Property prices: quality homes still selling amid slowdown

The five-year bull run is over but top-end properties are holding up nicely.

Author Diane Armstrong is pleased she sold her Paddington property in time. Picture: John Feder

When tech billionaire Scott Farquhar bought historic Sydney mansion Elaine for $75 million-plus — in cash — observers wondered if another sale like it would ever be struck.

News broke in April that the Atlassian co-founder and rich lister, whose net worth is $2.51 billion, had agreed to buy the Fairfax family home in Sydney’s exclusive harbourside Point Piper. No mortgage was needed for the deal.

The Sydney market was white-hot at the time after prices in the east coast capitals had spent the past five years soaring amid low interest rates, growing populations and ongoing undersupply of stock.

The housing market’s bull run started to cool shortly after as buyers became exhausted, the bank regulator moved to clamp down on riskier lending and warnings emerged that the cash rate could start rising, although the interest rate outlook now seems steady.

But the slowdown is uneven and some market segments are likely to hold up better than others, with another trophy home in Vaucluse reportedly changing hands in December for close to $67m after being offered by Singaporean property developer Chio Kiat Ow.

Property researcher CoreLogic has been tracking the change of pace. By the end of March, annual price growth in the white-hot Sydney market had reached an eye-watering 18.9 per cent. Across the capital cities, annual growth was at 12.9 per cent — the highest annual pace in almost seven years.

Tech billionaire Scott Farquhar’s “Elaine” in Sydney. Picture: AFP

Commentators widely described the spiralling increases as unsustainable, and the next month the researcher noted a “subtle fall” in Sydney values.

Despite a resurgence in July, by the end of November Sydney prices had fallen for three consecutive months and were 5 per cent higher over the past year.

The growth is substantially lower than at the peak but the median value in Sydney is still above $904,000, a significant hurdle for anyone trying to save a deposit.

Melbourne values are still rising, at a more moderate pace, up 10.1 per cent over the year to November to a median $718,000.

Real-estate agents started to report signs the market was becoming less frenetic. One property investor contacted by Inquirer says it was the first time in five years that agents had returned her calls.

The Agency chief executive Matt Lahood notes a fall in clearance rates in Sydney and Melbourne as buyers pick and choose between a larger range of homes that have hit the market. “There has been a lot more property selling before auction,” he says. “If you have a buyer, it’s better to secure that buyer before auction.”

Century 21 chairman Charles Tarbey says rising stock levels, a drop-off in buyers and the capital controls facing Chinese purchasers have contributed to a more balanced market. “I think it’s still declining in some areas but I think mostly the marketplace has levelled out,” Tarbey says. “We’re in for a good, reasonably steady market. Provided interest rates don’t go crazy, there should be no reason for anybody to panic.”

However, some off-the-plan sales could be under pressure when it comes time to settle, given the significant supply of new apartments due to settle in the next two years, he says.

But activity is patchy. Top-end Melbourne buyers’ agent David Morrell says spring transactions were lower than expected.

“The good properties are still flying out the door, exceeding reserve by $500,000, $1 million. The B and C graders have certainly slowed down,” Morrell says. “They rode on the back of what was happening elsewhere. That’s not the case any more. The public are just ignoring them.”

Since July 1, first-home buyers have been able to access stamp duty concessions for lower- priced properties in NSW and Victoria, which could have contributed to the July bump.

The broader slowdown coincided with the start of the winter months, traditionally a quieter time for auctions as vendors often prefer to wait until spring, when their gardens look better in photos.

Even so, industry experts predict prices will grow at a slower rate or keep falling over the next couple of years as lending clamps take effect and the Reserve Bank of Australia lifts the cash rate.

The more upbeat predictions suggest price growth will drop back into single digits. HSBC chief economist for Australia and New Zealand Paul Bloxham expects national housing price growth to roughly halve, from 8 per cent to 10 per cent in 2017, to 3 per cent to 6 per cent in 2018.

Housing supply has ramped up during the apartment boom, foreign demand has pulled back and lending is tighter, which has already been driving a slowdown, Bloxham says. “We expect these factors to continue to weigh on housing price growth. We do not expect a sharp decline in housing prices and expect only a modest decline in construction activity, as both are likely to be supported by strong population growth and low interest rates.”

Others see a modest fall in values as more likely. At CoreLogic, senior analyst Cameron Kusher expects national values could be flat or fall 2 per cent, with Melbourne on a similar trajectory. Sydney values could fall 6 per cent during 2018 if recent monthly falls of about 0.5 per cent continue.

BIS Oxford Economics forecasts median values for Sydney to fall 3.6 per cent in financial 2018 and 2.6 per cent in financial 2019, a total drop of 6.2 per cent.

The group’s senior manager for residential property, Angie Zigomanis, notes the high level of investor interest in the Sydney market as a factor that could have a noticeable impact on the direction of prices. “With banks cutting bank on interest-only lending, it’s reducing the ability for investors to pay that bit extra,” she says.

Of course, measures and predictions of average price movements are just that — averages — as Mortgage Choice chief executive John Flavell notes. “Averages are made of highs and lows,” Flavell says. “What we saw these last two, three years, particularly in Sydney, was the higher end.”

Demand is expected to hold up better for the most desirable locations in any city, particularly close to the jobs-rich CBDs.

“Generally, areas closer to the city will perform better than those in the outer, more affordable markets,” CoreLogic’s Kusher says.

“Demand’s really strongest in those areas closest to the city, well serviced by infrastructure, where people don’t have huge travel times to and from a job.

“Those are the areas that will be most sought after.”

One vendor who is hopeful of good demand for her inner-city property is Sydney author Diane Armstrong, who sold her investment property in Paddington through Ray White at the end of winter. She had owned the four-bedroom terrace for 22 years but decided to sell at a time when the market was “extremely good” and she had been reading about a shortage of good detached houses.

Reflecting now, she is glad to have sold when she did. “But that’s like a $64 million dollar question, isn’t it? You never know when is the right time to sell.”

Ray White Paddington principal Dean Jarman says the market in his area was busy this spring with strong attendance at open homes. But a couple of properties had not sold, with buyers looking hesitant for homes worth between $1.5m and $3m. “I think buyers are maybe being a little bit cautious at the moment,” Jarman says. “We’ve seen a little bit of change due to some lending regulations that have come across the industry in the last 12 months.”

For properties worth up to $1.5m, his office had a 100 per cent clearance rate.

After reading of so many outstanding results in recent months, many vendors have high expectations. Some could find it more difficult to find buyers willing to match their hopes, particularly for properties with less attractive fundamentals.

In the past, outer suburbs had not fared as well as inner suburbs, according to Gavin Hulcombe, director of valuation and advisory group Herron Todd White.

“Post-global financial crisis, while the inner suburbs dipped off, they were the first to recover. The slowdown in some of the outer suburbs was a bit more pronounced,” Hulcombe says. “Different markets are likely to perform differently.”

He also warns locations that have been heavily underpinned by investors could be most at risk.

Given the interest from investors, the unit market is likely to be weaker than houses, a number of commentators expect. Investors have pulled back as banks have increased mortgage rates for investor loans and repriced interest-only lending to make it less attractive than principal and interest lending.

Banks have also become less willing to lend to borrowers who have smaller than usual deposits.

Lenders are under pressure from the Australian Prudential Regulation Authority, which in late March told banks to limit interest-only loans to 30 per cent of new lending and ensure there was strong justification for any loans to borrowers who had a deposit of less than 10 per cent.

The most recent Australian Bureau of Statistics figures, from October, show a 0.5 per cent fall in loans to investors from the previous month on a trend basis.

But even within the unit market, differences are emerging.

“The one and two-bedroom apartment market — it’s going to be the weakest for sure,” Core­Logic’s Kusher says. “Three and four-bedroom (units) — there hasn’t been a huge level of construction of those products over the last few years.”

He also expects townhouses to perform better than units, on the back of demand from buyers who would be more likely to settle for a townhouse if they couldn’t quite afford a house.

And all one-bedroom units are not the same either.

A number of luxury apartment projects have sprung up in recent years targeted at owner-occupiers, in a backlash against the wave of investor-grade stock that has come to the market.

There are clear differences in the size, design and quality of finishes, Herron Todd White’s Hulcombe says. “We often see buildings that cater for the owner-occupier market sustain market activity much better than those that cater almost exclusively to the investor market,” he says.

“A lot of the investor units were bought off the plan. As they come back into the second-hand market it’s the owner-occupiers and local investors that determine the level of market acceptance of each of those buildings.”

Indeed, more than half the apartments bought off the plan since 2011 in Melbourne’s CBD, Docklands and Southbank resold at a loss or only broke even, BIS figures released in April showed.

Established houses are not immune from a softening market.

WBP Group executive chairman Greville Pabst highlights mortgage-belt areas as those that could be more challenged, although he expects quality family housing will hold up well.

“The outer fringes of Melbourne and Sydney, that mortgage belt where you typically have much higher loan-to-valuation ratios, they’re struggling,” Pabst says. “It doesn’t take much to tip that group over the line as well.”

Any softening could be apparent across broad geographic areas or at a more granular level, according to Rich Harvey, president of the Real Estate Buyers Agent Association and managing director of Propertybuyer. “Less desirable areas will be the fastest to cool and the most desirable areas will be the slowest to cool,” he says.

Individual properties with flaws, such as houses on busy roads or next to industrial complexes, will be at risk as buyers will have more choices, Harvey says.

After housing prices have soared so much over the past five years (75 per cent in Sydney between early 2012 and August this year), a small decline in values is not seen as a significant hit to the national wealth.

But the possibility remains that falling sentiment could discourage consumption, while lower prices could affect growth in construction jobs.

“A lot of the marginal projects become less feasible, so that means there’s less construction and less jobs growth,” BIS’s Zigomanis says. “From a consumer spending perspective, people are feeling their wealth isn’t growing as quickly. They’re more likely to batten down the hatches and cut back some of their consumer spending.”

Although WBP’s Pabst emphasises he doesn’t want to make “doomsday” predictions, he says the path of interest rates could be key. “It won’t take much to tip this market over,” he says.

“A lot of people are speculating. When the music stops and the game stops, there will be people that will be exposed.”