Issue 33 - 2022
The Sydney housing market soared 26% in 2021 on the back of COVID driven, ultra-low interest rate settings. Whilst homeowners celebrated the price rise and home buyers bemoaned it, few really felt the market was operating on fundamental value.
2021 was a classic price spike and therefore the housing market was going to need to recalibrate at some stage.
Admittedly the sharp and unexpected rise in interest rates in 2022 saw that recalibration begin a lot quicker than most market participants were expecting.
An overpriced property market will usually revert to fundamental market value in one of three ways:
- A price drop
- Price stagnation
- A price drop and then price stagnation
A housing market is only healthy to the degree that it is sustainable and stable. When a market’s price overshoots, a recalibration should be welcomed and seen for what it is.
Price correction/drop
The most notable example of this is America in 2008. The housing market was overheated on massive amounts of easy money and reckless lending between 2002 and 2008. At roughly the same time, many American jobs shifted offshore to Asia.
The U.S mortgage belt ultimately buckled under the strain of unaffordable mortgage repayments and job losses. Unlike Australia, the U.S had non-recourse lending in place. Borrowers could and did send the keys for their house back to the bank.
Essentially, they gave up trying to meet their mortgage payments. In America, the bank can take the mortgage holder’s house, but they cannot pursue the borrower for the short fall.
In 2008, non-recourse lending initially contributed to and then caused the price correction to accelerate, ushering in the mortgage meltdown that led to the GFC.
Whilst 2008 feels like a distant memory now, it is worth noting that households in many parts of China are refusing to pay their respective mortgages in 2022.
The Chinese housing market is undergoing a drastic price correction. Large scale property developers such as Evergrande risk imploding under excessive debt obligations and falling property prices.
Canada has a similar economy to Australia, in that it is underpinned by commodities and maintains affluent living standards by global measures. In 2016/2017 they introduced stringent regulation to stop the inflow of residential buyers from China.
Their property market suffered an instant price correction of 15%, highlighting how much these foreign funds were inflating the prices in Canada at that time.
These examples demonstrate that no property market is completely immune to sharp and sudden price corrections. Not every downturn sees a sharp drop in prices either. Property markets can recalibrate in other ways.
The Sydney property market has seen a modest price correction in 2022 relative to some of the more dramatic examples above. Prices are still well above where they were at the beginning of 2021, even taking the recent price correction into account.
It’s why we should see the recalibration phase as a welcome part of the market cycle. As Americans know and the Chinese are finding out, the bigger the boom, the bigger the…
Stagnant price over sustained period
If an overpriced housing market does not suffer a price correction, it’s likely to recalibrate over time through stagnant price growth. Essentially, inflation takes care of the job, realigning property prices back toward their long-term value.
The ‘wealth effect’ suggests consumers will spend or save in the broader economy depending on how confident they are about their personal finances. A regulator’s preferred path to rein in an overheated property market would be for prices to stagnate over a sustained period of time.
This then allows rising wages and inflation to subtly realign the fundamentals between debt levels and household incomes. Given our love of property in Australia, a stagnant real estate market is better than a falling one for households and the economy at large. The Sydney boom of 2002 realigned back to fundamental value over time rather a sharp drop in prices. Between 2002 and 2010, there were years of growth and periods of price corrections, but they were gyrations in the greater scheme.
Brisbane housing boomed in 2007 by 19% and then remained fairly flat until it boomed again by over 20% in 2021. The years of excessive growth are flattened out by the longer periods of stagnant price performance.
A combination of a price correction and a period of stagnant prices
As an extreme example, properties in Japan were worth less in 2006 than they were worth in 1986. Japanese property prices boomed, then they fell and then they flatlined for over 20 years. Over time, Japanese property prices returned to fair and reasonable value by global standards.
The RBA seem to have acknowledged at the beginning of their current cycle of rate increases that property prices would be impacted. “Impacted” is code for fall.
When property prices are up 26% for the year, inflation is running at over 5% and unemployment is down to 3.5%, increasing interest rates is a relatively easy decision for a central bank to make.
The RBA will become more circumspect about increasing interest rates if price falls in the property market accelerate beyond 10% to 15% and unemployment begins to creep up.
Given the multitude of global and domestic challenges the RBA faced in the first half of 2022, if they can engineer a soft landing in the property market, they will have performed an economic miracle.
A property market where prices drop a bit and then remain stagnant for a while, is the RBA’s best chance of recalibrating property prices without hurting the economy.
If you are planning to sell any time soon, check out our article, What Sells a Home for some helpful tips…
According to Core Logic data, Sydney house prices year to date have fallen 7.3% whilst apartments have pulled back 5.5%.
Data is only part of the story when assessing the immediate performance of the property market though. Getting an accurate read on the property market is notoriously difficult for Government agencies and the RBA.
The individual person or family active in the property market is very likely to find a disconnect between the data and what they are experiencing firsthand. There are a multitude of reasons the data can be unintentionally skewed as outlined below:
- The data does not capture vendors who went to market but didn’t sell because the price was unacceptable
- The data often focuses on settled sales rather than exchanged sales, so there is a lag of about 6 weeks
- The upper end of the market is stronger than the bottom half of the housing market, which supports/skews the overall numbers Off market sales and/or sales on delayed settlements may not be captured
- Improvements an owner makes to a property can push the sale price up, but the works are not always profitable, particularly given current building costs
- Off market sales and/or sales on delayed settlements may not be captured
- Improvements an owner makes to a property can push the sale price up, but the works are not always profitable, particularly given current building costs
- Sales volumes are down, therefore a smaller sample means the data is far more likely to fluctuate
If you are looking to buy or sell in the current market, it’s best to follow the data but also attend as many auctions and opens houses as possible. Some anecdotal clues to follow are:
- Days on market
- Number of auction bidders (both above and below)
- Open Inspection attendees
- Price movements during the sales campaign
Buyers are finding some pockets of the market are far more resilient than they anticipated. Large family homes, lifestyle apartments with views and well presented, well located affordable apartments are all in strong demand. The market is most hesitant around properties requiring full scale renovations.
In recent years, the Sydney market has operated in shorter cycles, with 12 to 18 month pullbacks followed by aggressive market rallies. A lot of prospective vendors are staying on the sidelines hoping interest rate relief emerges in 2023 and prices recover.
A lot of prospective vendors are staying on the sidelines hoping interest rate relief emerges in 2023 and prices recover.
Only time will answer that question. However, in the short term, buyers may not enjoy the range of spring listings they were expecting as many vendors aim to ride this cycle out.
When looking towards 2023 and beyond, many of the Fixed Home Loans that were secured at record low mortgage rates during COVID will begin to expire and require refinancing. This will be a shock to many household budgets and could cause selling pressure into the market.
Therefore, whilst some prospective vendors are hoping to ride the current cycle out, it is worth asking where market prices will be in Spring 2023.
If interest rates stay elevated and households need to refinance at higher mortgage rates into 2023/2024 it’s reasonable to think it will take some time for the market to absorb this reality.
For more information on the 2nd half of 2022, check out this TALKING PROPERTY interview.
Talking to homeowners right now, it seems anyone thinking about selling is concerned about uncertainty in the market. The result is that people are holding off while they deliberate and are feeling a little stuck.
The fact is, we have buyers looking for the right property, but not so many properties to offer them.
If you are sitting on the fence, deciding whether or not to sell, you need a real estate agent with a no risk policy and guarantee to ensure your exposure is limited. At Whitehaus we do things a little differently to make listing is easy and risk-free for you. It’s a process that costs you absolutely nothing until your property is sold.
Here are just a few things that make us different:
- Our SMART SALE methodology that puts you firmly in control.
- Zero up-front marketing costs.
- Our risk-free NO SALE : NO FEE Guarantee.
- Our whole team dedicated to selling every property.
- Proactive marketing – we create sales – we don’t just list a property and wait for buyers to find it.
- Open 7 days a week and always available for buyers and sellers, arranging private viewings as well as open homes to maximise opportunities.
Even if you don’t plan to sell until just yet, listing early and getting your campaign and home prepped and ready to go, means you can get ahead of the competition once the spring/summer frenzy begins.
CLICK HERE to find out more, get in touch, or send us a message.
If you’re not thinking of moving yourself, but know someone who is, you can also find details of our current referral reward.
