Great market update

Paul Wilcox

Market Comment



Sydney Property Upswing is Underway


Mon, 20 May 2013

The 25 basis points interest rates cut announced by the Reserve Bank after its May meeting came as a surprise to most economic forecasters.  In the RBA's quarterly Statement on Monetary Policy, the Bank emphasised that the Australian dollar had remained high while inflation at its present rate posed few concerns. 
 
So we move back to the position where further rate cuts this year are possible as evidence of a slowdown in the mining sector piles up and fears about the end of the mining boom begin to grow.
 
There's also the forthcoming September election to consider.  The pre-election period is always seen as a time of slowdown in economic activity as business awaits the outcome of the voting.
 
However, the RBA did note that a reversal of its recent easing of monetary policy could be required if "dwelling prices rise more quickly than assumed, spurred by low interest rates.” Housing is still in the sights of our economic governors, as is a possible rise in unemployment or a marked growth in household indebtedness.
 
It’s taken a while for the RBA’s rate cuts to have an effect on housing prices. Master Builders Australia chief economist Peter Jones told ABC News that it’s unusual for rate cuts to take so long to have an impact.
 
"It's a little bit of a hangover from the financial crisis - this aversion to debt and lack of confidence in things like global economic developments, some uncertainty at home as we go through structural change," he said.
 
"It is a little bit unusual but, it does look like interest rates are starting to improve the situation."
 
As the recent drop in the value of the Aussie dollar against the US greenback shows, significant changes can happen without much warning and in a very short span of time.
 
However, whichever way interest rates go in the short- to medium-term they’ll still be at or near historic lows. When the ANZ Bank announced it was lowering its mortgage rates by 0.27 percent, even more than the RBA’s recent rate cut, it sent a clear signal that any substantial increases are a long way off.
 
Buyers at the Sydney auctions responded to the rate cut in the most positive way; they bought.
 
"We saw fast, strong, immediate and confident bidding,” Sydney auctioneer Damian Cooley told the Sydney Morning Herald’s property editor Stephen Nicholls.
 
As an example the article used a house at 56 William Edward Street, Longueville that sold for $1,820,000, which was $220,000 over reserve, with eight registered bidders.
 
The weekend auction clearance rate was 70.7 percent. It followed the previous week's 78.1 percent, which was the highest for three years.
 
Australian Property Monitors senior economist Dr Andrew Wilson said that although the clearance rate was slightly weaker than the previous week it was still 10 percentage points above the same weekend last year.
 
"Expect the fall in rates to work its way through the market over the following weeks," he said.
 
"This is one of the best weekend auction results for the prestige market for some time."
 
Mr Nicholls noted that the Sydney auction market has now recorded 11 weekends with auction clearance rates above 70 percent this year, with two others at 69 percent – well above the figures recorded in the past two years and an indication of growing buyer confidence.
 
Even prices at the top end of Sydney’s market – properties in the city’s prestige suburbs that were languishing in 2012 as lower-priced areas attracted high levels of buyer interest, are now showing dramatic improvements.
 
According to the Herald’s Stephen Nicholls, much of the activity at the prestige end results from Chinese buyers taking advantage of the government's introduction of the Significant Investor Visa for migrants who invest $5 million in the country.
 
“On the northside prestige agents are lamenting the lack of trophy homes in that $20 million-plus range, although there has been a string of recent sales about $7 million”, he said.
 
An AAP report in the Sydney Morning Herald said that the biggest increase in home loan approvals in four years – a jump of 5.2 percent in March compared to the previous month, confirmed the recovery of the housing sector after two fairly bad years.
 
The report quoted JP Morgan economist Tom Kennedy who commented on the March figures from the Australian Bureau of Statistics.
 
"Even though today's data may be slightly overstating the strength of the home loan figures, I would say the underlying trend is certainly one of improvement.
 
"It suggests that investor and owner-occupier activity for non-first home buyers is really the driving force here and I would expect investors to become more active over the coming months as they take advantage of low interest rates," Mr Kennedy told AAP.
 
Perhaps because of the high level of property prices, of all the states and territories only NSW has a higher proportion of investors in the market compared with last year.
 
In an article on Domain.com, Dr Andrew Wilson notes that the proportion of investor loans approved in NSW this year has increased to a near all-time high of 50 percent compared to 43 percent during the same period last year.
 
“Owner-occupier activity in NSW by contrast has fallen by 3.7 percent over the 12 months due to the collapse in the first-home buyer market.
 
“NSW is quite clearly the current powerhouse of residential investment in Australia accounting for 36 percent of all investor activity.”
 
Dr Wilson says it’s no surprise that investors are currently active in NSW with house prices that continue to increase, high and rising rents, low vacancy rates and a solid local economy.
 
Writing in Business Day, Simon Johanson and Chris Vedelago have no doubts about why the housing market has suddenly acquired so much vitality.
 
“It's investors. They have piled in, fuelled by historic low interest rates, cheaper prices, generous negative gearing tax deductions and relaxed superannuation rules.
 
“Loans to investors have soared 16 percent in the last year, Australian Bureau of Statistics trend figures reveal. Meanwhile, lending to owner occupiers - the traditional powerhouse of the market - grew at a far slower pace, just 6.6 per cent over that time.”
 
There has been a measurable shift to drivers of the property markets, according to Johansen and Vedelago.
 
“We are slowly becoming a nation of property investors rather than home owners, new Tax Office records show. One in seven taxpayers now owns an investment property and one in 10 are negatively geared.”
 
They say that the repercussions of the Global Financial Crisis have narrowed investors' options.
 
“Many are hoarding cash in long-term bank deposits but as they reach maturity and new, lower interest rates begin to bite, investors are confronted with a choice - rollover or run.
 
“These falling returns on cash deposits are accelerating a push into property by self-managed superannuation funds (SMSFs), observers say.”
 
David and Libby Koch, writing for News.com, say that there are four phases of property:
- Opportunity Phase: best time to buy. Beginning of cycle;
- Growth Phase: investors more confident as they see values rise;
- Peak Phase: inexperienced and timid investors pile in; and
- Correction Phase: buyers over extend, banks tighten credit.
 
Looking at the present situation there can be few doubts that Sydney property values have gone through a trough and are once again beginning to rise. Unemployment and interest rates are low, the population is growing, the value of the Australian dollar is falling which makes property more affordable for overseas buyers, and consumer confidence is strong.
 
All of which means this is the start of what David and Libby Koch term the ‘opportunity phase’.  Those who buy now will see the value of their investment grow; those who hesitate will miss out on a very real opportunity.
 
Sources:
 
‘High dollar, low inflation influenced RBA rate cut’, Michael Janda, ABC News, 10 May 2013
 
‘4 property phases you need to know’, David and Libby Koch, News.com, 29 April 2013
 
‘Interest rate cuts spark buyer enthusiasm’, Stephen Nicholls, Sydney Morning Herald, 11 May 2013
 
‘Investors strong in NSW, but not elsewhere’, Dr Andrew Wilson, Domain.com, 8 May 2013
 
‘Offshore demand spurs buying spree at top end of town’, Lucy Maken, Domain.com, 4 May 2013
 
‘Housing figures show RBA rate cuts helping’, ABC News, 13 May 2013
 
‘Home loan approvals surge in March’,AAP story in SMH, 13 May 2013
 
‘Investors help lift property market out of the slump’, Simon Johanson and Chris Vedelago,
Business Day, 4 May 2013