SYDNEY: For the past three decades, buying a home in Sydney has been the surest bet in Australia. Rising prices have enriched families and made property the engine of household wealth.
Now the boom is under threat, and the consequences are rippling across the financial system.
Home values are sliding as borrowing costs rise and buyers react to the removal of tax incentives favouring property investments in the May budget.
In Sydney, prices are down about 7% from their peak in February, according to the latest figures from property consultancy Cotality.
Declines that started in the priciest neighbourhoods are spreading nationwide, with home values falling in 93% of suburbs in Australia’s capital cities.
The slump is hitting the nation’s biggest banks, with mortgage applications dropping as much as 20% since the budget and one chief executive officer saying “volatility and uncertainty” were more structurally present than for decades.
Last week, one of Sydney’s biggest developers, Bathla Group, fell into insolvency owing A$3.3bil.
The challenge is an extreme version of the one facing governments around the world after decades of leverage-fuelled and state-sanctioned home price gains.
Policymakers must figure out how to deflate frothy property markets and boost affordability, without derailing the economy at a time when inflationary pressures are driving up borrowing costs.
The risk for Australia is any prolonged downturn could hit families in their pockets at an already tough time.
A measure of consumer confidence fell to “deeply pessimistic” levels in June. About 60% of household wealth is tied up with property, according to Commerzbank AG.
“People don’t transact in a high-ticket item like property when they are not secure about their finances or the broader economy,” said Nicola Powell, chief residential economist for Domain, an online property portal.
The Australian government has been under increasing pressure to tackle housing affordability.
In Sydney, the average home costs almost 14 times the annual disposable income, making it the world’s second-most expensive city to buy property after Hong Kong, according to 2024 data from Demographia.
Treasurer Jim Chalmers targeted what he called the “unfair” status quo in the housing and tax system when he unveiled rules on May 12 restricting so-called negative gearing.
Previously, if the cost of owning a rental property was higher than the income it generated, landlords could deduct this net loss from their personal taxable income, reducing their overall tax bill.
Under the new regulations, which take effect from July 2027, existing property purchased after May 12 no longer qualifies for negative gearing, although new builds still do.
The goal was to encourage construction of new supply and make it easier for first-time buyers to enter the market by decreasing the appeal of investing in multiple homes.
The market “is going to be operating in a very different rhythm because you have seen policy change that impacts quite a large buyer cohort and first-time buyers are not large enough to replace investors,” said Powell.
“We are yet to see the true impact of fewer investors in the housing market.”
Cotality’s national home price gauge fell 0.9% in August in a fifth month of declines, taking the drop from the March peak to 3.6%. Prices slid 1.4% in Sydney that month.
Transactions are also slumping. Home sales are down 15.5% from a year earlier, and 11.5% below the five-year average, according to the firm’s quarterly estimates.
Brisbane, Perth and Sydney have had the biggest declines in sales, with volumes down more than 20% year-on-year, it said.
Properties are also taking longer to sell, meaning supply is elevated. In the four weeks through Aug 30, capital city listings were 24% higher than a year ago and 8% above the five-year average, Cotality data showed.
“Sydney continues to lead the downturn,” said Tim Lawless, research director at Cotality.
“The combination of a sharp drop in demand and higher than average advertised stock levels is weighing more heavily on Australia’s largest housing market.”
Yet rising interest rates mean homes aren’t getting more affordable even as prices decline.
The Reserve Bank of Australia (RBA) has hiked three times this year to lift the cash rate to 4.35%, up from 0.1% as recently as early 2022. Unlike the United States, where homebuyers typically take out 30-year fixed mortgages, less than 5% of Australian mortgages are on fixed terms, according to the RBA, meaning any increase in the cash rate feeds into their monthly repayments.
Elevated inflation limits the support the central bank can give the housing market.
The RBA is widely expected to hike again as early as September, with one Deutsche Bank AG economist calling underlying inflation “intolerably high”.
The shifting environment means the calculus has changed for residential real estate investors.
Just six weeks before the budget, Chris Hanna bought his fourth investment property, adding to a roughly A$6.5mil portfolio spread across Sydney’s west.
While the 33-year-old considers himself lucky that his purchase won’t fall under new tax rules, Hanna estimated it’s dropped in value from about A$1mil to A$960,000.
Instead of buying a fifth property as he previously planned, he is considering selling one or two of his homes.
It’s a sharp reversal from when Hanna bought his first property in 2019.
Low borrowing costs meant the investment was largely paying for itself, while rising values encouraged him to keep buying.
“With interest rates and everything, it’s getting hard to manage a large portfolio like this,” he said, adding that another quarter-point rate increase would cost him an extra couple of thousand dollars a month.
Gerry Bronn had planned to buy two or three residential properties in Australia over the course of a year, adding to investments including his home and a commercial property.
Instead he parked the few hundred thousand dollars he saved for the deposits into artificial intelligence and semiconductor shares, among others, while he waited for a better time to invest in real estate.
Residential property had previously seemed like a “no brainer”, Bronn said, but the expected returns no longer looked compelling. He now expects to wait at least six months before reconsidering. — Bloomberg
