June 26, 2014 by Craig Pontey
Last week the NSW Treasurer Andrew Constance summarised our budget as being in a powerful position with net debt down, expenses under control and the State’s triple-A credit rating maintained. The gloss has returned to the fortunes of NSW thanks in part to a strong housing market and increased construction activity.
Another demonstration of how big an impact the housing market has had on state finances comes from the fact that the budget papers show transfer duty, including stamp duty, contributed $938 million “due to strong growth in residential property transfers”.
Now that we are mid-way through 2014, what are some of the market signals that point to how the year might end, and will the current strength of the market continue? Lets have a look at some of the key market drivers, and what are among the main pointers we might consider.
Roughly these fall into a number of big picture areas like: population demographics, labour markets, housing activity, infrastructure and government policy. Then within the housing market itself we have factors such as the strength of the upper-end of the market, median price growth, the shape of the rental market, auction clearance rates, income stability (unemployment) and the spread of demand.
In terms of population growth, things are looking positive, and our population over the next 20 years is expected to grow by 100,500 people on average each year to 2031, however as the mining boom fades that name might well be exceeded. The big infrastructure projects, some of which are already underway will influence this, but we are in a positive growth trend.
People returning to NSW will also welcome the news that from July 1 the threshold below which first homeowners can claim the $15,000 grant for the purchase of new homes will be lifted from $650,000 to $750,000 and while this move might have limited impact on our immediate market, this should further benefit construction activity.
Another key influence on market over the next 6 months is the continued strength of the top-end where strong demand may well see a new record high set for Australia. These sales while limited in number, do send a clear and positive signal to the balance of the market, and we should not forget the fact that Sydney’s east still accounts for 4 of the top 10 Australian suburbs.
Another positive factor for the next six months is that strong sales and price growth is not limited to only one or two areas, the trend is widespread with areas like the east, inner west, north-west, lower north-shore and south west all in demand, in the east we have seen record demand for homes and several new apartment projects have sold out.
We have just seen one of the strongest autumn property markets in decades across Sydney and now one in five Sydney suburbs is a $1million plus area, which underlies the city wide trend.
All of these trends look positive and unlikely to be de-railed in the near future, which brings us to the influence of two other big factors being interest rates and the impact of off-shore buyers.
A few weeks ago I noted how stable our interest rates are for most of the time, and there is little doubt that low rates are helping to drive demand for residential property. However there is a somewhat interesting overlap between rates at the moment. The best 3-year fixed home loan rate sits around 4.72% only marginally above the lowest variable rate of 4.54%, and 3-year term deposits sits near 4.10% and you can get a 0% credit card transfer for 14 months, or just 2.9% for 2 years. In combination these basic figures appear to signal little chance of a rate increase in the next 6 months. We have also seen affordability improve with the benefit of the current low interest rate environment.
The last factor in the market is the influence of foreign investors, who typically do not buy established properties as foreign investors are only allowed to buy newly constructed property or off-the-plan. Although Australian based families living locally are active buyers of established homes.
There has been a suggestion that the Federal government should put back a 50% cap on sales to foreign investors in any newly constructed buildings the cap was removed by the Rudd government in 2009. However since then foreign investors have also started to invest large amounts of capital into developments and this is creating a major capital in-flow for the industry.
For NSW in particular all of the above factors would indicate a continued strong market, with improved supply and stronger construction activity a key factor.
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