2019 reviewed - From bust to boom

The property market could not have started 2019 in worse shape and it could not be finishing the year any stronger.

The year began auspiciously before January 1, when the Opal Tower had to be evacuated on Christmas Eve 2018. This incident signalled the beginning of the building defects issues which remains unresolved for many apartment owners. The Opal Tower was one of the many brand new high rise developments to fill the Sydney skyline in recent years. The apartment sector which was already battling potential over-supply and falling rental returns did not need another battlefront.

In the middle of the year Mascot Towers became the second building where residents needed to be evacuated from due to building defects.

Whilst reservations about some buildings and some developers still linger, the market at large seemed to shrug off the apartment defects issue.

The turnaround in the broader market was truly remarkable, with the volatility over the past 3 years leaving many to ponder – what is true market price?

Increasingly, prices for houses are exceeding their 2017 boom time levels, suggesting the market is setting fresh highs. Given the price correction during the downturn was around 15% and prices only started rising again in June 2019, there is evidence to suggest segments of the market has risen 15% in less than 6 months. Historically, this explosive growth is unprecedented in a market that is recovering. Only in the time to come will we truly know whether this recovery was justified or an irrationally exuberant market response to credit conditions and interest rates being eased.

The boom like conditions are not necessarily being felt Sydney-wide at this stage either. Inner-city housing, the Eastern Suburbs and the Lower North Shore up to the Northern beaches seem be performing the strongest.

The State and Federal elections scheduled for the first half of 2019 set up an intriguing anomaly for the market. The housing market tends to be cautious during elections, rarely do we have 2 significant elections in 3 months. Furthermore, many policies in both elections were likely to directly and indirectly impact on the housing market. The events in the week immediately after the Liberal Party’s shock win in the Federal election on May 18, 2019 set up the property boom we are experiencing now.

There were three significant events that turned the market:

Negative gearing would remain under the Morrison Government. The markets unease with the potential impact of removing negative gearing was apparent in the 6 to 12 months lead up to the election. Labor’s policy would have distorted negative gearing benefits in favour of brand new dwellings, at a time many capital cities were facing an excess of brand new high rise apartments. Once it became clear negative gearing would remain in place, buyer and investor confidence returned almost immediately.

Credit conditions were eased in the days after the Federal election. Further easing was also implemented in July and August as the mortgage assessment rate was lowered, meaning many more prospective buyers qualified for a home loan. This would have occurred if either party won. The Australian Prudential Regulation Authority (APRA) sensed their job was done in slowing the housing market down. Any sustained credit restraints threatened to have catastrophic impact on the market and broader economy. In fairness, APRA were probably not expecting the rapid rebound in housing that then occurred.

Interest rates – the RBA signalled almost immediately after the election they would look to cut interest rates. One got the feeling they would have liked to cut earlier, but that would have meant the RBA risked becoming political mid-election campaign. Rates were cut in June, July and October. By late November, RBA Governor Philip Lowe hinted at more cuts to come and even money printing if Global events dictated it.

Coming into the March State election, stock levels began to tighten, leaving buyers with limited choice. A symptom of a soft real estate market is excess stock level. At the bottom of the market, stock suddenly tightened as vendor’s held out.  At first, there was a sense the stock would ease after the state election, and then when that didn’t happen, people suggested post Federal Election stock would swell. But the expected surge in stock simply did not come, not even in spring. Booming prices did not tempt an excess of sellers onto the market. Buyers have had historically low listings to choose from during 2019.

The market recovery was complete when the Core Logic Index in July/August turned positive and buyer sentiment went with it. The fear that had gripped the market between May 2017 and May 2019 was replaced with cheaper credit, easier access to credit and buyers more willing to take on credit.

After the Royal Commission in 2018, banks are lending out more credit than ever before to home buyers. Credit is the reason the property market finishes 2019 in credit both literally and figuratively. The more things change, the more they stay the same.