s The Housing Demand Dilemma webinar.
“This translates directly into the demand for residential dwellings moving forward, and will fundamentally impact the demand and supply equation for the national residential market.
“It’s almost a halving of dwelling demand otherwise required in Sydney and Melbourne [in the next five years].
“Interestingly, Brisbane is far less impacted and clearly that’s a reflection of the fact that the housing market is much less reliant and dependent on overseas migration, including international students.”
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