STEEP DISCOUNTS, TIGHT LENDING: Inside Sydney's property downturn

A for-sale sign in front of properties overlooking Bondi Beach. (Photo by Ian Waldie / Getty Images)
  • Business Insider spoke to Sydney real estate agents to get an understanding for how Sydney’s market downturn is playing out on the ground.
  • Sydney prices have fallen around 4% over the past year but agents say houses in the $1 million to $2.5 million bracket have recently seen falls of between 5-10% — and in areas regarded as highly desirable.
  • The agents we spoke to said the market was in the process of re-calibrating, but downward pressure on house prices looks likely to remain over the next 12-24 months. One said it could be four years before prices rise from current levels.
  • They also said there had been a noticeable shift in financing for buyers, with more stringent requirements from banks and some pre-approved loans being reduced in size — evidence that credit conditions are tightening.

At this time last year, house prices in the exclusive suburbs of Sydney — regarded as the hottest pockets of the Australian property market — were still rising by more than 10%.

But now those same areas are seeing discounts running into hundreds of thousands of dollars on individual homes amid a weakening market, Business Insider has established.

Several Sydney real estate agents confirmed common discounting of around 10% on price guides as sellers have struggled to generate interest — even in the prized eastern suburbs and inner west areas of Sydney, which benefited most from the rapid price growth of recent years.

Data published today from CoreLogic shows Sydney posted a 4.2% decline in house prices over the past year, but Business Insider’s inquiries have shown the falls are not confined to the outer suburbs. Heavy discounting is emerging in what have been regarded as the high-demand parts of the city.

Agents from a range of firms said properties around the $2 million mark were most affected, and that the market conditions would persist for some time. Some said they expected the discounting to spread to higher and lower price brackets.

One agent said he thought it would be “four years or more before prices go up”.

CoreLogic

Business Insider has also seen marketing materials for two specific properties where the seller’s guide was revised down by $200,000 in May, around a 10% discount on previous indicated asking price.

In one clear example, a property on Park Parade, Bondi, was recently revised weeks ago to $2.1 million from its previous guide price of $2.3 million, in an email to the agents’ list of prospective buyers. Another property on Ormond Street, Paddington, had its guide price cut to $1.9 million from $2.1 million.

Both Bondi and Paddington are among the most desirable suburbs in Australia.

With auction clearance rates steadily declining in both Sydney and Melbourne over recent months, economists at Australia’s major banks — which account for the vast majority of housing loans — have also recently started forecasting years of price declines ahead.

CoreLogic

The shift in the housing market comes at a time when foreign investment approvals in Australia have declined sharply, and domestic credit conditions have been tightening.

Banks are introducing more stringent lending requirements at the same time as they face higher funding costs which could be passed onto consumers. So there is upwards pressure on borrowing costs despite the RBA official cash rate being on hold for the foreseeable future at a record-low 1.5%.

Sellers in a tight spot

Business Insider spoke to agents in Sydney’s eastern suburbs, the lower north shore, and the inner west about market conditions.

All spoke about price falls of 5-10% in their areas for certain price segments, with falls concentrated in properties in the $1-$2.5 million range.

Kenji Fukushima works at Phillips Pantzer Donnelley (PPD), a real estate agency based in the eastern Sydney suburb of Woollahra.

Fukushima said he had seen instances of discounting, particularly when sellers put themselves in a tight spot.

“That can be the case, say if a buyer has already bought somewhere else before the sale. So if they’ve upgraded to a more expensive property and they need to offload their old place to balance up,” Fukushima said.

In other words, buyers were would take a lower price if they were stuck in a liquidity trap as repayments become due on their new mortgage.

Alexander Phillips, a partner at PPD, said discounting had been more common at the mid-tier level of properties between $1–$2 million.

“I’d say at that $1 million mark we’re seeing price falls of around 10%. Up at $2 million it’s more like 5%, then it phases down as you get into the more expensive segments,” Phillips said.

In the inner west, James Cahill from the Glebe office of Belle Property said the price action was similar.

“I’d say the falls have been smaller in that $1-$1.5 million range,” Cahill said. “But yeah particularly around that $2 million mark, prices have fallen back to $1.8, $1.9 million.”

Piers Van Hamburg is a Director and Sales Agent at McGrath in Neutral Bay, in Sydney’s lower north shore.

He said it was a similar story there for properties up to a value of around $2.5 million, and he had noted a significant reduction in the volume of potential buyers.

“I’d say we’re seeing price falls of around 5-10% more broadly, yeah,” Van Hamburg said.

He added: “Whereas last year you’d list a property and there might be four interested buyers, this year there’s only one.”

Fukushima said that aside from specific instances of sharp price downgrades, the heat had clearly come out of the market.

“It’s less frothy. Whereas at the end of last year – or even the start of this year – where a property got listed at $2.5 million it would sell for around that or even slightly above.”

“Now we’re seeing similar properties dropped to $2.2, $2.3 million. At that price buyers are stepping in, so the market’s trying to re-balance and find that middle ground,” he said.

Tougher credit conditions

John Pryke/Getty Images

In a housing market forecast released earlier this week, Westpac cited the prospect of tighter bank lending standards as a factor which will weigh on price growth.

US interest rates have been rising and liquidity from global centrals banks is still forecast to decline — one factor which has put upwards pressure on funding costs for Australian banks.

At the same time, scrutiny of lending standards through the royal commission and via the hand of regulators has had banks ensuring that the financial position of prospective borrowers is closely examined.

Van Hamburg said there was clear evidence of that shift playing out at the ground level.

“One thing we’re saying to agents is, check if the buyer has finance approved,” Van Hamburg said.

“Because where previously a borrower could obtain approval in, say, 7 days from a bank. But now that’s stretched out to 30.”

“It really looks like they’re climbing under every rock, particularly with what people are spending.”

“Even stuff like how much people are spending for dinner, school fees, things like that.”

Cahill added there was a notable change in how banks are approving loans, and that pre-approved finance levels for buyers could be getting reduced.

“Six months ago I bought a place and I didn’t go through the same hurdles,” Cahill said. “But now I’m hearing that people are definitely finding it harder.”

Van Hamburg said prospective buyers also had to be aware that any pre-approved finance may not still be valid.

“For example, someone could’ve attained pre-approval from the bank for a loan of $3 million. And 6 months later they go back and can only get $2.7 million.”

Market outlook

When it comes to sentiment on the ground in one of Sydney’s most exclusive property enclaves, PPD’s Phillips said he hadn’t seen any signs of panic — yet.

“I don’t think there’s too much pressure yet. One thing about this market is that also gives you some time to play with,” Phillips said.

“We’re advising some clients, why not sell your property and rent for 12 months?”

“Perhaps at the top of the market you could’ve sold for $2.8 million, now you can only sell for $2.6 million.”

“Why not rent for period of time, then down the track that $3.5 million home you were eyeing off will have come down to $3.1 million, so in that sense you’re almost better off.”

In the inner west, Cahill said there was a sense recent price falls could become more entrenched.

“Vendors are of the mindset that things might be getting worse, so you’ve got more people kind of sitting on their hands and waiting,” Cahill said.

“You’ve got to factor in that the winter months are a bit weaker in general, but I haven’t seen it like this in at least a couple of years.”

Van Hamburg said there isn’t an overriding sense of fear in the lower north shore market, noting that not all properties can be thrown in the same basket.

“There’s still particular streets, for example, that are just always going to sell,” he said. “They might have a great location or be near a good school.”

But he added that the recent downturn in the broader market is likely to extend out over the next one to two years.

And Fukushima said the price pressures seen in the middle-tier bracket for exclusive suburbs could start to extend higher.

“Right now the prices pressures are being seen in the $1–$2.5 million range, but I think it could creep up into that range above $3 million eventually,” Fukushima said.

“We’re seeing some buyers say now’s a good time to get back in, with the extra froth coming back out of the market.”

Fukushima added that property prices in the eastern suburbs “are not going up anytime soon”.

“I think it will be another four years or more before prices go up,” Fukushima said.

Phillips also added some context around the prospect of a four-year time-frame for prices to resume an upward.

He said the outlook made sense, given where the market currently sits at this stage in the cycle.

“Say prices move lower over the next 12 months, then you have look further down the track — first of all for prices to bottom out, and then to start climbing back to where they where at the end of the last cycle.”

Boom times are over

While sentiment in Australia’s more expensive property markets has clearly shifted, it remains to be seen whether that will act as a leading indicator for price declines in less valuable segments.

Policy makers at the RBA and APRA will be closely monitoring how the current housing downturn in Australia’s housing cycle will filter through other areas of the economy.

They will be closely watching the outlook for consumption that could stem from a reduced wealth effect, as household debt remains high and wages growth remains low.

Earlier this week, ANZ economist David Plank said the dip in the bank’s weekly reading of consumer confidence “could reflect homeowners’ concerns about falling house prices, particularly in Sydney and Melbourne.”

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