Spring will be a major test in determining the direction of the Sydney property market for the next 12 months.
Traditionally, September 1 marks an increase in the number of For Sale listings as the warmer weather brings sellers out of hibernation.
The top three things that will determine the landscape for the next 12 months will be auction clearance rates, lending finance and the Federal election, with an ALP success heralding potential changes to negative gearing and capital gains tax.
Spring will help determine what the next 12 months will look like – although this will change if Labor wins the election.
This looks likely following the recent insurgency on the former Prime Minister Malcom Turnbull.
What we are seeing at the moment leading into Spring is that the volume of properties being auctioned in Sydney is going up significantly with preliminary auction clearance rates of 57.9 per cent (as published by CoreLogic on August 27, 2018).
These are not the figures of a collapsing market.
While auction clearance rates have slightly recovered we don’t expect to see anything sensational – but nor to we expect any significant price reductions.
The auction clearance rate is a strong barometer of the market and we know at the moment prices are lower which means it’s a buyers’ market and therefore more attractive.
Buyers thinking about the long term, particularly owner-occupiers may wish to take advantage of this opportunity.
It’s important to consider that due to strong price increases in Sydney and Melbourne in recent years the vast majority of the sellers had healthy equity and in a worst-case scenario could refinance or investigate other alternatives to putting their homes on the market.
The number of forced sales are expected to be very low.
The average holding period for units is at least 10 years and for houses more than 11 years and sellers were in a healthy position as to whether they wanted to meet the market or not, and how much they were willing to accept in terms of profit realisation.
Vendors are well aware of the transaction costs when it comes to selling a property, eg agent commission, marketing, stamp duty.
It’s not that easy to force a large number of people to sell which is why we won’t see a huge correction in the market.
In addition, with all the scrutiny of lending applications, the price reductions we’ve seen following outstanding capital growth, is actually quite modest.
Dwelling prices went down by 5.5 per cent in the last 12 months.
And while investor finance is at a low, still around 40 per cent, it means investors are still very much in the market.
Yes, it’s dropped but they are still there, and we know changes to investor activity does have an impact on the market.
It’s interesting to note that changes such as limiting investment to two properties per person will have only a small impact on the market.
It sounds good and would be well received, however, in substance it will only have a minor impact on the market as the vast majority of investors only have one property anyway and can also plan in advance property allocation among family members.
Sydney became less attractive for investors because the outlook for capital growth was not optimistic and rental return also fell.
According to data released by CoreLogic, Sydney had the largest decline in rents on record with a 0.4% annual fall, with demand for rental properties taking a big hit over the past 12 months, down 25 per cent.
The vacancy rates for July in Sydney also went up giving investors even more reasons to desert the market.
But at the end of the day, if you are looking for additional 5 per cent price reductions during Spring it is unlikely and by the same token if you are looking for significant recovery it is also unlikely.
The key question is whether the market will continue with some small price reductions of around 1-1.5 per cent per quarter or whether they will significantly diminish and show some modest positive growth or flatten.
However, there were some exceptions such as Greater Sydney’s Central Coast where growing demand for affordable dwelling options and the desire to live in established coastal areas, meant capital growth was expected to remain solid over the medium to long term.
The story was much the same in Melbourne, with exceptions such as Geelong bucking the market trend with solid capital growth forecast over the medium to long term.
We are not expecting any significant upsets in Sydney or Melbourne and if anyone is looking for substantial recovery it is unlikely.
Ultra-low interest rates, low capital growth and low rental returns … it’s not something you see every day.
This question of what will be the shape of the market for the next 12 months is not a standard one that simply addresses supply and demand under normal market conditions, because the answer is determined by credit standards and restrictions, as well as Labor’s proposed policy changes to negative gearing and capital gains tax if elected.
We already have scrutiny of loan applications, lending restrictions on investors, and potentially out-of-cycle interest rate increase affecting the market.
Everything is in the hands of the lenders.
What will happen this Spring?
Ask the banks and the policy-makers.
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