September 2018

This is the 5th in a series of posts summarising monthly news and happenings in Sydney real estate, and more broadly.

What downturn?

In this month’s market summary, many of the high level sources discuss that although the market is in a downwards direction, this decline is not substantial. It’s more of a correction than a fall. The question is, after the GFC, the huge ramifications of that over the last few years and other finance shockers (ie banking Royal Commission) are we becoming attuned to expecting disaster?

For example, although the ABC reports that $36 billion has been wiped from Australian house values so far in 2018, it might help to see this in a wider context. While this is a huge amount by any standards, looking at the figure against the total size of the market – $6.9 trillion – it’s a change of less than 0.5%.

Looking more closely at the Sydney market, Malcolm Gunning, president of the Real Estate Insitutue of Australia is quoted in the Real Estate Conversation as stating “What is also quite clear is in Sydney there are multiple markets… The decline in price or auction numbers varies from region to region… Each area in Sydney, and the dynamics, are a little different.”

This diversity in the Sydney market is also confirmed by the experience of individual auctioneers. While Real Estate Conversation data from one company shows that in 2017, clearance rates of 68% compared to an average of 52% at the moment, other auctioneers such as Chris Scerri observe that:

“The average clearance rate for the year of 2014 was sitting between 65% – 70% which is actually a little lower than what we are experiencing in today’s market conditions. Currently, C Scerri Auctions are sitting above average at 75%.”

This diversity in Sydney’s areas can be further explored by the Core Logic September update which shows Ryde (which has had substantial development over the last few years) as having the greatest dip in value in Australia, at -9.5%. Also in the top ten of Australia suburbs with the largest drops in value are Baulkham Hills (-9.3%), the Inner West (-8.9%), as well as Blacktown, Sutherland, Parramatta, Hornsby, and the Northern Beaches. In fact, of the top (or is that bottom) ten, all but one are in Sydney, and that is in Melbourne.

Gunning partly points the finger at infrastructure and employment opportunities as being indicative of the relative housing value of an area, and the disparate areas listed above have no shortage of these variables. However, Gunning also says that any ongoing dip in auction clearance rates (compared to 12 months ago) can at least partially be attributed to hope:

“I’m of the opinion that agents are giving reasonably accurate price indications, but vendors are hopeful and setting higher reserves… That is one of reasons properties aren’t selling. There is great reluctance for sellers to come to terms at this stage with the current market.”

This is certainly bourne out by Chris Tolhurst, writing for Domain, who notes that “Sydney property vendors trimmed their sails at several auctions on Saturday [15th Sept], accepting below-reserve prices to get transactions across the line.”

September 2018: Current market values in Ryde have dropped the largest percentage in Australia, but why?

Taking it all in context

Core Logic’s September housing market update by Tim Lawless refers to the current period as a ‘correction’ despite any ongoing downward trend. For example, national dwelling values may have accumulatively declined 2.2% since the 12 month peak at the same time last year with Sydney falling slightly further than Melbourne at 3.5% and 3.3% respectively, but were they over-inflated in the first place?

Interestingly, of this fall the upper quartile of these markets have been hit hardest. Sydney’s most expensive properties have now recording a 8.1% fall in values over the past 12 months. The broad middle of the market has averaged a 4.7% fall, while the most affordable quartile has seen a 5.2% fall. These Sydney falls in value are the greatest of the respective national averages except for the Darwin and Perth lowest quartile which recorded greater falls.

However, once again a wider context needs to be seen. For example, of the major centres, dwelling price­ to income ratio in Sydney (see below) is still much higher than other major centres. A sharp downward change for the last few months appears to be starting for Sydney and Melbourne though as yet this is probably not enough to suggest real relief to affordability.

Despite the weakening values, the equity of most homeowners remains in a strong position. By comparison, property values are reportedly still 49% higher than they were 5 years ago and 83% higher than they were 10 years ago. Taken in context, the ambivalent language around the drops makes sense.

Core Logic reaffirms previous findings that suggest moving forward into spring and the greater number of homes coming to market that this traditionally brings will likely bring no change to the current trends. The aggregate of the current downward market pressures from across the available sources include:

  • possible increases in mortgage rates,
  • reduced borrowing power of most buyers,
  • political uncertainty (the recent Federal leadership change),
  • an approaching election,
  • longer selling times,
  • higher stock levels,
  • increasing discounts given,
  • lower (on average) auction clearance rates,
  • a reduction in buyer competition,
  • flat wage growth
  • ongoing high ratio between market price and income

The long and short of it is that these conditions will make for an increasingly good time to buy, and that when this reaches within grasping distance for many, perhaps then the market will start to level out.

Graph credit: Core Logic