Sydney’s expensive inner ring suburbs are now a buyers’ market – but not for long

Read on to see why.

The month just gone

September 2024 was full of events relevant to Sydney property buyers including:

• escalating Middle East and European warfare

• the US Presidential debate and campaign

• the first drop in the US cash rate in four years

• a massive Chinese economic stimulus

• a day after holding the official cash rate, the RBA’s ‘no forward guidance’ Governor again provided forward guidance which was seen wrongly by many as ruling out any rate cuts this year

• the Federal Treasurer de-railed the long overdue RBA re structure (courtesy of taking a back firing shot at the RBA for smashing the economy) to finish the month by re-opening the negative gearing/capital gains tax concession debate. 

(While PM Albanese backed away from the latter ideas because of its long politically lethal past, property buyers in Sydney and in Australia need to keep both on the radar given overseas trends in the same direction and a growing awareness in many local quarters that reforming  Federal and State taxation regimes is essential to solving the housing supply crisis. Our well placed sources suggest the Government may have an appetite for tweaking negative gearing but not the capital gains tax concession which is far more lucrative for property owners and buyers)   

• in a further set back for the Albanese government and reinforcing the need for taxation reform, plummeting ABS building approval figures confirmed the demise of its National Accord Housing target of 1.2 million new well located Australian homes over the next five years 

• local government elections were held with final results still pending including the impact of the Liberal’s fiasco not nominating candidates in time and whether or not Clover Moore has held on to her Sydney City Council majority which we doubt. 

(Given the pivotal role Councils are playing in housing supply and strata reform, this is important with industry sources telling us that the few consolidated site deals inspired by schemes such as the NSW Transport Oriented Development Program are conditional on council approvals in relation to conservation and other issues)

• bucking usual trends at the start of spring and confirming a market that’s swung in favour of savvy buyers because of high interest rates.

According to CoreLogic, Sydney’s:

• median house price was up just 0.1% on last month
• auction clearance rates were the lowest this year and
• total listings were 7.3% higher than this time last year and 13.6% above the five year average.

So, what’s a “savvy buyer” ?

One who recognises the impact of the following on interest rates:

• unemployment is rising
• spending trends in the private sector are disinflationary and
• the sticky inflation is caused largely by burgeoning, unsustainable and sometimes wasteful public spending.

Taking these in order:

Unemployment

Before years’ end, the RBA must and will loosen its pre occupation with the inflation rate and focus more on its second mandate which is regulating unemployment. 

While the ABS Labour Force Survey released on 19 September 2024 showed the seasonally adjusted unemployment rates in August remained unchanged from 4.2% in July which contributed to the RBA staying its hand this month, that survey also showed a seasonally adjusted 16% annual increase in the number of unemployed people and only a 2.7% increase in the number of employed people. 

That’s a net 13.3% annual increase in the number of unemployed people – according to ABS data nearly two months out of date.

In addition to those numbers being consistent with anecdotal and other evidence of rising unemployment (think a hospitality industry on its knees in response to falling discretionary spending and a record number of insolvencies in other sectors nearly doubling each month), it is also reflected in other metrics including:

• falling capacity utilisation
• rising household unemployment expectations reported by the Westpac-Melbourne Institute consumer survey released on 10 September 2024
• a sharp August 2024 easing in before-tax wage growth according to the CBA wage tracker coinciding with
• a sharp fall in job advertisements and vacancies:

CBA’s Gareth Aird summed it up in a note published earlier this month (emphasis ours):

“The monthly labour force data has been choppier than usual more recently. But the trends are clear. The supply of labour is rising faster than the demand for workers so unemployment is moving higher”…

Private sector spending trends

Research also just published by CBA, Australia’s biggest lender, confirms that customers have overwhelmingly used July 2024 Stage 3 tax cuts to reduce debt rather than on inflationary spending:

Similarly, CoreLogic’s housing market report for this month shows that Sydney rents fell by 0.5%.

Burgeoning public sector spending

Compared to a 0.6% fall in the private sector’s share of GDP in Q2 2024, this chart says it all:

Why a buyers’ market in the inner ring?

By inner ring, we are referring to regions within about 12 klm of the Sydney CBD where property is generally more expensive than more distant regions and high interest rates are imposing the greatest affordability constraints on buyers up to $10 million.

While an interest rate drop signalling the start of a rate cutting cycle would undoubtedly boost buyer confidence in more distant regions, we believe two trends will turbo charge the inner ring more than the outer ring.

First, the same rise in unemployment likely to trigger a cycle of interest rate cuts will also accelerate the trend away for WFH and hybrid working as employers regain more bargaining power to pursue a preference for productivity and other reasons to have employees back in the office. Amazon and Tabcorp are the latest major employers this month to mandate that as the default position.

While not everyone agrees, that mandate is the overwhelming preference which this month’s extensive KPMG Survey as summarised in the 19 September 2024 AFR confirmed:

“Australia’s bosses are calling an end to the flexible workplace, with a KPMG chief executive survey showing that 82 per cent of respondents expect white-collar workers to be back in the office five days a week in three years. This was up from just 66 per cent in last year’s survey, but the same proportion of chief executive respondents – 78 per cent – said they would reward office-based employees with pay rises and promotions.”

Second, the new Metro which, in making commuting to the City so much easier and faster, is causing a contraction to the centre with major businesses moving from Macquarie Park and St Leonards to North Sydney and many more businesses moving from North Sydney to the Sydney CBD.

Such ‘recentralisation’ as we call it, will favour the inner ring suburbs.

Why not for long?

Several economists believe that any rate reduction(s) this year will have little impact on property prices because of the relatively small influence(s) it/they would have on affordability given stretched household disposable incomes.

We disagree strongly.

In our experience, a macroeconomic change such as a 0.25% interest rate reduction after a prolonged period like this, will immediately lift residential and commercial property buyer confidence as well as foster the perception of a new rate reducing cycle with the latter being exactly what the CBA is predicting:

Dexus CEO Ross Du Vernet endorses such an animal spirit telling this month’s AFR Property Summit that it would bring buyers back to Australian property markets.

“…I do think that the psychological impact of a cut will actually be quite important for the market.” (emphasis ours)

And that rate drop could be sudden:

Returning to Gareth Aird:

“The August Board Minutes stated that, “it was appropriate to continue placing somewhat greater-than-usual weight on the flow of data, relative to the forecasts, when there were uncertainties about the persistence of supply shocks.

This suggests that the RBA is more data dependent than usual. As a result, we believe the Board will be more reactive to near term data than is generally the case.

Importantly, it means the probability of an RBA ‘pivot’ is higher than usual in the policy setting process”.

Bond trader Angus Coote added to this sentiment in an excellent AFR article on 29 September 2024:

“By the end of next quarter Australia would have been in a per capita recession for two years, assuming the current trend of weak growth continues into the fourth quarter.

If you exclude immigration, the country has not experienced such sluggish economic performance since the recession of the 1990s. And if current conditions persist, we are edging closer to a full-blown technical recession regardless of the impact of immigration…

Momentum is critical and right now, the economy is at genuine risk of stalling. It’s no surprise then that the bond market has already priced in almost 50 basis points of cuts by February and 140 basis points by December next year.

…I believe there’s a very real possibility that the RBA could cut interest rates at one or both of the remaining meetings this year, in November or December. A single negative data point could prompt the central bank to pivot, much like the Fed, shifting focus from inflation to preserving growth.

It was particularly telling when RBA governor Michele Bullock acknowledged last week that there had been board discussions about potentially revising their guidance. This signals a growing readiness to adjust course if the economic outlook deteriorates further”.

Two of the major banks believe the first rate cut will occur when the RBA meets on 17 February 2025.

If so and allowing for a Christmas shutdown between 23 December 2024 and say 15 February 2025, that leaves just over 12 weeks from 1 October 2024 to find and buy a property before those animal spirits are lifted.

If the CBA is right and the first rate cut occurs on 9 December 2024, that 12 weeks reduces to 10.