Real Estate Round-up for Sydney January 2024

January 2024

Real Estate Round Up #66

This month, the Sydney housing market presents a complex and dynamic landscape, shaped by various factors including government policies, market trends, and economic conditions. Drawing on insights from multiple sources, this report delves into the key aspects of the Sydney housing market, including property market trends, rental prices, supply shortages, economic outlook, and government actions.

Home values increased 8.1% in 2023

In 2023, Australian home values experienced a significant recovery, with CoreLogic’s national Home Value Index (HVI) rising by 8.1%. This increase marked a notable turnaround from the 4.9% decline in 2022, though it was considerably less than the 24.5% surge in 2021. The year ended with a modest monthly rise in home values, with December seeing a 0.4% increase.

Tim Lawless, CoreLogic’s research director, noted [1] that the growth in home values peaked in May at 1.3% but slowed in the latter half of the year due to factors such as rate hikes, cost of living pressures, worsening affordability, rising stock levels, and low consumer sentiment.

The year 2023 was characterised by a wide disparity in home value growth across different regions. Cities like Perth, Adelaide, and Brisbane saw consistent monthly growth of over 1% since May. In contrast, growth in Melbourne and Sydney slowed significantly after the June rate hike, with Melbourne experiencing a decline in November and December and Sydney stabilising at a growth rate of just 0.2% in the last two months.

The disparity in growth rates across capital cities was attributed to varying factors of demand and supply. Cities with less pressing housing affordability issues and lower advertised supply levels, like Perth, Adelaide, and Brisbane, saw higher growth. Cities with higher advertised supply and lower annual home sales, like Melbourne and Sydney, experienced lower or negative growth.

Capital cities, in general, recorded stronger growth than regional areas in 2023. The combined capital cities index rose by 9.3%, compared to a 4.4% rise in the combined regional index. This trend marked a reversal from the early COVID period, where regional markets saw higher demand due to internal migration. However, regional migration normalised in 2023, and many regional markets became less affordable due to significant capital gains in previous years.

Despite the overall rise in housing values in 2023, five of the eight capital cities still recorded home values below their record highs. Sydney, Melbourne, ACT, Hobart, and Darwin all ended the year with values below their peak levels.

Land values go backwards while property prices go forwards

Also in 2023, New South Wales experienced a peculiar trend where land values decreased despite a rise in house prices [2]. The NSW valuer general reported an overall decrease of 1.6% in land values for the year to July 2023. This decline was attributed to factors such as rising interest rates, inflation, and increasing construction costs. In contrast, CoreLogic data indicated that home values in Sydney rose by 11.1% and in regional NSW by 2.4% during the same period.

The discrepancy between land values and house prices is explained by the timing of data capture. The valuer general’s report covered the latter half of 2022 and the first half of 2023, a period marked by a general market decline following interest rate increases starting in May 2022. However, house prices began to increase again in the most recent calendar year, suggesting that future reports may show higher land values.

The implications for property owners, particularly in terms of council rates and land taxes, are notable. Council rates, which are calculated on a rolling three-year average, may not see immediate changes unless land values continue to decline over the next few years. The 2023 reduction in land values will be partly reflected in land tax rates, but significant rate reductions would require continued lower land values in subsequent years.

Land tax in NSW is applicable only to properties where the land value exceeds a certain threshold (currently $1,075,000) and does not apply to primary residences. Most NSW landlords do not pay land tax, with only about one in six affected.

Experts caution against overinterpreting a single year’s reduction in land values, emphasising the cyclical nature of values and the significant upward trend observed over longer periods, such as five or ten years.

Can I buy a home in 2024?

The prospects for first home buyers in 2024 are mixed, with challenges and potential opportunities on the horizon. In early 2023, first home buyer activity reached a multi-year low due to rapidly rebounding prices and reduced borrowing capacity. However, there was a rebound later in the year, with new owner-occupier loans increasing by 25.9% by October, as per the Australian Bureau of Statistics.

First home buyers have been facing significant challenges, including rising prices, higher interest rates and inflation, and more expensive rents. These factors have reduced their ability to save and borrow. ANZ senior economist Adelaide Timbrell notes that while house prices have risen and are expected to continue doing so, the pace of annual price gains is expected to slow to 6% in 2024. Interest rates are also anticipated to have peaked, with a potential cut projected in late 2024. Wage growth is expected to outpace inflation, which could make saving slightly easier.

There is also additional support on the horizon for first home buyers. The federal government’s shared equity scheme, Help to Buy, is set to be rolled out, allowing eligible participants to buy with just a 2% deposit. The government will make an equity contribution of up to 40% for new homes and 30% for existing homes, reducing the loan required. This scheme is in addition to other initiatives like the Home Guarantee Scheme and changes to the First Home Super Saver Scheme, which are aimed at providing more flexibility and support to first home buyers.

Rents still going up by a lot

It’s news to no-one there have been significant increase in rental costs in Australia since the pandemic [4], outpacing wage growth and adding pressure to tenants amid a cost of living crisis. From the December quarter of 2019 to the September quarter of 2023, wages grew by 10.6%, but this was dwarfed by the rise in rental prices. In major cities like Sydney, Melbourne, Brisbane, Perth, and Adelaide, both unit and house rents have seen substantial increases, with some cities experiencing growth of over 60%.

The rapid growth in rent is attributed to very low vacancy rates, strong population growth, and insufficient building activity. Australia’s vacancy rate stood at 1% in December 2023, far below the 3% considered balanced. This tight market allows landlords to set higher rents due to increased competition among renters.

ANZ senior economist Adelaide Timbrell noted that renters are particularly disadvantaged compared to homeowners, who have options like refinancing mortgages or accessing equity. The competitive rental market is exacerbated by a lack of alternatives for tenants.

Curtin University professor Rachel Ong ViforJ pointed out that the end of lockdown-era supports, such as eviction moratoriums, led to a rise in rents as landlords sought to recoup perceived losses. The prolonged stay of tenants in the private rental market without the ability to purchase homes has raised concerns about security of tenure.

Solutions proposed include diversifying private rental properties through ‘build-to-rent’ developments and policy responses like limiting rent increases and allowing pets. However, immediate concerns for those in severe rental stress remain, with measures like a 15% increase in Commonwealth Rent Assistance being deemed insufficient.

Better Renting executive director Joel Dignam emphasised that high rental costs are not necessarily linked to wages but rather what landlords can demand. He suggested solutions like more public housing, changes in planning laws to increase housing supply, and stronger protections for renters, such as banning no-cause evictions and limiting rent increases, as seen in the ACT.

References

January 2024

Real Estate Round Up #66

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