Mortgage cliff a big Easter worry for Aussies

Easter is a time for potential homebuyers and sellers to take stock and after a strong start to the year, the market is in an unusual state, which could go a number of ways.

OPINION

Easter is the first interruptive pause in the sales calendar every year and it came early this year. Quite often the conversations with friends and family over the break can prompt a collective revision in outlook and momentum among sellers and buyers.

Sometimes it prompts heightened interest in the market participation, other times the market can feel a deterioration of enthusiasm.

The abbreviated period from the return from summer holidays until this weekend certainly provided a narrow time imperative that saw savvy vendors and their agents capitalise on their listings.

This year got off to a quick, strong start, with auction success rates resilient from early February, and right up to the big Saturday before Easter when Sydney saw some 1180 offerings.

There were 462 auctions scheduled in Sydney this week, with PropTrack economist Anne Flaherty saying volumes will quickly bounce back to 994 in the first week in April.

Distressed selling is set to boost housing supply levels. Picture: NCA NewsWire/Joel Carrett

It was obvious that sellers sensed buyer competition was boosting auction clearance rates even when auction volumes took off.

The 2024 market has not depended on the continuation of low stock levels seen throughout early 2023 when listings were running 13 per cent below their five-year average.

I sense the conversations over Easter will trigger continued elevated listings as sellers will be prompted given prices are up nicely. Many will be thinking it might be wise to get an upgrade happening before reduced interest rates spark renewed buoyancy.

It is also correct to say we might not all be out of the doldrums quite yet with distressed selling also likely to boost supply levels, as the home borrowers facing the so-called mortgage cliff reluctantly sell under the burden of higher interest rates.

The Easter discussions come as housing sits at the forefront of local, state and federal political debate. It comes as the supply of new homes sits at the lowest levels in years, leaving the federal government impossibly short of its ambitious target for 1.2m new homes by mid-2029.

It comes as construction companies continue to collapse.

Home prices expectation for 2024 have increased.

Louis Christopher at SQM notes that auction markets in Sydney opened the year stronger than expected and notably stronger than the same period in 2023.

“The hope of interest rate cuts, ongoing surges in the population growth rate plus a fairly solid Sydney economy, all contributed to the buoyant markets,” Christopher says.

He detected in recent weeks that auction clearance rates softened as uncertainty grew on exactly when the RBA would cut rates.

“Interest rate cuts are not expected until the second half of 2024,” he says.

“This reality may make for an uncertain auction market over the next few months but given the strength so far this year, our price expectations have increased and we now expect some moderate housing price gains in Sydney for 2024.”

NEW HOME BUILDS HIT RECORD LOW

The mismatch between apartment supply and demand continues to widen in the Sydney market, according to the latest analysis by Charter Keck Cramer.

“Although recent federal and state government initiatives are seeking to drive new supply, bringing new stock to market remains a challenge,” Richard Temlett, the national research director advises.

In 2023, the build-to-sell apartment development market was subdued in Sydney, with only 8300 completions, just one-third of annual supply requirement, but a slight uptick on the 7700 in 2022.

Construction commenced on 7200 apartments last year, which was the lowest number over the past decade, representing a decrease of 76 per cent on the 2016 peak.

Apartment construction in 2023 was the lowest over the past decade.

Last year also saw 6300 apartments freshly launched into the off the plan market, which was 31 per cent below the previous low experienced during the pandemic, and the lowest over the decade.

Temlett says the three sets of numbers highlight “the continuation of an ongoing and aggregating supply deficit”.

Completions will increase over the next three years with 22,800 apartments under construction and an additional 9600 being marketed and due for completion in 2026.

Sydney’s middle and outer regions remain prevalent when it comes to new supply, representing more than a third of apartment launches.

Launches are expected to increase when interest rates are cut and there is greater certainty around the new planning controls. For many developers there is confusion reading the current property market given extensive new government policies.

But building and material cost increases, rising interest rates, further taxes and charges along with limited apartment price growth has seen many projects become financially unfeasible.

The report noted that while median prices had started to move upwards, price growth had been “slow and sporadic” and accordingly many projects will not proceed under current settings.

“Projects that are design-led, respond to target market requirements and feature a reputable builder will mitigate risk and show greater success,” the report read.

Many local buyers remain priced out of the market or are holding off making purchase decisions given ongoing market uncertainty.

Investor returns have improved given “uncharacteristically” high and ongoing rental growth, although this incentive has been somewhat offset by the higher cost of mortgage loan interest.

Foreign investors remain absent and interstate investors also remain on the sidelines and will likely do so until off the plan incentives are reintroduced.

The report concluded that even as the industry does its best to play catch-up in the challenging environment, population growth will outweigh the capacity to deliver enough apartments fast enough.

Overseas migrants numbers will taper but continue as a key driver of housing demand.

“It is Charter Keck Cramer’s view that current population forecasts for NSW are conservative, with housing demand anticipated to be even stronger than the government is predicting,” Temlett says.