Not all smooth sailing – Cameron Kusher (Core Logic)

The property markets around Australia have recorded more record growth according to Core Logic but it is not all smooth sailing. We look at what is ahead this year with Cameron Kusher, what is behind the continuing growth in Sydney and Melbourne, what’s ahead for buyers and the facts about affordability.
Kevin:  The monthly CoreLogic Home Value Index reported a further rise in the value of capital city dwellings in February, with values rising 1.4% over the month, with Sydney continuing as the overall capital gains leader. Joining me to talk about the report and what’s happening in the property market around Australia, Cameron Kusher from CoreLogic.
Cameron, thanks for your time.
Cameron:  Thanks, Kevin.
Kevin:  Sydney, how it continues to grow, is that a surprise to you, or did you expect this?
Cameron:  Probably didn’t expect it to accelerate to the magnitude we’ve seen, but we did expect that with really low interest rates and obviously the investor segment of the market coming back, you’d continue to see growth. But over the last year values are up 18.4%, which is the fastest annual rate of growth for Sydney since the end of 2002.
You can obviously see why people are a little bit concerned with this, given that this grown phase is more than four and a half years old and we’re now getting the highest level of growth we’ve seen in more than a decade.
Kevin:  Yes. I think it’s been something like how many continuous months – like 58 months or something – we’ve had this growth?
Cameron:  It has been. The growth phase has been running for 58 months and we’ve seen values rise significantly, and even if we go back a little bit further than that from the previous growth phase – which started in the end of 2008 – to now, values in Sydney are up about 105%.
Kevin:  The legislators, of course, and politicians are really rubbing their hands together – well, not so much rubbing their hands together in glee but in worry saying, “How can we slow this down?” What are some of the triggers that they could pull to pull it back a bit, Cameron?
Cameron:  If we look at what was happening 12 months ago, the market in Sydney and Melbourne was actually slowing, and what we were seeing at that time was that they were cracking down on the investor lending. APRA had brought in the 10% cap of credit growth annually, and that was slowing things down, but we also had interest rates 50 basis points higher than they are at the moment.
Given the experience 12 months ago, I’d say that they’re probably the two main areas to really target. Higher interest rates, now, the Reserve Bank said that they don’t necessarily want to lift interest rates and they’d maybe even put them lower if it wasn’t for the Sydney and Melbourne housing markets. But also more focus on the investor market and slowing the level of demand there. The 10% cap, maybe it needs to be lowered to 6% or 7% to try to slow this thing even further.
Kevin:  It’s great for homeowners but it’s a great challenge for prospective buyers, isn’t it? The affordability of getting into the markets, particularly in Sydney and Melbourne?
Cameron:  It is. And the challenge is not servicing the debt for most people, because you have the lowest interest rates we’ve seen in generations, so once you can actually get into the home, the servicing of the mortgage – at least at the moment – is relatively easy. The challenge is saving up a big enough deposit to actually enter into the housing market.
If you look at Sydney at the moment, the median dwelling price – and that’s the combined houses and units – is $795,000, so a 10% deposit is $80,000. You have wages growing at the lowest level on record, so it’s difficult to see how people can actually save up a big enough deposit and keep chasing the market at the moment to enter in if they don’t already own.
Kevin:  We talk about a booming market around Australia, but there are different markets, aren’t there? You look at Perth and Darwin, where it’s been particularly slow. In fact, I think according to your report, they actually slipped back in that quarter, did they?
Cameron:  They have. Perth values fell 0.9% over the last three months, Darwin down 6%, and they’re both down at least 10% from where they were at their previous peaks. While Sydney and Melbourne are booming, Perth and Darwin are really struggling.
Then if we look at the other cities, Brisbane and Adelaide, you’re continuing to see just fairly moderate rates of growth, and there’s definitely been an acceleration in growth over the last 12 to 18 months in both Hobart and Canberra.
Kevin:  We’ve had growth over the last 58 months, as you pointed out. What’s the growth been in real terms, say, in the Sydney market in that period? Have you have any figures on that?
Cameron:  In terms of the real growth, we only calculate that each quarter in terms of inflation-adjusted growth, but if you look from when this growth phase started, the values are up about 75% in Sydney. If you adjust for inflation, they’re probably up around 55%. In Melbourne, they’ve increased by about 47% or 48% over the same period of time.
It really is all about Sydney and Melbourne, at the moment, in terms of the growth we’re seeing, and all the other capital cities have lagged significantly behind.
Kevin:  I want to talk to you about stock levels in just a moment. Before I do, can I just swing the attention to the rental market because that’s obviously a double-edged sword, isn’t it? When we talk about affordability of getting into a house, but we also have to make rentals affordable, too. What have the rental returns been like in Sydney and Melbourne with these rapid price increases?
Cameron:  They’re historically low. Obviously, you go around Sydney, go around Melbourne, go around Brisbane and see all the new apartment stock coming online. Most of that is ultimately going to end up as rental accommodation. At the moment, the rental yields in Sydney for a house is at 2.8% – that’s a gross figure – 3.7% for units, and in Melbourne, it’s 2.7% for houses, 4% for units.
They’re gross figures, so the net figure is actually going to be significantly lower than that, and increasingly the challenge at the moment is also to ensure that your property is actually occupied for 52 weeks of the year with so much more stock coming online.
Kevin:  We’re seeing great results from auctions around Australia, too, and rapid selling times. What about stock on market? What’s happening with that?
Cameron:  It’s quite low, and this is another driving factor of what’s happening in Sydney and Melbourne. We calculate our listings on a 28-day basis each week. At the end of last week, in Sydney, there were about 21,000 properties for sale, which is 11.3% lower than it was 12 months ago, and that was already fairly low 12 months ago. In Melbourne, you have about 28,500 properties for sale, so more than Sydney, but the amount of stock for sale is 5% lower than it was 12 months ago.
You have this combination of low cost of borrowing, strong population growth in Sydney and Melbourne, a very rampant investment market at the moment, and you have little stock to choose from, so people are making bids over and above the asking price at auctions or the listed price for private treaty sales and pushing values higher just because they need to get into the market because there’s very little stock out there.
Kevin:  How much of an influence is FOMO or fear of missing out? How much of a factor is that in the market currently, Cameron?
Cameron:  I certainly think it’s a big factor at the moment. I think people figure if they don’t get into the market now, it takes them 6 to 12 months to actually find the property they want. They’re going to have missed out on all that growth and they’re also going to have to find all that extra money.
The way I like to think of it is this: the common wisdom in real estate is you sell and then you buy a property, but if you sell now and it takes you 12 months to find your next property, in Sydney, if you did that 12 months ago, you’ve missed out on 18% growth and you have to make that up somewhere. So I really do think there is a bit of a case of fear of missing out going on at the moment.
Kevin:  What’s your view going forward for the rest of the year? What do you think growth is going to be like, Cameron?
Cameron:  Look, I think there’s still going to be growth. I do think that there’s just going to be too much pressure on the regulator to find more ways to slow this rate of growth in Sydney and Melbourne. So we do believe that over the second half of this year the rate of growth is going to slow, but it’s going to be because APRA gets in and makes some changes to the housing market and lending policies rather than just a natural slowdown in the market.
Kevin:  Always good talking to you, Cameron Kusher from CoreLogic. Thanks for your time, Cameron.
Cameron:  Thanks, Kevin.

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