We may be entering summer in Sydney, but the housing market has moved into Autumn. There are increasing signs that the great run in Sydney house prices has come to an end with data showing declining auction clearance rates, slower sales and falling mortgage lending levels.
Since house prices commenced the rally in early 2012, Melbourne prices have increased a healthy 23% and Brisbane 14%. But the major gains have been seen in Sydney which has had house prices increase 56% over this period. This compares to the 65% increase in Auckland home prices since the beginning of 2011 (Auckland prices began rallying about a year earlier).
The large increase in Sydney prices has made the city far less affordable than other major cities. Detached home prices in Sydney average $870k in Sydney compared to $482k in Brisbane and $570k in Melbourne. And in general Sydney homes are smaller and older which further lessens what you can get for your money.
All three of these major cities offer reasonable job prospects and are attractive places to live so are seeing strong population growth and hence demand for housing. It is the poor supply of new housing in Sydney that has resulted in large disparity in house prices.
Melbourne and Brisbane are surrounded by flat land suitable for the development of large housing estates. On the contrary Sydney is land constrained, with the ocean to the east, the Blue Mountains in the west and a large National Park blocking the south. Additionally, the centre Sydney suburbs are already intensified, making development of new apartment buildings more difficult than in Melbourne and Brisbane.
Around July this year we saw auction clearance rates in Sydney begin to decline. After achieving extraordinary clearance rates close to 90% earlier this year, recent auction clearance rates have been below 60%. We are seeing more homes offered up for sale, but enthusiasm from buyers is disappearing.
One reason for the cooling market is the recent restrictions placed on Australian banks by regulators. In order to combat aggressive lending to property investors, new regulations placed by APRA are limiting investor mortgage lending growth to 10%. This is a large part of why new loan data for September released this week showed a sharp decline in new loans to investors.
Another reason for the cooling housing market is the increase in mortgage rates. The regulatory mandated minimum capital requirements for major banks have recently been increased. In order to avoid a dilution in earnings the banks increased their mortgage rates, and in particular the rates offered to investors.
However – just like Auckland – house prices in Sydney are unlikely to fall severely for two main reasons: interest rates can be dropped to stimulate housing demand again; and both cities are expected to continue benefiting from strong population growth which will keep any oversupply of housing a temporary problem.
So at this stage we believe a cooling in the Sydney housing market is more likely to result in flat house prices rather than significant declines in prices. But a moderate fall in house prices is a possibility.
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.
 Corelogic QV home prices
 Domain auction data
 ABS Housing Finance